“It’s a deeply out-of-consensus view certain to rankle the Wall Street establishment. A group of academics set out to test time-honored investing advice that says a diversified portfolio of bonds and stocks is the best way to save for the future.”Huh? I’m surprised it took a new study to reach this conclusion. However, I think the report is at least thought provoking. Also mentioned is the importance of investors “sticking with” an all stock portfolio during tough times. Otherwise, the report’s findings likely wouldn’t hold water.
The question is:
”What would you do? Why?” https://www.fa-mag.com/news/you-re-better-off-going-all-in-on-stocks-than-bonds--new-research-finds-75713.html
Comments
JP Morgan confirms your researcher’s finding: I do believe holding a small percentage of less volatility (cash, bonds) during the withdrawal phase helps a retiree “withdrawal cash/bonds and hold a higher percentage of equities” in retirement.
Sited article:
https://jpmorgan.com/insights/outlook/market-outlook/five-considerations-for-investors-in-2024
But things are different during decumulation - even for the US markets. All-stock (or all-bond) portfolios are more likely to run out of money than hybrids. This has been demonstrated repeatedly.
That's what concerns me for a good friend who is 50 years old (married) and has a retirement portfolio of a million already. He hopes to retire at 52 and is planning to be 100% invested in the SP500 until death. He scoffs at the 4% rule as being far too conservative, though I don't know what his starting withdrawal rate plan is. He has floated the idea of meeting with a financial planner to vet his plan.
Here is a link for an article from M* columnist John Reckenthaler on the viability of an all-stock portfolio and high real withdrawal rate in retirement.
https://www.morningstar.com/retirement/can-you-safely-spend-more-early-retirement
On occasion I listened to Ramsey 20+ years ago when he was on late night AM. Sounded much more rational than. From that included clip, it sounds like he’s been attending the ”Rush Limbaugh School of Public Address”. Make what you will of his math.
FWIW - About 15 years ago (possibly more) there was a thread (maybe on F/A?) discussing a published theory that retirees should start out conservatively positioned and become more aggressive as they age. Sounded ridiculous to me at the time. But 25+ years into retirement I can at least understand the logic. Early on you’re most concerned about outliving your assets. If you’re fortunate enough, later on that becomes a less important concern and you might be inclined to put a little more risk “on the table” in pursuit of greater reward.
As always: No 1 size fits all.
Well, tables were turned soon on Ramsey as many on Twitter showed that with Ramsey's advice, anyone who started in 01/2000 would have already run out of money by now, forget about 30-40 years. So, fool was Ramsey. He didn't offer a rebuttal.
Decumulation is very different and less forgiving than accumulation.
You will never run out of money (technically) if you withdraw a percentage of your balance each year.
It’s the dollar amount and the purchasing power of those dollars over time that will keep you in or out of the cat food aisle.
I like running PV with a starting date of 2000 (tech bubble) and see how your friend’s portfolio would have fared with his 8% WD over the last 22 years.
Look for yearly increases in dollar amount of these yearly 8% WDs in PV one an indicator as well as a growing dollar amount of the remaining portfolio.
December article from our MFO contributor, @Lynn Bolin shares his retirement asset allocation, and his reasoning (and metrics).
https://mutualfundobserver.com/2023/12/searching-for-inflection-points/
This is how RMDs are calculated (age specific actuarial WD rate x each year’s portfolio’s ending balance).
Couldn’t we do the same? This would account for life expectancy (actuarial charts) and allow the retiree to increase their WD rate as they aged (if necessary).
How many retirees take more than their RMDs amounts after factoring in other income sources such as SS, pension, part time work, rental income?
It’s not unusual for retirees to be working in their 60’s, maximizing IRA contributions, delaying SS, and delaying IRA WDs. This may allow that retiree to hold a higher percentage of equities and ultimately consider taking a higher WD rate.
I stumbled across the idea that you start retirement with a low equity allocation and increase it as you age ten or so years ago, although I forgot the source. It avoids loosing 45% of your assets in a massive bear market just as you retire.
Of course this requires you to have enough income from SS a pension etc to survive early years without being forced to withdraw capital to live on.
I felt like a genius when I retired equity light in 2019, as the Covid Bear market hit. The problem now is to decide how soon and how much to increase my equity exposure. I have a much better feeling for our expenses and SS income now than I did in 2019, but domestic equities seem rather overpriced now.
A lot of people unfortunately have to take out a substantial % of their retirement account to survive.
@sma3 - I looked for that same idea online and couldn’t find it either. I’ll hasten to add, however, that from my vantage point it’s not quite as clear-cut or simple as it might sound, So much depends on the price at which one buys in - as much as I profess to loath market timing.
You are correct that those of us with pensions + SS may be able to assume more investment risk. While my 48% equity allocation (per Fido’s Analysis tool) is probably the highest ever during the retirement years (with the exception of late ‘08 / early ‘09), it is being accomplished with the assistance of a 30% allocation to L/S & hedged equity types of funds having relatively high ERs. That’s less than ideal, but does afford a respectful allocation to equities per age. Am always looking for ways to cut down expenses w/o ramping up the risk profile. A 10% allocation to individual stocks is part of the solution, but by no means the entire answer.
Thanks @bee for your earlier submissions to the thread,
https://risaprofile.com/about-us/
https://retirementresearcher.com/about/wade-pfau-bio/
https://www.amazon.com/Retirement-Planning-Guidebook-Navigating-Important/dp/194564009X
One of the ideas he has mentioned is "rising equity glide-path" (not sure who first came up with the idea). So, one starts with lower equity exposure around retirement to account for high SOR risks, and then increases equity exposure gradually as retirement progresses. These increases are not dramatic.
"What’s the solution?
There are four ways to manage the sequence-of-return risk. One, spend conservatively. Two, spend flexibly. If you can reduce your spending after a market downturn, that can manage sequence-of-return risk because you don’t have to sell as many shares to meet the spending need. A third option is to be strategic about volatility in your portfolio, even using the idea of a rising equity glide path. The fourth option is using buffer assets like cash, a reverse mortgage or whole life policy with cash value.
What is a rising equity glide path?
Start with a lower stock allocation at the beginning of retirement, and then work your way up. Later in retirement, market volatility doesn’t have as much impact on the sustainability of your spending path, and you can adjust by having a higher stock allocation later on. "
Subscription Link https://www.barrons.com/articles/retirement-4-percent-rule-downturn-strategy-51642806039
It also depends on how big is your portfolio.
- If you don't have enough, you don't have a choice but to own a high % of stocks for longevity.
- If you have WTF portfolio=enough, you can be at 20/80 to 80/20
- The biggest problem is in the middle. How to split between stock to bonds? 35-65% in stocks/bonds makes sense. Another good idea is "a rising equity glide path". You start with 35-40% in stocks and increase by 1% until you get to your sleep-well %.
In my case: since 2018=retirement, I have used at least 90% bonds + flexibility=trading.
If I have $10M, it still matters whether I withdraw 3% or 5%.
Just sayin..
My wife and I don't have anything close to $10m, but our income is perfectly satisfactory for our needs. We surely "have enough".
If we did have $10m we could surely withdraw a lot more, but it wouldn't really matter, because we don't really need that extra amount.
Just sayin...
WTF portfolio is when someone needs under 3% (2.5% is better) withdrawal annually from their portfolio. In that case they can have 20/80 to 80/20 mix of stock/bonds.
The portfolio size is usually in the millions. I'm talking about someone that is living well and spends money they can afford.
Of course, someone who has a pension+ SS that cover all the expenses, can have a smaller portfolio.
Let's see how many posters will try to find a word or something else I didn't mean and twist the above.
On the other hand, there are people who won many millions in the lottery and spend it all.
Then you have the FIRE (https://www.investopedia.com/terms/f/financial-independence-retire-early-fire.asp)
movement. That isn't appealing to m either.
Portfolio risk late in retirement? It’s a personal matter, I think, based more on temperament than anything else. If you still don’t have “enough” to survive on for the rest of your life when you reach 75 - 85 may God help you. It’s unlikely any particular allocation model is going to make much difference at that point. WTF.
Notwithstanding the above, the referenced study (in the OP) doesn’t deal specifically with appropriate equity / risk exposure per age. It simply asserts that an all stock portfolio (50% domestic / 50% foreign) will outperform a “balanced” (60/40) portfolio over just about any relevant time span.
@FD1000: If you post something that is obscurely phrased then we have little choice but to speculate on your intended meaning.
If you consider that to be "twisting" that's unfortunate. The remedy is to write more clearly, so that even we unsophisticated common folk can appreciate your brilliant insight and commentary.
Had to learn it to get a single sideband license. Deleted a long boring post about it.
Uma and John at their cinematic darkest.
Long live FFF!
Fox Force Five, that is!
https://www.investopedia.com/articles/personal-finance/121815/buffetts-9010-asset-allocation-sound.asp
Not sure if it was Pfau who stated this...but there's a concept that the riskiest time for investors are 5 to 7 years prior to retirement and 5 to 7 years after retirement...the ole' sequence of return risk...so thinking is to be extremely "safe" positioned in your portfolio during those times...as you can really get dinged with your funds at the worst possible time with no time for portfolio to recover
Also, curious if any of the class annuitized any of their portfolio going into retirement? and please also indicate if you are comfortable doing so if you have a gov't or other pension (reason being is that I consider a govt pension a better than equivalent of an annuity) I also do believe that Pfau has mentioned annuitizing part of one's portfolio going into retirement.
btw..never saw the movie Pulp F...only have seen snippets and always had no idea what if was about or what was going on, LOL!
Best Regards,
Baseball Fan
Many refer to The (Investor) Red Zone as the 5 years prior to retirement. Others, like me, refer to it as the 5 years prior to and after retirement.
We had never owned a dedicated bond fund and were always 95%-99% in stocks until entering The Zone pre-retirement. We bought our first allocation and dedicated bond funds when we entered The Zone pre-retirement. If we had it to do all over again, we would have not bought any dedicated bond funds - for us, a waste of time, money and effort. The only bonds we hold now are via three allocation funds with bonds being less than 5% of total portfolio. We do own a 5-yr CP CD ladder in lieu of any individual bonds or dedicated bond funds.
I think there is likely a tendency of many to become TOO conservative in The Zone, but the prevailing theme of it is better to be safe than sorry, though one's choice may be for one and end up resulting in the other.
Pulp Fiction is oft referred to as a cult classic of director Quentin Tarantino.
https://www.imdb.com/title/tt0110912/
Musta seen it at least 15 times by now. Stellar cast offers up stellar performances. One iconic scene after another. Not recommended for the faint of heart.
"Rising equity glide path" indeed follows a lower equity exposure around retirement (few years before and after).
Someone who doesn't have enough must take a lot more risk than the above.
I always found better ST trade in bond OEFs and the rest is in MM. MM gives me more flexibility and is easier to trade than CD/TR.
As usual, the red zone DEPENDS. There is a difference between retirement at age 55, 65, or 70.
Never in my life, have I owned a CD or US treasury, as you see at https://fixedincome.fidelity.com/ftgw/fi/FILanding.
From retirement in 2018 to 2022(5 years), I was at 10/90 (stocks/bond OEFs) and did well. In 2023, I'm at 100% bond OEFs doing pretty well. I keep changing my style according to the market. When MM pays over 5%, even 4%, all I need is 3 trades at 2+% to have a great return with very low SD/risk. Owning 2-3 funds makes my life easier.
So what?? That's your life. We have, as circumstances suggested, and we are doing every bit as well as you, thank you. We have also, as circumstances indicated, ventured in real estate (both residential and commercial), second mortgages, stocks, bonds, mutual funds of many types, money-market funds, CDs, and Treasuries. Some winners, some losers.
So what. That's our life. Not necessarily recommended for you or anyone else.
A suggestion for you, though- you might give serious consideration to investing in a hot-air balloon enterprise.