KlangFool wrote: ↑
Sun Nov 10, 2019 10:52 am
Naris wrote: ↑
Sun Nov 10, 2019 9:02 am
KlangFool wrote: ↑
Thu Nov 07, 2019 8:36 am
Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.
I think people have already pointed out that KlangFool's criticisms of 100% equities effectively double-count the drawdowns for equities (i.e. the expected performance for stocks already
accounts for the larger expected drawdowns that stocks experience), but I wanted to point out another issue with this point that I've seen KlangFool make repeatedly.
The statement quoted above is false. The accurate statement is not that 100/0 "only" wins over 70/30 with 20+ years, but that (historically) 100/0 virtually always
wins over 70/30 with 20+ years.
100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years.
It's not unreasonable to adopt a 100/0 portfolio because of the higher expect
<<100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years.
That statement is false. The reason why you believe that 100/0 has a higher expected return is because of the historical record. So, you cannot use the historical record of higher expected return without stating how 100/0 achieving this higher expected return.
The average return of 100/0 is 10.2%. But, we had a recession every 10 years or shorter period. The 100/0 usually suffer a big drop (50%) every 10 years or less. Then, it took many years to recover. For every 50% drop, it needs a 100% return to recover. Then, it needs a lot more to average out to 10.2% per year.
So, it is unreasonable to expect a higher return of 100/0 without taking the account of historical record that this higher expected return only achievable over a long period.
Just look at the chart of VTSAX across 10 to 20 years. This should be clear to anyone.
I'm honestly astounded that anyone would try to debate this point. Do you know what the term "expected return" means? I'll quote Investopedia (https://www.investopedia.com/terms/e/expectedreturn.asp
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these results. For example, if an investment has a 50% chance of gaining 20% and a 50% chance of losing 10%, the expected return is 5% (50% x 20% + 50% x -10% = 5%).
This is really basic stuff. Based on historical data, stocks have a higher expected return and higher volatility than bonds. The higher volatility can
cause stocks to underperform relative to bonds, but the typical scenario historically speaking is that stocks provide higher returns. Do you somehow disagree with this?
Another way of expressing my point: if you invest $100,000 for a year in either 100/0 or 70/30, based on historical data, the 100/0 investor will have more money than the 70/30 investor in more than half of scenarios and the mean portfolio of the 100/0 investor will also be larger -- the latter is literally what it means that 100/0 has a "higher expected return." You seem to be saying that since there will be some number of instances where the 70/30 investor will have a larger portfolio, then that that means the 100/0 approach doesn't have a higher "expected return" -- is that what you're arguing?
Obviously I'm setting aside the issue of whether historical data provides a good way of projecting future returns, but that's an issue that applies to both the 100/0 investor and the 70/30 investor. We have to use some mechanism for anticipating future returns, so we're left using historical data.
EDIT: Separately, I think you're significantly overstating how volatile stocks actually are. 50% drops are uncommon. It simply isn't accurate to state that "The 100/0 usually suffer a big drop (50%) every 10 years or less." I don't really care to get into the precise details here, but I want to note that you're making a number of factually inaccurate claims to bolster your arguments against a 100/0 portfolio.
EDIT2: In case anyone wants to verify that stocks really do have a higher expected return than bonds, you can check my example from above in your retirement projection calculator of choice. I used Firecalc to test the results of a $100k portfolio, running for 1 year, with $0 of spending. The results are below:
100/0: Mean = $107,896; Max = $151,843; Min = $64,374
70/30: Mean = $106,247; Max = $136,524; Min = $73,568
Thus, 70/30 has a higher minimum amount but a lower average return -- i.e. it has a lower expected return than 100/0. Sure, the difference isn't massive after one year, but the point stands: on average, 100/0 "wins" in comparison to 70/30 on much shorter timelines than 20 years. It certainly isn't the case that 100/0 "only" wins with 20+ year periods.