I am 34m, California and high earner. Current net worth is about to hit the $1.5 million dollar mark.
- Brokerage Account: $554k
- Retirement Accounts (401k / Roth IRA): $383k
- Home Equity: $488k
The investment accounts have been 100% equities since I started investing more seriously in my late 20s. But lately I've been running the math and with just $600k invested in equities for 25 years, and assuming an 8% compound return, I'll have $4.4 million dollars.
So what am I doing with the excess when it doesn't necessarily make sense to take more aggressive risk at this point? I'm buying long term US treasuries right now. It's nearly 5% risk free and it's a bit of an insurance policy against a downturn in equities as treasuries are known to be a "flight to safety" asset in a crisis.
I still don't feel like I have enough money but I'm starting to realize I will get there naturally over time with what I've built so far. Pretty cool.
Anyone else who was invested in 100% equities thinking about this tipping point and has it changed your investing strategy?
Transitioning From 100% Equities?
byu/thehenryshowYT infinancialindependence
Posted by thehenryshowYT
10 Comments
I worry about inflation affecting long term treasuries. The real rate of return is much smaller than 5%.
Why run the numbers for 25 years? You are 34. You can retire early you know.
Getting conservative at 34 makes no sense. You are shooting yourself in the foot. 100% equities (through index funds) is the way to go until you are ready to retire.
Shift from 100% to a 90/10 or 80/20 split.
If you’re not retiring in the next year, holding extra cash doesn’t make sense. The 5% nominal rate wull be largely eaten up by inflation and taxes. Bonds would provide better diversification for your situation
I invest in dividend stocks, to have a continuos, growing cash flow. I don’t think you can have too much cash flow.
If you are a high earner living in the state of California, which is a tax nightmare, you might look into municipal bonds.
There’s a stigma that these are for old people, but if you’re looking for a more safe part of your portfolio, municipal bonds might be smarter than treasuries. In California the last thing you want to do is increase your taxable income.
Personally, I would not buy a bond fund but I would learn how to build a municipal bond ladder myself. This is good practice for when you’re older and you want to live off, but it also helps you manage interest rate risk.
Below you can find more information about the treatment of municipal bonds in the state of California.
https://debtguide-api.treasurer.ca.gov/guide-pages/chapter-3-types-of-debt-obligations-issued-by-public-agencies/3-5-tax-treatment-of-municipal-bonds#:~:text=Bonds%20issued%20by%20California%20public,the%20federal%20income%20tax%20treatment.
My own view is that unless you plan to retire within the next few years, it’s sensible to stay in equities. If you’re going out at 40 for example, I’d start transitioning down slowly, probably by turning off automatic reinvestment of dividends.
Next, I’d take a look at TIPS if I were you. 5% risk free is great, but inflation is a huge variable. TIPS are equally risk free (Treasuries) but inflation protected. They may *seem* to return less but generally speaking they have the same *real* return (i.e. after inflation return) except with less risk on that component.
A very cool tool is at https://tipsladder.com. This can give you the specific tips to buy to guarantee a certain (real) income for a set number of years. One plausible way to use the tool is to go to the Social Security website and see your projected Social Security benefit per year, and use TIPS to match that in the years *before* you’ll be taking Social Security.
I would stay 100% equities or nearly 100% equities as long as you are in accumulation phase and only start scaling back when you’re like 3 or so years from decumulation. I recommend the risk parity radio podcast for discussion of asset allocations during decumulation.
The reason to own long term treasuries is not because of their risk free total return profile. The reason to own long term treasuries as part of a still predominantly equities portfolio is because of their low correlation with equities (particularly at times when low correlation matters most), which provides diversification benefits through rebalancing opportunities (check out how EDV performed during 2008 and 2020). But this is something to add as you near decumulation.
I wouldn’t go conservative at 34.
That said, temporarily shifting some new funds to 5%+ treasuries in an age of high CAPE stocks isn’t crazy