Is 100% Equity Allocation Wise in Retirement?

All right, well, Troy has a real question for you. It says, “What do the guys think about voices that urge against a Glide path for retirement funds? Could you keep retirement investments in an S&P fund forever and shoot for 10% returns every year?” And you may want, like, you guys kind of like a Glide path, like, you might want to talk about that, yeah.

Yeah, so when Troy’s asking about the Glide path, what he’s really talking about is this idea that as we age and as we get closer and closer to needing to access the funds that we have been saving, the allocation of those funds should naturally get more conservative. It should glide down. You think about a plane landing. It is at peak altitude, and then you get closer and closer to the runway, and you glide down towards the runway. So a lot of people say to us, or a lot of people ask us, “Hey, well, why would I do that? Why?” And it’s interesting he’s asking it from the academic sense. Brian, we see this practically all the time with entrepreneurs or folks who have taken some gigantic business risk and they’ve been incredibly rewarded for that. And they say, “Guys, I don’t care that I’m 74 years old. Did you see what I created? Why on earth would I ever back down my risk tolerance? I feel like a cowboy. It doesn’t make me nervous. I don’t care what the market does. I’m happy to be there.”

But there’s a huge flaw, I think, when people only focus on their risk tolerance. Why would we suggest, you know what? Maybe there’s another piece of the equation, and maybe we ought to think about dialing down the allocation. Yeah, wouldn’t it be so much easier because we have Financial Order of Operations. I love the Financial Order of Operations. You guys sent, like, somebody sent us a street sign where the word “food” for the billboard, the ‘D’ had fallen off, and it just said “Foo.” And they s, so I love that you guys think of us. Think of how easy it’d be if I could say Foo and Vu forever, you know? Vo, oh, Foo Ando and Vu forever. I mean, that’s kind of because there’s a whole group that are like, you know, you choose which Vanguard ETF that you love, and you go with it. There’s all kind of content on that. And look, I’m not against because I love index funds. I love ETFs, as you all know. We’re very passionate about that. But what B is alluding to, we have risk tolerance, and there’s a lot of us, the more educated you get, you’re going your risk tolerance because you understand the components of how economic cycles work. You can educate yourself beyond the point to where you’re very comfortable with risk. But what Bo is talking about beyond risk tolerance is, of course, risk capacity. That’s the thing. The thing that nobody talks about is that because I want you to understand as you get into your 50s and 60s or whatever you think your financial independence moment is, is that when we hit…

Because I have a client issue I’m dealing with right now, great client. I know they watch the content still. So, um, they’ll know I’m kind of talking about them where we’re working through how 2022 performance beat up their portfolio to a degree. It was not a great investing year. It was not a great, I mean, it was greater than 20% losses out there in the marketplace, so that’s a pretty big deal. And this client, who’s also a prolific saver, was buying every month during all the volatility of 2022. And then we’ve had a little bit of a recovery here in 2023, and they’re like, “Man, I thought I’d be slowly recovered on everything, you know, just the markets recovered now.” And I’ve had to use this moment of communication to kind of talk about, “Hey, it is true. Every dollar that you put in, even the S&P, is still down like 4 to 5% from all-time highs. Your portfolio, all that we bought during that period, is actually up, you know, it, that those purchases are up 7 to 8%. So there’s actually a delta difference of like 10 to 12%. Worked and did what it was supposed to. However, the headwind of your seven-figure portfolio that was on January 1st of 2022, they got beat up by the volatility. It’s going to take a while to recover even a diversified portfolio. Post the Great Recession, a good diversified portfolio took a good two years to fully recover, an undiversified portfolio, if you’re all in Vu for life. That’s probably going to take six, seven years because…

I mean, just it depends on because you’ve got to pay attention to the fact and what if you need that money in that period because that’s the problem with risk capacity. You have the tolerance. I’m not worried about you emotionally. It’s that what if you need the money? You’re not diversified, so you start pulling out of something that’s down 30% or 40% at the world’s worst time. And you have no choice because you need the money to live off of. So that’s why we do a Glide path, as Troy put it, is because as you get older, you want to diversify so you have access. This serves several purposes. It keeps you from ever having to sell assets that are down 30% or 40% at the world’s worst time. But it also, in my mind, I actually think there’s a silver lining in this is that as opportunities come your way in life because remember, oxygen and cash reserves and a diversified portfolio act in the same way…

We all take them for granted while things are rocking and rolling and everybody’s making money because you look at it and go, “Man, I could have made 10% last year because that’s what the S&P 500 made. But I only made 7.5%. You know, gosh, that stinks. I didn’t get that spread there.” What people don’t think about is the fact that when it goes ugly, and nobody has access to liquid assets like cash or bonds or diversified other safe-haven-type holdings, and everything’s down, there’s usually an opportunity to buy something. There’s distressed real estate, there’s distressed equities. That’s when you can do dynamic dollar-cost averaging, where you change out of it into undervalued asset classes from safe asset classes based upon bear market status. You create tremendous opportunity by having the flexibility and options of a diversified portfolio that can do things versus the person that’s riding or dying Vu or any of the other ETFs or index funds and waiting until the last minute. I think you might be just a little shortsighted on how scary this is. The last thing, Bo, and I’m sorry I’m just, but I get emotional about this is that I know how…

The first thing I struggle with with brand new retirees is that they all think that they’re cowboys until… because they think that they’ve done enough where they understand risk tolerance. But then the market goes down in that first year of retirement, and they feel an emotional feeling that they never felt because I think while you work, you just think if the market goes down, you just like, “Well, good. I’m saving into that. I’m buying into these cheaper prices.” That’s the financial mutant. And I’ll just keep working if it gets really bad. I’ll just work an extra year. I’ll work an extra two years. You leave the workforce, and then you don’t have the ability to go back to work…

That easily, and the market loses 20%, 30%. It’s going to hit a lot differently than when you’re in the workforce. Trust me. We work with hundreds of people who face this, and I can tell you from my experience, share it. It hits, and it’s going to create insecurity. It’s going to create anxiety. Why not go ahead and address that on the front end with a Glide path and flexibility and options so that you have your best retirement? Can I just throw one more thing? I know this because this is a BRI, and I’m totally stealing one of your things because this is so your thing, but you didn’t say it, so I’m going to say it. You cool with this? Yeah. Troy, the last thing I’d say to you is when it comes to wealth building, there are two unique and distinct stages that exist. There is the getting wealthy stage, and there is the staying wealthy stage. What the Glide path does, it is the indicator to you of which stage you are in. So while you’re in the getting wealthy stage, aggressive, high-risk tolerance, high-risk capacity, makes a ton of sense. But you need to have the realization that I am now flipping into the staying wealthy stage. I need to have an asset allocation that allows me to stay wealthy so I do not have to go back to the getting wealthy stage. That is the big difference. So recognize where you are in your financial journey and respond and react accordingly. For more information, check out our free resources.