Portfolio and retirement concepts - valid or not?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Poe22
Posts: 69
Joined: Thu Sep 15, 2022 1:21 pm

Portfolio and retirement concepts - valid or not?

Post by Poe22 »

I admit I've fallen into a deep rabbit hole regarding portfolio and retirement concepts. The more I read about them, the less I seem to know. Before I go nuts: Is there any common ground among Bogleheads regarding the following questions? If not, what's your personal opinion?

a) Does it even make sense to differentiate accumulation and retirement portfolios (as in: living off that portfolio instead of adding to it)?

b) Are retirement glide paths a mirage, because you ultimately cannot time/avoid the risk of your investing life period?

c) Is the concept of "safe withdrawal rates" valid or faulty?

d) Is 60/40 still the go-to portfolio allocation (not necessarily the best, but sort of a "golden standard")?

e) Is holding just stocks and bonds still recommendable, despite them being able to perform poorly at the same time?

f) Holding some other assets like REITs, Gold or Commodities improves Sharpe ratio when backtesting. Do higher Sharpe ratios matter in terms of withdrawal rates (just WR, not safe WR)?

g) Is a fixed stock/bond portfolio more recommendable for retirement than a "risk parity" portfolio? If so, why?
Risk parity as in: optimized for the least correlation between asset classes, and highest Sharpe ratio. Examples of risk parity portfolios: Golden Butterfly, Permanent Portfolio etc.
User avatar
SimpleGift
Posts: 4260
Joined: Tue Feb 08, 2011 3:45 pm

Re: Portfolio and retirement concepts - valid or not?

Post by SimpleGift »

Poe22 wrote: Thu Sep 22, 2022 12:25 pm Before I go nuts: Is there any common ground among Bogleheads regarding the following questions?
The questions you've asked are all key to personal portfolio design and construction. However, to be a do-it-yourself investor, one can't rely on the opinions of others to answer them. The answers are all personal, personal, personal.

The Bogleheads Forum is an excellent resource to learn the ins-and-outs of portfolio construction, since there are at least two sides to every issue and question under discussion. But in the end, you need to decide for yourself what is right for you. It's the only way you can land upon a portfolio design that you will understand completely, and be able to stick with through thick and thin.
sailaway
Posts: 5685
Joined: Fri May 12, 2017 1:11 pm

Re: Portfolio and retirement concepts - valid or not?

Post by sailaway »

For most of your questions, the more complicated solutions do not consistently perform better.

We have been 70/30 since just before we achieved FI and plan to maintain that allocation for the foreseeable future. We focus on tax efficiency when placing bonds in 401k vs stocks in Roth IRA and taxable (except ibonds, of course).

I read regularly, have skimmed through ERN's series, watch the Money Guy on YouTube, etc and just have not found a compelling argument to change anything going forward.
bloom2708
Posts: 9238
Joined: Wed Apr 02, 2014 2:08 pm

Re: Portfolio and retirement concepts - valid or not?

Post by bloom2708 »

I'll give you my opinions:

a) Living off 2 or 2.5% dividends is just a very low withdrawal rate. Total return, sell shares as you need cash

b) Take as much risk as you need, that may translate to less stocks and more fixed income as you age.

c) 3.5% is safer than 4%, etc. "safe" is relative. Most will have too much left at the end.

d) Age - 15 or so still seems to apply. I am 51 and we are 65/35. If you have a pension that covers 100% of spend, your answer may be different.

e) Rising rates certainly brings other "fixed income" into play. Bonds were never risk free, but decades of falling interest rates made it seem that way.

f) REITS are in the Total US stock index. Gold and Commodities are not required. I stay away.

g) A target mix + 5% rebalance bands gives you some float during bad times and good times. Some choose to only rebalance on the up swings. Lots of room here for the "personal".

You may disagree with all my answers. That is the "personal" in personal finance.
seajay
Posts: 809
Joined: Sat May 01, 2021 3:26 pm

Re: Portfolio and retirement concepts - valid or not?

Post by seajay »

Poe22 wrote: Thu Sep 22, 2022 12:25 pmf) Holding some other assets like REITs, Gold or Commodities improves Sharpe ratio when backtesting. Do higher Sharpe ratios matter in terms of withdrawal rates (just WR, not safe WR)?
Image
(clickable image)

Comparing TSM/TBM 60/40 to SCV/Gold 60/40 and the former had the better Sharpe ratio, but the lower SWR PV MC for 60/40 TSM/TBM versus PV MC for 60/40 SCV/Gold. So no, better Sharpe needn't reflect a better/safer WR. More volatile assets such as SCV instead of TSM, Gold instead of Bonds, isn't necessarily higher risk - subject to your definition of risk.
User avatar
vineviz
Posts: 13398
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Portfolio and retirement concepts - valid or not?

Post by vineviz »

Poe22 wrote: Thu Sep 22, 2022 12:25 pm a) Does it even make sense to differentiate accumulation and retirement portfolios (as in: living off that portfolio instead of adding to it)?
Usually, because they have - by definition - different objectives. But most people manage their portfolios in a slow transition, from one to the other.

Poe22 wrote: Thu Sep 22, 2022 12:25 pm b) Are retirement glide paths a mirage, because you ultimately cannot time/avoid the risk of your investing life period?
Asset allocation glide paths are sensible during the transition phase from accumulation to decumulation. After retirement, asset allocation should probably be static.
Poe22 wrote: Thu Sep 22, 2022 12:25 pm
c) Is the concept of "safe withdrawal rates" valid or faulty?
The concept is valid. Implementation is tricky.
Poe22 wrote: Thu Sep 22, 2022 12:25 pm d) Is 60/40 still the go-to portfolio allocation (not necessarily the best, but sort of a "golden standard")?
In decumulation, it's probably "good enough".
Poe22 wrote: Thu Sep 22, 2022 12:25 pm e) Is holding just stocks and bonds still recommendable, despite them being able to perform poorly at the same time?
Yep.
Poe22 wrote: Thu Sep 22, 2022 12:25 pm f) Holding some other assets like REITs, Gold or Commodities improves Sharpe ratio when backtesting. Do higher Sharpe ratios matter in terms of withdrawal rates (just WR, not safe WR)?
No, Sharpe ratios (especially historic ones) are basically useless.
Poe22 wrote: Thu Sep 22, 2022 12:25 pm g) Is a fixed stock/bond portfolio more recommendable for retirement than a "risk parity" portfolio? If so, why?
A risk parity portfolio is just a particular flavor of fixed asset allocation. There are lots of risk parity portfolios.
Poe22 wrote: Thu Sep 22, 2022 12:25 pm Risk parity as in: optimized for the least correlation between asset classes, and highest Sharpe ratio. Examples of risk parity portfolios: Golden Butterfly, Permanent Portfolio etc.
Most people peddling "risk parity" portfolios don't know much about retirement planning. Or economics.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
Poe22
Posts: 69
Joined: Thu Sep 15, 2022 1:21 pm

Re: Portfolio and retirement concepts - valid or not?

Post by Poe22 »

Thanks for your inputs guys, very helpful! I'm sincerely lost in all the portfolio options there are to choose from.

@Vineviz: Appreciate! I've added my answers in italic
vineviz wrote: Thu Sep 22, 2022 3:39 pm
Poe22 wrote: Thu Sep 22, 2022 12:25 pm a) Does it even make sense to differentiate accumulation and retirement portfolios (as in: living off that portfolio instead of adding to it)?
Usually, because they have - by definition - different objectives. But most people manage their portfolios in a slow transition, from one to the other.

The objective usually being? Less volatility for a retirement portfolio, as opposed to just staying with the accumulation portfolio?
Poe22 wrote: Thu Sep 22, 2022 12:25 pm b) Are retirement glide paths a mirage, because you ultimately cannot time/avoid the risk of your investing life period?
Asset allocation glide paths are sensible during the transition phase from accumulation to decumulation. After retirement, asset allocation should probably be static.

Ok, but that's more of a psychological crutch to avoid too much volatility, right? In certain years you might end up better just switching directly from accumulation to decumulation?
Poe22 wrote: Thu Sep 22, 2022 12:25 pm
c) Is the concept of "safe withdrawal rates" valid or faulty?
The concept is valid. Implementation is tricky.

Ok, but SWR are derived from backtesting alone, aren't they?
Poe22 wrote: Thu Sep 22, 2022 12:25 pm d) Is 60/40 still the go-to portfolio allocation (not necessarily the best, but sort of a "golden standard")?
In decumulation, it's probably "good enough".

That's comforting :happy
Poe22 wrote: Thu Sep 22, 2022 12:25 pm e) Is holding just stocks and bonds still recommendable, despite them being able to perform poorly at the same time?
Yep.

Ok, so you don't think that adding any other asset class to cover these periods might help?
Poe22 wrote: Thu Sep 22, 2022 12:25 pm f) Holding some other assets like REITs, Gold or Commodities improves Sharpe ratio when backtesting. Do higher Sharpe ratios matter in terms of withdrawal rates (just WR, not safe WR)?
No, Sharpe ratios (especially historic ones) are basically useless.

Sounds reasonable, but basically destroys the risk parity concept, I believe :)
Poe22 wrote: Thu Sep 22, 2022 12:25 pm g) Is a fixed stock/bond portfolio more recommendable for retirement than a "risk parity" portfolio? If so, why?
A risk parity portfolio is just a particular flavor of fixed asset allocation. There are lots of risk parity portfolios.
Poe22 wrote: Thu Sep 22, 2022 12:25 pm Risk parity as in: optimized for the least correlation between asset classes, and highest Sharpe ratio. Examples of risk parity portfolios: Golden Butterfly, Permanent Portfolio etc.
Most people peddling "risk parity" portfolios don't know much about retirement planning. Or economics.

So what do you think are the faults of the risk parity concept?
Post Reply