Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
8Toretirement
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Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by 8Toretirement »

My retirement plan is fully funded, each additional dollar only raises more funds we most likely won't use.

I am currently drawing down the equity portion of my portfolio and raising my cash component.
Alternatives to equities are not good.

As the US market moves to higher all time records, I feel the market is increasingly priced on the speculation of improving fundamentals in the economy, not earnings of the underlying stocks, and I am growing weary of riding this bull market. It will eventually turn.

Is anyone else tiring of the stock market?

I am still in the market but have trimmed my equity component to 30% where I envision it staying until we get a correction.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by BRIAN5000 »

I struggle with this question on a daily basis, do I need this much in the market, should I sell down my equity currently at 40% which is 5% over target, if I do sell what do I sell, then there's CG and loss of dividends etc. etc.. I hope you get some interesting responses.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by Koogie »

Me too. I get daily advice to "take profit". My response is: take it to where ?
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by AltaRed »

I just let everything ride 'as is'. No second guessing.

If we get a 30% correction, I will ride it down and then back up just like I did through the 2008 crisis.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by ghariton »

AltaRed wrote:I just let everything ride 'as is'. No second guessing.

If we get a 30% correction, I will ride it down and then back up just like I did through the 2008 crisis.
Me too.

I have absolutely no skill in market timing. I thought Brexit would be a trigger for a market meltdown. I thought Trump's election would be a trigger for a market meltdown. Luckily I am now smart enough (or too lazy) not to act on any of that.

As for risking money when there is no need to risk it. I quite understand the argument and have some sympathy for it. My solution is to have enough in safe fixed income so as to ride out the future, come what may (short of default by Government of Canada). The remainder can rise and fall with the markets. So what if I have to drive this car for a few years longer than I was expecting?

After all, if one has "enough" money, and one comes across a twenty dollar bill on the sidewalk, should one bend down and pick it up? Since the money is not needed, why waste the effort?

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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by AltaRed »

ghariton wrote:As for risking money when there is no need to risk it. I quite understand the argument and have some sympathy for it. My solution is to have enough in safe fixed income so as to ride out the future, come what may (short of default by Government of Canada). The remainder can rise and fall with the markets. So what if I have to drive this car for a few years longer than I was expecting?
A good qualifier that I should have included in my post. I can ride out an equity storm for at least 2-5 years if I had too... and longer if I really pulled in my horns.

FWIW, I could be a lot more conservative in my portfolio (much less equity) but quite frankly, I would find that too boring of an existence. I need just enough 'engagement' in the market to remain interested in what is going on, but not so much that it becomes 'work'. I tend to like Goldilocks situations.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by deaddog »

ghariton wrote:


As for risking money when there is no need to risk it. I quite understand the argument and have some sympathy for it. My solution is to have enough in safe fixed income so as to ride out the future, come what may (short of default by Government of Canada). The remainder can rise and fall with the markets. So what if I have to drive this car for a few years longer than I was expecting?

After all, if one has "enough" money, and one comes across a twenty dollar bill on the sidewalk, should one bend down and pick it up? Since the money is not needed, why waste the effort?

George
I figure you gotta dance with who brought you to the dance.

I ended up with my net worth because of equities. I might as well keep using them to increase my wealth while I can.

We can’t know the future so who knows how much I will need down the line. If I have to hire full time help to continue living in my house rather than some government facility it will be nice to have enough.

As far as that $20 bill, I’ll always take the time to pick it up. Even if it’s to pass on to someone who needs it. Leave it as a tip for the breakfast waitress.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by SQRT »

deaddog wrote:
I figure you gotta dance with who brought you to the dance.

I ended up with my net worth because of equities. I might as well keep using them to increase my wealth while I can.

We can’t know the future so who knows how much I will need down the line. If I have to hire full time help to continue living in my house rather than some government facility it will be nice to have enough.

As far as that $20 bill, I’ll always take the time to pick it up. Even if it’s to pass on to someone who needs it. Leave it as a tip for the breakfast waitress.
This is my thinking as well. In fact I often thought of your saying about dancing during the financial crises. I remembered it as "going home with the one you brought". Anyway, if my portfolio was halfed I would still be fine, essentially back to where I was in 2011.

Also, like Red I enjoy being in the market. Gives me something to keep the ole' brain working. But in the end I am really investing for my heirs. Hopefully, some day they will thank me. Having said that, if things go well, I can still find enjoyable things to spend or give on.

To a large extent it probably depends mostly on your risk tolerance. Mine is very high.
Last edited by SQRT on 15 Dec 2016 09:39, edited 2 times in total.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by gobsmack »

The calculation of risk goes both ways. If you are talking about money your plan does not need, it is also money you can afford to loose. It also means you can afford to ride a downturn for a few years without much pain. After all, it is money you did not need to begin with. It is a fairly safe position to be in. A much more difficult situation would be risking money that may put your plan in jeopardy.

If you want to invest these funds in equities, I think I would consider something like XAW (i.e., diversification as a mitigation strategy).
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by SoninlawofGus »

8Toretirement wrote: As the US market moves to higher all time records, I feel the market is increasingly priced on the speculation of improving fundamentals in the economy, not earnings of the underlying stocks, and I am growing weary of riding this bull market. It will eventually turn.
True for the US market, but as this data shows, the rest of world is not nearly at the same valuation level, with EAFE and emerging markets considerably less expensive. Even the US is not at crazy highs, though a rise in the Canadian dollar along with a correction there will be costly to us all.

I am at 40%, but as you write, fixed income is not really a great option either. Even if the TSX index returns 0% over the next 10 years, the current yield is around 2.7%, which is a good percentage point above GOC 10-year bonds.

I'm at 42% with a target of 40%. I will probably look at trimming the US stocks somewhat. The problem I have is that it is easiest to trim equities in my corporate RRSP plan, with no CG hit. However, that plan also has very poor options for fixed income -- only a couple of bond funds, and a single (very low paying) GIC option.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by hboy43 »

ghariton wrote:
AltaRed wrote:After all, if one has "enough" money, and one comes across a twenty dollar bill on the sidewalk, should one bend down and pick it up? Since the money is not needed, why waste the effort?

George
Almost fell out of my chair laughing. I was in Belleville on the boat solo this past season and around 9PM one night I literally found a $20 bill on the main street. Wasn't that much effort to pick it up, then wander into the local establishment and order a jug of beer.

A to why I stick with equities and grow my funds, well it is in my nature I guess.

The irony is that I seem to have a pretty good facility in the markets, yet there is almost nothing I can buy for myself that does me any good. I am perfectly content to wander around town in filthy jeans with 5 day's stubble looking indistinguishable from a homeless person most of the time, to my wife's often great annoyance. This is a great setup for the times when in clean jeans (or at least less dirty) and 2 day's stubble, I make a 4 figure donation and leave behind a few people thinking "dafuq?"

So we have this state of people who enjoy winter vacations, fast cars, and fine wine, but are terrible with their money stare across the table at me, and I stare back, each of us wishing to some extent we were in the other camp.

But in the end, we are who we are. Why fight it?

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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by deaddog »

SQRT wrote:
To a large extent it probably depends mostly on your risk tolerance. Mine is very high.
Mine is very low. That’s is why I employ a strategy that protects my capital gains and keeps losses to a minimum.

I have no need to have a cash cushion to ride out a market set back. If the market shows signs of weakness I start to sell. If I end up with a high percentage of cash and the market rebounds (like happened in February of this year) then I get back in.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by SQRT »

deaddog wrote:
SQRT wrote:
To a large extent it probably depends mostly on your risk tolerance. Mine is very high.
Mine is very low. That’s is why I employ a strategy that protects my capital gains and keeps losses to a minimum.

I have no need to have a cash cushion to ride out a market set back. If the market shows signs of weakness I start to sell. If I end up with a high percentage of cash and the market rebounds (like happened in February of this year) then I get back in.
Sounds good at least in theory. Market timing is difficult. I just stay 100% invested. Would cost a lot to do otherwise as my larger positions have very significant embeded cap gains. Haven't traded at all his year. Right now this strategy looks brilliant. Could be my best year since 2009.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by StuBee »

I aim for a 65:35 split between equity and cash. The market has skewed me to 68:32 which is not yet "trigger territory". However to finance cash needs for 2017, rather than just liquidate FI (which is how I can sleep well at night...), I sold off some equity (all registered). This has partially corrected the situation (has brought me to about 66.5:33.5).
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by deaddog »

SQRT wrote: Sounds good at least in theory. Market timing is difficult. I just stay 100% invested. Would cost a lot to do otherwise as my larger positions have very significant embeded cap gains. Haven't traded at all his year. Right now this strategy looks brilliant. Could be my best year since 2009.
Have you done the calculations to see when the optimum time is to realize your capital gains? I have to assume that the tax will be greater if you leave them accumulate and leave them for your estate to pay.

It’s not something that I’m concerned about as I’m fairly current because of my market timing. But I wonder if the tax tail is wagging the investment dog.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by Garthd »

I'm always fully invested. It's a great feeling to be caught with your pants up. Peter Lynch

Works for me.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by SQRT »

deaddog wrote:
SQRT wrote: Sounds good at least in theory. Market timing is difficult. I just stay 100% invested. Would cost a lot to do otherwise as my larger positions have very significant embeded cap gains. Haven't traded at all his year. Right now this strategy looks brilliant. Could be my best year since 2009.
Have you done the calculations to see when the optimum time is to realize your capital gains? I have to assume that the tax will be greater if you leave them accumulate and leave them for your estate to pay.

It’s not something that I’m concerned about as I’m fairly current because of my market timing. But I wonder if the tax tail is wagging the investment dog.
I will pay tax at the highest marginal rate whenever I cash out. So unless they increase the inclusion rate I'm not worried. My spouse's estatate will have plenty of assets to pay the cap gains tax. The tax free deferral is very important in my view.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by AltaRed »

Nice problem to have. Those with incomes below circa $200k could start to manage their cap gain dispositions at some point in time by gifting of various sorts (charitable, favourite causes, family). It is a matter of when one thinks they might be within 5 years of their best before date, how much 'obscene' excess they have at the time, one's view of what they want to do with their remaining lifespan, etc. Until then, I agree deferment (absent a crystal ball on changes in cap gain inclusion rate) is otherwise likely the best choice.

Out-of-the-blue example: If my spouse and I woke up one day at age 85 and we were renting a 2 bedroom retirement home, we hardly would need $2 million left for our remaining days. We'd start giving good amounts of that away in various directions.

Edited for grammar/spelling
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by BRIAN5000 »

A good qualifier that I should have included in my post. I can ride out an equity storm for at least 2-5 years if I had too... and longer if I really pulled in my horns.
You would be ok except for maybe a Japanese style market reversion. I think planning just for necessities is overrated, you should plan to secure the retirement you want including discretionary spending as best you can and have some options at hand in case it really gets ugly.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by ghariton »

BRIAN5000 wrote:I think planning just for necessities is overrated, you should plan to secure the retirement you want including discretionary spending as best you can and have some options at hand in case it really gets ugly.
It's not just planning for necessities. Rather, it's a manner of dealing with risk -- at least for me. Knowing that there is a core of "safe" money allows me to invest the rest -- about two thirds of the portfolio -- into equities and ride out drawdowns such as 2008/09 without anxiety.

Of course, if one has lots and lots of money, such that even the worst drawdown would still leave enough for necessities, no matter what the portfolio, then this approach isn't necessary. Unfortunately, I'm not in that happy position.

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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by 8Toretirement »

BRIAN5000 wrote:
A good qualifier that I should have included in my post. I can ride out an equity storm for at least 2-5 years if I had too... and longer if I really pulled in my horns.
You would be ok except for maybe a Japanese style market reversion. I think planning just for necessities is overrated, you should plan to secure the retirement you want including discretionary spending as best you can and have some options at hand in case it really gets ugly.
I would agree with this, when I say my plan is fully funded, I mean I have fully funded my plan for a very good retirement from 59. I have no need to make increased returns to add to my retirement quality. Any addition is a bonus.

Still have 51/2 years until retirement so funds will increase based on savings alone.

At this point for myself, being fully invested in the stock market is foolhardy, I am taking a risk my standard of living will go down in retirement. I have cash right now as I decide best course of action, which may well be 1-2 year GIC's if the rates go higher on a rate sale which happens several times a year.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by 8Toretirement »

ghariton wrote:
BRIAN5000 wrote:I think planning just for necessities is overrated, you should plan to secure the retirement you want including discretionary spending as best you can and have some options at hand in case it really gets ugly.
It's not just planning for necessities. Rather, it's a manner of dealing with risk -- at least for me. Knowing that there is a core of "safe" money allows me to invest the rest -- about two thirds of the portfolio -- into equities and ride out drawdowns such as 2008/09 without anxiety.

Of course, if one has lots and lots of money, such that even the worst drawdown would still leave enough for necessities, no matter what the portfolio, then this approach isn't necessary. Unfortunately, I'm not in that happy position.

George
We always assume the market will go back up, and in a similar manner to what occurred in 08/09. What if the next recession doesn't play out that way.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by AltaRed »

8Toretirement wrote:We always assume the market will go back up, and in a similar manner to what occurred in 08/09. What if the next recession doesn't play out that way.
If it does not play out that way, then we have the dubious disctinction of being like Japan. Few nations, if any, are in denial the way Japan is.

I am thus willing to risk we will NOT be like Japan, simply because we will promote immigration to replace/supplement our aging workforce. Stagnation has as much to do with aging demographics as it does with stupid government economic policy and lack of worker productivity gains.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

Post by Koogie »

BRIAN5000 wrote:You would be ok except for maybe a Japanese style market reversion.
A powerful argument for international diversification. If the TSX were to stagnate like the Nikkei, US and Intl holdings would buoy up the diversified and punish those with an overly developed home market bias.
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Re: Risk Reward of Holding Stocks When Your Plan Doesn't Need Them

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Koogie wrote:A powerful argument for international diversification.
+ 1

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