When 60/40 just isn't appropriate
Re: When 60/40 just isn't appropriate
I'm a bit confused. If I am 65, I need an investment plan that assumes I may live another 30-40 years. That isn't much different than when I was 25. I fully appreciate the "supposed" theory that someone in the accumulation phase has an income to offset losses. But I guess I don't fully buy it. I've always tried to save as much as I could and therefore was never in a position to "make up"
for losses during my accumulation phase.
I am now 62 and contemplating retirement in the immediate future. My past investment formula has worked very well for me. My stock/bond allocation follows a mathematical formula that lowers the stock allocation when stocks are at all-time highs, and raises the stock allocation when stocks are trading at 52 week lows. If the advice to a 25 year old is to have a strong allocation to stocks (and under my formula that is probably 60% allocation, going as high as 80% and as low as 40% depending upon stock prices), then why wouldn't I want to do the exact same thing during my retirement? Why wouldn't stocks losing 40% in one year be as much a buying opportunity for me at 70 as it would be for me at 30?
I understand volatility - I've lived with it during a lifetime of investing. I bought heavily with the one day crash in 1986, 2001, and my stock allocation went from 65% in Aug 2008 until hitting a high of just over 90% in April 2009 (buying into that market, at my age, was like jumping out of an airplane without a parachute - I was scared to death, but kept the faith and was rewarded handsomely for doing so).
I just don't understand why adjusting my stock allocation upward when stocks are trading at 52 week lows (and adjusting it downward when stocks are hitting 52 week and all time highs) isn't a good thing during retirement as it would be otherwise? My goal during retirement is the same as it was when I was 25 - to obtain the best return that I can over a 30-40 year period of time. History shows that over 30-40 years, stocks are almost certainly going to be the best investment. Why would I intentionally deviate from that advice when I am in retirement?
And to be clear - I would not be selling stocks to live on. I would be living on the fixed income portion of the portfolio and only selling stocks when my formula said stocks were expensive (defined in my simplistic model as stocks trading at 52 week highs and even more so when trading at all time highs), Again, I apologize for being obtuse and I am sure I must be missing something - but since I am at that point in my life when I will soon retire, this is more than just theory for me. I have to make a real decision and I know my "theory" seems to go against the grain of much of what I read - but so long as I can live with losses like we saw in 2008/09 and view them as good investment opportunities, why should I not do so? Thank you for any and all assistance.
for losses during my accumulation phase.
I am now 62 and contemplating retirement in the immediate future. My past investment formula has worked very well for me. My stock/bond allocation follows a mathematical formula that lowers the stock allocation when stocks are at all-time highs, and raises the stock allocation when stocks are trading at 52 week lows. If the advice to a 25 year old is to have a strong allocation to stocks (and under my formula that is probably 60% allocation, going as high as 80% and as low as 40% depending upon stock prices), then why wouldn't I want to do the exact same thing during my retirement? Why wouldn't stocks losing 40% in one year be as much a buying opportunity for me at 70 as it would be for me at 30?
I understand volatility - I've lived with it during a lifetime of investing. I bought heavily with the one day crash in 1986, 2001, and my stock allocation went from 65% in Aug 2008 until hitting a high of just over 90% in April 2009 (buying into that market, at my age, was like jumping out of an airplane without a parachute - I was scared to death, but kept the faith and was rewarded handsomely for doing so).
I just don't understand why adjusting my stock allocation upward when stocks are trading at 52 week lows (and adjusting it downward when stocks are hitting 52 week and all time highs) isn't a good thing during retirement as it would be otherwise? My goal during retirement is the same as it was when I was 25 - to obtain the best return that I can over a 30-40 year period of time. History shows that over 30-40 years, stocks are almost certainly going to be the best investment. Why would I intentionally deviate from that advice when I am in retirement?
And to be clear - I would not be selling stocks to live on. I would be living on the fixed income portion of the portfolio and only selling stocks when my formula said stocks were expensive (defined in my simplistic model as stocks trading at 52 week highs and even more so when trading at all time highs), Again, I apologize for being obtuse and I am sure I must be missing something - but since I am at that point in my life when I will soon retire, this is more than just theory for me. I have to make a real decision and I know my "theory" seems to go against the grain of much of what I read - but so long as I can live with losses like we saw in 2008/09 and view them as good investment opportunities, why should I not do so? Thank you for any and all assistance.
Re: When 60/40 just isn't appropriate
Everyone settles on what works for them.Bill1952 wrote:I'm a bit confused. If I am 65, I need an investment plan that assumes I may live another 30-40 years. That isn't much different than when I was 25. I fully appreciate the "supposed" theory that someone in the accumulation phase has an income to offset losses. But I guess I don't fully buy it. I've always tried to save as much as I could and therefore was never in a position to "make up"
for losses during my accumulation phase.
I am now 62 and contemplating retirement in the immediate future. My past investment formula has worked very well for me. My stock/bond allocation follows a mathematical formula that lowers the stock allocation when stocks are at all-time highs, and raises the stock allocation when stocks are trading at 52 week lows. If the advice to a 25 year old is to have a strong allocation to stocks (and under my formula that is probably 60% allocation, going as high as 80% and as low as 40% depending upon stock prices), then why wouldn't I want to do the exact same thing during my retirement? Why wouldn't stocks losing 40% in one year be as much a buying opportunity for me at 70 as it would be for me at 30?
I understand volatility - I've lived with it during a lifetime of investing. I bought heavily with the one day crash in 1986, 2001, and my stock allocation went from 65% in Aug 2008 until hitting a high of just over 90% in April 2009 (buying into that market, at my age, was like jumping out of an airplane without a parachute - I was scared to death, but kept the faith and was rewarded handsomely for doing so).
I just don't understand why adjusting my stock allocation upward when stocks are trading at 52 week lows (and adjusting it downward when stocks are hitting 52 week and all time highs) isn't a good thing during retirement as it would be otherwise? My goal during retirement is the same as it was when I was 25 - to obtain the best return that I can over a 30-40 year period of time. History shows that over 30-40 years, stocks are almost certainly going to be the best investment. Why would I intentionally deviate from that advice when I am in retirement?
And to be clear - I would not be selling stocks to live on. I would be living on the fixed income portion of the portfolio and only selling stocks when my formula said stocks were expensive (defined in my simplistic model as stocks trading at 52 week highs and even more so when trading at all time highs), Again, I apologize for being obtuse and I am sure I must be missing something - but since I am at that point in my life when I will soon retire, this is more than just theory for me. I have to make a real decision and I know my "theory" seems to go against the grain of much of what I read - but so long as I can live with losses like we saw in 2008/09 and view them as good investment opportunities, why should I not do so? Thank you for any and all assistance.
You sound 100% comfortable with what has worked for you for many years through thick and thin.
It makes total sense that you stick with that plan.
Re: When 60/40 just isn't appropriate
How does your algorithm work exactly? It's vague to say "adjusting" at 52-week or all-time highs or lows. Have you developed this by backtesting, and if so what were the results?Bill1952 wrote:I'm a bit confused. If I am 65, I need an investment plan that assumes I may live another 30-40 years. That isn't much different than when I was 25. I fully appreciate the "supposed" theory that someone in the accumulation phase has an income to offset losses. But I guess I don't fully buy it. I've always tried to save as much as I could and therefore was never in a position to "make up"
for losses during my accumulation phase.
I am now 62 and contemplating retirement in the immediate future. My past investment formula has worked very well for me. My stock/bond allocation follows a mathematical formula that lowers the stock allocation when stocks are at all-time highs, and raises the stock allocation when stocks are trading at 52 week lows. If the advice to a 25 year old is to have a strong allocation to stocks (and under my formula that is probably 60% allocation, going as high as 80% and as low as 40% depending upon stock prices), then why wouldn't I want to do the exact same thing during my retirement? Why wouldn't stocks losing 40% in one year be as much a buying opportunity for me at 70 as it would be for me at 30?
I understand volatility - I've lived with it during a lifetime of investing. I bought heavily with the one day crash in 1986, 2001, and my stock allocation went from 65% in Aug 2008 until hitting a high of just over 90% in April 2009 (buying into that market, at my age, was like jumping out of an airplane without a parachute - I was scared to death, but kept the faith and was rewarded handsomely for doing so).
I just don't understand why adjusting my stock allocation upward when stocks are trading at 52 week lows (and adjusting it downward when stocks are hitting 52 week and all time highs) isn't a good thing during retirement as it would be otherwise? My goal during retirement is the same as it was when I was 25 - to obtain the best return that I can over a 30-40 year period of time. History shows that over 30-40 years, stocks are almost certainly going to be the best investment. Why would I intentionally deviate from that advice when I am in retirement?
And to be clear - I would not be selling stocks to live on. I would be living on the fixed income portion of the portfolio and only selling stocks when my formula said stocks were expensive (defined in my simplistic model as stocks trading at 52 week highs and even more so when trading at all time highs), Again, I apologize for being obtuse and I am sure I must be missing something - but since I am at that point in my life when I will soon retire, this is more than just theory for me. I have to make a real decision and I know my "theory" seems to go against the grain of much of what I read - but so long as I can live with losses like we saw in 2008/09 and view them as good investment opportunities, why should I not do so? Thank you for any and all assistance.
Re: When 60/40 just isn't appropriate
I have not back-tested it. As all of us have, I had read 1000 times about the benefits of rebalancing back to your allocation levels because doing so forces you to buy low(er) and sell high(er). So, I said to myself, if that's true, why not exaggerate the buys/sells by adjusting the allocation higher/lower at the sale/buy price points. What I basically do is track the prices of my portfolio weekly, including the 52 week high and low (and track all time high). I don't do this for fixed income - but I do it separately for my other 4 core allocations (Total Stock Market; international Small; REIT; INTL REIT). My formula calculates % Btwn 52Wk-Low & (52Wk Hi + (1/2 Dif AT-Hi - 52Wk Hi)) - it then uses that calculation to adjust the percentage allocation. So you have a base allocation of 50%. Next you decide how much variation you will have - say 10% either way (i.e. 40% to 60%). So your % allocation will be 60% when stocks are at 52 week lows and 40% when you hit all time highs (and something a bit less than that when you hit a 52 week high but not an all time high). I also have a formula that calculates when I actually make an adjustment (the dollar amount must be at least 10% off from the allocation amount and represent at least 2% of the total portfolio - thus trying to avoid small moves). I am actually considering modifying the formula to use Edelson's Value Averaging concepts as a means of "buying more when prices are low" and selling when high(er).tibbitts wrote:How does your algorithm work exactly? It's vague to say "adjusting" at 52-week or all-time highs or lows. Have you developed this by backtesting, and if so what were the results?Bill1952 wrote:I'm a bit confused. If I am 65, I need an investment plan that assumes I may live another 30-40 years. That isn't much different than when I was 25. I fully appreciate the "supposed" theory that someone in the accumulation phase has an income to offset losses. But I guess I don't fully buy it. I've always tried to save as much as I could and therefore was never in a position to "make up"
for losses during my accumulation phase.
I am now 62 and contemplating retirement in the immediate future. My past investment formula has worked very well for me. My stock/bond allocation follows a mathematical formula that lowers the stock allocation when stocks are at all-time highs, and raises the stock allocation when stocks are trading at 52 week lows. If the advice to a 25 year old is to have a strong allocation to stocks (and under my formula that is probably 60% allocation, going as high as 80% and as low as 40% depending upon stock prices), then why wouldn't I want to do the exact same thing during my retirement? Why wouldn't stocks losing 40% in one year be as much a buying opportunity for me at 70 as it would be for me at 30?
I understand volatility - I've lived with it during a lifetime of investing. I bought heavily with the one day crash in 1986, 2001, and my stock allocation went from 65% in Aug 2008 until hitting a high of just over 90% in April 2009 (buying into that market, at my age, was like jumping out of an airplane without a parachute - I was scared to death, but kept the faith and was rewarded handsomely for doing so).
I just don't understand why adjusting my stock allocation upward when stocks are trading at 52 week lows (and adjusting it downward when stocks are hitting 52 week and all time highs) isn't a good thing during retirement as it would be otherwise? My goal during retirement is the same as it was when I was 25 - to obtain the best return that I can over a 30-40 year period of time. History shows that over 30-40 years, stocks are almost certainly going to be the best investment. Why would I intentionally deviate from that advice when I am in retirement?
And to be clear - I would not be selling stocks to live on. I would be living on the fixed income portion of the portfolio and only selling stocks when my formula said stocks were expensive (defined in my simplistic model as stocks trading at 52 week highs and even more so when trading at all time highs), Again, I apologize for being obtuse and I am sure I must be missing something - but since I am at that point in my life when I will soon retire, this is more than just theory for me. I have to make a real decision and I know my "theory" seems to go against the grain of much of what I read - but so long as I can live with losses like we saw in 2008/09 and view them as good investment opportunities, why should I not do so? Thank you for any and all assistance.
Re: When 60/40 just isn't appropriate
tibbitts,
What it does do, however, is psychologically I look forward to market down turns - I get excited about buying and increasing my percentage allocations when markets are down. Having said that, the Aug 2008 to March 2009 drop was dizzying - not only was I selling bonds and buying stocks as the market fell, but my formula had me steadily increasing my percentage allocation to stocks - buying more and more stocks as the market tumbled - seeing my life savings cut in half by a couple hundred thousand dollars - was not an easy ride - but I stuck with it.
What it does do, however, is psychologically I look forward to market down turns - I get excited about buying and increasing my percentage allocations when markets are down. Having said that, the Aug 2008 to March 2009 drop was dizzying - not only was I selling bonds and buying stocks as the market fell, but my formula had me steadily increasing my percentage allocation to stocks - buying more and more stocks as the market tumbled - seeing my life savings cut in half by a couple hundred thousand dollars - was not an easy ride - but I stuck with it.
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Re: When 60/40 just isn't appropriate
I just kept dollar cost averaging into the slide of 2008, which forced me to buy more shares at a lower price, without worrying about where they'd end up. I rebalanced when things got out of whack beyond 5% in either direction. I thought it was simple to do, but agree that market slides are harrowing.
- in_reality
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Re: When 60/40 just isn't appropriate
Congratulations that it worked out for you and others.Bill1952 wrote:tibbitts,
What it does do, however, is psychologically I look forward to market down turns - I get excited about buying and increasing my percentage allocations when markets are down. Having said that, the Aug 2008 to March 2009 drop was dizzying - not only was I selling bonds and buying stocks as the market fell, but my formula had me steadily increasing my percentage allocation to stocks - buying more and more stocks as the market tumbled - seeing my life savings cut in half by a couple hundred thousand dollars - was not an easy ride - but I stuck with it.
Don't confuse outcome with strategy though.
If it had been a prolonged bear market like Japan experienced, you may have gotten bitten. By rebalancing into a falling market in retirement, you are increasing your sequence of returns risk.
So great, buying low and watching them rise is wonderful, but if you sell bonds to buy stocks low and things don't recover soon enough- you might end up selling low to as you need to make withdrawals.
In other words, the strategy to increase returns by taking more risk in retirement may work out but let's not pretend there is no left tail risk. Let's admit that it very well may not work out because that is simply the truth.
Re: When 60/40 just isn't appropriate
Thank you for your response. This is precisely the point where I get confused. You are, of course, precisely right. It didn't have to turn out the way it did. It could have been a prolonged bear market. But - here's the rub. We all know that. Whether we are 25 or 65. All we can do is make the best decisions we think we can make based upon the information available. And, if a 30/70 mix isn't the optimum choice for a 25 year old with 40 years in front of him/her, then why would it not be the same for a 65 year old? Isn't the risk of a 30/70 mix significantly underperforming a risk that must be equally considered? Isn't the idea to try to make the most intelligent assessment of the best investment mix for someone who has 40 years of investing facing him/her (and, at the end of the day, isn't that the same for the 25 year old as it is for the 65 year old)?in_reality wrote:Congratulations that it worked out for you and others.Bill1952 wrote:tibbitts,
What it does do, however, is psychologically I look forward to market down turns - I get excited about buying and increasing my percentage allocations when markets are down. Having said that, the Aug 2008 to March 2009 drop was dizzying - not only was I selling bonds and buying stocks as the market fell, but my formula had me steadily increasing my percentage allocation to stocks - buying more and more stocks as the market tumbled - seeing my life savings cut in half by a couple hundred thousand dollars - was not an easy ride - but I stuck with it.
Don't confuse outcome with strategy though.
If it had been a prolonged bear market like Japan experienced, you may have gotten bitten. By rebalancing into a falling market in retirement, you are increasing your sequence of returns risk.
So great, buying low and watching them rise is wonderful, but if you sell bonds to buy stocks low and things don't recover soon enough- you might end up selling low to as you need to make withdrawals.
In other words, the strategy to increase returns by taking more risk in retirement may work out but let's not pretend there is no left tail risk. Let's admit that it very well may not work out because that is simply the truth.
Re: When 60/40 just isn't appropriate
Bill,
No. You are supposed to be preoccupied by risks that are extremely rare and beyond your control.
Like, influenza kills 30,000 people in the USA every year and we'd rather worry about the Ebola or West Nile viruses.
Like, we'd rather worry about the 53 people killed in GM ignition switch failures than the 130,000 people killed in all crashes of GM vehicles in the same period.
http://www.usatoday.com/story/opinion/2 ... /15851125/
60/40 is entirely appropriate, counterexamples that apply to a few notwithstanding
L.
No. You are supposed to be preoccupied by risks that are extremely rare and beyond your control.
Like, influenza kills 30,000 people in the USA every year and we'd rather worry about the Ebola or West Nile viruses.
Like, we'd rather worry about the 53 people killed in GM ignition switch failures than the 130,000 people killed in all crashes of GM vehicles in the same period.
http://www.usatoday.com/story/opinion/2 ... /15851125/
60/40 is entirely appropriate, counterexamples that apply to a few notwithstanding
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: When 60/40 just isn't appropriate
I have been asking myself the same question for a while (and then I stopped!). I can understand that a 75 years-old would think differently because of a rapidly decreasing horizon. But at 55 or 60 or 65? Not so obvious. I suspect many people mix two different factors around retirement time. Life expectancy is one thing, and your level of wealth is another. If your level of wealth is such that almost any investment strategy will work, then sure, reducing volatility could be viewed as desirable. But if it's not, then it's a different ball-game. And with a 30 to 40 years horizon (yep, people do live longer nowadays, and the trend is unlikely to be reversed), then you still want growth in your portfolio or you're taking a hell of a risk for your LTC years. Personally, I recently early-retired, and I have no plan to change my AA from my accumulation years anytime soon. I'm not wealthy enough to do so, and I plan to keep kicking for a while, thank you very much. In other words, the long-term risks of bonds don't disappear just because you turned 60 or 65 or because you retired. It strongly depends on other factors...Bill1952 wrote:This is precisely the point where I get confused. You are, of course, precisely right. It didn't have to turn out the way it did. It could have been a prolonged bear market. But - here's the rub. We all know that. Whether we are 25 or 65. All we can do is make the best decisions we think we can make based upon the information available. And, if a 30/70 mix isn't the optimum choice for a 25 year old with 40 years in front of him/her, then why would it not be the same for a 65 year old? Isn't the risk of a 30/70 mix significantly underperforming a risk that must be equally considered? Isn't the idea to try to make the most intelligent assessment of the best investment mix for someone who has 40 years of investing facing him/her (and, at the end of the day, isn't that the same for the 25 year old as it is for the 65 year old)?
- in_reality
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Re: When 60/40 just isn't appropriate
I guess you could look at it that way, and I think many people do.Bill1952 wrote:Isn't the idea to try to make the most intelligent assessment of the best investment mix for someone who has 40 years of investing facing him/her (and, at the end of the day, isn't that the same for the 25 year old as it is for the 65 year old)?
For me, I consider this. At 25 I am not taking withdrawals from my portfolio and really do have a longer investment horizon for stocks to recover. At 65, I will likely be taking withdrawals. So if I am rebalancing into stocks which continue to fall, and I am taking withdrawals, then my safe assets will be disappearing at a faster rate and I wouldn't want to sell the falling stocks. Sure there is the promise of the newly purchased stocks rising nicely, but will my portfolio last long enough to see that day come? It may or may not and that probably depends at least partially on the size of my safe assets.
Re: When 60/40 just isn't appropriate
Won't you be rebalancing into stocks which continue to fall regardless of whether you have a 30/70 or 60/40 allocation? Isn't it just a factor of being able to withstand a longer bear market at a 30/70 allocation than you can with a 60/40 allocation? But if you are going to allow the possible black swan to control your allocation decision, how can you say that a 30/70 allocation is adequate protection? And how do you avoid the likelihood of underperforming with a 30/70 allocation with the result that your assets no longer last long enough as the price you pay for worrying about the black swan / 20 year bear market?in_reality wrote:I guess you could look at it that way, and I think many people do.Bill1952 wrote:Isn't the idea to try to make the most intelligent assessment of the best investment mix for someone who has 40 years of investing facing him/her (and, at the end of the day, isn't that the same for the 25 year old as it is for the 65 year old)?
For me, I consider this. At 25 I am not taking withdrawals from my portfolio and really do have a longer investment horizon for stocks to recover. At 65, I will likely be taking withdrawals. So if I am rebalancing into stocks which continue to fall, and I am taking withdrawals, then my safe assets will be disappearing at a faster rate and I wouldn't want to sell the falling stocks. Sure there is the promise of the newly purchased stocks rising nicely, but will my portfolio last long enough to see that day come? It may or may not and that probably depends at least partially on the size of my safe assets.
- in_reality
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Re: When 60/40 just isn't appropriate
No, I won't be rebalancing as a hard and fast rule into falling stocks in retirement.Bill1952 wrote: Won't you be rebalancing into stocks which continue to fall regardless of whether you have a 30/70 or 60/40 allocation?
Since I can't say 30/70 is adequate, and as you mention assets not lasting long enough is a risk, I will probably go 50/50. I am only 48 now so it's not mission critical to have this exactly figured out, but I plan to go 50/50 and if stocks tank to just ride them out.Bill1952 wrote:Isn't it just a factor of how long the bear market lasts and that at a 30/70 allocation you can withstand a much longer bear market than you can at 60/40? But if allow the possible black swan control your allocation decision, how can you say that 30/70 is adequate? And how do you avoid likely underperforming and your assets not lasting long enough as the price you pay for worrying about the black swan of a 20 year bear market?
I figure if stocks recover soon enough then I will end up rebalancing out of stocks into safe assets eventually anyway. That would be even if I didn't rebalance into stocks. If stock don't recover in a long bear, then I don't really want to be rebalancing into them anyway.
I don't see why I need to rush to rebalance into stocks, watch them rise and then rebalance out of them. Sure I could make a little more money but by the time I am retired, I will be more concerned about not losing too much in a rare event.
I look it like this. In Japan, they knew a tsunami could go over the wall at the nuclear plant. The rare risk was known and dismissed as too costly to build higher walls. A simpler solution would have been just to elevate the back up generators so that even if the water came, the plant could have functioned. It was a relatively easy solution (hindsight is so easy).
So, I don't want to reduce my equity allocation in retirement too much (I think that could be too costly) and as a simple solution to a rare event (left tail risk in an extended bear market), I will just not rebalance into falling stocks.
Re: When 60/40 just isn't appropriate
If you are going to hold for 30 years and not sell that is one thing.History shows that over 30-40 years, stocks are almost certainly going to be the best investment. Why would I intentionally deviate from that advice when I am in retirement?
If you are simply living off dividends that is one thing.
If you are living on dividends and principle that is something else entirely. In this case your average holding period is not 30 years. Depending on how much principle you are spending down it might be a lot less. If you are forced to sell a lot when markets are down a long ways you may not have enough shares to make up for the loss when the market rebounds. Many stories of folks who get wiped out this way.
In other words, if you are loaded (scenarios 1 and 2 above) you can do just about anything and it will likely work out. If you only have sort of enough you have to be much more careful. Someone in this last case should probably stay away from very large stock allocations, market timing, etc, even though that works out for some people some of the time.
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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What experts say
Bill1952:
Welcome to the Bogleheads Forum!
Forget about market timing based on stock prices.
What Experts Say About Market-Timing
Best wishes.
Taylor
Welcome to the Bogleheads Forum!
I will answer your question indirectly: The asset-allocation experts at EVERY mutual fund company reduce stocks and increase bonds in their Target Funds as the investor becomes older. I think you would be wise to do the same.If the advice to a 25 year old is to have a strong allocation to stocks (and under my formula that is probably 60% allocation, going as high as 80% and as low as 40% depending upon stock prices), then why wouldn't I want to do the exact same thing during my retirement?
Forget about market timing based on stock prices.
What Experts Say About Market-Timing
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
- Rick Ferri
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Re: When 60/40 just isn't appropriate
When the stock market falls, who suffers more? Is it a working person who is accumulating money for retirement, or a retiree who is withdrawing money?
Although market risk is the same in both cases, I suggest there is a greater perception of loss to a retiree who is withdrawing money. This is because a worker continues to accumulate money, thus dampening the effect of a downturn, while in contrast a retiree is taking money out, thus accelerating the loss of capital and increasing the fear of running out of money. This can have an unexpected negative impact on a person who thought they could handle 60% stock risk because they were able to handle it while accumulating assets.
All thinks being equal, I theorize the risk tolerance for a retiree is less than their risk tolerance while working because of the perceived accelerated loss of capital in a bear market and the known inability to make up that loss through future contributions.
Rick Ferri
Although market risk is the same in both cases, I suggest there is a greater perception of loss to a retiree who is withdrawing money. This is because a worker continues to accumulate money, thus dampening the effect of a downturn, while in contrast a retiree is taking money out, thus accelerating the loss of capital and increasing the fear of running out of money. This can have an unexpected negative impact on a person who thought they could handle 60% stock risk because they were able to handle it while accumulating assets.
All thinks being equal, I theorize the risk tolerance for a retiree is less than their risk tolerance while working because of the perceived accelerated loss of capital in a bear market and the known inability to make up that loss through future contributions.
Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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Re: When 60/40 just isn't appropriate
Message deleted.
Last edited by Ki_poorrichard on Sun Feb 22, 2015 3:11 pm, edited 2 times in total.
"We are never certain. We are always ignorant to some degree." - Peter L. Bernstein
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Re: When 60/40 just isn't appropriate
+1scone wrote: I think the 30/70 portfolio, with a 2.5% withdrawal rate, will go through hell and high water.
"We are never certain. We are always ignorant to some degree." - Peter L. Bernstein
Re: When 60/40 just isn't appropriate
Thank you Taylor and Rick. First, I have reduced my base stock allocation from 70% at age 50 to 50% today (age 62). I closely track Vanguard's 2020 Target Index and my portfolio returns mirror it pretty closely. And I agree that down markets during the withdrawal stage of life runs the risk of abandoning one's strategy due to the incredible fear it must generate.
Having said all those things, I still struggle with the theory behind why Vanguard's 2020 target fund reduces the stock exposure - and why I should do the same. Shouldn't the risk of under performance over a 30-40 year period be as big a concern for a retiree with a modest portfolio as is volatility?
And if the withdrawal rate is a fixed percentage (be it 2.5% or 4%) - and the retiree is able to withstand year to year income variations as the portfolio value rises/falls - then if I had a crystal ball that told me the best return over the next 40 years would be a 100% stock allocation, wouldn't that be my best allocation and I just sell 4% of the portfolio every January (or 1/12th of 4% monthly)? What am I missing? I am really so confused by this.
And, again, thank you for responding. This is a very serious subject and I am so confused.
Bill
Having said all those things, I still struggle with the theory behind why Vanguard's 2020 target fund reduces the stock exposure - and why I should do the same. Shouldn't the risk of under performance over a 30-40 year period be as big a concern for a retiree with a modest portfolio as is volatility?
And if the withdrawal rate is a fixed percentage (be it 2.5% or 4%) - and the retiree is able to withstand year to year income variations as the portfolio value rises/falls - then if I had a crystal ball that told me the best return over the next 40 years would be a 100% stock allocation, wouldn't that be my best allocation and I just sell 4% of the portfolio every January (or 1/12th of 4% monthly)? What am I missing? I am really so confused by this.
And, again, thank you for responding. This is a very serious subject and I am so confused.
Bill
Re: When 60/40 just isn't appropriate
Put another way. Assume I retire today with a one million dollar portfolio. I decide that I will withdraw a steady $3,333 monthly ($40,000 annually) for the first five years, and then adjust for inflation every 5 years thereafter. Meanwhile my portfolio is invested 100% in Vanguard's Total Stock Index and I simply have it set to automatically sell $3,333 on the 1st of every month.
Isn't this strategy as likely as any other to perform "the best" over the rest of my retirement years? Aren't the risks of running out of money even greater to me with a 50/50 or 30/70 allocation and taking the same $3,333 every month?
And if I am not going to take a steady dollar amount each month - but rather am going to take a percentage of the portfolio, doesn't that make the 100% stock portfolio even more certain to achieve the higher return over time and the greater amount of withdrawals (at the expense of annual volatility in income)?
Isn't this strategy as likely as any other to perform "the best" over the rest of my retirement years? Aren't the risks of running out of money even greater to me with a 50/50 or 30/70 allocation and taking the same $3,333 every month?
And if I am not going to take a steady dollar amount each month - but rather am going to take a percentage of the portfolio, doesn't that make the 100% stock portfolio even more certain to achieve the higher return over time and the greater amount of withdrawals (at the expense of annual volatility in income)?
Re: When 60/40 just isn't appropriate
Thank you, Rick, for your article. I finally realized I am just not comfortable with 50/50 or even 40/60, and I am striving to get my portfolio to a 35/65 AA (I was at 20/80 due to a windfall of Muni Bonds and CDs).
My DH, on the other hand, is quite happy with his 50/50 AA.
My DH, on the other hand, is quite happy with his 50/50 AA.
Re: When 60/40 just isn't appropriate
Bill,Bill1952 wrote:Put another way. Assume I retire today with a one million dollar portfolio. I decide that I will withdraw a steady $3,333 monthly ($40,000 annually) for the first five years, and then adjust for inflation every 5 years thereafter. Meanwhile my portfolio is invested 100% in Vanguard's Total Stock Index and I simply have it set to automatically sell $3,333 on the 1st of every month.
Isn't this strategy as likely as any other to perform "the best" over the rest of my retirement years? Aren't the risks of running out of money even greater to me with a 50/50 or 30/70 allocation and taking the same $3,333 every month?
And if I am not going to take a steady dollar amount each month - but rather am going to take a percentage of the portfolio, doesn't that make the 100% stock portfolio even more certain to achieve the higher return over time and the greater amount of withdrawals (at the expense of annual volatility in income)?
I suggest you read one or both of Michael Zwecher, "Retirement Portfolios" or Jim Otar, "Unveiling the Retirement Myth". Understand what is "sequence of returns risk".
Suppose you retire and live for 30 years. You take some fixed annual amount from your portfolio. During those 30 years the market is likely, at some point, to drop 40%. If that drop occurs early in your retirement, it is much more harmful than if it occurs later.
L.
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Re: When 60/40 just isn't appropriate
@Bill1952
Did the same thing as you did in 2008-09 (58/61). I move what IRAs and Roth's as I could to deferred annuities with income guarantees with all stock MF selections. Moved all 401k from balanced to 100% equity MF. Started to trade heavily.
We were running out of time and money in 2008. I knew that the probability in recovering for our retirement was not good in a 60/40 (balanced) portfolio; Slim chance in a bond heavy portfolio; A pretty good chance recovery in a equity heavy portfolio.
B. Bernstein said that the most dangerous times in retirement planning is just before retirement and just after retirement. I hadn't read his book at that time, but I figured that I had virtually nothing to lose by thinking, What remaining dangers in Dec 2008 = Opportunity.
My question is Why should the retiree self planner and retiree take the risk of any AA?
Did the same thing as you did in 2008-09 (58/61). I move what IRAs and Roth's as I could to deferred annuities with income guarantees with all stock MF selections. Moved all 401k from balanced to 100% equity MF. Started to trade heavily.
We were running out of time and money in 2008. I knew that the probability in recovering for our retirement was not good in a 60/40 (balanced) portfolio; Slim chance in a bond heavy portfolio; A pretty good chance recovery in a equity heavy portfolio.
B. Bernstein said that the most dangerous times in retirement planning is just before retirement and just after retirement. I hadn't read his book at that time, but I figured that I had virtually nothing to lose by thinking, What remaining dangers in Dec 2008 = Opportunity.
My question is Why should the retiree self planner and retiree take the risk of any AA?
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Re: When 60/40 just isn't appropriate
It is not just "perception of loss". If you sell shares they are gone, they do not recover. The loss is locked in and real. Agree there is also a perception issue s not all shares are sold. Just commenting that it is even worse than you describe.I suggest there is a greater perception of loss to a retiree who is withdrawing money.
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: When 60/40 just isn't appropriate
By a perception of greater loss during a bear market for a retiree, I meant there is a perception that a market downturn is worse than if the same person was working and adding money to their account.
Rick Ferri
Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Re: When 60/40 just isn't appropriate
As a recent retiree, I think this works in two ways. First, any spending that I do must come from that declining reservoir of money I've accumulated. Second, once it's lost, I can't replenish it from the outside quickly nohow.
Re: When 60/40 just isn't appropriate
Right, I agree. Just commenting on the fact I think that is true, but even worse.Rick Ferri wrote:By a perception of greater loss during a bear market for a retiree, I meant there is a perception that a market downturn is worse than if the same person was working and adding money to their account.
Rick Ferri
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: When 60/40 just isn't appropriate
Excellent point Rick! I was just having this exact conversation with my parents last week. Retirement is a whole new ballgame. New funds are no longer coming into the accounts to dollar cost average and add to. Funds are going the other way and coming out of the accounts!Rick Ferri wrote:When the stock market falls, who suffers more? Is it a working person who is accumulating money for retirement, or a retiree who is withdrawing money?
Although market risk is the same in both cases, I suggest there is a greater perception of loss to a retiree who is withdrawing money. This is because a worker continues to accumulate money, thus dampening the effect of a downturn, while in contrast a retiree is taking money out, thus accelerating the loss of capital and increasing the fear of running out of money. This can have an unexpected negative impact on a person who thought they could handle 60% stock risk because they were able to handle it while accumulating assets.
All thinks being equal, I theorize the risk tolerance for a retiree is less than their risk tolerance while working because of the perceived accelerated loss of capital in a bear market and the known inability to make up that loss through future contributions.
Rick Ferri
John C. Bogle: “Simplicity is the master key to financial success."
Re: When 60/40 just isn't appropriate
I am reviving a thread from 2015...just to get what bogleheads think about the current situation.
Total world stock market size as of late 2016 is about $65T while the size of total bond market is about $100T based on google search (I am no expert here).
If one wants to own stocks and bonds in the same proportion, it looks like 40/60 may be an appropriate ratio of stocks to bonds...which aligns with conservative allocation funds like Wellesley of Vanguard.
Your thoughts (as of 2017) appreciated.
Total world stock market size as of late 2016 is about $65T while the size of total bond market is about $100T based on google search (I am no expert here).
If one wants to own stocks and bonds in the same proportion, it looks like 40/60 may be an appropriate ratio of stocks to bonds...which aligns with conservative allocation funds like Wellesley of Vanguard.
Your thoughts (as of 2017) appreciated.
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Re: When 60/40 just isn't appropriate
Why would you care about owning stocks and bonds in the same proportion to their total value?Explorer wrote:I am reviving a thread from 2015...just to get what bogleheads think about the current situation.
Total world stock market size as of late 2016 is about $65T while the size of total bond market is about $100T based on google search (I am no expert here).
If one wants to own stocks and bonds in the same proportion, it looks like 40/60 may be an appropriate ratio of stocks to bonds...which aligns with conservative allocation funds like Wellesley of Vanguard.
Your thoughts (as of 2017) appreciated.
The argument for cap-weighted stocks is fairly strong. For bonds, I don't think so. But together? I really don't know why that would be effective. That would certainly mean you would be holding a lot of international bonds.
The Sensible Steward
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Re: When 60/40 just isn't appropriate
I think Larry has noted before that 85% of the risk in a 60/40 portfolio comes from the equities. That's a lot of concentrated risk.
Dave
Dave
Re: When 60/40 just isn't appropriate
That is not even remotely what that term means.Random Walker wrote:I think Larry has noted before that 85% of the risk in a 60/40 portfolio comes from the equities. That's a lot of concentrated risk.
Dave
Re: When 60/40 just isn't appropriate
Stock/Bond allocation is a personal decision based on each individual's need, ability and willingness to accept stock market risk. It should not be evaluated based on any global or market ratios as suggested above.Explorer wrote:Total world stock market size as of late 2016 is about $65T while the size of total bond market is about $100T based on google search (I am no expert here).
If one wants to own stocks and bonds in the same proportion, it looks like 40/60 may be an appropriate ratio of stocks to bonds...which aligns with conservative allocation funds like Wellesley of Vanguard.
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Re: When 60/40 just isn't appropriate
I pretty sure owning stocks and bonds in the same proportion as you mentioned above has nothing at all to do with the 60/40 ratio of stocks to bonds in people's portfolio. It is simply a preference to own 60% stock and 40% bonds, or any other ratio you choose.Explorer wrote:If one wants to own stocks and bonds in the same proportion, it looks like 40/60 may be an appropriate ratio of stocks to bonds...which aligns with conservative allocation funds like Wellesley of Vanguard.
Re: When 60/40 just isn't appropriate
As the holder of a 60/40 allocation of equities/bonds, I did this way for the amount of risk I was willing, and able to accept. I'm a long term buy and holder of funds/etfs. My 10 year return is just under 7.7%. Is it working for me? Yes. Will it work right in the future? Who knows? I don't, and you sure don't either. Yes I rode out the 2008 market/banking crash.
Even educators need education. And some can be hard headed to the point of needing time out.
Re: When 60/40 just isn't appropriate
60/40 is Ok in retirement if... when stuff hits the fan the impact is downsizing from a Mercedes to a Buick.
It's not OK if you downsize from 3 meals a day to 1 meal a day.
I'm at 30/70 and feel pretty comfortable with that.
burt
It's not OK if you downsize from 3 meals a day to 1 meal a day.
I'm at 30/70 and feel pretty comfortable with that.
burt
Re: When 60/40 just isn't appropriate
I've looked at some VPW scenarios and it seems that there is not a whole lot of difference in portfolio outcomes between 60/40 and 40/60 in really bad markets (like the period 1966 to 1980). But simulations don't seem to cover the current low real bond rates very well.
So I'm OK right now with 60/40 and am willing to go towards 40/60 should certain fundamentals change ... like a flattening yield curve.
So I'm OK right now with 60/40 and am willing to go towards 40/60 should certain fundamentals change ... like a flattening yield curve.
Re: When 60/40 just isn't appropriate
I align with this simple rationale. With the stock bull market long in the tooth (since 2009) and myself approaching retirement in 5 years or so, I am beginning to shift towards 30% to 40 % equities and the rest in bonds/cash.burt wrote:60/40 is Ok in retirement if... when stuff hits the fan the impact is downsizing from a Mercedes to a Buick.
It's not OK if you downsize from 3 meals a day to 1 meal a day.
I'm at 30/70 and feel pretty comfortable with that.
burt
It is a personal decision, however, on the allocation ratio. Thanks for the replies.
Re: When 60/40 just isn't appropriate
Here is a good read.http://www.physicianonfire.com/bonds1/
Re: When 60/40 just isn't appropriate
I reread this entire thread. (I vaguely remember reading it a couple of years ago.) I found it very interesting with lots to think about. Rick Ferri's 30/70 seems a tad bit conservative for me as a retiree (72 with a spouse 70) although I understand he recommends it as a starting point for discussion. The wealth of different opinions, analyses and data on AAs is just mind-boggling. I keep coming back to the opinions of two wise men, both of whom appeal to the KISS principle:
- Taylor Larrimore's injunction to never have more in stocks than you can afford to lose.
- Prof. Markowitz's 50/50 default position. If he doesn't know which asset class is going to do best going forward, I sure as hell don't.
The result is that I come down on the side of about 45/50/5 with an equity range from 40 - 50%.
- Taylor Larrimore's injunction to never have more in stocks than you can afford to lose.
- Prof. Markowitz's 50/50 default position. If he doesn't know which asset class is going to do best going forward, I sure as hell don't.
The result is that I come down on the side of about 45/50/5 with an equity range from 40 - 50%.
Friar1610 |
50-ish/50-ish - a satisficer, not a maximizer
Re: When 60/40 just isn't appropriate
I was comparing 60/40 versus 40/60 using the VPW tool and a start date of 1966 for the simulation. This is the worst period in modern history for a retirement portfolio of standard construction. It seemed to show similar results for both AA's, not quite what I would have guessed.
But this nugget of information is worth mentioning: the simulation with a US equity versus the US+international equity showed the (at least for this period) the international equity helped a lot. Specifically it points to periods after 1972 as being helpful to have the international. Before 1972 the international data was not available.
But this nugget of information is worth mentioning: the simulation with a US equity versus the US+international equity showed the (at least for this period) the international equity helped a lot. Specifically it points to periods after 1972 as being helpful to have the international. Before 1972 the international data was not available.
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Re: When 60/40 just isn't appropriate
With a 2.5% withdrawal rate, 60/40 will go through hell and high water too. So would 100/0, assuming you have a mix of US and Intl stocks. 2.5% is barely beating inflation.. you'd probably be better off buying an SPIA.Ki_poorrichard wrote:+1scone wrote: I think the 30/70 portfolio, with a 2.5% withdrawal rate, will go through hell and high water.
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Re: When 60/40 just isn't appropriate
Paul Merriman's distribution tables showing the performance of $1 million from 1970 to most recent year are where I got the idea that 60/40 was the "sweet spot." Just from staring at them you can see its better success rate during this particular wild ride of a 45 year period. Each table is for an annual distribution rate of 3% to 5%, fixed and variable, and shows in 10 percent increments how portfolios from 0/100 to 100/0 did, using something like his model equity portfolio.
http://paulmerriman.com/retirement-distributions-2016/
http://paulmerriman.com/retirement-distributions-2016/
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Re: When 60/40 just isn't appropriate
First of all, I really enjoy and appreciate Paul Merriman's work. His podcast is a good 'listen' every week or so. FWIW, his 'ultimate buy-and-hold' portfolio, a 'slice and dice', is up about 1.5% in CAGR over the 'three fund portfolio' since 2001 (earliest data for TIPS in Portfolio Visualizer); this is with both holding 40% in bonds.Johnnie wrote:Paul Merriman's distribution tables showing the performance of $1 million from 1970 to most recent year are where I got the idea that 60/40 was the "sweet spot." Just from staring at them you can see its better success rate during this particular wild ride of a 45 year period. Each table is for an annual distribution rate of 3% to 5%, fixed and variable, and shows in 10 percent increments how portfolios from 0/100 to 100/0 did, using something like his model equity portfolio.
http://paulmerriman.com/retirement-distributions-2016/
That being said, I'm not sure what you mean by "sweet spot" in terms of withdrawals from a 60/40. There would have been lower volatility with less stock exposure, but more stock exposure would have left a significantly higher ending balance. Granted, we each have to find what works best for you, but I'm not sure that those tables alone are appropriate for that.
Also, his tables only show one specific sequence of returns. I would recommend that you use some of the useful tools available at Portfolio Charts and Portfolio Visualizer to see how a portfolio would have fared over different time periods; it makes a significant difference.
The Sensible Steward
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Merriman Portfolio vs. Three-Fund Portfolio
willthrill81:First of all, I really enjoy and appreciate Paul Merriman's work. His podcast is a good 'listen' every week or so. FWIW, his 'ultimate buy-and-hold' portfolio, a 'slice and dice', is up about 1.5% in CAGR over the 'three fund portfolio' since 2001 (earliest data for TIPS in Portfolio Visualizer); this is with both holding 40% in bonds.
Paul Merriman's 'ultimate buy-and-hold' portfolio currently has the worst 10-year performance of all eight "Lazy Portfolios."
The Second-Grader Three-Fund Portfolio has the best performance.
Paul B. Farrell's Lazy Portfolios
Past performance does not forecast future performance.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Merriman Portfolio vs. Three-Fund Portfolio
My statement was in regards to returns since 2001, not just the last ten years.Taylor Larimore wrote:willthrill81:First of all, I really enjoy and appreciate Paul Merriman's work. His podcast is a good 'listen' every week or so. FWIW, his 'ultimate buy-and-hold' portfolio, a 'slice and dice', is up about 1.5% in CAGR over the 'three fund portfolio' since 2001 (earliest data for TIPS in Portfolio Visualizer); this is with both holding 40% in bonds.
Paul Merriman's 'ultimate buy-and-hold' portfolio currently has the worst 10-year performance of all eight "Lazy Portfolios."
The Second-Grader Three-Fund Portfolio has the best performance.
Paul B. Farrell's Lazy Portfolios
Past performance does not forecast future performance.
Best wishes.
Taylor
I don't know why, but even using the same tickers as they do, I can't replicate Marketwatch's portfolio returns. According to Portfolio Visualizer, the three-fund portfolio (60/30/10) had a CAGR of 5.26% from 2007-2016, while the UBH had a CAGR of 4.57% during the same period. That's a much smaller gap between the two than indicated by Marketwatch.
There are two primary reasons the UBH lagged the three-fund over this particular time period. First, this particular version of the UBH has 40% in bonds compared to the three-fund's 10%, a sizable difference that definitely helped the three-fund portfolio. Second, and more importantly, the UBH is equally weighted in terms of U.S. and international equities, whereas the three-fund was 2/3 U.S. equities, which performed better during the last ten years. Had they been equally weighted (45% each) while still maintaining the 10% in bonds, the UBH would have slightly outperformed the three-fund.
Personally, I'm definitely more of a U.S. equities investor, though I do see value in some exposure to international SC and EM. Were I to implement the UBH portfolio myself, I would reduce the international exposure by about half and tilt more toward the U.S.
The Sensible Steward
Re: Merriman Portfolio vs. Three-Fund Portfolio
Taylor Larrimore, every time Paul Merriman's recommended buy-and-hold equity portfolio is mentioned on this forum you diss it with that same source, which appears to be bogus for the purpose. Specifically, it compares portfolios with different fixed income/equity allocations. IOW, it does not compare apples to apples.Taylor Larimore wrote:willthrill81:First of all, I really enjoy and appreciate Paul Merriman's work. His podcast is a good 'listen' every week or so. FWIW, his 'ultimate buy-and-hold' portfolio, a 'slice and dice', is up about 1.5% in CAGR over the 'three fund portfolio' since 2001 (earliest data for TIPS in Portfolio Visualizer); this is with both holding 40% in bonds.
Paul Merriman's 'ultimate buy-and-hold' portfolio currently has the worst 10-year performance of all eight "Lazy Portfolios."
The Second-Grader Three-Fund Portfolio has the best performance.
Paul B. Farrell's Lazy Portfolios
Past performance does not forecast future performance.
Best wishes.
Taylor
I and at least other person have noted this and complained about this in previous threads but here we go again.
"I know nothing."
Re: When 60/40 just isn't appropriate
Will, like I said, "60/40 looks optimal" was my takeaway after staring at those post-1970 tables for excessive periods of time. It just kind of jumps out as the mix that would have carried a 1970 retiree through thick and thin, with maximum drawdowns that all proved to be recoverable.willthrill81 wrote:I'm not sure what you mean by "sweet spot" in terms of withdrawals from a 60/40.
Roger that though on this was just one possible sequence of returns and never to be repeated. But as I pointed out (and Merriman does too) it was one heck of a wild 45 year ride and hardly a day at the park! Except for the 1990s that is, which goes right to your point: That massive rally saved a lot of retirees' bacon after getting beat up hard up until around 1982. That makes your warning even more valid, because future retirees may not get a similar miracle-moment.
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Re: When 60/40 just isn't appropriate
That's why FIRECalc is such a popular tool around here. It examines all of the possible sequences for a given retirement time frame.Johnnie wrote:Roger that though on this was just one possible sequence of returns and never to be repeated. But as I pointed out (and Merriman does too) it was one heck of a wild 45 year ride and hardly a day at the park! Except for the 1990s that is, which goes right to your point: That massive rally saved a lot of retirees' bacon after getting beat up hard up until around 1982. That makes your warning even more valid, because future retirees may not get a similar miracle-moment.
http://firecalc.com/
They have a great example of how impactful sequence of returns risk was for retirees in 1973, 1974, and 1975 on the home page.
And yes, the future will certainly look different from the past, but the real question is just how different.
The Sensible Steward
Re: When 60/40 just isn't appropriate
I haven't use FireCalc in a while so had not seen the graphic, a really powerful illustration. Thanks for pointing it out.willthrill81 wrote:They have a great example of how impactful sequence of returns risk was for retirees in 1973, 1974, and 1975 on the home page.
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