ghariton wrote:I've never believed in market allocation according to target ratios of equity, bonds, etc. I've got an amount of bonds that will let me live modestly but reasonably comfortably to age 90, and I maintain that amount. (That's close to Shakespeare's ironn rule.) (After 90, it will be CPP and OAS, and my house equity will help pay for the nursing home.)
The rest of my money is in equities, mostly US ETFs, but some Canadian ETFs as well, plus very small amounts in three individual energy producers (my play mone). As the market fluctuates, so does the proportion of equities in my portfolio. They currently amount to about a third. While that ratio must have bounced around a lot lately, it is not something I track.
I am of the same mind for our family. After coming a long ways from naive simple questions on this forum over 2 years ago, I have learned, mostly from this forum (possibly directly from ghariton if you have posted this before) that this approach is what will determine our financial independence and potential retirement, if we choose.
However, I think it is important to indicate that while this approach allows for immense financial peace of mind, it is a luxury that, perhaps, many on this forum can afford, but I would argue the majority of people in the world could not/can not. It may be due to insufficient earnings/savings, or it may be due to a desired retirement lifestyle greater than what the accumulated capital will allow. Either way, most will require the equity premium and will need to weather the related volatility.
I have run countless simulations using past data, and I find the uncertainty of declaring an asset allocation and withdrawing a fixed percentage in retirement unacceptable. One run will show an 8 figure surplus at death at age 90 (many decades from now...not 2009 dollars), the next run shows destitution at age 76. I can't live with that uncertainty, especially once we have given up our jobs, possibly earlier than we needed to thinking that we would be ok. So my financial ambition is as George has outlined above, and we hope to achieve it with enough capital and a modest lifestyle. Failing enough capital, it will need to be a simple lifestyle.
Fixed income for needs and as much wants as we can afford. Equities for the rest, and to provide for luxury if the markets allow.
The most valuable investment we currently make is to continue the simple life we have always enjoyed throughout our 15 years of university. If we become accustomed to something extravagant, it would be alot harder to scale back later. This is the greatest risk that I see: A change in lifestyle expectations somewhere along our journey which may not be fundable with fixed income in retirement.