100% stocks in the accumulation phase?

[Kevin K.]

At the risk of rehashing some of the comments on the lengthy Golden Butterfly thread, I thought this new post by Tyler over at Portfolio Charts in response to a "why not go 100% stocks?" question on Bogleheads was really excellent and also the perfect introduction to a total return and truly non-correlated asset approach vs. the Boglehead asset allocation one that's so much more commonly used.

https://portfoliocharts.com/2016/07/25/thinking-beyond-stocks-can-fortify-your-accumulation-plan/

There are an awful lot of folks in the ER world (MMM himself and, especially, J. Collins) who seem to view the ability to hold on through devastating stock market crashes that can go on for years as some sort of badge of courage, but (a) it isn't; and (b) very few people in the real world can actually stay the course with huge equity allocations.

Tyler offered this gem of a comment on another forum in response to a question about whether allocations should change substantially pre vs. post FI, and I think it's damn near frame-worthy:

"I personally believe the time to start developing good investing habits is when you first start investing, and one's strategy should not involve taking unnecessary risks before FI or changing portfolios after. For the most part I think the best advice is to pick an enduring financial strategy from the start and focus on maximizing savings rather than returns. If it's too risky to retire on, it's probably also too risky to guarantee with any amount of certainty the retirement date you want so badly. And if the volatility causes you to sell low every few years, it's most likely hurting you more than it helps anyway.

I also believe that much of the equity glide path advice comes from the over-simplified perspective that total stock and total bond funds are the only investing options available and that good returns (important for accumulation) and low volatility (equally important for retirement) are mutually exclusive. Too many people tackle the exclusivity problem for those two assets by adjusting the percentages over time rather than challenging the two-option assumption. Following modern portfolio theory, there are good portfolio options with solid returns AND low volatility with no adjustments required. That's a common theme of the site and the reason that there's an entire section dedicated to portfolio examples."

IMHO this perspective and the Portfolio Charts site in general are pretty amazing - even revolutionary - tools to have available to the general public - and for free! This kind of perspective on asset allocation, in my experience, is normally the province of a small handful of DFA fund folks that manage huge endowments and the accounts of the super-rich.

[nobodyspecial]

I think yesterdays topic was that the first few (10) years post Fire are the most (or indeed only) risky ones.
In accumulation you can always simply work a few more years faced with a crash - if you have retired and your only option is to sell to buy food - then bonds might be useful.
 

[Lagom]

No mustachian should have issues with selling low (if they do, they should already know 100% stocks is not for them), so that part of the comment is irrelevant. Also, holding through down years is not a "badge of courage," it's just understanding that in the long run, prosperity prevails, and stock holdings bring the most value in times of prosperity. Obviously, a massive selloff just as you intend to retire would suck, but as has been discussed ad naseum in various threads, the chances of that are quite low, and historically, even if that does happen, the 4% rule still holds almost all of the time.

If for some reason this wisdom should collapse, no portfolio will make up for the financial Armageddon that would result (perhaps short of physical gold), so it's not worth worrying about that possibility. I found the GB portfolio tantalizing for the same reason many others have, but ultimately trusting the market actually seems to be one of the least risky things you can do if you want to support a 30-40-50+ year retirement.

[arebelspy]

That article to me showed why one wouldn't want to use the GB for accumulation.

Even a portfolio that backtests about as well as one CAN backtest (and one can argue if it was chosen because of backtesting or not, but even if you say it wasn't, you'll probably concede that it backtests amazingly well), and it still did quite poorly versus TSM over 30 years.

Here's the two charts he presents, put together:



The GB looks great, because of how narrow the range is--it's reliable!  But the thing is, what it's reliable at is under performing.  The y-axis scale is different for the two charts!  And unless one looks carefully, you won't notice it.

But I highlighted the 800k line in green.  TSM hits that almost every time (maybe 10% below, 90% above?).  GB only hits it about half the time.  The 900k line I highlighted in blue. TSM hits it half the time, GB not a single time!

If you want 800k, GB will take you about 30 years (half the time you'll hit it a bit before, half a bit after).  If you want 800k with TSM, you'll likely hit it around 23-ish years (from my eyeball of when about half of them have crested 800k at some point).  8 extra years of working, because you don't want to handle a little short term volatility?  No thanks.

Asset allocation isn't a free lunch, sad to say, and while your returns are much more stable, you do give up something for that.

To me, that chart above is exactly why one SHOULD be in TSM in the accumulation phase.  Because market setbacks can easily be made up for.  Imagine if you want 1MM.. about half the TSM ones have made it.  None of the GB lines have even hit 900k. 

If you want to go more conservative in ER, like GB or PP, in ER for capital preservation, okay.  I guess that's fine.  (Though my thought on it is..if it under performs so much over the 30 years of accumulation.. and I'm planning for 30+ years of ER...)

/shrug

GB has benefits, no doubt.  Big ones for those having trouble staying the course.   As to this:

There are an awful lot of folks in the ER world (MMM himself and, especially, J. Collins) who seem to view the ability to hold on through devastating stock market crashes that can go on for years as some sort of badge of courage

I don't advocate "staying the course" as a "badge of courage" so you can brag "yeah, I went through the crash of XYZ without selling!" but because it's a more mathematically optimal route.  :)

But if you can just ignore your accounts for your accumulation phase, TSM offers a much faster route than GB, the majority of the time (of course, the shorter your accumulation phase is, the more risk you're taking of having to OMY, but by using something like GB, you're basically guaranteeing it.  And I'd rather OMY if there was a big crash anyways, regardless of my AA, for the massive accumulation potential such as there was in 2009).

GB seems nice and fun, in that article, but looking at that y-axis?  Yikes.  That's seriously what I DON'T want in accumulation--lots of extra years of work, because I'm afraid of a little volatility at the one point when I shouldn't be--when I've got a firehose of cash bringing in funds to invest.

[arebelspy]

Can someone good at photoshop change all the GB lines to one color, all the TSM to another (and not worry about the lighter/darker for more recent year stuff), and superimpose the GB over TSM, with the axis scaled properly?

Original photos:
https://portfoliocharts.files.wordpress.com/2015/07/total-stock-market-accumulation-2016.jpg
https://portfoliocharts.files.wordpress.com/2015/09/golden-butterfly-accumulation-2016.jpg

[Tyler]

Can someone good at photoshop change all the GB lines to one color, all the TSM to another (and not worry about the lighter/darker for more recent year stuff), and superimpose the GB over TSM, with the axis scaled properly?

I think you missed this one in the article.  ;)



The yellow is the GB.  The light red is 100% stocks. 

But don't forget the blue one -- that's the Coward's portfolio.  It has 40% Short Term Treasuries, and basically matched the full range of TSM outcomes once you look past the 90's stock bubble that caused the red peak and subsequent crater. 

The article is about a lot more than the Golden Butterfly. 

[arebelspy]

I didn't miss that chart, it was right under the ones I was talking about.

I have a really hard time seeing those lines.  Can you do a solid color for TSM, and another for GB, and not worry about fading them, or other portfolios, or whatever, and just look at GB v TSM for 30-year accumulation?

And, FWIW, I didn't address that part, but I think that is even more deceptive than the y-axis shenanigans.

But surely that extra risk is rewarded in the end — right?  Not necessarily.  Here’s what they all look like on the same chart
...
In year 30, there’s a $600k spread in historic outcomes for the stock market based simply on when you were lucky enough to start investing.  For the Coward’s Portfolio, it’s about $500k — overlapping most of the stock outcomes, but notably leaving out any of the temporary euphoric highs and subsequent drops of the 90’s stock bubble.  And the Golden Butterfly had a remarkably low spread of only $100k while still competing with stock market gains much more closely than one would expect from a portfolio with only 40% stocks.

When you say there's a 600k spread in outcomes for TSM versus 100k for GB, it makes TSM sound really bad.. but you neglect to mention the most important part: even the LOWEST of those TSMs are about equal to the HIGHEST of those GBs.  In other words, that 600k spread sounds really bad, but almost of that spread is above the GB results.

In fact, you start with a question "But surely that extra risk is rewarded in the end — right?  Not necessarily." -- but it pretty much IS rewarded in the end, in almost every scenario.

I love much of your analysis, Tyler, but I think you've gotten a little blinded by GB and a lot of the analysis can be a bit biased nowadays versus your earlier commentary.

If this article was about investing on a 10-year timeframe, I think you'd have a decent point. And it may be more relevant for the ER folks.  But it seems apparent to me, based on that y-axis, that for 30 years, TSM beats GB basically every time.

[Tyler]

And, FWIW, I didn't address that part, but I think that is even more deceptive than the y-axis shenanigans.

When you say there's a 600k spread in outcomes for TSM versus 100k for GB, it makes TSM sound really bad.. but you neglect to mention the most important part: even the LOWEST of those TSMs are about equal to the HIGHEST of those GBs.  In other words, that 600k spread sounds really bad, but almost of that spread is above the GB results.

With respect...

I supplied a chart with all three portfolios overlayed on the same scale, and the relative accumulation of the portfolios is there for everyone to see.  I understand you have trouble reading it, and I appreciate you pointing that out.  I'll look into improving it.  The charts in question are in a section discussing dependability, not maximization, but I included the overlayed chart specifically so there would be no confusion with the terminal values and I directly addressed the stock upside.  The article is about so much more than that.

There are no shenanigans, and the GB is not at all the focus.  We have an entire thread for arguing about that.  ;)

[Radagast]

I agree with ARS that a very high allocation to stocks is most likely to result in the best outcome for accumulators. Adding other assets reduces the spread of outcomes, but the reduction has been more likely to occur on the high end instead of the low end unless the assets are chosen very carefully, and then only rarely. "Cash" and other tame investments have been especially detrimental. Either way the allocation to stocks vs. other assets seems to be the dominant factor for an accumulator, with higher stock allocations almost always resulting in more money. However, the GB and other portfolios with "tame" or non-correlated assets seem clearly better than 100% stocks for people siphoning money away instead adding it. So, ARS, you might want to rethink your allocation if you are subtracting from your stock funds rather than adding.

It boils down to this: volatility is almost always good for accumulators and bad for withdraw-ors.

[steveo]

I completely agree with Tyler points on the accumulation phase. I think the goal shouldn't be to get rich quickest or to end up with the most.

In stating that if you are cool with 100% stocks and the implications of that asset allocation go for it.

At the same time I have a massive fear that people that use Tyler's site and backtest possible asset allocations don't realise that the future will be different to the past. I'm much more a fan of picking a simple asset allocation and sticking with that.

[arebelspy]

So, ARS, you might want to rethink your allocation if you are subtracting from your stock funds rather than adding.

For me personally, I am adding to my equities positions.

But for those in the accumulation phase in general, TSM seems superior.

It boils down to this: volatility is almost always good for accumulators and bad for withdraw-ors.

If it comes with upside (as stocks tend to), this seems mostly correct.

Can someone good at photoshop change all the GB lines to one color, all the TSM to another (and not worry about the lighter/darker for more recent year stuff), and superimpose the GB over TSM, with the axis scaled properly?

Original photos:
https://portfoliocharts.files.wordpress.com/2015/07/total-stock-market-accumulation-2016.jpg
https://portfoliocharts.files.wordpress.com/2015/09/golden-butterfly-accumulation-2016.jpg

Still hoping to see this from someone willing and good at photoshop.  :)

[arebelspy]

I completely agree with Tyler points on the accumulation phase. I think the goal shouldn't be to get rich quickest or to end up with the most.

What should the goal during the accumulation phase be then?

(I'm not necessarily saying one of those should be the goal, but curious if you think those aren't it, what it should be.)

[Tyler]

Still hoping to see this from someone willing and good at photoshop.  :)

Does this help?



Red is TSM, blue is Cowards, gold is GB. 

[arebelspy]

That is much more legible, thanks!

[arebelspy]

The posed question of "But surely that extra risk is rewarded in the end — right?  Not necessarily." and ending with "And the Golden Butterfly had a remarkably low spread of only $100k while still competing with stock market gains much more closely than one would expect from a portfolio with only 40% stocks." still seems like a false conclusion to me.  The GB got roundly beat over the 30-year periods from 1972-2015, for someone accumulating.

That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

As it is, this article as a whole just seems unbalanced.

[Tyler]

I disagree that anything is misleading, but I appreciate your point.  I reworded that section a bit to eliminate a few statements that are clearly stumbling blocks which unnecessarily distract from my larger point about portfolio dependability.

Thanks for the feedback. 

[TheAnonOne]

The posed question of "But surely that extra risk is rewarded in the end — right?  Not necessarily." and ending with "And the Golden Butterfly had a remarkably low spread of only $100k while still competing with stock market gains much more closely than one would expect from a portfolio with only 40% stocks." still seems like a false conclusion to me.  The GB got roundly beat over the 30-year periods from 1972-2015, for someone accumulating.

That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

As it is, this article as a whole just seems unbalanced.

Similar conclusion on my end as well.

In this, and other research, that I have done, the TSM approach basically wins as soon as the investor passes through any 1 singular bull market. Even with the subsequent crash (if any, but mainly talking about 2000) they still end up over the bond/gold heavy portfolios for basically... the rest of time.

[Cycling Stache]

I think the goal shouldn't be to get rich quickest or to end up with the most.

That's exactly what the goal should be.  The more quickly you get to FI, the more quickly you move on with the rest of your life.  This is (mostly) an early retirement blog, after all.

The questions are what additional risk are you taking to get there more quickly, and is that risk worth it.  The answer over a 30-year period--as ARS pointed out pretty clearly--is absolutely when it comes to investing in equities.  TSM may have a larger spread, but almost all of it is upside, and based on net present value based on the various outcomes, the number is way higher.

The issue with the allocation becomes more important when you focus on time frames.  If you're 5 years (you hope) from your FI number based on a more conservative portfolio than 100% equities, then the potential downside risk of investing in 100% equities to try to get there in 4 years or 4.5 years might not be worth it.  But I think many people who have jobs probably do think in terms of being willing to work until whenever they get to their number, then stop.  So the downside risk isn't as significant as AFTER leaving the job (where portfolio allocation would matter more) because people really can and will work until they get to their number, and take on the extra risk of 100% equities in order to get there faster.

After you retire, you need to care more about allocations because of the increased difficulty of adding new income (compared to when you were already working).

I think the one point working against ARS's analysis is that the 30-year timeline is (hopefully) not that realistic for most of the people on this blog, so considering the volatility/increased risk of 10-15 year time frames might make more sense.  But I still bet most people would take the risk of 100% equities to get to their number more quickly while they have a job and are working, given the ability to keep working until they hit the number if the downside risk plays out.

And finally--and importantly, given the many posts on investor alley--this all depends on the ability to stick to the plan and not react to the markets, which many people do seem to struggle with when the likes of Brexit and a 5% move triggers numerous, multi-page "what should we do now" threads.

[Kaspian]

I completely agree with Tyler points on the accumulation phase. I think the goal shouldn't be to get rich quickest or to end up with the most.

What should the goal during the accumulation phase be then?

(I'm not necessarily saying one of those should be the goal, but curious if you think those aren't it, what it should be.)

Personally, it's to set a reasonable expectation for rate of return, stick to that, and hopefully it pans out to historic averages.  My goal (plan in Personal Investment Policy) is to theoretically get 5-7% returns over the long-term, not to "win".   It sounds like striving for mediocrity, but that's sort of what index investing is anyway.  I need to make a good soup, not the best soup in the fucking universe.  :D

Also, terribly afraid that people overestimate their courage levels.  ...In the same way people do their own driving abilities.  Everyone is above average.  It's easy to say you're not afraid of sharks if you're still standing in the boat.  Having invested through the Dot COM crash and 2008, I know my own bravery levels.  A lot of those guys who committed suicide during the crashes?  Yeah, they *thought* they had a "high risk tolerance".  :(

[Retire-Canada]

That's exactly what the goal should be.  The more quickly you get to FI, the more quickly you move on with the rest of your life.  This is (mostly) an early retirement blog, after all.

Agreed.

I'm in the accumulation phase and I am 100% stocks, but not 100% US stocks. I'd rather have higher volatility/higher returns now than lower volatility/lower returns since I have no need of the $$ I have invested and can ride out any crash. I didn't freak out in 2008 and I am much better informed now so I think I can handle a major paper value loss without doing something stupid.

Once I FIRE I will care about stability more as I'll need $$ every year. However, even then my goal would only be to have a stable portion of my portfolio that would cover me for say 5 years of living expenses to ride out a market downturn. So that would be something like $100K - $150K depending how I was feeling about doing some PT work. Out of a portfolio that will be in the $750K - $1M range that means the majority will still be in stocks.

[bryan]

Still hoping to see this from someone willing and good at photoshop.  :)

Does this help?



Red is TSM, blue is Cowards, gold is GB.

Would be nice to be able to specify x/y scale, or rather where the axis stops. Effectively it would be nice to reduce the 30 year scale/sample to 4-15 years for folks with higher savings rates so we can really see the effects more clearly.

Same issue (can't customize axis, scale, sample) for some calculators, so they aren't as visually helpful on certain cases (like firetime calc where you just need 4 years to go, everything is bunched up to the left and goes off graph quickly).

[Tyler]

Would be nice to be able to specify x/y scale, or rather where the axis stops. Effectively it would be nice to reduce the 30 year scale/sample to 4-15 years for folks with higher savings rates so we can really see the effects more clearly.

Same issue (can't customize axis, scale, sample) for some calculators, so they aren't as visually helpful on certain cases (like firetime calc where you just need 4 years to go, everything is bunched up to the left and goes off graph quickly).

Good idea!  I'll have to experiment a bit to find a way to adjust the various scales on the fly (the online service I use strips out VBA so not all solutions work).  I agree it would be a nice feature for certain charts.

[arebelspy]

I think the one point working against ARS's analysis is that the 30-year timeline is (hopefully) not that realistic for most of the people on this blog, so considering the volatility/increased risk of 10-15 year time frames might make more sense.  But I still bet most people would take the risk of 100% equities to get to their number more quickly while they have a job and are working, given the ability to keep working until they hit the number if the downside risk plays out.

Indeed.  Like I said earlier, I think an article on this same topic, looking at a 10 or 20 year time frame would be interesting.  But if the conclusion for 30 years wasn't "TSM wins over 30 years," it's hard to know how balanced that discussion over a shorter time frame will be.  Tyler clearly has different priorities for his portfolio than a lot of us, which is fine (and I like reading the different perspective), but then it tilts the articles that way.  I'd still like to read it though.

But the Bogleheads crowd, who started the topic, likely have a 30+ year accumulation period (they aren't so much into ER), so that article may be more relevant to them anyways.  We're the weird ones with 10-20 year timeframes.

I do think the "Time to FI" calculators are really, really useful for us, and often show TSM is not optimal for someone wanting to FIRE as quick as possible, as reliably as possible.

[steveo]

I completely agree with Tyler points on the accumulation phase. I think the goal shouldn't be to get rich quickest or to end up with the most.

What should the goal during the accumulation phase be then?

(I'm not necessarily saying one of those should be the goal, but curious if you think those aren't it, what it should be.)

The goal during the accumulation and the drawdown phase should be to achieve the best risk adjusted return. If the only goal is to be the richest or get there the quickest there is a chance that you will end up losing money at a time when you can't afford too. Same as in the drawdown phase. You need to be looking at potential negative investment returns as well as potential positive investment returns.

[steveo]

That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

You have to take everything into account. This is where a 100% TSM approach can fall apart. I'm 43 now. I've only just paid off my house at the start of this year. I figure I have 4-5 years and then I'm FI. So due to my circumstances (I'm Australian and we have crazy house prices) my accumulation phase won't really be 30 years. It will basically be about 5 years although I have accumulated some old man money prior to paying off my house. In my opinion my accumulation asset allocation and my drawdown asset allocation should be exactly the same or maybe better put I don't see investment returns as being a driving factor in getting my FI money. My FI money will be based predominantly on the amount of money I save.

[steveo]

I think the goal shouldn't be to get rich quickest or to end up with the most.

That's exactly what the goal should be.

I just answered this. I still don't see it as being as simple as what some of you are making out.

[steveo]

I completely agree with Tyler points on the accumulation phase. I think the goal shouldn't be to get rich quickest or to end up with the most.

What should the goal during the accumulation phase be then?

(I'm not necessarily saying one of those should be the goal, but curious if you think those aren't it, what it should be.)

Personally, it's to set a reasonable expectation for rate of return, stick to that, and hopefully it pans out to historic averages.  My goal (plan in Personal Investment Policy) is to theoretically get 5-7% returns over the long-term, not to "win".   It sounds like striving for mediocrity, but that's sort of what index investing is anyway.  I need to make a good soup, not the best soup in the fucking universe.  :D

Also, terribly afraid that people overestimate their courage levels.  ...In the same way people do their own driving abilities.  Everyone is above average.  It's easy to say you're not afraid of sharks if you're still standing in the boat.  Having invested through the Dot COM crash and 2008, I know my own bravery levels.  A lot of those guys who committed suicide during the crashes?  Yeah, they *thought* they had a "high risk tolerance".  :(

100% correct. Mediocre is just fine with me. I don't want the best. That is why I'm not really interested in backtesting a bunch of different asset allocations. I'll just pick something that I'm comfortable will do okay and stick with that.

Although I'm interested in asset allocation and savings and all the rest of it I figure money is something that you get right and then you forget about it. Some people will get better returns than me but I don't care.

[Tyler]

Tyler clearly has different priorities for his portfolio than a lot of us, which is fine (and I like reading the different perspective), but then it tilts the articles that way.

Oh -- I definitely have a point of view!  People don't read MMM for balanced stories on the benefits of corporate life.  ;)  While I absolutely strive to be factual and open-minded, true balance comes from multiple voices, not just one.  Don't just take my word for it!  I wholeheartedly endorse comparing and contrasting my opinions with JLCollins, Jason Fieber (Dividend Mantra), and other smart people with very different investing approaches (including arebelspy with his real estate expertise!) to find what resonates with you. 

Speaking of multiple voices, this one's for you and Bryan.  Discuss.


(edited to fix incorrect description)

[arebelspy]

That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

You have to take everything into account. This is where a 100% TSM approach can fall apart. I'm 43 now. I've only just paid off my house at the start of this year. I figure I have 4-5 years and then I'm FI. So due to my circumstances (I'm Australian and we have crazy house prices) my accumulation phase won't really be 30 years. It will basically be about 5 years although I have accumulated some old man money prior to paying off my house. In my opinion my accumulation asset allocation and my drawdown asset allocation should be exactly the same or maybe better put I don't see investment returns as being a driving factor in getting my FI money. My FI money will be based predominantly on the amount of money I save.

Of course.  And we'd all agree with that.  But in this instance, we're talking about a 30-year accumulation period.  We're not talking about your particular circumstance (which none of us necessarily even knew).  Reread what I wrote that you quoted.

That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

On your five-year timeframe, certainly giving up some return in exchange for less volatility may be desirable.  But on a 30-year timeframe?  That's what's in question here.

[arebelspy]

Oh -- I definitely have a point of view!  People don't read MMM for balanced stories on the benefits of corporate life.  ;)  While I absolutely strive to be factual and open-minded, true balance comes from multiple voices, not just one.  Don't just take my word for it!  I wholeheartedly endorse comparing and contrasting my opinions with JLCollins, Dividend Mantra, and other smart people with very different investing approaches (including arebelspy with his real estate expertise!) to find what resonates with you. 

Definitely.  I just didn't realize, til this article, what your perspective was.  I previously thought it was to encourage people to look beyond the 60/40 standard portfolio to other asset classes, and give an honest evaluation towards where each might be better, and when one might prefer one over the other.  It seems like that's just part of it, but moreso to argue for and convince people that other ones are better than simple stocks, in nearly all cases.  In other words, I thought it was a more impartial look at all asset allocations to determine the best one(s) for different individuals, but this past article made it seem more like advocating for and against certain ones.  I think the bias just came out in this one, because TSM seems better in almost every 30-year period in your backtest timeframe, but it's mostly put down, which just seemed odd.  To me it'd seem like a pretty clear case of "yup, here's one of the few times TSM may be better."  Just how I read it.  :)

Speaking of multiple voices, this one's for you and Bryan.  Discuss.

Interesting.  15 year accumulation is certainly not as clear cut as 30 years .. I think I'd still personally pick TSM over GB (if those were the only two portfolios that existed), but I can definitely see why others wouldn't, especially if they like to constantly check the value of their holdings, and if they get bad feelings if that number goes down (strong loss aversion).

[Tyler]

Definitely.  I just didn't realize, til this article, what your perspective was.  I previously thought it was to encourage people to look beyond the 60/40 standard portfolio to other asset classes, and give an honest evaluation towards where each might be better, and when one might prefer one over the other.  It seems like that's just part of it, but moreso to argue for and convince people that other ones are better than simple stocks, in nearly all cases.  In other words, I thought it was a more impartial look at all asset allocations to determine the best one(s) for different individuals, but this past article made it seem more like advocating for and against certain ones.  I think the bias just came out in this one, because TSM seems better in almost every 30-year period in your backtest timeframe, but it's mostly put down, which just seemed odd.  To me it'd seem like a pretty clear case of "yup, here's one of the few times TSM may be better."  Just how I read it.  :)

Fair enough.  I definitely put a stake down from the start in this particular article to present the argument for thinking beyond stocks.  A lot of that is because of the way the Bogleheads post that posed the question was worded, but I fully admit to having a slant towards the benefits of diversification*.  I genuinely feel it can help a lot of people in ways that are rarely talked about outside of academic circles.  And let's be honest -- my calculators with only two or three funds would be pretty boring!  ;)  In all seriousness, I've learned a lot in the process of exploring the nuances of portfolio theory and the site is my way of sharing what I've learned (and continue to learn) with others. 

(*) Despite the perception people might have from the concentration of posts on this particular forum, however, I'm honestly not biased towards the Golden Butterfly.  I think any of the other portfolios on the site are great options, and I am more than happy to talk about the pluses and minuses of each to help you find one that works for you.  I'd love it if people had more questions about Swensen, Ivy, and all of the other interesting options! 

That said, as a personal challenge to keep myself honest I do have a fun post idea I'm tossing around.  If stock funds were my only option, what portfolio would I choose?  I'm still considering the various ways to approach that problem. 

[arebelspy]

That said, as a personal challenge to keep myself honest I do have a fun post idea I'm tossing around.  If stock funds were my only option, what portfolio would I choose?  I'm still tossing around the various ways to approach that problem.

Hmm, that's interesting.  I guess my first question would be to figure out how to avoid a backtesting problem (e.g. "small caps have done better, so that's what I choose")?

[bryan]

Speaking of multiple voices, this one's for you and Bryan.  Discuss.

(edited to fix incorrect description)

Interesting.  15 year accumulation is certainly not as clear cut as 30 years .. I think I'd still personally pick TSM over GB (if those were the only two portfolios that existed), but I can definitely see why others wouldn't, especially if they like to constantly check the value of their holdings, and if they get bad feelings if that number goes down (strong loss aversion).

Cool. Tyler, are these 15 year samples as well, or still 30 year? i.e. are there ~13 lines for each or ~28?

I realize now I've already made a tangential comment on this sort of thing: http://forum.mrmoneymustache.com/investor-alley/betterment-45192/msg844484/#msg844484

Basically that the faster you get to FIRE, the less asset allocation even matters (duh). Here are two charts customized for the question at hand (anyone can go in and modify and re-run, if you find $80k too crazy etc):
- TSM : https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&initialAmount=250000&annualOperation=1&yearlyWithdrawal=80000&inflationAdjusted=true&yearlyPercentage=4.0&lifeExpectancyModel=0&currentAge=70&years=5&simulationModel=2&fullHistory=true&startYear=1972&endYear=2014&bootstrapModel=1&bootstrapMinYears=1&bootstrapMaxYears=20&circularBootstrap=true&distribution=1&meanReturn=7.0&volatility=12.0&inflationModel=1&inflationMean=4.26&inflationVolatility=3.13&asset1=TotalStockMarket&allocation1_1=100&asset2=IntlStockMarket&allocation2_1=0&asset3=TotalBond&allocation3_1=0&asset4=Commodities&allocation4_1=0&asset5=REIT&allocation5_1=0
- GB : https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&initialAmount=250000&annualOperation=1&yearlyWithdrawal=80000&inflationAdjusted=true&yearlyPercentage=4.0&lifeExpectancyModel=0&currentAge=70&years=5&simulationModel=2&fullHistory=true&startYear=1972&endYear=2014&bootstrapModel=1&bootstrapMinYears=1&bootstrapMaxYears=20&circularBootstrap=true&distribution=1&meanReturn=7.0&volatility=12.0&inflationModel=1&inflationMean=4.26&inflationVolatility=3.13&asset1=LargeCapValue&allocation1_1=20&asset2=SmallCapValue&allocation2_1=20&asset3=LongTermBond&allocation3_1=20&asset4=TwoYearTBills&allocation4_1=20&asset5=Gold&allocation5_1=20

Even lacking https://portfoliocharts.com/calculators/ niceties which help visually deciding, GB seems nice. If you don't plan to FIRE for 30 years, CAGR probably means more to you?

Though this introduces the idea that maybe you don't have a single asset allocation your entire life, but rather have a glidepath or optimum portfolio in a given situation... it's not timing the market, it's timing your own situation! (and possibly exposing yourself more to some demographic/macro risks)

That said, as a personal challenge to keep myself honest I do have a fun post idea I'm tossing around.  If stock funds were my only option, what portfolio would I choose?  I'm still tossing around the various ways to approach that problem.

Hmm, that's interesting.  I guess my first question would be to figure out how to avoid a backtesting problem (e.g. "small caps have done better, so that's what I choose")?

Yeah.. you have to throw out the best back-testing portfolio with reasoning like "well that surely can't last forever," until eventually you've added enough diversification that you are comfortable. Same issue some people have with holding gold, I think. So the reasonable solution is figuring out some interesting limitation options at the outset (min/max % holding, take advantage of some tax efficiency, must include certain classes of assets, etc). I guess this is how most of the porfolios on https://portfoliocharts.com/portfolios/ were created. So indeed, I would be interested to see how Tyler approaches it.

[Tyler]

Cool. Tyler, are these 15 year samples as well, or still 30 year? i.e. are there ~13 lines for each or ~28?

They're the same previous chart, but cropped at 3 years on the low end and 15 on the high.  It's hard to make out because of the density, but each portfolio actually has 42 lines -- 30 complete runs to 15 years, and every run 14 years down to 3.  I like showing even the shorter lines to illustrate when recent periods break from historical norms. 

[steveo]

That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

You have to take everything into account. This is where a 100% TSM approach can fall apart. I'm 43 now. I've only just paid off my house at the start of this year. I figure I have 4-5 years and then I'm FI. So due to my circumstances (I'm Australian and we have crazy house prices) my accumulation phase won't really be 30 years. It will basically be about 5 years although I have accumulated some old man money prior to paying off my house. In my opinion my accumulation asset allocation and my drawdown asset allocation should be exactly the same or maybe better put I don't see investment returns as being a driving factor in getting my FI money. My FI money will be based predominantly on the amount of money I save.

Of course.  And we'd all agree with that.  But in this instance, we're talking about a 30-year accumulation period.  We're not talking about your particular circumstance (which none of us necessarily even knew).  Reread what I wrote that you quoted.

That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

On your five-year timeframe, certainly giving up some return in exchange for less volatility may be desirable.  But on a 30-year timeframe?  That's what's in question here.

I agree. I even said earlier (I think) that so long as you are comfortable with a 100% stock allocation you should go for it.

Still we are all in a similar situation. Is it really about getting the best possible return - i.e. the maximum return or is it about getting the best risk adjusted return. I still think it's about the best risk adjusted return.

My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

I think that it should also be about sleeping well at night.

[steveo]

Definitely.  I just didn't realize, til this article, what your perspective was.  I previously thought it was to encourage people to look beyond the 60/40 standard portfolio to other asset classes, and give an honest evaluation towards where each might be better, and when one might prefer one over the other.  It seems like that's just part of it, but moreso to argue for and convince people that other ones are better than simple stocks, in nearly all cases.  In other words, I thought it was a more impartial look at all asset allocations to determine the best one(s) for different individuals, but this past article made it seem more like advocating for and against certain ones.  I think the bias just came out in this one, because TSM seems better in almost every 30-year period in your backtest timeframe, but it's mostly put down, which just seemed odd.  To me it'd seem like a pretty clear case of "yup, here's one of the few times TSM may be better."  Just how I read it.  :)

Fair enough.  I definitely put a stake down from the start in this particular article to present the argument for thinking beyond stocks.  A lot of that is because of the way the Bogleheads post that posed the question was worded, but I fully admit to having a slant towards the benefits of diversification*.  I genuinely feel it can help a lot of people in ways that are rarely talked about outside of academic circles.  And let's be honest -- my calculators with only two or three funds would be pretty boring!  ;)  In all seriousness, I've learned a lot in the process of exploring the nuances of portfolio theory and the site is my way of sharing what I've learned (and continue to learn) with others. 

(*) Despite the perception people might have from the concentration of posts on this particular forum, however, I'm honestly not biased towards the Golden Butterfly.  I think any of the other portfolios on the site are great options, and I am more than happy to talk about the pluses and minuses of each to help you find one that works for you.  I'd love it if people had more questions about Swensen, Ivy, and all of the other interesting options! 

That said, as a personal challenge to keep myself honest I do have a fun post idea I'm tossing around.  If stock funds were my only option, what portfolio would I choose?  I'm still considering the various ways to approach that problem.

I disagree with your perception on what I consider micro-managing portfolio theory and I disagree with portfolios like the PP or the GB which I think you favour however I think it's good that you state an opinion.

[Tyler]

I disagree with your perception on what I consider micro-managing portfolio theory and I disagree with portfolios like the PP or the GB which I think you favour however I think it's good that you state an opinion.

Yeah, I admit there's no escaping my sweet spot for the PP.  Readers of "Fail Safe Investing" will even recognize Harry Browne's influence at the very end of the "Thinking Beyond Stocks" post that's the subject of this thread.

I've used it for many years, and always enjoy talking about it.  The core fundamentals that make the PP tick are really modern portfolio theory in a nutshell, and it's what got me interested in the subject to begin with.  But I certainly am under no illusions that it's the best choice for everyone. 

[arebelspy]

My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.

[Shane]

^+1

People need to just get over their hang ups. Volatility ≠ risk. If you can't deal with volatility, that's your problem, not a problem with TSM. It's possible to educate yourself to understand that volatility is inevitable when investing in TSM, and just learn to accept it, rather than working so hard to come up with convoluted "diversified" portfolios that underperform TSM and require working decades longer to hit the same numbers.

[bryan]

My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.

^+1

People need to just get over their hang ups. Volatility ≠ risk. If you can't deal with volatility, that's your problem, not a problem with TSM. It's possible to educate yourself to understand that volatility is inevitable when investing in TSM, and just learn to accept it, rather than working so hard to come up with convoluted "diversified" portfolios that underperform TSM and require working decades longer to hit the same numbers.

TSM is actually pretty average (above average with Vanguard etc) as far as portfolio returns go. Or so I was lead to believe; can't find a link to the picture of TSM being firmly in the middle of the CAGR cloud of asset allocation options. That's basically the point, right? Pretty amazing actually.. efficient markets and all that I guess.

If you two are true to your words, why aren't you both in 100% SCV or I-EM?!

Probably because you have expenses and must sell assets at some point. This means you are exposed to (extended) down year risks and tail risk.

Pretty crazy to want the .1% CAGR improvement of TSM over GB for the increased risks. I would hate it if (relevant to OP) I had to work for 7 extra years because I am in TSM instead of GB and just ended up with bad timing. Maybe it's just risk tolerance that others just prefer to roll the dice with TSM instead of having a more complex portfolio?

See the start-date-sensitivity as well:
https://portfoliocharts.com/portfolio/golden-butterfly/
https://portfoliocharts.com/portfolio/total-stock-market/
(scroll to the bottom)
or compare directly from what Tyler already shared: https://portfoliocharts.com/2016/07/25/thinking-beyond-stocks-can-fortify-your-accumulation-plan/

@Tyler, are the CAGR reported on your site median or average (heat map)? Or am I a newb and thinking of it wrong..

[steveo]

My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.

I basically agree with all of this. My only proviso is the volatility part of your argument. I think most people probably need some safe money to handle downturns.

[steveo]

My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.

^+1

People need to just get over their hang ups. Volatility ≠ risk. If you can't deal with volatility, that's your problem, not a problem with TSM. It's possible to educate yourself to understand that volatility is inevitable when investing in TSM, and just learn to accept it, rather than working so hard to come up with convoluted "diversified" portfolios that underperform TSM and require working decades longer to hit the same numbers.

TSM is actually pretty average (above average with Vanguard etc) as far as portfolio returns go. Or so I was lead to believe; can't find a link to the picture of TSM being firmly in the middle of the CAGR cloud of asset allocation options. That's basically the point, right? Pretty amazing actually.. efficient markets and all that I guess.

If you two are true to your words, why aren't you both in 100% SCV or I-EM?!

Probably because you have expenses and must sell assets at some point. This means you are exposed to (extended) down year risks and tail risk.

Pretty crazy to want the .1% CAGR improvement of TSM over GB for the increased risks. I would hate it if (relevant to OP) I had to work for 7 extra years because I am in TSM instead of GB and just ended up with bad timing. Maybe it's just risk tolerance that others just prefer to roll the dice with TSM instead of having a more complex portfolio?

See the start-date-sensitivity as well:
https://portfoliocharts.com/portfolio/golden-butterfly/
https://portfoliocharts.com/portfolio/total-stock-market/
(scroll to the bottom)
or compare directly from what Tyler already shared: https://portfoliocharts.com/2016/07/25/thinking-beyond-stocks-can-fortify-your-accumulation-plan/

@Tyler, are the CAGR reported on your site median or average (heat map)? Or am I a newb and thinking of it wrong..

This is what concerns me regarding Tylers site. You can chuck all those variables in but who says it is going to work like that. I bet that it doesn't.

At the same time I think 100% TSM is asking for trouble for most people.

[steveo]

^+1

People need to just get over their hang ups. Volatility ≠ risk. If you can't deal with volatility, that's your problem, not a problem with TSM. It's possible to educate yourself to understand that volatility is inevitable when investing in TSM, and just learn to accept it, rather than working so hard to come up with convoluted "diversified" portfolios that underperform TSM and require working decades longer to hit the same numbers.

This is hyperbole. Most people with a high saving rate will reach their target based upon savings rather than investment returns. TSM is probably more risky because you could get hit at the wrong time.

[arebelspy]

My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.

I basically agree with all of this. My only proviso is the volatility part of your argument. I think most people probably need some safe money to handle downturns.

Absolutely.  And a cash buffer I think is a fine way to help you sleep at night.  Much better than an AA that underperforms in the long run (which your ER likely will be), IMO.  But to each his own.  :)

[mathjak107]

as i said in another thread :

when it comes to an accumulation stage which can span decades ,   looking for ways to cut temporary short term volatility in downturns ends up costing you permanent long term gains .

the logic of trying to reduce a temporary situation which is likely irrelevant over the long term   and permanently effect the long term outcome is not the greatest idea for growing money  .

unless you lack pucker factor or have time constraints on the money , an answer to a temporary problem that may have little or no long term ramifications and  reduces long term  results makes little sense to me .


sure , i can see it for those who are somewhat risk sensitive  , i get that . but for the rest  this logic of mitigating volatility never made much sense to me when it is usually a temporary situation  .

the only time it mattered is a few years before i retired so at that point we reduced volatility . i try to maintain beta at about 40% the volatility of the s&p 500 now .

[steveo]

My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.

I basically agree with all of this. My only proviso is the volatility part of your argument. I think most people probably need some safe money to handle downturns.

Absolutely.  And a cash buffer I think is a fine way to help you sleep at night.  Much better than an AA that underperforms in the long run (which your ER likely will be), IMO.  But to each his own.  :)

The thing is just say you need a cash buffer and I think you do because when the markets crash you want to either buy or at least not sell. What percentage do you have in cash ? Why not just put that into bonds which should have a better return. I suppose you can have some cash and some bonds. If you only have an emergency fund you probably won't have a cash buffer that will help if a crash occurs anyway.

That starts looking like a typical stocks/bonds portfolio. It's just how much you put into each option.

I'm not sure on the best option myself. I just don't think a 100% stock option is going to work out that well. It doesn't give you any buffer if the stock market goes through a tough time. I suppose if you have a massive portfolio and you can live just off dividends then thats okay however my take is that would mean you are working too long as well.

Maybe there is no perfect solution including 100% stocks.

[mathjak107]

most of the academic study's all show that cash buffers are comforting to the mind but actually add little benefit . the drag of cash  in the up markets weighs down the gains . so much so that after an up cycle ,  spending down even in down years tends to leave you with a bigger  balance .

the bigger cushion gained in the up years covers the selling in down years .

many folks do not  use cash buffers although i do . they just spend equally from their invested assets preserving all their original allocations  .

i find in retirement i prefer the mental comfort of two years cash on hand even though it is really just mental masturbation .

we have the current years cash already on hand for spending  and all  dividends , interest and any cash we get fill up the reserve year .

this  way dividend cuts in bad drops or lighter then usual distributions  do not send us scrambling to fill short falls .   we have a whole other year to make up any differences we need .  it kind of keeps our spending plan flowing nicely with no hic cups this way .

there are lots of different ways to keep the income flowing including all kinds of bucket systems  but in the end one way is likely better then any other . the same gains and interest rates usually give you the same situation at the end of the day . you just arrive at it differently .

[DK]

http://www.gocurrycracker.com/path-100-equities/

relevant.

[mathjak107]

the irony is that you would think the more conservative the investor the more likely they will be to stay the course .

but study's by ibbotson and morningstar tracking the money flow show that not to be the case .

investor returns vs the fund's returns are just as poor on balanced funds as growth funds .

humans are prewired to hate losing money more then making it so most exhibit poor investor behavior regardless . we get blindsided in financial forums because we tend to associate with those who make investing an interest or hobby . but most of the outside world is not like that .

[Tyler]

@Tyler, are the CAGR reported on your site median or average (heat map)? Or am I a newb and thinking of it wrong..

The CAGR in each cell of the heat map are for every single investing period (hover your mouse over the cells in the calculator to see specific values).  The point is to illustrate how different they can be for the same portfolio just based on timeframe.  The one reported in the "long-term CAGR" field is the longest one from 1972-2015 (the top-right cell on the chart).  You can find the median CAGR for any portfolio (and any timeframe) using the Long Term Returns chart/calculator.