+1What happens at either of these AA's historically is that you blow way past your number in those pre-retirement sequences where you find the poor SWRs. Low SWR has meant a big run up and it is pretty trivial to decide to de-risk. I personally went 100/0 with a step move to 80/20 eight years before my expected retirement - based on great returns.Historically Buffett's 90/10 was safer than 100% stock. For instance assume stocks pay 3% dividends and that's enough to live on, the remainder just left as-is, compared to 90/10 that yields 2.7% of the 3% and you draw a 0.3% SWR. The worst case historic 30 year outcomes (residual) were better for the 90/10, as was the median case outcome.Articles saying people don't have the behavioral fortitude to stay 100% equities?Don't these articles always show up when the stock market is setting record highs?
This would seem to be the correct time for such articles.
The article is wrong where it talks about risk-adjusted return without considering portfolio size or new contributions. These define the portfolio risk much more than returns vs volatility. Buffett at 90/10 is very safe for a good reason but 100/0 is also safe for the new investor for a very good reason - future contributions. Other's volatility risk materializing actually helps you while young. Things that help you are not things to fear.
Much of investing is averaging, most tend to average in over many years, average out over many years, that helps smooth things out. SWR measures reflect averaging out, but disregards having averaged in, uses a fixed base start of drawdown date amount rather than reflecting how well or poorly it may have been to get to that value. However what works better for averaging out might also be considered as having worked better for averaging in, i.e. less variance, a better worst case.
For a 50 year retirement and 20 years until social security with half my expenses covered by social security each of these has a 5% chance of failure:
100/0 26.2x expenses
90/10 25.4x expense
If we accept 5% failure the 100/0 portfolio only needs to be 3% bigger than the 90/10 portfolio.
If we reduce to 1% failure the 100/0 portfolio needs to be 7% bigger.
If we reduce to 0.1% failure the 100/0 portfolio needs to be 12% bigger.
If we reduce to 0.01% failure the 100/0 portfolio needs to be 17% bigger.
What you see is that the outsized returns from being 100/0 make up for the risk of the lower SWR for any failure rate someone at either AA might accept. It's not that stocks are less risky today its that we have bigger portfolios and that risk matters less. It is also that we can afford to de-risk without sacrificing great future earning potential. Those of us that were aggressive and evaluate risk appropriately have already won the game - and we don't need to stop playing.
I am a strong advocate for reaching those bigger portfolios with aggressive stock allocation and then some level of de-risking. 10-20% bonds is enough on a risk improvement basis and really all that makes sense if your risk tolerance is not changing dramatically. Someone with consistent risk tolerance would go from 100/0 to between 90/10 and 80/20, retire early, and have more than 25x expenses. If you get to 25x expense with 30 years to go and are ready to retire I recommend 70/30 AA. You need more bonds if you have the smaller portfolio.
A 30% bigger portfolio is 10x safer. If 10x safer is not enough you can fiddle with AA for marginal improvements in safety. It doesn't do much as our examples above show.
Achieving returns provides more safety than controlling volatility. This is why you stay aggressive until you get close to achieving your goals and then de-risk. If you try to manage volatility you increase risk. If you don't understand risk you are likely to make behavioral mistakes, calling stock risky, and having a less secure retirement sequence because of your choices. You certainly took the excess risk with too low of an AA even if you made it to a fully funded retirement. Once you get a big enough portfolio you have the luxury to do whatever you want. The least risk way to get there is with aggressive stock AA in accumulation and an understanding of risks that allows you to maintain that AA without behavioral mistakes.
Start in your 20's by buying a house using a mortgage (comparable to leveraged equities). Then add stocks. Then after you've accumulated enough to where your savings are relatively small relative to your total portfolio value/wealth start looking more towards preserving rather than growing that wealth.
Statistics: Posted by seajay — Sun Jun 30, 2024 7:38 am — Replies 109 — Views 10736