When 60/40 just isn't appropriate

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Tamales
Posts: 1644
Joined: Sat Jul 05, 2014 10:47 am

Re: When 60/40 just isn't appropriate

Post by Tamales »

1210sda wrote: Could you please explain the meaning and significance of "maximum draw down".
1210
A picture would probably make it clear. It's the % drop from the highest level before the decline to the bottom of the decline (the region highlighted in light orange in the picture of the 70% stock, 30% bond portoflio). Psychologically, that's the loss most investors would perceive since most of us base losses from what we once had. The "recovery time" is the time it takes to reach "break even" for the first time relative to this former level. Note that a little later it again dipped below this, and it wasn't until 2012 that it stayed above that level for good. So this bull run by one measure has only been going on for about 3 years, not 6.

Image
z3r0c00l
Posts: 3790
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC

Re: When 60/40 just isn't appropriate

Post by z3r0c00l »

Garco wrote:@Nisiprius. Could it be that people find 60/40 attractive for some mystical reason? It's very close to the "golden ratio" -- https://en.wikipedia.org/wiki/Golden_ratio.

I have sometimes gravitated toward something like that in asset allocations of different types, e.g., between growth vs. value in my mid-cap stocks. Some secret force is at work. This ratio feeeels right.
You know I do see this in myself, seeing percentages starting with an even number much more comforting. 70/30 and 50/50 just look ugly compared to 80/20 or 60/40. 55/45 looks the worst!
70% Global Stocks / 30% Bonds
randomguy
Posts: 11285
Joined: Wed Sep 17, 2014 9:00 am

Re: When 60/40 just isn't appropriate

Post by randomguy »

novicemoney wrote: I thought this too, but for us all the calculators validate a 30/70 AA at 95 to 100% success rate. Even if we use a conservative return rate of 3%. I am strictly an amateur in all this, but it seems that your retirement spending projections and SWR seem to be the bigger factors.
AA pretty much doesn't matter for 30 year retirements and 4% SWR unless you are going 100% one way or the other. Stocks and bonds performed about the same during the rate limiting years of 1966-1981. The difference is in the amount of money left over at the end. For example firecalc gives 30% stocks gives 663k at the end of 30 years while 60% stocks leaves 1.4 million on average. If having 2x as much money worth dealing with the variance along the way? Depends on your priorities.
bhsince87
Posts: 2914
Joined: Thu Oct 03, 2013 1:08 pm

Re: When 60/40 just isn't appropriate

Post by bhsince87 »

scone wrote:I think the 30/70 portfolio, with a 2.5% withdrawal rate, will go through hell and high water. It even does pretty well when interest rates are rising, as long as inflation isn't too bad. And of course, today one can use TIPS to help with inflation. For me, it's so much simpler to save more now, so that 2.5% is a good-sized sum, than to increase the stock portion and stress out about the markets. It's just not worth it to me.
100% bonds will give you 40 years, guaranteed, at a 2.5% withdrawal rate. Use TIPS, and you've got inflation protection too.
Time is what we want most, but what we use worst. William Penn
Derek Tinnin
Posts: 864
Joined: Tue Jan 08, 2008 6:16 pm
Location: cincinnati, oh

Re: When 60/40 just isn't appropriate

Post by Derek Tinnin »

randomguy wrote:
novicemoney wrote: I thought this too, but for us all the calculators validate a 30/70 AA at 95 to 100% success rate. Even if we use a conservative return rate of 3%. I am strictly an amateur in all this, but it seems that your retirement spending projections and SWR seem to be the bigger factors.
AA pretty much doesn't matter for 30 year retirements and 4% SWR unless you are going 100% one way or the other. Stocks and bonds performed about the same during the rate limiting years of 1966-1981. The difference is in the amount of money left over at the end. For example firecalc gives 30% stocks gives 663k at the end of 30 years while 60% stocks leaves 1.4 million on average. If having 2x as much money worth dealing with the variance along the way? Depends on your priorities.
Define "about the same"

1966-1981 annualized
HmL/Value +4.81
SmB/Size +5.42
5 Yr. Treasuries +5.76
Long-Term Gov Bonds +2.53
Beta/TSM -0.28
randomguy
Posts: 11285
Joined: Wed Sep 17, 2014 9:00 am

Re: When 60/40 just isn't appropriate

Post by randomguy »

Derek Tinnin wrote:
randomguy wrote:
novicemoney wrote: I thought this too, but for us all the calculators validate a 30/70 AA at 95 to 100% success rate. Even if we use a conservative return rate of 3%. I am strictly an amateur in all this, but it seems that your retirement spending projections and SWR seem to be the bigger factors.
AA pretty much doesn't matter for 30 year retirements and 4% SWR unless you are going 100% one way or the other. Stocks and bonds performed about the same during the rate limiting years of 1966-1981. The difference is in the amount of money left over at the end. For example firecalc gives 30% stocks gives 663k at the end of 30 years while 60% stocks leaves 1.4 million on average. If having 2x as much money worth dealing with the variance along the way? Depends on your priorities.
Define "about the same"

1966-1981 annualized
HmL/Value +4.81
SmB/Size +5.42
5 Yr. Treasuries +5.76
Long-Term Gov Bonds +2.53
Beta/TSM -0.28
The comparison is always with the S&P 500 in these studies which was about a -1% real. Bonds are trickier as it depends on what exactly you look at people use different values. Real return for long bonds was about -3.4% but if you had a blended profile similiar to total bond, your end up more like 0% real depending on your exact assumptions. If you were tilting in 1966 heavily towards international, value, and small, you did a heck of a lot better than the S&P 500 investor and you will find your AA matters more.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: When 60/40 just isn't appropriate

Post by nedsaid »

stemikger wrote:I recently saw an interview on You Tube where John Bogle said he is increasingly nervous about Target Retirement Funds because they don't take social security into consideration. I know the Target Retirement Income Fund ultimately glides to 30/70 AA stocks/bonds. Isn't this too conservative if you include social security? Also, we are living longer and many would like to leave some money behind for family or charities. If that is one's way of thinking does 60/40 or 50/50 have a place for a permanent AA until death?
This shows that even Mr. Bogle seems to be a bit contradictory at times (don't we all?). It is interesting that Mr. "Age in Bonds" suggests that many retirees' asset allocation might be too conservative when taking into account Social Security. I saw an interview where he suggested that when taking into account Social Security that a 65% stocks/35% bonds portfolio might be appropriate for investors. I am not too far from that now.
A fool and his money are good for business.
Derek Tinnin
Posts: 864
Joined: Tue Jan 08, 2008 6:16 pm
Location: cincinnati, oh

Re: When 60/40 just isn't appropriate

Post by Derek Tinnin »

randomguy wrote:
Derek Tinnin wrote:
randomguy wrote:
novicemoney wrote: I thought this too, but for us all the calculators validate a 30/70 AA at 95 to 100% success rate. Even if we use a conservative return rate of 3%. I am strictly an amateur in all this, but it seems that your retirement spending projections and SWR seem to be the bigger factors.
AA pretty much doesn't matter for 30 year retirements and 4% SWR unless you are going 100% one way or the other. Stocks and bonds performed about the same during the rate limiting years of 1966-1981. The difference is in the amount of money left over at the end. For example firecalc gives 30% stocks gives 663k at the end of 30 years while 60% stocks leaves 1.4 million on average. If having 2x as much money worth dealing with the variance along the way? Depends on your priorities.
Define "about the same"

1966-1981 annualized
HmL/Value +4.81
SmB/Size +5.42
5 Yr. Treasuries +5.76
Long-Term Gov Bonds +2.53
Beta/TSM -0.28
The comparison is always with the S&P 500 in these studies which was about a -1% real. Bonds are trickier as it depends on what exactly you look at people use different values. Real return for long bonds was about -3.4% but if you had a blended profile similiar to total bond, your end up more like 0% real depending on your exact assumptions. If you were tilting in 1966 heavily towards international, value, and small, you did a heck of a lot better than the S&P 500 investor and you will find your AA matters more.
Oh I know this quite well...I have the data. Just making sure we don't make broad assumptions, which includes standard rule of thumb stock/bond mixes.

Best,
DT
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: When 60/40 just isn't appropriate

Post by Browser »

The Kitces/Pfau theory of increasing equity allocation in retirement is the functional equivalent of the "bonds first" withdrawal strategy, which is a kind of two-bucket approach. If you start with, say, 70% in bonds and take your income withdrawals from the bond portion, while leaving the stock portion alone, you slowly whittle away bonds first until you are left with all stocks. I can see the logic of it, in the sense that you thereby maximize the opportunity to grow your equity investment. However, your portfolio gradually becomes more and more volatile (in percentage terms); although since it shrinks over time from withdrawals, the drawdown risk in dollars is more stable. Of course, the problem is that most 85-year olds are going to have more trouble sleeping with stock-heavy portfolios so nobody will actually do this. However, if you have a strong bequest motive and enough safe income to sleep at night then it makes more sense.

What makes the most sense to me is to keep your stock allocation constant in retirement; at least as long as you can stick with that fixed allocation (e.g., 30%). Results such as Otar's, which show 30% is optimal over backcasted "bad case" scenarios are predicated on the notion of having a fixed 30% allocation. If you were to systematically decrease that allocation with age, then the results would be different.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: When 60/40 just isn't appropriate

Post by nedsaid »

nisiprius wrote:
alpenglow wrote:Nisi,

Thanks for sharing your research. I've always been on the conservative side, particularly for a younger accumulator. What did you find to be optimum for large caps and intermediate term bonds? Thanks!
The list of caveats on this stuff is so long I don't really want to post details. Everything depends on endpoints, those silly MPT curves writhe around like worms when you change the endpoints. It's also sensitive to the assumed return of the riskless asset. I'm not totally clear on the relationships between the SBBI "long-term government bond," "long-term corporate bond," and "intermediate-term government bond" series data, and what you would see in real life in a mutual fund.

I'm interested in it intellectually because it is the supposed underpinning for so many things.

I just want to know "what is the supposed rationale for 60/40? Did someone calculate some numbers once, or is it just a meaningless tradition--someone pulled it out of the air and said 'sounds about right to me?'"
I am suspicious that the history of the 60/40 ratio goes something like this. A bright and very respected pension fund manager did a study of what allocation of stocks and bonds would best balance risk versus reward. He probably found what Nisiprius discovered, that financial data moves all over the place. For example, an efficient frontier changes drastically depending on the beginning and ending points. He probably poured over whatever data was available at the time, threw up his hands, and picked what looked like a nice round number. His 60/40 formula probably made it into a trade magazine. Of course if you are on the cutting edge and don't want to be out of date, you do whatever the trade magazine tells you to do. So probably the 60/40 got adopted by enough pension fund managers that it became the standard. After a while, the standard gets to be like holy writ which doesn't get challenged. My gosh, if it is in the trade magazines, then it must be true!! Over the years, it worked pretty good and pension funds and Wall Street further reinforced their commitment to this standard.

I don't really know the history of the 60/40 ratio, but knowing what I know about human nature, my "Nedsaid" version of history is probably closer to the truth than what is admitted. Somebody came up with the number, it seemed to work pretty good, and pension fund managers stuck with it.
A fool and his money are good for business.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: When 60/40 just isn't appropriate

Post by Browser »

Here's one answer. The 60/40 rule was the best risk-adjusted allocation until the mid-1960s. Don't have the data to see if it actually was.
Derek Sasveld, a senior consultant with Chicago's Ibbotson Associates, says the theoretical justification for the 60-40 mix came in the mid-1960s. At that time, there was keen interest among some institutional investors in building portfolios that produced good risk-adjusted returns. To find the right mix, they looked at the past 40 years of U.S. stock and bond returns.

"That 60-40 portfolio from 1926 through 1965 was terrific," Mr. Sasveld notes. "The correlation between stocks and bonds at that point was virtually zero."
http://www.wsj.com/articles/SB8822240102879000

Here's another answer:
The theoretical framework for building a diversified portfolio dates back to the work of Markowitz in the 1950’s (and later, Sharpe). Markowitz used the classical market-capitalization-weighted portfolio. 60/40 was the global universe of investable markets.
https://dougcronk.wordpress.com/2010/09 ... asset-mix/
Last edited by Browser on Sun Feb 08, 2015 4:03 pm, edited 1 time in total.
We don't know where we are, or where we're going -- but we're making good time.
scone
Posts: 1457
Joined: Wed Jul 11, 2012 4:46 pm

Re: When 60/40 just isn't appropriate

Post by scone »

bhsince87 wrote:
scone wrote:I think the 30/70 portfolio, with a 2.5% withdrawal rate, will go through hell and high water. It even does pretty well when interest rates are rising, as long as inflation isn't too bad. And of course, today one can use TIPS to help with inflation. For me, it's so much simpler to save more now, so that 2.5% is a good-sized sum, than to increase the stock portion and stress out about the markets. It's just not worth it to me.
100% bonds will give you 40 years, guaranteed, at a 2.5% withdrawal rate. Use TIPS, and you've got inflation protection too.
Well, I don't know about guaranteed. I'm younger than my DH, so I might need more than 40 years. And TIPS don't protect your whole portfolio unless it's all TIPS, which isn't likely if your RMDs are more than you spend, so you accumulate a taxable portfolio. (Let's not forget that TIPS have never been tested in a long running inflationary environment.)

Dr. Bernstein had an efficient frontier chart that strongly suggested that a small allocation to stocks is safer, as in a lower drawdown, than an all bond portfolio. I've found that to be true in backtesting, FWIW. Unfortunately I can't remember the title of the article. In any case, 100% of any one asset class strikes me as undiversified, and I just wouldn't want to go there.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
User avatar
DG99999
Posts: 206
Joined: Fri May 30, 2014 12:30 pm

Re: When 60/40 just isn't appropriate

Post by DG99999 »

I did a number of runs of Firecalc using the default settings (exception being expenses adjusted to 0.22%) for 20 to 40 years of retirement to determine the Safe Withdrawal Rates for various allocations. Specifically comparing a 60/40 portfolio to a 35/65 portfolio the results from this particular tool gave deltas in SWR approximately as follows for the 35/65 portfolio (vs the 60/40):

20 years = +0.19%
25 years = +0.12%
30 years = +0.06%
35 years = -0.08%
40 years = -0.2%

The smallest terminal values for all calculations were positive and approximately zero (i.e. = SWR).
The average terminal values were 1.55X to 1.85X for the 60/40 portfolio compared to the 35/65 portfolio(1.1 to 2.3 times initial value vs. 0.74 to 1.2 times initial value).
The largest terminal values were 1.32X to 1.64X for the 60/40 portfolio compared to the 35/65 portfolio (3 to 9 times initial value vs. 2 to 5 times initial value).

This ONE example suggested to me that the SWR improvement was quite modest for retirement periods of 30 years or less (and did not exist for long periods), but that terminal value might be an important consideration for some individuals - with the 60/40 portfolio always superior for average and maximum value.

Inclusion of the data for 75/25 and 50/50 portfolios resulted in the same general trend for SWR and terminal values (for a given time period Avg/Max were always greater with more stocks)

I also did some runs for a stock portfolio which included about 33% small caps using the tool (this works over a different/shorter time period) and came up with similar results for the SWR (did not record terminal values, but rechecking a couple points the trend looks similar for those also).
I am not a financial professional. My posts are only my opinion on the topic. You need to do your own due diligence and consult with a professional when addressing your financial questions.
bhsince87
Posts: 2914
Joined: Thu Oct 03, 2013 1:08 pm

Re: When 60/40 just isn't appropriate

Post by bhsince87 »

scone wrote:
bhsince87 wrote:
scone wrote:I think the 30/70 portfolio, with a 2.5% withdrawal rate, will go through hell and high water. It even does pretty well when interest rates are rising, as long as inflation isn't too bad. And of course, today one can use TIPS to help with inflation. For me, it's so much simpler to save more now, so that 2.5% is a good-sized sum, than to increase the stock portion and stress out about the markets. It's just not worth it to me.
100% bonds will give you 40 years, guaranteed, at a 2.5% withdrawal rate. Use TIPS, and you've got inflation protection too.
Well, I don't know about guaranteed. I'm younger than my DH, so I might need more than 40 years. And TIPS don't protect your whole portfolio unless it's all TIPS, which isn't likely if your RMDs are more than you spend, so you accumulate a taxable portfolio. (Let's not forget that TIPS have never been tested in a long running inflationary environment.)

Dr. Bernstein had an efficient frontier chart that strongly suggested that a small allocation to stocks is safer, as in a lower drawdown, than an all bond portfolio. I've found that to be true in backtesting, FWIW. Unfortunately I can't remember the title of the article. In any case, 100% of any one asset class strikes me as undiversified, and I just wouldn't want to go there.
Just to be clear, I'm not advocating 100% of anything.

I was just pointing out the mathematical reality.

Take, say, $25,000 annually from $1,000,000, and it will last for 40 years. Just math.
Time is what we want most, but what we use worst. William Penn
Grt2bOutdoors
Posts: 25617
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: When 60/40 just isn't appropriate

Post by Grt2bOutdoors »

bhsince87 wrote:
scone wrote:
bhsince87 wrote:
scone wrote:I think the 30/70 portfolio, with a 2.5% withdrawal rate, will go through hell and high water. It even does pretty well when interest rates are rising, as long as inflation isn't too bad. And of course, today one can use TIPS to help with inflation. For me, it's so much simpler to save more now, so that 2.5% is a good-sized sum, than to increase the stock portion and stress out about the markets. It's just not worth it to me.
100% bonds will give you 40 years, guaranteed, at a 2.5% withdrawal rate. Use TIPS, and you've got inflation protection too.
Well, I don't know about guaranteed. I'm younger than my DH, so I might need more than 40 years. And TIPS don't protect your whole portfolio unless it's all TIPS, which isn't likely if your RMDs are more than you spend, so you accumulate a taxable portfolio. (Let's not forget that TIPS have never been tested in a long running inflationary environment.)

Dr. Bernstein had an efficient frontier chart that strongly suggested that a small allocation to stocks is safer, as in a lower drawdown, than an all bond portfolio. I've found that to be true in backtesting, FWIW. Unfortunately I can't remember the title of the article. In any case, 100% of any one asset class strikes me as undiversified, and I just wouldn't want to go there.
Just to be clear, I'm not advocating 100% of anything.

I was just pointing out the mathematical reality.

Take, say, $25,000 annually from $1,000,000, and it will last for 40 years. Just math.
True, but most folks don't hold $1,000,000 in cash, instead they are holding a basket of securities whose prices fluctuate, sometimes dramatically so. The variable percentage withdrawal might come in handy if holding such a portfolio - draw more when returns are high, draw less when returns are muted or negative. I once made the mistake of asking a colleague how to accumulate a million dollar retirement portfolio, the response was to save either $25K annually over a 40 year career and leave it in a savings account or to accumulate $40K annually over a 25 year career. As you say, simple math. Of course, holding cash only will expose the person to other sorts of risks as we all know. Such is life.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
scone
Posts: 1457
Joined: Wed Jul 11, 2012 4:46 pm

Re: When 60/40 just isn't appropriate

Post by scone »

^^ Yes, I'm aware of the math, but since the problem isn't that simple, it doesn't solve anything that I need to solve. If you can tell me the monthly CPI for the next half century, that would be helpful. Also whether SS will keep paying at the rate we currently expect. And a heads up on future tax regs... :D
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: When 60/40 just isn't appropriate

Post by Leeraar »

bhsince87 wrote:Just to be clear, I'm not advocating 100% of anything.

I was just pointing out the mathematical reality.

Take, say, $25,000 annually from $1,000,000, and it will last for 40 years. Just math.
Why do that? At age 60, plunk down $428,000 in an SPIA, and it will pay $25,000 (5.84%) forever.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: When 60/40 just isn't appropriate

Post by Leeraar »

scone wrote:^^ Yes, I'm aware of the math, but since the problem isn't that simple, it doesn't solve anything that I need to solve. If you can tell me the monthly CPI for the next half century, that would be helpful. Also whether SS will keep paying at the rate we currently expect. And a heads up on future tax regs... :D
Knowing your date of demise would be the greatest simplification ...

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
scone
Posts: 1457
Joined: Wed Jul 11, 2012 4:46 pm

Re: When 60/40 just isn't appropriate

Post by scone »

Leeraar wrote:
scone wrote:^^ Yes, I'm aware of the math, but since the problem isn't that simple, it doesn't solve anything that I need to solve. If you can tell me the monthly CPI for the next half century, that would be helpful. Also whether SS will keep paying at the rate we currently expect. And a heads up on future tax regs... :D
Knowing your date of demise would be the greatest simplification ...

L.
Just tell me where I will die, and I'll never go there.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
bhsince87
Posts: 2914
Joined: Thu Oct 03, 2013 1:08 pm

Re: When 60/40 just isn't appropriate

Post by bhsince87 »

Leeraar wrote:
bhsince87 wrote:Just to be clear, I'm not advocating 100% of anything.

I was just pointing out the mathematical reality.

Take, say, $25,000 annually from $1,000,000, and it will last for 40 years. Just math.
Why do that? At age 60, plunk down $428,000 in an SPIA, and it will pay $25,000 (5.84%) forever.

L.
Yes, I agree. I am a fan of the SPIA, and I even started to mention that is the route I'd go with a portion of my funds. IMO, 2.5% is way too conservative (assuming no legacy is desired).

But I deleted that. I didn't want to take this thread any further away from the topic at hand.

But now that you mention it..... :)

I find many of these allocation studies to be a bit like navel gazing. Most of them ignore annuities, Social Security and pensions, reverse mortgages, etc.

I realize that not everyone qualifies for Social Security or a pension, but anyone with a portfolio of stocks and bonds can buy an annuity. Yes, they aren't "risk free", but neither are stocks and many bonds.
Time is what we want most, but what we use worst. William Penn
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: When 60/40 just isn't appropriate

Post by Leeraar »

bhsince87 wrote:
Leeraar wrote:
bhsince87 wrote:Just to be clear, I'm not advocating 100% of anything.

I was just pointing out the mathematical reality.

Take, say, $25,000 annually from $1,000,000, and it will last for 40 years. Just math.
Why do that? At age 60, plunk down $428,000 in an SPIA, and it will pay $25,000 (5.84%) forever.

L.
Yes, I agree. I am a fan of the SPIA, and I even started to mention that is the route I'd go with a portion of my funds. IMO, 2.5% is way too conservative (assuming no legacy is desired).

But I deleted that. I didn't want to take this thread any further away from the topic at hand.

But now that you mention it..... :)

I find many of these allocation studies to be a bit like navel gazing. Most of them ignore annuities, Social Security and pensions, reverse mortgages, etc.

I realize that not everyone qualifies for Social Security or a pension, but anyone with a portfolio of stocks and bonds can buy an annuity. Yes, they aren't "risk free", but neither are stocks and many bonds.
That is more or less what I said upthread: viewtopic.php?p=2366931#p2366931

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
User avatar
nisiprius
Advisory Board
Posts: 52105
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: When 60/40 just isn't appropriate

Post by nisiprius »

I like nedsaid's speculation, above. Essentially, that someone pulled a sensible round number out of the air and it become amplified by repeated passage through "authorities" repeating each other. I'd love to see it proved, though.
Browser wrote:"That 60-40 portfolio from 1926 through 1965 was terrific," Mr. Sasveld notes. "The correlation between stocks and bonds at that point was virtually zero."
http://www.wsj.com/articles/SB8822240102879000
Great find.

Except I ain't reproducing those results. Now my calculations, I have to keep saying this, could be off. And I also have to say this, this is just playing with numbers, I don't believe any of it much, don't take this as actionable information.

It's a real pity he does not say what data they were using--specifically what he means by "bonds" and whether or not he was including inflation. But since he's from Ibbotson, it seems likely that he is using the Ibbotson SBBI data which is nice because that's what I have.

There are three possible choices that could have been made for "bonds."

So I'm running through all three possible choices, with and without inflation correction.

1926-1965, stocks and "bonds," any of the three Ibbotson "bond" series.
Low correlation, YES.
60/40 optimum, NO.

Stocks = Ibbotson SBBI large-company stocks (S&P 500 and antecedents)
LT Corp = Ibbotson SBBI long-term corporate bonds
LT Gov = Ibbotson SBBI long-term government bonds
IT Gov = Ibbotson SBBI intermediate-term government bonds
Inflation = BLS series, December-December, cpiai.txt

1926-1965.

1) Without inflation correction.
Stocks and LT Corp: ρ = 0.05, optimum 13/87
Stocks and LT Gov: ρ = 0.03, optimum 24/76
Stocks and IT Gov: ρ = 0.15, optimum 12/88

2) With inflation correction.
Stocks and LT Corp: ρ = 0.11, optimum 33/67
Stocks and LT Gov: ρ = 0.06, optimum 46/54
Stocks and IT Gov: ρ = 0.00, optimum 36/64

Notice that there is not a single one that shows an optimum allocation of over 50% stocks, and that most of them are far lower. Here's the chart for the pair with the highest stock allocation: Stocks and long-term government bonds, 1926-1965, inflation corrected.

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: When 60/40 just isn't appropriate

Post by Browser »

Here I thought we had the answer and Nisiprius had to spoil it. :(
We don't know where we are, or where we're going -- but we're making good time.
Levett
Posts: 4177
Joined: Fri Feb 23, 2007 1:10 pm
Location: upper Midwest

Re: When 60/40 just isn't appropriate

Post by Levett »

John Bogle's take on "the policy portfolio":

http://www.vanguard.com/bogle_site/sp20030605.html

Lev
sls239
Posts: 1207
Joined: Thu Oct 23, 2008 4:04 pm

Re: When 60/40 just isn't appropriate

Post by sls239 »

All theory aside -

Doesn't this come down to approximately spending 40 years at 70/30 pinning your hopes on the stock market and then spending the next 30 years at 30/70 pinning your hopes on the bond market?

But approximately, if instead of 3/7ths of your years being dominated by the bond market, why not just 3/7ths of your portfolio for all years?

And 3/7ths is 43%.

So is it possible that is the origin of 60/40?
Derek Tinnin
Posts: 864
Joined: Tue Jan 08, 2008 6:16 pm
Location: cincinnati, oh

Re: When 60/40 just isn't appropriate

Post by Derek Tinnin »

sls239 wrote:All theory aside -

Doesn't this come down to approximately spending 40 years at 70/30 pinning your hopes on the stock market and then spending the next 30 years at 30/70 pinning your hopes on the bond market?

But approximately, if instead of 3/7ths of your years being dominated by the bond market, why not just 3/7ths of your portfolio for all years?

And 3/7ths is 43%.

So is it possible that is the origin of 60/40?
30% is 30%
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: When 60/40 just isn't appropriate

Post by Browser »

Levett wrote:John Bogle's take on "the policy portfolio":

http://www.vanguard.com/bogle_site/sp20030605.html

Lev
Thanks for that link to Bogle's views -- very thought-provoking piece.
We don't know where we are, or where we're going -- but we're making good time.
toddanderson
Posts: 24
Joined: Wed Oct 22, 2014 2:47 pm

Re: When 60/40 just isn't appropriate

Post by toddanderson »

How do people calculate draw down ? from the chart here 100% stocks max draw down 517days, but when i just look at a chart in google finance
on the total market or s&p500 It did not break even until 2013

http://i1180.photobucket.com/albums/x41 ... dalfw7.jpg
Tamales wrote:There are a lot of different ways to read the tea leaves on this, but here's some data (with all the standard caveats) on the range of 100% to 0% total stock and total bond, from just before the '08 crash to today.

While we normally think about the percent maximum drawdown as indicating pain, look at the duration of that drawdown for the longevity of the pain (last 3 rows in the table). It holds pretty steady from 100% stocks down to 40% stocks but really drops off in going from 40% stocks to 30% stocks in this case. Also note the annualized return barely moves from 100% stocks down to 60% stocks, but both the max drawdown percent and the standard deviation both fell by 30+ percent over the same range.
Sharpe ratio gives little guidance since it is increasing all the way through 90% bonds.

Image
User avatar
stemikger
Posts: 4950
Joined: Thu Apr 08, 2010 5:02 am

Re: When 60/40 just isn't appropriate

Post by stemikger »

nedsaid wrote:
stemikger wrote:I recently saw an interview on You Tube where John Bogle said he is increasingly nervous about Target Retirement Funds because they don't take social security into consideration. I know the Target Retirement Income Fund ultimately glides to 30/70 AA stocks/bonds. Isn't this too conservative if you include social security? Also, we are living longer and many would like to leave some money behind for family or charities. If that is one's way of thinking does 60/40 or 50/50 have a place for a permanent AA until death?
This shows that even Mr. Bogle seems to be a bit contradictory at times (don't we all?). It is interesting that Mr. "Age in Bonds" suggests that many retirees' asset allocation might be too conservative when taking into account Social Security. I saw an interview where he suggested that when taking into account Social Security that a 65% stocks/35% bonds portfolio might be appropriate for investors. I am not too far from that now.
I agree Ned. When I saw him say this in an interview, my first thought was I don't remember reading that in Common Sense on Mutual Funds or the Little Book of Common Sense Investing. That is something that should not have been left out. Having said that I'm on board with Jack with everything else and maybe even this. Time will tell when I retire.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
bondsr4me
Posts: 2427
Joined: Fri Oct 18, 2013 7:08 am

Re: When 60/40 just isn't appropriate

Post by bondsr4me »

Rick Ferri wrote:Peter Bernstein wrote The 60/40 Solution in 2002. His seminal article laid out arguments for why 60% stocks and 40% bonds is the “ideal asset allocation” for long-term investors. He considered this allocation the “center of gravity” on a risk and return spectrum.

Bernstein’s observation is timeless advice for many investors, but not everyone. The 60/40 mix is a solid starting point for a discussion about asset allocation for investors who are accumulating assets for retirement. However, it may not be the right starting point for someone living off their savings because the returns can be too volatile.

Read The Center of Gravity for Retirees

Rick Ferri
Rick....I wholeheartedly agree with you...60/40 (or any other "ideal" allocation) may not be appropriate for everyone, especially retirees depending on income from investments, especially stocks. Dividends can be cut, suspended, discontinued....not a happy thing for a retiree needing this cash.
Not every person has the same risk profile.
I agree with you.
Don
User avatar
VA_Gent
Posts: 235
Joined: Thu Jul 24, 2014 10:29 am

Re: When 60/40 just isn't appropriate

Post by VA_Gent »

Max DrawDown= High point of portfolio to low point of portfolio, before a new high point is reached. Caution is advised, because monthly drawdowns will allways be smaller than daily or intraday. Think intraday "flash crash"

That table is showing peak to trough days, not peak to peak days. Which is considerably longer.
"In investing, what is comfortable is rarely profitable." - Robert Arnott
toddanderson
Posts: 24
Joined: Wed Oct 22, 2014 2:47 pm

Re: When 60/40 just isn't appropriate

Post by toddanderson »

Ok that explains it,
I guess I have more interest when my account breaks even and how long that takes after a downturn it the market.

VA_Gent wrote:Max DrawDown= High point of portfolio to low point of portfolio, before a new high point is reached. Caution is advised, because monthly drawdowns will allways be smaller than daily or intraday. Think intraday "flash crash"

That table is showing peak to trough days, not peak to peak days. Which is considerably longer.
User avatar
VA_Gent
Posts: 235
Joined: Thu Jul 24, 2014 10:29 am

Re: When 60/40 just isn't appropriate

Post by VA_Gent »

Yes, exactly!

Also, Google only shows price not total return.
"In investing, what is comfortable is rarely profitable." - Robert Arnott
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: When 60/40 just isn't appropriate

Post by Leeraar »

VA_Gent wrote:Yes, exactly!

Also, Google only shows price not total return.
You can get Total Return from Yahoo - look at the last column in the Historical Data table, "Adjusted Price". In each case, you should check that this is what they say it is, checking how a distribution is accounted for.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
richard
Posts: 7961
Joined: Tue Feb 20, 2007 2:38 pm
Contact:

Re: When 60/40 just isn't appropriate

Post by richard »

nisiprius wrote:Rick, I would really like to know the origins of "60/40." It was a "traditional" allocation long before Peter L. Bernstein's paper, and incidentally I do not agree that his paper presents any real rationale for 60/40. He asks the obvious question and then doesn't answer it!<>
I believe the origins are that it's a round number which approximated the overall composition of the market (i.e., relative market caps) in the early days of modern writing about asset allocation.

Note the prevalence of presenting allocation choices in 20 pp increments (20/80, 40/60, etc.). 40/60 was too low and 80/20 was too high, and 50/50 doesn't fit in the 20 pp sequence, therefore 60/40.
User avatar
nisiprius
Advisory Board
Posts: 52105
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: When 60/40 just isn't appropriate

Post by nisiprius »

Of course, Benjamin Graham wrote
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequence inverse range of between 75% and 25% in bonds. There is an implication that the standard division should be an equal one, or 50-50, between the two major investment mediums
I don't think the difference between 60/40 and 50/50 matters much, but if we're just pulling round numbers out of the air intuitively, 50/50 seems so natural that I still think there's a need for an explanation of how 60/40 became the "classic" or "traditional" allocation.

Peter L. Bernstein's "stocks earn more so you ought to have >50% in stocks" just doesn't do it for me.

I can't find the quote right now but Harry Markowitz is on record somewhere as saying that he "ought" to calculate the "covariances" and derive the efficient frontier but that he doesn't, but just puts half of his portfolio in stocks and half in bonds.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: When 60/40 just isn't appropriate

Post by Leeraar »

nisiprius wrote: I still think there's a need for an explanation of how 60/40 became the "classic" or "traditional" allocation.
Perhaps it is the 11th Commandment?

https://www.youtube.com/watch?v=4TAtRCJIqnk

L. :D :D
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: When 60/40 just isn't appropriate

Post by abuss368 »

Rick Ferri wrote:
RetiredinKaty wrote:Mr. Ferri, thank you for sharing your current thinking on retirement allocation and for having the courage to evolve. At some point I think you should address how you have come to 30/70 as a more typical guideline with respect to your books on AA in which you suggest typical allocations of 50% stock for active retirees and 40% stock for mature retirees. Did the financial crisis, the advent of TIPS, or today’s high equity valuations influence your thinking?
The difference between 60/40 for accumulators and 30/70 for retirees is the goal of the investor. The focus on 60/40 is as much "return desired" as it is "risk control" while the focus of 30/70 is more "risk control " than "return desired." Also, these are starting point, not absolutes. An accumulator can being their analysis at 60/40 and go to higher or lower to achieve a desired risk and return outcome while the 30/70 is purposefully designed at the lowest allocation to equity to be efficient because the goal of most retires is to have lower risk. That being said, the equity position can go higher and often does.

For example, not knowing anything else, I'd start a discussion with a 40 year old at 60/40, but it may end up at 40/60, 80/20 or someplace in-between. Not knowing anything else, I'd start a discussion with a 65 year old at 30/70, but the allocation to equity may well move higher based on their particular situation.

I hope that helps.

Rick Ferri
Thanks Rick! That is an excellent post that I plan to discuss with both of my folks who are recently retired.
John C. Bogle: “Simplicity is the master key to financial success."
pascalwager
Posts: 2311
Joined: Mon Oct 31, 2011 8:36 pm

Re: When 60/40 just isn't appropriate

Post by pascalwager »

I can't find the quote right now but Harry Markowitz is on record somewhere as saying that he "ought" to calculate the "covariances" and derive the efficient frontier but that he doesn't, but just puts half of his portfolio in stocks and half in bonds.
I've seen this quote too. His reasoning was that he couldn't predict whether stocks or bonds would outperform during his investing career.
VT 60% / VFSUX 20% / TIPS 20%
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: When 60/40 just isn't appropriate

Post by Browser »

A google search reveals that the quote is said to come from Jason Zweig's book Your Money and Your Brain. Zweig tells the story of Harry Markowitz, the creator of Modern Portfolio Theory, who struggled to put his own idea into practice. “I should have computed the historical covariances of the asset classes and drawn an efficient frontier. But I visualized my grief if the stock market went way up and I wasn’t in it—or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” It's not clear where Zweig got the story or if he heard it directly from Markowitz.
We don't know where we are, or where we're going -- but we're making good time.
ourbrooks
Posts: 1575
Joined: Fri Nov 13, 2009 3:56 pm

Re: When 60/40 just isn't appropriate

Post by ourbrooks »

I, of course, am using a 0/0 portfolio for my core expenses. No stocks, no bonds. I can't tell my health insurer that I'm not making my full payment this year because interest rates rose and my bonds dropped. It's LMP for me!

For my discretionary expenses, I'm using "age in stocks" and expect to be 90% stocks at age 90, unless, of course, I've spent it all by then. If I've still got a lot left, I'll probably want to leave it as a bequest and let my heirs deal with the stock market crash that occurred six months before I died. (In fact, watching them deal with it might provide enough entertainment to keep me alive a bit longer.)

The real point here is that I have trouble figure out why it's even interesting to talk about a single asset allocation for my entire portfolio when I'm going to spend the money in different ways with different amounts of risk tolerance for each category. The overall allocation should be the result of the decisions about different uses I have for the money and if it happens to come out 60/40 or 70/30, well, that's just because the balance of my high risk and low risk uses just happened to come out that way. The only way to change it is to decide on different uses for the money - more in the contingency fund and less in the home improvement fund is what will move me from 60/40 to 70/30, not some global decision about what overall allocation I ought to have.

I've done my own rough calculations but I'd dearly love Rick Ferri or some other financial writer to do it the right way. Start with how the money is going to be spent; assign risk factors to different allocations and then, optionally, compute an overall allocation.
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: When 60/40 just isn't appropriate

Post by fortyofforty »

I believe it was Benjamin Graham who proposed a 50/50 split as being the "neutral" stock to bond ratio, with variations of up to 25/75 and 75/25 if conditions warranted it (needing some justification). It's been a while since I read The Intelligent Investor, though, so I might be wrong.
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: When 60/40 just isn't appropriate

Post by Leeraar »

ourbrooks wrote:I've done my own rough calculations but I'd dearly love Rick Ferri or some other financial writer to do it the right way. Start with how the money is going to be spent; assign risk factors to different allocations and then, optionally, compute an overall allocation.
And, since that allocation is a result, not a starting point, what on earth does it really matter?

It's like computing your overall gas mileage after you sell your car.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
jimkinny
Posts: 1856
Joined: Sun Mar 14, 2010 1:51 pm

Re: When 60/40 just isn't appropriate

Post by jimkinny »

Rick Ferri: thanks for the link to your article.

I found the two charts of rolling 5 years risk/returns charts particularly informative. The charts put some numbers on the lesson I learned in the great recession and from reading about the years 1930 to 1940. I agree that 30/70 is a good place to start from for those in retirement or nearing retirement.

Jim
User avatar
in_reality
Posts: 4529
Joined: Fri Jul 12, 2013 6:13 am

Re: When 60/40 just isn't appropriate

Post by in_reality »

How much of Figure 1 in Rick's chart (terminal account values) is due to an effect from rebalancing into a falling asset?

Aside from lowing stock allocation, might one also choose not to rebalance into stocks as they fall (and instead just take withdrawls from the outperforming asset ...which effectively is just a slower rebalancing)?

For instance, Rick cites 100% bonds as returning 109k and 100% stocks 46k over that time. So wouldn't a 60% 40% porfolio have returned 27863.4 from stocks and 43980 from bonds for a total of 71843?

71843 is higher than Rick's ~68k figure for a 60/40 portfolio so I think rebalancing is having an effect too.

Also, 71843 figure is derived from returns which have already subtracted withdrawls of 333.34/month. So actually, a 60% stock 40% bond portfolio actually has volatility resembling about a 55% bond portfolio if you don't rebalance on the fall.

I understand the point of rebalancing is to reduce risk by lowering your percent of outperforming assets. But in this case, since stocks are truly the risk asset even if they are outperforming, you are increasing your risk by the rebalancing.

Similar starting with a 50-50% portfolio and not rebalancing would give you $78k and adding back in the double counted 333.34/month, you'd be at about $83k which is closer to what you'd have had if you had started with a 60% to 70% bond portfolio (81k@60% - 88k@70%).

So my take from these numbers is that if you looking for a little growth in retirement, you don't have to drop the stocks down that low, but don't rebalance into them when they fall.
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: When 60/40 just isn't appropriate

Post by fortyofforty »

If you want to withdraw money from a 60/40 stock/bond portfolio, and draw from the outperforming asset class, would investing in a balanced index fund make sense? Wouldn't the balanced fund automatically (as it rebalances for you) force you to draw from the outperforming side of the fence, leaving the underperforming side untouched? Not sure if this is the way it would work out in reality.
User avatar
in_reality
Posts: 4529
Joined: Fri Jul 12, 2013 6:13 am

Re: When 60/40 just isn't appropriate

Post by in_reality »

fortyofforty wrote:If you want to withdraw money from a 60/40 stock/bond portfolio, and draw from the outperforming asset class, would investing in a balanced index fund make sense? Wouldn't the balanced fund automatically (as it rebalances for you) force you to draw from the outperforming side of the fence, leaving the underperforming side untouched? Not sure if this is the way it would work out in reality.
Yes you would make the withdrawal from the out performing asset.

However, wouldn't you also use the outperforming asset to rebalance into the underperforming asset which in this case would be stocks.

If the concern is how much to allocate to stocks in retirement because you don't want to sell them at a low, why buy more in a down market? You are increasing your risk by doing so. Aren't you???
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: When 60/40 just isn't appropriate

Post by Dandy »

In retirement I think we are looking at the wrong Bernstein. In retirement the overall asset allocation, for those who have enough, is a secondary consideration. You don't have to continue to dance with the allocation girl you came into retirement with. The first priority is securing your retirement not maintaining a specific allocation. This assumes that your earning power goes to essentially zero and the retirement pot is all you've got. You now have a major risk in addition, and more important than equity risk - the risk of not properly funding retirement.

Once you have enough SS, pension, annuity income and "safe" investments to fund your retirement to (I say age 90) then invest the rest anyway you like. That would be a better focus on controlling risk in retirement vs just assuming a lower equity allocation. You may end up with a 40/60 allocation (or a 60/40 allocation) but the fixed income portion might be a lot different than having only intermediate bond funds. You might have more short term bonds/funds, TIPs bonds/funds and CD/CD ladders etc. This approach mitigates both retirement funding risk and equity risk in a more structured manner.

The game plan for withdrawals would be to take them from the "safe" assets. But, if equities have had a nice run you have a choice. If equities have had a bad run don't rebalance out of the "safe" assets. There is no set it and forget it plan. Every few years you need to look at your health, expenses and assets and make any adjustments that are warranted.
thx1138
Posts: 1164
Joined: Fri Jul 12, 2013 2:14 pm

Re: When 60/40 just isn't appropriate

Post by thx1138 »

Can someone explain to me why anyone thinks that the highest risk adjusted return from an efficient frontier is at all relevant to an AA when we assume that no one uses leverage? If the "optimal" point produces too low a return for portfolio success then it isn't of any use unless you are able to efficiently use leverage to increase the return at a constant Sharpe ratio. But of course it really isn't practical for most individuals to do that. If your long term portfolio survival rate improves by having a higher return that happens to have a worse Sharpe ratio than the "optimal" portfolio then what useful information did computing the "optimal" point provide? In what meaningful sense is it at all "optimal"?

I love crunching numbers and MPT calculations of the efficient frontier are very satisfying, but I honestly fail to see the point of them when it comes to financial planning for retirement. The compute an AA point which is essentially arbitrary and not at all practically related to the goals of long term financial planning.

I completely understand the utility of MPT analysis for evaluating whether there is a *better* portfolio mix for a *given* expected return. What I don't understand is how it is at all meaningful in evaluating a equity/bond mix when it comes to retirement planning. Fine this return has the best Sharpe ratio. Who cares? If it doesn't have the necessary return then it isn't at all optimal in a meaningful sense.

I am I missing something fundamental here? I feel like someone is missing the forest for the trees but I can't tell if it is me.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: When 60/40 just isn't appropriate

Post by Browser »

thx1138 wrote:Can someone explain to me why anyone thinks that the highest risk adjusted return from an efficient frontier is at all relevant to an AA when we assume that no one uses leverage? If the "optimal" point produces too low a return for portfolio success then it isn't of any use unless you are able to efficiently use leverage to increase the return at a constant Sharpe ratio. But of course it really isn't practical for most individuals to do that. If your long term portfolio survival rate improves by having a higher return that happens to have a worse Sharpe ratio than the "optimal" portfolio then what useful information did computing the "optimal" point provide? In what meaningful sense is it at all "optimal"?

I love crunching numbers and MPT calculations of the efficient frontier are very satisfying, but I honestly fail to see the point of them when it comes to financial planning for retirement. The compute an AA point which is essentially arbitrary and not at all practically related to the goals of long term financial planning.

I completely understand the utility of MPT analysis for evaluating whether there is a *better* portfolio mix for a *given* expected return. What I don't understand is how it is at all meaningful in evaluating a equity/bond mix when it comes to retirement planning. Fine this return has the best Sharpe ratio. Who cares? If it doesn't have the necessary return then it isn't at all optimal in a meaningful sense.

I am I missing something fundamental here? I feel like someone is missing the forest for the trees but I can't tell if it is me.
Here's one take: I think it's important to consider what stage you are in along the continuum between accumulation and decumulation. The "best" allocation for an accumulation portfolio is the one that has an expected return targeted to one's total return objective at some point in time. Volatility or risk-adjusted return is a secondary consideration, given the constraint that the investor should avoid being too aggressive and running the risk of not being able to stick with his allocation plan during drawdowns. In a sense, volatility is your friend during the accumulation period and can increase the internal rate of return due to mean reversions.

But for decumulation portfolios or late accumulation portfolios, limiting portfolio volatility and optimizing risk-adjusted returns is a much more important consideration. Portfolio volatility will negatively impact portfolio survival, particularly if significant drawdowns are incurred early in the decumulation period (sequence of returns risk).

It seems clear to me that, following this logic, a more aggressive stock allocation such as 60% or higher, is justified during accumulation, which places primary emphasis on absolute returns. However, a less aggressive stock allocation such as 30% or less is justified later during accumulation and during decumulation, which places primary emphasis on risk-adjusted returns and limiting portfolio volatility. I think MPT analysis can be particularly useful when considering the decumulation or late accumulation phase. Much earlier in accumulation maybe not as much since your objective here is to maximize expected portfolio returns subject to not exceeding your risk (loss) tolerance.
We don't know where we are, or where we're going -- but we're making good time.
Post Reply