Is John Bogle Wrong on Retirement Asset Allocation?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
devotee
Posts: 42
Joined: Thu Jan 17, 2013 1:13 pm

Is John Bogle Wrong on Retirement Asset Allocation?

Post by devotee »

A recent article on marketwatch.com mentioned Mr. Bogle's long-held belief, with which I agree, to have your fixed income allocation roughly equal your age. Then the article proceeded to mention what they said was Mr.Bogle's lesser well-known advice to include any pension and Social Security payments in the calculation. It said to take the total of your annual pension and Social Security payments, multiply by 15 (why, I don't know) and add the result to your fixed income.
I did this. The result was that, as a 65 year old retiree, because of my pension and Social Security, I should have $1 million of my $1.25 million stock and bond nest egg in equities in order to meet the appropriate allocation (65% bonds and 35% stocks) for my age. This seems much too risky for just about anyone and especially for me, since I may soon have to begin taking some distributions from the nest egg. What do you bogleheads think?
User avatar
CyberBob
Posts: 3387
Joined: Tue Feb 20, 2007 1:53 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by CyberBob »

devotee wrote:It said to take the total of your annual pension and Social Security payments, multiply by 15 (why, I don't know) and add the result to your fixed income.
The inverse of 15 gives you 6.67%, which is a ballpark payout a 65 year old man would get buying an immediate annuity.

Bob
User avatar
Mel Lindauer
Moderator
Posts: 35757
Joined: Mon Feb 19, 2007 7:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Mel Lindauer »

devotee wrote:A recent article on marketwatch.com mentioned Mr. Bogle's long-held belief, with which I agree, to have your fixed income allocation roughly equal your age. Then the article proceeded to mention what they said was Mr.Bogle's lesser well-known advice to include any pension and Social Security payments in the calculation. It said to take the total of your annual pension and Social Security payments, multiply by 15 (why, I don't know) and add the result to your fixed income.
I did this. The result was that, as a 65 year old retiree, because of my pension and Social Security, I should have $1 million of my $1.25 million stock and bond nest egg in equities in order to meet the appropriate allocation (65% bonds and 35% stocks) for my age. This seems much too risky for just about anyone and especially for me, since I may soon have to begin taking some distributions from the nest egg. What do you bogleheads think?
Many Bogleheads don't agree with Jack on this point. Rather, they use SS as an income stream that reduces the amount that they'll have to take from their portfolio to meet their current living expenses. As you noted, counting SS as a bond would lead many retired investors to take on much more equity risk than they're comfortable with, setting them up for possibly bailing out when the going gets rough.
Best Regards - Mel | | Semper Fi
chaz
Posts: 13604
Joined: Tue Feb 27, 2007 1:44 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by chaz »

Risk level is a personal issue - no fixed rule. Be comfortable.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
Topic Author
devotee
Posts: 42
Joined: Thu Jan 17, 2013 1:13 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by devotee »

I agree with the bogleheads that Mel Lindauer mentions as being opposed to Mr. Bogle's inclusion of pension and Social Security in the asset allocation calculation. I personally use the latter two as an income stream (as Mel suggests) to reduce any necessary distributions from my nest egg. I do intend to adhere to Mr Bogle's 65% bond allocation being that I'm 65, but I'll only be using my $1.25 million nest egg money to meet that advice-- that will mean keeping $437,500 or so in stocks and $812,500 or so in bonds. This will allow me to sleep a lot easier.
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by pkcrafter »

Mel Lindauer wrote:
Many Bogleheads don't agree with Jack on this point. Rather, they use SS as an income stream that reduces the amount that they'll have to take from their portfolio to meet their current living expenses. As you noted, counting SS as a bond would lead many retired investors to take on much more equity risk than they're comfortable with, setting them up for possibly bailing out when the going gets rough.
+1

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
MathWizard
Posts: 6542
Joined: Tue Jul 26, 2011 1:35 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by MathWizard »

I would not say that he is wrong, because he has said that this is a rule of thumb and that each individual
should use this as a starting point and adjust as necessary.

A quote a book of his on this can be found in the Wiki entry:
http://www.bogleheads.org/wiki/Asset_allocation

Realize that there are people on the extremes: 100% equities or a very high bond/cash allocation at
a very young age. The SS as a bond just means that a person with SS (and/or a pension) has the
ability to handle more risk that someone who has neither, so it is not necessary to have as much in bonds,
though an individual may want to.

SS has inflation protection that many pensions do not. In the case of a non-inflation adjusted pension, one
would want a somewhat higher equity allocation at age 65 than 35/65 to make up for the purchasing power lost.
So to me the (non-inflation adjusted) pension as a bond makes more sense to me than SS as a bond.
But that is just me.
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 6:12 am

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by G-Money »

If you're setting your asset allocation based upon your need, willingness, and ability to take risk, then it doesn't matter. You'll get to the same asset allocation (in terms of dollars in stocks, dollars in bonds, cash flow from pension/SS) regardless.

I don't think anyone can be objectively wrong about a retirement asset allocation. Someone else's approach might be wrong for you, but that's why you get to make your own decisions.
Don't assume I know what I'm talking about.
User avatar
stemikger
Posts: 4950
Joined: Thu Apr 08, 2010 5:02 am

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by stemikger »

chaz wrote:Risk level is a personal issue - no fixed rule. Be comfortable.
+1

I don't think he is wrong, he has often said he is on the conservative side. I personally think age in bonds is too conservative. I used to following that rule when I was younger. Looking back, I now feel that was a mistake.

People are living longer today and the one thing I hardly hear mentioned when talking about keeping larger fixed income the closer to retirement is that all because someone is retiring it doesn't mean they are going to take out the entire amount all at once. They will take out 4% or whatever they deem appropriate each year meaning the amount they have in stocks is going to stay there 20, 30, 40 years. Keeping that in mind being too conservative all because you are retired may be viewed as being more risky then holding stocks to keep up with inflation.

http://www.fool.com/investing/general/2 ... tions.aspx
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
Topic Author
devotee
Posts: 42
Joined: Thu Jan 17, 2013 1:13 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by devotee »

I can afford to be that conservative because half of my fixed income nest egg is totally in a 403b that pays exactly 7% year in and year out with no possible loss of principal no matter what happens to interest rates. I can understand that those without that benefit may want to have more allocation in equities.
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by abuss368 »

This is the one area where Mr. Bogle confuses me! I really enjoy reading his articles, books, and watching his interviews, but this whole social security and pension area just not agree with his advice of "age in bonds".

Perhaps Mr. Bogle will expand on this and provide updated advice.
John C. Bogle: “Simplicity is the master key to financial success."
freebeer
Posts: 2014
Joined: Wed May 02, 2007 8:30 am
Location: Seattle area USA

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by freebeer »

abuss368 wrote:This is the one area where Mr. Bogle confuses me! I really enjoy reading his articles, books, and watching his interviews, but this whole social security and pension area just not agree with his advice of "age in bonds"...
Well again "age in (bonds + NPV of social security)" is much less conservative than pure "age in bonds". And it's also less aggressive than "count NPV of social security as part of your bond allocation" for someone who's already 65%/35% equities/bonds. So I don't think we can take either part of Jack's formulation in isolation - in toto, it's a pretty balanced recommendation.
User avatar
joe8d
Posts: 4544
Joined: Tue Feb 20, 2007 7:27 pm
Location: Buffalo,NY

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by joe8d »

pkcrafter wrote:
Mel Lindauer wrote:
Many Bogleheads don't agree with Jack on this point. Rather, they use SS as an income stream that reduces the amount that they'll have to take from their portfolio to meet their current living expenses. As you noted, counting SS as a bond would lead many retired investors to take on much more equity risk than they're comfortable with, setting them up for possibly bailing out when the going gets rough.
+1

Paul
+2
All the Best, | Joe
Austintatious
Posts: 878
Joined: Thu Sep 13, 2012 7:01 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Austintatious »

abuss368 wrote:This is the one area where Mr. Bogle confuses me! I really enjoy reading his articles, books, and watching his interviews, but this whole social security and pension area just not agree with his advice of "age in bonds".

Perhaps Mr. Bogle will expand on this and provide updated advice.
I'd assumed that a Bogle "age in bonds" allocation is to be based on only one's stocks and bonds portfolio, that it's not intended to include bond-like (Bogle's term) income streams like SS and pensions. It seems clear to me, now, that that's not what Bogle is recommending, and that it's distinctly more conservative that what he intends. Though I'm relatively new to the man's teachings and to this forum, I've concluded that Jack Bogle is simply not as conservative or as inflexible as I (and perhaps some other Bogleheads) have thought. For example, in recent times, he's advised that exchanging some TBM for intermediate corporates is a reasonable way to deal with current market trends. That surprised and caused some concern for more than few, here. And this recommendation to include SS and pension income streams in one's fixed income when determining an "age in bonds" allocation has clearly caused what - concern, as has been reflected by the several threads on SS as bonds? Truth is, at least it seems to me, Jack Bogle ain't nearly as conservative or as rigid as many of us have thought, and that it causes some of us a bit of heartburn. So, I'm working on it. My more recent perception of Jack Bogle is that he's very much a work in progress, and I suspect that's a healthy thing for him and for us all. Anyway, that's been my impression, formed over the past couple of years.
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Dandy »

Set your allocation to meet your risk tolerance. the main point is you should take into consideration that a pension and social security income stream allows you to take more risk. Age in bonds is still a good place to start. Having a pension and social security provides some security. Do you need to take more risk? If so, and you can tolerate it Mr Bogle is saying go ahead.

I would not let anyone, even St. Jack, talk you into going beyond you risk tolerance or need. He is probably right that there are a lot of retirees that are in great financial shape e.g. pension, SS, house paid for an no other debt and they could easily afford to own more equities. So, take a look at your portfolio, needs and risk and see if more equities is right for you.
User avatar
Leif
Posts: 3698
Joined: Wed Sep 19, 2007 4:15 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Leif »

freebeer wrote:
abuss368 wrote:This is the one area where Mr. Bogle confuses me! I really enjoy reading his articles, books, and watching his interviews, but this whole social security and pension area just not agree with his advice of "age in bonds"...
Well again "age in (bonds + NPV of social security)" is much less conservative than pure "age in bonds". And it's also less aggressive than "count NPV of social security as part of your bond allocation" for someone who's already 65%/35% equities/bonds. So I don't think we can take either part of Jack's formulation in isolation - in toto, it's a pretty balanced recommendation.
+1

I think is completely appropriate to use SS and a pension in asset allocation. Some have SS and some don't. Some have a pension and some don't. It can have a large impact. Yes of course it is an income stream that will determine how much you need to withdraw from savings/investment. But how do you exclude that from asset allocation? Also remember it is a starting point. Depending on your desires to leave money or die broke or take more risk or take less, you AA will adjust to suit.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by The Wizard »

I'm an Income Stream analyst in retirement and just prior, so I do conversions the other way: how many $$$ per month will this provide.
That being said, there's still a RANGE of acceptable AA percentages before & after retirement. Bogleheads do NOT line up with age in bonds as a rule.
So I would say that Mr. Bogle is somewhat off-center with these recommendations, but not outside the ballpark...
Attempted new signature...
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by dbr »

Leif wrote:
freebeer wrote:
abuss368 wrote:This is the one area where Mr. Bogle confuses me! I really enjoy reading his articles, books, and watching his interviews, but this whole social security and pension area just not agree with his advice of "age in bonds"...
Well again "age in (bonds + NPV of social security)" is much less conservative than pure "age in bonds". And it's also less aggressive than "count NPV of social security as part of your bond allocation" for someone who's already 65%/35% equities/bonds. So I don't think we can take either part of Jack's formulation in isolation - in toto, it's a pretty balanced recommendation.
+1

I think is completely appropriate to use SS and a pension in asset allocation. Some have SS and some don't. Some have a pension and some don't. It can have a large impact. Yes of course it is an income stream that will determine how much you need to withdraw from savings/investment. But how do you exclude that from asset allocation? Also remember it is a starting point. Depending on your desires to leave money or die broke or take more risk or take less, you AA will adjust to suit.
The discussion is not about whether or not the existence of income streams should be considered in setting asset allocations. The discussion is about HOW to consider those income streams. Mr. Bogle wants us to take them into account as capitalized assets classified as bonds. Others might suggest looking at how the existence of income streams affects one's need, ability, and willingness to take risk. There could be other approaches. In any case the issue doesn't even make sense without a prior understanding of how one might arrive at an asset allocation at all. In Mr. Bogle's case that method is clear; it is the rule age in bonds. Once you start with that rule and you want to take income into account it is pretty well forced that income be counted as a bond. If you do that you have to be happy that the outcome of taking income into account compared to ignoring it will be to specify a more aggressive allocation of the liquid assets. Other methods of determining asset allocation don't necessarily have that consequence. People often opine that the result of taking income into consideration would be to also take a more aggressive allocation of stocks to bonds. That, however, is not at all necessary. For example, once one accounts for the existence of income streams the investor might not need an aggressive asset allocation and following the dictum of taking no more volatility risk than necessary, one would reduce the investment in equities. The discussion is also opened up as to what objective the investor has for his assets. In the case that existing income is sufficient to meet needs, the purposes of investing might be other things entirely, which could dictate any range of asset allocation possibilities.
teacher
Posts: 1165
Joined: Sun Oct 05, 2008 5:45 pm
Location: California

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by teacher »

dbr said:
The discussion is also opened up as to what objective the investor has for his assets. In the case that existing income is sufficient to meet needs, the purposes of investing might be other things entirely, which could dictate any range of asset allocation possibilities.
When our IPS was written in 2009, we considered need, ability, and willingness to take risk. We tried to consider our income stream but we didn't know when we would retire and whether DH would take a lump sum over a defined pension, and we did not really consider the legacy component of our investment objective. We just hoped we could bequeath. Now that we have both retired, and the lump sum vs pension decision has been made, the investment objective is crystal clear. We are able to leave a legacy and our AA needs to reflect our wish to do so. So, I believe dbr is correct. "The discussion is about HOW to consider those income streams." In 2009, we had age -10 in bonds. To reflect our objective to leave a legacy because our income stream is sufficient and the portfolio can ameliorate inflation, we are changing the AA to 60/40.
User avatar
ruralavalon
Posts: 26297
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by ruralavalon »

Mel Lindauer wrote:
devotee wrote:A recent article on marketwatch.com mentioned Mr. Bogle's long-held belief, with which I agree, to have your fixed income allocation roughly equal your age. Then the article proceeded to mention what they said was Mr.Bogle's lesser well-known advice to include any pension and Social Security payments in the calculation. It said to take the total of your annual pension and Social Security payments, multiply by 15 (why, I don't know) and add the result to your fixed income.
I did this. The result was that, as a 65 year old retiree, because of my pension and Social Security, I should have $1 million of my $1.25 million stock and bond nest egg in equities in order to meet the appropriate allocation (65% bonds and 35% stocks) for my age. This seems much too risky for just about anyone and especially for me, since I may soon have to begin taking some distributions from the nest egg. What do you bogleheads think?
Many Bogleheads don't agree with Jack on this point. Rather, they use SS as an income stream that reduces the amount that they'll have to take from their portfolio to meet their current living expenses. As you noted, counting SS as a bond would lead many retired investors to take on much more equity risk than they're comfortable with, setting them up for possibly bailing out when the going gets rough.
Just my $0.02, for what its worth.

This is just a speculation about why many pre-retirees don't count SS or pension income in their bond allocation. A large majority of people (including myself) don't know how to do a present value calculation, and great many don't even understand why it would be needed. Also unless you are fairly close to retirement, you don't really know what your SS income will be. So pre-retirement they (we) just don't know how to include that in the bond allocation.

In retirement, or near retirement, you do know what your SS income will be and the SS times 15 calculation is an easy way (which even we math-deficient ones can use) to determine a bond-like value for that income stream.

In my case, in investing before retirement I had arrived at 50/50 allocation for our investment portfolio -- using using age in bonds as a starting point, considering SS as reducing income needs, and the "whats comfortable" approach. After retirement I found that, using age in bonds, counting SS as a bond, using 15 times SS = its bond value -- yielded a target 50/50 allocation for our investment portfolio. So in our case the two approaches yielded the exact same result. (I have no pension, so that didn't enter into the picture under either approach.)

So my suspicion (based on a sample of 1) is that the two approaches both work well.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
lloydbraun
Posts: 101
Joined: Mon May 30, 2011 9:14 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by lloydbraun »

I think we have to remember that Bogle is not a messianic figure. His advice and his work has helped all of us, but most of us probably have slight differences with him. Personally I invest in all index funds (403b) and etfs (roth) but do not go by either his or Vanguard's target allocation for someone my age (35). Instead I do age-15 in bonds and have slightly more exposure to int'l than Bogle recommends. It doesn't matter, in the end I'm following his general message: controlling costs (average ER of .09).
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Dandy »

If we capitalize pension and SS income streams and count them as bonds - why not our salary during the accumulation phase?

We should take all income streams into account when determining out asset allocation. I'm sure most of us do, if not by formally converting them to bonds (Mr. Bogle), then informally when assessing our need and desire to take risks and formulating our IPS/allocation.

If capitalized income streams form the all or a vast majority of your fixed income - I think that is a potential problem. When your equity side takes a big hit, and it will, you can't do anything with your "bonds" can't sell a pension or SS or even a piece of them - you are stuck with what they really are - income streams not bonds.

You basically will have to keep drawing from your shrinking equity position at a time you should be considering buying more or at least using some of you "real" fixed income. Just something to keep in mind before you capitalize (pretend) income streams are really bonds.
AdamP
Posts: 207
Joined: Thu Dec 12, 2013 10:24 am

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by AdamP »

lloydbraun wrote:I think we have to remember that Bogle is not a messianic figure. His advice and his work has helped all of us, but most of us probably have slight differences with him.
Beat me to it. For all the very intelligent discussion that goes on on this forum, the often (forgive me) mindless allegiance and litmus testing to a cherry-picked and limited subset of what John Bogle has said and done is just sad. Group think at its worst (and yes, all humans -regardless of intelligence- are susceptible).

I get it, the forum was started around -some- of the ideas of John Bogle. However, those ideas should've only been a starting point for further knowledge -not written down on stone tablets to sit outside the altar to Bogle. For instance low-cost indexing and asset allocations that balance risk versus reward are simple ideas, and research since then has supported them in general and expanded on the nuances. Unfortunately, the future is unknowable. You need look no further than the use and need for Firecalc and Bayesian statistics (to name of few) to understand that many assumptions and models are tested not for certain proof that they will work, but for statistical evidence of their likelihood of working or failing AND -here's the kicker- are always based on past performance. I can't fathom why some members so fiercely defend things like different AA glide paths. There is not now, nor will their ever be, proof in the now that one will absolutely work better than another in a market controlled by irrational humans that have conflicting self-interests.

Follow research, not figureheads. And for the love of Bogle, stop cherry picking his words and holding some up as the literal word of your deity of choice (and ignoring others as apocryphal).

You may now burn me at the stake for being a heretic.
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by dbr »

AdamP wrote:
lloydbraun wrote:I think we have to remember that Bogle is not a messianic figure. His advice and his work has helped all of us, but most of us probably have slight differences with him.
Beat me to it. For all the very intelligent discussion that goes on on this forum, the often (forgive me) mindless allegiance and litmus testing to a cherry-picked and limited subset of what John Bogle has said and done is just sad. Group think at its worst (and yes, all humans -regardless of intelligence- are susceptible).
I think you are misreading this forum. Far and away the majority sentiment here is exactly the opposite of mindless allegiance and litmus testing. In this specific instance there is almost overwhelming rejection of the age in bonds/SS as bonds mantra. The actual group think regarding asset allocation is so far all over the map as to not be any thought at all unless the dictum that every investor should arrive at the allocation he deems suitable for his own situation is group think.
AdamP
Posts: 207
Joined: Thu Dec 12, 2013 10:24 am

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by AdamP »

dbr wrote:I think you are misreading this forum.
I did not say there aren't other heretics or that there are no contrarian views. However, I respectfully disagree that Bogle isn't held up as an authority figure. A little google-fu shows 29,100 posts for "Bogle said/says", 11,500 for "Bogle is right" (and 5,120 for "Bogle is wrong" -and many of those start with "I don't think" or "not that")... Even the unwritten belief behind the question that started this very thread is "Bogle is usually right" or "we, the Bogleheads, follow Bogle".

I do agree that there are many contrarian views to Bogle, and that the forum, although often suffering from group think regarding his sayings, does not always speak with one unified voice. I'll quote another thread (http://www.bogleheads.org/forum/viewtop ... 9#p1564016).
nisiprius wrote:This is a topic of constant controversy in this forum, and for one of the more recent go-arounds see the thread containing my posting here. It's controversial because John C. Bogle himself believes international investing is not necessary, and says if you want to do it anyway, OK, but don't go over 20% of your stock allocation. Within the forum, that is a minority view and one area in which many Bogleheads are willing to say, simply, "I think Bogle is wrong."
The question behind my point is: why does the forum even debate what Bogle did or didn't say, and if he is or isn't right? Why is it "controversial because John C. Bogle himself believes..."? Bogle isn't posting here (that I can find), and even if he is, members are mainly building positions around (or against) what he said, or what others said he said. I just don't see why the opinions of Bogle (or anyone, for that matter) engender any devotion, or creation of camps to defend, or cause anyone (like the OP) to sheepishly ask, "Is John Bogle Wrong".

Build positions around financial research papers; defend or question their assumptions and conclusions. If your position is supported by research, great! Does it align with Bogle's views? Who cares. If your position is impossible to prove (e.g. predicting the future): don't act like you can defend it for a second, and certainly don't appeal to authority.
User avatar
Mel Lindauer
Moderator
Posts: 35757
Joined: Mon Feb 19, 2007 7:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Mel Lindauer »

Dandy wrote:If we capitalize pension and SS income streams and count them as bonds - why not our salary during the accumulation phase?

We should take all income streams into account when determining out asset allocation. I'm sure most of us do, if not by formally converting them to bonds (Mr. Bogle), then informally when assessing our need and desire to take risks and formulating our IPS/allocation.

If capitalized income streams form the all or a vast majority of your fixed income - I think that is a potential problem. When your equity side takes a big hit, and it will, you can't do anything with your "bonds" can't sell a pension or SS or even a piece of them - you are stuck with what they really are - income streams not bonds.

You basically will have to keep drawing from your shrinking equity position at a time you should be considering buying more or at least using some of you "real" fixed income. Just something to keep in mind before you capitalize (pretend) income streams are really bonds.
That's an important point that I've raised before. You can't rebalance with those "make-believe bonds".
Best Regards - Mel | | Semper Fi
Topic Author
devotee
Posts: 42
Joined: Thu Jan 17, 2013 1:13 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by devotee »

I just don't see why the opinions of Bogle (or anyone, for that matter) engender any devotion, or creation of camps to defend, or cause anyone (like the OP) to sheepishly ask, "Is John Bogle Wrong".

Build positions around financial research papers; defend or question their assumptions and conclusions. If your position is supported by research, great! Does it align with Bogle's views? Who cares. If your position is impossible to prove (e.g. predicting the future): don't act like you can defend it for a second, and certainly don't appeal to authority.
AdamP



There was no "sheepish" feeling on my part when posing this question as the title of my post. As much as I respect Mr. Bogle, I felt he was dead wrong (at least as far as I was concerned) to include pension and SS as bonds. The title of my post was meant simply to draw attention and responses. Gratifyingly, the boglehead participants show respect, but no abject fealty to Mr. Bogle.
User avatar
Munir
Posts: 3200
Joined: Mon Feb 26, 2007 3:39 pm
Location: Oregon

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Munir »

AdamP wrote:
dbr wrote:I think you are misreading this forum.
I did not say there aren't other heretics or that there are no contrarian views. However, I respectfully disagree that Bogle isn't held up as an authority figure. A little google-fu shows 29,100 posts for "Bogle said/says", 11,500 for "Bogle is right" (and 5,120 for "Bogle is wrong" -and many of those start with "I don't think" or "not that")... Even the unwritten belief behind the question that started this very thread is "Bogle is usually right" or "we, the Bogleheads, follow Bogle".

I do agree that there are many contrarian views to Bogle, and that the forum, although often suffering from group think regarding his sayings, does not always speak with one unified voice. I'll quote another thread (http://www.bogleheads.org/forum/viewtop ... 9#p1564016).
nisiprius wrote:This is a topic of constant controversy in this forum, and for one of the more recent go-arounds see the thread containing my posting here. It's controversial because John C. Bogle himself believes international investing is not necessary, and says if you want to do it anyway, OK, but don't go over 20% of your stock allocation. Within the forum, that is a minority view and one area in which many Bogleheads are willing to say, simply, "I think Bogle is wrong."
The question behind my point is: why does the forum even debate what Bogle did or didn't say, and if he is or isn't right? Why is it "controversial because John C. Bogle himself believes..."? Bogle isn't posting here (that I can find), and even if he is, members are mainly building positions around (or against) what he said, or what others said he said. I just don't see why the opinions of Bogle (or anyone, for that matter) engender any devotion, or creation of camps to defend, or cause anyone (like the OP) to sheepishly ask, "Is John Bogle Wrong".

Build positions around financial research papers; defend or question their assumptions and conclusions. If your position is supported by research, great! Does it align with Bogle's views? Who cares. If your position is impossible to prove (e.g. predicting the future): don't act like you can defend it for a second, and certainly don't appeal to authority.
To AdamP,

A number of us who use this forum do not have the expertise to evaluate and judge financial research papers. As a physician (retired) I did not expect most of my patients to be able to read the details of the medical literature and decide on courses of therapy based on their readings. Don't get me wrong. It helps tremendously to be as educated as possible about a subject because it would help one to make evaluations of what the experts are saying- but it does not replace expert opinion.

Many of us quote not just Bogle but people like Swedroe, Ferri, Bernstein, and others. We do not hold them up as messiahs because they are mortal and also often disagree with each other. I hope I have enough knowledge to help me assess whom I would believe since I have to make decisions at some time. Jack Bogle has a special standing not because he is a messiah but he is the one that set the basic premises for the Boglehead philosophy. We all can disagree with him occasionally but we do not dismiss him lightly as just another opinion on the subject.

Since I am unable to understand and evaluate finance and investment research papers on my own, I find it helpful to hear quotes of what the experts believe (as long as they are accurate) because that would help me reach wise decisions regarding my finances.
User avatar
stemikger
Posts: 4950
Joined: Thu Apr 08, 2010 5:02 am

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by stemikger »

Munir wrote:
AdamP wrote:
dbr wrote:I think you are misreading this forum.
I did not say there aren't other heretics or that there are no contrarian views. However, I respectfully disagree that Bogle isn't held up as an authority figure. A little google-fu shows 29,100 posts for "Bogle said/says", 11,500 for "Bogle is right" (and 5,120 for "Bogle is wrong" -and many of those start with "I don't think" or "not that")... Even the unwritten belief behind the question that started this very thread is "Bogle is usually right" or "we, the Bogleheads, follow Bogle".

I do agree that there are many contrarian views to Bogle, and that the forum, although often suffering from group think regarding his sayings, does not always speak with one unified voice. I'll quote another thread (http://www.bogleheads.org/forum/viewtop ... 9#p1564016).
nisiprius wrote:This is a topic of constant controversy in this forum, and for one of the more recent go-arounds see the thread containing my posting here. It's controversial because John C. Bogle himself believes international investing is not necessary, and says if you want to do it anyway, OK, but don't go over 20% of your stock allocation. Within the forum, that is a minority view and one area in which many Bogleheads are willing to say, simply, "I think Bogle is wrong."
The question behind my point is: why does the forum even debate what Bogle did or didn't say, and if he is or isn't right? Why is it "controversial because John C. Bogle himself believes..."? Bogle isn't posting here (that I can find), and even if he is, members are mainly building positions around (or against) what he said, or what others said he said. I just don't see why the opinions of Bogle (or anyone, for that matter) engender any devotion, or creation of camps to defend, or cause anyone (like the OP) to sheepishly ask, "Is John Bogle Wrong".

Build positions around financial research papers; defend or question their assumptions and conclusions. If your position is supported by research, great! Does it align with Bogle's views? Who cares. If your position is impossible to prove (e.g. predicting the future): don't act like you can defend it for a second, and certainly don't appeal to authority.
To AdamP,

A number of us who use this forum do not have the expertise to evaluate and judge financial research papers. As a physician (retired) I did not expect most of my patients to be able to read the details of the medical literature and decide on courses of therapy based on their readings. Don't get me wrong. It helps tremendously to be as educated as possible about a subject because it would help one to make evaluations of what the experts are saying- but it does not replace expert opinion.

Many of us quote not just Bogle but people like Swedroe, Ferri, Bernstein, and others. We do not hold them up as messiahs because they are mortal and also often disagree with each other. I hope I have enough knowledge to help me assess whom I would believe since I have to make decisions at some time. Jack Bogle has a special standing not because he is a messiah but he is the one that set the basic premises for the Boglehead philosophy. We all can disagree with him occasionally but we do not dismiss him lightly as just another opinion on the subject.

Since I am unable to understand and evaluate finance and investment research papers on my own, I find it helpful to hear quotes of what the experts believe (as long as they are accurate) because that would help me reach wise decisions regarding my finances.
+1
Well said Doc. I feel the same way. When I read what Mr. Bogle says it is always well thought out and his reasoning makes so much sense to me. Jack and Warren Buffett don't talk down to people and have the same ability to make a difficult subject understandable to the masses. That is the sign of a true teacher and someone worth emulating.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
lloydbraun
Posts: 101
Joined: Mon May 30, 2011 9:14 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by lloydbraun »

I would differ a little with that analysis. As a retired physician you surely have the intelligence to read financial papers in journals, though it's not essential to do so. I read what I can though ALL of what I've read supports passive, index based investing. In fact, the more academic literature I've read the more I've been convinced that Bogle, Ferri, Swedroe, Bernstein, and others are correct. After reading all of this literature I'm pretty confident that whether I'm 75/25 in stocks/bonds or 80/20, as long as I save, invest, and keep costs as low as possible or nearly as low as possible (in the future if I get lazy I may switch to a Vanguard target retirement fund which would be slightly more expensive than what I currently have) then it won't make a huge difference to my quality of life in retirement.
Last edited by lloydbraun on Tue Mar 04, 2014 6:40 pm, edited 1 time in total.
lloydbraun
Posts: 101
Joined: Mon May 30, 2011 9:14 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by lloydbraun »

Sorry if my initial post sent us down the path of splitting hairs with regard to investment plans. I would assume most of us are relatively similar with our overall strategies, the tactics we use to implement those strategies are just a bit different.
Deceptor
Posts: 30
Joined: Sat Nov 23, 2013 5:50 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Deceptor »

In short: No, John Bogel is/was not wrong.
User avatar
tadamsmar
Posts: 9972
Joined: Mon May 07, 2007 12:33 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by tadamsmar »

A key question in retirement planning is: Have I saved enough to live on?

Equating your investments,your entire AA, to a reliable retirement income stream is a basic part of retirement planning. Why single bonds out for special treatment in this respect? Why equate reliable income stream like SS to bonds given that you just have to turn around and reverse the equation as part of retirement planning?
jnatke
Posts: 4
Joined: Tue Mar 04, 2014 11:08 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by jnatke »

Who ever said Bogle was conservative? Fiscally prudent, I'd say... not too sure about conservative.

Anyway, I wouldn't take Bogle (or Buffet or Graham or anyone) quite that literally.

I think all the poor guy is trying to say is at least consider the effect social security has on your retirement planning...

What's so wrong about that?

Jeff
User avatar
bertilak
Posts: 10711
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by bertilak »

Dandy wrote:Set your allocation to meet your risk tolerance. the main point is you should take into consideration that a pension and social security income stream allows you to take more risk.
I would add "and allows you to take less risk."

This leads to the aphorism "Why continue to play the game if you have already won?" There are a few reasons...
  1. The game is fun to play.
  2. You may want to build up a bigger legacy.
  3. You may want to "go for the brass ring" to make a step up in your lifestyle.
Just be sure none of those goals put the "won game" at risk of turning into a loss.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by abuss368 »

stemikger wrote: Well said Doc. I feel the same way. When I read what Mr. Bogle says it is always well thought out and his reasoning makes so much sense to me. Jack and Warren Buffett don't talk down to people and have the same ability to make a difficult subject understandable to the masses. That is the sign of a true teacher and someone worth emulating.
Very well said. This is why I have always enjoyed Jack Bogle's interviews, articles, and all his books are on my book shelf. In fact, I still have 5 of his books to read and I am looking forward to it.

Have you read all his books?
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by abuss368 »

How does one rebalance a pension or the present value of social security payments?

Same as the threads that appear every so often about including your home in your asset allocation and portfolio. How do you re-balance the equity in the house?
John C. Bogle: “Simplicity is the master key to financial success."
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Dandy »

Taking pension and social security into account when determining your risk tolerance and eventual asset allocation makes perfect sense.
The example of a person having $400 k capitalized pension and SS and $400k equities and thinking they have a 50% bond and 50% equity portfolio doesn't make sense to me. They have two income streams and 100% equity portfolio. If that fits their risk tolerance great - but let's not play mind games with what their real allocation and risk is. It is much riskier than a true 50% bond and 50% equity portfolio with the $400k of actual investable assets.

Bonds are many times used as a way to add stability to a portfolio. Usually, they do not suffer the dramatic and often rapid plunges in value that equities do on occasion. How stable are pensions and SS? Well many pension plans reduce by 50% the payments to the surviving spouse. Social Security leaves the surviving spouse with the higher of their or the deceased's SS. That is a reduction in income if both had collected SS.

So these income streams capitalized into pretend bonds may have a de stabilizing effect on the portfolio in the event of a death of a spouse. Sure any major life event should prompt a review of the survivor's financial position and risk need. It would be nice for the surviving spouse not to face loss of income (and pretend bond value that they can hopefully re calc) and 100% of their money in equities. Capitalization of income streams (or a house) just seem like a bad idea and totally unnecessary.
Austintatious
Posts: 878
Joined: Thu Sep 13, 2012 7:01 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Austintatious »

Dandy wrote:Taking pension and social security into account when determining your risk tolerance and eventual asset allocation makes perfect sense.
The example of a person having $400 k capitalized pension and SS and $400k equities and thinking they have a 50% bond and 50% equity portfolio doesn't make sense to me. They have two income streams and 100% equity portfolio. If that fits their risk tolerance great - but let's not play mind games with what their real allocation and risk is. It is much riskier than a true 50% bond and 50% equity portfolio with the $400k of actual investable assets.

Bonds are many times used as a way to add stability to a portfolio. Usually, they do not suffer the dramatic and often rapid plunges in value that equities do on occasion. How stable are pensions and SS? Well many pension plans reduce by 50% the payments to the surviving spouse. Social Security leaves the surviving spouse with the higher of their or the deceased's SS. That is a reduction in income if both had collected SS.

So these income streams capitalized into pretend bonds may have a de stabilizing effect on the portfolio in the event of a death of a spouse. Sure any major life event should prompt a review of the survivor's financial position and risk need. It would be nice for the surviving spouse not to face loss of income (and pretend bond value that they can hopefully re calc) and 100% of their money in equities. Capitalization of income streams (or a house) just seem like a bad idea and totally unnecessary.
It seems to me that, in general and by their nature, pension plans and SS are assets offering greater stability than does one's stocks and bonds portfolio. Yes, in some cases, the death of a spouse may result in changes in the income stream from a pension/SS but at least those changes, if not the death itself, are relatively predictable. And with thoughtful planning, a couple can do much to mitigate the impact from a spouse's death. It's the stock and bond markets that are unpredictable and inherently less stable. Surely, it's the relative stability/reliability/predictability of pensions and/or SS that cause Jack Bogle to suggest the consideration of "bond-like" assets as part of one's fixed income in deciding on asset allocation.
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Dandy »

And with thoughtful planning, a couple can do much to mitigate the impact from a spouse's death. It's the stock and bond markets that are unpredictable and inherently less stable. Surely, it's the relative stability/reliability/predictability of pensions and/or SS that cause Jack Bogle to suggest the consideration of "bond-like" assets as part of one's fixed income in deciding on asset allocation.

Capitalizing and taking into account are two different things to me. Taking it into account is saying I'm fortunate that I have income streams that cover 80% of my retirement needs I was comfortable with a 50/50 allocation but after thinking it through I feel comfortable with a 65/35 allocation (in real stocks/bonds). Capitalizing is making part (or all) of your new bond allocation pretend bonds.

Why not put the thoughtful planning into recognizing that they are fortunate to have nice income streams and then decide what risk and allocation of true investable asset should be? It is the capitalization of income streams into pretend bonds that is unnecessary. If they decide 100% equities more power to them -- at least they will be dealing with true investable assets that are usually somewhat liquid and can usually be adjusted in the future.

Sure these income streams are usually stable but quite suddenly volatile when they are not. I'd say a 50% drop in pension income overnight is pretty severe. Not exactly what I am looking for from my bond allocation. Rebalancing can be difficult or impossible. Do you adjust for growth in SS payments? Can't buy equities when they are low and may have to draw only from depressed equities. So - what advantages are there for capitalizing SS and pension? Simplicity? no. Really, it is that you can feel more comfortable in allocating more to equities. Well you can do that by just taking them into account.

I really wonder how many investors actually capitalize their income streams in their allocation. as in I'm 60% equities and 40% bonds and my 40% bonds consist of 30% capitalized SS and 10% Total Bond Fund. I would be floored if many actually do that. Has any other respected investment "expert" recommended it? Ferri?, Bernstein? Swedroe?, Pfau? Piper? Roth? I honestly don't recall.

Frankly, I think Jack got a little carried away on this issue. He rightly feels that many retirees are under allocated to equities and
aren't taking their SS, Pension into account. They are much better off than if they didn't have these income streams - so they could and should take on more equity risk. I just wish he had stopped there and not discussed capitalizing them.

Hey I'm not knocking jack. He is the single best thing that has ever happened for individual investors.
Austintatious
Posts: 878
Joined: Thu Sep 13, 2012 7:01 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by Austintatious »

Dandy wrote:And with thoughtful planning, a couple can do much to mitigate the impact from a spouse's death. It's the stock and bond markets that are unpredictable and inherently less stable. Surely, it's the relative stability/reliability/predictability of pensions and/or SS that cause Jack Bogle to suggest the consideration of "bond-like" assets as part of one's fixed income in deciding on asset allocation.

Capitalizing and taking into account are two different things to me. Taking it into account is saying I'm fortunate that I have income streams that cover 80% of my retirement needs I was comfortable with a 50/50 allocation but after thinking it through I feel comfortable with a 65/35 allocation (in real stocks/bonds). Capitalizing is making part (or all) of your new bond allocation pretend bonds.

Why not put the thoughtful planning into recognizing that they are fortunate to have nice income streams and then decide what risk and allocation of true investable asset should be? It is the capitalization of income streams into pretend bonds that is unnecessary. If they decide 100% equities more power to them -- at least they will be dealing with true investable assets that are usually somewhat liquid and can usually be adjusted in the future.

Sure these income streams are usually stable but quite suddenly volatile when they are not. I'd say a 50% drop in pension income overnight is pretty severe. Not exactly what I am looking for from my bond allocation. Rebalancing can be difficult or impossible. Do you adjust for growth in SS payments? Can't buy equities when they are low and may have to draw only from depressed equities. So - what advantages are there for capitalizing SS and pension? Simplicity? no. Really, it is that you can feel more comfortable in allocating more to equities. Well you can do that by just taking them into account.

I really wonder how many investors actually capitalize their income streams in their allocation. as in I'm 60% equities and 40% bonds and my 40% bonds consist of 30% capitalized SS and 10% Total Bond Fund. I would be floored if many actually do that. Has any other respected investment "expert" recommended it? Ferri?, Bernstein? Swedroe?, Pfau? Piper? Roth? I honestly don't recall.

Frankly, I think Jack got a little carried away on this issue. He rightly feels that many retirees are under allocated to equities and
aren't taking their SS, Pension into account. They are much better off than if they didn't have these income streams - so they could and should take on more equity risk. I just wish he had stopped there and not discussed capitalizing them.

Hey I'm not knocking jack. He is the single best thing that has ever happened for individual investors.
Dandy, I agree with a lot of what you're saying, here. But when you say that "capitalizing" and "taking into account" are two different things, I'm not sure I agree. To me, taking into account is essentially the same thing as capitalizing, however informal or vaguely defined the accounting. It's just that the value folks are willing to "assign" to future income streams as part of their overall allocation is going to vary, depending on how much of a hedge they feel the need for. My guess is that many Bogleheads consider the value of income streams in determining their stock and bond acquisitions and allocations, however well defined or established their assigned value may be. When they do that, I think they're essentially "capitalizing" the income streams, as aggressively or conservatively as they're comfortable with. The big question is just how formal the process, and how much. I, too, would be surprised if many have plugged the full present value of those income streams into their allocation formula.
Topic Author
devotee
Posts: 42
Joined: Thu Jan 17, 2013 1:13 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by devotee »

"Capitalizing" involves a rigid quantitative response which for me (OP) would result in the unacceptable, risky placement of 80% of my nest egg into equities. "Taking into Account" implies a more qualitative response allowing one's individual risk tolerance to determine stock/bond allocations. I feel that Dandy is correct.
tibbitts
Posts: 23589
Joined: Tue Feb 27, 2007 5:50 pm

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by tibbitts »

He rightly feels that many retirees are under allocated to equities and aren't taking their SS, Pension into account. They are much better off than if they didn't have these income streams - so they could and should take on more equity risk.
The problem is that this notion of taking on more equity risk happened to coincide with interest rates dropping to zero-ish levels, with seemingly no hope of ever recovering. Without getting into a debate on that latter point, we didn't have this discussion when money markets were paying 6% and inflation was running 3%. Nor did we have it when equities were in the process of dropping 50%. That doesn't really mesh with the whole stay-the-course thing.
User avatar
stemikger
Posts: 4950
Joined: Thu Apr 08, 2010 5:02 am

Re: Is John Bogle Wrong on Retirement Asset Allocation?

Post by stemikger »

tibbitts wrote:
He rightly feels that many retirees are under allocated to equities and aren't taking their SS, Pension into account. They are much better off than if they didn't have these income streams - so they could and should take on more equity risk.
The problem is that this notion of taking on more equity risk happened to coincide with interest rates dropping to zero-ish levels, with seemingly no hope of ever recovering. Without getting into a debate on that latter point, we didn't have this discussion when money markets were paying 6% and inflation was running 3%. Nor did we have it when equities were in the process of dropping 50%. That doesn't really mesh with the whole stay-the-course thing.
This is true. Charles Ellis fears that people are being too conservative with their retirement asset allocation and that can be more dangerous than being too aggressive. Maybe Jack is starting to feel the same way.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
Post Reply