Bogleheads take on bond tent

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vineviz
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 3:25 pm Kitces says: ...it turns out that the true driver of sequence of return risk and safe withdrawal rates are the returns that the retiree earns over the first decade – and specifically, the real returns over the first decade, that provide an indication of whether the retirement portfolio will have produced enough real growth to keep up with inflation-adjusted spending for the rest of retirement.
Again, that's true if you're looking at things from the point of view of someone right at the point of retiring.

Move forward in time, though, say to year 7 of retirement. Does the retiree have only 3 more years of danger zone? Clearly not. At this point, the " true driver of sequence of return risk and safe withdrawal rates" are the next 7-8 years. And so on.
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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Mon Jan 24, 2022 2:05 pm
UsualLine wrote: Mon Jan 24, 2022 1:57 pm
Sorry, I think you are the one missing the point. Yes in fact I do consider that SORR is largely gone after 10 years into retirement. That is what the researchers have shown. You seem to be mentally restarting the clock with the 50, 40, 30 year horizon. But the researchers are not resetting the clock and recalculating SWR, they are looking at one SWR for an entire retirement.
SORR is always concentrated in the NEXT few years of whatever withdrawal period you’re using.

For instance if you have two more withdrawals left to take then returns of -50% then +50% is much worse than the inverse.
Now I finally think I see where we differ. You think SORR is always there and I think it goes away. Please see my Kitces reference above.
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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Mon Jan 24, 2022 3:32 pm
UsualLine wrote: Mon Jan 24, 2022 3:25 pm Kitces says: ...it turns out that the true driver of sequence of return risk and safe withdrawal rates are the returns that the retiree earns over the first decade – and specifically, the real returns over the first decade, that provide an indication of whether the retirement portfolio will have produced enough real growth to keep up with inflation-adjusted spending for the rest of retirement.
Again, that's true if you're looking at things from the point of view of someone right at the point of retiring.

Move forward in time, though, say to year 7 of retirement. Does the retiree have only 3 more years of danger zone? Clearly not. At this point, the " true driver of sequence of return risk and safe withdrawal rates" are the next 7-8 years. And so on.
Well yes, because I am right at the point of retiring. :happy

If I get to year 7 and everything is going great and my 4% SWR is now closer to 3%, then I am feeling good. I am not going to stress about another 10 year SORR because at some point it can't hurt me. The portfolio gets so big that SORR is not an issue. I am going to let my glidepath raise my portfolio volatility back up to baseline risk tolerance.
Last edited by UsualLine on Mon Jan 24, 2022 3:59 pm, edited 2 times in total.
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Re: Bogleheads take on bond tent

Post by dogagility »

UsualLine wrote: Mon Jan 24, 2022 2:10 pm I don't see why you said my statement you quoted is false. There is an identifiable risk early in retirement. With a constant asset allocation your are not doing anything to mitigate that risk.
Using a constant asset allocation, the "risk" (if it shows up) is mitigated by varying portfolio withdrawals based upon current portfolio size. Simple.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 3:37 pm If I get to year 7 and everything is going great and my 4% SWR is now closer to 3%, then I am feeling good. I am not going to stress about another 10 year SORR. I am going to let my glidepath raise my portfolio volatility back up to baseline risk tolerance.
You're missing the important part, I think, which is that a bond tent will result in trading less SORR now for MORE of it later. It's myopic to employ a strategy that trades risk reduction TODAY for an equally large risk increase later. Or, at least, it's incorrect to believe that you've reduced your risk when you've merely shifted it in time.
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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Mon Jan 24, 2022 3:59 pm
UsualLine wrote: Mon Jan 24, 2022 3:37 pm If I get to year 7 and everything is going great and my 4% SWR is now closer to 3%, then I am feeling good. I am not going to stress about another 10 year SORR. I am going to let my glidepath raise my portfolio volatility back up to baseline risk tolerance.
You're missing the important part, I think, which is that a bond tent will result in trading less SORR now for MORE of it later. It's myopic to employ a strategy that trades risk reduction TODAY for an equally large risk increase later. Or, at least, it's incorrect to believe that you've reduced your risk when you've merely shifted it in time.
I acknowledge that a bond tent will reduce portfolio return early on and make it take longer to reach that "untouchable" level where SORR is no longer a risk. That is the price to pay for mitigating the very worst outcome, which is a long deep bear market early on.
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Re: Bogleheads take on bond tent

Post by Leesbro63 »

vineviz wrote: Mon Jan 24, 2022 3:06 pm
WhiteMaxima wrote: Mon Jan 24, 2022 2:59 pm Fix income is not safe but low voliative than equity. High inflation will eat away fix income purchase power.
Not if the fixed income is indexed to inflation, as it would be with TIPS or Series I savings bonds.
Only if in an IRA type account. For many Bogleheads with limited tax-sheltered space, the majority of our portfolios are taxable. And inflation-protected bonds become subject to significant "taxflation" if the very inflation that they are purchased to hedge rears it's ugly head. Like now.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 4:05 pm I acknowledge that a bond tent will reduce portfolio return early on and make it take longer to reach that "untouchable" level where SORR is no longer a risk. That is the price to pay for mitigating the very worst outcome, which is a long deep bear market early on.
Again, this is plainly wrong.

The bond tent does nothing that will "mitigate the very worst outcome". It simply trades one "very worst outcome" for a slightly different but equally damaging "very worst outcome".

It's like trading $1 in quarters for $1 in dimes and claiming that you made money, because now you have 10 coins instead of 4 coins. The bond tent provides an illusion of reduced risk without actually reducing the risk!
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Re: Bogleheads take on bond tent

Post by climber2020 »

UsualLine wrote: Mon Jan 24, 2022 4:05 pm I acknowledge that a bond tent will reduce portfolio return early on and make it take longer to reach that "untouchable" level where SORR is no longer a risk. That is the price to pay for mitigating the very worst outcome, which is a long deep bear market early on.
I don’t think that’s the very worst outcome. In many cases, it’s easier for someone to go back to work after being away for 6 months vs 3-4 years.

I’d think it’d be worse to retire having gone to a 20/80 or 30/70 bond tent, have several years of great stock returns, the bond tent expires (or whatever is the proper term to describe going back to a higher stock allocation) and then stocks crash after you’ve increased your stock percentage. You missed the run-up with your conservative allocation, you got back into stocks right before they crash, and you’ve been out of work for so long that you’re no longer employable.
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Re: Bogleheads take on bond tent

Post by dbr »

Leesbro63 wrote: Mon Jan 24, 2022 4:17 pm
vineviz wrote: Mon Jan 24, 2022 3:06 pm
WhiteMaxima wrote: Mon Jan 24, 2022 2:59 pm Fix income is not safe but low voliative than equity. High inflation will eat away fix income purchase power.
Not if the fixed income is indexed to inflation, as it would be with TIPS or Series I savings bonds.
Only if in an IRA type account. For many Bogleheads with limited tax-sheltered space, the majority of our portfolios are taxable. And inflation-protected bonds become subject to significant "taxflation" if the very inflation that they are purchased to hedge rears it's ugly head. Like now.
Actually in an IRA you have the same problem if you actually want to spend the money. And the RMD increases with the value of the account.

If tax brackets and all the other conditions working in a tax return ratchet up uniformly with inflation then it is a wash. If they don't then inflation hurts. Remember the dollars paying the inflated tax bill are worth less as well.

Here is an article on some of this: https://www.wsj.com/articles/2022-tax-t ... %20singles.
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Re: Bogleheads take on bond tent

Post by Leesbro63 »

dbr wrote: Mon Jan 24, 2022 4:35 pm
Leesbro63 wrote: Mon Jan 24, 2022 4:17 pm
vineviz wrote: Mon Jan 24, 2022 3:06 pm
WhiteMaxima wrote: Mon Jan 24, 2022 2:59 pm Fix income is not safe but low voliative than equity. High inflation will eat away fix income purchase power.
Not if the fixed income is indexed to inflation, as it would be with TIPS or Series I savings bonds.
Only if in an IRA type account. For many Bogleheads with limited tax-sheltered space, the majority of our portfolios are taxable. And inflation-protected bonds become subject to significant "taxflation" if the very inflation that they are purchased to hedge rears it's ugly head. Like now.
Actually in an IRA you have the same problem if you actually want to spend the money. And the RMD increases with the value of the account.

If tax brackets and all the other conditions working in a tax return ratchet up uniformly with inflation then it is a wash. If they don't then inflation hurts. Remember the dollars paying the inflated tax bill are worth less as well.

Here is an article on some of this: https://www.wsj.com/articles/2022-tax-t ... %20singles.
So you are making my point on steroids: TIPS and O-Bonds don’t really inflation-protect even in IRA type accounts. There’s no fixed income place to hide. But I’m not gonna increase equity allocation because that just a trade for a bigger risk. This is beginning to feel a lot like 1974-5 where stock and fixed income investors have no choice but to accept portfolio loss.
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Re: Bogleheads take on bond tent

Post by dbr »

climber2020 wrote: Mon Jan 24, 2022 4:33 pm
UsualLine wrote: Mon Jan 24, 2022 4:05 pm I acknowledge that a bond tent will reduce portfolio return early on and make it take longer to reach that "untouchable" level where SORR is no longer a risk. That is the price to pay for mitigating the very worst outcome, which is a long deep bear market early on.
I don’t think that’s the very worst outcome. In many cases, it’s easier for someone to go back to work after being away for 6 months vs 3-4 years.

I’d think it’d be worse to retire having gone to a 20/80 or 30/70 bond tent, have several years of great stock returns, the bond tent expires (or whatever is the proper term to describe going back to a higher stock allocation) and then stocks crash after you’ve increased your stock percentage. You missed the run-up with your conservative allocation, you got back into stocks right before they crash, and you’ve been out of work for so long that you’re no longer employable.
But you should be happy. The bond tent mitigated the risk. In this case the risk was that of getting a good sequence of returns early on. We won't mention that said stock runup was going to be the very thing this retirement was going to depend on.
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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Mon Jan 24, 2022 4:29 pm
UsualLine wrote: Mon Jan 24, 2022 4:05 pm I acknowledge that a bond tent will reduce portfolio return early on and make it take longer to reach that "untouchable" level where SORR is no longer a risk. That is the price to pay for mitigating the very worst outcome, which is a long deep bear market early on.
Again, this is plainly wrong.

The bond tent does nothing that will "mitigate the very worst outcome". It simply trades one "very worst outcome" for a slightly different but equally damaging "very worst outcome".

It's like trading $1 in quarters for $1 in dimes and claiming that you made money, because now you have 10 coins instead of 4 coins. The bond tent provides an illusion of reduced risk without actually reducing the risk!
It does mitigate the worst outcome. If I am 100% stocks and the market tanks 50% my 4% withdrawal becomes 8% (4/0.5) and it is hard to recover. If I am 50% bonds my 4% withdrawal becomes 5.3% (4/0.75) and it is easier to recover.

If instead the market rises 50% then my 4% has become 2.6% (4/1.5) and with the bond tent 3.2% (4/1.25). Sure 3.2% is worse than 2.6% but no one would consider that outcome equally damaging as the 8% vs 5.3% case.

That 8% example is the problem to be avoided and why Kitces, Pfau, and ERN all advocate for a bond tent or rising glidepath or other term. Are you saying they are all plainly wrong?
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Re: Bogleheads take on bond tent

Post by vineviz »

Leesbro63 wrote: Mon Jan 24, 2022 4:40 pm So you are making my point on steroids: TIPS and O-Bonds don’t really inflation-protect even in IRA type accounts.
Basically this a scaremongering way to say "taxes reduce your wealth".

The only way to avoid having taxes reduce your gains is to have all your gains in tax-free accounts.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 4:49 pm That 8% example is the problem to be avoided and why Kitces, Pfau, and ERN all advocate for a bond tent or rising glidepath or other term. Are you saying they are all plainly wrong?
Yes, I'm saying they are wrong and I've pointed out HOW and WHY they've got it wrong repeatedly in this thread.
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Re: Bogleheads take on bond tent

Post by loukycpa »

I recall Karsten Jeske talking about when one should actually start to glide up. As I recall he did not advocate starting to increase the equity allocation until the crap hits the fan. If you start 50/50 then stay 50/50 for a time, potentially a long period of time if market returns are good in the early years of retirement.

Does this alter the thinking at all?
Last edited by loukycpa on Mon Jan 24, 2022 4:58 pm, edited 1 time in total.
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Re: Bogleheads take on bond tent

Post by dbr »

Leesbro63 wrote: Mon Jan 24, 2022 4:40 pm
dbr wrote: Mon Jan 24, 2022 4:35 pm
Leesbro63 wrote: Mon Jan 24, 2022 4:17 pm
vineviz wrote: Mon Jan 24, 2022 3:06 pm
WhiteMaxima wrote: Mon Jan 24, 2022 2:59 pm Fix income is not safe but low voliative than equity. High inflation will eat away fix income purchase power.
Not if the fixed income is indexed to inflation, as it would be with TIPS or Series I savings bonds.
Only if in an IRA type account. For many Bogleheads with limited tax-sheltered space, the majority of our portfolios are taxable. And inflation-protected bonds become subject to significant "taxflation" if the very inflation that they are purchased to hedge rears it's ugly head. Like now.
Actually in an IRA you have the same problem if you actually want to spend the money. And the RMD increases with the value of the account.

If tax brackets and all the other conditions working in a tax return ratchet up uniformly with inflation then it is a wash. If they don't then inflation hurts. Remember the dollars paying the inflated tax bill are worth less as well.

Here is an article on some of this: https://www.wsj.com/articles/2022-tax-t ... %20singles.
So you are making my point on steroids: TIPS and O-Bonds don’t really inflation-protect even in IRA type accounts. There’s no fixed income place to hide. But I’m not gonna increase equity allocation because that just a trade for a bigger risk. This is beginning to feel a lot like 1974-5 where stock and fixed income investors have no choice but to accept portfolio loss.
I don't think stocks inflation protect either. They may outrun inflation to a reasonable degree over time, but I doubt the real return increases with inflation, or does it? Then you still have to pay more in taxes to be able to spend the money, whether you are getting bigger dividends, or, even worse, distributing your increased gain from an IRA. The key is whether or not tax rates are fixed in real dollars. If they are, it is a wash.

If there is an "asset" that is benefited by inflation it would be taking out a loan or mortgage and paying it back later in worthless dollar. But if you take out an adjustable rate mortgage, then you are in trouble.
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Re: Bogleheads take on bond tent

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UsualLine wrote: Mon Jan 24, 2022 3:34 pm Now I finally think I see where we differ. You think SORR is always there and I think it goes away.
You're just plain wrong. The ordering of returns, which is what sequence of returns risk is at the core, always impacts the final portfolio balance, the amount withdrawn, or both. Kitces would never dispute this because it's easily demonstrable math.
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Re: Bogleheads take on bond tent

Post by Leesbro63 »

dbr wrote: Mon Jan 24, 2022 4:57 pm
Leesbro63 wrote: Mon Jan 24, 2022 4:40 pm
dbr wrote: Mon Jan 24, 2022 4:35 pm
Leesbro63 wrote: Mon Jan 24, 2022 4:17 pm
vineviz wrote: Mon Jan 24, 2022 3:06 pm

Not if the fixed income is indexed to inflation, as it would be with TIPS or Series I savings bonds.
Only if in an IRA type account. For many Bogleheads with limited tax-sheltered space, the majority of our portfolios are taxable. And inflation-protected bonds become subject to significant "taxflation" if the very inflation that they are purchased to hedge rears it's ugly head. Like now.
Actually in an IRA you have the same problem if you actually want to spend the money. And the RMD increases with the value of the account.

If tax brackets and all the other conditions working in a tax return ratchet up uniformly with inflation then it is a wash. If they don't then inflation hurts. Remember the dollars paying the inflated tax bill are worth less as well.

Here is an article on some of this: https://www.wsj.com/articles/2022-tax-t ... %20singles.
So you are making my point on steroids: TIPS and O-Bonds don’t really inflation-protect even in IRA type accounts. There’s no fixed income place to hide. But I’m not gonna increase equity allocation because that just a trade for a bigger risk. This is beginning to feel a lot like 1974-5 where stock and fixed income investors have no choice but to accept portfolio loss.
I don't think stocks inflation protect either. They may outrun inflation to a reasonable degree over time, but I doubt the real return increases with inflation, or does it? Then you still have to pay more in taxes to be able to spend the money, whether you are getting bigger dividends, or, even worse, distributing your increased gain from an IRA. The key is whether or not tax rates are fixed in real dollars. If they are, it is a wash.

If there is an "asset" that is benefited by inflation it would be taking out a loan or mortgage and paying it back later in worthless dollar. But if you take out an adjustable rate mortgage, then you are in trouble.
But if you have a significant amount of fixed income, you’re probably better off paying cash and effectively being your own banker. Because even an historically low mortgage will cost more than putting the money into a similar duration bond.
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Re: Bogleheads take on bond tent

Post by martincmartin »

willthrill81 wrote: Mon Jan 24, 2022 5:51 pm
UsualLine wrote: Mon Jan 24, 2022 3:34 pm Now I finally think I see where we differ. You think SORR is always there and I think it goes away.
You're just plain wrong. The ordering of returns, which is what sequence of returns risk is at the core, always impacts the final portfolio balance, the amount withdrawn, or both. Kitces would never dispute this because it's easily demonstrable math.
Yes. But we don't care about the final portfolio balance. We care about whether or not you run out of money in retirement.

Optimizing the final portfolio balance means optimizing for the average outcome. Optimizing for success, i.e. not running out of money, means optimizing for the worst case and ignoring the final portfolio balance.
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Re: Bogleheads take on bond tent

Post by dbr »

Leesbro63 wrote: Mon Jan 24, 2022 5:55 pm
dbr wrote: Mon Jan 24, 2022 4:57 pm
Leesbro63 wrote: Mon Jan 24, 2022 4:40 pm
dbr wrote: Mon Jan 24, 2022 4:35 pm
Leesbro63 wrote: Mon Jan 24, 2022 4:17 pm

Only if in an IRA type account. For many Bogleheads with limited tax-sheltered space, the majority of our portfolios are taxable. And inflation-protected bonds become subject to significant "taxflation" if the very inflation that they are purchased to hedge rears it's ugly head. Like now.
Actually in an IRA you have the same problem if you actually want to spend the money. And the RMD increases with the value of the account.

If tax brackets and all the other conditions working in a tax return ratchet up uniformly with inflation then it is a wash. If they don't then inflation hurts. Remember the dollars paying the inflated tax bill are worth less as well.

Here is an article on some of this: https://www.wsj.com/articles/2022-tax-t ... %20singles.
So you are making my point on steroids: TIPS and O-Bonds don’t really inflation-protect even in IRA type accounts. There’s no fixed income place to hide. But I’m not gonna increase equity allocation because that just a trade for a bigger risk. This is beginning to feel a lot like 1974-5 where stock and fixed income investors have no choice but to accept portfolio loss.
I don't think stocks inflation protect either. They may outrun inflation to a reasonable degree over time, but I doubt the real return increases with inflation, or does it? Then you still have to pay more in taxes to be able to spend the money, whether you are getting bigger dividends, or, even worse, distributing your increased gain from an IRA. The key is whether or not tax rates are fixed in real dollars. If they are, it is a wash.

If there is an "asset" that is benefited by inflation it would be taking out a loan or mortgage and paying it back later in worthless dollar. But if you take out an adjustable rate mortgage, then you are in trouble.
But if you have a significant amount of fixed income, you’re probably better off paying cash and effectively being your own banker. Because even an historically low mortgage will cost more than putting the money into a similar duration bond.
Yes, the trick is to be a net debtor.
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Re: Bogleheads take on bond tent

Post by martincmartin »

SORR to your retirement success can go away in two ways:

1. You have enough money that any asset allocation, even 100% equities, can fund your withdrawls for the rest of your retirement.

2. You're a decade or more into a bear market. Bear markets don't go on forever, so at this point, there's a bull market starting in the next few years. Being 100% equities will result in the best growth for your portfolio. And your balance may be low enough that 100% equities is the best way to ensure you make enough money that you don't run out.

To oversimplify a bit, historical data from the US, UK and Japan show that after 10 years, you'll be in one of these two situations.
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Re: Bogleheads take on bond tent

Post by willthrill81 »

martincmartin wrote: Mon Jan 24, 2022 5:58 pm
willthrill81 wrote: Mon Jan 24, 2022 5:51 pm
UsualLine wrote: Mon Jan 24, 2022 3:34 pm Now I finally think I see where we differ. You think SORR is always there and I think it goes away.
You're just plain wrong. The ordering of returns, which is what sequence of returns risk is at the core, always impacts the final portfolio balance, the amount withdrawn, or both. Kitces would never dispute this because it's easily demonstrable math.
Yes. But we don't care about the final portfolio balance. We care about whether or not you run out of money in retirement.
That's not what sequence of returns risk is. When SWR type withdrawals are used, there is never a point at which the risk of premature portfolio depletion mathematically disappears.
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Re: Bogleheads take on bond tent

Post by martincmartin »

UsualLine wrote: Mon Jan 24, 2022 4:49 pm It does mitigate the worst outcome. If I am 100% stocks and the market tanks 50% my 4% withdrawal becomes 8% (4/0.5) and it is hard to recover. If I am 50% bonds my 4% withdrawal becomes 5.3% (4/0.75) and it is easier to recover.

If instead the market rises 50% then my 4% has become 2.6% (4/1.5) and with the bond tent 3.2% (4/1.25). Sure 3.2% is worse than 2.6% but no one would consider that outcome equally damaging as the 8% vs 5.3% case.

That 8% example is the problem to be avoided and why Kitces, Pfau, and ERN all advocate for a bond tent or rising glidepath or other term.
Yes, this is exactly right.

UsualLine, have any good readings about this stuff where I can learn more?
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Re: Bogleheads take on bond tent

Post by willthrill81 »

UsualLine wrote: Mon Jan 24, 2022 4:49 pm It does mitigate the worst outcome. If I am 100% stocks and the market tanks 50% my 4% withdrawal becomes 8% (4/0.5) and it is hard to recover. If I am 50% bonds my 4% withdrawal becomes 5.3% (4/0.75) and it is easier to recover.

If instead the market rises 50% then my 4% has become 2.6% (4/1.5) and with the bond tent 3.2% (4/1.25). Sure 3.2% is worse than 2.6% but no one would consider that outcome equally damaging as the 8% vs 5.3% case.
How would the bond tent strategy work if bonds lose -1% annually to inflation, as the bond market is expecting, for the next decade? And what if stocks then perform poorly over the following decade?
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Re: Bogleheads take on bond tent

Post by martincmartin »

willthrill81 wrote: Mon Jan 24, 2022 6:32 pm How would the bond tent strategy work if bonds lose -1% annually to inflation, as the bond market is expecting, for the next decade? And what if stocks then perform poorly over the following decade?
It depends on stocks not performing poorly for 20 years. If they perform poorly in your second decade, then they performed well during the first decade, and the stock portion rose during that first decade. So with 20 years to go in retirement, you have a lot of money and your withdrawals are small compared to your portfolio.

Your scenario is pretty much like retiring in 1963 or so, 10 years before the crash of 1973-1974. As vineviz has pointed out, if the bond tent is good at anything, it's retiring around this time. Edit: then the "death of equities" businessweek cover in 1979, equities continued to do poorly until 1982. Bonds did poorly from 1963 to 1969. So yes, retiring 1963 or so sounds an almost exact match to your scenario.
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Re: Bogleheads take on bond tent

Post by UsualLine »

martincmartin wrote: Mon Jan 24, 2022 6:04 pm SORR to your retirement success can go away in two ways:

1. You have enough money that any asset allocation, even 100% equities, can fund your withdrawls for the rest of your retirement.

2. You're a decade or more into a bear market. Bear markets don't go on forever, so at this point, there's a bull market starting in the next few years. Being 100% equities will result in the best growth for your portfolio. And your balance may be low enough that 100% equities is the best way to ensure you make enough money that you don't run out.

To oversimplify a bit, historical data from the US, UK and Japan show that after 10 years, you'll be in one of these two situations.
Yes. I wish I had thought to put it that way.
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Re: Bogleheads take on bond tent

Post by djm2001 »

vineviz wrote: Sun Jan 23, 2022 9:47 am Planning for the gap years between retirement and claiming Social Security is important and that MIGHT in some cases generate a plan that looks like a bond tent, but this is due more to the uneven cash flows than to sequence of returns risk mitigation.
Is the idea here something like... build a non-rolling ladder of bonds during the accumulation phase such that at all times you hold market weight of all bonds whose maturity (or is it duration?) exceeds the planned retirement date? And then hold those bonds until maturity?

And stocks, being somewhat akin to infinite term bonds, are accumulated first and held forever?

That would look sort of like a bond tent in terms of bond allocation, though that's just a side effect the real goal which is actually duration matching the post retirement years. This seems like an interesting lens through which to view glidepaths and bond tents.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Bogleheads take on bond tent

Post by vineviz »

martincmartin wrote: Mon Jan 24, 2022 6:04 pm 2. You're a decade or more into a bear market. Bear markets don't go on forever, so at this point, there's a bull market starting in the next few years. Being 100% equities will result in the best growth for your portfolio. And your balance may be low enough that 100% equities is the best way to ensure you make enough money that you don't run out.
You're asking us to assume that a bull market will always come along at exactly the right time to ensure the bond tent works, then asking us to rely on that assumption as proof that a bond tent works? This is just codifying the error I pointed out earlier, which is generalizing the LAST cycle with a low SWR as representing ALL cycles of low SWR.

It's circular logic at its most pernicious, and relies on a predictability in market returns that doesn't exist.

Hope is not a plan.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Bogleheads take on bond tent

Post by vineviz »

martincmartin wrote: Mon Jan 24, 2022 6:48 pm It depends on stocks not performing poorly for 20 years. If they perform poorly in your second decade, then they performed well during the first decade, and the stock portion rose during that first decade. So with 20 years to go in retirement, you have a lot of money and your withdrawals are small compared to your portfolio.
There are plenty of possible sequences in which the bond tent does worse than a fixed allocation and plenty in which it does matter.

Maybe this graphic will help. It plots 1,000 return sequences as matched pairs of SWRs. The x-axis shows the SWR for a particular sequence with a 50>>100 equity allocationglide path and the y-axis shows the SWR for the same sequence using a fixed 75/25 allocation. The red line shows the diagonal, so a blue dot ABOVE the red line means that fixed SWR is higher than rising SWR while a blue dot BELOW the red line means fixed is lower than rising.

For most sequences, it's a coin toss as to which allocation approach turned out to be the best. The fixed allocation made the best sequences slightly better, but over most of the range the two approaches are statistically indistinguishable.

Image
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Re: Bogleheads take on bond tent

Post by UsualLine »

martincmartin wrote: Mon Jan 24, 2022 6:11 pm
UsualLine wrote: Mon Jan 24, 2022 4:49 pm It does mitigate the worst outcome. If I am 100% stocks and the market tanks 50% my 4% withdrawal becomes 8% (4/0.5) and it is hard to recover. If I am 50% bonds my 4% withdrawal becomes 5.3% (4/0.75) and it is easier to recover.

If instead the market rises 50% then my 4% has become 2.6% (4/1.5) and with the bond tent 3.2% (4/1.25). Sure 3.2% is worse than 2.6% but no one would consider that outcome equally damaging as the 8% vs 5.3% case.

That 8% example is the problem to be avoided and why Kitces, Pfau, and ERN all advocate for a bond tent or rising glidepath or other term.
Yes, this is exactly right.

UsualLine, have any good readings about this stuff where I can learn more?
I really like the Early Retirement Now blog Safe Withdrawal Rate series. I think he has a strong technical approach (he was a professional economist) and is good at bringing out really interesting implications from the data. For example parts 23-25 really made me think twice about how much mileage you can get out of flexibility in consumption or willingness to return to work. Every entry has something worth thinking about.

https://earlyretirementnow.com/safe-wit ... te-series/

I also really like Kitces for some non-standard takes on issues. His site is much broader though and it is harder to find what you are looking for.

https://www.kitces.com/

And of course Bogleheads. I am usually just a lurker here, I don't normally engage. But I see bad information on this thread.
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Re: Bogleheads take on bond tent

Post by dbr »

I wonder if people pondering mechanism here take into account that a severe bond tent by its very nature produces a bad sequence of returns, meaning it is a guarantee to get low returns early on.

Generally a problem in messing with asset allocation while withdrawing is that the benefits of reduced volatility are negated by the penalty of reduced returns on average, or, if one wants, the other way around.

As to entering retirement at 4% withdrawal, 100% stocks, and getting a market crash, it might be wise not to be 100% and to use common sense and cut spending when there is a portfolio problem. Or if your priority is a lot in stocks to die wealthy cut back the withdrawal plan to less than 4%.

On the other hand, waiting into late in retirement to increase stocks sabotages dying wealthy because it leaves too little time in the market at high returns if they materialize.

But a big picture result as in the previous post is a better analysis altogether than addressing extreme scenarios is.
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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Mon Jan 24, 2022 7:49 pm
martincmartin wrote: Mon Jan 24, 2022 6:04 pm 2. You're a decade or more into a bear market. Bear markets don't go on forever, so at this point, there's a bull market starting in the next few years. Being 100% equities will result in the best growth for your portfolio. And your balance may be low enough that 100% equities is the best way to ensure you make enough money that you don't run out.
You're asking us to assume that a bull market will always come along at exactly the right time to ensure the bond tent works, then asking us to rely on that assumption as proof that a bond tent works? This is just codifying the error I pointed out earlier, which is generalizing the LAST cycle with a low SWR as representing ALL cycles of low SWR.

It's circular logic at its most pernicious, and relies on a predictability in market returns that doesn't exist.

Hope is not a plan.
No one claims they are proving anything. We are all just trying to find the approach that gives the best probability of a successful retirement drawdown. Reversion to the mean is a feature observed in real world markets. Read any critique of Monte Carlo simulations of market returns and that will be one of the first caveats that comes up.
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Re: Bogleheads take on bond tent

Post by martincmartin »

vineviz wrote: Mon Jan 24, 2022 7:55 pm
martincmartin wrote: Mon Jan 24, 2022 6:48 pm It depends on stocks not performing poorly for 20 years. If they perform poorly in your second decade, then they performed well during the first decade, and the stock portion rose during that first decade. So with 20 years to go in retirement, you have a lot of money and your withdrawals are small compared to your portfolio.
There are plenty of possible sequences in which the bond tent does worse than a fixed allocation and plenty in which it does matter.

Maybe this graphic will help. It plots 1,000 return sequences as matched pairs of SWRs. The x-axis shows the SWR for a particular sequence with a 50>>100 equity allocationglide path and the y-axis shows the SWR for the same sequence using a fixed 75/25 allocation. The red line shows the diagonal, so a blue dot ABOVE the red line means that fixed SWR is higher than rising SWR while a blue dot BELOW the red line means fixed is lower than rising.

For most sequences, it's a coin toss as to which allocation approach turned out to be the best. The fixed allocation made the best sequences slightly better, but over most of the range the two approaches are statistically indistinguishable.

Image
Thanks for this analysis. Given that we have at most 150 years of data, I assume your 1000 sequences are from a simulation, one that assumes the Capital Asset Pricing Model? In particular that future stock returns don't depend on current value or recent returns? As the Wikipedia article on CAPM puts it, it has failed many historical tests. CAPM may be appropriate for something with no intrinsic value, like Bitcoin, where the price is purely speculative. But companies produce profits. If the total value of the global stock market crashed to less than the value of one years proftis, do you think stock prices are just as likely to crash as they are now? What if you could buy stocks for the price of one years dividends? You would make your money back in a single year, and all dividends after that are pure profit. The point is, companies have intrinsic value because they make profits,. So their value can't go too low.

I'd rather put my faith in historical data of how stock markets have actually behaved, than a simulation with assumptions that are known to be wrong.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 8:10 pm We are all just trying to find the approach that gives the best probability of a successful retirement drawdown.
Then look no further: a constant equity allocation is the approach you seek.
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Re: Bogleheads take on bond tent

Post by vineviz »

martincmartin wrote: Mon Jan 24, 2022 8:14 pm Thanks for this analysis. Given that we have at most 150 years of data, I assume your 1000 sequences are from a simulation, one that assumes the Capital Asset Pricing Model? In particular that future stock returns don't depend on current value or recent returns?
I'm not sure what you think the CAPM is, but it has nothing to do with what you just wrote.

Yes the data I presented are simulated returns.
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Re: Bogleheads take on bond tent

Post by martincmartin »

vineviz wrote: Mon Jan 24, 2022 8:25 pm
martincmartin wrote: Mon Jan 24, 2022 8:14 pm Thanks for this analysis. Given that we have at most 150 years of data, I assume your 1000 sequences are from a simulation, one that assumes the Capital Asset Pricing Model? In particular that future stock returns don't depend on current value or recent returns?
I'm not sure what you think the CAPM is, but it has nothing to do with what you just wrote.
The Wikipedia article says that CAPM assumes ”asset returns whose probability distributions are completely described by the first two moments (for example, the normal distribution) ”. But perhaps that's different than saying that the mean and variance don't change based on the current value, or whether there has recently been a bull or bear market. Thanks for pointing that out.

I agree that in the memoryless scenario assumed in typical Monte Carlo simulations, the bond tent doesn't help, and maybe hurts. The bond tent does rely on the idea that a bear market doesn't last for 20 years, and that a bad bear market is followed by a strong recovery.
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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Mon Jan 24, 2022 8:22 pm
UsualLine wrote: Mon Jan 24, 2022 8:10 pm We are all just trying to find the approach that gives the best probability of a successful retirement drawdown.
Then look no further: a constant equity allocation is the approach you seek.
And here is Wade Pfau's take:
https://retirementresearcher.com/4-appr ... etirement/

"Other approaches to reducing downside risk (volatility in the undesired direction) could also be considered. For instance, a rising equity glide path in retirement could start with an equity allocation that is even lower than typically recommended (in safe withdrawal rate research literature) at the start of retirement, but then slowly increase the stock allocation over time.

This can reduce the probability and the magnitude of retirement failures. This approach reduces vulnerability to early retirement stock market declines that cause the most harm to retirees."
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Re: Bogleheads take on bond tent

Post by vineviz »

martincmartin wrote: Mon Jan 24, 2022 8:39 pm I agree that in the memoryless scenario assumed in typical Monte Carlo simulations, the bond tent doesn't help, and maybe hurts. The bond tent does rely on the idea that a bear market doesn't last for 20 years, and that a bad bear market is followed by a strong recovery.
A bond tent works if you assume you can only experience conditions in which a bond tent works. I think that about sums it up.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 8:52 pm
vineviz wrote: Mon Jan 24, 2022 8:22 pm
UsualLine wrote: Mon Jan 24, 2022 8:10 pm We are all just trying to find the approach that gives the best probability of a successful retirement drawdown.
Then look no further: a constant equity allocation is the approach you seek.
And here is Wade Pfau's take:
https://retirementresearcher.com/4-appr ... etirement/
I've already pointed out the problems with Pfau's line of reasoning.
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Re: Bogleheads take on bond tent

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martincmartin wrote: Mon Jan 24, 2022 6:48 pm
willthrill81 wrote: Mon Jan 24, 2022 6:32 pm How would the bond tent strategy work if bonds lose -1% annually to inflation, as the bond market is expecting, for the next decade? And what if stocks then perform poorly over the following decade?
It depends on stocks not performing poorly for 20 years. If they perform poorly in your second decade, then they performed well during the first decade, and the stock portion rose during that first decade. So with 20 years to go in retirement, you have a lot of money and your withdrawals are small compared to your portfolio.
The problem is if you're equity exposure is small during that first decade, there's a good shot that your portfolio will already be down a fair amount by the time the second decade begins.

For instance, let's say that you have a 30/70 AA during the first decade. Bonds return -1%, and stocks return 5%, and you withdraw an inflation-adjusted 4% of the starting balance every year. After the first 10 years, the inflation-adjusted balance is down to 66.8% of the starting balance. You now flip the AA to 70/30, and stocks return -2% every year for a decade while bonds return +2%. By the end of year 15, the portfolio's inflation-adjusted balance is down to 44.5% of the starting balance, meaning that over half of the portfolio has been depleted with 15 more years to go.

Things could have been much worse, but I really want you to see that very realistic returns (though 2% real returns for bonds from years 11 and forward is likely very optimistic) can play out in such a way that a bond tent can really bite you, so much so that it can result in premature portfolio depletion.

The reason is simple: when the bond allocation is high, bonds are having a disproportionately high influence on the final portfolio balance (including potentially resulting in it being zero before the desired time), and the same is true of stocks when their allocation in the portfolio is high. By maintaining a fixed AA throughout the entire retirement, both assets are impacting the final portfolio balance according to the overall AA.

I really don't see why it's hard to see that a bond tent strategy concentrates risk rather than diversifies it.
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Re: Bogleheads take on bond tent

Post by martincmartin »

willthrill81 wrote: Mon Jan 24, 2022 9:01 pm For instance, let's say that you have a 30/70 AA during the first decade.
You've dinner a great job of pointing out why an equity allocation that low wouldn't work. The bond tent starts at 40% or 50% equities, rising to 100% after 10 or 15 years. So that's an average AA around 70/30 or 67/33.
Things could have been much worse, but I really want you to see that very realistic returns (though 2% real returns for bonds from years 11 and forward is likely very optimistic) can play out in such a way that a bond tent can really bite you, so much so that it can result in premature portfolio depletion.

The reason is simple: when the bond allocation is high, bonds are having a disproportionately high influence on the final portfolio balance (including potentially resulting in it being zero before the desired time), and the same is true of stocks when their allocation in the portfolio is high. By maintaining a fixed AA throughout the entire retirement, both assets are impacting the final portfolio balance according to the overall AA.

I really don't see why it's hard to see that a bond tent strategy concentrates risk rather than diversifies it.
So essentially you're saying, if you have more bonds when stocks do well, then more stocks when bonds do well, you'll do worse than if you had your average AA that whole time, is that right?

I think that's totally correct if there are no withdrawals, and no sequence of return risk. It's the withdrawals that make for sequence of return risk, and support the bond tent.
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Re: Bogleheads take on bond tent

Post by willthrill81 »

martincmartin wrote: Mon Jan 24, 2022 9:31 pm
willthrill81 wrote: Mon Jan 24, 2022 9:01 pm For instance, let's say that you have a 30/70 AA during the first decade.
You've dinner a great job of pointing out why an equity allocation that low wouldn't work. The bond tent starts at 40% or 50% equities, rising to 100% after 10 or 15 years. So that's an average AA around 70/30 or 67/33.
So you think that 30/70 is too low for the strategy to work at all but 40/60 is enough for it to work fine? :?:
Things could have been much worse, but I really want you to see that very realistic returns (though 2% real returns for bonds from years 11 and forward is likely very optimistic) can play out in such a way that a bond tent can really bite you, so much so that it can result in premature portfolio depletion.

The reason is simple: when the bond allocation is high, bonds are having a disproportionately high influence on the final portfolio balance (including potentially resulting in it being zero before the desired time), and the same is true of stocks when their allocation in the portfolio is high. By maintaining a fixed AA throughout the entire retirement, both assets are impacting the final portfolio balance according to the overall AA.

I really don't see why it's hard to see that a bond tent strategy concentrates risk rather than diversifies it.
So essentially you're saying, if you have more bonds when stocks do well, then more stocks when bonds do well, you'll do worse than if you had your average AA that whole time, is that right?[/quote]

Yes, that's right.
martincmartin wrote: Mon Jan 24, 2022 9:31 pm I think that's totally correct if there are no withdrawals, and no sequence of return risk. It's the withdrawals that make for sequence of return risk, and support the bond tent.
Withdrawals only amplify the effect, which I described above already.

I give up. I spent a lot of time modeling the above in Excel already, and it seems clear that math won't change your mind.
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Re: Bogleheads take on bond tent

Post by martincmartin »

willthrill81 wrote: Mon Jan 24, 2022 9:41 pm
martincmartin wrote: Mon Jan 24, 2022 9:31 pm
willthrill81 wrote: Mon Jan 24, 2022 9:01 pm For instance, let's say that you have a 30/70 AA during the first decade.
You've dinner a great job of pointing out why an equity allocation that low wouldn't work. The bond tent starts at 40% or 50% equities, rising to 100% after 10 or 15 years. So that's an average AA around 70/30 or 67/33.
So you think that 30/70 is too low for the strategy to work at all but 40/60 is enough for it to work fine? :?:
You mentioned 30/70 as the AA for the first decade, I thought you meant that was the average, not the starting point. Sorry I misunderstood.

I give up. I spent a lot of time modeling the above in Excel already, and it seems clear that math won't change your mind.
Please don't give up. I wrote my comment as I was falling asleep last night, in an effort to keep the conversation going. In retrospect, I should have waited until I could give it the mental effort it deserves.

Can you share the Excel spreadsheet? For example, if you save it in Dropbox, you can get a "share" link which you can post here using the URL tag. Or you can import your Excel spreadsheet to google docs and share that link. I'd like to understand your modeling better. One of my fears with bond tent, and any purely historical analysis, is that there's some hidden assumption that hasn't happened in the data, but could. Perhaps your analysis is pointing out just such an assumption.

Now that I've had a good nights sleep AND my morning caffeine, here's the analysis I'd like to do:

I'd like to compare your sequence of returns, with both fixed AA and bond tent, with the returns for the two decades swapped. As you've said, with the returns the way you've modeled them, fixed AA produces a "good" result, and bond tent a "bad" result. But if we swap them, so that the bad equities are in the first decade, would a fixed AA produce a result worse than the "bad" result, and bond tent better? The bond tent only claims to raise the worst case result over all (historical) sequence of returns. It certainly will make things worse under some scenarios.

Sorry again for trying to respond when I couldn't give your thoughts the attention they deserve.
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Re: Bogleheads take on bond tent

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I removed an off-topic post. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
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Re: Bogleheads take on bond tent

Post by loukycpa »

https://hackyourwealth.com/asset-allocation

I plan to listen again to this podcast that addresses the bond tent strategy. I do think vineviz and others make some valid points and want to reevaluate myself. Sharing in case others might benefit as well.
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Re: Bogleheads take on bond tent

Post by climber2020 »

martincmartin wrote: Mon Jan 24, 2022 9:31 pm You've dinner a great job of pointing out why an equity allocation that low wouldn't work. The bond tent starts at 40% or 50% equities, rising to 100% after 10 or 15 years.
Is this realistically how one would deploy a bond tent strategy?

Example:
Bond tent is put in place. Stocks then decline by 50% over the next year or so. You got lucky and timed perfectly the exact scenario where a bond tent would be beneficial compared to a constant asset allocation.

Would you not immediately go to 100% stocks at this point? Why do it gradually over 10-15 years? The market will likely have recovered by then and you've lost the benefit of using such a strategy in the first place.

The other question is if someone who is risk averse enough to use a bond tent is going to be capable of going all in to 100% equities in the middle of a big market crash when everyone around them is panicking and talking doom.
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Re: Bogleheads take on bond tent

Post by martincmartin »

climber2020 wrote: Tue Jan 25, 2022 7:15 am
martincmartin wrote: Mon Jan 24, 2022 9:31 pm You've dinner a great job of pointing out why an equity allocation that low wouldn't work. The bond tent starts at 40% or 50% equities, rising to 100% after 10 or 15 years.
Is this realistically how one would deploy a bond tent strategy?

Example:
Bond tent is put in place. Stocks then decline by 50% over the next year or so. You got lucky and timed perfectly the exact scenario where a bond tent would be beneficial compared to a constant asset allocation.

Would you not immediately go to 100% stocks at this point? Why do it gradually over 10-15 years? The market will likely have recovered by then and you've lost the benefit of using such a strategy in the first place.
I would not. That sounds like market timing. Stock markets can and have dropped more than 50%. In fact, at the start of the Great Depression, they dropped 89% from peak to trough in nominal dollars. How do you know that the 50% is the market bottom?

OTOH, I wonder if it might be worth having some CAPE based allocation. My impression of valuation based AA like that is, they don't work as well as simple time based ones. But I haven't really explored them.
The other question is if someone who is risk averse enough to use a bond tent is going to be capable of going all in to 100% equities in the middle of a big market crash when everyone around them is panicking and talking doom.
And what's more, their portfolio, compared to future expenses, will be looking very bad. Assuming they start with 25x annual expenses, but with a 30 year retirement, they're counting on some growth. If they end the first decade significantly down, they'll be even more worried about running out of money. Talk about stocks being undervalued compared to profits, and bear markets always ending, probably won't be enough to sooth them.

I consider myself fairly insensitive to risk, and I'm not planning to go beyond 75% or 80% equities.
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Re: Bogleheads take on bond tent

Post by martincmartin »

willthrill81 wrote: Mon Jan 24, 2022 9:01 pm For instance, let's say that you have a 30/70 AA during the first decade. Bonds return -1%, and stocks return 5%, and you withdraw an inflation-adjusted 4% of the starting balance every year. After the first 10 years, the inflation-adjusted balance is down to 66.8% of the starting balance. You now flip the AA to 70/30, and stocks return -2% every year for a decade while bonds return +2%. By the end of year 15, the portfolio's inflation-adjusted balance is down to 44.5% of the starting balance, meaning that over half of the portfolio has been depleted with 15 more years to go.
I modeled your scenario in a Google spreadsheet, along with swapping the decades. If you make a copy of it, you can change the starting & 11th year stocks in the upper left. Bond Tent is 40% -> 100%, fixed AA is 60/40. Here's what I found.

Code: Select all

		 First Decade Returns
		Bad Bonds    Bad Stocks

Bond Tent	   $344k	$378k

Fixed AA	   $406k	$313k
So the worst case for bond tent is having bad bond returns in the first decade, as you say. And it's worse than the fixed AA in that case, as you point out. For the fixed asset allocation, the worst outcome is with the bad stock returns in the first decade, because of SORR. And the worst case for fixed AA, at $313k, is worse than the worst case for the bond tent, at $344k.
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Re: Bogleheads take on bond tent

Post by Exchme »

Lest vineviz, Willthrill81 and others think that explaining this is tiresome and repetitive, I want to thank them. I read a virtually identical thread a year or so ago and prior to then I had thought that the bond tent was a great idea. Then I read their arguments and realized they were right and I hadn't thought it all the way through.

I think a key point is that markets respond to external events, not just their own rhythms and excesses. Bad events can and do occur at any time, even back to back. So regardless of how a bond tent behaved in historical outcomes, the bond tent hurts in the general case of randomly occurring bad events as illustrated by vineviz 's Monte Carlo simulations.

For every sequence of returns that the bond tent fixes by lowering stock exposure early, there is another possible outcome where the bond tent's slower initial growth and eventual higher stock allocation gives you more risk later. When you face that later storm, the bond tent means you have fewer assets at the start of the storm and more stock exposure, so can end up worse than just keeping everything at your average allocation and sailing the stormy seas as best you can.

Maybe another way to view it is via the willingness, ability and need to take risk viewpoint. The early low stock allocation may increase your need to take risk later, which may leave you needing to take more risk than you are willing and able to emotionally withstand.
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