rrosenkoetter wrote:And it's very hard to save enough to retire just using Treasury bonds and TIPs.
Statistically, stocks may not return much more than that over an individual investors' retirement-savings period. The great thing about stocks versus bonds is that historically the distribution of outcomes over long holding periods has been almost all upside. But the thing stock enthusiasts continually miss is that the lower end of that distribution is about the same as bonds. Not just the worst-case scenario, but the lower tenth percentile or something like that.
What this means is that you need to save about the same amount no matter what your asset allocation is. You cannot use the fact that you're investing in stocks to justify a lower savings rate. What I find inexcusable about the mainstream advisory wisdom is that they are constantly saying that, or are being misunderstood as having said that. Is this a straw man? Consider this direct quotation from a pair of credentialed idiots: "A smarter allocation can improve your nest egg by 50%. That's a lot easier than increasing your savings by 50%."
I really feel that the asset allocation choice is best formulated in this way:
1) You must save enough to fund your retirement "needs," however that is defined.
2) The amount you need to save is the same no matter what your asset allocation is. To say "it's very hard to save enough to retire just using Treasury bonds and TIPs" is just to say that it's very hard to save enough. If you aren't saving enough to retire just using Treasury bonds and TIPs, you aren't saving enough if you add stocks. You're counting on luck, and luck is not a strategy.
3) Because in the past adding stocks almost never impaired final outcomes much, and often improved them a lot, everyone should hold some stocks.
4) Everyone has a limited risk tolerance, and it is usually lower than people think. When one's risk tolerance is exceeded, one does foolish things that really do impair your final outcome. Therefore, one should not add more stocks than one's risk tolerance allows.
5) The above imply that savings rate is determined by financial considerations alone, independent of allocation choice; and that allocation choice is determined by risk tolerance alone, independent of financial situations. Notice that this is exactly what Adrian Nenu used to post in his rule of thumb, "Equity allocation = twice maximum tolerable risk, but never more than 50%." Incidentally, Charles Jaffe had a throwaway in one of his columns, and I'd love to know the source. He said that a study showed that the average investor sold when his total portfolio had dropped by about 20%. That would imply that stock allocation should not exceed about 40%.
Any way we can get this set out as a 'greatest post of all time on Bogleheads?'