dodecahedron wrote: ↑
Sun Sep 08, 2019 6:21 pm
nedsaid wrote: ↑
Sun Sep 08, 2019 5:48 pm
dodecahedron wrote: ↑
Sun Sep 08, 2019 4:28 pm
nedsaid wrote: ↑
Sun Sep 08, 2019 12:04 pm
nps wrote: ↑
Sat Sep 07, 2019 7:03 am
I don't think it's the most important. I would put savings rate way ahead in terms of importance.
At 2% returns, you are going to have to have one heck of a savings rate. You need money to compound faster than that, particularly when you factor in inflation. Asset allocation and savings rate are both rather important.
No guarantee that money will compound faster with any particular asset allocation over any other particular asset allocation. Yes, expected returns may be higher with more equities, but no guarantees that actual returns will be higher, so what you describe as a ¨proper¨ asset allocation may or not get you what you think you ¨need.¨
Saving more means learning to be content with a lifestyle that costs less, which--in my opinion--is more important to a fulfilling retirement than asset allocation. If you can find happiness living a (relatively) monastic lifestyle during your accumulation phase, you are more likely to be happy with a modest lifestyle in retirement.
So yes, I agree that saving more (and consuming less) is more important than asset allocation. I know many apparently contented retirees who have lived simply and frugally all their lives and are quite content in retirement, despite having asset allocations much more conservative than the Boglehead center of gravity.
Your friends benefitted from twin bull markets in stocks and bonds. In fact, from about 1982-2013, Long Treasuries outperformed stocks by a hair. So the equity-like returns from bonds, fueled by a drop in interest rates from 14% to 3%, made rather bond heavy portfolios have very good returns. The allocation of stocks vs. bonds, in that environment didn't matter so much. Falling interest and inflation rates were gale force tail winds.
Actually, the folks I was thinking of were not investing in stocks or bonds. They were mostly investing in things like direct CDs, stable value funds, GICs, and money market funds, in many cases largely in taxable accounts. And the after-tax after-inflation return on those fixed income investments may have been less than folks can get on today´s CDs.
Edited to add: look, I am not saying that asset allocation is not important, only that savings rate is even more important. To make this point as starkly as possibly, it does no good whatsoever to have chosen an ideal ¨perfect¨ asset allocation if you are spending more than you earn during the accumulation phase and therefore racking up more liabilities than assets.
Savings rates are important, I suppose savings rates could be so high that returns aren't so important. That isn't reality for most people, it certainly wasn't for me. In addition, folks can benefit from tax deferred compounding in IRAs and workplace retirement savings plans. In a taxable account, taxes take a haircut year after year. I also benefitted from rising stock and bond markets. As I recall, you and your husband were in Academia, not sure how applicable their experience is to most folks. Again, the bulk of the time your friends invested from 1982 to lets say 2008, had relatively high interest rates as compared to today.
Direct CDs, Guaranteed Interest Contracts, and Stable Value Funds had returns very similar to bonds. Money markets paid good interest until the 2008-2009 financial crisis. The kind of rates you could get from 1982-2008 are just not available today.
I remember that early on in my investment career, I purchased US Treasury STRIPS that locked in an 8% return, pretty sure those were 10 year bonds. There is just nothing like that today. I also remember that years after the 2008-2009 financial crisis, my interest rates from the bank and in my money market account were so low that I needed a microscope to see them. Last I looked, the US Treasury 30 year bond yielded just under 2%.
Most folks will need the added boost from stocks to help with a secure retirement. 2% just ain't going to do it unless one can achieve a very high savings rate and sustain that savings rate for years.
Looking at my current retirement account balances, about 1/3 are my contributions and about 2/3 are my earnings. Savings rates didn't save me by themselves, I needed investment returns as well. I had high savings rates but not high income. Many of your friends likely had both high savings rates and higher levels of income.
A fool and his money are good for business.