100% Equities Challenge Scenario

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
SantaClaraSurfer
Posts: 752
Joined: Tue Feb 19, 2019 10:09 am

100% Equities Challenge Scenario

Post by SantaClaraSurfer »

I've read some of the discussions about Prof. Scott Cederburg's "Challenging the Status Quo" regarding a 100% equity asset allocation both here and on the Rational Reminder podcast and website.

What I did not see was a head to head comparison of 100% equities vs. a Boglehead approach in a real life challenge scenario that an average investor might face. By challenge I mean a scenario that would a) pose serious issues for any retirement saver and b) where there's not a clear winner that you could easily predict in advance.

With that in mind, I worked up some data creating a challenge scenario in a spreadsheet. I want to share the results and some observations and hear your thoughts.

Givens:
  • The time period = 2025-2045.
  • Average annual inflation for the entire timeframe = 3.2%.
  • Bond Index Funds have a nominal return of 4.4% and a real return of 1.2%.
  • Equities (outside of 8 Challenge Years) have a nominal return of 8.7% and a real return of 5.5%.
  • TIPS are available at a 2% fixed rate.
  • Results are in today's dollars
In our example, we are following two similar investors who are both 55 years old in 2025. Our investors will both retire and collect $30,000 per year Social Security Income starting in 2035 at age 65. Both investors plan on an annual budget of $70,000 per year in retirement and start the year 2025 with $1 million in their retirement portfolio. Both have a goal of funding the difference between their Social Security Income and their assets (ie. $40,000) beginning with their retirement in 2035 at age 65. For purposes of this comparison only, both investors start the period with a 25x portfolio and do not contribute to their retirement assets other than via the growth of their retirement accounts.

Investor 1: Is a "Boglehead" style investor. They split their portfolio into 60% equities, 20% Bond Index Funds, and 20% TIPS.

Investor 1 rebalances once per year maintain a strict 75% in equities and 25% in bond index funds every year, and withdraws using the same proportion. Investor 1 holds TIPS as a standalone investment, initially in a TIPS fund, and then, at retirement, in a TIPS ladder. This means that Investor 1 will not rebalance the TIPS portion of their portfolio.

Investor 2: Is a "Cederburg" investor. They maintain their portfolio at 100% equities at all times.

Investor 2 does not need to rebalance. They are very sure that they are prepared to handle the swings of the equity market, and are comfortable selling equities to fund annual expenses in retirement even when equities are down that year.

Challenge Scenario: Between the years 2033 and 2040 the equity market has two shocks, the first is a bear market in 2033 that results in a -24% annual drop. The second is a market crash in 2036 that results in a -43% annual drop.

Our challenge scenario is over by the end of 2040 and the equity market 100% recuperates its level from the beginning of 2033 and resumes a steady 8.7% nominal growth thereafter. The challenge scenario impacts the equity portion of both investors' equity allocations in exactly the same way, with the larger equity exposure held by Investor 2 simply meaning a larger drop or rise. The 2033-2040 equity returns in the challenge scenario are: 2033: -24% 2034: +12% 2035: +9% 2036: -43% 2037: +12% 2038: +11% 2039:+8.5% 2040: +40%.

This equity drop directly impacts both investors between ages 63 and 67, right around retirement age. This is an excellent way to stress test these approaches.

Let's see what happens to the two portfolios in this stress test, especially as both investors begin to drawdown their portfolios in 2035.

Code: Select all

Year. Investor 1 Total	Investor 2 Total
2025	$1,000,000.00	$1,000,000.00
2026	$1,043,976.00	$1,052,216.00
2027	$1,089,904.65	$1,107,158.51
2028	$1,137,873.61	$1,164,969.90
2029	$1,187,974.48	$1,225,799.97
2030	$1,240,303.06	$1,289,806.34
2031	$1,294,959.48	$1,357,154.87
2032	$1,378,733.12	$1,428,020.07
2033	$1,439,479.78	$1,502,585.56
2034	$1,232,767.83	$1,105,422.15
2035	$1,309,678.24	$1,198,454.47
2036	$1,330,746.01	$1,225,793.28
2037	$992,377.17	$637,623.70
2038	$1,013,661.38	$652,566.11
2039	$1,031,462.72	$662,449.24
2040	$1,038,084.61	$657,037.18
2041	$1,198,290.03	$851,696.79
2042	$1,213,028.80	$857,448.99
2043	$1,235,457.63	$863,501.55
2044	$1,251,933.48	$869,870.15
2045	$1,269,197.66	$876,571.29
Observations:
  • A dramatic drop in equities at retirement age between 2033-2037 significantly impacts both retirement investors, even though they both started with 25x their anticipated expenses in 2025.
  • Investor 2 is highly impacted by two equity market drops at retirement, and, as a consequence of selling stocks when the market is low to pay their expenses, their portfolio, while it does not fail, never really recovers to anything close to its previous level in the timeframe.
  • Investor 2 has nine years where their retirement need (at $40,000) is more than 25x the remaining balance on their portfolio, leading them to draw an excess $82,849 unfunded from their portoflio. (Alternately, they could have spent less.)
  • Investor 1 has, in comparison, only 4 years where their portfolio narrowly misses their withdrawal goal, leaving $9,564 unfunded. (Investor 2's unfunded number is 8.5x Investor 1's.)
  • After rising to $1,500,000 in 2033, Investor 2's portfolio balance falls to $637,000 in 2037 and does not rise above $1,000,000 by the end of the period, at age 75 in the year 2045.
  • In 2037, at age 67, having stuck with 100% equities, Investor 2 no longer has many good options to change course to a safer asset allocation without significantly adjusting the amount they have available for expenses per year. (ie. Selling equities when equities are down to purchase bonds.) Basically, there are market scenarios, including this challenge scenario, that will severely test the 100% equities investor and leave few good options, even at an age where that may not be ideal.
  • While Investor 2's 100% equity strategy may eventually recover, and, per Prof. Cederburg, in general outperform a portfolio that holds bond index funds, investors considering holding 100% equities, especially in these age ranges, should look at Investor 2's outcomes between ages of 63 and 75 and ask if that is something they would be comfortable with for themselves.
  • Bond index funds in this scenario might seem to be a horrible investment as, due to inflation they offer only a 1.2% real return. Adding to that low return, Investor 1 continually rebalances INTO bond index funds in all but two years, selling high yielding equities and purchasing bonds. However, in the two years in which Investor 1 rebalances from bond index funds to equities, in 2033 with $60,598 and in 2036 with $84,538, the bond index funds are vital for their portfolio and set the stage for its long term health.
  • The $145,136 that Investor 1 rebalances from bond index funds to equities in 2033 and 2036 brings their equity total to 76% of Investor 2's ($500,366 to $658,702) at one point, leaving a surprisingly small difference between the equities held in both portfolios. This is not something Investor 2 (or any 100% equity investor) may have anticipated and it directly impacts the head to head performance of the two portfolios. This results in an advantage in excess of $300,000 for Investor 1 that continues to the end of the period.
  • Investor 1's $200,000 stake in TIPS in 2025 proved to be a highly suitable investment to handle the 3.2% inflation in this challenge scenario. Since Investor 1 does not rebalance their TIPS and converts them to a 30 year ladder in 2035 when they begin to fund their retirement, this advantage regarding persistent inflation is maintained for all the years of this scenario. (In practice, to be clear, it may not necessarily be this easy to maintain TIPS holdings with a 2% fixed rate.)
  • The inflation in this challenge scenario is a two-edged sword for Investor 2. The nominal return of equities, while 8.7%, is reduced to 5.5% real. That has not been the case over the previous two decades, where US equities, in particular, have enjoyed high real returns. Banking on high real returns from equities is not something investors should necessarily count on going forward. A relatively small investment in TIPS (20% in 2025) meant that Investor 1 was never too far out of reach of Investor 2, given the high average inflation rate in our test case. (This was especially evident when calculating the real returns in the spreadsheet, as the Equity and Bond index fund nominal returns would be reduced by the inflation rate, while the TIPS balance would grow by the inflation rate plus the fixed return.)
  • An investor holding STRIPS instead of TIPS in this scenario as Investor 1 would need an average YTM of 5.2% to match the impact of Investor 1's TIPS allocation.
Happy to hear your thoughts. For myself, while I remain convinced that a balanced asset allocation that includes bonds is appropriate for me, I'm open to seeing what advocates of the 100% equity approach make of this challenge scenario.
Last edited by SantaClaraSurfer on Sat Mar 30, 2024 8:14 pm, edited 1 time in total.
KlangFool
Posts: 31775
Joined: Sat Oct 11, 2008 12:35 pm

Re: 100% Equities Challenge Scenario

Post by KlangFool »

Deleted

KlangFool
Last edited by KlangFool on Sat Mar 30, 2024 9:46 pm, edited 1 time in total.
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
SantaClaraSurfer
Posts: 752
Joined: Tue Feb 19, 2019 10:09 am

Re: 100% Equities Challenge Scenario

Post by SantaClaraSurfer »

KlangFool wrote: Sat Mar 30, 2024 7:01 pm If the person is retiring at 65/2035 at 1 million, why do you start your calculation at 2025?
Thank you for your question.

Both investors start with a 25x portfolio that is "sufficent" at age 55, yet both investors experience a harsh challenge that tests their portfolios just prior to retirement at age 63.

The time leading up to the equity decline in 2033 is important as it reveals that the two portfolios actually remain quite close in value even though one is a 60/40 portfolio, including, as your own portfolio does, bond index funds, and the other is 100% equities.

Code: Select all

Year. Investor 1 Total	Investor 2 Total
2025	$1,000,000.00	$1,000,000.00
2026	$1,043,976.00	$1,052,216.00
2027	$1,089,904.65	$1,107,158.51
2028	$1,137,873.61	$1,164,969.90
2029	$1,187,974.48	$1,225,799.97
2030	$1,240,303.06	$1,289,806.34
2031	$1,294,959.48	$1,357,154.87
2032	$1,378,733.12	$1,428,020.07
2033	$1,439,479.78	$1,502,585.56
2034	$1,232,767.83	$1,105,422.15
2035	$1,309,678.24	$1,198,454.47
2036	$1,330,746.01	$1,225,793.28
2037	$992,377.17	$637,623.70
2038	$1,013,661.38	$652,566.11
2039	$1,031,462.72	$662,449.24
2040	$1,038,084.61	$657,037.18
2041	$1,198,290.03	$851,696.79
2042	$1,213,028.80	$857,448.99
2043	$1,235,457.63	$863,501.55
2044	$1,251,933.48	$869,870.15
2045	$1,269,197.66	$876,571.29
Both investors draw an equal amount from their portfolios starting in 2035. The portfolio risk, however, is much greater for the 100% equities investor in this scenario, everything else being equal, because holding 100% equities did not result in massive outperformance, leaving them exposed to the market crash in 2037. 100% equities did not even result in an advantage in 2034, given 8 years of run up, after being exposed to a -24% bear market. (see above.)

By showing the run up, this example demonstrates how it possible to begin with a $1 million portfolio in 2025, see it grow to $1.5 million and then end up with $992,000 or even $637,000 just two years into retirement draw downs. The kind of outcome enumerated above can happen.

My example also showed that even in a situation where stocks do return to their previous level in a contained time frame (in this case, eight years), the impact of a market crash on a 100% equity portfolio can set it back for more years than a retiree may have the luxury of waiting.
Last edited by SantaClaraSurfer on Sat Mar 30, 2024 8:13 pm, edited 1 time in total.
billfromct
Posts: 2086
Joined: Tue Dec 03, 2013 8:05 am

Re: 100% Equities Challenge Scenario

Post by billfromct »

You say the investors will “collect $30,000 per year SSI”.

SSI (Supplemental Security Income), according to the Society Security Administration website, “SSI provides monthly payments to people with disabilities and older adults who have little or no income or resources.”

Based on their financial resources ($1,000,000), I don’t think these two “investors” would qualify for SSI (Supplemental Security Income).

bill
Topic Author
SantaClaraSurfer
Posts: 752
Joined: Tue Feb 19, 2019 10:09 am

Re: 100% Equities Challenge Scenario

Post by SantaClaraSurfer »

billfromct wrote: Sat Mar 30, 2024 8:12 pm You say the investors will “collect $30,000 per year SSI”.

SSI (Supplemental Security Income), according to the Society Security Administration website, “SSI provides monthly payments to people with disabilities and older adults who have little or no income or resources.”

Based on their financial resources ($1,000,000), I don’t think these two “investors” would qualify for SSI (Supplemental Security Income).

bill
Thank you for your response.

I've changed my post to read Social Security Income, in case my meaning wasn't clear.
User avatar
aj76er
Posts: 1194
Joined: Tue Dec 01, 2015 10:34 pm
Location: Austin, TX

Re: 100% Equities Challenge Scenario

Post by aj76er »

What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating. So it is not fair to assume both portfolios start at 25x. The 100% equity portfolio would likely be much larger at the start of retirement.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
snowday2022
Posts: 770
Joined: Sun Jan 16, 2022 1:48 pm

Re: 100% Equities Challenge Scenario

Post by snowday2022 »

Your expected returns for a long stretch without a major market decline is very pessimistic. Remember equities have historically returned 6-7% over very long periods including market crashes and bear markets. So in your scenario from 2025-2033 the ROR would likely be much higher. If you’re going to short play the equities ROR you should do the same with bonds.

Rerun the scenario with 15-18% returns for the 8 years before your bear market followed by a crash, which BTW would be almost Great Depression level in its severity (24 and then a 43% decline on top of that would be what 75% decline total?).

And despite these inaccuracies and a Depression, Investor 2 still has almost the same amount of money as when they started.
Topic Author
SantaClaraSurfer
Posts: 752
Joined: Tue Feb 19, 2019 10:09 am

Re: 100% Equities Challenge Scenario

Post by SantaClaraSurfer »

aj76er wrote: Sat Mar 30, 2024 8:18 pm What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating. So it is not fair to assume both portfolios start at 25x. The 100% equity portfolio would likely be much larger at the start of retirement.
1. With respect, it doesn't matter how Investor 1 and Investor 2 arrived at their $1 million portfolios at age 55. There are many possible ways this could happen, even over multiple decades. Further, an equal start point, in my view, makes for a fair test. (Unless you are suggesting that 100% equities investors should always start with a portfolio advantage by default?)

2. Look at the performance of the portfolios over the first ten years before any draw down. Investor 1, starting with 60/40, keeps up somewhat closely with Investor 2, and then cleanly outperforms Investor 2 after they rebalance after the first downturn (see 2034). In this case, a "much larger" portfolio for 100% equities doesn't seem so clear cut.

Code: Select all

Year. Investor 1 Total	Investor 2 Total
2025	$1,000,000.00	$1,000,000.00
2026	$1,043,976.00	$1,052,216.00
2027	$1,089,904.65	$1,107,158.51
2028	$1,137,873.61	$1,164,969.90
2029	$1,187,974.48	$1,225,799.97
2030	$1,240,303.06	$1,289,806.34
2031	$1,294,959.48	$1,357,154.87
2032	$1,378,733.12	$1,428,020.07
2033	$1,439,479.78	$1,502,585.56
2034	$1,232,767.83	$1,105,422.15
2035	$1,309,678.24	$1,198,454.47
2036	$1,330,746.01	$1,225,793.28
2037	$992,377.17	$637,623.70
2038	$1,013,661.38	$652,566.11
2039	$1,031,462.72	$662,449.24
2040	$1,038,084.61	$657,037.18
2041	$1,198,290.03	$851,696.79
2042	$1,213,028.80	$857,448.99
2043	$1,235,457.63	$863,501.55
2044	$1,251,933.48	$869,870.15
2045	$1,269,197.66	$876,571.29
SnowBog
Posts: 4753
Joined: Fri Dec 21, 2018 10:21 pm

Re: 100% Equities Challenge Scenario

Post by SnowBog »

SantaClaraSurfer wrote: Sat Mar 30, 2024 8:33 pm 1. With respect, it doesn't matter how Investor 1 and Investor 2 arrived at their $1 million portfolios at age 55. There are many possible ways this could happen, even over multiple decades. Further, an equal start point, in my view, makes for a fair test. (Unless you are suggesting that 100% equities investors should always start with a portfolio advantage by default?)
I think that's exactly the view of those who advocate for 100/0 AA. By starting with an "equal" balance, you are arguably creating an "unfair" comparison. (Unless it's $0 in year 1...)

For clarity, I'm not a 100/0 advocate. I know our risk tolerance isn't 100/0. I know we're also not trying to have the "most money", either at retirement, or when the last of us dies.

Our AA is 65/35. It's helps us ensure we retire when we want, and we'll sleep better at night knowing our ride won't be as bumpy.

ETA - I'd also note the difference between "returns", and "risk-adjusted returns". While it's "likely" (but not guaranteed) that 100% stocks will have "higher returns", the Modern Portfolio Theory (as I understand it) view is that a similar risk-adjusted return can be had at a lower AA. Which returns this to a "risk tolerance" view. There are definitely some with 100/0 AA's that can hold on, but if prior financial crashes tell us anything, there will be a lot that can't - they'll get scared and sell and this "strategy" falls apart. "Everyone has a plan until they get punched in the face."
KlangFool
Posts: 31775
Joined: Sat Oct 11, 2008 12:35 pm

Re: 100% Equities Challenge Scenario

Post by KlangFool »

Deleted

KlangFool
Last edited by KlangFool on Sat Mar 30, 2024 9:45 pm, edited 1 time in total.
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
SantaClaraSurfer
Posts: 752
Joined: Tue Feb 19, 2019 10:09 am

Re: 100% Equities Challenge Scenario

Post by SantaClaraSurfer »

snowday2022 wrote: Sat Mar 30, 2024 8:26 pm Your expected returns for a long stretch without a major market decline is very pessimistic. Remember equities have historically returned 6-7% over very long periods including market crashes and bear markets. So in your scenario from 2025-2033 the ROR would likely be much higher. If you’re going to short play the equities ROR you should do the same with bonds.

Rerun the scenario with 15-18% returns for the 8 years before your bear market followed by a crash, which BTW would be almost Great Depression level in its severity (24 and then a 43% decline on top of that would be what 75% decline total?).

And despite these inaccuracies and a Depression, Investor 2 still has almost the same amount of money as when they started.
Thank you for your reply and attention to the numbers.

In my example nominal equity returns were 8.7% outside of the market drop in the challenge period, that's well above Vanguard's 10-year annualized nominal return and volatility forecast which puts US equities at 3.7-.5.7%. My average return over the entire range, 5.4%, is in line with that. That's not a great 20 year period, but it's also not a Great Depression outcome. I will happily admit that it would be interesting to rerun this with a higher base return for equities, but I can't do that in five minutes!

In contrast, however, you are suggesting that I put in a base number (15-18%) for my scenario that's 3x Vanguard's forward number for US equities. Where are you coming up with that forward number? That's something like an S+P 500 of 17,800 in 2032. That's a bold outlook.

For the bond index fund, I set the real return at 1.2%. There's not much lower I could set it without being completely out of line with current bond returns. For TIPS, if the inflation rate is on the high end in the scenario, TIPS will do very well.

You might find this episode of the Rational Reminder podcast interesting: "Do Stocks Return 10-12% on average?"

This quote from Ben Felix, in particular, informed my decision to set the real equity return at 5.5%:
From 1900 through 1950, US stocks returned an annualized 5.57% real. That's a lot closer to what global stock returns have been from 1900 through 2023. I'm going to dig more into this in a minute. Basically, US stock returns post-1950 were exceptional, relative to pre-1950 US stock returns and relative to global stock returns. It was this exceptional period on many different ways of measuring that. I think the big question for investors thinking about, or hearing that they're going to get a 10% return is whether that pre-1950 sample, US sample, or the post-1950 sample is more relevant for thinking about expected returns, for thinking about the future.
KlangFool
Posts: 31775
Joined: Sat Oct 11, 2008 12:35 pm

Re: 100% Equities Challenge Scenario

Post by KlangFool »

aj76er wrote: Sat Mar 30, 2024 8:18 pm
What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating.
aj76er,

Only for lucky people that never have to withdraw from their portfolio over many decades of accumulating. This myth will be corrected in the coming recession. Just like many other recessions previously.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
User avatar
sf_tech_saver
Posts: 449
Joined: Sat Sep 08, 2018 9:03 pm

Re: 100% Equities Challenge Scenario

Post by sf_tech_saver »

Buffet portfolio for me please.

90/10.

Avoid the worst years and out-grow in the rest.

He's pretty good at this :)
VTI is a modern marvel
User avatar
cosmos
Posts: 245
Joined: Thu Oct 16, 2008 4:11 pm
Location: Third rock from the Sun

Re: 100% Equities Challenge Scenario

Post by cosmos »

aj76er wrote: Sat Mar 30, 2024 8:18 pm
What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating.
That is why I am going to move up to 200% equities.
It's 106 miles to Chicago, we've got a full tank of gas, half a pack of cigarettes, it's dark... and we're wearing sunglasses. Hit it.
User avatar
David Jay
Posts: 14644
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: 100% Equities Challenge Scenario

Post by David Jay »

cosmos wrote: Sat Mar 30, 2024 9:17 pm
aj76er wrote: Sat Mar 30, 2024 8:18 pm
What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating.
That is why I am going to move up to 200% equities.
300% equities means you have an even bigger starting portfolio. :wink:
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
snowday2022
Posts: 770
Joined: Sun Jan 16, 2022 1:48 pm

Re: 100% Equities Challenge Scenario

Post by snowday2022 »

SantaClaraSurfer wrote: Sat Mar 30, 2024 9:04 pm
snowday2022 wrote: Sat Mar 30, 2024 8:26 pm Your expected returns for a long stretch without a major market decline is very pessimistic. Remember equities have historically returned 6-7% over very long periods including market crashes and bear markets. So in your scenario from 2025-2033 the ROR would likely be much higher. If you’re going to short play the equities ROR you should do the same with bonds.

Rerun the scenario with 15-18% returns for the 8 years before your bear market followed by a crash, which BTW would be almost Great Depression level in its severity (24 and then a 43% decline on top of that would be what 75% decline total?).

And despite these inaccuracies and a Depression, Investor 2 still has almost the same amount of money as when they started.
Thank you for your reply and attention to the numbers.

In my example nominal equity returns were 8.7% outside of the market drop in the challenge period, that's well above Vanguard's 10-year annualized nominal return and volatility forecast which puts US equities at 3.7-.5.7%. My average return over the entire range, 5.4%, is in line with that. That's not a great 20 year period, but it's also not a Great Depression outcome. I will happily admit that it would be interesting to rerun this with a higher base return for equities, but I can't do that in five minutes!

In contrast, however, you are suggesting that I put in a base number (15-18%) for my scenario that's 3x Vanguard's forward number for US equities. Where are you coming up with that forward number? That's something like an S+P 500 of 17,800 in 2032. That's a bold outlook.

For the bond index fund, I set the real return at 1.2%. There's not much lower I could set it without being completely out of line with current bond returns. For TIPS, if the inflation rate is on the high end in the scenario, TIPS will do very well.

You might find this episode of the Rational Reminder podcast interesting: "Do Stocks Return 10-12% on average?"

This quote from Ben Felix, in particular, informed my decision to set the real equity return at 5.5%:
From 1900 through 1950, US stocks returned an annualized 5.57% real. That's a lot closer to what global stock returns have been from 1900 through 2023. I'm going to dig more into this in a minute. Basically, US stock returns post-1950 were exceptional, relative to pre-1950 US stock returns and relative to global stock returns. It was this exceptional period on many different ways of measuring that. I think the big question for investors thinking about, or hearing that they're going to get a 10% return is whether that pre-1950 sample, US sample, or the post-1950 sample is more relevant for thinking about expected returns, for thinking about the future.

https://themeasureofaplan.com/us-stock- ... esent/amp/

The Vanguard projections are designed to include years with bear markets etc. The 15-18% I suggested was NOT scientific, just kind of a gestalt based on historical data and your hypothetical scenario of 8 years of growth before a bear and then crash. Usually, equities go way up before they crash. This was true in the Depression, Japan, DotCom/Great Recession, COVID bear market, etc. Basically, it is uncommon for the market to remain flat for more than a year or two, it’s either going up substantially (15-18% for example but of course not always and sometimes more), or it’s declining.

So anyway, your scenario is middling returns followed by a Great Depression level decline. And yet Investor 2 hangs on and has plenty of money 20 y after retiring. That’s not a terrible result. Yes the final amount is less than Investor 1 but only because of the pessimistic assumptions and a particularly bad SOR.
Walkure
Posts: 1039
Joined: Tue Apr 11, 2017 9:59 pm

Re: 100% Equities Challenge Scenario

Post by Walkure »

It's also very weird to assume that neither investor is making any new contributions in the pre-retirement years 2025-2033. Usually those are the peak earning years and also when the greater IRS "catch-up" limits are in play to shovel extra $$$ toward tax-advantaged accounts.
SnowBog
Posts: 4753
Joined: Fri Dec 21, 2018 10:21 pm

Re: 100% Equities Challenge Scenario

Post by SnowBog »

snowday2022 wrote: Sat Mar 30, 2024 9:24 pm but only because of the pessimistic assumptions and a particularly bad SOR.
Do you know something we don't?

The future, and it's returns, are uncertain... I think the point was, when faced with a bad sequence of returns, especially early on, it's detrimental to a retiree with a larger "risk" (aka 100% stocks)...

Sure, they might have had "more money" at the point of retirement if they had "good returns" leading up to then - that is assuming they didn't just retire when they had "enough" to do so.

But I'm not sure the point of either side on this... We can throw around "hypotheticals" all we want... What if the returns were X%, what if the crash happened in Y year?

Much analysis has been done on AA differences. You can see the impacts in things like the "efficent frontier", where different AA's have nearly the same risk-adjusted expected returns; taking on more risk doesn't necessarily mean you'll end up with more returns (but it also doesn't mean you can't end up with more returns). And taking on less risk doesn't necessarily mean you'll end up with less returns. It depends on future returns - and the sequence of those returns - which is unknowable... Things like the Trinity Study showed similar results, where the impact of AA was not always where 100/0 "won" (and that was limited to a 30-year horizon).

And the "reality" is that we aren't robots, we aren't emotionless beings, if the financial markets are in chaos and it's unclear if the markets will return, it takes someone with nerves of steel (and a spouse/partner of a similar mind - or one ignorant of the risk they carry) to "stay the course". That's where "theories" fall apart - when tested against reality. Go read some of the posts from prior crashes, from staunch BH members who had balanced portfolios, who knew to stay the course, who knew that selling went against everything they believed - and yet as they stared into the void - they blinked.

At the end of the day we are the biggest risk to our plans success.
hoops777
Posts: 4640
Joined: Sun Apr 10, 2011 12:23 pm
Location: Behind the 3 point line

Re: 100% Equities Challenge Scenario

Post by hoops777 »

100 pct equities will probably provide higher returns unless you have bad luck with your individual timing or duration.
Of course something totally unexpected could happen which is why it is best to have some diversification.
A lot of really smart people make projections based on past history that end up saying oops.
K.I.S.S........so easy to say so difficult to do.
4nursebee
Posts: 2711
Joined: Sun Apr 01, 2012 7:56 am
Location: US

Re: 100% Equities Challenge Scenario

Post by 4nursebee »

SantaClaraSurfer wrote: Sat Mar 30, 2024 6:37 pm I've read some of the discussions about Prof. Scott Cederburg's "Challenging the Status Quo" regarding a 100% equity asset allocation both here and on the Rational Reminder podcast and website.

What I did not see was a head to head comparison of 100% equities vs. a Boglehead approach in a real life challenge scenario that an average investor might face. By challenge I mean a scenario that would a) pose serious issues for any retirement saver and b) where there's not a clear winner that you could easily predict in advance.

With that in mind, I worked up some data creating a challenge scenario in a spreadsheet. I want to share the results and some observations and hear your thoughts.

Givens:
  • The time period = 2025-2045.
  • Average annual inflation for the entire timeframe = 3.2%.
  • Bond Index Funds have a nominal return of 4.4% and a real return of 1.2%.
  • Equities (outside of 8 Challenge Years) have a nominal return of 8.7% and a real return of 5.5%.
  • TIPS are available at a 2% fixed rate.
  • Results are in today's dollars
In our example, we are following two similar investors who are both 55 years old in 2025. Our investors will both retire and collect $30,000 per year Social Security Income starting in 2035 at age 65. Both investors plan on an annual budget of $70,000 per year in retirement and start the year 2025 with $1 million in their retirement portfolio. Both have a goal of funding the difference between their Social Security Income and their assets (ie. $40,000) beginning with their retirement in 2035 at age 65. For purposes of this comparison only, both investors start the period with a 25x portfolio and do not contribute to their retirement assets other than via the growth of their retirement accounts.

Investor 1: Is a "Boglehead" style investor. They split their portfolio into 60% equities, 20% Bond Index Funds, and 20% TIPS.

Investor 1 rebalances once per year maintain a strict 75% in equities and 25% in bond index funds every year, and withdraws using the same proportion. Investor 1 holds TIPS as a standalone investment, initially in a TIPS fund, and then, at retirement, in a TIPS ladder. This means that Investor 1 will not rebalance the TIPS portion of their portfolio.

Investor 2: Is a "Cederburg" investor. They maintain their portfolio at 100% equities at all times.

Investor 2 does not need to rebalance. They are very sure that they are prepared to handle the swings of the equity market, and are comfortable selling equities to fund annual expenses in retirement even when equities are down that year.

Challenge Scenario: Between the years 2033 and 2040 the equity market has two shocks, the first is a bear market in 2033 that results in a -24% annual drop. The second is a market crash in 2036 that results in a -43% annual drop.

Our challenge scenario is over by the end of 2040 and the equity market 100% recuperates its level from the beginning of 2033 and resumes a steady 8.7% nominal growth thereafter. The challenge scenario impacts the equity portion of both investors' equity allocations in exactly the same way, with the larger equity exposure held by Investor 2 simply meaning a larger drop or rise. The 2033-2040 equity returns in the challenge scenario are: 2033: -24% 2034: +12% 2035: +9% 2036: -43% 2037: +12% 2038: +11% 2039:+8.5% 2040: +40%.

This equity drop directly impacts both investors between ages 63 and 67, right around retirement age. This is an excellent way to stress test these approaches.

Let's see what happens to the two portfolios in this stress test, especially as both investors begin to drawdown their portfolios in 2035.

Code: Select all

Year. Investor 1 Total	Investor 2 Total
2025	$1,000,000.00	$1,000,000.00
2026	$1,043,976.00	$1,052,216.00
2027	$1,089,904.65	$1,107,158.51
2028	$1,137,873.61	$1,164,969.90
2029	$1,187,974.48	$1,225,799.97
2030	$1,240,303.06	$1,289,806.34
2031	$1,294,959.48	$1,357,154.87
2032	$1,378,733.12	$1,428,020.07
2033	$1,439,479.78	$1,502,585.56
2034	$1,232,767.83	$1,105,422.15
2035	$1,309,678.24	$1,198,454.47
2036	$1,330,746.01	$1,225,793.28
2037	$992,377.17	$637,623.70
2038	$1,013,661.38	$652,566.11
2039	$1,031,462.72	$662,449.24
2040	$1,038,084.61	$657,037.18
2041	$1,198,290.03	$851,696.79
2042	$1,213,028.80	$857,448.99
2043	$1,235,457.63	$863,501.55
2044	$1,251,933.48	$869,870.15
2045	$1,269,197.66	$876,571.29
Observations:
  • A dramatic drop in equities at retirement age between 2033-2037 significantly impacts both retirement investors, even though they both started with 25x their anticipated expenses in 2025.
  • Investor 2 is highly impacted by two equity market drops at retirement, and, as a consequence of selling stocks when the market is low to pay their expenses, their portfolio, while it does not fail, never really recovers to anything close to its previous level in the timeframe.
  • Investor 2 has nine years where their retirement need (at $40,000) is more than 25x the remaining balance on their portfolio, leading them to draw an excess $82,849 unfunded from their portoflio. (Alternately, they could have spent less.)
  • Investor 1 has, in comparison, only 4 years where their portfolio narrowly misses their withdrawal goal, leaving $9,564 unfunded. (Investor 2's unfunded number is 8.5x Investor 1's.)
  • After rising to $1,500,000 in 2033, Investor 2's portfolio balance falls to $637,000 in 2037 and does not rise above $1,000,000 by the end of the period, at age 75 in the year 2045.
  • In 2037, at age 67, having stuck with 100% equities, Investor 2 no longer has many good options to change course to a safer asset allocation without significantly adjusting the amount they have available for expenses per year. (ie. Selling equities when equities are down to purchase bonds.) Basically, there are market scenarios, including this challenge scenario, that will severely test the 100% equities investor and leave few good options, even at an age where that may not be ideal.
  • While Investor 2's 100% equity strategy may eventually recover, and, per Prof. Cederburg, in general outperform a portfolio that holds bond index funds, investors considering holding 100% equities, especially in these age ranges, should look at Investor 2's outcomes between ages of 63 and 75 and ask if that is something they would be comfortable with for themselves.
  • Bond index funds in this scenario might seem to be a horrible investment as, due to inflation they offer only a 1.2% real return. Adding to that low return, Investor 1 continually rebalances INTO bond index funds in all but two years, selling high yielding equities and purchasing bonds. However, in the two years in which Investor 1 rebalances from bond index funds to equities, in 2033 with $60,598 and in 2036 with $84,538, the bond index funds are vital for their portfolio and set the stage for its long term health.
  • The $145,136 that Investor 1 rebalances from bond index funds to equities in 2033 and 2036 brings their equity total to 76% of Investor 2's ($500,366 to $658,702) at one point, leaving a surprisingly small difference between the equities held in both portfolios. This is not something Investor 2 (or any 100% equity investor) may have anticipated and it directly impacts the head to head performance of the two portfolios. This results in an advantage in excess of $300,000 for Investor 1 that continues to the end of the period.
  • Investor 1's $200,000 stake in TIPS in 2025 proved to be a highly suitable investment to handle the 3.2% inflation in this challenge scenario. Since Investor 1 does not rebalance their TIPS and converts them to a 30 year ladder in 2035 when they begin to fund their retirement, this advantage regarding persistent inflation is maintained for all the years of this scenario. (In practice, to be clear, it may not necessarily be this easy to maintain TIPS holdings with a 2% fixed rate.)
  • The inflation in this challenge scenario is a two-edged sword for Investor 2. The nominal return of equities, while 8.7%, is reduced to 5.5% real. That has not been the case over the previous two decades, where US equities, in particular, have enjoyed high real returns. Banking on high real returns from equities is not something investors should necessarily count on going forward. A relatively small investment in TIPS (20% in 2025) meant that Investor 1 was never too far out of reach of Investor 2, given the high average inflation rate in our test case. (This was especially evident when calculating the real returns in the spreadsheet, as the Equity and Bond index fund nominal returns would be reduced by the inflation rate, while the TIPS balance would grow by the inflation rate plus the fixed return.)
  • An investor holding STRIPS instead of TIPS in this scenario as Investor 1 would need an average YTM of 5.2% to match the impact of Investor 1's TIPS allocation.
Happy to hear your thoughts. For myself, while I remain convinced that a balanced asset allocation that includes bonds is appropriate for me, I'm open to seeing what advocates of the 100% equity approach make of this challenge scenario.
I feel totally overwhelmed and stupid reading the above.
Does challenge scenario mean you picked something to prove what you wanted?
Pale Blue Dot
MH2
Posts: 664
Joined: Thu Oct 28, 2021 3:46 am

Re: 100% Equities Challenge Scenario

Post by MH2 »

You can get close to modelling this with Portfolio Visualizer. You can’t specify a market drop x years in advance, but a simple comparison of the failure rates will tell you everything you need to know.
Oddball
Posts: 373
Joined: Thu May 03, 2018 9:35 am

Re: 100% Equities Challenge Scenario

Post by Oddball »

4nursebee wrote: Sun Mar 31, 2024 3:03 am
SantaClaraSurfer wrote: Sat Mar 30, 2024 6:37 pm I've read some of the discussions about Prof. Scott Cederburg's "Challenging the Status Quo" regarding a 100% equity asset allocation both here and on the Rational Reminder podcast and website.

What I did not see was a head to head comparison of 100% equities vs. a Boglehead approach in a real life challenge scenario that an average investor might face. By challenge I mean a scenario that would a) pose serious issues for any retirement saver and b) where there's not a clear winner that you could easily predict in advance.

With that in mind, I worked up some data creating a challenge scenario in a spreadsheet. I want to share the results and some observations and hear your thoughts.

Givens:
  • The time period = 2025-2045.
  • Average annual inflation for the entire timeframe = 3.2%.
  • Bond Index Funds have a nominal return of 4.4% and a real return of 1.2%.
  • Equities (outside of 8 Challenge Years) have a nominal return of 8.7% and a real return of 5.5%.
  • TIPS are available at a 2% fixed rate.
  • Results are in today's dollars
In our example, we are following two similar investors who are both 55 years old in 2025. Our investors will both retire and collect $30,000 per year Social Security Income starting in 2035 at age 65. Both investors plan on an annual budget of $70,000 per year in retirement and start the year 2025 with $1 million in their retirement portfolio. Both have a goal of funding the difference between their Social Security Income and their assets (ie. $40,000) beginning with their retirement in 2035 at age 65. For purposes of this comparison only, both investors start the period with a 25x portfolio and do not contribute to their retirement assets other than via the growth of their retirement accounts.

Investor 1: Is a "Boglehead" style investor. They split their portfolio into 60% equities, 20% Bond Index Funds, and 20% TIPS.

Investor 1 rebalances once per year maintain a strict 75% in equities and 25% in bond index funds every year, and withdraws using the same proportion. Investor 1 holds TIPS as a standalone investment, initially in a TIPS fund, and then, at retirement, in a TIPS ladder. This means that Investor 1 will not rebalance the TIPS portion of their portfolio.

Investor 2: Is a "Cederburg" investor. They maintain their portfolio at 100% equities at all times.

Investor 2 does not need to rebalance. They are very sure that they are prepared to handle the swings of the equity market, and are comfortable selling equities to fund annual expenses in retirement even when equities are down that year.

Challenge Scenario: Between the years 2033 and 2040 the equity market has two shocks, the first is a bear market in 2033 that results in a -24% annual drop. The second is a market crash in 2036 that results in a -43% annual drop.

Our challenge scenario is over by the end of 2040 and the equity market 100% recuperates its level from the beginning of 2033 and resumes a steady 8.7% nominal growth thereafter. The challenge scenario impacts the equity portion of both investors' equity allocations in exactly the same way, with the larger equity exposure held by Investor 2 simply meaning a larger drop or rise. The 2033-2040 equity returns in the challenge scenario are: 2033: -24% 2034: +12% 2035: +9% 2036: -43% 2037: +12% 2038: +11% 2039:+8.5% 2040: +40%.

This equity drop directly impacts both investors between ages 63 and 67, right around retirement age. This is an excellent way to stress test these approaches.

Let's see what happens to the two portfolios in this stress test, especially as both investors begin to drawdown their portfolios in 2035.

Code: Select all

Year. Investor 1 Total	Investor 2 Total
2025	$1,000,000.00	$1,000,000.00
2026	$1,043,976.00	$1,052,216.00
2027	$1,089,904.65	$1,107,158.51
2028	$1,137,873.61	$1,164,969.90
2029	$1,187,974.48	$1,225,799.97
2030	$1,240,303.06	$1,289,806.34
2031	$1,294,959.48	$1,357,154.87
2032	$1,378,733.12	$1,428,020.07
2033	$1,439,479.78	$1,502,585.56
2034	$1,232,767.83	$1,105,422.15
2035	$1,309,678.24	$1,198,454.47
2036	$1,330,746.01	$1,225,793.28
2037	$992,377.17	$637,623.70
2038	$1,013,661.38	$652,566.11
2039	$1,031,462.72	$662,449.24
2040	$1,038,084.61	$657,037.18
2041	$1,198,290.03	$851,696.79
2042	$1,213,028.80	$857,448.99
2043	$1,235,457.63	$863,501.55
2044	$1,251,933.48	$869,870.15
2045	$1,269,197.66	$876,571.29
Observations:
  • A dramatic drop in equities at retirement age between 2033-2037 significantly impacts both retirement investors, even though they both started with 25x their anticipated expenses in 2025.
  • Investor 2 is highly impacted by two equity market drops at retirement, and, as a consequence of selling stocks when the market is low to pay their expenses, their portfolio, while it does not fail, never really recovers to anything close to its previous level in the timeframe.
  • Investor 2 has nine years where their retirement need (at $40,000) is more than 25x the remaining balance on their portfolio, leading them to draw an excess $82,849 unfunded from their portoflio. (Alternately, they could have spent less.)
  • Investor 1 has, in comparison, only 4 years where their portfolio narrowly misses their withdrawal goal, leaving $9,564 unfunded. (Investor 2's unfunded number is 8.5x Investor 1's.)
  • After rising to $1,500,000 in 2033, Investor 2's portfolio balance falls to $637,000 in 2037 and does not rise above $1,000,000 by the end of the period, at age 75 in the year 2045.
  • In 2037, at age 67, having stuck with 100% equities, Investor 2 no longer has many good options to change course to a safer asset allocation without significantly adjusting the amount they have available for expenses per year. (ie. Selling equities when equities are down to purchase bonds.) Basically, there are market scenarios, including this challenge scenario, that will severely test the 100% equities investor and leave few good options, even at an age where that may not be ideal.
  • While Investor 2's 100% equity strategy may eventually recover, and, per Prof. Cederburg, in general outperform a portfolio that holds bond index funds, investors considering holding 100% equities, especially in these age ranges, should look at Investor 2's outcomes between ages of 63 and 75 and ask if that is something they would be comfortable with for themselves.
  • Bond index funds in this scenario might seem to be a horrible investment as, due to inflation they offer only a 1.2% real return. Adding to that low return, Investor 1 continually rebalances INTO bond index funds in all but two years, selling high yielding equities and purchasing bonds. However, in the two years in which Investor 1 rebalances from bond index funds to equities, in 2033 with $60,598 and in 2036 with $84,538, the bond index funds are vital for their portfolio and set the stage for its long term health.
  • The $145,136 that Investor 1 rebalances from bond index funds to equities in 2033 and 2036 brings their equity total to 76% of Investor 2's ($500,366 to $658,702) at one point, leaving a surprisingly small difference between the equities held in both portfolios. This is not something Investor 2 (or any 100% equity investor) may have anticipated and it directly impacts the head to head performance of the two portfolios. This results in an advantage in excess of $300,000 for Investor 1 that continues to the end of the period.
  • Investor 1's $200,000 stake in TIPS in 2025 proved to be a highly suitable investment to handle the 3.2% inflation in this challenge scenario. Since Investor 1 does not rebalance their TIPS and converts them to a 30 year ladder in 2035 when they begin to fund their retirement, this advantage regarding persistent inflation is maintained for all the years of this scenario. (In practice, to be clear, it may not necessarily be this easy to maintain TIPS holdings with a 2% fixed rate.)
  • The inflation in this challenge scenario is a two-edged sword for Investor 2. The nominal return of equities, while 8.7%, is reduced to 5.5% real. That has not been the case over the previous two decades, where US equities, in particular, have enjoyed high real returns. Banking on high real returns from equities is not something investors should necessarily count on going forward. A relatively small investment in TIPS (20% in 2025) meant that Investor 1 was never too far out of reach of Investor 2, given the high average inflation rate in our test case. (This was especially evident when calculating the real returns in the spreadsheet, as the Equity and Bond index fund nominal returns would be reduced by the inflation rate, while the TIPS balance would grow by the inflation rate plus the fixed return.)
  • An investor holding STRIPS instead of TIPS in this scenario as Investor 1 would need an average YTM of 5.2% to match the impact of Investor 1's TIPS allocation.
Happy to hear your thoughts. For myself, while I remain convinced that a balanced asset allocation that includes bonds is appropriate for me, I'm open to seeing what advocates of the 100% equity approach make of this challenge scenario.
I feel totally overwhelmed and stupid reading the above.
Does challenge scenario mean you picked something to prove what you wanted?
That's what I got from this. The OP has TIPS and bonds as stabile and solid investments over 20 years but stocks have a run that is only rivaled by The Great Depression, and therefore the 100% equities has less money in the end.
User avatar
TimeIsYourFriend
Posts: 614
Joined: Sun Dec 17, 2023 11:19 am

Re: 100% Equities Challenge Scenario

Post by TimeIsYourFriend »

The main point of the Cederburg study was that periods of high inflation wipe out bonds in the long term to the point that they do not recover. That real-world scenario would need to be included in any analysis.
Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice wrote:We find that a simple, all-equity portfolio outperforms QDIAs [Qualified Default Investment Alternative] across all retirement outcomes. A strategy of investing 50% in domestic stocks and 50% in international stocks throughout one’s lifetime — which is not a QDIA — dominates the QDIAs in long-term appreciation by generating more wealth at retirement and providing higher initial retirement consumption. Surprisingly, the all-equity strategy also compares favorably with the QDIAs in capital preservation. Households allocating 50% to domestic stocks and 50% to international stocks are less likely to exhaust their savings and more likely to leave a large inheritance. This non-QDIA strategy beats the TDF and other QDIAs across the board in achieving the PPA goals of long-term appreciation and capital preservation.
Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice wrote:Whereas Stocks/I dominates the TDF in generating wealth at retirement and bequest regardless of the inflation outcome, the TDF produces slightly lower ruin probabilities than Stocks/I for very low inflation realizations during retirement. In the bottom ex post retirement inflation quintile, the TDF has a ruin probability of 1.0% versus 1.4% for Stocks/I. In the top quintile, however, the TDF has a 56.5% ruin probably compared with 18.5% for Stocks/I. The bonds in QDIAs carry large inflation exposure over long horizons.
Last edited by TimeIsYourFriend on Sun Mar 31, 2024 9:44 am, edited 1 time in total.
"Time is your friend; impulse is your enemy." - John C. Bogle
User avatar
windaar
Posts: 1720
Joined: Thu Mar 08, 2012 6:31 am

Re: 100% Equities Challenge Scenario

Post by windaar »

This kind of post tacks away away what Boglehead investing philosophy is for. At least how I see it, BH is not a complicated strategic and tactical approach to investing but something for the average schmo who has to invest with 401(k)s and 403(b)s, having to make investing desisions that his or her grandparents never had to with their pensions and company retirement plans. BH gives simple effecive guidelines on how to be that "millionaire next door" instead of that uncle who can't figure out how he can live on his Social Security after saving nothing. The BH wiki has everything one needs to begin a life of investing that will be very effective, from honest risk and goal introspection to solid approaches such a the 3-Fund portfolio "staying the course."
Nobody knows nothing.
ScubaHogg
Posts: 3661
Joined: Sun Nov 06, 2011 2:02 pm

Re: 100% Equities Challenge Scenario

Post by ScubaHogg »

SantaClaraSurfer wrote: Sat Mar 30, 2024 8:33 pm
aj76er wrote: Sat Mar 30, 2024 8:18 pm What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating. So it is not fair to assume both portfolios start at 25x. The 100% equity portfolio would likely be much larger at the start of retirement.
1. With respect, it doesn't matter how Investor 1 and Investor 2 arrived at their $1 million portfolios at age 55. There are many possible ways this could happen, even over multiple decades. Further, an equal start point, in my view, makes for a fair test. (Unless you are suggesting that 100% equities investors should always start with a portfolio advantage by default?)
It does matter, since you are essentially saying investor 1 had a higher savings rate than investor 2

Quick Monte Carlo. 20% savings rate off a 40k income for 40 years, 50th percentile

Investor 1

40/20/20/20 (US/INTL DEV/TBM/TIPS): $725,000
https://www.portfoliovisualizer.com/mon ... lcj6CShDry

Investor 2
60/40 (US/INTL DEV): $1.5M
https://www.portfoliovisualizer.com/mon ... dPNgrj7i6x
Last edited by ScubaHogg on Sun Mar 31, 2024 9:30 am, edited 1 time in total.
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
User avatar
steve r
Posts: 1310
Joined: Mon Feb 13, 2012 7:34 pm
Location: Connecticut

Re: 100% Equities Challenge Scenario

Post by steve r »

TimeIsYourFriend wrote: Sun Mar 31, 2024 8:06 am The main point of the Cederburg study was that periods of high inflation wipe out bonds in the long term to the point that they do not recover. That real-world scenario would need to be included in any analysis.
Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice wrote:We find that a simple, all-equity portfolio outperforms QDIAs [Qualified Default Investment Alternative] across all retirement outcomes. A strategy of investing 50% in domestic stocks and 50% in international stocks throughout one’s lifetime — which is not a QDIA — dominates the QDIAs in long-term appreciation by generating more wealth at retirement and providing higher initial retirement consumption. Surprisingly, the all-equity strategy also compares favorably with the QDIAs in capital preservation. Households allocating 50% to domestic stocks and 50% to international stocks are less likely to exhaust their savings and more likely to leave a large inheritance. This non-QDIA strategy beats the TDF and other QDIAs across the board in achieving the PPA goals of long-term appreciation and capital preservation.
Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice wrote:Whereas Stocks/I dominates the TDF in generating wealth at retirement and bequest regardless of the inflation outcome, the TDF produces slightly lower ruin probabilities than Stocks/I for very low inflation realizations during retirement. In the bottom ex post retirement inflation quintile, the TDF has a ruin probability of 1.0% versus 1.4% for Stocks/I. In the top quintile, however, the TDF has a 56.5% ruin probably compared with 18.5% for Stocks/I. The bonds in QDIAs carry large inflation exposure over long horizons.
+1
I suspect Cederburg would challenge the assumption of U.S. and ex U.S. moving together over long periods of time as assumed in the challenge years. I do not know for sure. But, short term, even annual, correlations between the two are high; long term things look different according to the paper.

Cederburg might challenge the challenge challenge scenario. You can assume tough times starting around 2025, but then would mean revert in the plush years so things average out -- meaning above average returns in the out years to offset below average returns in the lean year. Again, IDK for sure.

Personally, I am not in the 100 percent equity camp, but primarily for behavioral reasons -- the paper suggests however that this is not optimal. That may or may not be true. But there is no way I am going into retirement at 100 percent equities and thinking I will stay the course if things turn for the worst.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
SnowBog
Posts: 4753
Joined: Fri Dec 21, 2018 10:21 pm

Re: 100% Equities Challenge Scenario

Post by SnowBog »

windaar wrote: Sun Mar 31, 2024 8:49 am This kind of post tacks away away what Boglehead investing philosophy is for. At least how I see it, BH is not a complicated strategic and tactical approach to investing but something for the average schmo who has to invest with 401(k)s and 403(b)s, having to make investing desisions that his or her grandparents never had to with their pensions and company retirement plans. BH gives simple effecive guidelines on how to be that "millionaire next door" instead of that uncle who can't figure out how he can live on his Social Security after saving nothing. The BH wiki has everything one needs to begin a life of investing that will be very effective, from honest risk and goal introspection to solid approaches such a the 3-Fund portfolio "staying the course."
+100

I'll butcher the qoute, which IIRC was from Bogle himself, who said something like "The Three Fund Portfolio may not be the best portfolio, but it's better than an infinite number of alternatives."

Those choosing not to follow a BH style balanced portfolio are hoping they have one that isn't onethat ends up on the infinite list of worse alternatives... And since the future is unknowable, they won't find out until they are far down the path...

For us, we are good with a boring balanced Three Fund Portfolio, it's about the "surest thing" one can use for retirement savings. We'll get our excitement from elsewhere in our lives.
User avatar
TimeIsYourFriend
Posts: 614
Joined: Sun Dec 17, 2023 11:19 am

Re: 100% Equities Challenge Scenario

Post by TimeIsYourFriend »

The 3-fund portfolio with nominal bonds looks really good from a tailwind of falling interest rates for decades. The paper in question doesn't mean you have to adopt 100% equities to get anything out of the conclusion. It could be that you exchange nominals for TIPS for example, although, not as optimal as 100% equities but that doesn't matter. What matters is gliding to a nominal bond heavy portfolio in retirement can get murdered with high inflation and the longer you hold it, the more likely that will happen.
"Time is your friend; impulse is your enemy." - John C. Bogle
alluringreality
Posts: 1526
Joined: Tue Nov 12, 2019 9:59 am

Re: 100% Equities Challenge Scenario

Post by alluringreality »

SantaClaraSurfer wrote: Sat Mar 30, 2024 6:37 pm Investor 2: Is a "Cederburg" investor. They maintain their portfolio at 100% equities at all times.

Investor 2 does not need to rebalance.
"An even mix of 50% domestic stocks and 50% international stocks" from the abstract implies rebalancing, regardless of my behavioral reservations.
45% US Indexes, 25% Ex-US Indexes, 30% Fixed Income - Buy & Hold
ScubaHogg
Posts: 3661
Joined: Sun Nov 06, 2011 2:02 pm

Re: 100% Equities Challenge Scenario

Post by ScubaHogg »

SantaClaraSurfer wrote: Sat Mar 30, 2024 8:33 pm
aj76er wrote: Sat Mar 30, 2024 8:18 pm What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating. So it is not fair to assume both portfolios start at 25x. The 100% equity portfolio would likely be much larger at the start of retirement.
1. With respect, it doesn't matter how Investor 1 and Investor 2 arrived at their $1 million portfolios at age 55. There are many possible ways this could happen, even over multiple decades. Further, an equal start point, in my view, makes for a fair test. (Unless you are suggesting that 100% equities investors should always start with a portfolio advantage by default?)
I’d add that having mild and stable inflation implicitly “always” gives nominal bonds a portfolio advantage. That is, it’s just assuming away the risk of nominal bonds
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
Topic Author
SantaClaraSurfer
Posts: 752
Joined: Tue Feb 19, 2019 10:09 am

Re: 100% Equities Challenge Scenario

Post by SantaClaraSurfer »

windaar wrote: Sun Mar 31, 2024 8:49 am This kind of post tacks away away what Boglehead investing philosophy is for. At least how I see it, BH is not a complicated strategic and tactical approach to investing but something for the average schmo who has to invest with 401(k)s and 403(b)s, having to make investing desisions that his or her grandparents never had to with their pensions and company retirement plans. BH gives simple effecive guidelines on how to be that "millionaire next door" instead of that uncle who can't figure out how he can live on his Social Security after saving nothing. The BH wiki has everything one needs to begin a life of investing that will be very effective, from honest risk and goal introspection to solid approaches such a the 3-Fund portfolio "staying the course."
Appreciate your perspective on simplicity.

100% stocks endorsed by a professor is also, to be fair, a pretty simple and appealing message.

60% equities, 20% bond index funds, and 20% TIPS is not all that different than what you find in the BH wiki.

When I ran a scenario testing both approaches with moderate inflation and low real returns, a 3 fund portfolio, including TIPS, held up better in an early retirement market equity crash.

Doing this exercise highlighted for me that it may not be easy to switch to a more conservative allocation from 100% equities after an equity market crash in early retirement without having to adjust your overall portfolio expectations.

The alternative, staying the course and gritting it out with 100% stocks, may actually have paid off in the past per the research, but that's asking a great deal of patience from, as you put it, "the average schmo."
User avatar
steve r
Posts: 1310
Joined: Mon Feb 13, 2012 7:34 pm
Location: Connecticut

Re: 100% Equities Challenge Scenario

Post by steve r »

TimeIsYourFriend wrote: Sun Mar 31, 2024 9:49 am The 3-fund portfolio with nominal bonds looks really good from a tailwind of falling interest rates for decades. The paper in question doesn't mean you have to adopt 100% equities to get anything out of the conclusion. It could be that you exchange nominals for TIPS for example, although, not as optimal as 100% equities but that doesn't matter. What matters is gliding to a nominal bond heavy portfolio in retirement can get murdered with high inflation and the longer you hold it, the more likely that will happen.
This is probably true in theory and in the long run. This was NOT true in rising rate / inflationary 2022-2023. Intermediate term treasures did better than total bond and TIPs. (presumably because the real return portion of TIPs went from negative to positive 2 percentage points +/-).

Obviously there are other ways to hedge inflation. Own stuff (i.e. a home) or iBonds are two examples.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
User avatar
aj76er
Posts: 1194
Joined: Tue Dec 01, 2015 10:34 pm
Location: Austin, TX

Re: 100% Equities Challenge Scenario

Post by aj76er »

David Jay wrote: Sat Mar 30, 2024 9:20 pm
cosmos wrote: Sat Mar 30, 2024 9:17 pm
aj76er wrote: Sat Mar 30, 2024 8:18 pm
What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating.
That is why I am going to move up to 200% equities.
300% equities means you have an even bigger starting portfolio. :wink:
Snarky comments aside, there actually is some theoretical evidence that mild leverage (e.g. 1.2x) early in one’s career can be optimal.

For many young professionals starting out that take on a big mortgage without much assets, they may actually be >100% equity.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
User avatar
aj76er
Posts: 1194
Joined: Tue Dec 01, 2015 10:34 pm
Location: Austin, TX

Re: 100% Equities Challenge Scenario

Post by aj76er »

SantaClaraSurfer wrote: Sat Mar 30, 2024 8:33 pm
aj76er wrote: Sat Mar 30, 2024 8:18 pm What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating. So it is not fair to assume both portfolios start at 25x. The 100% equity portfolio would likely be much larger at the start of retirement.
1. With respect, it doesn't matter how Investor 1 and Investor 2 arrived at their $1 million portfolios at age 55. There are many possible ways this could happen, even over multiple decades. Further, an equal start point, in my view, makes for a fair test. (Unless you are suggesting that 100% equities investors should always start with a portfolio advantage by default?)

2. Look at the performance of the portfolios over the first ten years before any draw down. Investor 1, starting with 60/40, keeps up somewhat closely with Investor 2, and then cleanly outperforms Investor 2 after they rebalance after the first downturn (see 2034). In this case, a "much larger" portfolio for 100% equities doesn't seem so clear cut.

Code: Select all

Year. Investor 1 Total	Investor 2 Total
2025	$1,000,000.00	$1,000,000.00
2026	$1,043,976.00	$1,052,216.00
2027	$1,089,904.65	$1,107,158.51
2028	$1,137,873.61	$1,164,969.90
2029	$1,187,974.48	$1,225,799.97
2030	$1,240,303.06	$1,289,806.34
2031	$1,294,959.48	$1,357,154.87
2032	$1,378,733.12	$1,428,020.07
2033	$1,439,479.78	$1,502,585.56
2034	$1,232,767.83	$1,105,422.15
2035	$1,309,678.24	$1,198,454.47
2036	$1,330,746.01	$1,225,793.28
2037	$992,377.17	$637,623.70
2038	$1,013,661.38	$652,566.11
2039	$1,031,462.72	$662,449.24
2040	$1,038,084.61	$657,037.18
2041	$1,198,290.03	$851,696.79
2042	$1,213,028.80	$857,448.99
2043	$1,235,457.63	$863,501.55
2044	$1,251,933.48	$869,870.15
2045	$1,269,197.66	$876,571.29
Your argument would carry more weight if you could find an historical example of a lower equity portfolio outperforming a higher equity portfolio during a 30 year accumulation period (with no withdrawals, and assuming a globally diversified equity index).

This thread may be of interest to you:
viewtopic.php?t=407525

It is well established that reducing volatility early in retirement lowers SORR. You aren’t adding any great epiphany there. However, it is disingenuous to ignore the accumulation phase in which volatility can actually help someone dollar cost averaging in (assuming mean reversion in equities), in which case they end up with a larger portfolio at retirement.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
Topic Author
SantaClaraSurfer
Posts: 752
Joined: Tue Feb 19, 2019 10:09 am

Re: 100% Equities Challenge Scenario

Post by SantaClaraSurfer »

ScubaHogg wrote: Sun Mar 31, 2024 9:58 am I’d add that having mild and stable inflation implicitly “always” gives nominal bonds a portfolio advantage. That is, it’s just assuming away the risk of nominal bonds
The test scenario has annual inflation of 3.2% for 20 years. Are you calling that mild? (It's significantly higher than how expected inflation is being expressed in the current bond markets.)

How do you recommend calculating expected inflation, and where do you set it currently?

In contrast to undercounting the risk of bonds, the bond index fund in my scenario earns 1.2% real. That's .4% less than Ben Carlson finds the average real return for bonds in this well-documented post. Even with that disadvantage, rebalancing to bond index funds proves very helpful to the three fund investor in my scenario.

The advantages of inflation-linked bonds, like TIPS, which you don't mention, was one of my main takeaways from running this test.
User avatar
TimeIsYourFriend
Posts: 614
Joined: Sun Dec 17, 2023 11:19 am

Re: 100% Equities Challenge Scenario

Post by TimeIsYourFriend »

steve r wrote: Sun Mar 31, 2024 11:25 am
TimeIsYourFriend wrote: Sun Mar 31, 2024 9:49 am The 3-fund portfolio with nominal bonds looks really good from a tailwind of falling interest rates for decades. The paper in question doesn't mean you have to adopt 100% equities to get anything out of the conclusion. It could be that you exchange nominals for TIPS for example, although, not as optimal as 100% equities but that doesn't matter. What matters is gliding to a nominal bond heavy portfolio in retirement can get murdered with high inflation and the longer you hold it, the more likely that will happen.
This is probably true in theory and in the long run. This was NOT true in rising rate / inflationary 2022-2023. Intermediate term treasures did better than total bond and TIPs. (presumably because the real return portion of TIPs went from negative to positive 2 percentage points +/-).

Obviously there are other ways to hedge inflation. Own stuff (i.e. a home) or iBonds are two examples.
I don’t expect any portfolio hedges everything over a 2 year period.
"Time is your friend; impulse is your enemy." - John C. Bogle
Topic Author
SantaClaraSurfer
Posts: 752
Joined: Tue Feb 19, 2019 10:09 am

Re: 100% Equities Challenge Scenario

Post by SantaClaraSurfer »

aj76er wrote: Sun Mar 31, 2024 11:38 am It is well established that reducing volatility early in retirement lowers SORR. You aren’t adding any great epiphany there. However, it is disingenuous to ignore the accumulation phase in which volatility can actually help someone dollar cost averaging in (assuming mean reversion in equities), in which case they end up with a larger portfolio at retirement.
Argh, calling me disingenuous is pretty harsh, especially given the fact that I've linked to good sources from different perspectives throughout this discussion. My conclusions are modest, and I've spelled out my givens and invited feedback from the first post.

That's the opposite of disingenuous in my book.

I agree with you that holding diverse and low cost equity funds is an essential part of all phases of the retirement journey, from early accumulation well into retirement.

My post highlights the risks with holding 100% equities in the event of a market downturn at retirement. I also share some relevant alternatives for a 3-fund investor like committing to a long term TIPS holding in their asset allocation, and steady rebalancing between equities and bonds to hold an AA.

Investor 1 maintains a sizable allocation to equities into retirement (which my example, at 60/40, does) and that is a significant factor in their success.

While I agree with you that Sequence of Returns Risk is well known. The idea that a 100% equities investor should consider that risk carefully and map it against their own personal life situation, which is what I'm advocating for, is not a controversial position.

If someone reading this, instead of simply backtesting against the strong equity performance of the last decades, creates their own spreadsheet looking forward and perhaps challenging their assumptions about expected real equity returns, that's a good outcome.

Asking "what will I do if real returns don't match my expectations?" is a good exercise, not a trick.
WestCoastPhan
Posts: 431
Joined: Sun Apr 24, 2022 10:30 pm

Re: 100% Equities Challenge Scenario

Post by WestCoastPhan »

aj76er wrote: Sun Mar 31, 2024 11:28 am
David Jay wrote: Sat Mar 30, 2024 9:20 pm
cosmos wrote: Sat Mar 30, 2024 9:17 pm
aj76er wrote: Sat Mar 30, 2024 8:18 pm
What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating.
That is why I am going to move up to 200% equities.
300% equities means you have an even bigger starting portfolio. :wink:
Snarky comments aside, there actually is some theoretical evidence that mild leverage (e.g. 1.2x) early in one’s career can be optimal.

For many young professionals starting out that take on a big mortgage without much assets, they may actually be >100% equity.
Yep. I've been, on a net basis (after factoring in my mortgage), >100% equity for almost 30 years.
ScubaHogg
Posts: 3661
Joined: Sun Nov 06, 2011 2:02 pm

Re: 100% Equities Challenge Scenario

Post by ScubaHogg »

SantaClaraSurfer wrote: Sun Mar 31, 2024 11:49 am
ScubaHogg wrote: Sun Mar 31, 2024 9:58 am I’d add that having mild and stable inflation implicitly “always” gives nominal bonds a portfolio advantage. That is, it’s just assuming away the risk of nominal bonds
The test scenario has annual inflation of 3.2% for 20 years. Are you calling that mild? (It's significantly higher than how expected inflation is being expressed in the current bond markets.)
My back of the envelope calculation has that below what is has been for the past 40 years (3.6%), so there is that. There is also the fact that US inflation has been mild by worldwide standards, but there is no law of nature that says it must be so.

How do you recommend calculating expected inflation, and where do you set it currently?
A) I don’t think future inflation rates are knowable and I don’t think bond markets have any skill at predicting changes in inflation, And given the wild swings in inflation we’ve seen worldwide the past century, I think that is a reasonable opinion. Instead I think they are both unknown and unbounded. This thread covers some of the risks of that, as do some of William Bernstein’s writings. Indeed, if I didn’t think that then I would quickly reach the conclusion that one should hold SPIAs in place of nominal bonds, or at least in place of many of them

viewtopic.php?t=382830

B) if I insisted on modeling inflation I’d run several tests to see how fragile my outcomes are to what inflation actually does instead of a single test with very low (yes, 3.2% is very low)

The advantages of inflation-linked bonds, like TIPS, which you don't mention, was one of my main takeaways from running this test.
? I didn’t mention TIPS cause I was commenting on the inflation risk of nominal bonds. Why would I mention tips in such a post?
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
StillGoing
Posts: 378
Joined: Mon Nov 04, 2019 3:43 am
Location: U.K.

Re: 100% Equities Challenge Scenario

Post by StillGoing »

While the extensive lifecycle thread has been cited upthread, it might be worth noting that there are a very small number (*see below) of historical 40 year accumulation periods starting between about 1885 and 1905 where holding 100% stocks did not result in the largest portfolio at accumulation.

Using the Simba dataset (TSM and TBM), with 1 inflation-adjusted dollar invested at the start of each year, the accumulation period starting in 1902 is given for stock allocations of 0, 20, 40, 60, 80, and 100% (where appropriate, rebalanced each year).

Image

Interesting to note that there's not a lot of difference in the first twenty years (possibly because the amount saved was a significant fraction of the portfolio value), and that the run up that stocks enjoyed before the crash at the end of the 20s was wiped out by that crash.

The terminal values (in real $) were, for stock allocations of 0% to 100%: 78.5, 91.3, 101.4, 107.0, 106.9, and 100.6

i.e., the value peaked somewhere between a stock allocation of 60% and 80% (FWIW, redoing the analysis with finer steps in stock allocation indicated the peak lay close to 70%).

* The fraction of retirements where the 40 year terminal value was greater for a lower stock allocation than for an allocation of 100% was 0%, 0%, 1.8%, 3.6%, and 7.1% for allocations of 0%, 20%, 40%, 60%, and 80%, respectively. I should also point out that on the occasions where 100% allocation did not give the highest amount, the difference was not that great (about $6) compared to the 25th percentile, where 100% stocks beat 80% by $12, 60% by $30, and 40% by $48.

Of course, this is for domestic US stocks, adding international stocks may, or may not, have changed these results.

cheers
StillGoing
Last edited by StillGoing on Mon Apr 01, 2024 11:15 am, edited 1 time in total.
seajay
Posts: 1700
Joined: Sat May 01, 2021 3:26 pm
Contact:

Re: 100% Equities Challenge Scenario

Post by seajay »

aj76er wrote: Sun Mar 31, 2024 11:28 am
David Jay wrote: Sat Mar 30, 2024 9:20 pm
cosmos wrote: Sat Mar 30, 2024 9:17 pm
aj76er wrote: Sat Mar 30, 2024 8:18 pm
What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating.
That is why I am going to move up to 200% equities.
300% equities means you have an even bigger starting portfolio. :wink:
Snarky comments aside, there actually is some theoretical evidence that mild leverage (e.g. 1.2x) early in one’s career can be optimal.

For many young professionals starting out that take on a big mortgage without much assets, they may actually be >100% equity.
So if one starts with 1.2x in early accumulation years, ends deep into retirement leaving a 30/70 legacy (0.3x), time averaged 75/25 (0.75x). Or constant 75/25 may be more optimal than 100/0.
ScubaHogg
Posts: 3661
Joined: Sun Nov 06, 2011 2:02 pm

Re: 100% Equities Challenge Scenario

Post by ScubaHogg »

aj76er wrote: Sun Mar 31, 2024 11:28 am
David Jay wrote: Sat Mar 30, 2024 9:20 pm
cosmos wrote: Sat Mar 30, 2024 9:17 pm
aj76er wrote: Sat Mar 30, 2024 8:18 pm
What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating.
That is why I am going to move up to 200% equities.
300% equities means you have an even bigger starting portfolio. :wink:
Snarky comments aside, there actually is some theoretical evidence that mild leverage (e.g. 1.2x) early in one’s career can be optimal.

For many young professionals starting out that take on a big mortgage without much assets, they may actually be >100% equity.
There was even a whole book about it

https://www.amazon.com/Lifecycle-Invest ... B003GYEGK2
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
User avatar
David Jay
Posts: 14644
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: 100% Equities Challenge Scenario

Post by David Jay »

aj76er wrote: Sun Mar 31, 2024 11:28 am
David Jay wrote: Sat Mar 30, 2024 9:20 pm
cosmos wrote: Sat Mar 30, 2024 9:17 pm
aj76er wrote: Sat Mar 30, 2024 8:18 pm
What you are not taking into account is that the 100% equity investor is going to have a much larger starting portfolio after many decades of accumulating.
That is why I am going to move up to 200% equities.
300% equities means you have an even bigger starting portfolio. :wink:
Snarky comments aside, there actually is some theoretical evidence that mild leverage (e.g. 1.2x) early in one’s career can be optimal.

For many young professionals starting out that take on a big mortgage without much assets, they may actually be >100% equity.
I understand the math, but I come from the behavioral side. Holding margin through a severe downturn induces severe emotional trauma.

And please note the discussion is percentage of equities. Not a mortgage.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Catalina25
Posts: 20
Joined: Sat Mar 23, 2024 9:13 pm

Re: 100% Equities Challenge Scenario

Post by Catalina25 »

4nursebee wrote: Sun Mar 31, 2024 3:03 am I feel totally overwhelmed and stupid reading the above.
Uh...what he said.
SnowBog wrote: Sat Mar 30, 2024 10:20 pm And the "reality" is that we aren't robots, we aren't emotionless beings, if the financial markets are in chaos and it's unclear if the markets will return, it takes someone with nerves of steel...or one ignorant of the risk they carry.
Either/Or? I prefer a balanced approach of 60% nerves of steel and 40% ignorance.
EliteZags
Posts: 39
Joined: Wed Jan 08, 2014 6:44 pm

Re: 100% Equities Challenge Scenario

Post by EliteZags »

so basically if you assume having to retire within 10 years then having 2 major historic level market crashes within the first few years of retirement, then it makes sense to have bonds

ok cool


the rest of us will be over here building wealth
lostdog
Posts: 5380
Joined: Thu Feb 04, 2016 1:15 pm

Re: 100% Equities Challenge Scenario

Post by lostdog »

75/25 for the win...
World Stocks(VT)-70% || World Bonds(BNDW)-30%
Topic Author
SantaClaraSurfer
Posts: 752
Joined: Tue Feb 19, 2019 10:09 am

Re: 100% Equities Challenge Scenario

Post by SantaClaraSurfer »

EliteZags wrote: Mon Apr 01, 2024 4:01 pm so basically if you assume having to retire within 10 years then having 2 major historic level market crashes within the first few years of retirement, then it makes sense to have bonds

ok cool


the rest of us will be over here building wealth
Actually, those aren't the conclusions that I drew. Here's two:
  • Inflation-protected bonds like TIPS or I Bonds, are a worthwhile long term asset allocation in retirement, especially when they offer a real return in addition to the inflation component. I think this is worth thinking about. The TIPS performance was stronger than I expected.
  • Following a strict rebalancing in an equity-heavy allocation, in my example holding to 75/25 versus letting the equities run, offered real protection in a downturn while still offering the upside of equity growth.
I've been transparent about my overall equity allocation, which is now at 73% (down from around 80% when I first joined here.)

So, like most Bogleheads on the forum, I've been building wealth at the market rate. I also wouldn't ever say that there's an us versus them mindset in terms of retirement savings goals; we're all in the same Boglehead boat.

In my time here I've learned that this forum is a valuable place with thousands of intelligent and experienced participants whom I find worthy of respect, whether I agree with them or not.
abc132
Posts: 2497
Joined: Thu Oct 18, 2018 1:11 am

Re: 100% Equities Challenge Scenario

Post by abc132 »

StillGoing wrote: Mon Apr 01, 2024 4:20 am While the extensive lifecycle thread has been cited upthread, it might be worth noting that there are a very small number (*see below) of historical 40 year accumulation periods starting between about 1885 and 1905 where holding 100% stocks did not result in the largest portfolio at accumulation.

Using the Simba dataset (TSM and TBM), with 1 inflation-adjusted dollar invested at the start of each year, the accumulation period starting in 1902 is given for stock allocations of 0, 20, 40, 60, 80, and 100% (where appropriate, rebalanced each year).

Image

Interesting to note that there's not a lot of difference in the first twenty years (possibly because the amount saved was a significant fraction of the portfolio value), and that the run up that stocks enjoyed before the crash at the end of the 20s was wiped out by that crash.

The terminal values (in real $) were, for stock allocations of 0% to 100%: 78.5, 91.3, 101.4, 107.0, 106.9, and 100.6

i.e., the value peaked somewhere between a stock allocation of 60% and 80% (FWIW, redoing the analysis with finer steps in stock allocation indicated the peak lay close to 70%).

* The fraction of retirements where the 40 year terminal value was greater for a lower stock allocation than for an allocation of 100% was 0%, 0%, 1.8%, 3.6%, and 7.1% for allocations of 0%, 20%, 40%, 60%, and 80%, respectively. I should also point out that on the occasions where 100% allocation did not give the highest amount, the difference was not that great (about $6) compared to the 25th percentile, where 100% stocks beat 80% by $12, 60% by $30, and 40% by $48.

Of course, this is for domestic US stocks, adding international stocks may, or may not, have changed these results.

cheers
StillGoing
The worst decumulation sequences are typically some of the best accumulation sequences. The worst accumulation sequences typically have great returns in decumulation. This is what my backtesting shows - in the rare case accumulation is worse you still tend to get rewarded in decumulation.

The best odds tend to be stock heavy accumulation and risk reduction for decumulation. You simply don't know ahead of time if you are a good or bad accumulation sequence so taking the 3.6% chance of outperformance with 60/40 and 96.4% chance of underperformance is typically an increase in your personal risk.

When you include accumulation and decumulation there is not a great risk based argument for something like 60/40 in accumulation. Of course we can take on more risk for behavioral reasons but the 60/40 crowd may be taking more risk than the 80/20 crowd.
User avatar
steve r
Posts: 1310
Joined: Mon Feb 13, 2012 7:34 pm
Location: Connecticut

Re: 100% Equities Challenge Scenario

Post by steve r »

TimeIsYourFriend wrote: Sun Mar 31, 2024 12:39 pm
steve r wrote: Sun Mar 31, 2024 11:25 am
TimeIsYourFriend wrote: Sun Mar 31, 2024 9:49 am The 3-fund portfolio with nominal bonds looks really good from a tailwind of falling interest rates for decades. The paper in question doesn't mean you have to adopt 100% equities to get anything out of the conclusion. It could be that you exchange nominals for TIPS for example, although, not as optimal as 100% equities but that doesn't matter. What matters is gliding to a nominal bond heavy portfolio in retirement can get murdered with high inflation and the longer you hold it, the more likely that will happen.
This is probably true in theory and in the long run. This was NOT true in rising rate / inflationary 2022-2023. Intermediate term treasures did better than total bond and TIPs. (presumably because the real return portion of TIPs went from negative to positive 2 percentage points +/-).

Obviously there are other ways to hedge inflation. Own stuff (i.e. a home) or iBonds are two examples.
I don’t expect any portfolio hedges everything over a 2 year period.
Good point. However, it is the only inflationary period where we could observe how TIPs performed. So, I guess it depends on how much faith you place on their performance during inflation matching one's expectations. I would expect they do well in such a protracted scenario.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
Catalina25
Posts: 20
Joined: Sat Mar 23, 2024 9:13 pm

Re: 100% Equities Challenge Scenario

Post by Catalina25 »

SantaClaraSurfer wrote: Sun Mar 31, 2024 10:11 am The alternative, staying the course and gritting it out with 100% stocks, may actually have paid off in the past per the research, but that's asking a great deal of patience from, as you put it, "the average schmo."
Last Friday, I finally forced myself to throttle back my portfolio from 100% equities, which I'd been riding for quite a long time, to what I've come to realize is a more rational, diverse investment appproach now that I'm retired (actually just over two years ago at 59). Not gonna lie, the last 15 years were quite a ride with the S&P rocking nominal total returns over 15%, and it was with great angst that I reallocated down to my now 75/25 portflio. I rode 100% equities over the last few decades as my fear of not accumulating enough greatly exceeded my concern over normal market fluctuations/corrections.

I'm not sure if I can get down to the prevailing wisdom of the 60/40 portolio as I like having a bit of growth still as a hedge against inflation, but who knows, maybe if a drink more of the Kool-Aid I will get there.

And a shout out to the people of this forum for helping me see the light!
Post Reply