johnny847,
"-Ignore past performance of all three funds. It's irrelevant."
Why?
The anxiety (your word, not mine) would be the obvious short term risk of having all-Stocks right at Day One of retirement. Long term, I still want all, or mostly all Stocks, so it's a soonish, short timeframe Bond strategy that I'm trying to work out to guard against an early crash.
Then I'm confused as to why we're having this discussion. You're saying that you want to have basically 100% stocks, but because we have a crash coming up, you want to hold some bonds. And then, once the crash is over, you'll switch back to stocks.
We can get all hung up on the semantics of market timing. Whether we agree on the definition, your strategy has all the pitfalls of market timing.
We both agree that there will be a stock market crash sometime in the future. And assuming you don't die of some random accident, it will be in your lifetime. To prepare for this crash, you want to hold some bonds to weather the crash.
But neither of us (and I doubt anybody out there really) knows when the stock market will crash. So you want to hold some bonds now. But bonds' returns lag stocks' returns most of the time, so your portfolio will in all likelihood return of a 100% stock portfolio up to the moment of the crash. Then of course, during the crash, your portfolio with bonds will do better.
But will you come out ahead? That depends on how soon the crash is, which as we both agree, we do not know.
So what does this tell me? Well I conclude that one of the following is true:
1) You were okay with the risk of 100% stocks in the accumulation phase, but you are not for the withdrawal phase. Now that you're about to start your withdrawal phase, you should adjust your portfolio for that change in risk tolerance
permanently.
2) You believe you know with reasonable certainty that the market will crash soon enough that switching to bonds in the short term will be better for you financially.
If it actually is the latter, which you say it is not, then I will gladly pay a lot of money for your crystal ball.
"Past performance doesn't matter."
If that was strictly true, then the 4% rule, even as a basic guideline, should be considered pure fantasy since it's 100% based on past performance data. And, how then do you pick what to invest in when you believe (implied by your quote here) that you have no idea what any investment might do in the future? Pure random chance?
I'm well aware of prospectus disclaimers and know past returns are no guaranteeof future returns. But just like I might die tomorrow, I wouldn't bet on it based on 'past returns' of other humans like me and my personal 'performance returns' so to speak. I could totally die tomorrow, but to bet I won't isn't market timing. The market might never crash again, but really that would be a fool's bet to put money on, right?
When I said past performance doesn't matter, this was in the context of choosing a particular fund. As I said in my post,
Ignore past performance of all three funds. It's irrelevant. What's important is the underlying securities.
So let me be perfectly clear: the past performance
of any particular fund is irrelevant. The only thing that is important is the underlying securities.
Bonds are a safer investment than stocks because there is a contractual obligation to pay back the value of the bond, and the nominal return on the bond is fixed upon purchase. Yes, the company may go under, as we all know. We account for this risk as default risk. But also, bondholders are the first priority in getting paid from the bankruptcy proceedings. The stockholders are not entitled to anything. The laws around bonds are constructed in a way that minimizes your risk as an investor.
Stocks on the other hand, have no performance guarantees. But stocks can provide, in theory, near infinite return. Obviously no stock achieves this, but the point is, the potential gain is essentially unlimited unlike that of a stock. Furthermore, any company will try desperately to survive and grow. The potential return is higher than that of bonds, and companies are motivated to do the best they can.
The above reasoning explains why we should prefer stocks over bonds for long term growth. This is how I choose what to invest in.
Furthermore, the way that cFIREsim (and of course, the 4% rule, because it is a result of a few cases you can run in cFIREsim) results should be used:
First, you set a threshold for success rate. Most people will say 80-85%, because anything above that doesn't really mean to much. It is, after all, past data, and the past doesn't guarantee anything about the future.
Suppose cFIREsim spits out a 95% success rate for your inputs. This meets the typical 80-85% threshold. By following a retirement that conforms to those inputs, you are betting that with high probability, the future is going to be
no worse that the past. cFIREsim uses data all the way back from 1871. That's 144 years of data, which for a 30 year retirement, is 115 retirement cycles. There's enough data points there for me to draw reasonable conclusions.
But this is different from what you're trying to do. You're letting the past performance of these three bond funds inform your decision as to which bond fund, if any, to choose:
VUSUX looks like the best returns, but will it be the most screwed by a coming Fed interest rate hike? I 'heard' that this hike is already 'baked into' all the Bond Fund prices? Yes/No?
This is not the same thing as using cFIREsim. There is no notion of using the past returns to bet that the future is not going to be worse than the past. By using past returns of the three funds, you're implicitly saying that VUSUX has done better than the other funds in the past and this will probably be true going forward. We have no idea if this will actually be the case.
So why do I recommend total bond? Again, because of diversification.