Talk me out of a 60/40 AA

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nasrullah
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Talk me out of a 60/40 AA

Post by nasrullah » Tue Jan 02, 2018 8:18 pm

Past performance doesn't guarantee future results - blah, blah, blah.

Assuming a three fund portfolio (VTSMX, VGTSX, VBMFX) with 20% of equities in International I've been looking to justify an Age-10/15 in Bonds portfolio. I haven't been able to find any combination (even messing with the International allocation) of Asset Allocation, rebalancing period, etc... where the CAGR/IRR is more than 1% off between them, but with MASSIVELY different Worst Year / Max Drawdown percentages?

Seriously though, how do you justify an extremely minimal difference in the return over a 10% difference in the max drawdown for the period? If you're willing to take a -40% ride, why not just go 100% VFINX and at least get something in the end to justify the ulcers along the way?

https://www.portfoliovisualizer.com/bac ... ation7_3=0
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Sandtrap
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Re: Talk me out of a 60/40 AA

Post by Sandtrap » Tue Jan 02, 2018 8:21 pm

Talk me out of a 60/40 AA
Mr. Bernstein has some thoughts on that allocation.
http://web.archive.org/web/20061214061 ... in6040.pdf
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Alexa9
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Re: Talk me out of a 60/40 AA

Post by Alexa9 » Tue Jan 02, 2018 8:23 pm

I read online that The Big Crash is coming THIS YEAR! Now that I think about it, I read that the last 10 years. I think they were right in 2008. The truth is nobody knows nothing, so protect your butt with bonds.

am
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Re: Talk me out of a 60/40 AA

Post by am » Tue Jan 02, 2018 8:45 pm

What do bonds protect Against? Short term fluctuations down, not inflation ( assuming not tips), less feelings of loss when market goes down? I never really understood why I hold bonds too much. Losing 500k instead of 630k will hurt bad enough. More efficient portfolio has no practical meaning to me. Havent had to rebalance much because of 5% bands. Stay the course more? Well if you invest in the markets you assume it will go up in the long run.

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Re: Talk me out of a 60/40 AA

Post by bloom2708 » Tue Jan 02, 2018 8:48 pm

60/40 is too <insert something here>

Get wild and crazy and go 70/30. Live on the edge. :wink:

Closer to 50 than 40 and ~60/40 here.
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aristotelian
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Re: Talk me out of a 60/40 AA

Post by aristotelian » Tue Jan 02, 2018 8:57 pm

What is your need, willingness, and ability to take risk? 60/40 is fine for many people in the abstract but you may be different.

dbr
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Re: Talk me out of a 60/40 AA

Post by dbr » Tue Jan 02, 2018 9:26 pm

A different perspective on what the results are might come from running FireCalc in "not retired" mode for thirty years or so and look at the ranges of possible portfolio outcomes for varying stock/bond allocations from 100/0 to 50/50 or so. You can do it with a fixed initial portfolio, with contributions over time, or with a combination of both. I'm not sure using worst drawdown as a figure of merit is a good way to set asset allocation. What is it about worst drawdown that this would drive your decision making?

radiowave
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Re: Talk me out of a 60/40 AA

Post by radiowave » Tue Jan 02, 2018 9:28 pm

There's a lot to be said where you are in relationship to retirement. If I was going to retire in say early 2008, if I had a more conservative portfolio I would be better off in the short term (e.g. late 2008 through 2011) than a more aggressive one. If the investments are part of the anticipated funding in retirement, well that's a lot different than being in the early or mid accumulation phase where you can ride out the market downturn.
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nasrullah
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Re: Talk me out of a 60/40 AA

Post by nasrullah » Tue Jan 02, 2018 9:30 pm

dbr wrote:
Tue Jan 02, 2018 9:26 pm
A different perspective on what the results are might come from running FireCalc in "not retired" mode for thirty years or so and look at the ranges of possible portfolio outcomes for varying stock/bond allocations from 100/0 to 50/50 or so. You can do it with a fixed initial portfolio, with contributions over time, or with a combination of both. I'm not sure using worst drawdown as a figure of merit is a good way to set asset allocation. What is it about worst drawdown that this would drive your decision making?
FireCalc? This is a new one to me - can you include a link?
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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Re: Talk me out of a 60/40 AA

Post by heyyou » Tue Jan 02, 2018 9:31 pm

60/40 is good enough until you are absolutely sure that you need to change it to something else. Then do change it. Maybe write in your investment policy statement that you can only change your allocation every five? years.

Think about your personal history. Consider how you felt during the 2000 Crash. Think about both your percentage and your dollar losses in the 2008 Crash. Studying history is far easier than living through it.

My opinion is that your allocation needs to be good enough, but there are many good choices. How much you save is far more important than what particular numbers you choose for your allocation, so emphasize your saving.

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nasrullah
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Re: Talk me out of a 60/40 AA

Post by nasrullah » Tue Jan 02, 2018 9:37 pm

But why not 100% stocks then? Heck why not lever up to 110%?

This is what I'm missing - increasing the stock AA from 60/40 to 80/20 has less than a 1% increase in CAGR in every 10+ year period I've looked at. You have to shorten the window to < 5 years before I've found a meaningful increase in CAGR. But even then does a 2% increase in CAGR justify a > 20% difference in Max Drawdown?

I'm 38, have $650k in invested assets, and for the time being have a $150k/year investment target. Hopefully I'll be able to maintain that, and even more hopefully increase it as time passes. In theory I have time and resources to be more aggressive but why?

Maybe the simple answer is I've finally found *my* AA.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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nasrullah
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Re: Talk me out of a 60/40 AA

Post by nasrullah » Tue Jan 02, 2018 9:39 pm

dbr wrote:
Tue Jan 02, 2018 9:26 pm
A different perspective on what the results are might come from running FireCalc in "not retired" mode for thirty years or so and look at the ranges of possible portfolio outcomes for varying stock/bond allocations from 100/0 to 50/50 or so. You can do it with a fixed initial portfolio, with contributions over time, or with a combination of both. I'm not sure using worst drawdown as a figure of merit is a good way to set asset allocation. What is it about worst drawdown that this would drive your decision making?
Found FireCalc https://www.firecalc.com/ and just lost the next week of my life :) Thanks, this is pretty amazing.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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nasrullah
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Re: Talk me out of a 60/40 AA

Post by nasrullah » Tue Jan 02, 2018 9:46 pm

heyyou wrote:
Tue Jan 02, 2018 9:31 pm
60/40 is good enough until you are absolutely sure that you need to change it to something else. Then do change it. Maybe write in your investment policy statement that you can only change your allocation every five? years.
Thanks - that's really good advice.
heyyou wrote:
Tue Jan 02, 2018 9:31 pm
Think about your personal history. Consider how you felt during the 2000 Crash. Think about both your percentage and your dollar losses in the 2008 Crash. Studying history is far easier than living through it.
2000 was horrible, so was the incredibly slow recovery to normal (really felt like 2003 before the economy as a whole was on its feet).
heyyou wrote:
Tue Jan 02, 2018 9:31 pm
My opinion is that your allocation needs to be good enough, but there are many good choices. How much you save is far more important than what particular numbers you choose for your allocation, so emphasize your saving.
This, more than anything else, really is the key isn't it?
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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Re: Talk me out of a 60/40 AA

Post by dumbbunny » Tue Jan 02, 2018 9:49 pm

nasrullah wrote:
Tue Jan 02, 2018 9:39 pm


Found FireCalc https://www.firecalc.com/ and just lost the next week of my life :) Thanks, this is pretty amazing.
Try www.cfiresim.com, too, if you have time.
“It’s the curse of old men to realize that in the end we control nothing." "Homeland" episode, "Gerontion"

3funder
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Re: Talk me out of a 60/40 AA

Post by 3funder » Tue Jan 02, 2018 10:02 pm

Don't overthink this. Choose your allocation and dive in.

Wombatty
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Re: Talk me out of a 60/40 AA

Post by Wombatty » Wed Jan 03, 2018 5:47 am

I would highly recommend reading this series of Asset Allocation articles.
The link below goes to the third post.

http://idiosyncraticwhisk.blogspot.com. ... short.html

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stemikger
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Re: Talk me out of a 60/40 AA

Post by stemikger » Wed Jan 03, 2018 6:04 am

Talk you out of it? I'll talk you into it! IMHO it's the ultimate SWAN portfolio for all people at all ages.

Im 60/40 and I'm 53 and my wife is 57. My wife shows no interest at all in investing. After thinking about it for 20 plus years, upon retirement, I plan to put it all in the Vanguard Balanced Index Fund for life so in the event I predecease her, her only worry will be whether she will take 3%, 4% or in a really good year 5%. I will rest peacefully in the afterlife this way and sleep better while I'm still in this meat suit.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Talk me out of a 60/40 AA

Post by snowox » Wed Jan 03, 2018 7:07 am

stemikger wrote:
Wed Jan 03, 2018 6:04 am
Talk you out of it? I'll talk you into it! IMHO it's the ultimate SWAN portfolio for all people at all ages.

Im 60/40 and I'm 53 and my wife is 57. My wife shows no interest at all in investing. After thinking about it for 20 plus years, upon retirement, I plan to put it all in the Vanguard Balanced Index Fund for life so in the event I predecease her, her only worry will be whether she will take 3%, 4% or in a really good year 5%. I will rest peacefully in the afterlife this way and sleep better while I'm still in this meat suit.


53/49 retired and 60/40 as well. I agree with it being the Swan portfolio at least for now! :sharebeer

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stemikger
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Re: Talk me out of a 60/40 AA

Post by stemikger » Wed Jan 03, 2018 7:15 am

snowox wrote:
Wed Jan 03, 2018 7:07 am
stemikger wrote:
Wed Jan 03, 2018 6:04 am
Talk you out of it? I'll talk you into it! IMHO it's the ultimate SWAN portfolio for all people at all ages.

Im 60/40 and I'm 53 and my wife is 57. My wife shows no interest at all in investing. After thinking about it for 20 plus years, upon retirement, I plan to put it all in the Vanguard Balanced Index Fund for life so in the event I predecease her, her only worry will be whether she will take 3%, 4% or in a really good year 5%. I will rest peacefully in the afterlife this way and sleep better while I'm still in this meat suit.


53/49 retired and 60/40 as well. I agree with it being the Swan portfolio at least for now! :sharebeer
I used to think I would get more conservative as I get older, but after reading how one should include social security as part of their bond allocation, 60/40 for life is ideal. I asked this question via e-mail to Mr. Bogle directly and he answered my question. He said nothing is wrong with 60/40 for life. So I have St. Jack's blessing, that is all I need to Stay the Course.

If you are interested here is my question asked by Mel to Jack at around 59:18
https://vimeo.com/channels/bogleheads/241479867
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Talk me out of a 60/40 AA

Post by Valuethinker » Wed Jan 03, 2018 7:38 am

Sandtrap wrote:
Tue Jan 02, 2018 8:21 pm
Talk me out of a 60/40 AA
Mr. Bernstein has some thoughts on that allocation.
http://web.archive.org/web/20061214061 ... in6040.pdf
Hi

Did you mean William Bernstein, who posts here? The Intelligent Asset Allocator and other books?

In fact, this article was written by Peter Bernstein. A very well known author in the field of investing and finance (now deceased).

The article was very interesting and I thank you for it.

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Re: Talk me out of a 60/40 AA

Post by Mike Scott » Wed Jan 03, 2018 7:40 am

My target AA is around 65/35 and I plan to stick here into retirement in a few years. If I ended up with a surprise windfall of "enough," I might consider moving towards 50/50. Some of the previously linked articles and a lot of other reading suggests to me that smallish changes like this probably don't make a lot of difference in the long term. The old rule of thumb / recommendation of sticking somewhere between 75/25 and 25/75 seems to be a comfortable fit with a lot of more sophisticated recent analyses but I don't personally have any desire to go under 50/50.

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Re: Talk me out of a 60/40 AA

Post by snarlyjack » Wed Jan 03, 2018 7:45 am

nasrullah,

Nice meeting you & welcome to Bogleheads.

Here is a interesting article with studies/numbers that
you might find interesting.

Enjoy & good luck.

https://earlyretirementnow.com/2017/09/ ... lidepaths/

dbr
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Re: Talk me out of a 60/40 AA

Post by dbr » Wed Jan 03, 2018 9:26 am

dumbbunny wrote:
Tue Jan 02, 2018 9:49 pm
nasrullah wrote:
Tue Jan 02, 2018 9:39 pm


Found FireCalc https://www.firecalc.com/ and just lost the next week of my life :) Thanks, this is pretty amazing.
Try www.cfiresim.com, too, if you have time.
I agree. I tend to just throw out the old standby when it comes up.

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nasrullah
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Re: Talk me out of a 60/40 AA

Post by nasrullah » Wed Jan 03, 2018 10:25 am

Wombatty wrote:
Wed Jan 03, 2018 5:47 am
I would highly recommend reading this series of Asset Allocation articles.
The link below goes to the third post.

http://idiosyncraticwhisk.blogspot.com. ... short.html
Thanks - in my queue for tonight.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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nasrullah
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Re: Talk me out of a 60/40 AA

Post by nasrullah » Wed Jan 03, 2018 10:27 am

stemikger wrote:
Wed Jan 03, 2018 7:15 am
snowox wrote:
Wed Jan 03, 2018 7:07 am
stemikger wrote:
Wed Jan 03, 2018 6:04 am
Talk you out of it? I'll talk you into it! IMHO it's the ultimate SWAN portfolio for all people at all ages.

Im 60/40 and I'm 53 and my wife is 57. My wife shows no interest at all in investing. After thinking about it for 20 plus years, upon retirement, I plan to put it all in the Vanguard Balanced Index Fund for life so in the event I predecease her, her only worry will be whether she will take 3%, 4% or in a really good year 5%. I will rest peacefully in the afterlife this way and sleep better while I'm still in this meat suit.


53/49 retired and 60/40 as well. I agree with it being the Swan portfolio at least for now! :sharebeer
I used to think I would get more conservative as I get older, but after reading how one should include social security as part of their bond allocation, 60/40 for life is ideal. I asked this question via e-mail to Mr. Bogle directly and he answered my question. He said nothing is wrong with 60/40 for life. So I have St. Jack's blessing, that is all I need to Stay the Course.

If you are interested here is my question asked by Mel to Jack at around 59:18
https://vimeo.com/channels/bogleheads/241479867
Awesome thank you!
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

B. Wellington
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Re: Talk me out of a 60/40 AA

Post by B. Wellington » Wed Jan 03, 2018 10:34 am

stemikger wrote:
Wed Jan 03, 2018 6:04 am
Talk you out of it? I'll talk you into it! IMHO it's the ultimate SWAN portfolio for all people at all ages.

Im 60/40 and I'm 53 and my wife is 57. My wife shows no interest at all in investing. After thinking about it for 20 plus years, upon retirement, I plan to put it all in the Vanguard Balanced Index Fund for life so in the event I predecease her, her only worry will be whether she will take 3%, 4% or in a really good year 5%. I will rest peacefully in the afterlife this way and sleep better while I'm still in this meat suit.
^^^+1 We are in the same age group and this works for us. Although a Wellington/Wellesley mix that we have held for years. We held a more aggressive portfolio in the past, however I find this to be the ultimate SWAN portfolio for us as well. YMMV.

I keep a printed copy of Peter Bernstein's 60/40 Solution near my desk. Arguably one of the Best papers written on this topic. Every now and then, I will review it just to remind myself to "stay the course".

dbr
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Re: Talk me out of a 60/40 AA

Post by dbr » Wed Jan 03, 2018 10:37 am

nasrullah wrote:
Wed Jan 03, 2018 10:27 am
stemikger wrote:
Wed Jan 03, 2018 7:15 am
snowox wrote:
Wed Jan 03, 2018 7:07 am
stemikger wrote:
Wed Jan 03, 2018 6:04 am
Talk you out of it? I'll talk you into it! IMHO it's the ultimate SWAN portfolio for all people at all ages.

Im 60/40 and I'm 53 and my wife is 57. My wife shows no interest at all in investing. After thinking about it for 20 plus years, upon retirement, I plan to put it all in the Vanguard Balanced Index Fund for life so in the event I predecease her, her only worry will be whether she will take 3%, 4% or in a really good year 5%. I will rest peacefully in the afterlife this way and sleep better while I'm still in this meat suit.


53/49 retired and 60/40 as well. I agree with it being the Swan portfolio at least for now! :sharebeer
I used to think I would get more conservative as I get older, but after reading how one should include social security as part of their bond allocation, 60/40 for life is ideal. I asked this question via e-mail to Mr. Bogle directly and he answered my question. He said nothing is wrong with 60/40 for life. So I have St. Jack's blessing, that is all I need to Stay the Course.

If you are interested here is my question asked by Mel to Jack at around 59:18
https://vimeo.com/channels/bogleheads/241479867
Awesome thank you!
If the question had been "I don't have any SS, what would be wrong with putting everything in 60/40 balanced index fund?" the answer from Mr. Bogle would still be "Nothing." His answer is unequivocal. He didn't ask if by counting your SS as a bond and putting stocks and actual bonds at 60/40, did you end up at age-in-bonds.

Random Walker
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Re: Talk me out of a 60/40 AA

Post by Random Walker » Wed Jan 03, 2018 10:41 am

About 90% of the risk in a 60/40 portfolio is concentrated in the equities. If the equity risk is all TSM, then all that risk is in a single factor, market beta.

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Re: Talk me out of a 60/40 AA

Post by cfs » Wed Jan 03, 2018 11:16 am

"Talk me out of a 60/40 AA" --- and the real question should be WHY. Thanks for reading ~cfs~
~ Member of the Active Retired Force since 2014 ~

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Re: Talk me out of a 60/40 AA

Post by bligh » Wed Jan 03, 2018 11:46 am

I am vastly outclassed in investing knowledge by most of the people who have posted on this thread before me.

But okay, I'll bite. *puts on his flame suit and body armor*

Historically I think one of the reasons you see such a small difference in returns between a 60/40 and an 80/20 is that bonds used to yield a LOT more. Interest rates were a lot higher. This falling yield over the last half century or so has also boosted the average returns for bonds. As a result the 40% of the portfolio in bonds didn't trail *too* far behind in performance. So imagine bonds returning 6% and stocks returning 11% , the difference in return for that 40% of your portfolio, is 5%. In exchange for that 5% lower performance you get much less volatility.

In today's environment, if you assume that stocks will continue to provide ~11% returns over the next 30 years, but adjust bonds to yield something closer to 3% (Even if the yield rises, the performance of your bonds will face a headwind due to the dropping NAV) .. The difference in expected performance for 40% of your portfolio is now, 8%. So for the next 30 years you may find an 80/20 portfolio outperform the 60/40 by more than 1%. This is not the same thing as saying 60/40 is a bad idea. It just means you should be prepared to pay a higher price than what you are seeing historically (in terms of decreased performance) for the same decrease in volatility.

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Re: Talk me out of a 60/40 AA

Post by Greg in Idaho » Wed Jan 03, 2018 11:50 am

dumbbunny wrote:
Tue Jan 02, 2018 9:49 pm
nasrullah wrote:
Tue Jan 02, 2018 9:39 pm


Found FireCalc https://www.firecalc.com/ and just lost the next week of my life :) Thanks, this is pretty amazing.
Try www.cfiresim.com, too, if you have time.
+1 on this

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Re: Talk me out of a 60/40 AA

Post by Valuethinker » Wed Jan 03, 2018 12:56 pm

bligh wrote:
Wed Jan 03, 2018 11:46 am


In today's environment, if you assume that stocks will continue to provide ~11% returns over the next 30 years, but adjust bonds to yield something closer to 3% (Even if the yield rises, the performance of your bonds will face a headwind due to the dropping NAV) .. The difference in expected performance for 40% of your portfolio is now, 8%. So for the next 30 years you may find an 80/20 portfolio outperform the 60/40 by more than 1%. This is not the same thing as saying 60/40 is a bad idea. It just means you should be prepared to pay a higher price than what you are seeing historically (in terms of decreased performance) for the same decrease in volatility.
And there's the logical problem.

If bonds return 2% stocks cannot sustainably return 11%. If they did, the implied PE of stocks in 30 years time would be 1990 Japan type levels (or US 2000, probably more).

Bond yields are low because Quantitative Easing has driven them down quite substantially, plus an unprecedented degree of economic slackness post Crash has allowed monetary authorities to ignore inflationary worries.

But the corollary of that is that future equity returns will also be lower. The risk premium for equities is not 9%, it's 3-6%, with plenty of evidence it will be at the low end of that number (implying a nominal return of 5% p.a.). I would suggest 3-4% is reasonable for planning (5-6% pa nominal return, assuming inflation averages 2%).

I really hope no one is basing their personal financial planning on 11% pa returns from stocks in the next 30 years (implying stock markets would go up c. 2^5 ie 64 times in the 30 years).

We've had the good news, the near tripling of markets since March 2009. That was the one off adjustment of stock markets to a new, "permanent", lower interest rates-- and of course they might not be permanently this low. It cannot happen again, unless we think interest rates can go negative AND earnings growth for markets will still be in line with historic trends.

For equities to give you 11%, we'd need one hell of a bear market, right now, and the presumption that we could invest post that bear market (so it's not like-for-like).

60-40 has the merits of having been a good strategy for a very long time. Granted if your real returns on bonds are likely to be less than 2%, and on equities 3%-5%, then your future returns will be lower than they have been.

quantAndHold
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Re: Talk me out of a 60/40 AA

Post by quantAndHold » Wed Jan 03, 2018 1:10 pm

There’s clearly no way that the return on stocks is going to be bonds +9%, or anything close to that. But on the other hand, bligh does have one thing right. During the period covered by Portfolio Visualizer, bonds have been on a historically huge run up. Because current bond rates are so much lower now than they were, we can’t possibly expect the same kind of returns from bonds over the next 20 years as we did in the past 40 years.

As far as 60/40...yeah, sounds fine. So does 70/30. I suspect Valuethinker’s prediction about future returns is as good as any.

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Re: Talk me out of a 60/40 AA

Post by bgf » Wed Jan 03, 2018 1:24 pm

Valuethinker wrote:
Wed Jan 03, 2018 12:56 pm

And there's the logical problem.

If bonds return 2% stocks cannot sustainably return 11%. If they did, the implied PE of stocks in 30 years time would be 1990 Japan type levels (or US 2000, probably more).

Bond yields are low because Quantitative Easing has driven them down quite substantially, plus an unprecedented degree of economic slackness post Crash has allowed monetary authorities to ignore inflationary worries.

But the corollary of that is that future equity returns will also be lower. The risk premium for equities is not 9%, it's 3-6%, with plenty of evidence it will be at the low end of that number (implying a nominal return of 5% p.a.). I would suggest 3-4% is reasonable for planning (5-6% pa nominal return, assuming inflation averages 2%).
i don't see any reason why equities are universally forbidden from returning 11% with government bonds returning 2%. what is your reason?
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Re: Talk me out of a 60/40 AA

Post by tc101 » Wed Jan 03, 2018 2:20 pm

I'm 67 years old and am at 50/50. As I read this conversation I am tempted to move to 60/40. But during the last big crash there was so much talk about the wisdom of an all bond portfolio that I was thinking about going down to 25/75. I think I'll stay where I am for now and see what people are talking about after the next crash.
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Re: Talk me out of a 60/40 AA

Post by BW1985 » Wed Jan 03, 2018 2:48 pm

nasrullah wrote:
Tue Jan 02, 2018 9:37 pm
But why not 100% stocks then? Heck why not lever up to 110%?

This is what I'm missing - increasing the stock AA from 60/40 to 80/20 has less than a 1% increase in CAGR in every 10+ year period I've looked at. You have to shorten the window to < 5 years before I've found a meaningful increase in CAGR. But even then does a 2% increase in CAGR justify a > 20% difference in Max Drawdown?

I'm 38, have $650k in invested assets, and for the time being have a $150k/year investment target. Hopefully I'll be able to maintain that, and even more hopefully increase it as time passes. In theory I have time and resources to be more aggressive but why?

Maybe the simple answer is I've finally found *my* AA.
What's your current AA?
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

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Re: Talk me out of a 60/40 AA

Post by letsgobobby » Wed Jan 03, 2018 3:11 pm

Deleted
Last edited by letsgobobby on Fri Jun 28, 2019 6:56 pm, edited 1 time in total.

smesman
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Re: Talk me out of a 60/40 AA

Post by smesman » Wed Jan 03, 2018 5:09 pm

At the moment, 50/50 or 40/60 also seems to make a lot of sense to me.

The truth is that we don't know what will happen the next 10-40 years. Bonds/cash may outperform stocks over this period, or you may want to withdraw your portfolio earlier for some reason (e.g. study, home/health care costs). From what I've read, something like 20/80 is *more* risky because of inflation risk, but 40/60 or 50/50 may hit the sweet spot.

It is true that the more stocks you have the higher the expected returns become, but also the worse the worst case outcomes become.

Some people say that they keep enough "safe" money in cash or SS to keep an income floor they can live happily off, but if that is true, why take the the risk with the rest of the money?

One thing to keep in mind is the declining returns of income. E.g. earning 80,000 a year instead of 40,000 does not make the average person "double as happy". Especially at higher incomes over 120,000 it seems that there is very little additional value.Turning this logic around, the more more money you lose the more exponentially less satisfied you become.

If you're interested, here is a topic from Sep 2017 about the "need to take risk": viewtopic.php?f=10&t=228606

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nasrullah
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Re: Talk me out of a 60/40 AA

Post by nasrullah » Wed Jan 03, 2018 6:35 pm

BW1985 wrote:
Wed Jan 03, 2018 2:48 pm
What's your current AA?
77/23 completely by accident. Now that I know enough to make an informed decision I'm trying to decide what it should be.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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bligh
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Re: Talk me out of a 60/40 AA

Post by bligh » Wed Jan 03, 2018 6:43 pm

Valuethinker wrote:
Wed Jan 03, 2018 12:56 pm
And there's the logical problem.

If bonds return 2% stocks cannot sustainably return 11%. If they did, the implied PE of stocks in 30 years time would be 1990 Japan type levels (or US 2000, probably more).

Bond yields are low because Quantitative Easing has driven them down quite substantially, plus an unprecedented degree of economic slackness post Crash has allowed monetary authorities to ignore inflationary worries.

But the corollary of that is that future equity returns will also be lower. The risk premium for equities is not 9%, it's 3-6%, with plenty of evidence it will be at the low end of that number (implying a nominal return of 5% p.a.). I would suggest 3-4% is reasonable for planning (5-6% pa nominal return, assuming inflation averages 2%).

I really hope no one is basing their personal financial planning on 11% pa returns from stocks in the next 30 years (implying stock markets would go up c. 2^5 ie 64 times in the 30 years).

We've had the good news, the near tripling of markets since March 2009. That was the one off adjustment of stock markets to a new, "permanent", lower interest rates-- and of course they might not be permanently this low. It cannot happen again, unless we think interest rates can go negative AND earnings growth for markets will still be in line with historic trends.

For equities to give you 11%, we'd need one hell of a bear market, right now, and the presumption that we could invest post that bear market (so it's not like-for-like).

60-40 has the merits of having been a good strategy for a very long time. Granted if your real returns on bonds are likely to be less than 2%, and on equities 3%-5%, then your future returns will be lower than they have been.
It is impossible to tell the future. Personally, I agree with you that stocks (and bonds) are not going to provide the kind of returns they have done in the past. If we want to assume that the difference between an 80/20 and a 60/40 continues to be a constant 1% into the future, the "60/40 portfolio is more expensive to maintain than it used to be" point can be made in a different way.

Giving up 1% in return when your portfolio is giving you 9% is giving up ~11% of the annual return for the reduced volatility that a 60/40 portfolio brings.

Giving up 1% in return when your portfolio is giving you 5% is giving up ~20% of the annual return for the reduced volatility that a 60/40 portfolio brings.

So buying that reduced volatility still would cost you more than it used to.

Anyway, I am just playing devil's advocate here. I have no clue what the future holds and I am not saying that paying that additional premium is not worth it. I presume the OP just wanted to hear arguments/criticisms against the 60/40 allocation so he could test his decision and make a more informed one. Personally I am at age-15 in bonds.

EnjoyIt
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Re: Talk me out of a 60/40 AA

Post by EnjoyIt » Wed Jan 03, 2018 7:11 pm

Your wealth is currently $650k and you save $150k/yr. If you are 100% in equities a 50% drop will have you go down by $325k. You can easily make that up in 2 years of savings and won't really affect you too much. Now picture yourself 10 years from now. The markets have returned 5% a year and you saved $150k every year for those 10 years. (lets not quibble over the returns. This is just an example.) You are now sitting on $3 million. At $3 million a 50% downturn is $1.5 million and worth 10 years of savings in your eyes. Can you stomach that? a 60/40 portfolio would have your equities decrease by $900k while your bonds would increase a little as people panic to safer assets. Plus now you have some bonds available to rebalance and help buy low if your stomach can handle the purchase. Is that a decent enough reason to hold 40% in bonds?

BTW, I am in my 40s and my AA is 70/30. Looking to stay at 70/30 until we go part time and will adjust to 60/40 as dictated by my investment plan.

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Re: Talk me out of a 60/40 AA

Post by MotoTrojan » Wed Jan 03, 2018 7:28 pm

I think you are simply underestimating the impact of a 1% increase in CAGR over a 30-40 year period.

dbr
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Re: Talk me out of a 60/40 AA

Post by dbr » Wed Jan 03, 2018 7:31 pm

MotoTrojan wrote:
Wed Jan 03, 2018 7:28 pm
I think you are simply underestimating the impact of a 1% increase in CAGR over a 30-40 year period.
Yes, the characterization of the drawdowns as huge and the return differences as negligible is a distortion in thinking.

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Re: Talk me out of a 60/40 AA

Post by OkieIndexer » Wed Jan 03, 2018 7:46 pm

Historically, the earnings yield of the market has been a pretty good predictor of long-term (7-20 years, roughly) real returns. The earnings yield is simply the reciprocal of the P/E ratio. Currently the Shiller P/E ratio is 33, so the earnings yield of the S&P 500 right now is 1/33 = 3%. Thus over the next 7-20 years roughly you can expect around a 3% total real return from the S&P 500. That's assuming inflation stays relatively stable. If inflation goes up more than expected, you could easily have a negative real return, even out to 20 years. If we get a deflationary depression, real returns could end up negative. But let's assume pretty steady 2% inflation and go with 3% real returns.

For bonds, the current yield is pretty much what you can expect your nominal return to be. The Total Bond fund yield right now is only 2.5%, so if we assume 2% inflation, your real annualized return can be expected to be around 0.5-1% with Total Bond.

Thus a 60/40 portfolio's expected long term real return right now = 0.6(3%) + 0.4(1%) = 2.2% real annualized.

Is a 2% real annualized return over the next ~7-20 years enough to meet your goals? If so, then 60/40 will probably be fine. If not, and you think you can emotionally sit through a couple of 50% plunges in equities, then you need to go with a higher equity allocation.

If you want to factor in international equities, just do the calculations above with a 22 P/E ratio (i.e. 4.5% real expected return long term), which is approximately what the Shiller P/E is right now for World ex-U.S.

Edit: I see you mentioned you want 20% international equities, so your expected real return = (0.2*0.6)(4.5%) + (0.8*0.6)(3%) + 0.4(1%) = 2.4% real annualized. Is that enough to meet your goals? If not, you'll probably need more equities.
Last edited by OkieIndexer on Wed Jan 03, 2018 8:06 pm, edited 1 time in total.
"In bull markets, people say 'The more risk I take, the greater my return.' But when people aren't afraid of risk, they'll accept risk without being compensated." -Howard Marks, Oaktree Capital

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Re: Talk me out of a 60/40 AA

Post by Toons » Wed Jan 03, 2018 7:54 pm

As long has you reach your financial goals ,,
Go with the allocation that might give you the best opportunity to do so
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Talk me out of a 60/40 AA

Post by betablocker » Wed Jan 03, 2018 8:38 pm

I’d talk you out of it by saying the returns will stink over the intermediate term and after a 8-9 year bull market maybe longer. That’s why everyone is after alts, factors, etc. It definitely seems like we’re in for a tough time with 60/40 after a great run. Millennials should hope for a sharp crash so the strategy will work longer term for them. I’m not so sure we’ll see it. Over the intermediate term we could see years of a sideways market with low returns, an inflation shock (ala the early 70s), or a crash. The one thing we won’t see is strong performance for 60/40.

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nasrullah
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Re: Talk me out of a 60/40 AA

Post by nasrullah » Wed Jan 03, 2018 8:52 pm

snarlyjack wrote:
Wed Jan 03, 2018 7:45 am
nasrullah,

Nice meeting you & welcome to Bogleheads.

Here is a interesting article with studies/numbers that
you might find interesting.

Enjoy & good luck.

https://earlyretirementnow.com/2017/09/ ... lidepaths/
Thanks!
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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nasrullah
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Re: Talk me out of a 60/40 AA

Post by nasrullah » Wed Jan 03, 2018 8:58 pm

smesman wrote:
Wed Jan 03, 2018 5:09 pm
Turning this logic around, the more more money you lose the more exponentially less satisfied you become.
Very well put.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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nasrullah
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Re: Talk me out of a 60/40 AA

Post by nasrullah » Thu Jan 04, 2018 12:08 am

bligh wrote:
Wed Jan 03, 2018 6:43 pm
Giving up 1% in return when your portfolio is giving you 9% is giving up ~11% of the annual return for the reduced volatility that a 60/40 portfolio brings.

Giving up 1% in return when your portfolio is giving you 5% is giving up ~20% of the annual return for the reduced volatility that a 60/40 portfolio brings.

So buying that reduced volatility still would cost you more than it used to.
Thank you, this is actually the most interesting response/viewpoint I've read so far on this.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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nasrullah
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Re: Talk me out of a 60/40 AA

Post by nasrullah » Thu Jan 04, 2018 12:12 am

EnjoyIt wrote:
Wed Jan 03, 2018 7:11 pm
Your wealth is currently $650k and you save $150k/yr. If you are 100% in equities a 50% drop will have you go down by $325k. You can easily make that up in 2 years of savings and won't really affect you too much. Now picture yourself 10 years from now. The markets have returned 5% a year and you saved $150k every year for those 10 years. (lets not quibble over the returns. This is just an example.) You are now sitting on $3 million. At $3 million a 50% downturn is $1.5 million and worth 10 years of savings in your eyes. Can you stomach that? a 60/40 portfolio would have your equities decrease by $900k while your bonds would increase a little as people panic to safer assets. Plus now you have some bonds available to rebalance and help buy low if your stomach can handle the purchase. Is that a decent enough reason to hold 40% in bonds?
This is an argument for 60/40, not against it. I agree very much with your statement on this. I'm not buying Bitcoin don't feel like I'm missing out in any way. As much as I don't want to miss out on the upside of the market, I'm getting to the point where I feel like I'd rather miss out on some upside to save pain on the downside.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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