Articles talking about a 50/50 asset allocation

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SBritt
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Articles talking about a 50/50 asset allocation

Post by SBritt »

So far the only thing I've seen has been the page on Vanguard's site that shows different asset allocations and their best and worst performing year and average return. I'm looking for some articles that argue about 50/50 asset allocation being superior to other asset allocations regardless of age.

Is there anyone on here that follows that philosophy?

Thanks for your time.
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Re: Articles talking about a 50/50 asset allocation

Post by joe8d »

SBritt wrote:So far the only thing I've seen has been the page on Vanguard's site that shows different asset allocations and their best and worst performing year and average return. I'm looking for some articles that argue about 50/50 asset allocation being superior to other asset allocations regardless of age.

Is there anyone on here that follows that philosophy?

Thanks for your time.
Yes. I'm retired, 71.5 yrs old and have a 50/50 AA.I'm in a situation where I don't have to take risk/can take risk.To me that means 50/50.Just make sure that the 50% Income side meets your LMP needs.In my case ,it far exceeds it.
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Re: Articles talking about a 50/50 asset allocation

Post by bertilak »

SBritt wrote:So far the only thing I've seen has been the page on Vanguard's site that shows different asset allocations and their best and worst performing year and average return. I'm looking for some articles that argue about 50/50 asset allocation being superior to other asset allocations regardless of age.

Is there anyone on here that follows that philosophy?
As a retiree, I do.

50/50 seems to be a neutral position and I see no overriding, compelling, evidence to push me one way or the other. The 50/50 applies to whatever savings one has after all fixed liabilities have been accounted for. So, if I have bunch of money in a bond ladder designated to meet future expenses, i don't count that as a percentage of my AA. The AA is only for the "risky" part of the portfolio.
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Re: Articles talking about a 50/50 asset allocation

Post by tbradnc »

50/50 is the sweet spot for me..

Market goes up - I feel smart.
Market goes down - I feel smart.

:)
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Re: Articles talking about a 50/50 asset allocation

Post by abuss368 »

that may be hard to find as every investors goals, time frame, and tolerance to risk is unique.
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Re: Articles talking about a 50/50 asset allocation

Post by sscritic »

SBritt wrote: I'm looking for some articles that argue about 50/50 asset allocation being superior to other asset allocations regardless of age.
Do you also want it to be the best of the best over all time periods as well? That's another regardless you want to consider.

Clue: there is no such animal.

50/50 is satisfactory for many people. It might even be good. But it is not a magic elixir, nor is any other number you imagine or read about on the internet.

P.S. I don't asset allocate, unlike many around here. I invest, and I invested new contributions 50/50 for many years. I never rebalanced, except by way of these new contributions. No matter what my allocation was at any time, each new contribution brought me closer to 50/50.
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Re: Articles talking about a 50/50 asset allocation

Post by bertilak »

tbradnc wrote:50/50 is the sweet spot for me..

Market goes up - I feel smart.
Market goes down - I feel smart.

:)
My feeling's exactly.

Half of my savings are 100% invested for maximum return and the other half are 100% invested for safety! Best of both worlds.

Thus I don't think of it as 50/50 but as 100/100. I don't want to cut back on either of those 100's.
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Re: Articles talking about a 50/50 asset allocation

Post by dbr »

SBritt wrote:So far the only thing I've seen has been the page on Vanguard's site that shows different asset allocations and their best and worst performing year and average return. I'm looking for some articles that argue about 50/50 asset allocation being superior to other asset allocations regardless of age.

Is there anyone on here that follows that philosophy?

Thanks for your time.
If you look at articles that show the safe withdrawal rate in retirement it will usually be the case that there is a slight maximum point as a function of asset allocation in the range 40/60 to 60/40. I don't think that maximum is significant against the uncertainty that should be drawn around the result, but it is there. It is a bad idea to let stocks go too far below the 30%-40% range, so 50/50 is kind of the minimum risk that is still "safe" in this context.
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Re: Articles talking about a 50/50 asset allocation

Post by nisiprius »

Give up on trying to prove that any asset allocation is objectively optimal. There's no special magic in 50/50 and you can't possibly prove it's better or worse than 60/40 or "age in bonds" or traditional glide slopes.

If you want an article that praises 50/50 without claiming more than that there are an infinite number of plans that are worse, try this:The Twelve Pillars of Wisdom, by John C. Bogle:
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.

Although the stock market’s wild and wooly odyssey since I wrote them makes those words seem an eon away, I believe more than ever in that basic principle: Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile. In my book, I noted that this approach was consistent with the philosophy of Benjamin Graham, author of The Intelligent Investor.
The only big advantage of 50/50, it seems to me, is that by using nice round numbers you are being honest with yourself and not kidding yourself that you are doing any fine-tuning optimization.

You can choose whatever you feel like doing and find a qualified "expert" to say that it's best.
  • The conventional wisdom, which I personally like, is that stock allocation should decline with age, not because that will optimize anything, but for the common sense reasons that in the event of a severe crash, your ability to quit withdrawing from the portfolio during the crash is high before retirement and low after retirement; and your ability dust yourself off and start saving all over again declines with age.
  • A number of writers have argued that a glide slope has no real advantage over having a stable allocation.
  • The flavor-of-the-month is a claim, a claim which I think is absurd, by Pfau and Kitces, that stock allocation should increase during retirement.
  • A poster called my attention to a paper from a source and authority I don't know, a W. Van Harlow of Putnam Institute (affiliated with Putnam Investments), who claims in a paper Optimal asset allocation in retirement: A downside risk perspective
    We find that the range of appropriate equity asset allocations in retirement is strikingly low compared with those of typical lifecycle and retirement funds now in the marketplace. In fact, for retirement portfolios whose primary goal is to mini- mize the risk of depletion and sustain withdrawals, optimal equity allocations range between 5% and 25%
The conclusion: nobody really knows.

A very important point, which is fairly obvious but doesn't get pointed out, is that the general pattern of retirement safety, found as nearly as I can tell in every study, is that the pattern is extremely sensitive to the choice of withdrawal rate. There are basically two patterns that are commonly reported.

a) If you pick a conservative, low withdrawal rate, then failure rates are genuinely low and amazingly insensitive to asset allocation. Anything works.

b) If you pick the rates that the studies typically pick, which can be described as "pushing it," then failure rates are uncomfortably high for aggressive allocations, but even higher for conservative allocations. These are usually condensed to soundbites touting high stock allocations, "so-and-so found that, paradoxically higher stock allocations are safer in retirement."

The big decision, and there are no guidelines or shortcuts or objectively correct answer, is whether one can personally tolerate a 50% stocks allocation in retirement. I've yet to see anything really helpful in making that decision. All of the "risk tolerance questionnaires" seem designed to keep advisors out of trouble by putting clients on record as being OK with risk, not really to help clients explore or understand the issue.
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Re: Articles talking about a 50/50 asset allocation

Post by sscritic »

nisiprius wrote:The flavor-of-the-month is a claim, a claim which I think is absurd, by Pfau and Kitces, that stock allocation should increase during retirement.
To be fair, I think this is only half the story. As I understand it, they recommend decreasing your stock allocation as you approach retirement so that a crash right at retirement age doesn't ruin you, and then to increase the stock allocation after retirement. It's the sequence of returns story and how you want to deal with it.
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Re: Articles talking about a 50/50 asset allocation

Post by nisiprius »

dbr wrote:
SBritt wrote:So far the only thing I've seen has been the page on Vanguard's site that shows different asset allocations and their best and worst performing year and average return. I'm looking for some articles that argue about 50/50 asset allocation being superior to other asset allocations regardless of age.

Is there anyone on here that follows that philosophy?

Thanks for your time.
If you look at articles that show the safe withdrawal rate in retirement it will usually be the case that there is a slight maximum point as a function of asset allocation in the range 40/60 to 60/40. I don't think that maximum is significant against the uncertainty that should be drawn around the result, but it is there. It is a bad idea to let stocks go too far below the 30%-40% range, so 50/50 is kind of the minimum risk that is still "safe" in this context.
I don't think that's the pattern I've seen. It's true that all curves go down at the extremes. For low withdrawal rates, it's what you said--a very very broad, shallow, mound, and it is more accurate to say that extreme allocations are suboptimal than to try to find the exact optimum in the middle. For high withdrawal rates, you can luck out if you have stocks but not if you don't, so the failure rates go way up but the optimum shifts toward aggressive allocations.

Google found me AN example of A chart that shows that pattern, if you read across the rows. Low withdrawals: success with any allocation. Medium withdrawals: higher failures at the extremes, and a very very broad, shallow mound in the center. IMHO-excessive withdrawals: IMHO-high failure rates at all allocations, but less bad with higher stock allocations.Image
Source
Last edited by nisiprius on Tue Jan 28, 2014 1:51 pm, edited 1 time in total.
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Re: Articles talking about a 50/50 asset allocation

Post by nisiprius »

sscritic wrote:
nisiprius wrote:The flavor-of-the-month is a claim, a claim which I think is absurd, by Pfau and Kitces, that stock allocation should increase during retirement.
To be fair, I think this is only half the story. As I understand it, they recommend decreasing your stock allocation as you approach retirement so that a crash right at retirement age doesn't ruin you, and then to increase the stock allocation after retirement. It's the sequence of returns story and how you want to deal with it.
Yes, they do. But they don't ever name any safe vaguely-bond-like thing you possess that would be increasing in retirement to balance the increasing risk of the increasing stock allocation.

Before retirement, your human capital is constantly decreasing. In retirement, it surely isn't, so what is?

The only thing I can come up with is your remaining life expectancy is constantly decreasing, so if you run out of money the number of years you must endure in poverty decreases, so the number of potential misery-years decreases? That is, you can take more risk because the quantified negative consequences of failure decline with age? At age 97, running out of money and living in poverty is not a big deal because it won't be for long?
Last edited by nisiprius on Tue Jan 28, 2014 9:46 am, edited 1 time in total.
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Re: Articles talking about a 50/50 asset allocation

Post by dbr »

nisiprius wrote: Google found me AN example of A chart that shows that pattern, if you read across the rows. Low withdrawals: success with any allocation. Medium withdrawals: higher failures at the extremes, and a very very broad, shallow mound in the center. IMHO-excessive withdrawals: IMHO-high failure rates at all allocations, but less bad with higher stock allocations.ImageSource
The less bad at high stock for higher withdrawal rates is not very meaningful as the failure rates are too high for the examples to be of interest.

But anyway the OP wanted articles and my comment and your excellent chart are examples of that.
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Re: Articles talking about a 50/50 asset allocation

Post by nisiprius »

dbr wrote:...The less bad at high stock for higher withdrawal rates is not very meaningful as the failure rates are too high for the examples to be of interest...
That is my point precisely.

Low withdrawals: everything works.

Conservative withdrawals: everything but extremes works, and the "optimum" is so broad that it is better to say "avoid the extremes" than "use the optimum."

Aggressive withdrawals: nothing works well, but conservative allocations are even worse.

Carefully examine any claims that "aggressive allocations are safer," because they tend to be associated with withdrawal rates that are pushing it.

I would add: distrust any writer who couches the discussion in terms of percentage of success rather than percentage of failure, because that means they have decided, for some reason, to frame the study optimistically.
Last edited by nisiprius on Tue Jan 28, 2014 9:59 am, edited 1 time in total.
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Re: Articles talking about a 50/50 asset allocation

Post by G-Money »

Not a particularly scholarly article, and it talks about 60/40, rather than 50/50, but here's a classic from Peter Bernstein:

http://web.archive.org/web/200612140619 ... in6040.pdf
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Re: Articles talking about a 50/50 asset allocation

Post by whomever »

Yes, they do. But they don't ever name any safe vaguely-bond-like thing you possess that would be increasing in retirement to balance the increasing risk of the increasing stock allocation.
One way to conceptualize it would be 'Gee, I think, overall, 50:50 stock:bond is the way to go. But I'm most vulnerable to an unfavorable sequence of returns right after I retire, so I'm going to have it at 25:75 on my first day of retirement, and then gradually revert to 50:50'. Depending on how you define 'gradually', that could look a lot like 'increase stocks as you age'.

(We have a while longer to chew on the concept of decumulating instead of accumulating. We're kind of leaning towards 'keep 10 years expenses in low risk assets, and most of the rest in stocks'. That leads to some interesting asset allocation curves, because '10 years expenses' varies a lot over time (high when work stops and no income, drops a little with one pension, then more for second pension and/or spouse early SS, then drops a lot when we're both on SS+pensions, then goes up when first one dies. The curve is pretty U shaped prior to 70, and maybe afterwards if we get a decent sequence of returns.)

p.s. Nisi: you do have an uncanny ability to condense complex issues into minimal length, high clarity prose!
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Re: Articles talking about a 50/50 asset allocation

Post by Clive »

Stocks and bonds are walking on a beach. They leave two sets of footprints in the sand behind them. Looking back, the tracks represent various stages of their life. At some points the two trails dwindle to one, especially at the lowest and most hopeless moments of Stocks life. When Stocks questions Bonds, believing that Bonds must have abandoned him, Bonds gives the explanation: "During your times of trial and suffering, when you see only one set of footprints, it was then that I carried you".

... doesn't work so well when Bonds are small and Stocks are the size of a gorilla.
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Re: Articles talking about a 50/50 asset allocation

Post by Leeraar »

I am at 50/50, but that should be irrelevant to anyone who is not me.

My AA is the result of analyzing our needs, assets and other factors like age. The AA was never a starting point.

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Re: Articles talking about a 50/50 asset allocation

Post by G-Money »

Clive wrote:Stocks and bonds are walking on a beach. They leave two sets of footprints in the sand behind them. Looking back, the tracks represent various stages of their life. At some points the two trails dwindle to one, especially at the lowest and most hopeless moments of Stocks life. When Stocks questions Bonds, believing that Bonds must have abandoned him, Bonds gives the explanation: "During your times of trial and suffering, when you see only one set of footprints, it was then that I carried you".
:D

That's the first time I encountered anyone adapting the "Footprints in the Sand" poem to investing. Not sure I completely agree it works like that, but mega bonus points for creativity. :thumbsup
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Re: Articles talking about a 50/50 asset allocation

Post by YDNAL »

SBritt wrote:I'm looking for some articles that argue about 50/50 asset allocation being superior to other asset allocations regardless of age.
The "superior asset allocation" is only known in retrospect. Anyone who tells you otherwise is lying to you.

A *personal* asset allocation should be based on Ability & Need for risk. One must also have the Willingness (psychological) to take the risk.
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Re: Articles talking about a 50/50 asset allocation

Post by JMacDonald »

The most famous 50/50 bond/stock portfolio is Scott Burns' Couch Potato Portfolio. Here is the introduction to that portfolio:
On the Importance of Being A Dull Investor
http://assetbuilder.com/blogs/scott_bur ... estor.aspx
Here is what Scott Burns says twenty years later:
Couch Potato investing turns 20
http://www.dallasnews.com/business/colu ... rns-20.ece
I introduced it in a September 1991 column. Had you adopted the Couch Potato philosophy at the beginning of 1992, an original $10,000 investment would now be $42,360, a compound annual return of about 7.49 percent. (I say “about” because that’s the value at the end of October, not a complete 20 years. It could change by Dec. 31.)
I wonder how many people ever followed this portfolio?
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Re: Articles talking about a 50/50 asset allocation

Post by Rodc »

nisiprius wrote:
dbr wrote:
SBritt wrote:So far the only thing I've seen has been the page on Vanguard's site that shows different asset allocations and their best and worst performing year and average return. I'm looking for some articles that argue about 50/50 asset allocation being superior to other asset allocations regardless of age.

Is there anyone on here that follows that philosophy?

Thanks for your time.
If you look at articles that show the safe withdrawal rate in retirement it will usually be the case that there is a slight maximum point as a function of asset allocation in the range 40/60 to 60/40. I don't think that maximum is significant against the uncertainty that should be drawn around the result, but it is there. It is a bad idea to let stocks go too far below the 30%-40% range, so 50/50 is kind of the minimum risk that is still "safe" in this context.
I don't think that's the pattern I've seen. It's true that all curves go down at the extremes. For low withdrawal rates, it's what you said--a very very broad, shallow, mound, and it is more accurate to say that extreme allocations are suboptimal than to try to find the exact optimum in the middle. For high withdrawal rates, you can luck out if you have stocks but not if you don't, so the failure rates go way up but the optimum shifts toward aggressive allocations.

Google found me AN example of A chart that shows that pattern, if you read across the rows. Low withdrawals: success with any allocation. Medium withdrawals: higher failures at the extremes, and a very very broad, shallow mound in the center. IMHO-excessive withdrawals: IMHO-high failure rates at all allocations, but less bad with higher stock allocations.ImageSource
Boy, the color coding in that chart is horrible. 99% can be bright red "this is horrible!" and in other places less than 60% is a nice bright green "this is wonderful", just like the 100%. In at least one case going from 100% to 99% goes from great (green) to horrible (99%).
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Articles talking about a 50/50 asset allocation

Post by Raymond »

Rodc wrote:...Boy, the color coding in that chart is horrible. 99% can be bright red "this is horrible!" and in other places less than 60% is a nice bright green "this is wonderful", just like the 100%. In at least one case going from 100% to 99% goes from great (green) to horrible (99%).
Yes, I noticed that too.

Why is 0% stocks (100% bonds) @ a withdrawal rate of 3.5% = 99.19% success is coded red, while 100% stocks @ 7.5% = 58.38% success is coded green?

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Re: Articles talking about a 50/50 asset allocation

Post by whomever »

Why is 0% stocks (100% bonds) @ a withdrawal rate of 3.5% = 99.19% success is coded red, while 100% stocks @ 7.5% = 58.38% success is coded green?
Just guessing: If you read across the 7.5% (bottom) line, the 100% equity success rate of 88.38 is the best outcome *for a withdrawal rate of 7.5%*. The color coding is only relative to the other entries for your chosen withdrawal rate, i.e. choose your rate, then look for green only on that line.

I agree, it's not a good scheme to answer the question of 'what withdrawal rate is reasonable'.
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Re: Articles talking about a 50/50 asset allocation

Post by dharrythomas »

Ben Graham in 'The intelligent Investor' states that all investors should be between 25/75 and 75/25 with a default asset allocation of 50/50. That source should be authohritative enough for your needs, Warren Bufett started out as a student of and then worked for Ben Graham.

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Re: Articles talking about a 50/50 asset allocation

Post by Aequipondium »

SBritt said: "So far the only thing I've seen has been the page on Vanguard's site that shows different asset allocations and their best and worst performing year and average return. I'm looking for some articles that argue about 50/50 asset allocation being superior to other asset allocations regardless of age."

The Vanguard article "Recessions and balanced portfolio returns" (Joseph Davis and Daniel Piquet, October, 2011) doesn't argue that 50/50 is "superior to other asset allocations," but it makes a good argument IMO for a balanced asset allocation through good times and bad:
Given the rising risk of a renewed U.S. recession, investors may wonder about the merits of a more “defensive” posture for their broad portfolio. To provide perspective, we calculated the historical returns of a balanced 50% equity/50% bond portfolio under two distinct U.S. businesscycle regimes: recessions and expansions. We show that the average real returns of such a portfolio since 1926 have been statistically equivalent regardless of whether the U.S. economy was in or out of recession.
Find the paper at https://personal.vanguard.com/pdf/icrrbp.pdf
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Re: Articles talking about a 50/50 asset allocation

Post by G-Money »

whomever wrote:
Why is 0% stocks (100% bonds) @ a withdrawal rate of 3.5% = 99.19% success is coded red, while 100% stocks @ 7.5% = 58.38% success is coded green?
Just guessing: If you read across the 7.5% (bottom) line, the 100% equity success rate of 88.38 is the best outcome *for a withdrawal rate of 7.5%*. The color coding is only relative to the other entries for your chosen withdrawal rate, i.e. choose your rate, then look for green only on that line.

I agree, it's not a good scheme to answer the question of 'what withdrawal rate is reasonable'.
Right. There's really no reason for any of the success rates in the 7.5% withdrawal rate to be green. Just like it's silly for a 99.19% success rate in the 3.5% withdrawal rate/0% equities box to be red. A color scheme tied to percentages (say, dark green = >95%, light green = 90%-95%, yellow = 85%-90%, etc.) would have been preferable.
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Re: Articles talking about a 50/50 asset allocation

Post by Clive »

I like 50/50 as its generally equal amounts of both volatile and relatively stable - which works reasonably when periodically rebalanced back to target weightings (has a tendency to add-low/reduce-high, cost average).

50% bonds invested as a 5 year ladder has 10% maturing each year (cash in hand), which can be the trigger to consider a rebalance review. If stocks had declined 40% since the prior review, then all of that 10% is redirected into stock and none rolled into bonds. If stocks had declined less, or risen, then new 5 year bonds are bought. If stocks had dived deeper than a 40% loss then there's some bonds with a year or less to maturity and whose price will tend to be converging on its redemption value.

Rolling bonds helps the overall ladder to track rates up and down over time, albeit in a delayed manner (overall washes). When each bond is held to maturity that's like T-Bill risk. Marking to market can be ignored and the rewards then amount to the average of the current and past four years 5-year yields (assuming each rung was equally loaded).

in the UK bonds with 5+ years remaining at the time of purchase can be held to maturity in tax exempt accounts (ISA), such that a ladder is potentially tax efficient. Treasury bonds are unlikely to default and can accommodate larger deposits than the limited guaranteed protected amounts of high street cash-deposit accounts.

When stocks are down, 50/50 is down less and as such is comforting. When stocks are up you partook in part of those gains.

When your home is a third of your total wealth, 50/50 of liquid assets collectively amount to a third in each of land (home), commerce (stocks) and reserves (bonds) - an asset allocation that the ancient Talmud were advocating some 2000+ (?) years ago. In more recent times Benjamin Graham advocated 50/50.

50/50 is likely not superior - but its a reasonable and sensible broad/general choice - no matter what your age. Neither the best, nor the worst, but average and comfortable.
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Re: Articles talking about a 50/50 asset allocation

Post by Angst »

whomever wrote:
Why is 0% stocks (100% bonds) @ a withdrawal rate of 3.5% = 99.19% success is coded red, while 100% stocks @ 7.5% = 58.38% success is coded green?
Just guessing: If you read across the 7.5% (bottom) line, the 100% equity success rate of 88.38 is the best outcome *for a withdrawal rate of 7.5%*. The color coding is only relative to the other entries for your chosen withdrawal rate, i.e. choose your rate, then look for green only on that line.

I agree, it's not a good scheme to answer the question of 'what withdrawal rate is reasonable'.
Thank you! I'm just reading through this thread for the first time and this was driving me nuts too. I'm annoyed I didn't figure it out myself, but it's somehow a lot of fun to see it actually does make sense.
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Re: Articles talking about a 50/50 asset allocation

Post by White Coat Investor »

dbr wrote:
nisiprius wrote: Google found me AN example of A chart that shows that pattern, if you read across the rows. Low withdrawals: success with any allocation. Medium withdrawals: higher failures at the extremes, and a very very broad, shallow mound in the center. IMHO-excessive withdrawals: IMHO-high failure rates at all allocations, but less bad with higher stock allocations.ImageSource
The less bad at high stock for higher withdrawal rates is not very meaningful as the failure rates are too high for the examples to be of interest.

But anyway the OP wanted articles and my comment and your excellent chart are examples of that.
It is meaningful up to ~ 5%. (5.5% if you're not paying some schmuck a 0.5% annual fee according to the table). Lots of people would be comfortable with a 90% success rate (10% failure rate lest nisiprius label me an optimist). At a 5% withdrawal rate, a stock heavy portfolio is much more likely to last than a bond heavy portfolio.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
YDNAL
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Re: Articles talking about a 50/50 asset allocation

Post by YDNAL »

nisiprius wrote:You can choose whatever you feel like doing and find a qualified "expert" to say that it's best.
  • The conventional wisdom, which I personally like, is that stock allocation should decline with age, not because that will optimize anything, but for the common sense reasons that in the event of a severe crash, your ability to quit withdrawing from the portfolio during the crash is high before retirement and low after retirement; and your ability dust yourself off and start saving all over again declines with age.
  • A number of writers have argued that a glide slope has no real advantage over having a stable allocation.
  • The flavor-of-the-month is a claim, a claim which I think is absurd, by Pfau and Kitces, that stock allocation should increase during retirement.
  • A poster called my attention to a paper from a source and authority I don't know, a W. Van Harlow of Putnam Institute (affiliated with Putnam Investments), who claims in a paper Optimal asset allocation in retirement: A downside risk perspective
    We find that the range of appropriate equity asset allocations in retirement is strikingly low compared with those of typical lifecycle and retirement funds now in the marketplace. In fact, for retirement portfolios whose primary goal is to minimize the risk of depletion and sustain withdrawals, optimal equity allocations range between 5% and 25%
The conclusion: nobody really knows.
I agree with your conclusion because nobody that I know can tell the future. Well, let me qualify that, perhaps F&F disciples know that small and value *will* do something given sufficient time (like 50 years). :)

I take exception to the 3rd bullet point above.
  • The research by Pfau and Kitces centers around mitigating unfavorable sequence of returns Pre- and Shortly after retirement.
  • With a higher allocation to Fixed Income during the initial 15 years (from memory), one can more safely increase exposure to Equity subsequently, as necessary to meet all subsequent goals and objectives.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Rodc
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Re: Articles talking about a 50/50 asset allocation

Post by Rodc »

With a higher allocation to Fixed Income during the initial 15 years (from memory), one can more safely increase exposure to Equity subsequently, as necessary to meet all subsequent goals and objectives.
Seems to me the primary benefit of stocks is compounding over enough time to really matter, and smoothing over enough time to reduce (hopefully) volatility.

If you retire at say 65 and then ramp up stocks 15 years later you are 80. By then for most people there is not enough "long term" left to justify a high stock allocation (unless you are really investing for heirs). Sure you might survive a high stock allocation because you don't have many years left, but you won't benefit from it either, so what exactly is the point of moving to a high stock allocation at that point?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
YDNAL
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Re: Articles talking about a 50/50 asset allocation

Post by YDNAL »

Rodc wrote:
I take exception to the 3rd bullet point above.
• The research by Pfau and Kitces centers around mitigating unfavorable sequence of returns Pre- and Shortly after retirement.

• With a higher allocation to Fixed Income during the initial 15 years (from memory), one can more safely increase exposure to Equity subsequently, as necessary to meet all subsequent goals and objectives.

I added, in blue, the missing part of the quote you chose.
Seems to me the primary benefit of stocks is compounding over enough time to really matter, and smoothing over enough time to reduce (hopefully) volatility.

If you retire at say 65 and then ramp up stocks 15 years later you are 80. By then for most people there is not enough "long term" left to justify a high stock allocation (unless you are really investing for heirs). Sure you might survive a high stock allocation because you don't have many years left, but you won't benefit from it either, so what exactly is the point of moving to a high stock allocation at that point?
Have you read the paper ?
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Rodc
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Re: Articles talking about a 50/50 asset allocation

Post by Rodc »

YDNAL,

Yeah, it is a weird paper, I read it a while back and just skimmed it again. I don't think their data says what they think it says, though maybe I missed something.

First, given their "market expectations data" their 4% and 5% withdrawal rates are so high that the failure rates are such that all allocations are crazy bad. The best is a success rate (for 4%, worse of course for 5%) of 74%, starting 30% moving to 80%. But 50/50 is also 74% (I guess rising allocation wins by a fraction of a percent).

Given their "historical returns" things are better, but the benefit of rising allocations is tiny, it is below the level of noise of what one can learn from a Monte Carlo simulation. For example they show a max success rate of 95% going from 30% to 70%. But a fixed 50% gives a success rate of 94%. This is just noise.

There are perhaps some benefits in "legacy shortfall" though to be honest I don't really understand what it is they are really trying to do there; their measure just does not seem very directly useful.

At any rate benefits seem very modest at best.

For the reasons I stated it fundamentally seems suspect. Their data does not seem to support the idea at least not very strongly.

I would also say it seems like a very modest contribution to the literature on a lousy way to plan a retirement. The whole SWR estimate approach is fundamentally flawed: it is not a plan so much as a very rough planning estimate. Tweaking asset allocation to get a smidge better metrics for what is at best a rough estimate is not a useful game as you are just playing with things well below the level of noise. It is like weighing yourself on a scale that flops around +/- 10 lbs and being happy or upset with your new diet when your weight changes by a couple of ounces.

PS: went back again: like success rates, the differences between legacy shortfalls are trivially small. All they have shown is 50/50 or rising glide path averaging 50/50 gives the same performance plus or minus a tiny amount of simulation noise.
Last edited by Rodc on Sun Feb 09, 2014 8:53 am, edited 1 time in total.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Topic Author
SBritt
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Re: Articles talking about a 50/50 asset allocation

Post by SBritt »

Thanks for all the replies! It has been a great read. I'm still torn between a 60/40 and 50/50 allocation. I am 24 years old but risk averse. I know I will likely hear I should have more in stocks, but at these current values it is hard to see how much higher they are going to go for the short term and I feel a more conservative mix would be a better play and then shift into a riskier allocation once prices become more attractive.
galao888
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Re: Articles talking about a 50/50 asset allocation

Post by galao888 »

Hi,

I completely empathise with you. I am in my late 30s now, but have been at 50:50 pretty much ever since I started saving/investing. You might also like this article on how the 50:50 AA did during 2008. http://ecnfin.com/2012/10/07/simple-505 ... s-of-2008/

Sunny greetings from Europe :happy
Big Snack
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Re: Articles talking about a 50/50 asset allocation

Post by Big Snack »

SBritt wrote: I'm still torn between a 60/40 and 50/50 allocation.
In that case, 55/45 might be a good compromise.
JRA
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Re: Articles talking about a 50/50 asset allocation

Post by JRA »

In my opinion, the percentage of your portfolio that you have in equities should be based solely on your need to take risk and you ability to do so. Larry Swedroe has been wisely preaching this for years; there is no "Platonic form" of the perfect portfolio. If your willingness and need to take risk indicate that you should have a 50/50 portfolio, you should have a 50/50 portfolio.
StaTiK
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Re: Articles talking about a 50/50 asset allocation

Post by StaTiK »

SBritt wrote:Thanks for all the replies! It has been a great read. I'm still torn between a 60/40 and 50/50 allocation. I am 24 years old but risk averse. I know I will likely hear I should have more in stocks, but at these current values it is hard to see how much higher they are going to go for the short term and I feel a more conservative mix would be a better play and then shift into a riskier allocation once prices become more attractive.
As long as you understand that this is still market timing. Not saying your plan is good or bad just that it is market timing. I, personally, am not able to tell you when/if prices will become more attractive. :beer

Your original post made it sound like you were looking for an age independent solution, not a "current market" solution.
terrabiped
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Re: Articles talking about a 50/50 asset allocation

Post by terrabiped »

SBritt wrote:Thanks for all the replies! It has been a great read. I'm still torn between a 60/40 and 50/50 allocation. I am 24 years old but risk averse. I know I will likely hear I should have more in stocks, but at these current values it is hard to see how much higher they are going to go for the short term and I feel a more conservative mix would be a better play and then shift into a riskier allocation once prices become more attractive.
Here is a thought. Set 50/50 as your baseline, but allow equities to grow to 60/40 before rebalancing. Repeat as needed.
springnr
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Re: Articles talking about a 50/50 asset allocation

Post by springnr »

SBritt wrote:Thanks for all the replies! It has been a great read. I'm still torn between a 60/40 and 50/50 allocation.....
For a visual view, google or go to ifa dot com. At the top of the page are some buttons, click on the 50 button which will load a bunch of charts/graphs of different way to look at allocation, etc. Also clicking on the i button loads a page with more items. I did not pay too much attention to their specifics, but enjoyed the easy look at trends.
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