Author Topic: bonds as a % of your age  (Read 12077 times)

nereo

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bonds as a % of your age
« on: April 22, 2014, 09:16:00 AM »
Let's start by stating the obvious: "everyone has to determine their own investment strategy to fit their goals and risk tolerances". 
What i'm looking for is people's individual opinions on the "hold-your-age-in-bonds" investement strategy.  Not advice for what I personally should do.

the background:
Over the holiday weekend I spent a lot of time with family, including my non-mustachian, extremely conservative grandparents.  GD is a retired investment banker who thinks he knows best and likes to pry into his family's finances. Among his nuggets of unsolicited advice were that "no one should retire before 55 unless they have $3-5M in the bank" and that at my age I should have a 60/40 balance "if I can tolerate the risk" (I'm 33).  He was aghast that I've only recently decided to go from 100/0 to something closer to 90/10.

I know Jack Bogle uses the age-in-bonds as a very rough starting point for AA, and I've read through jlcollinsnh and I've heard this advice echoed throughout these forums too. 
My counter is based on retiring early and our longer life expectancies.  Someone who's healthy and retired at 50 should plan on a portfolio that will last at least 4 decades.  Running fireCALC-type simulators there's virtually no difference in the % of portolios that survive 30 years and 50 years.  Even at 'normal' retirement of 65 a healthy adult in the US has 19 years of life expectancy, but also has about a 1:3 chance of reaching 92 - almost 30 more years. To me, that's an almost infinite time horizon (i.e. not statistically different from a portfolio designed to last 99 years).
From what I can tell, having a portfolio of >40% bonds results in more failures, not fewer for periods >30  years.
I'm currently developing my own strategy involving owning some bonds and periodic rebalancing, but given that I should have a 30+ year horizon even when I'm in my 50s, I can't ever see why I'd want to own 40%+ bonds. I'm not convinced I ever want to go >20% bonds.

please share your own thoughts.  I'm not here to shoot them down or call people names - I'd just really like to know what other individuals who are or plan to be FIRE think a reasonable bond allocation should be when there's the potential for living another 30, 40 or even 50+ years.

JohnGalt

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Re: bonds as a % of your age
« Reply #1 on: April 22, 2014, 09:34:11 AM »
From what I've seen running scenarios in cfiresim - at a 3% withdrawal rate over long periods, it doesn't matter, as long as you're at least half in stocks, you'll still get a 100% success rate.  As you increase the withdrawal rate, the more having a higher stock allocation results in higher success rates.   

warfreak2

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Re: bonds as a % of your age
« Reply #2 on: April 22, 2014, 09:35:31 AM »
This kind of tidbit of advice is mostly directed at people who don't have simulators.

Your asset allocation doesn't just depend on your goals and risk tolerances, but also how much you have invested. If your goal is to retire on $20k/year, then a $500k portfolio and a $2MM portfolio would have different optimally-safe allocations (the second one only needs to keep up with inflation, even if you will live another 100 years).

As the proverb goes, "all proverbs are wrong".

arebelspy

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Re: bonds as a % of your age
« Reply #3 on: April 22, 2014, 09:50:22 AM »
I like to be more aggressive, so I like the bonds = half your age rule.

I agree with wf2 though, you should run it for your own scenario, and take on the risk and asset allocation that gives you the most likely chance of success and makes you comfortable.
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nereo

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Re: bonds as a % of your age
« Reply #4 on: April 22, 2014, 10:00:28 AM »
This kind of tidbit of advice is mostly directed at people who don't have simulators.
Sure.  So let's tighten the discussion up a bit. With regards to the original topic, anyone care to describe their planed AA, including such relevant info as how long they need it to last, SWR, what their starting principle will be and any contingency plans (or at least as much info as you care to share to make the discussion relevant)?
where is your "happy equity/bond balance" when you FIRE?
Personally we're looking at ~790k with 10-15% in bonds, which we'll draw from during down years and replenish during up years.  Expenses of $28k/year, and our main source of flexiblity will be our ability to generate side income (particularly through renters, but also by working part time) and reducing spending if our portfolio takes a bad hit a-la-2008.

arebelspy

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Re: bonds as a % of your age
« Reply #5 on: April 22, 2014, 10:17:01 AM »
where is your "happy equity/bond balance" when you FIRE?

I'm going to be 90% rentals, but if I were doing a traditional equity/bond mix I'd be something like 90/10.. maybe 80/20, 4% SWR.

If my portfolio doubled in real terms and my spending didn't, I'd look at switching to more like 40-60% equities.

As it is, my paper portfolio (which, as I said, will be a small percent of my net worth) will be 100% equities.
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Re: bonds as a % of your age
« Reply #6 on: April 22, 2014, 10:21:53 AM »
Personally, I'm about 80/20 right now (32 years old for reference). I don't think I'd ever go below 70/30, because as you've figured out yourself, a portfolio over a long retirement needs more stocks to survive.

I am in a market where real estate rentals just aren't a good idea (I don't think), but if I were into real estate as part of my portfolio, I might have a higher % of stocks.

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Re: bonds as a % of your age
« Reply #7 on: April 22, 2014, 10:50:19 AM »
I think I unwittingly gave my response to this thread over in another thread, but since it's probably more relevant here, I'll rewrite it here and add on:

I believe is the main (only?) reason to hold bonds in a portfolio for an early retiree is to give you something positive in your portfolio to mentally cling to in order to keep you from selling your stocks at a loss during a crash.

If you can keep yourself from bailing out of stocks during a crash (and if we assume the future is no worse than any year in the US past), a 100% stock portfolio is less risky over the long-term than a lower stock-allocation portfolio.

But, holding 100% stocks makes it less likely that you'll be able to stick to that allocation in a crash, thus likely making it more risky in real-world applications where human emotions are involved. That's why I like something like an 80/20% portfolio. It doesn't perform much worse than an idealized, robotically-controlled 100/0% portfolio, but it probably performs a lot better than a real-world, human-controlled 100/0% portfolio.

So, as a still-working 36 year old, I'm about 85/15%, and intend to keep the same allocation in retirement. At the moment my expenses are about 2.5% of my portfolio, but I'm still working because a) I'm a wuss, and b) a recent entry into a relationship has thrown much uncertainty into what my future expenses will look like. A conservative adviser might suggest that since I've already at least partially "won the game" to shift more of my money gained from the giant run-up in the stock market into bonds, but that would be for emotional reasons, since at least the simulators don't support that.

In cFIREsim you can leave the defaults (4% withdrawal rate) and do "Investigate Allocation" for various time periods (30 years vs. 50 years). The resulting graphs show that for 30 year periods you can reduce your stock allocation to 50% without much reducing your idealized success rate, while for a 50 year period you can only go down to 85% before the dropoff starts.

I'd guess your grandfather is biased by his age, and his personal unfamiliarity with the longer timeframes and significantly altered math that comes with early retirement.

Though it's possible he could have a more-sophisticated argument: "I know what the simulators show, but I also know the likelihood of you sticking with your 85% stock allocation over 50 years (as the simulation requires) is quite low, so thus your real-world success rate is actually greater with a higher bond-allocation than the simulation shows."

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Re: bonds as a % of your age
« Reply #8 on: April 22, 2014, 10:58:25 AM »
I think the problem many seniors are facing right now is that they followed that old rule of thought and are now running out of money because of the bond market.  If you were making 6-10% in bonds that is not that shabby at all, but less than 3% and you are going to have a hard time keeping up. 

When I am within 7 years of retirement, I will put 4 years of expenses into bonds. 

matchewed

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Re: bonds as a % of your age
« Reply #9 on: April 22, 2014, 11:10:36 AM »
This kind of tidbit of advice is mostly directed at people who don't have simulators.
Sure.  So let's tighten the discussion up a bit. With regards to the original topic, anyone care to describe their planed AA, including such relevant info as how long they need it to last, SWR, what their starting principle will be and any contingency plans (or at least as much info as you care to share to make the discussion relevant)?
where is your "happy equity/bond balance" when you FIRE?
Personally we're looking at ~790k with 10-15% in bonds, which we'll draw from during down years and replenish during up years.  Expenses of $28k/year, and our main source of flexiblity will be our ability to generate side income (particularly through renters, but also by working part time) and reducing spending if our portfolio takes a bad hit a-la-2008.

Currently 95/5 as I hit various milestones of assets I plan increasing the percentage of bonds but only to a max of 20%. I'll maintain that during the first few years of FIRE and as long as the market stays either flat or tanks I may increase the stock percentage as that income will need to last. If the market dials it up to 11 I'll probably go more conservative but never more than 40% bonds. Like I said that money needs to last. As for the other details you've mentioned like most people here I'll need it to last some 60 years, contingency plan is to work part time if need be but part of my FIRE plan is living a portion of my life in a place with significantly lower CoL so that might mitigate some of that as well as my plan hinges on about 22k of spending.


The Happy Philosopher

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Re: bonds as a % of your age
« Reply #10 on: April 22, 2014, 11:21:38 AM »
Be careful with generalizing firecalc to longer time frames, there just isn't as much data to work with (many more 30 year periods than 50 year periods). If paper assets are your only source of income then a "hold your bonds in age" allocation seems reasonable to me.  If you retire in your 30's with 100% stock allocation be careful.  There is a lot of time for things to go wrong!  Now if you have other streams of income (pension, rental income) then there should be considered.  A pension, ss, or income producing real estate acts more like a bond so one could make the argument that 20k/yr in net rental income is like having 500k in bond like assets. 

The danger I see is that someone retiring at age 35 with no margin for error can get into trouble - especially someone living as mustachian lifestyle.  I've said it before, it's much harder to cut back on spending when you have already maximized efficiency.  Most believers in the 4% rule agree that spending adjustments are necessary in periods of poor market returns. If you are wasting 100k/yr on time-shares and luxury cars there is a much higher margin for error than if you have a 12 year old car and have your food budget down to the penny.

Personally I would not retire with more than 60% equities using only paper assets.

nereo

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Re: bonds as a % of your age
« Reply #11 on: April 22, 2014, 11:37:10 AM »
I believe is the main (only?) reason to hold bonds in a portfolio for an early retiree is to give you something positive in your portfolio to mentally cling to in order to keep you from selling your stocks at a loss during a crash.

If you can keep yourself from bailing out of stocks during a crash (and if we assume the future is no worse than any year in the US past), a 100% stock portfolio is less risky over the long-term than a lower stock-allocation portfolio.

this was exactly my line of thinking until recently.  A few individuals (on this board in particular) have led me to modify my thinking somewhat, mostly because of the magic of rebalancing with bonds.  the idea (in part) is that holding some bonds lets you purchase yet more equities when the markets go down (and the % you have in bonds increases).  It sets up a 'buy-low, sell high' automatic scenario.  at least that's how i'm understanding it now.  i'm still implementing it into my own life. Holding mostly equities with some bonds and periodically rebalancing seems to beat 100% equities under most long-term scenarios.

Quote
I'd guess your grandfather is biased by his age, and his personal unfamiliarity with the longer timeframes and significantly altered math that comes with early retirement.

Though it's possible he could have a more-sophisticated argument: "I know what the simulators show, but I also know the likelihood of you sticking with your 85% stock allocation over 50 years (as the simulation requires) is quite low, so thus your real-world success rate is actually greater with a higher bond-allocation than the simulation shows."
My grandfather is an interesting fellow that has an unflappable belief in holding US treasuries, gold and physical properties (not REITs) above all else.  He bought properties in the 70s and 80s and has been systematically selling them off to pay for his retirement.  I have no doubt he was permanently influenced by the great depression.  Despite having been a banker he sees the stock market as a risky place for young people (and only young people) to put money in if they understand that they may loose it all.  I do not know what his personal investments are but I know he's periodically worried that his checking account from the local bank exceeds what is insured by FDIC (they insure up to $250k). 



beltim

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Re: bonds as a % of your age
« Reply #12 on: April 22, 2014, 11:47:10 AM »
I believe is the main (only?) reason to hold bonds in a portfolio for an early retiree is to give you something positive in your portfolio to mentally cling to in order to keep you from selling your stocks at a loss during a crash.

If you can keep yourself from bailing out of stocks during a crash (and if we assume the future is no worse than any year in the US past), a 100% stock portfolio is less risky over the long-term than a lower stock-allocation portfolio.

this was exactly my line of thinking until recently.  A few individuals (on this board in particular) have led me to modify my thinking somewhat, mostly because of the magic of rebalancing with bonds.  the idea (in part) is that holding some bonds lets you purchase yet more equities when the markets go down (and the % you have in bonds increases).  It sets up a 'buy-low, sell high' automatic scenario.  at least that's how i'm understanding it now.  i'm still implementing it into my own life. Holding mostly equities with some bonds and periodically rebalancing seems to beat 100% equities under most long-term scenarios.

Do you have any sources for this?  I have also seen people on these boards say that having a percentage of bonds beats a 100% equity portfolio, but every time I've looked for data, I only find studies that show 100% equities gives the highest total return.

nereo

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Re: bonds as a % of your age
« Reply #13 on: April 22, 2014, 11:53:46 AM »
The danger I see is that someone retiring at age 35 with no margin for error can get into trouble - especially someone living as mustachian lifestyle.  I've said it before, it's much harder to cut back on spending when you have already maximized efficiency.  Most believers in the 4% rule agree that spending adjustments are necessary in periods of poor market returns. If you are wasting 100k/yr on time-shares and luxury cars there is a much higher margin for error than if you have a 12 year old car and have your food budget down to the penny.
Thanks for your opinion.  Good point with how someone already living the mustachian lifestyle has far less fat to trim during harder times.  I'd never really looked at it that way before - I'd always seen it as a positive way of avoiding the hedonisitc treadmill, but of course there's the difficulty of making efficient even more efficient.
Having alternative ways of either cutting spending or increasing revenue seem key.  That's a big reason why we have a place where it's easy to take in a renter if/when we want to.  Plus we're not mustachian enough where we can't cut out a few $k of squishiness from our budget

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Re: bonds as a % of your age
« Reply #14 on: April 22, 2014, 12:14:17 PM »

Do you have any sources for this?  I have also seen people on these boards say that having a percentage of bonds beats a 100% equity portfolio, but every time I've looked for data, I only find studies that show 100% equities gives the highest total return.
The Trinity study is a good place to start if you want to read a bit into it. 75/25 AA beat out 100/0 under most scenarios. 
Also, this was discussed in part in the following thread (starts about halfway down):
http://forum.mrmoneymustache.com/ask-a-mustachian/best-investing-strategy-for-financial-independence/msg263926/#msg263926
check out the responses in that thread by "arebelspy" and "warfreak2" among others for why and when it works.

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Re: bonds as a % of your age
« Reply #15 on: April 22, 2014, 12:14:52 PM »
When I am within 7 years of retirement, I will put 4 years of expenses into bonds. 

I like what GoldenStache had to say here, and I would think I'll implement a similar strategy. Mine would be more like:

"When I am within 3 years of hopeful retirement, I will maintain 4 years of expenses in a mix of bonds and estimated net rental income, and everything else will be stocks." So if net proceeds from rentals produces 75% of annual expenses, I'll have another 1 year of expenses held in a bond portfolio (4 - (0.75*4) = 1).

My current mix is somewhere in the 85/15 range to reduce volatility a bit, but I'm currently re-thinking that and might go more aggressive during the accumulation phase. I agree with others that bonds as a % of your age is for less sophisticated investors as a rule of thumb.

skyrefuge

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Re: bonds as a % of your age
« Reply #16 on: April 22, 2014, 12:16:09 PM »
Be careful with generalizing firecalc to longer time frames, there just isn't as much data to work with (many more 30 year periods than 50 year periods).

In FIRECalc there are currently 113 30-year periods vs. 93 50-year periods. That's not a huge difference in my mind. Though of course it is the more recent years that are missing for the 50-year periods, and maybe you consider those more predictive for some reason? Also note that the original Trinity study used a mere 43 30-year periods, and people were apparently fine generalizing based on that, so looking at more than twice the number of 50-year periods hardly seems dangerous.

If you retire in your 30's with 100% stock allocation be careful.  There is a lot of time for things to go wrong!

Running an equal number of cycles (93) of 30-year and 50-year periods at 4% withdrawal of a 100% stock portfolio shows 8 failures for 30-years, and 12 failures for 50 years. So the "failures per year" rate doesn't actually get worse as the period gets longer.

The danger I see is that someone retiring at age 35 with no margin for error can get into trouble - especially someone living as mustachian lifestyle.  I've said it before, it's much harder to cut back on spending when you have already maximized efficiency.

Completely agreed; I believe I signed up a couple years ago to make that very comment on one of MMM's posts. By teaching us so well he was removing one of our safety margins! That's just not particularly relevant to the topic at hand though, since "asset allocation" is not a particularly direct or effective way to add safety margin. A larger stash/lower expenses are the only ways to protect against both inflation risk and stock market risk, while asset allocation can only shift you from one risk towards the other.

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Re: bonds as a % of your age
« Reply #17 on: April 22, 2014, 12:26:47 PM »
Be careful with generalizing firecalc to longer time frames, there just isn't as much data to work with (many more 30 year periods than 50 year periods).

In FIRECalc there are currently 113 30-year periods vs. 93 50-year periods. That's not a huge difference in my mind. Though of course it is the more recent years that are missing for the 50-year periods, and maybe you consider those more predictive for some reason? Also note that the original Trinity study used a mere 43 30-year periods, and people were apparently fine generalizing based on that, so looking at more than twice the number of 50-year periods hardly seems dangerous.

I love posts like this, with informative stats I wouldn't necessarily think to look up myself.  Thanks!
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beltim

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Re: bonds as a % of your age
« Reply #18 on: April 22, 2014, 12:30:00 PM »

Do you have any sources for this?  I have also seen people on these boards say that having a percentage of bonds beats a 100% equity portfolio, but every time I've looked for data, I only find studies that show 100% equities gives the highest total return.
The Trinity study is a good place to start if you want to read a bit into it. 75/25 AA beat out 100/0 under most scenarios. 
Also, this was discussed in part in the following thread (starts about halfway down):
http://forum.mrmoneymustache.com/ask-a-mustachian/best-investing-strategy-for-financial-independence/msg263926/#msg263926
check out the responses in that thread by "arebelspy" and "warfreak2" among others for why and when it works.

The Trinity study talks about how often a portfolio survives a 30 year period under different withdrawal rates.  It does not talk about total returns of a portfolio.

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Re: bonds as a % of your age
« Reply #19 on: April 22, 2014, 12:41:01 PM »
In FIRECalc there are currently 113 30-year periods vs. 93 50-year periods. That's not a huge difference in my mind.
One problem is that the 50-year periods overlap each other a lot more than the 30-year periods do - each year of data appears in up to 50 periods rather than 30, so for example, more than half of the periods from the latter sample include the events of 1960.

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Re: bonds as a % of your age
« Reply #20 on: April 22, 2014, 01:04:15 PM »
Im basically 50 (in a few months) and have a 60/40 ratio of that being 40% in bonds. Of that 40% I have 80% in VBTLX and 20% in VTABX for what its worth.

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Re: bonds as a % of your age
« Reply #21 on: April 22, 2014, 01:04:27 PM »
Be careful with generalizing firecalc to longer time frames, there just isn't as much data to work with (many more 30 year periods than 50 year periods).

In FIRECalc there are currently 113 30-year periods vs. 93 50-year periods. That's not a huge difference in my mind. Though of course it is the more recent years that are missing for the 50-year periods, and maybe you consider those more predictive for some reason? Also note that the original Trinity study used a mere 43 30-year periods, and people were apparently fine generalizing based on that, so looking at more than twice the number of 50-year periods hardly seems dangerous.

If you retire in your 30's with 100% stock allocation be careful.  There is a lot of time for things to go wrong!

Running an equal number of cycles (93) of 30-year and 50-year periods at 4% withdrawal of a 100% stock portfolio shows 8 failures for 30-years, and 12 failures for 50 years. So the "failures per year" rate doesn't actually get worse as the period gets longer.

The danger I see is that someone retiring at age 35 with no margin for error can get into trouble - especially someone living as mustachian lifestyle.  I've said it before, it's much harder to cut back on spending when you have already maximized efficiency.

Completely agreed; I believe I signed up a couple years ago to make that very comment on one of MMM's posts. By teaching us so well he was removing one of our safety margins! That's just not particularly relevant to the topic at hand though, since "asset allocation" is not a particularly direct or effective way to add safety margin. A larger stash/lower expenses are the only ways to protect against both inflation risk and stock market risk, while asset allocation can only shift you from one risk towards the other.

Valid points, let me clarify a little.  I  think data should be skewed towards more recent times, our economic system had changed over the years and I'm not sure how useful data from the late 1800's is in predicting what happens the next 50 years.  Older data gets pretty murky for some asset classes.  I'm just not convinced we can continue to grow the next 50 years like we did the last 50.  Our economy is much more mature.  I am much more suspect of monte carlo simulations that involve such long time periods.

Also I don't think failure/year is the way to look at it.  I know what you are saying but what someone retiring is concerned about is failure period. 12 failures vs. 8 failures is 50% higher.  Look at it this way, if 93 people retire in each category it is the difference between 8.6% and 12.9% failure (both not acceptable in my opinion).

You are correct that asset allocation doesn't reduce risk, it just changes the kind of risk.  My point is that most mustachians will require a smoother income stream due to efficiency and thus volatility risk hurts them more than big wasteful spenders.  Inflation is a killer for long retirements though so for this reason I would lean more aggressive the younger I retired.



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Re: bonds as a % of your age
« Reply #22 on: April 22, 2014, 01:34:09 PM »
Holding mostly equities with some bonds and periodically rebalancing seems to beat 100% equities under most long-term scenarios.

I don't really see this holding up in the cFIREsim scenarios. I think it might have been an anomaly of the limited data set used in the Trinity study. 50 years at 4% is the only case I found so far where 100% stocks does not have the highest success rate, and there it's just barely lower than the 95% case. (30 years @ 4% has a dip at 95% and rises back up at 100%).

You can optionally run cFIREsim without yearly rebalancing, and for a 4% WR, it doesn't really effect the success rates for anything above 80% stocks. For lower stock allocations, the main effect is to actually raise the success rate for mid-to-high bond allocations if you don't rebalance (for a 30-year period, not rebalancing boosts the success of 95-to-55% bond portofolios, and for a 50-year period it boosts 95-to-45% bond portfolios).

It sort of makes sense that rebalancing's effects would become less visible at the extreme ends, simply because the amount of money you're rebalancing is not large enough to have much of an effect.

Unless there's something wrong with cFIRESim, this actually further reinforces for me that bonds are for emotional support. Rebalancing actually lowers your on-paper success in most cases, so the reason to hold bonds and rebalance to them must be to increase your real-world success.

My grandfather is an interesting fellow that has an unflappable belief in holding US treasuries, gold and physical properties (not REITs) above all else.  He bought properties in the 70s and 80s and has been systematically selling them off to pay for his retirement.  I have no doubt he was permanently influenced by the great depression.  Despite having been a banker he sees the stock market as a risky place for young people (and only young people) to put money in if they understand that they may loose it all.  I do not know what his personal investments are but I know he's periodically worried that his checking account from the local bank exceeds what is insured by FDIC (they insure up to $250k).

Yeah, I always find it interesting/scary to understand what (often temporal, one-time) effects have caused us all to have the biases that we have (what are we learning that's "wrong" from the last 10-20 years of stock/bond/inflation results?)
« Last Edit: April 22, 2014, 01:40:14 PM by skyrefuge »

skyrefuge

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Re: bonds as a % of your age
« Reply #23 on: April 22, 2014, 01:48:09 PM »
One problem is that the 50-year periods overlap each other a lot more than the 30-year periods do - each year of data appears in up to 50 periods rather than 30, so for example, more than half of the periods from the latter sample include the events of 1960.

Good point. I'm not sure how to wrap my head around the importance of single years vs. sequences-of-years though. For example, the same "events of 1960" caused one cycle to lose $165k that year, while another cycle gained $4 million.

nereo

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Re: bonds as a % of your age
« Reply #24 on: April 22, 2014, 02:05:09 PM »
Holding mostly equities with some bonds and periodically rebalancing seems to beat 100% equities under most long-term scenarios.

I don't really see this holding up in the cFIREsim scenarios. I think it might have been an anomaly of the limited data set used in the Trinity study. 50 years at 4% is the only case I found so far where 100% stocks does not have the highest success rate, and there it's just barely lower than the 95% case. (30 years @ 4% has a dip at 95% and rises back up at 100%).

You can optionally run cFIREsim without yearly rebalancing, and for a 4% WR, it doesn't really effect the success rates for anything above 80% stocks. For lower stock allocations, the main effect is to actually raise the success rate for mid-to-high bond allocations if you don't rebalance (for a 30-year period, not rebalancing boosts the success of 95-to-55% bond portofolios, and for a 50-year period it boosts 95-to-45% bond portfolios).

Interesting.  As I said I"m only recently coming to the idea of holding any bonds during the accumulation phase and rebalancing to set up a sort of forced "buy low, sell high" structure.  It could be that it simply won't work with a 90/10 or 80/20 portfolio, but then again maybe it does because money is coming in (in the forms of savings) which can be allotted to either one or the other depending on the balance of the portolio and market conditions. I'm running fireCALC simulaitons now with $0 withdraw rates and annual contributions, nad it does seem like 100% stocks tends to result in larger portolios.  But what I can't figure out is when and how often fireCALC rebalances these things.
I'm just learning the theory myself, and would love to be corrected if what i'm understanding doesn't hold true. 

skyrefuge

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Re: bonds as a % of your age
« Reply #25 on: April 22, 2014, 02:58:31 PM »
Some good reading here how rebalancing should NOT be sold as a return-enhancer, because it only works like that if you happen to get lucky with your market timing. In general, over the long term it should be expected to reduce your return, since it means, on average, you'll have more of your money in lower-returning bonds than you would if you didn't rebalance.

http://www.kitces.com/blog/is-passive-rebalancing-a-form-of-active-management/
http://www.kitces.com/blog/is-rebalancing-supposed-to-enhance-returns-or-reduce-them/

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Re: bonds as a % of your age
« Reply #26 on: April 22, 2014, 03:19:25 PM »
I'm 47, early retired, and paper assets are about 70% of my net worth (real estate is the other 30%). Of the paper assets, they're roughly 70% stocks, 25% bonds and 5% cash. I'll have a very modest pension later on, plus real estate as another safe(r) harbor, so I don't mind having a higher allocation in stocks.

Joel

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Re: bonds as a % of your age
« Reply #27 on: April 22, 2014, 09:26:31 PM »
I like to be more aggressive, so I like the bonds = half your age rule.

I agree with wf2 though, you should run it for your own scenario, and take on the risk and asset allocation that gives you the most likely chance of success and makes you comfortable.

This is what I do.

Bonds = half my age

sleepyguy

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Re: bonds as a % of your age
« Reply #28 on: April 23, 2014, 06:12:51 AM »
Agreed, same approach I take.

With my kids RESP I take the 0% rule :)

I like to be more aggressive, so I like the bonds = half your age rule.

I agree with wf2 though, you should run it for your own scenario, and take on the risk and asset allocation that gives you the most likely chance of success and makes you comfortable.

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Re: bonds as a % of your age
« Reply #29 on: April 23, 2014, 09:12:58 AM »
Your grandparents are probably in their 70s and your grand dad was invested through the crashes in the 60s,70s,80s, and 00s. He might have learned some wisdom along the way.:)  The difference between 30 years and 99 years is actually pretty significant.  Lets go with a 90/10 4%
30 years 95%
60 years 83%
90 years 75%

Endowments have looked at this and they safe rate they have is about 3%.  And it should be pointed out that not all failure cases are equal. For a 60 year old running out of money at 20 years is a real bad. Running out at 35 years in  isn't anywhere near as bad (you might not make it that far and having to live in a medicaid community for 5 years isn't as bad as 20:))


In accumulation, if you have the stomach for it (you didn't think of selling in 2000-2002 or 2008, or the 20% dip in 2011) and in this environment (i.e. long term bond out performed stocks from 1981-2011 but I don't see that happening with todays rates) overweighing in stocks makes a ton of sense.  I sit somewhere around 90/10 these days. If I choose to retire tomorrow, I would set it up so that I had 10 years in fixed (CDs, bond ladders, iBonds) and the rest invested in market. That would leave me at about 75/25 AA wise.  I would rather be closer to 60/40 but there is no way I am buying long term bonds until they start yielding more like 6 or 7% so that money is getting dumped into stocks.


Let's start by stating the obvious: "everyone has to determine their own investment strategy to fit their goals and risk tolerances". 
What i'm looking for is people's individual opinions on the "hold-your-age-in-bonds" investement strategy.  Not advice for what I personally should do.

the background:
Over the holiday weekend I spent a lot of time with family, including my non-mustachian, extremely conservative grandparents.  GD is a retired investment banker who thinks he knows best and likes to pry into his family's finances. Among his nuggets of unsolicited advice were that "no one should retire before 55 unless they have $3-5M in the bank" and that at my age I should have a 60/40 balance "if I can tolerate the risk" (I'm 33).  He was aghast that I've only recently decided to go from 100/0 to something closer to 90/10.

I know Jack Bogle uses the age-in-bonds as a very rough starting point for AA, and I've read through jlcollinsnh and I've heard this advice echoed throughout these forums too. 
My counter is based on retiring early and our longer life expectancies.  Someone who's healthy and retired at 50 should plan on a portfolio that will last at least 4 decades.  Running fireCALC-type simulators there's virtually no difference in the % of portolios that survive 30 years and 50 years.  Even at 'normal' retirement of 65 a healthy adult in the US has 19 years of life expectancy, but also has about a 1:3 chance of reaching 92 - almost 30 more years. To me, that's an almost infinite time horizon (i.e. not statistically different from a portfolio designed to last 99 years).
From what I can tell, having a portfolio of >40% bonds results in more failures, not fewer for periods >30  years.
I'm currently developing my own strategy involving owning some bonds and periodic rebalancing, but given that I should have a 30+ year horizon even when I'm in my 50s, I can't ever see why I'd want to own 40%+ bonds. I'm not convinced I ever want to go >20% bonds.

please share your own thoughts.  I'm not here to shoot them down or call people names - I'd just really like to know what other individuals who are or plan to be FIRE think a reasonable bond allocation should be when there's the potential for living another 30, 40 or even 50+ years.

nereo

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Re: bonds as a % of your age
« Reply #30 on: April 23, 2014, 09:42:55 AM »
Your grandparents are probably in their 70s and your grand dad was invested through the crashes in the 60s,70s,80s, and 00s. He might have learned some wisdom along the way.:)  The difference between 30 years and 99 years is actually pretty significant.  Lets go with a 90/10 4%
30 years 95%
60 years 83%
90 years 75%
My grandfather is turning 90 this summer - as I indicated before his formulative years were spend in the great depression.  I'm not sure the crashes in the 80s and 00s affected him much at all as he never has had much in equities, but has stuck with more tangible assets. 
Normally I love asking older people to expound on their experiences, but his path is just so different from my own that I don't put much stock in his advice (e.g. needing $3M to retire 'early'). 
My skepticism with very time periods is two fold.  First, there is so much uncertainty with how the world will change in 60+ year time frames that projections become a bit silly.   Second, regardless of whether the time frame is 30 years or 90 years, looking at the simulations you can usually tell if you are in danger 10-12 years in.  Is the real-adjusted portfolio lower 12 years in?  If it is you might want to make a few adjustments.  If it's gone up by at least 12% (ave +1% per year) the chance of depletion becomes vanishingly small, regardless of the time frame.

Quote
Endowments have looked at this and they safe rate they have is about 3%.  And it should be pointed out that not all failure cases are equal. For a 60 year old running out of money at 20 years is a real bad. Running out at 35 years in  isn't anywhere near as bad (you might not make it that far and having to live in a medicaid community for 5 years isn't as bad as 20:))
I don't know whether running out of money when I'm 95 and too feable to work would be better or worse than running out of money when I'm 80, when I still might have a shot at doing something (walmart greeter?).  Either way, I think retirees could look at their portfolios and see a potential failure several years down the road. 

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Re: bonds as a % of your age
« Reply #31 on: April 26, 2014, 02:58:28 PM »
My advice is to ignore the rules of thumb, set clear investment objectives, and model your preferred asset allocation (assuming reversion to historical averages).

First of all, for investors that want to spend more time optimizing cash flow and total return, bond allocation should not be dependent on age.  Bond/fixed income allocation should be dependent on:

  • desired stability of cash flow
  • desired hedging against non-correlated assets (e.g. Equities)
  • relative value, when compared to other investment options

Stable cash flow can be achieved from other sources of reliable income, such as employment income, rents, and reliable stock dividends.  Therefore, your minimum allocation to bonds should be sufficient to provide a high confidence that you will meet your desired near-term cash flow objectives, AFTER considering your expected expenses and other sources of reliable income. 

As mentioned by other posters, bonds are generally an effective hedge against stocks.  As stocks and other "risk assets" become over-valued and reversion becomes more likely, it is generally prudent to increase allocation to bonds.  Some people would call this "market timing". 

Perhaps most importantly, people need to understand that the value and risks associated with bonds are not static.  The future price of a Bond is very dependent on credit/default risk and interest rate risk.  In a rising interest rate environment (like right now), the price of current bonds is expected to decrease. 

Since I have a full-time job, cash flow is not an issue for me.  In the current market environment, I have a 5% allocation to bonds and a 30% allocation to cash equivalents (not subject to interest rate risk).  However, this allocation will change, when market conditions change. 

RapmasterD

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Re: bonds as a % of your age
« Reply #32 on: April 27, 2014, 10:08:55 PM »
I don't buy the age-bonds thing at all, at any ratio.

LowER

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Re: bonds as a % of your age
« Reply #33 on: April 27, 2014, 11:19:39 PM »
If someone has relatively low cost of living and relatively high income, and a very decent EF, and high tolerance for massive losses, and a time horizon of at least 10, preferably 20, years or more, a very high percentage of stocks to bonds seems reasonable.  My ratio is very high right now.  I survived the 2008/2009 crash under horrible circumstances (outside the crash) and know my tolerance for paper losses and will buy like crazy with another/next inevitable crash.  Will I kick myself when the crash occurs?  Yes - but I believe tincture of time and willingness to live uber frugally through that, will help me thrive, in time.

Outside each of those circumstances, I think age in bonds, or half, is extremely prudent.