is "age in bonds" really good Bogleheads advice?

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freebeer
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is "age in bonds" really good Bogleheads advice?

Post by freebeer »

A recent thread [1] discusses the benefit of bonds-first decumulation. There's some debate about the effect, but this discussion and others has caused me to doubt that "age in bonds" conventional wisdom (which in retirement would amount to stock-first decumulation and pre-retirement could also magnify sequence-of-returns risk) was ever a good idea.

Could it be that "age in bonds", as advocated on the Bogleheads® investment philosophy main page [2], is mis-aligned with the broader Bogleheads principle to make rationally-motivated decisions? I'm not aware of any concrete argument supporting that age-in-bonds is an optimal strategy (previous threads I've found like [3] are pretty vague). And, recommending something sub-optimal purely on psychological grounds would seem to be a cop out. "age in bonds [minus 20] to a terminal percentage between 20% and 50%" might for example be a rationally defensible glide path. Our own investment plan calls for maintaining a fixed allocation so this is not a personal question.. and I know age-in-bonds is not advocated as a one-size-fits-all solution for everyone. But I'm soliciting thoughts on whether the age-on-bonds guideline is appropriate for *anyone*, at least sufficiently to merit being considered part of the core "Bogleheads investment philosophy". And, after all, Jack Bogle maintains a fixed allocation! :wink:

[1] http://www.bogleheads.org/forum/viewtop ... st=1754997
[2] http://www.bogleheads.org/wiki/Boglehea ... philosophy
[3] http://www.bogleheads.org/forum/viewtopic.php?t=78728
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nedsaid
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Re: is "age in bonds" really good Bogleheads advice?

Post by nedsaid »

I see it as a rough guideline or rule of thumb. A better rule might be age - 10 equals percentage in bonds.

I am 54 and about 31-32% of my portfolio is in fixed income investments. it is high because bonds are expensive and yield so darned low. Did some mild rebalancing from stocks to bonds recently and hated doing even that. I think of this as the investment equivalent of eating my spinach. I do it not because I like it but because it is good for me.

You really have to fit these rules of thumb to your particular situation. I see these as being guidelines and not rigid rules.
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Re: is "age in bonds" really good Bogleheads advice?

Post by Index Fan »

It's a great place to start when you are trying to figure out what your AA should be, sort of a touchstone. You apply refinements based on your own personal circumstances and risk tolerance. it turns out that age in bonds works pretty well for me.
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Re: is "age in bonds" really good Bogleheads advice?

Post by chaz »

It's a personal choice based on your level of risk tolerance.
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Re: is "age in bonds" really good Bogleheads advice?

Post by k66 »

Other than a casual reference as a rule of thumb or good guideline, I don't recall seeing any evidence that AIB provides optimal consumption. I have always taken it to be that as one ages, one would presumably want the higher security and lower volatility associated with bonds.

Most of dispersion studies I have seen generally point to an equal mix of bonds and stocks (maybe even leaning a little heavier into equities) as being optimal types of allocations. As has been discussed previously, you need the higher equities to give you the better chance of promoting longevity of the portfolio (at least the historical evidence guides us this way).

For myself, I am 20% bonds currently (accumulating phase) and plan to be no more than 30% to 40% during draw-down. Why I am not AIB (near50%)? Because It is simply too wimpy.
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Re: is "age in bonds" really good Bogleheads advice?

Post by linuxizer »

[quote='nedsaid'] A better rule might be age - 10 equals percentage in bonds.[/quote]

By what criteria is that better?

--

I see this as a little bit like the three fund portfolio. You can find various backwards-looking criteria by which a tilted or slice'n'diced portfolio is "more optimal," but it's extremely unclear that a three fund portfolio is worse, particularly when you add in behavioral factors.

Stated differently, there's a broad range of data-supported strategies. Three fund portfolios and age in bonds are among them. The enemy of a good plan....
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Re: is "age in bonds" really good Bogleheads advice?

Post by whaleknives »

People here use a less than literal interpretation, treating it as a general recommendation to increase bonds with decreasing investment horizon.

John Bogle, on the page opposite his "Simple Rule of Thumb", described a more general "Basic Asset Allocation Model (Stocks/Bonds)" of only four splits, from 80/20 for the younger accumulator to 50/50 for the older distributor. "For example, my highest recommended target allocation for stocks would be 80% for younger investors accumulating assets over a long time frame. My lowest target stock allocation, 50%, would apply to older investors in the distribution phase. These investors must give greater weight to the short-run consequences of their actions." (Bogle on Mutual Funds, 1994, pp. 238-239)

This is more similar to Benjamin Graham's "never have less than 25% or more than 75%" in stocks (Wiki).
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Re: is "age in bonds" really good Bogleheads advice?

Post by IlliniDave »

As Bogle himself put's it, age in bonds is a "crude starting point". One must also weigh overall financial situation, objectives, and risk tolerance when determining what their allocation should be.
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Re: is "age in bonds" really good Bogleheads advice?

Post by garlandwhizzer »

Age in bonds as a strategy originated when intermediate term high quality bonds had positive anticipated returns in real inflation adjusted dollars. In short bonds made you money, perhaps not as much as stocks but certainly with less volatility. In the current interest rate environment, most are expecting real high quality bond returns over the next decade of about zero, perhaps negative, in real dollars. Such long periods of zero or negative returns in the bond market have happened before, like 1940 - 1980 which like now started from a time of very low interest rates. The 1940 -1980 period was characterized by increasing inflation for decades which peaked at about 13% in the early 80s. We do not know whether or not our period of low interest rates will be followed by significant and increasing inflation in which case bonds suffer much greater than stocks. That is the greatest risk to bond dominated portfolios.

Over the past three decades bonds have offered risk-free return. In the era of 1980 to 2011, that tradeoff was a very good one because bond returns were essentially equal with stock returns with much, much less volatility and psychological stress along the way. In the 40 years before that it was a bad tradeoff, more like return-free risk. We do not know exactly what the future of that tradeoff going forward is, but it certainly appears that the cost one pays for reduced portfolio volatility in expected long term portfolio returns is very high now relative to the past three decades.

Personally, I'm not an age in bonds guy. I'm 66 and I currently have 30 % in "safe" assets, about equally split between bonds and cash. Cash has inflation risk but no term or repayment risk and it can be instantly converted into bond funds when and if their principal value drops to a desirable level at some point. I don't advocate that allocation for everyone. It's a personal choice where each of us decides to position ourselves in the tradeoff. I don't think it's a one size fits all situation.

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Re: is "age in bonds" really good Bogleheads advice?

Post by freebeer »

chaz wrote:It's a personal choice based on your level of risk tolerance.
Sure, I accept that it's a valid personal choice. And if you have a lot more money than you need and no bequest motive then "100% bonds" is also a valid personal choice.

But the wiki page states more strongly that: "A good guideline is to hold 'your age in bonds'.'". I just don't see why this is true - and there is no citation or other concrete support for the specific guidance (although there is support for the general principle of a higher equity allocation in younger years). And Bogleheads core principles include making rational investment decisions supported by logical arguments. I don't see why it makes sense to consider this particular personal choice, unsupported by any logical argument and with plenty of arguments for why it's not optimal, part of the core "Bogleheads Investment Philosophy".

I would not quibble if the Wiki page said instead of "A good guideline is to hold 'your age in bonds'.'", "One way to do this is to hold your 'age in bonds' (until some maximum % based on your future risk need and tolerance)".
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Re: is "age in bonds" really good Bogleheads advice?

Post by ruralavalon »

frebeer wrote:Could it be that "age in bonds", as advocated on the Bogleheads® investment philosophy main page [2], is mis-aligned with the broader Bogleheads principle to make rationally-motivated decisions? I'm not aware of any concrete argument supporting that age-in-bonds is an optimal strategy (previous threads I've found like [3] are pretty vague).
No, none of the above. Its not misaligned with any broader principal, and its not claimed to be optimal strategy.

The Bogleheads wiki article on Asset Allocation under a section entitled "Rules of Thumb", clearly labels the adage "roughly your age in bonds" as a rule of thumb. Wiki article link: Asset Allocation .

The Bogleheads wiki article notes (Note 2) that the several rules of thumb referred to in the article "are very general rules of thumb to be adjusted for the investor's circumstances; a key circumstance being the presence or absence of a pension, which would change ones willingness or need to take risk."

The standard definition of the term "rule of thumb" is : " a principle with broad application that is not intended to be strictly accurate or reliable for every situation. It is an easily learned and easily applied procedure for approximately calculating or recalling some value, or for making some determination." Wikipedia, "Rule of Thumb" ; and "1. a general principle or rule based on experience or practice, as opposed to a scientific calculation. 2. a rough, practical method of procedure." thefreedictionary, "Rule of Thumb" .

I don't know what the OP is calling the "Main Page", and I don't see this adage referred to under "Bogleheads Investrment Philosophy" or "Boglehead Philosophy".
Wiki article link: Getting Started ; and
Wiki article link: Bogleheads® investment philosophy .

And yes, in my view it does work well as a starting point for decision making and for most people. It helps keep young people who think they are aggressive (but have never experienced a market twitch, much less a crash) from overestimating their risk tolerance, it helps the middle aged to understand the idea of shifting to a safer approach as you age, and it helps old guys like me understand that its still OK (safe) to keep something substantial in equities.
Last edited by ruralavalon on Sun Jul 21, 2013 11:50 am, edited 1 time in total.
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Re: is "age in bonds" really good Bogleheads advice?

Post by Taylor Larimore »

I'm soliciting thoughts on whether the age-on-bonds guideline is appropriate for *anyone*, at least sufficiently to merit being considered part of the core "Bogleheads investment philosophy".
Freebeer:

It is notable that different company "glide paths" of target funds, designed by experts, are ALL age-in-bonds related.

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Re: is "age in bonds" really good Bogleheads advice?

Post by MrMatt2532 »

In my mind, the whole point of a glide path is to maintain a constant risk throughout your life. This may sound confusing, but let me explain.

The basic idea is that while you are young, you have many earning years ahead of you and can afford to take a lot of risk with your financial assets. When you are older, you probably have already earned most of what you are going to earn, so you can't afford much risk with your financial assets since you will need to live off of them. This concept is also known as human capital.

See the vanguard research paper on the topic: https://institutional.vanguard.com/iam/ ... main=false
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Re: is "age in bonds" really good Bogleheads advice?

Post by Ged »

Age in bonds is an excellent, concise way of expressing a core part of the Boglehead philosophy. It's a very useful phrase to use as part of a 30 second explanation of what we propose here.

More in-depth elaborations of the Boglehead Way can elaborate and refine this idea. It's part of the process of moving from active to passive investing that a new Boglehead needs to go through.
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Re: is "age in bonds" really good Bogleheads advice?

Post by Chris M »

The Wiki article states: "All age-based guidelines are predicated on the assumption that an individual's circumstances mirror the general population's."

What I would infer from this statement is that age in bonds is an appropriate guideline for the general population, but an individual's circumstances might require a different approach. But I wonder if age in bonds really is good guidance even for the general population? Maybe in some past time, when the general population saved more and consumed less. But these days many if not most Americans are not saving enough for their retirement. If most people still working are behind in saving, wouldn't better advice for them be "put as much in equities as your risk tolerance will allow?" (Plus also start saving a lot more and spending less!) Note that this advice would not necessarily apply to retirees; I think for them it all depends on their withdrawal rate.
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Re: is "age in bonds" really good Bogleheads advice?

Post by EternalOptimist »

I'm 63 retired for 2+ years and am 50/50.....feels about right to me. Will stay there until it no longer seems right. To each his own.
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Re: is "age in bonds" really good Bogleheads advice?

Post by MnD »

Too conservative IMO.

I'm "age minus 25 in bonds" which puts one at 100% equity just starting out and 60/40 by age 65.
We'll be 69/34 at age 56 retirement and will fix our portfolio at 60/40 at age 65 onward.

With one "1% times years" DB pension, two above-average claims on Social Security and a paid-off house we don't mind some risk and volatility on the investment side, and it's getting a little less volatile every year. We plan to do some sort of dynamic withdrawal system in retirement where the year ending balance of financial net worth influences what we take out the next year.
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Re: is "age in bonds" really good Bogleheads advice?

Post by mickeyd »

As mentioned here and on numerous other threads, Age/Bonds is just a guide for those who have no other idea where to start when contemplating asset allocation. I probably used it many years ago when I has flopping around and trying to get a grip on "what to do."

At age 68 I am @ 60/40 and may eventually slide down (up?) to 50/50 when I get old.
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Re: is "age in bonds" really good Bogleheads advice?

Post by Kalo »

Chris M wrote:The Wiki article states: "All age-based guidelines are predicated on the assumption that an individual's circumstances mirror the general population's."

What I would infer from this statement is that age in bonds is an appropriate guideline for the general population, but an individual's circumstances might require a different approach. But I wonder if age in bonds really is good guidance even for the general population? Maybe in some past time, when the general population saved more and consumed less. But these days many if not most Americans are not saving enough for their retirement. If most people still working are behind in saving, wouldn't better advice for them be "put as much in equities as your risk tolerance will allow?" (Plus also start saving a lot more and spending less!) Note that this advice would not necessarily apply to retirees; I think for them it all depends on their withdrawal rate.
The problems I see with "put as much in equities as your risk tolerance will allow" are:
1) It fails to consider that some AA's can return more with lower risk via diversification.

2) I firmly believe that people are terrible at estimating their own risk tolerance, and that they overestimate it during bull equity markets, which is usually a time just prior to when they're going to benefit the most from holding bonds.

I think reading or re-reading one of the BH recommended books on AA is the best advice for anyone at any age.

Kalo
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Re: is "age in bonds" really good Bogleheads advice?

Post by stlutz »

To the value of the age in bonds approach is that it enourages holding a higher percentage of bonds than Wall Street types generally advocate. Equity allocations that are too high tend to result in behavioral problems (i.e. go big in stocks when the market has been doing well then scale back after a big crash).
Our own investment plan calls for maintaining a fixed allocation so this is not a personal question
I've come to believe that this is a better approach as well. Better times to own stocks/bonds don't necessarily correlate to one's age. As such, I think a better "default" rule than Age in Bonds is the old fashioned 60/40 portfolio.
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Re: is "age in bonds" really good Bogleheads advice?

Post by freebeer »

Chris M wrote:The Wiki article states: "All age-based guidelines are predicated on the assumption that an individual's circumstances mirror the general population's."

What I would infer from this statement is that age in bonds is an appropriate guideline for the general population, but an individual's circumstances might require a different approach. But I wonder if age in bonds really is good guidance even for the general population? Maybe in some past time, when the general population saved more and consumed less. But these days many if not most Americans are not saving enough for their retirement. If most people still working are behind in saving, wouldn't better advice for them be "put as much in equities as your risk tolerance will allow?" (Plus also start saving a lot more and spending less!) Note that this advice would not necessarily apply to retirees; I think for them it all depends on their withdrawal rate.
ChrisM, good point I hadn't noticed the statement. I would suggest (for discussion's sake - maybe I'm wrong so I welcome other perspectives) the even stronger proposition that age in bonds is NOT good guidance for an individual whose "circumstances mirror the general population's":

First, the average person arguably has at least somewhat of a bequest motive (average number of offspring being > 0). And, most portfolios undergoing decumulation in a "safe" withdrawal scenario do not trend to zero because the low withdrawal rates are designed to survive the worst periods in the last century including the Great Depression. So the average person's got a growing portfolio in late retirement. Of course they COULD keep following age-in-bonds, say to 85% bonds at age 85. But why SHOULD they?

Or, we could consider the average person an under-saver who need to spend more than is safe. Sure more stocks means more volatility but if such a person sticks to age in bonds they are basically GUARANTEED to run out of money - if they keep a higher equity percentage, models indicate that a much higher withdrawal rate has a decent chance of making it. Better some chance than none.

Lastly the average person in US depends on SS benefits for the majority of their spending and so their portfolio withdrawals are just a supplement to this baseline income. For such a person going full-safe bonds late in life may make little sense even if they are on track to hit zero $ balance by the end, because the can handle more volatility in order to be able to spend a bit more, since they have a backstop in SS.

So to me "age in bonds" is an OK strategy only in a very narrow set of circumstances: for someone with no bequest motive, no SS benefits backstop, and whose portfolio is converging on zero $. In that case progressing towards 100% bonds en route to age 100 might be prudent. But it's hard for me to se how such an individual's circumstances would "mirror the general population's". For the general population, "age in bonds until bonds reach X%" (where X is tailored based on risk tolerance) would seem like much better general advice.

But again I welcome analysis from any pro-age-in-bonds'ers of why it's good general advice.
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Re: is "age in bonds" really good Bogleheads advice?

Post by ruralavalon »

freebeer wrote: ChrisM, good point I hadn't noticed the statement. I would suggest (for discussion's sake - maybe I'm wrong so I welcome other perspectives) the even stronger proposition that age in bonds is NOT good guidance for an individual whose "circumstances mirror the general population's":

. . . [then discusses how an "average person's" situation might be different] . . .
You are again skipping over the entire idea of what a "rule of thumb" is. Its not guidance for any individual, its a starting point. As noted in the wiki on Asset Allocation: "I [Mr. Bogle] recommended -- as a crude starting point -- that an investor's bond position should be equal to his or her age. . . . . . Clearly, such a rule must be adjusted to reflect an investor's objectives, risk tolerance, and overall financial position".

In other words, what is your "prior"? If you are risk tolerant you move down in bond percentage, but from what starting point? If you are risk INtolerant, you move up in bond percentages, but from what starting point? This "rule of thumb" like any other can furnish a "prior", a starting point for the decision making process. Its not the end point of the decision making process.

And in actual practice, it seems to work out fairly well. Bogelheads seem to adjust for aging as the rule of thumb suggests, so that their allocations come out to approximately stocks at 113 minus age. 2011 Regression . And that seems to be fairly stable, not different in any large percentage from earlier in 2007 in spite of the enormous market disruption of 2008.
Last edited by ruralavalon on Sun Jul 21, 2013 5:30 pm, edited 2 times in total.
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Re: is "age in bonds" really good Bogleheads advice?

Post by Call_Me_Op »

freebeer wrote: Could it be that "age in bonds", as advocated on the Bogleheads® investment philosophy main page [2], is mis-aligned with the broader Bogleheads principle to make rationally-motivated decisions?
It is a starting point - a rule of thumb - not a firm rule, and is consistent with taking less risk as you age. I think it makes a lot of sense if interpreted as intended. You seem to be suggesting that it is intended as a firm and universal rule, which is incorrect.
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Re: is "age in bonds" really good Bogleheads advice?

Post by nisiprius »

There are really three separate questions here.
a) Decrease: Should portfolio risk be ramped down with increasing age?
b) Aggressiveness: at age 50, is 50/50 stocks bonds about right, too conservative, much too conservative?
c) Shape: Is a straight line the best profile?

The answer to (a) is surely "yes." Although I don't like the concept of "human capital" or trying to characterize one's career as "a bond," you don't need to do a mathematical analysis to see that your best estimate of total future earnings--discounted if you like, corrected for inflation if you like--decreases with time, and thus your ability to recover from bear markets decreases. There are at least three good reasons to decrease the risk of the investible portfolio with age. First, it corresponds to most peoples' perceptions of their own risk tolerance. Second, it's plain common sense based on having fewer future earnings years ahead of you. And, third, it is what comes out of economists calculations. If you consider a "total portfolio," consisting of the investment portfolio plus the present value of future earnings, future earnings are a relatively safe part. As future earnings decline, the risk of the total portfolio will increase, unless you compensate by de-risking the investible portfolio. It is irrational to let the risk of the total portfolio increase unless your risk tolerance in retirement is actually higher than it was while you were earning.

The answer to (b) is surely "personal." However, I have never seen any convincing rationale for the increase of 15%-20% that has occurred mainstream conventional-wisdom stock allocations over the past thirty years or so. No, stocks have not become any less risky than they ever were. There has been about a three-year increase in life expectancy at age 65, so an overprecise fine-tuner might argue for a 3% increase in stock allocation--but not 15-20%; so forget any nonsense about "because people are living longer."

The answer to (c) is surely "no, but it probably doesn't matter much. The important thing is to have some plan that can be followed that does reduce stock allocation with age." All the glide slopes used in target-date funds, and those that emerge from financial economists' calculations, are S-shaped; compared to age in bonds, they stay high longer, get most of the decline done during ages 40-60, and then level off.
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Re: is "age in bonds" really good Bogleheads advice?

Post by freebeer »

Taylor Larimore wrote:...It is notable that different company "glide paths" of target funds, designed by experts, are ALL age-in-bonds related.

Best wishes
Taylor
Dear Taylor,

That's a good point, thanks for the feedback and to be clear I have no doubt that there should be some kind of age-related glide path as general guidance for most investors.

But I think the data from target funds supports my argument that age-in-bonds is not ideal "naked" guidance for the general population. VG target funds glide-path for example ([1]) have 50% equities at retirement, presuming the nominal standard age 65: that's 43% more equities than age-in-bonds, a pretty major difference. And allocation never drops below 30% equities, another major difference. Lastly the equity allocation starts and stays at 90% from age 20 to 40, again a major difference vs. going from 80% to 60% during this time. "age in bonds" would be a strange way to describe "10% bonds until age 40, 70% bonds from age 72 on, and in between ages 40 and 72 gradually shift to that second plateau". In fact a better approximation to VG TR (and arguably a closer to optimal strategy) would be "10% bonds until age 50, 50% bonds thereafter". That is age in bonds, true, but only one time.

[1] http://www.wealthadvisors.com/assets/va ... hanges.pdf
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Re: is "age in bonds" really good Bogleheads advice?

Post by Chris M »

Kalo wrote:
Chris M wrote:The Wiki article states: "All age-based guidelines are predicated on the assumption that an individual's circumstances mirror the general population's."

What I would infer from this statement is that age in bonds is an appropriate guideline for the general population, but an individual's circumstances might require a different approach. But I wonder if age in bonds really is good guidance even for the general population? Maybe in some past time, when the general population saved more and consumed less. But these days many if not most Americans are not saving enough for their retirement. If most people still working are behind in saving, wouldn't better advice for them be "put as much in equities as your risk tolerance will allow?" (Plus also start saving a lot more and spending less!) Note that this advice would not necessarily apply to retirees; I think for them it all depends on their withdrawal rate.
The problems I see with "put as much in equities as your risk tolerance will allow" are:
1) It fails to consider that some AA's can return more with lower risk via diversification.

2) I firmly believe that people are terrible at estimating their own risk tolerance, and that they overestimate it during bull equity markets, which is usually a time just prior to when they're going to benefit the most from holding bonds.

I think reading or re-reading one of the BH recommended books on AA is the best advice for anyone at any age.

Kalo
I agree with your point 2, people are bad at determining their risk tolerance. It is very difficult to do, especially for those who haven’t experienced a major bear market. But regardless of the difficulties I don’t see any way around having to address this issue. And I don’t think age in bonds helps you address it. One fifty year old with a 50/50 allocation may find it much too aggressive and wind up selling stocks during a downturn, while another may find it much too conservative. As ruralavalon notes, Bogle says age in bonds is a starting point, that then should be adjusted based on the “investor’s objectives, risk tolerance, and overall financial position.” My point is that many investors’ “financial position” is such that they are in serious danger of not meeting their “objectives”—specifically, the objective of a comfortable, financially safe retirement. For example, according to the AARP Public Policy Institute if current trends continue 30% of middle class workers will become low-income retirees (A. Barry Rand, “Retirement at Risk,” AARP Bulletin, Vol. 54, No. 2, March 2013, p. 30). While this situation may mainly reflect inadequate savings, at this point these people need to try to catch up using all means available—not just by increasing their savings but also by upping their allocation to stocks as high as their risk tolerance will allow. My own view is that retirement is a very expensive, and risky, proposition, not just for those who need to catch up but for pretty much everyone. But one of the best ways to reduce the risk is to build up as big a nest egg as you can while you’re still working. Holding as high an allocation in stocks as you can stand can help you to do this. And if age in bonds is really just a starting point for a much more complicated analysis of current finances, objectives, and risk tolerances, then is the advice to put as much in equities as your risk tolerance will allow possibly just a way to cut to the chase?

As for your first point, the main opportunities to increase returns and reduce risk through diversification are in the equity portion of the portfolio. I don’t see much if any opportunity to increase returns by adding more bonds to a portfolio. In Asset Allocation Roger Gibson shows that multiple asset class investing would have increased returns and reduced risks over the past four decades. But he excludes bonds from the asset classes he considers in his analysis.
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Re: is "age in bonds" really good Bogleheads advice?

Post by steadyeddy »

freebeer wrote:Is "age in bonds" really good Bogleheads advice?
It was during the last thirty years or so, but nobody knows if it will be in the future.
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Re: is "age in bonds" really good Bogleheads advice?

Post by freebeer »

steadyeddy wrote:
freebeer wrote:Is "age in bonds" really good Bogleheads advice?
It was during the last thirty years or so, but nobody knows if it will be in the future.
Well, was it, though? I mean we had a lengthy bull market in bonds so yeah it worked out OK. But going 100% gold for the last fifteen years or so would have worked out OK but I think we can all agree that wasn't ever good Bogleheads advice. You can hit a 18 vs. a dealer 7 and win the hand but it's still a bad idea.

VG seems to think (via target retirement) that a 20-year-old and a 30-year-old should both have 90% equities, not 80% and 70% respectively. And VG seems to think that an 85-year-old should still have 30% equities, not 15%. I'm not suggesting Bogleheads philosophy should be equivalent to VG's recommendations but if we differ from what VG recommends (and what Jack Bogle does) it would seem like some actual modeling and analysis should inform that different recommendation, and I still haven't seen any such.

Another question I have is whether any of the more expert posters and wiki authors actually use age-in-bonds. There have been many discussions about portfolio allocation and it always seems that folks describe having a fixed allocation. To some degree the recommendation age-in-bonds feels to me like a cop-out based on pychological factors: we are concerned that flighty youth won't stay the course through bear markets with a super high equity percentage, and that nervous seniors can't even handle a 30% equity percentage. So we knowingly recommend sub-optimal equity percentages (implicitly, via age-in-bonds) as in effect "advice to newbies". I think at a minimum this should be qualified accordingly and again sub-optimal advice does not feel to me like it belongs in a statement of core Bogleheads Philosophy.

But I don't really know if age-in-bonds is bad, I'm just posing the question since I've not seen any argument that it is good (and there are surface reasons to suppose that it isn't). Retirement calculators like Firecalc, if they let you analyze pre-retirement accumulation phase at all, don't (AFAIK) allow for simulating the results of a age-in-bonds allocation glidepath (or any other glidepath). If any of the "quants" on the list have modeled age-in-bonds over a whole person's cycle I'd love if someone could post their results and how it compares with other allocations based on historical sequences of returns and/or Monte Carlo simulations. Perhaps it compares favorably, or at least not too unfavorably, thus refuting my concern that age-in-bonds recommendation should be considered harmful.
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Re: is "age in bonds" really good Bogleheads advice?

Post by Aptenodytes »

As usual Nisi clarifies quite a bit. However, his answer to the parsed "is 50-50 OK for someone age 50" is too categorical. Based on the polls done here, most 50-year-old Bogleheads would not be 50% bonds, and many would be >10 percentage points under that. So based on our behavior, we would collectively consider that allocation too conservative. The people managing target-date funds would agree with us -- the Vanguard target 2025 fund is 30% bonds and the target 2030 fund is 22% bonds -- our 50-year-old would probably be choosing between those two.

I think 80-age in bonds would be a more reasonable rule of thumb. It lacks the simplicity of age-in-bonds, but all it requires is a simple arithmetic calculation using a round number. To me, stating the rule in a manner that is off by about 20 percentage points, based on our behavior and the experts who manage the target date funds, reaches the level of being too far off to be useful.

I will readily acknowledge that age in bonds is a better rule to follow than no rule. If there are people for whom that's the alternative, then age in bonds is valuable.
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Re: is "age in bonds" really good Bogleheads advice?

Post by Qtman »

I couldn't resist this topic. Just like every other financial situation, this one is very dependent on multiple factors unique to the individual. The book "Bonds" by Stan & Hildy Richelson makes a good case for 100% bonds.

The constant "advice" given on this board based on minimal information and virtually no knowledge of the poster's personal information/risk tolerance/family responsibilities/family medical history/investing experience/major life goals/etc/etc is frightening. It's akin to having cancer and asking for treatment advice from a group of freshman biology majors at a typical state university.
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Re: is "age in bonds" really good Bogleheads advice?

Post by cjking »

I was in the other thread mentioned, a quick scan of this thread leads me to believe that no-one has taken on board the exact issue the OP has raised. There is specific reason to believe that decreasing your stock exposure gradually during withdrawal is a bad idea.

My explanation of this is that to avoid sequence-of-returns issues with stocks you want a low withdrawal rate, and if you are withdrawing from stocks as well rebalancing away from them your withdrawal rate from stocks is higher than your overall withdrawal rate, possibly higher than is safe.

My past analysis has led me to believe a safe withdrawal rate from stocks is one that is below the earnings yield, so probably less than 4% for US stocks at the moment.

I believe if you want to sell stocks at a higher rate, then rather doing it gradually each year regardless of market conditions, you should do it opportunistically at a good (or at least not bad) time for selling stocks.

Having said all that, starting with 35% as age-in-bonds might suggest, and stopping the glide-path at 25% to comply with another rule-of-thumb that you should always have that much in equities, is probably only going to give mild exposure to the problem, compared to for example starting with 60:40 and doing stocks-first withdrawal.

Edit: To give a concrete example, suppose you have $1 million, $350,000 in stocks. After taking $40,000 income from portfolio as a whole, age-in-bonds requires you to have 34%*$960,000 = £326,400 in stocks. So that's ($350,000-£326,400)/$350,000 = 6.7% withdrawal rate from stocks.
Last edited by cjking on Mon Jul 22, 2013 6:44 am, edited 1 time in total.
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Re: is "age in bonds" really good Bogleheads advice?

Post by nisiprius »

Qtman wrote:I couldn't resist this topic. Just like every other financial situation, this one is very dependent on multiple factors unique to the individual. The book "Bonds" by Stan & Hildy Richelson makes a good case for 100% bonds.
:!: :!: :!:
Really? Who is their target audience? Even Bodie ("Worry-Free Investing") doesn't go that far... and he's talking about TIPS, not nominal bonds. Could you briefly summarize what their strategy is?

With a schlocky title like "Bonds: The Unbeaten Path to Secure Investment Growth" I'm pretty skeptical about the objectivity of the book. Why don't they ever use titles like "Bonds: A Surprisingly-Often-Winning Path to Really Quite Decent Investment Growth?" I wonder whether if, by any chance, these are advisors who sell bonds? Aha... "Hildy Richelson advises clients nationwide on buying fixed-income investments. President of the Scarsdale Investment Group, Ltd., a registered investment advisor..."
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Re: is "age in bonds" really good Bogleheads advice?

Post by stemikger »

As Mr. Bogle has said numerous times it's a very rough rule of thumb but definitely not something set in stone. It's a good place to start and then make it fit your own personal circumstances. He himself uses it for taxable, but not for retirement. Unless he's 50 years old.

http://www.reuters.com/article/2012/09/ ... LI20120911
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Re: is "age in bonds" really good Bogleheads advice?

Post by IlliniDave »

freebeer wrote:

But I don't really know if age-in-bonds is bad, I'm just posing the question since I've not seen any argument that it is good (and there are surface reasons to suppose that it isn't). Retirement calculators like Firecalc, if they let you analyze pre-retirement accumulation phase at all, don't (AFAIK) allow for simulating the results of a age-in-bonds allocation glidepath (or any other glidepath). If any of the "quants" on the list have modeled age-in-bonds over a whole person's cycle I'd love if someone could post their results and how it compares with other allocations based on historical sequences of returns and/or Monte Carlo simulations. Perhaps it compares favorably, or at least not too unfavorably, thus refuting my concern that age-in-bonds recommendation should be considered harmful.
The relative weights of stocks/bonds in a portfolio is a fuzzy science at best. It's not hard to concoct hypothetical scenarios where a relatively conservative age in bonds position would be sufficient if not superior to a more aggressive approach. It's equally easy to dream up scenarios that support the converse. There is no one-size-fits-all answer. Whenever you go about trying to determine an "optimal" allocation there are a couple of hard reality obstacles you hit: the optimal allocation is strongly dependent on an individual's circumstances, and the future behavior of investments in unknown.

A combination of inexperience, low risk tolerance, and aggressive allocation can drive people to flee risk entirely or even completely out of investing. I know a guy who hasn't voluntarily participated in equity investments since October of 1987. It's been all uber-safe short-term fixed income and money market investing for him the last 25 years. That sort of scenario could arguably be worse in the big picture than someone starting off a little more conservative than necessary until the get their investing sea legs. Some authorities recommend brand new investors start off appreciably higher than age in bonds until they adjust to the reality that an investor will lose money at times. More aggressive allocations can then be approached with the benefit of increased experience and knowledge.

I am relatively aggressive. My target is 70/30 and I have no plan to change it anytime soon. I'll be 50 next year. However, I think the best advice to give someone approaching the topic from a position of ignorance is one that arguably errs on the conservative side. It should be clear that the vast majority of allocation suggestions are not presented as something Moses came down off the mountain with. Age in bonds is a place to begin the thought process and is probably suitable for some investors. Just because such a rule of thumb exists does not excuse someone who encounters it from pulling on their big boy/big girl britches and doing due diligence with regards to their own personal situation, needs, and desires, during the course of their investing lifetimes.
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Re: is "age in bonds" really good Bogleheads advice?

Post by steadyeddy »

freebeer wrote: To some degree the recommendation age-in-bonds feels to me like a cop-out based on pychological factors: we are concerned that flighty youth won't stay the course through bear markets with a super high equity percentage, and that nervous seniors can't even handle a 30% equity percentage. So we knowingly recommend sub-optimal equity percentages (implicitly, via age-in-bonds) as in effect "advice to newbies". I think at a minimum this should be qualified accordingly and again sub-optimal advice does not feel to me like it belongs in a statement of core Bogleheads Philosophy.
A fair point of view. A counterpoint is that most of us tend toward the extreme of fear or greed depending on our personality, and more importantly, recent market performance. (There are archives of 2008 threads that make this clear!) We've all seen the new posters asking about increasing bonds during the downturns, and increasing stocks in the upturns. I think the "conservatism" of age in bonds might not be as far off base as the recent stock rally has made it appear.

And I'll say just one more thing. Low bond yields make fixed income investing look like a "sure loser" right now. But compared to what? Nobody can promise you that stocks won't have depressed returns going forward as well.
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Re: is "age in bonds" really good Bogleheads advice?

Post by dbr »

freebeer wrote:
Could it be that "age in bonds", as advocated on the Bogleheads® investment philosophy main page [2], is mis-aligned with the broader Bogleheads principle to make rationally-motivated decisions?
It really is a question of whether or not you think it is possible to make rational-motivated decisions based on one-liners. I would think most rationally-motivated thinkers would say that it is not possible because the world is inevitably more complicated, more nuanced, and more specific to individual circumstances than can be managed by one-liners.

I think a better approach is to take these things not as advice but as "title headings," as it were, for a longer discussion. The one liner serves as a reference to things that one needs to think about.

In short things like "age in bonds" are not even advice. Hence, they cannot be misaligned with an actual body of investment advice. Also, I would not go so far as to elevate a body of good thinking about investing to the level of "principles." That makes things dogmatic instead of thoughtful.
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Re: is "age in bonds" really good Bogleheads advice?

Post by IlliniDave »

dbr wrote:I think a better approach is to take these things not as advice but as "title headings," as it were, for a longer discussion.
That's a great way to put it, dbr.
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Re: is "age in bonds" really good Bogleheads advice?

Post by ourbrooks »

"Age in bonds" is not just bad advice; in my opinion, it's downright dangerous and the Wiki needs a warning that the advice about age in bonds is unsupported and unproven.

There is no known safe withdrawal rate for "age in bonds." ALL of the safe withdrawal rate studies have been done with fixed allocations and rebalancing. The one factoid I've been able to get on the subject is a post by rodc in which he says he's studied the issue, and "age in bonds" is about equivalent to the average allocation across the retirement period. That's bad news; if you start at age 65 and live 30 years, the average would be something like 20% stocks/80% bonds. For those percentages, the safe withdrawal rate studies show a higher failure rate than more balanced allocations.

Another way to think about the approach is this: it's the opposite of rebalancing lots of the time. You end up moving money into bonds when stocks have done badly so you don't get any of the benefits when stocks rebound.

The whole "human capital" argument seems very weak to me, if, for no other reason, than if you want to leave a bequest, you are, effectively, borrowing "human capital" from your heirs, a concept I find hard to think about. What really matters is the fact that, once, withdrawals have begun, an unfortunate sequence of market returns can do permanent damage. This is true even if you begin withdrawing at age 25. That's why 100% stocks is not a good withdrawal phase strategy, even if you have cast iron risk tolerance; if you have 100% stocks, you're more likely to die broke than if you hold 80% stocks.

Conversely, holding too high a percentage of bonds is equally deadly. When people say they're worried about risk, they usually mean volatility risk. Until recently, no on e seemed worried about inflation risk any more. Well, it's once more a hot topic of conversation, under the new and more accurate name, "negative real return" risk. Because of this risk, up above about 80% in bonds you're actually increasing your risk of running out of money.

The safe withdrawal rate studies show that a constant allocation of anywhere from 30% to 70% stocks throughout retirement leads to the lowest portfolio failure risk. Why increase the risk of failure by using "age in bonds" or some other glidepath?
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Re: is "age in bonds" really good Bogleheads advice?

Post by linuxizer »

freebeer wrote:Another question I have is whether any of the more expert posters and wiki authors actually use age-in-bonds. There have been many discussions about portfolio allocation and it always seems that folks describe having a fixed allocation. To some degree the recommendation age-in-bonds feels to me like a cop-out based on pychological factors: we are concerned that flighty youth won't stay the course through bear markets with a super high equity percentage, and that nervous seniors can't even handle a 30% equity percentage. So we knowingly recommend sub-optimal equity percentages (implicitly, via age-in-bonds) as in effect "advice to newbies". I think at a minimum this should be qualified accordingly and again sub-optimal advice does not feel to me like it belongs in a statement of core Bogleheads Philosophy.
Not sure if I'm a "more expert poster," but I do use age in bonds for our humble savings, and intend to at least until the distribution phase (unless someone wants to gift me a windfall, in which case I'll change!).

I think its worth noting in all of this fretting about whether age-in-bonds is too different from the the "expert-designed" glide paths, that there was a time when everyone on these boards was in an uproar because Vanguard changed its glide path to be more aggressive in response to years of getting beaten by other target retirement funds as stocks were going up.

It's also important to maintain the distinction between the overall level of agresssiveness (e.g. age-in-bonds vs. age-in-bonds-minus-10/20) and the functional form (e.g. linear like age-in-bonds vs. non-linear like the target retirement funds).

With that in mind, the comment that age-in-bonds is "dangerous" is inaccurate.
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Re: is "age in bonds" really good Bogleheads advice?

Post by dbr »

ourbrooks wrote:"Age in bonds" is not just bad advice; in my opinion, it's downright dangerous and the Wiki needs a warning that the advice about age in bonds is unsupported and unproven.

I think one should certainly not invest by one liner without understanding the rationale. After discussion one may find some valid rationale and some things to think about. One may also find some bad advice there.

There is no known safe withdrawal rate for "age in bonds." ALL of the safe withdrawal rate studies have been done with fixed allocations and rebalancing. The one factoid I've been able to get on the subject is a post by rodc in which he says he's studied the issue, and "age in bonds" is about equivalent to the average allocation across the retirement period. That's bad news; if you start at age 65 and live 30 years, the average would be something like 20% stocks/80% bonds. For those percentages, the safe withdrawal rate studies show a higher failure rate than more balanced allocations.

Indeed, and that is something of a study that says there can be longevity risk to age in bonds that is not taken into account. There was also something posted on a web page perhaps by Norstad that shows how bonds first may be less risky.

Another way to think about the approach is this: it's the opposite of rebalancing lots of the time. You end up moving money into bonds when stocks have done badly so you don't get any of the benefits when stocks rebound.

The whole "human capital" argument seems very weak to me, if, for no other reason, than if you want to leave a bequest, you are, effectively, borrowing "human capital" from your heirs, a concept I find hard to think about. What really matters is the fact that, once, withdrawals have begun, an unfortunate sequence of market returns can do permanent damage. This is true even if you begin withdrawing at age 25. That's why 100% stocks is not a good withdrawal phase strategy, even if you have cast iron risk tolerance; if you have 100% stocks, you're more likely to die broke than if you hold 80% stocks.

Conversely, holding too high a percentage of bonds is equally deadly. When people say they're worried about risk, they usually mean volatility risk. Until recently, no on e seemed worried about inflation risk any more. Well, it's once more a hot topic of conversation, under the new and more accurate name, "negative real return" risk. Because of this risk, up above about 80% in bonds you're actually increasing your risk of running out of money.

Indeed there is risk in bonds that real returns may be too low.

The safe withdrawal rate studies show that a constant allocation of anywhere from 30% to 70% stocks throughout retirement leads to the lowest portfolio failure risk. Why increase the risk of failure by using "age in bonds" or some other glidepath?

In addition I don't think you can discuss safety of retirement without a broader view including annuitization and inflation risk (as mentioned above). It isn't exactly all that simple.
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Re: is "age in bonds" really good Bogleheads advice?

Post by Chris M »

freebeer wrote:But I think the data from target funds supports my argument that age-in-bonds is not ideal "naked" guidance for the general population. VG target funds glide-path for example ([1]) have 50% equities at retirement, presuming the nominal standard age 65: that's 43% more equities than age-in-bonds, a pretty major difference. And allocation never drops below 30% equities, another major difference. Lastly the equity allocation starts and stays at 90% from age 20 to 40, again a major difference vs. going from 80% to 60% during this time. "age in bonds" would be a strange way to describe "10% bonds until age 40, 70% bonds from age 72 on, and in between ages 40 and 72 gradually shift to that second plateau". In fact a better approximation to VG TR (and arguably a closer to optimal strategy) would be "10% bonds until age 50, 50% bonds thereafter". That is age in bonds, true, but only one time.

[1] http://www.wealthadvisors.com/assets/va ... hanges.pdf
Aptenodytes wrote:As usual Nisi clarifies quite a bit. However, his answer to the parsed "is 50-50 OK for someone age 50" is too categorical. Based on the polls done here, most 50-year-old Bogleheads would not be 50% bonds, and many would be >10 percentage points under that. So based on our behavior, we would collectively consider that allocation too conservative. The people managing target-date funds would agree with us -- the Vanguard target 2025 fund is 30% bonds and the target 2030 fund is 22% bonds -- our 50-year-old would probably be choosing between those two.
The above two points are very important. If target date funds and, especially, bogleheads as a group are diverging from the age in bonds advice, then should this be the advice given to others?

Morningstar has a paper that looks at asset allocations for all target date funds, not just Vanguard's: http://corporate.morningstar.com/us/doc ... Survey.pdf

The averages across all the funds appear to be similar to those for the Vanguard funds, for example, funds with 2035 to 2055 target dates have average equity asset allocations of 85 to 92 percent, while funds with 2025 to 2030 dates average 70% to 76%. Even those with a 1990 target date (85 to 90 year old) average 28% equities.

Thank you freebeer for raising this question. If asset allocation is the most important determinant of investment returns and risk, and the stock/bond split is the most important asset allocation decision that must be made, then it is equally important to put bogleheads' advice on this topic up for discussion from time to time--even if the final consensus is the original advice should stand.
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Re: is "age in bonds" really good Bogleheads advice?

Post by KyleAAA »

Age in bonds is just a starting point. I would argue that it IS optimal for investors who don't particularly care to learn anything about investing (which is sadly, the majority) because 1.) it's easy to remember, 2.) it's easy to implement, 3.) it has moral weight behind it since it's been so often repeated (thus making it easy to buy into), and 4.) it's far better than what most of those people would do otherwise. Personally, I think any advice that doesn't make psychology the primary consideration is a sub-optimal cop-out. Optimal in this case refers to the overall financial health of the entire population, not any given individual within it. We Bogleheads are a special case. We are educated, motivated, and interested in investing. Most people aren't. Just because we invest one way doesn't mean we shouldn't advise others to invest in some other way. Different audiences.
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Re: is "age in bonds" really good Bogleheads advice?

Post by Chris M »

KyleAAA wrote:Age in bonds is just a starting point. I would argue that it IS optimal for investors who don't particularly care to learn anything about investing (which is sadly, the majority) because 1.) it's easy to remember, 2.) it's easy to implement, 3.) it has moral weight behind it since it's been so often repeated (thus making it easy to buy into), and 4.) it's far better than what most of those people would do otherwise. Personally, I think any advice that doesn't make psychology the primary consideration is a sub-optimal cop-out. Optimal in this case refers to the overall financial health of the entire population, not any given individual within it. We Bogleheads are a special case. We are educated, motivated, and interested in investing. Most people aren't. Just because we invest one way doesn't mean we shouldn't advise others to invest in some other way. Different audiences.
I think investors who aren't willing to learn anything at all should probably use a target date fund. This in fact seems to be the trend.
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Re: is "age in bonds" really good Bogleheads advice?

Post by ruralavalon »

ourbrooks wrote: There is no known safe withdrawal rate for "age in bonds." ALL of the safe withdrawal rate studies have been done with fixed allocations and rebalancing. The one factoid I've been able to get on the subject is a post by rodc in which he says he's studied the issue, and "age in bonds" is about equivalent to the average allocation across the retirement period. That's bad news; if you start at age 65 and live 30 years, the average would be something like 20% stocks/80% bonds. For those percentages, the safe withdrawal rate studies show a higher failure rate than more balanced allocations.
. . . . .
The safe withdrawal rate studies show that a constant allocation of anywhere from 30% to 70% stocks throughout retirement leads to the lowest portfolio failure risk. Why increase the risk of failure by using "age in bonds" or some other glidepath?
In my opinion, this is the only good point raised so far against the general rule of thumb "roughly your age in bonds". The Trinity Study, Table 3, shows really good success rate predictions (100 or 95%) for a 04% withdrawal rate and 30 years, for asset allocations all the way from 100% stocks thru 50/50.

But that same study and Table shows a success rate at a 04% withdrawal rate for 30 years of just 71% at with a 25/75 stock bond allocation, and a success rate of only 20% with 100% bonds. So an increasingly higher bond allocation in the retirement ages does seem to be demonstrated to be a bad idea.

I do generally endorse this rule of thumb as a starting point for decision making. Personally, at age 67 and retired we have decided on an asset allocation of 50/50 and we plan to stay there for the forseeable future. The Trinity Table I linked is one reason we had for deciding to stay at 50/50.
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Re: is "age in bonds" really good Bogleheads advice?

Post by Jack44 »

A lot of the "Age In Bonds" discussions seem to be affected by recent events. Notwithstanding the fact that it is just a rule of thumb, with the rise in equities we have experienced of late there are a lot of opinions expressed that Age In Bonds is an invalid concept and far too conservative for the average investor. Until the next big market drop.
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Re: is "age in bonds" really good Bogleheads advice?

Post by exoilman »

Jack44 wrote:A lot of the "Age In Bonds" discussions seem to be affected by recent events. Notwithstanding the fact that it is just a rule of thumb, with the rise in equities we have experienced of late there are a lot of opinions expressed that Age In Bonds is an invalid concept and far too conservative for the average investor. Until the next big market drop.
+1
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Re: is "age in bonds" really good Bogleheads advice?

Post by IlliniDave »

ruralavalon wrote:
ourbrooks wrote: There is no known safe withdrawal rate for "age in bonds." ALL of the safe withdrawal rate studies have been done with fixed allocations and rebalancing. The one factoid I've been able to get on the subject is a post by rodc in which he says he's studied the issue, and "age in bonds" is about equivalent to the average allocation across the retirement period. That's bad news; if you start at age 65 and live 30 years, the average would be something like 20% stocks/80% bonds. For those percentages, the safe withdrawal rate studies show a higher failure rate than more balanced allocations.
. . . . .
The safe withdrawal rate studies show that a constant allocation of anywhere from 30% to 70% stocks throughout retirement leads to the lowest portfolio failure risk. Why increase the risk of failure by using "age in bonds" or some other glidepath?
In my opinion, this is the only good point raised so far against the general rule of thumb "roughly your age in bonds". The Trinity Study, Table 3, shows really good success rates (100 or 95%) for a 04% withdrawal rate and 30 years, for asset allocations all the way from 100% stocks thru 50/50.

But that same study and Table shows a success rate at a 04% withdrawal rate for 30 years of just 71% at with a 25/75 stock bond allocation, and a success rate of only 20% with 100% bonds. So an incresaingly higher bond allocation in the retirement ages does seem to be demonstrated to be unwise.
Unwise if you need to withdraw the 4% or more consistently for the entire 30-year period (retirees in the aggregate spend less as they move into their 80s and beyond). If you can get down to 3% 25/75 looks okay per that study. If the investor/retiree does need 4% or more I agree age in bonds is not suitable.
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MathWizard
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Re: is "age in bonds" really good Bogleheads advice?

Post by MathWizard »

ruralavalon wrote:
ourbrooks wrote: There is no known safe withdrawal rate for "age in bonds." ALL of the safe withdrawal rate studies have been done with fixed allocations and rebalancing. The one factoid I've been able to get on the subject is a post by rodc in which he says he's studied the issue, and "age in bonds" is about equivalent to the average allocation across the retirement period. That's bad news; if you start at age 65 and live 30 years, the average would be something like 20% stocks/80% bonds. For those percentages, the safe withdrawal rate studies show a higher failure rate than more balanced allocations.
. . . . .
The safe withdrawal rate studies show that a constant allocation of anywhere from 30% to 70% stocks throughout retirement leads to the lowest portfolio failure risk. Why increase the risk of failure by using "age in bonds" or some other glidepath?
In my opinion, this is the only good point raised so far against the general rule of thumb "roughly your age in bonds". The Trinity Study, Table 3, shows really good success rate predictions (100 or 95%) for a 04% withdrawal rate and 30 years, for asset allocations all the way from 100% stocks thru 50/50.

But that same study and Table shows a success rate at a 04% withdrawal rate for 30 years of just 71% at with a 25/75 stock bond allocation, and a success rate of only 20% with 100% bonds. So an increasingly higher bond allocation in the retirement ages does seem to be demonstrated to be a bad idea.

I do generally endorse this rule of thumb as a starting point for decision making. Personally, at age 67 and retired we have decided on an asset allocation of 50/50 and we plan to stay there for the forseeable future. The Trinity Table I linked is one reason we had for deciding to stay at 50/50.
I agree that the Trinity Study suggests a greater than 50% equity allocation. However, that study had a static AA.
I have looked around for an update to that study using a glide path, e.g. start at 100% equities and increase AA by 1% to bonds each
year ending at 70%. Do the same for 75%, 50% and 25% equities (last 5 year 100% bonds) (and maybe 35% to fit age-in-bonds for 65 yr old)

This would give a failure rate (from the past history) for various glidepaths similar to age in bonds age_in_bonds-10, ...
I have not seen such a study.
Default User BR
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Re: is "age in bonds" really good Bogleheads advice?

Post by Default User BR »

Aptenodytes wrote:I think 80-age in bonds would be a more reasonable rule of thumb.
I'm having trouble with this. I don't think you meant what you said, otherwise the aging investor would be decreasing bond holdings. But 80-age in stocks seems overly conservative to me.


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ruralavalon
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Re: is "age in bonds" really good Bogleheads advice?

Post by ruralavalon »

MathWizard wrote: I agree that the Trinity Study suggests a greater than 50% equity allocation. However, that study had a static AA.
I have looked around for an update to that study using a glide path, e.g. start at 100% equities and increase AA by 1% to bonds each
year ending at 70%. Do the same for 75%, 50% and 25% equities (last 5 year 100% bonds) (and maybe 35% to fit age-in-bonds for 65 yr old)

This would give a failure rate (from the past history) for various glidepaths similar to age in bonds age_in_bonds-10, ...
I have not seen such a study.
Yes, as I understand the study it used static withdrawal rate(s), then adjusted the rate(s) for inflation in years post the retirement date, and did not adjust allocation for increasing age. So in my mind a that is good reason for setting your rate and allocation at your retirement date and then staying at that allocation.
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