What Should My Stock Allocation Be on My Early Retirement Journey?

So one of the things keeping me awake was how to properly allocate my stocks on My Early Retirement Journey.

Why is this important?
Investing, yes, has the potential to grow your capital with the magic of compound interest. However, the risk of losing your initial investment is present as well. What I seek to do is grow my money the fastest (which will allow a shorter Journey to Early Retirement) while minimizing the risk of loss.

The conundrum:
The twist with conventional wisdom is it focuses on years available to earn income to make up for any losses and allow the stock market to adjust after a downturn. Early Retirement means I still have physical life left to earn money. So does my risk exposure relate to my actual age (i.e. incoming earning potential measured in years) or the time to my proposed Early Retirement?  I took to the internet and this is what I found:

Thought 1: (source: millenial-revolution.com)

Thought 2: (source: forbes.com)
Rules of thumb, like ‘100 – Your Age' in stocks, are a great place to start.
It had a good run, gaining popularity in the 1970s and 80s as a shorthand for the mean-variance optimization model that came out of Nobel prize-winning modern portfolio theory(MPT) in the 1950s. 

The professional investment world is trending closer to a rule of ‘[120] – Your Age’ in stocks.  Indeed, a look at the three largest target date fund providers – Fidelity, Vanguard and T. Rowe Price– shows that they all hold much closer to ‘125 – Your Age.’ For example, these three target date funds allocate 90% in stocks for a 30-year old, and about 75-85% in stocks for a 50-year old.

**I can attest to this; my target date fund is set to 90% stocks and I am in my 30s.

A recent paper by money manager Research Affiliates makes a strong case that the youngest investors...[are]... best served by a “starter portfolio” of 1/3-1/3-1/3 in stocks, bonds, and “inflation securities” like TIPs and floating rate bonds (ETFs TIP and FLOT are good examples). This creates a portfolio of 33% stocks/67% bonds.

The article concludes with: two rules of thumb can cover the needs of most: a conservative starter portfolio for early-stage investors (like that 1/3-1/3-1/3 portfolio of stocks, bonds and inflation securities) and an updated age-based portfolio like ‘120 – Your Age’ in stocks for the rest.

Thought 3: (source: financialsamurai.com)
Different allocation models that account for aversion to risk, lifestyle choices, and interest in investing.

Example: Survival Allocation Model for those within 10 years of retirement.   

The Verdict:
My current stock allocation was set by the individual institutions based on a traditional retirement age (65+). Thus they are about 90% stocks. I was seduced by the aggressive investing with the hopes that I'd reach my FIRE number faster. However, I have an age in mind more than I have a number in mind. Also because I am a millennial, I tend to want what I want as soon as the thought occurs. I am not convinced that more aggressive retirement will get me out of the workforce before age 40 (6 years from now).  Some say that an 80/20 allocation beats a 100% stock allocation in the long run. In fact, the oft lauded benefits of indexing are based on the fact that you hold on to the investment product for at least 15 years to balance any losses. The links don't cite any credible source, so I'll take the information with a grain of salt. Again, who really knows.  In short, I'd like to leave the workforce sooner than 15 or 20 years, even if only for a sabbatical. Thus I'm positioned to keep my 401k slightly more aggressive than my taxable account since I would be accessing the taxable account faster but less aggressive than is traditional for my age. That's it for now.

So what will I do?
When I first drafted this post about 3 months ago, it was changing by the minute. As I explore more in the FIRE community, I wonder how much of what is out there is true and accurate both in terms of research and what bloggers purport they're actually doing. After my experience just starting the blog, I take the advice with a heapful of salt (not just a grain).  The default at both of my investment institutions is 90% stocks; per internet searches, conventional wisdom and general rules of thumb suggest 70% stock allocation based on my age. I initially thought I would have different allocations across my 3 accounts, but as of this moment, simpler is better because sometimes knowledge fades from the forefront of my mind to the deep recesses.

That being said, I think I will do 80/20 across all accounts with a tentative plan to transition to 60/40 when I reach FIRE.  At least one FIRE blogger has reported this conservative allocation after reaching FIRE (and even before), and their reported mentality on back-up plans and not losing money is aligned with where I am on the psychological side of investing. I'd rather spend less than HAVE to go back to work.  I would rather maintain what I have than risk losing it for greater gains. Caveat: I do leave myself the option to return to work for 1 to 2 years after a 9 or 10 year sabbatical. I have mentally allotted return to work as a back-up plan both to boost savings and to break up the Journey after achieving FIRE. All in all, I don't hate my job; I just want a break...a long break. Again this is all subject to change as I become aware of new information. How did you choose your allocation?

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