aj76er wrote:Yes, I believe you are describing the characteristics of a total stock market fund (e.g. VTSAX) coupled with "sequence of returns risk" that can occur early in a long withdrawal phase from a portfolio that is heavily invested in such an asset. Holding a significant amount of bonds yielding 2.5% can help mitigate this risk significantly.
This board recommends intermediate term and higher quality bonds. So the problems in returns are likely a slow bleed of underperformance (same as a high ER) not a huge sudden drop (there are scenarios where those sorts of bonds could get killed, and while rare they are likely in say a 100 year cycle). The problem with VTSAX at this point IMHO is a slow bleed in high PE stocks because of float weighting and stock market volatility. Essentially I think the Boglehead board recommend portfolio is likely to underperform by about 150 basis points the same way a high ER portfolio would. Over a few decades that adds up and digs substantially into the total asset base.
But there are worse options. Let's pick a bad case scenario for this portfolio. Stocks are overvalued and we head into a 3 year period of high inflation with interest rates well below the inflation rate. Stocks get hurt but nothing drastic (say -%50 real, -30% nominal) and the bonds get hurt in real terms (duration is lowish so while they are hurt nominally the low duration keeps the damage down). You get to do one good rebalance about midway through the real drop. You pretty much catch the whole bear the rebalance helps so lets say -20% nominal, -35% real in the first few years. Your spending has jumped 30% due to inflation and what was before a 3.5% draw is now about 5.7%. Returns can be good and that's still going to cut things very close with a reasonable chance of not getting through retirement. If I make the inflationary recession just a bit worse or say the recovery doesn't happen quickly (a 5 year period of stagnation) then it isn't close anymore at all, you stand no chance.
The problem with cash is it dilutes it doesn't diversify. Intermediate high quality bonds have two diversifying factors: duration risk and credit risk but in such low quantities they don't do much. Far far better would be to take on diversified risk that doesn't dilute. For example volatility is an asset with a -8% annual return, huge standard deviation and a strong negative correlation with stocks. Even a small percentage of volatility is going to do a much better job of protecting your portfolio than that little bit of duration and credit risk.
Now with dividend stocks you get a very different reaction to that scenario. Your dividends likely go up with inflation or better. Corporations with high dividends are heavily short long bonds (they have often lots of debt). The recession is bad for them, the inflation is terrific for them.
aj76er wrote: The problem with not holding bonds during accumulation is that you never know when a forced long withdrawal phase may occur (e.g. due to a layoff or disability). I think the general consensus on this site concerning the low yield on bonds is to use them, but to also adjust expectations accordingly (e.g. save more, lower withdrawal rate, etc..)
I agree that's the consensus. I think the consensus is wrong. Why intentionally buy bad assets that at best give you a lowish return and at worst give you a real negative return? There are far better assets that can accomplish the safety more efficiently.