1966 - 1995 represent pretty much the darkest path in Bill Bengen's 4% rule. From 1966 to 1985, S&P 500 returned a 6.8% on an inflation of 6.8%, giving a real return of 0%. The damage was bad enough that if you retired in 1966, you will barely make it to 1985 before your portfolio depletes.
https://awealthofcommonsense.com/2014/0 ... eally-bad/
The damage comes from a combination its length and the inflation. For 16 years, the return was essentially zero. If you had bonds, the return was even worse. Bad recent periods like 2000-2010 had a -1% real return, but those were mitigated somewhat if you had some bonds and it was only for 10 years. I believe it was worse than retiring in 1929 because in 1929, you had deflation to cushion your fall and bonds would have helped. This is assuming that the bond didn't default, which is probably a good reason to stick with treasuries.
I feel the take away is that equity has the highest return but also the greatest uncertainty. Cash has probably the lowest return and the lowest uncertainty. You can do it the tortoise way and just invest in massive amount of cash. In a lot of country without functioning stock market, this may be the only way to invest. If you invest in equity, you can reach your goal faster over the long term, but due to the volatility, you may be unlucky and hit roadblocks along the way. This is often why people start out with a high equity allocation and then add bonds as they near retirement to reduce uncertainty. Even if equity stay flat for 16 years, I feel that if you are in the accumulation phrase that would still be ok since you are buying at a level price. May be reset your expectation that you might need to wait 20 years or so for the equity bump.
Bonds are also not entirely safe either. Bill Bernstein is fond of pointing out that from 1941 - 1981, long treasury had a return of -65%. This has led me to keep my bond fund duration intermediate. I have seen post about longer bonds being a better companion than intermediate and some of the numbers show seems to bear this out, but I remain wary.
Keep in mind that 1966 - 1983 is just one bad period out of many periods. Most of the other periods were more favorable to investing. Trying to structure a portfolio to protect against the worse investment period would be like planning your life as if you lived during WWII. You will missed out on opportunity because you were too pessimistic. I know that being too optimistic is bad, but so is being too pessimistic.
https://awealthofcommonsense.com/2014/0 ... eally-bad/
The damage comes from a combination its length and the inflation. For 16 years, the return was essentially zero. If you had bonds, the return was even worse. Bad recent periods like 2000-2010 had a -1% real return, but those were mitigated somewhat if you had some bonds and it was only for 10 years. I believe it was worse than retiring in 1929 because in 1929, you had deflation to cushion your fall and bonds would have helped. This is assuming that the bond didn't default, which is probably a good reason to stick with treasuries.
I feel the take away is that equity has the highest return but also the greatest uncertainty. Cash has probably the lowest return and the lowest uncertainty. You can do it the tortoise way and just invest in massive amount of cash. In a lot of country without functioning stock market, this may be the only way to invest. If you invest in equity, you can reach your goal faster over the long term, but due to the volatility, you may be unlucky and hit roadblocks along the way. This is often why people start out with a high equity allocation and then add bonds as they near retirement to reduce uncertainty. Even if equity stay flat for 16 years, I feel that if you are in the accumulation phrase that would still be ok since you are buying at a level price. May be reset your expectation that you might need to wait 20 years or so for the equity bump.
Bonds are also not entirely safe either. Bill Bernstein is fond of pointing out that from 1941 - 1981, long treasury had a return of -65%. This has led me to keep my bond fund duration intermediate. I have seen post about longer bonds being a better companion than intermediate and some of the numbers show seems to bear this out, but I remain wary.
Keep in mind that 1966 - 1983 is just one bad period out of many periods. Most of the other periods were more favorable to investing. Trying to structure a portfolio to protect against the worse investment period would be like planning your life as if you lived during WWII. You will missed out on opportunity because you were too pessimistic. I know that being too optimistic is bad, but so is being too pessimistic.
Statistics: Posted by gavinsiu — Sat Oct 12, 2024 11:20 pm — Replies 11 — Views 1267