Author Topic: "Your age in bonds". A bad choice for early retirement?  (Read 13436 times)

StockBeard

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"Your age in bonds". A bad choice for early retirement?
« on: July 01, 2015, 10:57:41 AM »
So far I've been targeting "my age in bonds" for my bond/stock allocation. Is that in general a bad idea for people who intend to retire early? Should I go more aggressively with stock?

EricP

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #1 on: July 01, 2015, 10:58:34 AM »
I think prevailing wisdom is to just use 25% bonds throughout ER, I could be wrong, though.

FI40

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #2 on: July 01, 2015, 11:08:18 AM »
I think for early retirees, making the bond allocation depend on age doesn't make much sense because you're doing all the building during a short time period.

I'm more partial to the idea that at the time of retirement (i.e. when you've hit your FI number) you should be at some allocation that you consider conservative, to combat those bad scenarios where the 4% rule can fail like having stocks drop 50% in the first few years of retirement. And at the beginning when you have 0 net worth, most agree you should be at your most aggressive. So for me, this means as my asset level increases and I get closer to my FI number, I'll increase the bond allocation proportionally so that I end up with a conservative allocation once I reach FI (50/50, say).

I'm curious to hear what others think about this issue too.

forummm

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #3 on: July 01, 2015, 11:23:33 AM »
You should use whatever AA *you* are comfortable with and *will stick with* no matter what. When the market drops 50% (which it probably will at some point) you have to be comfortable with your AA. When the market doubles (which it will) you have to be comfortable with your AA. It's when you start to change it that you open yourself up to significant financial risks.

johnny847

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #4 on: July 01, 2015, 11:27:48 AM »
The "age in bonds" advice is targeted at the average American who retires in their 60s or 70s. For people like us, this doesn't quite fit.

The principle still applies in general. Take more risk when you are accumulating wealth.

But I would say you should also take a lot of risk during the early stages of retirement. Or spend less than the 4% rule would say you can during the early stages. Why? Sequence of returns risk.

Quote from: Go Curry Cracker
…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years

Remember, you're not saving for the start of retirement. You're saving for the end of your life.


Now I say more risk. As forummm notes, you have to be comfortable with whatever AA you choose. I mean more risk than at the end of retirement. I don't mean take lots of risk - I mean as much as you are comfortable with.

FLBiker

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #5 on: July 01, 2015, 11:45:49 AM »
I personally do ~15% in bonds.  We're still in the earning stage.  When we get within a couple years of FIRE, I'll add more bonds.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #6 on: July 01, 2015, 11:49:11 AM »
I do 110-Age = equity % . I know alot of MMMers here go for 100%, but I don't have the stomach for it, John Bogle's view of having age = bonds % was too conservative for my taste, so I went for the next best thing, 110-Age =equity % or Age -10= bonds % which is the samething. It all depends on each individual and how much risk your willing to take. In my case, I am in between a risk taker and a conservative.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #7 on: July 01, 2015, 12:28:49 PM »
You should use whatever AA *you* are comfortable with and *will stick with* no matter what. When the market drops 50% (which it probably will at some point) you have to be comfortable with your AA. When the market doubles (which it will) you have to be comfortable with your AA. It's when you start to change it that you open yourself up to significant financial risks.

Agreed.  Your AA shouldn't really be age dependent.  Choose an AA that you can commit to and stick with it.

FI40

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #8 on: July 01, 2015, 04:10:10 PM »
You should use whatever AA *you* are comfortable with and *will stick with* no matter what. When the market drops 50% (which it probably will at some point) you have to be comfortable with your AA. When the market doubles (which it will) you have to be comfortable with your AA. It's when you start to change it that you open yourself up to significant financial risks.

Agreed.  Your AA shouldn't really be age dependent.  Choose an AA that you can commit to and stick with it.

You would have the same allocation with a small portfolio as you would once you've hit your FI number? Aren't your risk tolerances different at those times?

dungoofed

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #9 on: July 01, 2015, 04:33:21 PM »
I don't think one necessarily precludes the other.

arebelspy

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #10 on: July 01, 2015, 05:07:41 PM »
Half your age + 7.
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forummm

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #11 on: July 01, 2015, 05:26:30 PM »
ArcTan(SqRt(2)/Age*WaistCircumferenceInches)*4*Pi/S&P500Volatility+3rdDigitOfDowIndex

StockBeard

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #12 on: July 01, 2015, 05:32:27 PM »
Half your age + 7.
How has this allocation been working for you so far, given that you're -999 years old, according to the forum?

deborah

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #13 on: July 01, 2015, 05:39:45 PM »
ArcTan(SqRt(2)/Age*WaistCircumferenceInches)*4*Pi/S&P500Volatility+3rdDigitOfDowIndex
Forummm - why not just SAY 10%? (Based upon the 3rd Digit of the Dow Index being 9, and the rest of this twaddle coming to less than 1)
« Last Edit: July 01, 2015, 05:52:39 PM by deborah »

ender

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #14 on: July 01, 2015, 05:45:31 PM »
Half your age + 7.
How has this allocation been working for you so far, given that you're -999 years old, according to the forum?

To be fair he does have a lot of "bonds" in the form of mortgages, maybe that's how it works if you have a negative percentage of your portfolio in bonds (?).


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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #15 on: July 01, 2015, 05:46:09 PM »
Half your age + 7.
I thought that was the formula for something completely different.

johnny847

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #16 on: July 01, 2015, 05:46:48 PM »
Half your age + 7.
How has this allocation been working for you so far, given that you're -999 years old, according to the forum?

He's leveraged up to his eyeballs and then some.

Left

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #17 on: July 01, 2015, 06:01:19 PM »
I figured bonds would be important to ER people. For myself, I have a $ amount that I want paid out to me each month, once my bond portion hits that amount, I will go 100% stocks going forward on new cash (well adding to bonds to keep up with inflation).

My ideal 4% swr will be 3% from bond payments and 1% from stocks for that first year. Then each year after that, I just adjust the bonds to keep up with inflation, and everything that the stocks return above that gets reinvested into stocks (with a portion to bonds for the inflation adjustment). I realize that I will need a larger portfolio so the bonds make up 3/4 of what I plan to spend each year. In simple math, my $1m portfolio will have $750k bonds, and $250k stocks to return 4%. Then if stocks outrace bonds during good times, I just leave them alone and not rebalance. I don't know how well 75% bonds will do at the start of ER, but I heard that a crash at the start of retirement hurts the most because you stop having a job income to replace losses. But over time, I want it to even out to 40% bonds/60% stocks, not sure how many years it will take to hit $2m, where I will have 40% in bonds but still paying out my original col from when I retired.

But I have about 11 years before I hit $1m (my own "estimate" based on "nothing" going wrong... which means I'll push it to 15 years). So my idea might change, while growing the portfolio, I'm at 90% stocks because I'm in my 20s (don't want 100% stocks). I plan to just switch my entire 401k to bonds when it hits $750k the first time (100% stocks in taxable), then start rolling the money it gives out to live on.

Some kind of balls were involved, at least.
tasty vegan balls?
« Last Edit: July 01, 2015, 06:03:32 PM by eyem »

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #18 on: July 01, 2015, 06:01:34 PM »
Half your age + 7.
I thought that was the formula for something completely different.

I was wondering who would catch this, and who wouldn't.  ;)

Half your age + 7.
How has this allocation been working for you so far, given that you're -999 years old, according to the forum?

He's leveraged up to his eyeballs and then some.

Some kind of balls were involved, at least.
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forummm

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #19 on: July 01, 2015, 06:13:15 PM »
ArcTan(SqRt(2)/Age*WaistCircumferenceInches)*4*Pi/S&P500Volatility+3rdDigitOfDowIndex
Forummm - why not just SAY 10%? (Based upon the 3rd Digit of the Dow Index being 9, and the rest of this twaddle coming to less than 1)

Precision in financial calculations is really important.

arebelspy

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #20 on: July 01, 2015, 06:35:18 PM »
False precision especially so.

;)
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forummm

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #21 on: July 01, 2015, 06:38:05 PM »
False precision especially so.

;)

Hey man, it totally beat the S&P500 by 3.68% on my backtest over the last 93 months.

Thedudeabides

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #22 on: July 01, 2015, 06:43:37 PM »

Half your age + 7.

I LOL'd. Best answer.

El Marinero

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #23 on: July 02, 2015, 12:08:31 PM »
Half your age + 7.

Made me snicker, too

gReed Smith

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #24 on: July 02, 2015, 02:07:41 PM »
I think there is some research that suggests stocks are actually more predictable than bonds over 30-40 years.  I think this suggests a higher proportion of stocks is appropriate and desirable for people with 30+ year timelines whether you are retired or not.  I doubt I'll ever go below 60/40 because by the time my life expectancy is <30 years, I hope to still have enough money left that I am investing for the benefit of my heirs.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #25 on: July 02, 2015, 02:17:12 PM »
I'm 44.  Have 40% bonds. Projections show I'll be FI in 8.3 years even with that much allocated there.  I'm fine with that.  (Yeah, I know I'm a geezer compared to most people here.)  If I had've started indexing and allocation when I should have done (i.e., 25), yeah--I likely would have done the sliding allocation thing.  But probably only by decade.  You shouldn't be bothered changing that scale every year.  A lot of things show mix bond/equity index investors get to around the same place no matter what their allocation.  As MMM would say:  "Your savings rate is the most important number."  And as Bogle would say: "It doesn't really matter.  Just keep your costs low and forget about it."  Everything else is really just navel-gazing and semantics. 

FI40

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #26 on: July 03, 2015, 08:45:26 PM »
Just as a point of interest, in this video, Bogle seems to advocate adjusting asset allocation based on your view of the stock or bond markets (yield, P/E, etc). Bit of a tangent but it's another reason some people change their AA over time.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #27 on: July 03, 2015, 09:02:28 PM »
Half your age + 7.

That's been my formula for dating.   Sadly it seems to apply more to the 90 years who want to date me rather than the 35 year old I want to date.

Perhaps it works better for investing.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #28 on: July 03, 2015, 09:05:10 PM »
Half your age + 7.

That's been my formula for dating.   Sadly it seems to apply more to the 90 years who want to date me rather than the 35 year old I want to date.

Perhaps it works better for investing.
There's something wrong with the maths.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #29 on: July 03, 2015, 09:15:45 PM »
Half your age + 7.

That's been my formula for dating.   Sadly it seems to apply more to the 90 years who want to date me rather than the 35 year old I want to date.

Perhaps it works better for investing.
There's something wrong with the maths.

No there isn't. Suppose clifp is 56.
Then a 90 year old who wants to date a younger person could date clifp: 90/2+7 = 52.

But clifp wants to date a younger person. By this rule, clifp can date somebody who is at least 35.

Unless you mean that 90 and 35 have to be on the outer edges of both applications of the rule.

deborah

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #30 on: July 03, 2015, 09:41:34 PM »
I was being exact - and you confirmed that his maths is a little out.

arebelspy

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #31 on: July 03, 2015, 10:22:44 PM »
I was being exact - and you confirmed that his maths is a little out.

I'm still not following how the math is wrong.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #32 on: July 03, 2015, 10:28:05 PM »
Half your age + 7 - for a 90 year old = 52, for a 52 year old = 31 not 35 - pedantic, I know.

arebelspy

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #33 on: July 03, 2015, 10:39:28 PM »
I'm not following, but maybe we're not interpreting clif's statement the same.

Both the 35 year old and 90 year old fit within the rule, he's saying it seems to apply more to the 90 year old that he could date than the 35 year old he wants to.

If he said 28 year old he wants to, the math wouldn't work.  But since both 35 and 90 fit, the math seems to check out to me...

Or, in other words, you calculated the lower bound for a 52 year old is 31.  35>31.
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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #34 on: July 03, 2015, 10:41:38 PM »
Either he is too old for the 90 year old, or the 35 year old is to old for him.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #35 on: July 03, 2015, 11:20:15 PM »
Either he is too old for the 90 year old, or the 35 year old is to old for him.

How can there be "too old"?  The formula is to determine beyond what limit is too young.

If 31 is the lower bound, 35 is acceptable.  30 is not.
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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #36 on: July 03, 2015, 11:22:07 PM »
Aaaaahhhh! As I said, I was being pedantic at taking it as being "=Half your age + 7" rather than ">=Half your age + 7"

arebelspy

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Re: &quot;Your age in bonds&quot;. A bad choice for early retirement?
« Reply #37 on: July 03, 2015, 11:50:40 PM »
Ah, gotcha. Google half your age + 7 and you'll find a Wikipedia article with a graph. You were looking for something on the lower bound line, rather than in the "okay" boundary. :)
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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #38 on: July 04, 2015, 02:04:37 AM »
I was being exact - and you confirmed that his maths is a little out.

I was rounding.  Technically  95 year old is as old as I can date and 34.5 is as young.  But judging from my mom's friend at her retirement home, folks really go downhill after 90 so I am drawing the line there. Several years ago I went out with a 35 year old and there was  a bit of generation gap. The rule may actually work better for bonds than for dating.  But for investing purposes I taking 30 years off my age. 

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #39 on: July 04, 2015, 06:15:25 AM »
Just as a point of interest, in this video, Bogle seems to advocate adjusting asset allocation based on your view of the stock or bond markets (yield, P/E, etc). Bit of a tangent but it's another reason some people change their AA over time.

Yes, he's given the example of when the PEs were almost 40 before 2000 a few times. But that's the only time I've heard him say he engaged in market timing. Ben Graham advocated market timing of this nature. But it's hard to do. I think the average person will lose money doing this over the long run. And they will be stressed out the rest of their lives trying to decide whether *now* is the time to market time. Seems unlikely to be worth it.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #40 on: July 04, 2015, 07:02:14 AM »
I think holding your age in bonds is a bad choice for anybody, early retiree or not.  I forget the exact percentage, but I believe history shows that the US allocation that maximizes return over the long term is somewhere between 70/30 and 90/10 stocks/bonds.  If you don't have much safety buffer built into your stash and you have a high percentage of bonds, inflation risk is likely to catch up with you before you die.  If you have a good safety buffer, you can afford to ratchet down the stock market risk and hold a higher percentage of bonds.  But you probably don't need to, because your safety buffer will protect you from sequence of return risk.  Why not juice up your returns so you can leave more to your heirs or you favorite charity?  In the low safety buffer scenario, you are exposed to sequence of return risk early in your retirement if you have a high percentage in stocks.  But I'd rather have to go back to work early on than have to go back when I'm 80 because inflation caught up to me.

forummm

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #41 on: July 04, 2015, 07:59:07 AM »
But I'd rather have to go back to work early on than have to go back when I'm 80 because inflation caught up to me.

SS is inflation indexed, and any pension you might have is likely increased for inflation too. But if you are going to spend much more than the amount those would bring you, or are not confident in those fixed income sources remaining in place, then inflation would be a bigger concern.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #42 on: July 04, 2015, 12:53:36 PM »
But I'd rather have to go back to work early on than have to go back when I'm 80 because inflation caught up to me.

SS is inflation indexed, and any pension you might have is likely increased for inflation too. But if you are going to spend much more than the amount those would bring you, or are not confident in those fixed income sources remaining in place, then inflation would be a bigger concern.
There's been a big debate in Australia about indexing for inflation versus indexing for CPI in pensions. Over the past 150 years, the standard of living (on which CPI is based) has doubled each generation. If we base the future on historical data, pensions indexed to inflation gradually erode the recipient's standard of living with respect to the community.
« Last Edit: July 04, 2015, 01:24:03 PM by deborah »

FI40

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #43 on: July 04, 2015, 05:38:23 PM »
But I'd rather have to go back to work early on than have to go back when I'm 80 because inflation caught up to me.

SS is inflation indexed, and any pension you might have is likely increased for inflation too. But if you are going to spend much more than the amount those would bring you, or are not confident in those fixed income sources remaining in place, then inflation would be a bigger concern.
There's been a big debate in Australia about indexing for inflation versus indexing for CPI in pensions. Over the past 150 years, the standard of living (on which CPI is based) has doubled each generation. If we base the future on historical data, pensions indexed to inflation gradually erode the recipient's standard of living with respect to the community.

Standard of living is the same as consumer price index? How do they calculate inflation in Aus? Over here, it's equal to CPI in most peoples' minds AFAIK, and standard of living would be calculated more qualitatively.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #44 on: July 04, 2015, 05:50:20 PM »
Sorry, I was right before I changed it. CPI = Inflation. The other figure is the percentage of Male Total Average Weekly Earnings (MTAWE).

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #45 on: July 04, 2015, 05:59:32 PM »
I think holding your age in bonds is a bad choice for anybody, early retiree or not.  I forget the exact percentage, but I believe history shows that the US allocation that maximizes return over the long term is somewhere between 70/30 and 90/10 stocks/bonds.  If you don't have much safety buffer built into your stash and you have a high percentage of bonds, inflation risk is likely to catch up with you before you die.  If you have a good safety buffer, you can afford to ratchet down the stock market risk and hold a higher percentage of bonds.  But you probably don't need to, because your safety buffer will protect you from sequence of return risk.  Why not juice up your returns so you can leave more to your heirs or you favorite charity?  In the low safety buffer scenario, you are exposed to sequence of return risk early in your retirement if you have a high percentage in stocks.  But I'd rather have to go back to work early on than have to go back when I'm 80 because inflation caught up to me.

Unfortunately cFIREsim does not use international funds. However, a 90/10 stocks/bonds allocation when using only US stocks is NOT the allocation that maximizes returns. http://www.gocurrycracker.com/path-100-equities/

Look at the median end values. 100% equities is the highest. 

I ran 60 year retirements with allocations from 75/25 to 100/0 in 5% increments. The median values were all increasing with increasing stock allocations:
$3.47M
$4.58M
$6.09M
$7.42M
$9.31M
$11.25M

The same trend is seen for average values.

Now as I stated earlier, this does not incorporate any international equities. However, international equities in general provide a similar return to US stocks with some level of correlation. The developed markets are pretty well correlated with the US, and emerging markets are not well correlated. I have no reason to believe that adding international stocks would decrease portfolio returns for stock heavy portfolios.

It is well accepted that stocks in the long run outperform bonds. Adding bonds to your portfolio does not increase your total portfolio returns. The notion of "buying low and selling high" when you rebalance in a market crash sounds nice in theory, but it does not increase total portfolio returns because bonds lag stocks by too significant a margin when stocks aren't crashing.

The only reason to add bonds to your portfolio is to reduce the volatility of your portfolio. I don't feel like listing out all the numbers but the standard deviation of each portfolio tested above increased with higher stock allocations.
« Last Edit: July 04, 2015, 09:32:51 PM by johnny847 »

smoghat

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #46 on: July 04, 2015, 09:31:15 PM »
Quote
One dollar invested in stocks in 1802 would have grown to $8.8 million in 2003, in bonds to $16,064, in Treasury Bills to $4,575, and in gold to $19.75."


Read more: http://www.investopedia.com/walkthrough/corporate-finance/4/capital-markets/history-stocks-bonds.aspx#ixzz3ez5NMEBN
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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #47 on: July 05, 2015, 04:15:44 AM »
I think holding your age in bonds is a bad choice for anybody, early retiree or not.  I forget the exact percentage, but I believe history shows that the US allocation that maximizes return over the long term is somewhere between 70/30 and 90/10 stocks/bonds.  If you don't have much safety buffer built into your stash and you have a high percentage of bonds, inflation risk is likely to catch up with you before you die.  If you have a good safety buffer, you can afford to ratchet down the stock market risk and hold a higher percentage of bonds.  But you probably don't need to, because your safety buffer will protect you from sequence of return risk.  Why not juice up your returns so you can leave more to your heirs or you favorite charity?  In the low safety buffer scenario, you are exposed to sequence of return risk early in your retirement if you have a high percentage in stocks.  But I'd rather have to go back to work early on than have to go back when I'm 80 because inflation caught up to me.

Unfortunately cFIREsim does not use international funds. However, a 90/10 stocks/bonds allocation when using only US stocks is NOT the allocation that maximizes returns. http://www.gocurrycracker.com/path-100-equities/

Look at the median end values. 100% equities is the highest. 

I ran 60 year retirements with allocations from 75/25 to 100/0 in 5% increments. The median values were all increasing with increasing stock allocations:
$3.47M
$4.58M
$6.09M
$7.42M
$9.31M
$11.25M

The same trend is seen for average values.

Now as I stated earlier, this does not incorporate any international equities. However, international equities in general provide a similar return to US stocks with some level of correlation. The developed markets are pretty well correlated with the US, and emerging markets are not well correlated. I have no reason to believe that adding international stocks would decrease portfolio returns for stock heavy portfolios.

It is well accepted that stocks in the long run outperform bonds. Adding bonds to your portfolio does not increase your total portfolio returns. The notion of "buying low and selling high" when you rebalance in a market crash sounds nice in theory, but it does not increase total portfolio returns because bonds lag stocks by too significant a margin when stocks aren't crashing.

The only reason to add bonds to your portfolio is to reduce the volatility of your portfolio. I don't feel like listing out all the numbers but the standard deviation of each portfolio tested above increased with higher stock allocations.

Thanks for the clarification.  I must have been remembering some sort of "risk-adjusted" return.  Anyway, the point remains that there is no reason (that I can see) for holding a large portion of one's portfolio in bonds, unless you are gifted with the ability to predict the future and are engaging in successful market timing (but see the thread on dual momentum investing: http://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/).  As Forummm pointed out, SS and a pension can help protect against inflation risk, but if you aren't already fully accounting for those in your retirement planning, then you've essentially built in those sources as a safety buffer, and your portfolio is bigger than it needs to be.  In which case you probably shouldn't be worried about sequence of return risk.  If you're accounting for SS/pension, then your starting portfolio amount can be smaller, in which case you are still exposed to inflation risk over time (i.e., the risk that the sum of your SS/pension income and portfolio withdrawals won't be enough to cover your spending).

forummm

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #48 on: July 05, 2015, 06:46:48 AM »
Yes, depending on your simulation inputs, the Sharpe Ratio (risk-adjusted returns) can be higher for portfolios that include high-quality bonds. This means that while returns are a little lower for a little additional % allocated to bonds, the volatility goes down by more than enough to compensate for that, if your scale of adequate compensation is the Sharpe Ratio.

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Re: "Your age in bonds". A bad choice for early retirement?
« Reply #49 on: July 05, 2015, 04:48:25 PM »
So far I've been targeting "my age in bonds" for my bond/stock allocation. Is that in general a bad idea for people who intend to retire early? Should I go more aggressively with stock?

Age in bonds, 10+ age in bonds, etc. are all 'rules of thumb.'  In other words they are good advice to someone who is starting at absolute zero and isn't going to bother to try to learn anymore than a 5 second soundbite.

You should determine your AA based on your goals and your tolerance for volatility.  Here is a good link for helping your figure that out.  https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk

And here is a chart from that link I think is worth extra attention. 


Look at the worst years for each portfolio.  Find one that wouldn't scare the crap out of you or wreck your retirement.  Also keep in mind dollar cost averaging works in reverse once you retire so lots of volatility when you are withdrawing from your portfolio hurts a lot more than when you are adding to it.  For this reason the absolute max aggressive portfolio I would consider for someone drawing down their portfolio is 70/30.  Most investors are probably better off with a 50/50 or 60/40, but even for a conservative investor the most conservative they should probably go is a 30/70.

As you can see the average annual return difference between 70/30 and 100% stock is about 1% a year, but the downside difference is pretty substantial.  Everyone understands the basic idea of risk and return, more return = more risk.  What I think people miss is that diminishing returns is also in there.  The difference between 8% average returns and 10% average returns isn't 20% more risk.  It is 100% more risk. 

Tactical Allocations:  Changing your portfolio based on what you think the market is going to do or because of valuations.  I actually do this with a tiny piece of my portfolio.  Once you start shifting the whole thing you run the risk of being wrong and hurting yourself.  The market can stay at high valuations for a very long time.  Sitting in cash because you think interest rates have to go up(so no bonds) and the market is overvalued(so no stocks) sounds good in your head.  Many people believing these things since 2010(for interest rates) and 2012(for stocks) have missed one of the best bull markets for stocks and bonds.  Now if you want to keep 90% of your portfolio fixed to the AA that is best for you, and try to make market predictions with the other 10%.... well you might due a little better but you don't run the risk of hurting yourself... too bad.  Example:  Your AA is 60/40.  Right now you think stocks are way overvalued and bonds aren't worth it so you shift to 55%stocks,35%bonds, 10% cash.  If you are right you will have cash to dump into stocks if they crash.  If you are wrong you just miss out on some returns.
« Last Edit: July 05, 2015, 04:50:57 PM by Indexer »