Keep in mind most of the historical data supporting a higher bond allocation comes from eras more than 30 years ago. This is how we know an AA made it 30 years in the past! These long-ago years included times when safe bonds, like 10y US treasuries for example, were yielding 4%, 5%, 6%, 7% and higher. The real yield on those bonds from decades ago was usually in the +2% to +4% range. Compare that to today's real yields in the -1.5% to -2% range and you'll note a big difference.
https://www.multpl.com/10-year-real-interest-ratehttps://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chartI'm wary of SORR, but I'm also wary of allocating my assets into things that can only possibly lose purchasing power. That in itself is a risky decision. If we have a Japanese scenario ahead of us here in the US, the stock market will go nowhere
while one's bonds steadily bleed purchasing power. And if we have an inflationary scenario or even a normalization of interest rates, bonds are going to get clobbered and suffer double-digit losses like a stock correction. See: "bond convexity".
https://www.investopedia.com/terms/c/convexity.aspBonds would do well in exactly one scenario - a deflationary spiral into a great depression. In all other scenarios, you're losing purchasing power. This is a much different scenario than historical retirement cohorts were looking at. Back in their world, the real yield from a large bond allocation might cover much of one's withdraw rate. Even better, bonds and stocks could be rebalanced to juice long-term gains. Now look at today's world: Instead of earning something, one's bond allocation is a net expense in terms of purchasing power! And the same thing that would cause stocks to collapse from their lofty PE ratio - higher interest rates - is the thing which would cause double-digit losses in a bond portfolio of any significant duration. In the past 20 years, bonds have lost their key benefits: safety, real earnings, and diversification.
So how does one achieve the following goals in a near-ZIRP world?
1) protection from Sequence of Returns Risk (SORR)
2) rebalancing opportunities
3) lower portfolio volatility, so that the WR does not get too high during bear markets
The answer is to use options strategies. Our ancestors accepted lower rates of returns with their 50/50 and 60/40 portfolios, compared to what they could have earned with 80/20 or 90/10 or 100/0 portfolios, but they paid that price in exchange for the 3 benefits listed above. You can still do the same with stock options. There's no free lunch. There is a price. But to me that price is more reasonable than the real losses, real risks, and lack of actual portfolio protection involved with bonds.
Take the collar strategy for example. You sell a call and buy a put, while also holding the stock or fund. In doing so, you essentially trade away the potential for very high returns in exchange for protection from very low returns. If you use LEAPS options, you can obtain up to 2.5 years' protection per trade, although I would recommend updating the options positions at least annually to re-center the hedge. Because you are both selling a contract and buying a contract, the out-of-pocket costs offset to some degree depending on your specific strike prices. A collar can even be "costless" if the price of the call you sell is roughly equal to the price of the put you buy.
https://www.theoptionsguide.com/costless-collar.aspxIf a SORR event occurs, the put option you own multiplies in value at the same time as the call option you sold decreases in value (goal 1). In fact, the value of your pair of options is constantly fluctuating in the opposite direction of your stocks - reducing the volatility of a 90% stock portfolio to something more like a 60/40 (goal 3). At some threshold you wrote down in your IPS, you sell the put and buy back the call for a big profit. E.g. If stocks fall 25%, you exit your options positions for a gain that makes up for most of all of what you "lost" on stocks. Then you just wait for the recovery and re-establish your hedge later. You could even plan to gradually reduce your options hedge instead of dropping it all at once, as stock prices continued to fall and the risks of being long decrease. This is a very direct form of rebalancing (goal 2) that does not rely on interest rates or commodity prices or any other dependencies. If you enter a collar during a period of low volatility (i.e. VIX<15) then you'll see your hedge gain value just from increases in volatility - which is coincidentally exactly the time you'll be exiting the hedge.
Suppose you're not this bold, and you want to maintain the hedge at all times no matter what. Or perhaps you're genuinely scared by whatever is causing the SORR event - then you can just hold your hedge and enjoy the lower volatility and lower withdraw rates while everyone else freaks out. As long as you sell parts of your hedge at the same time you're selling stocks to fund your retirement lifestyle, you're enjoying a lower WR and avoiding risk to the long-term durability of your stock portfolio.
One last reason to do a collar instead of a big bond allocation: With a collar, you can allocate 90-100% of your assets to stocks with higher expected total returns, while locking in a risk profile that has a defined floor and ceiling on your outcomes. Thus you can invest aggressively and safely at the same time. A 95% stock portfolio with a collar is a lot safer than an unhedged 60/40 portfolio right now. The 60/40 could lose half its value, but the hedged portfolio can only lose maybe 15%, 20%, or 25% depending on how it was set up and beyond that point can lose no more. Sure, it can also only gain something like 10%, 15%, or 20% in the next year, but arguably the 60/40 is in the same boat. That's a fair price to pay in these low-interest times. As the portfolio owner, you decide how much upside you're willing to trade for downside protection.
Disclosure: I own 5 bonds backed by student loans, yielding 7.5% on my cost, and comprising about 4% of my overall portfolio. Those are my only bonds, and I won't be replacing them when they mature.