Goal: I want to propose a portfolio optimized for someone wanting to get to FI(optional RE) and ask for everyone's help in trying to pick it apart and find where it may be flawed. This allocation should be ideal for both the accumulation phase and RE/draw-down phase.
Background: Much of the FIRE community speaks of low cost index fund investing, sticking with it through the ups and downs, and frequently reference the long time horizon people trying to FIRE will have. The portfolios most commonly encountered are 100% VTSAX, some combination of that with bonds, the three fund Boglehead's portfolio, Paul Merriman's and others. There seems to be a trend toward simplicity and a faith in the overall return over the long run. I am likely suffering from the Dunning-Kruger Effect myself, but worry that maybe people talking about FIRE actually are as well. That is why I am asking for help to see where I may be wrong in thinking I have found a better allocation of savings.
Problems I see with the typical FI(RE) portfolios:
- The high volatility of the market opens up what seems like a lot of sequence of return risk. This particular article stressed this for me: https://portfoliocharts.com/2015/11/17/ ... ates-work/. Often the community suggests to mitigate this risk by decreasing a draw-down to 3.5% or less of the portfolio and adjusting withdraws depending on how the market is doing.
- There is a much longer run-out for someone who FIREs than a typical retiree and it seems important to maintain the ability for ones portfolio to increase in value. Someone who FIREs but runs out of money 20-30 years into retirement isnt going to get an income generating job very easily.
- High equity (stock) portfolios seem to be able to generate the needed return for the long future, but the instability can lead to long periods of draw-down and scenarios where portfolios run out of money. Safer portfolios often trade the volatility for a lower rate of return which makes it less likely that the portfolio could last 50+ years.
- In the accumulation phase of FI(RE), one wants to gain maximum returns while not having their portfolio lose value before they RE. If people invest aggressively for the returns to get to FIRE quickly (and plan on riding out the bumps), then they risk a crash early or right before they RE which could change their ability to FIRE.
50% SCV - IJS
30% Long Term Treasuries - TLT
20% Gold - IAU
(Alternatively for those seeking to be aggressive a 60/20/20 may offer higher overall returns with more volatility)
Comparing it to other portfolios:
By using back-testing with Portfolio Charts you can see how it has performed historically (you will have to manually enter the values -- I am not sure how to link it with the values): https://portfoliocharts.com/portfolio/my-portfolio/
Looks pretty good, right?
Compare it to:
- The Merriman Ultimate https://portfoliocharts.com/portfolio/m ... -ultimate/
- Classic 60-40 https://portfoliocharts.com/portfolio/classic-60-40/
- The Three Fund Portfolio https://portfoliocharts.com/portfolio/t ... portfolio/
Asset Back tested to outperform with higher Sortino ratio, lower Max Drawdown and lower Worst Year compared to TSM:
https://www.portfoliovisualizer.com/bac ... ion4_2=100
Fund-specific back tested vs VTSMX to show the same:
https://www.portfoliovisualizer.com/bac ... ion4_2=100
Strengths of the portfolio
Using the data Portfolio Charts uses, this FIRE Fund has relatively good stability combined with a good return. This leads to the following observations:
- A lower ulcer index with relatively small "deepest" and "longest" draw-downs (especially when compared to other FIRE portfolios)
- Rolling returns that are consistent compared to other portfolios. Also pretty consistent over the years.
- A relatively high and narrow real CAGR range
- A low start date sensitivity
- A short and consistent time period when trying to determine when you will achieve FI
- Much higher safe withdraw rate (SWR) and perpetual withdraw rate (PWR) compared to the others
- Historical account values that suggest excellent growth for the future using an array of back tested start dates. I interpret this to mean that the portfolio in most scenarios continued to grown quite nicely compared to the others often spoken of.
Weaknesses of the portfolio: This is where I need everyone's help! I am not delusional to think I have found the secret sauce, but from what I can tell of the historical data it seems to have a high CAGR with low volatility and risk. How does this hold up in a taxable vs tax-deferred account? Surely I must be missing something....
Some things I anticipate people may say:
Historical data does not guarantee future returns. I agree with this 100%. Let us all agree that no one knows the future. In the absence of knowing this future, the best we can do is use the tools we have available. A very strong one in my mind is historical data (better than guesses, hunches, etc). Just as with people, historical performance doesn't guarantee future performance, but with an unknown future it is often times one of the most reliable sources to use. It is often better than assumptions or people thinking they can predict future markets. In essence we all go off of historical data when we invest in the market in general.
The most important thing is that you invest, re-balance and otherwise don't touch it. I agree wholeheartedly, but assuming you would do that with any portfolio, why not try and pick the best one? Ones faith in a portfolio usually comes form historical data, otherwise we wouldn't have any reason to have faith when the market doesn't go the way we expect. This emphasizes the importance of known historical data, otherwise it would just be blind faith.
Small Cap Value will not produce returns like it did historically. Even if SCV lost to growth over the recent history, this FIRE Portfolio still managed to do very well (even better) than the TSM. Additionally, predicting SCV wont do well seems like attempts at predicting the future (see above).
Thank you! Thank you! Thank you!
I want to thank everyone who made it this far. It was long, wordy and hopefully not too confusing. I really do appreciate any insights as to why a portfolio like this might not be as good as it looks on paper.