Flip from 60/40 to 40/60

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glenmalan
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Flip from 60/40 to 40/60

Post by glenmalan » Wed Apr 22, 2020 1:12 pm

I recently came across info that challenged my thinking.

We traditionally look at an AA of 60/40 stocks to bonds. Backtesting this from 1987 the CAGR is 9.67%. Max drawdown is 29.05%. The Sortino ratio is 1.07.

If we flip this to 60/40 bonds to stocks the CAGR is 9.33% and the max drawdown drops to 16.78% with a Sortino ratio of 1.24.

The ETFs I used for the analysis above are VFINX and VUSTX.

Looking at the outcomes, I'm somewhat tempted to switch, but wondering if I'm missing something. I'd really appreciate any thoughts from any of you on this.

Thanks in advance.

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FiveK
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Re: Flip from 60/40 to 40/60

Post by FiveK » Wed Apr 22, 2020 1:32 pm

glenmalan wrote:
Wed Apr 22, 2020 1:12 pm
...60/40 stocks to bonds the CAGR is 9.67%
...60/40 bonds to stocks the CAGR is 9.33%
Seems believable. Means the stock-heavy investor would have 10.8% more (1.0967^33/1.0933^33) now.

Silk McCue
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Re: Flip from 60/40 to 40/60

Post by Silk McCue » Wed Apr 22, 2020 1:34 pm

When you first joined two years ago you said that you were a Dual Momentum investor. Now you are thinking 40/60 might be a better play than 60/40 going forward based upon backtesting something you had heard about. You are likely open to this because of the recent market machinations.

It is best to settle down with sane and sensible investing based upon the Bogleheads philosophy. It's never to late.

Cheers

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Re: Flip from 60/40 to 40/60

Post by RadAudit » Wed Apr 22, 2020 1:39 pm

glenmalan wrote:
Wed Apr 22, 2020 1:12 pm
wondering if I'm missing something. I'd really appreciate any thoughts from any of you on this.
Don't know. Volatility? My DW is willing to exchange higher returns and higher volatility for lower returns and less volatility.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

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Phineas J. Whoopee
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Re: Flip from 60/40 to 40/60

Post by Phineas J. Whoopee » Wed Apr 22, 2020 1:45 pm

Was.

Conflating verb tenses can be hazardous to one's wealth.

Was.

PJW

Triple digit golfer
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Re: Flip from 60/40 to 40/60

Post by Triple digit golfer » Wed Apr 22, 2020 1:58 pm

You started your backtest near the beginning of one of the longest bond bull markets in history.

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Re: Flip from 60/40 to 40/60

Post by aristotelian » Wed Apr 22, 2020 2:01 pm

The time period you selected was a long term bull market for bonds, and you have selected long bonds which would be unusual and very risky as the core of a bond heavy portfolio. If interest rates were to rise, I think you would second guess this strategy and probably take a beating when bonds are down (probably at a time when stocks are up). Then you would go 60/40 just before stocks crash etc.

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Re: Flip from 60/40 to 40/60

Post by jrbdmb » Wed Apr 22, 2020 2:01 pm

glenmalan wrote:
Wed Apr 22, 2020 1:12 pm
I recently came across info that challenged my thinking.

We traditionally look at an AA of 60/40 stocks to bonds. Backtesting this from 1987 the CAGR is 9.67%. Max drawdown is 29.05%. The Sortino ratio is 1.07.

If we flip this to 60/40 bonds to stocks the CAGR is 9.33% and the max drawdown drops to 16.78% with a Sortino ratio of 1.24.

The ETFs I used for the analysis above are VFINX and VUSTX.

Looking at the outcomes, I'm somewhat tempted to switch, but wondering if I'm missing something. I'd really appreciate any thoughts from any of you on this.

Thanks in advance.
From 1980 to 2020 the 5-year Treasury interest rate has dropped from 16.17% to 0.37%. I do not think that type of bond rally is repeatable, so basing your investment plan on backtesting to 1987 could be unwise.

Coltrane75
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Re: Flip from 60/40 to 40/60

Post by Coltrane75 » Wed Apr 22, 2020 2:09 pm

Does anyone know where information can be found on 60/40 or 40/60 portfolio performance from the 1940s to today? I think that would be helpful to see its performance during the long-term trend of increasing interest rates from the 1940s to the 1980s.

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Re: Flip from 60/40 to 40/60

Post by friar1610 » Wed Apr 22, 2020 2:18 pm

The right answer for you might depend on your objectives. I haven't run the numbers for the specific scenario/time period you describe. But most of the things I've read say that there is very little difference in portfolio survival rates with portfolios ranging from 40/60 to 60/40 given a specific withdrawal amount over identical periods of time. But the terminal value of the portfolio is likely to be significantly higher with a higher equity allocation. And, as already been pointed out, you are using data from an era that offered much higher bond returns, so all bets may be off going forward.
Friar1610

Topic Author
glenmalan
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Re: Flip from 60/40 to 40/60

Post by glenmalan » Wed Apr 22, 2020 6:27 pm

Silk McCue wrote:
Wed Apr 22, 2020 1:34 pm
When you first joined two years ago you said that you were a Dual Momentum investor. Now you are thinking 40/60 might be a better play than 60/40 going forward based upon backtesting something you had heard about. You are likely open to this because of the recent market machinations.

It is best to settle down with sane and sensible investing based upon the Bogleheads philosophy. It's never to late.

Cheers
Thanks - I am no longer a DM follower.

What is the Boglehead asset allocation CAGR over that time period? Is that posted anywhere?

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FiveK
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Re: Flip from 60/40 to 40/60

Post by FiveK » Wed Apr 22, 2020 6:31 pm

glenmalan wrote:
Wed Apr 22, 2020 6:27 pm
What is the Boglehead asset allocation CAGR over that time period? Is that posted anywhere?
There isn't a single "Boglehead asset allocation" but you can test whatever AA you wish at Portfolio Visualizer.

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Re: Flip from 60/40 to 40/60

Post by willthrill81 » Wed Apr 22, 2020 6:38 pm

Coltrane75 wrote:
Wed Apr 22, 2020 2:09 pm
Does anyone know where information can be found on 60/40 or 40/60 portfolio performance from the 1940s to today? I think that would be helpful to see its performance during the long-term trend of increasing interest rates from the 1940s to the 1980s.
The Simba backtesting spreadsheet has those data.

But to cut to the chase, from 1941-1981 the real return of the simulated total bond market was -1.59% annualized. The notion that bonds had robustly positive yields throughout the 20th century and that negative real yields is a new thing is robustly false.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Ewb
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Re: Flip from 60/40 to 40/60

Post by Ewb » Wed Apr 22, 2020 7:03 pm

Although EAM is not a Boglehead philosophy, there are some good points brought up in this article. I’d read the entire article so nothing is taken out of context.

https://www.evansonasset.com/stocks-for ... run-13.htm

“Perhaps the most persuasive case for caution in assuming that equities are always the best choice for long-term portfolios is a relatively recent 30 year period, 1981 through 2011. Long-term government bonds gained an average of 11.5% per year while the S&P 500 index with dividends reinvested gained 10.8% per year over the same period with much more risk and volatility. Stocks had risen more than bonds over every 30-year period from 1861 until 1981.”

Escapevelocity
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Re: Flip from 60/40 to 40/60

Post by Escapevelocity » Wed Apr 22, 2020 7:14 pm

Just split the difference and go with 50/50

Topic Author
glenmalan
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Re: Flip from 60/40 to 40/60

Post by glenmalan » Wed Apr 22, 2020 7:17 pm

FiveK wrote:
Wed Apr 22, 2020 6:31 pm
glenmalan wrote:
Wed Apr 22, 2020 6:27 pm
What is the Boglehead asset allocation CAGR over that time period? Is that posted anywhere?
There isn't a single "Boglehead asset allocation" but you can test whatever AA you wish at Portfolio Visualizer.
I used it Portfolio Visualizer for the info in my opening post.

Silk McCue
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Re: Flip from 60/40 to 40/60

Post by Silk McCue » Wed Apr 22, 2020 7:55 pm

glenmalan wrote:
Wed Apr 22, 2020 7:17 pm
FiveK wrote:
Wed Apr 22, 2020 6:31 pm
glenmalan wrote:
Wed Apr 22, 2020 6:27 pm
What is the Boglehead asset allocation CAGR over that time period? Is that posted anywhere?
There isn't a single "Boglehead asset allocation" but you can test whatever AA you wish at Portfolio Visualizer.
I used it Portfolio Visualizer for the info in my opening post.
The analysis you are performing will not lead you to the outcome you desire.

Cheers

averagedude
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Re: Flip from 60/40 to 40/60

Post by averagedude » Wed Apr 22, 2020 8:42 pm

60/40, 40/60, or 50/50? It probably doesn't matter. The most important thing is choosing one and sticking with it.

CFM300
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Re: Flip from 60/40 to 40/60

Post by CFM300 » Wed Apr 22, 2020 8:57 pm

Vanguard has a page showing historical returns from 1926-2018 for allocations from 0% stocks (100% bonds) to 100% stocks (0% bonds), in 10% increments.

https://personal.vanguard.com/us/insigh ... llocations

dru808
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Re: Flip from 60/40 to 40/60

Post by dru808 » Wed Apr 22, 2020 9:01 pm

glenmalan wrote:
Wed Apr 22, 2020 7:17 pm
FiveK wrote:
Wed Apr 22, 2020 6:31 pm
glenmalan wrote:
Wed Apr 22, 2020 6:27 pm
What is the Boglehead asset allocation CAGR over that time period? Is that posted anywhere?
There isn't a single "Boglehead asset allocation" but you can test whatever AA you wish at Portfolio Visualizer.
I used it Portfolio Visualizer for the info in my opening post.
He’s telling you there is no single boglehead asset allocation, it ranges from 0/100 - 100/0, you’re free to test different asset allocations on PV to see what they returned in the (past).
60% US equity | 25% International equity | 15% US Treasury bonds

tibbitts
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Re: Flip from 60/40 to 40/60

Post by tibbitts » Wed Apr 22, 2020 9:03 pm

glenmalan wrote:
Wed Apr 22, 2020 6:27 pm
Silk McCue wrote:
Wed Apr 22, 2020 1:34 pm
When you first joined two years ago you said that you were a Dual Momentum investor. Now you are thinking 40/60 might be a better play than 60/40 going forward based upon backtesting something you had heard about. You are likely open to this because of the recent market machinations.

It is best to settle down with sane and sensible investing based upon the Bogleheads philosophy. It's never to late.

Cheers
Thanks - I am no longer a DM follower.

What is the Boglehead asset allocation CAGR over that time period? Is that posted anywhere?
I try to read some posts before making any of my own on forum that's new to me, and if you had done that you would have discovered after about a dozen posts that there is no "Boglehead asset allocation." Everybody here has completely different opinions on most specifics of investing, especially asset allowcation. Most people on Bogleheads don't even follow many of Bogle's ideas in multiple areas of investing, and beyond maybe "costs matter", half of us can't even agree on what his ideas were.

Random Walker
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Re: Flip from 60/40 to 40/60

Post by Random Walker » Wed Apr 22, 2020 9:42 pm

I think you make a lot of sense. I’ve run Monte Carlo Analyses on my portfolio and have been surprised by the lack of sensitivity to overall asset allocation: not a lot of difference between 60/40 and 40/60. Of course everyone’s circumstance is different. But the move to 40/60 is a move towards risk parity: more evenly spreading the risks.

If one assumes a SD for stocks of about 20% and an SD for bonds of about 5%, then the 60/40 portfolio has about 86% of its risk wrapped up in a single factor, the market factor. Even the 40/60 portfolio has about a surprising 73% of its risk in the single market factor. Although the simple mean return should be higher for the portfolio with the higher equity allocation, it will have more variance drain. The difference in compounded returns of the two portfolios will be smaller than the difference in simple mean returns because the more efficient portfolio will lose less to volatility.

Dave

Topic Author
glenmalan
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Re: Flip from 60/40 to 40/60

Post by glenmalan » Thu Apr 23, 2020 7:59 am

tibbitts wrote:
Wed Apr 22, 2020 9:03 pm
glenmalan wrote:
Wed Apr 22, 2020 6:27 pm
Silk McCue wrote:
Wed Apr 22, 2020 1:34 pm
When you first joined two years ago you said that you were a Dual Momentum investor. Now you are thinking 40/60 might be a better play than 60/40 going forward based upon backtesting something you had heard about. You are likely open to this because of the recent market machinations.

It is best to settle down with sane and sensible investing based upon the Bogleheads philosophy. It's never to late.

Cheers
Thanks - I am no longer a DM follower.

What is the Boglehead asset allocation CAGR over that time period? Is that posted anywhere?
I try to read some posts before making any of my own on forum that's new to me, and if you had done that you would have discovered after about a dozen posts that there is no "Boglehead asset allocation." Everybody here has completely different opinions on most specifics of investing, especially asset allowcation. Most people on Bogleheads don't even follow many of Bogle's ideas in multiple areas of investing, and beyond maybe "costs matter", half of us can't even agree on what his ideas were.
Thanks for clarifying for me. With the pinned posts and books that are written about the 3 fund portfolio under the title of "Bogleheads" it feels like there is a lean toward that being the mantra.

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glenmalan
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Re: Flip from 60/40 to 40/60

Post by glenmalan » Thu Apr 23, 2020 8:02 am

Random Walker wrote:
Wed Apr 22, 2020 9:42 pm
I think you make a lot of sense. I’ve run Monte Carlo Analyses on my portfolio and have been surprised by the lack of sensitivity to overall asset allocation: not a lot of difference between 60/40 and 40/60. Of course everyone’s circumstance is different. But the move to 40/60 is a move towards risk parity: more evenly spreading the risks.

If one assumes a SD for stocks of about 20% and an SD for bonds of about 5%, then the 60/40 portfolio has about 86% of its risk wrapped up in a single factor, the market factor. Even the 40/60 portfolio has about a surprising 73% of its risk in the single market factor. Although the simple mean return should be higher for the portfolio with the higher equity allocation, it will have more variance drain. The difference in compounded returns of the two portfolios will be smaller than the difference in simple mean returns because the more efficient portfolio will lose less to volatility.

Dave
Thanks Dave - I appreciated your insights on the risk percentages. The main point I was attempting to make in my original post was that it appears similar returns are achieved by 60/40 and 40/60, however the drawdowns as a measure of volatility for the 40/60 AA are around 45% lower which is significant.

Coltrane75
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Re: Flip from 60/40 to 40/60

Post by Coltrane75 » Thu Apr 23, 2020 8:13 am

willthrill81 wrote:
Wed Apr 22, 2020 6:38 pm
Coltrane75 wrote:
Wed Apr 22, 2020 2:09 pm
Does anyone know where information can be found on 60/40 or 40/60 portfolio performance from the 1940s to today? I think that would be helpful to see its performance during the long-term trend of increasing interest rates from the 1940s to the 1980s.
The Simba backtesting spreadsheet has those data.

But to cut to the chase, from 1941-1981 the real return of the simulated total bond market was -1.59% annualized. The notion that bonds had robustly positive yields throughout the 20th century and that negative real yields is a new thing is robustly false.
Thanks for the info, I'll have to check that out on my personal PC as my work is blocking it. If in a hypothetical scenario of us entering a long period of rising interest rates like from 1941-1981, does that make the case of mixing in TIPS into the allocation for bonds?

Random Walker
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Re: Flip from 60/40 to 40/60

Post by Random Walker » Thu Apr 23, 2020 8:35 am

glenmalan wrote:
Thu Apr 23, 2020 8:02 am
Random Walker wrote:
Wed Apr 22, 2020 9:42 pm
I think you make a lot of sense. I’ve run Monte Carlo Analyses on my portfolio and have been surprised by the lack of sensitivity to overall asset allocation: not a lot of difference between 60/40 and 40/60. Of course everyone’s circumstance is different. But the move to 40/60 is a move towards risk parity: more evenly spreading the risks.

If one assumes a SD for stocks of about 20% and an SD for bonds of about 5%, then the 60/40 portfolio has about 86% of its risk wrapped up in a single factor, the market factor. Even the 40/60 portfolio has about a surprising 73% of its risk in the single market factor. Although the simple mean return should be higher for the portfolio with the higher equity allocation, it will have more variance drain. The difference in compounded returns of the two portfolios will be smaller than the difference in simple mean returns because the more efficient portfolio will lose less to volatility.

Dave
Thanks Dave - I appreciated your insights on the risk percentages. The main point I was attempting to make in my original post was that it appears similar returns are achieved by 60/40 and 40/60, however the drawdowns as a measure of volatility for the 40/60 AA are around 45% lower which is significant.
And after a big drawdown there is less money around to experience the subsequent gains. That is why volatility drag and portfolio efficiency is a significant issue. The extreme example is that it takes a 100% gain to break even after a 50% loss. If you lose 50% in year 1 and make 100% in year 2, you simple mean average return is 25%. Your compounded return is 0%. Volatility is a real cost.

Dave

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firebirdparts
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Re: Flip from 60/40 to 40/60

Post by firebirdparts » Thu Apr 23, 2020 9:15 am

Planning for a bond bull market only works if the bond bull market is in the future. It might be a good idea. Bonds are easy to understand and everybody thinks they're already high. Time will tell.
A fool and your money are soon partners

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willthrill81
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Re: Flip from 60/40 to 40/60

Post by willthrill81 » Thu Apr 23, 2020 9:54 am

Coltrane75 wrote:
Thu Apr 23, 2020 8:13 am
willthrill81 wrote:
Wed Apr 22, 2020 6:38 pm
Coltrane75 wrote:
Wed Apr 22, 2020 2:09 pm
Does anyone know where information can be found on 60/40 or 40/60 portfolio performance from the 1940s to today? I think that would be helpful to see its performance during the long-term trend of increasing interest rates from the 1940s to the 1980s.
The Simba backtesting spreadsheet has those data.

But to cut to the chase, from 1941-1981 the real return of the simulated total bond market was -1.59% annualized. The notion that bonds had robustly positive yields throughout the 20th century and that negative real yields is a new thing is robustly false.
Thanks for the info, I'll have to check that out on my personal PC as my work is blocking it. If in a hypothetical scenario of us entering a long period of rising interest rates like from 1941-1981, does that make the case of mixing in TIPS into the allocation for bonds?
TIPS provide inflation protection, not interest rate protection.

I very much doubt that we will ever again see interest rates reach the levels they did in the late 1970s and early 1980s, but nobody knows.

However, I do think that TIPS are a very good deal right now. The break-even inflation rate with 30 year TIPS vs. 30 year Treasuries is only 1.29% (i.e. if inflation is above 1.29% over the next 30 years, you'll have a higher inflation-adjusted return with TIPS than with nominal Treasury bonds).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Flip from 60/40 to 40/60

Post by tennisplyr » Thu Apr 23, 2020 10:11 am

averagedude wrote:
Wed Apr 22, 2020 8:42 pm
60/40, 40/60, or 50/50? It probably doesn't matter. The most important thing is choosing one and sticking with it.

Yes. My guess is that someone 65 years of age with 40/60 when he turns 75 he probably doesn't say "wonder where I'd be if I did 60/40 when I was 65"
Those who move forward with a happy spirit will find that things always work out.

cherijoh
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Re: Flip from 60/40 to 40/60

Post by cherijoh » Thu Apr 23, 2020 10:26 am

glenmalan wrote:
Wed Apr 22, 2020 1:12 pm
I recently came across info that challenged my thinking.

We traditionally look at an AA of 60/40 stocks to bonds. Backtesting this from 1987 the CAGR is 9.67%. Max drawdown is 29.05%. The Sortino ratio is 1.07.

If we flip this to 60/40 bonds to stocks the CAGR is 9.33% and the max drawdown drops to 16.78% with a Sortino ratio of 1.24.

The ETFs I used for the analysis above are VFINX and VUSTX.

Looking at the outcomes, I'm somewhat tempted to switch, but wondering if I'm missing something. I'd really appreciate any thoughts from any of you on this.

Thanks in advance.
I don't put too much stock in backtesting because who knows what will happen in the future! I think you could argue for any AA between those two if you are close to or in retirement. 40/60 stocks to bonds is probably too conservative for someone who is many years from retirement.

One thing you need to consider is the prevailing interest rates at the beginning and end of the period studied. Some of the return from bonds that you touted is from higher interest rates in the begining of the period and also from capital gains as the interest rates declined over that period. You will not see that going forward due to the current low interest rates. And it is anyones guess what stocks will do.

Coltrane75
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Re: Flip from 60/40 to 40/60

Post by Coltrane75 » Thu Apr 23, 2020 11:32 am

willthrill81 wrote:
Thu Apr 23, 2020 9:54 am
Coltrane75 wrote:
Thu Apr 23, 2020 8:13 am
willthrill81 wrote:
Wed Apr 22, 2020 6:38 pm
Coltrane75 wrote:
Wed Apr 22, 2020 2:09 pm
Does anyone know where information can be found on 60/40 or 40/60 portfolio performance from the 1940s to today? I think that would be helpful to see its performance during the long-term trend of increasing interest rates from the 1940s to the 1980s.
The Simba backtesting spreadsheet has those data.

But to cut to the chase, from 1941-1981 the real return of the simulated total bond market was -1.59% annualized. The notion that bonds had robustly positive yields throughout the 20th century and that negative real yields is a new thing is robustly false.
Thanks for the info, I'll have to check that out on my personal PC as my work is blocking it. If in a hypothetical scenario of us entering a long period of rising interest rates like from 1941-1981, does that make the case of mixing in TIPS into the allocation for bonds?
TIPS provide inflation protection, not interest rate protection.

I very much doubt that we will ever again see interest rates reach the levels they did in the late 1970s and early 1980s, but nobody knows.

However, I do think that TIPS are a very good deal right now. The break-even inflation rate with 30 year TIPS vs. 30 year Treasuries is only 1.29% (i.e. if inflation is above 1.29% over the next 30 years, you'll have a higher inflation-adjusted return with TIPS than with nominal Treasury bonds).
Inflation linked securites like TIPS and I Bonds are probably the best deals going right now.

I think I'm sticking with 60/40 and will accept the returns I get; if they're lower than planned I'll adapt.

Topic Author
glenmalan
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Re: Flip from 60/40 to 40/60

Post by glenmalan » Thu Apr 23, 2020 3:59 pm

cherijoh wrote:
Thu Apr 23, 2020 10:26 am
glenmalan wrote:
Wed Apr 22, 2020 1:12 pm
I recently came across info that challenged my thinking.

We traditionally look at an AA of 60/40 stocks to bonds. Backtesting this from 1987 the CAGR is 9.67%. Max drawdown is 29.05%. The Sortino ratio is 1.07.

If we flip this to 60/40 bonds to stocks the CAGR is 9.33% and the max drawdown drops to 16.78% with a Sortino ratio of 1.24.

The ETFs I used for the analysis above are VFINX and VUSTX.

Looking at the outcomes, I'm somewhat tempted to switch, but wondering if I'm missing something. I'd really appreciate any thoughts from any of you on this.

Thanks in advance.
I don't put too much stock in backtesting because who knows what will happen in the future! I think you could argue for any AA between those two if you are close to or in retirement. 40/60 stocks to bonds is probably too conservative for someone who is many years from retirement.

One thing you need to consider is the prevailing interest rates at the beginning and end of the period studied. Some of the return from bonds that you touted is from higher interest rates in the begining of the period and also from capital gains as the interest rates declined over that period. You will not see that going forward due to the current low interest rates. And it is anyones guess what stocks will do.
If rates go up wouldn’t stocks go down too?

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willthrill81
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Re: Flip from 60/40 to 40/60

Post by willthrill81 » Fri Apr 24, 2020 10:12 am

glenmalan wrote:
Thu Apr 23, 2020 3:59 pm
cherijoh wrote:
Thu Apr 23, 2020 10:26 am
glenmalan wrote:
Wed Apr 22, 2020 1:12 pm
I recently came across info that challenged my thinking.

We traditionally look at an AA of 60/40 stocks to bonds. Backtesting this from 1987 the CAGR is 9.67%. Max drawdown is 29.05%. The Sortino ratio is 1.07.

If we flip this to 60/40 bonds to stocks the CAGR is 9.33% and the max drawdown drops to 16.78% with a Sortino ratio of 1.24.

The ETFs I used for the analysis above are VFINX and VUSTX.

Looking at the outcomes, I'm somewhat tempted to switch, but wondering if I'm missing something. I'd really appreciate any thoughts from any of you on this.

Thanks in advance.
I don't put too much stock in backtesting because who knows what will happen in the future! I think you could argue for any AA between those two if you are close to or in retirement. 40/60 stocks to bonds is probably too conservative for someone who is many years from retirement.

One thing you need to consider is the prevailing interest rates at the beginning and end of the period studied. Some of the return from bonds that you touted is from higher interest rates in the begining of the period and also from capital gains as the interest rates declined over that period. You will not see that going forward due to the current low interest rates. And it is anyones guess what stocks will do.
If rates go up wouldn’t stocks go down too?
In theory, yes. There is evidence to support this as well. The cheapest that U.S. stocks have been in terms of valuations was in the early 1980s when interest rates were very high. Though some dispute it, most believe that stocks and bonds compete with each other, to some extent, for capital. The higher the yields on bonds, the lower stock valuations should be, all else being equal. For instance, I would not be as aggressive with stocks if I could get 6% real from Treasuries.

In a rising interest rate environment, you generally want to hold very short-term debt obligations. But the problem is that predicting the direction of interest rates is at least as difficult as predicting the direction of stocks, possibly more so. A couple of years ago, it seemed that the majority of posters here thought that interest rates 'had nowhere to go but up', so they moved into short-term bond positions. Then interest rates fell substantially, and long-term Treasuries zoomed upward.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dharrythomas
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Re: Flip from 60/40 to 40/60

Post by dharrythomas » Fri Apr 24, 2020 3:55 pm

We should all be able to agree that Bogle did not recommend either international or active funds, in addition to the CMH.

illumination
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Re: Flip from 60/40 to 40/60

Post by illumination » Fri Apr 24, 2020 4:09 pm

Unless you think we really get deep into negative interest rates, I don't see a realistic scenario where you get those sorts of returns on a 60% bond portfolio, at least from here.

I would argue expecting anything more from bonds than the promised interest rate is really no different than market timing with stocks and thinking you can outperform.

tibbitts
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Re: Flip from 60/40 to 40/60

Post by tibbitts » Fri Apr 24, 2020 4:25 pm

dharrythomas wrote:
Fri Apr 24, 2020 3:55 pm
We should all be able to agree that Bogle did not recommend either international or active funds, in addition to the CMH.
We can't say Bogle was entirely anti-active-management, and his position on international was perhaps not enthusiasitc, but tolerant to a point.

What is CMH?

Random Walker
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Re: Flip from 60/40 to 40/60

Post by Random Walker » Fri Apr 24, 2020 8:02 pm

CMH = Cost Matters Hypothesis :-)

Dave

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Re: Flip from 60/40 to 40/60

Post by randomguy » Fri Apr 24, 2020 8:24 pm

illumination wrote:
Fri Apr 24, 2020 4:09 pm
Unless you think we really get deep into negative interest rates, I don't see a realistic scenario where you get those sorts of returns on a 60% bond portfolio, at least from here.

I would argue expecting anything more from bonds than the promised interest rate is really no different than market timing with stocks and thinking you can outperform.
The bigger question for me is how the returns between the two portfolios will differ going forward. With a .3% difference that you got from the 80s, 40/60 instead of 60/40 might make a ton of sense. What if the difference is more like 1 % (i.e. stocks return 7%, long bonds return 2% for 5% vs 4%), are you still willing to make the trade off? Obviously we have no clue about returns or spreads going forward.

I am not up on the historical numbers of 60/40 where the bonds are long bonds. If you use something like total bond or 10 years, the gap tends to be around .7%. And if you are taking money out of the portfolio, you run the risk with long bonds of having the higher volatility show up when you don't want it. Having both your stocks and bonds drop 20% over the same time period isn't great. Some like holding 6.43% long bonds in 1973 and waking up in 1981 with 13.9% long bonds at the same time your stocks are struggling isn't great.

Slowtraveler
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Re: Flip from 60/40 to 40/60

Post by Slowtraveler » Fri Apr 24, 2020 10:36 pm

35 years is awful short to base backtesting for your portfolio on it. Of course bonds have done great in this megacycle. This play may also work for you but I wouldn't base it on such a short backtesting period. Most backtests go back to at least '72 but some go back to the 1800's, the steady trends you find here can be far more consistent than one testing that doesn't cover and entire investor lifetime.

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Re: Flip from 60/40 to 40/60

Post by CFM300 » Fri Apr 24, 2020 11:54 pm

dharrythomas wrote:
Fri Apr 24, 2020 3:55 pm
We should all be able to agree that Bogle did not recommend either international or active funds...
In a 2018 interview, Bogle talked about the portfolio he created for a scholarship fund he established at his prep school, "on the assumption that nobody will touch it for a long time." The allocation:

45% VG Wellington (active)
45% VG Balanced
05% Emerging Markets (international)
05% Gold

That interview, by the way, is part of a series called "In Pursuit of the Perfect Portfolio." Other interviewees include: Schiller, Fama, Ellis, Markowitz, Merton, Scholes, Sharpe, Siegel, and probably others I'm forgetting. Very entertaining.

illumination
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Re: Flip from 60/40 to 40/60

Post by illumination » Sat Apr 25, 2020 10:39 am

randomguy wrote:
Fri Apr 24, 2020 8:24 pm
illumination wrote:
Fri Apr 24, 2020 4:09 pm
Unless you think we really get deep into negative interest rates, I don't see a realistic scenario where you get those sorts of returns on a 60% bond portfolio, at least from here.

I would argue expecting anything more from bonds than the promised interest rate is really no different than market timing with stocks and thinking you can outperform.
The bigger question for me is how the returns between the two portfolios will differ going forward. With a .3% difference that you got from the 80s, 40/60 instead of 60/40 might make a ton of sense. What if the difference is more like 1 % (i.e. stocks return 7%, long bonds return 2% for 5% vs 4%), are you still willing to make the trade off? Obviously we have no clue about returns or spreads going forward.

We obviously don't know, but I'm only assuming bonds return their promised interest rate, which in many cases is over 95% less than they were paying in the 80's and 90's (if we're looking at Treasury rates). A 10 year T-bill currently pays .65%, in the 80's it was up to 15%, in the 90's up to nearly 7%. That alone changes the math dramatically.

Much of the bond return was appreciation because interest rates continued lower, can that continue when rates are so close to zero? To me the only way I see any sort of return on bonds long term like we had in past portfolios would be go for long periods where interest rates continue lower into negative territory.

And if interest rates "normalize" because we start to have inflation and you're holding a bond fund, it could be devastating.

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Re: Flip from 60/40 to 40/60

Post by jolmscheid » Sat Apr 25, 2020 11:20 am

CFM300 wrote:
Fri Apr 24, 2020 11:54 pm
dharrythomas wrote:
Fri Apr 24, 2020 3:55 pm
We should all be able to agree that Bogle did not recommend either international or active funds...
In a 2018 interview, Bogle talked about the portfolio he created for a scholarship fund he established at his prep school, "on the assumption that nobody will touch it for a long time." The allocation:

45% VG Wellington (active)
45% VG Balanced
05% Emerging Markets (international)
05% Gold

That interview, by the way, is part of a series called "In Pursuit of the Perfect Portfolio." Other interviewees include: Schiller, Fama, Ellis, Markowitz, Merton, Scholes, Sharpe, Siegel, and probably others I'm forgetting. Very entertaining.
Interesting to note in Portfolio Visualizer that the VG Balanced/VG Wellington portfolio beat out an 80/20 and 70/30 allocation over the past 25 years even at a lower approx 62% equity allocation.

Perhaps this is due to higher bond yields in the past?

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Re: Flip from 60/40 to 40/60

Post by willthrill81 » Sat Apr 25, 2020 11:36 am

jolmscheid wrote:
Sat Apr 25, 2020 11:20 am
CFM300 wrote:
Fri Apr 24, 2020 11:54 pm
dharrythomas wrote:
Fri Apr 24, 2020 3:55 pm
We should all be able to agree that Bogle did not recommend either international or active funds...
In a 2018 interview, Bogle talked about the portfolio he created for a scholarship fund he established at his prep school, "on the assumption that nobody will touch it for a long time." The allocation:

45% VG Wellington (active)
45% VG Balanced
05% Emerging Markets (international)
05% Gold

That interview, by the way, is part of a series called "In Pursuit of the Perfect Portfolio." Other interviewees include: Schiller, Fama, Ellis, Markowitz, Merton, Scholes, Sharpe, Siegel, and probably others I'm forgetting. Very entertaining.
Interesting to note in Portfolio Visualizer that the VG Balanced/VG Wellington portfolio beat out an 80/20 and 70/30 allocation over the past 25 years even at a lower approx 62% equity allocation.

Perhaps this is due to higher bond yields in the past?
That's part of it. The other part is that falling bond yields provided capital appreciation to bonds. With yields being very low now, it will be more difficult, though certainly not impossible, for these funds to perform as well as they did relative to more stock heavy allocations.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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