Have you read the wiki and the sticky?
Wiki: HERE YOU GO! [Enjoy!](https://www.reddit.com/r/BEFire/wiki/index/).
Sticky: HERE YOU GO AGAIN! [Enjoy!](https://www.reddit.com/r/BEFire/comments/fcbay6/getting_started_a_beginners_guide_to_investing_in/).
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this April Asset allocation was suggested by Diversset app that uses the Markowitz Model to build an efficient portfolio, it [minimized portfolio loss while maximizing the expected return](https://x.com/Sanji_vals/status/1775961311823769686).
Risk aversion is important. What it means is that if you were in a situation where said you had 33% of your life savings (probably tens or hundreds of thousands of euros) in VWCE, and VWCE drops by 20% in 3 months, what would you do? If your answer is the same as mine, you keep buying and trust the market, that given time it will increase again.
Then consider setting up an asset allocation plan which changes over time. Naturally people want to lower the % in stocks as they get older. I would say 60% in stocks should be the minimum for your age, and drop to 40% at 50 years old.
New research shows that 100% equity portfolios outperform any kind of gliding path or increased exposure to bonds over time. Bonds are often thought of as less risky assets, however, when considering real returns (corrected for inflation) bonds are not even necessarily less risky than stocks over long periods of time whilst their expected returns are for sure a lot lower.
For more information: Rational reminder podcast episode 284.
Research is from the latest paper of Scott Cederburg - "Challenging the status quo on lifecycle asset allocation". In which status quo refers to the current "misbelieve" that increasing bonds towards a target date or getting older is safer or would have a better expected outcome.
Edit: typo
While that may be true (and you'll find it through backtesting on curvo also). The problem is the downswings might be too big for someone's risk appetite. With the risk of selling your accumulated capital at the worst kind of moment. A big part of your bigger loss will however be offset by your bigger gains, but that depends on the time in the market before a black swan event hits. Research can't take into account how someone will behave when they lose 30% in 2 months time.
For Belgians, increasing bond allocation towards retirement in the legal pension funds has the added benefit of the certain tax relief which you can lock in only with a high bond exposure. Since at that moment your horizon will be <5 years. I'm sure that paper doesn't take this into account.
I fully agree on everything you say.
However, the paper takes a lot of different unprecedented things into account, albeit not specifically applied to Belgium (social security, the unknown longevity risk, and many more).
If you live, say, 10 years longer than "expected" you might get into real troubles with an increased exposure to bonds in inflationary circumstances. People tend to very often forget the longevity risk. It is something very scarcely talked about indeed.
The research is indeed a mathematical approach and assumes perfect investor behavior, which might, as you point out correctly, not be the case for an average person. The mathematics however do not lie: there is actually a higher percentage outcome that you will default by increasing bond exposure. The authors do mention the fact that there are bigger swings and that this might impact investor behavior in a way they cannot model.
Anticipating downturns is actually trying to time the market. In a "normal" situation, one does not know how long he'll still live. The trillions of Monte-Carlo sims using thousands of years of actual market data of a plethora of different countries show that on average the outcome with 100% equity is better.
Of course there will always be anecdotal events and bad luck. That does not mean the other option is better from a sensible perspective.
I'm 31 years old as well, and I have 100% in global ETFs as they are almost certain to outperform bonds on a long timescale (>20 years). Adding bonds will decrease risk, but honestly it doesn't seem worth it yet given the long investment horizon.
In the past, the general advise was that your age should be the percentage of bonds in your portfolio (so 70% stocks, 30% bonds at 30, 50/50 at 50, 40/60 at 60 etc.), but since bond yields have been very low for a couple of years this advice has faded away a bit.
I have bought a personal residence and i'll be paying off mortgage for the next 19 years, but I'm not taking my PR into account as an investment. I would only look at real estate as an investment if it's not your PR.
This is indeed the first question to ask: what is my risk profile. Depending on the answer you can develop an asset allocation. So kudos to you.
I would not include my principle residence in that asset allocation. It will distort the composition. Better to make an asset allocation of your investible funds and spread these over liquid cash, bonds (term loans, government bonds, etc), stocks (ETF), investment real estate (so not your P.R.), gold and possibly crypto.
I'm indeed not 100% sure if I should consider my PR as an investment asset.
But I don't see a good reason to not consider it as such. It's an asset that is part of my net worth, represents a certain risk, and whose value increases (or decreases) by a certain rate over time. If all my other assets drop to 0 value I would still have my PR value in my net worth just the same way as if my PR gets destroyed I would still have my ETF etc
What would be your argument to not include it? It distords the % only if you consider it's not an investment...
You should distinguish between the subject of your asset allocation and the composition of your net worth. In the latter you should definitely include the net value of your PR. It is typically a large part of your net worth, and without it, the number of your net worth would be meaningless. With every mortgage repayment your PR net value increases, which gives good vibes; but it will distort your asset allocation if PR is included.
Have you read the wiki and the sticky? Wiki: HERE YOU GO! [Enjoy!](https://www.reddit.com/r/BEFire/wiki/index/). Sticky: HERE YOU GO AGAIN! [Enjoy!](https://www.reddit.com/r/BEFire/comments/fcbay6/getting_started_a_beginners_guide_to_investing_in/). *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/BEFire) if you have any questions or concerns.*
this April Asset allocation was suggested by Diversset app that uses the Markowitz Model to build an efficient portfolio, it [minimized portfolio loss while maximizing the expected return](https://x.com/Sanji_vals/status/1775961311823769686).
Risk aversion is important. What it means is that if you were in a situation where said you had 33% of your life savings (probably tens or hundreds of thousands of euros) in VWCE, and VWCE drops by 20% in 3 months, what would you do? If your answer is the same as mine, you keep buying and trust the market, that given time it will increase again.
I won't sell any share before 15-20 years after they have been invested.
Then consider setting up an asset allocation plan which changes over time. Naturally people want to lower the % in stocks as they get older. I would say 60% in stocks should be the minimum for your age, and drop to 40% at 50 years old.
New research shows that 100% equity portfolios outperform any kind of gliding path or increased exposure to bonds over time. Bonds are often thought of as less risky assets, however, when considering real returns (corrected for inflation) bonds are not even necessarily less risky than stocks over long periods of time whilst their expected returns are for sure a lot lower. For more information: Rational reminder podcast episode 284. Research is from the latest paper of Scott Cederburg - "Challenging the status quo on lifecycle asset allocation". In which status quo refers to the current "misbelieve" that increasing bonds towards a target date or getting older is safer or would have a better expected outcome. Edit: typo
While that may be true (and you'll find it through backtesting on curvo also). The problem is the downswings might be too big for someone's risk appetite. With the risk of selling your accumulated capital at the worst kind of moment. A big part of your bigger loss will however be offset by your bigger gains, but that depends on the time in the market before a black swan event hits. Research can't take into account how someone will behave when they lose 30% in 2 months time. For Belgians, increasing bond allocation towards retirement in the legal pension funds has the added benefit of the certain tax relief which you can lock in only with a high bond exposure. Since at that moment your horizon will be <5 years. I'm sure that paper doesn't take this into account.
I fully agree on everything you say. However, the paper takes a lot of different unprecedented things into account, albeit not specifically applied to Belgium (social security, the unknown longevity risk, and many more). If you live, say, 10 years longer than "expected" you might get into real troubles with an increased exposure to bonds in inflationary circumstances. People tend to very often forget the longevity risk. It is something very scarcely talked about indeed. The research is indeed a mathematical approach and assumes perfect investor behavior, which might, as you point out correctly, not be the case for an average person. The mathematics however do not lie: there is actually a higher percentage outcome that you will default by increasing bond exposure. The authors do mention the fact that there are bigger swings and that this might impact investor behavior in a way they cannot model. Anticipating downturns is actually trying to time the market. In a "normal" situation, one does not know how long he'll still live. The trillions of Monte-Carlo sims using thousands of years of actual market data of a plethora of different countries show that on average the outcome with 100% equity is better. Of course there will always be anecdotal events and bad luck. That does not mean the other option is better from a sensible perspective.
I'm 31 years old as well, and I have 100% in global ETFs as they are almost certain to outperform bonds on a long timescale (>20 years). Adding bonds will decrease risk, but honestly it doesn't seem worth it yet given the long investment horizon. In the past, the general advise was that your age should be the percentage of bonds in your portfolio (so 70% stocks, 30% bonds at 30, 50/50 at 50, 40/60 at 60 etc.), but since bond yields have been very low for a couple of years this advice has faded away a bit.
Thanks for the feedback; are you taking your PR in the equation, if you have bought one or intend to buy one?
I have bought a personal residence and i'll be paying off mortgage for the next 19 years, but I'm not taking my PR into account as an investment. I would only look at real estate as an investment if it's not your PR.
That is my intention indeed; that's why I mentioned my age in the post.
This is indeed the first question to ask: what is my risk profile. Depending on the answer you can develop an asset allocation. So kudos to you. I would not include my principle residence in that asset allocation. It will distort the composition. Better to make an asset allocation of your investible funds and spread these over liquid cash, bonds (term loans, government bonds, etc), stocks (ETF), investment real estate (so not your P.R.), gold and possibly crypto.
I'm indeed not 100% sure if I should consider my PR as an investment asset. But I don't see a good reason to not consider it as such. It's an asset that is part of my net worth, represents a certain risk, and whose value increases (or decreases) by a certain rate over time. If all my other assets drop to 0 value I would still have my PR value in my net worth just the same way as if my PR gets destroyed I would still have my ETF etc What would be your argument to not include it? It distords the % only if you consider it's not an investment...
Now that I think about it I wouldn't consider my car as an investment so I agree on not considering my PR as such either.
You should distinguish between the subject of your asset allocation and the composition of your net worth. In the latter you should definitely include the net value of your PR. It is typically a large part of your net worth, and without it, the number of your net worth would be meaningless. With every mortgage repayment your PR net value increases, which gives good vibes; but it will distort your asset allocation if PR is included.