Author Topic: Argument for More Stocks in Retirement (historical proof)  (Read 1484 times)


  • 5 O'Clock Shadow
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  • Location: Alberta
Argument for More Stocks in Retirement (historical proof)
« on: December 18, 2016, 12:04:52 AM »
Hey All,

I've been helping the 'rents plan their retirement portfolio, and, after going through the historical analysis, I don't see why having a high bond proportion makes much logical sense. In fact, if you make the following assumptions, a 80%-100% stock portfolio is quite reasonable.


1. The bond and stock market from 1926-2015 will repeat itself.
2. The retiree is interested in withdrawing a fixed amount yearly (inflation adjusted) from their original investment.
3. The retiree is not scared of dips in the market and is only interested in maximizing #2 over their lifespan.
4. The retiree does not need emergency funds (isn't this what insurance is for???)

I've made an interactive chart to illustrate the scenarios. It can be accessed here. As you can see, 30-year failure rates are minimal (and actually optimized) with a mostly stock portfolio. Furthermore, by going mostly stocks, you have the chance of being able to spend a bit more money (and leaving more money) as you approach the end years. (The analysis uses historical data of total returns of the S&P 500 and 5-Year Treasuries)

Would love to hear any comments!
« Last Edit: December 18, 2016, 12:56:03 AM by mgarf »


  • Bristles
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Re: Argument for More Stocks in Retirement (historical proof)
« Reply #1 on: December 18, 2016, 12:50:50 AM »
Assumption 1 is certainly false. The future will have some similarities with the past, but how much is a matter of great debate.

Assumption 3 is a lot easier to say than to follow through with. I think that I can weather any downturn too, but then I think about all the mistakes I've made in the past and wonder if I'll actually be able to hold strong.

Assumption 4 confuses me. How can you pay your insurance deductibles without an emergency fund? Why would someone buy those expensive insurance plans for all their home electronics and appliances instead of just self insuring them all with a few thousand in a bank? How do you get around after a car accident that insurance contests and you don't get paid out for 6 months?

Failing to have an emergency fund of some sort sounds to me like planning to fail.


  • Handlebar Stache
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Re: Argument for More Stocks in Retirement (historical proof)
« Reply #2 on: December 18, 2016, 07:25:26 AM »
Ok lets look at historical returns.

100% stocks, mean return = 10%, in crisis events the portfolio can drop over 50%.

60/40, mean return 8.8%, in crisis events the portfolio has normally dropped in the 25-30% range.

If you have a 2-3% withdrawal rate it doesn't matter. Both should be fine. If you are exactly at 4% it can matter. 100% stocks has better odds of outpacing inflation, but sequence of return risk in the first 5 years is huge! If the portfolio drops 50% in the first or second year that 4% SWR turns in an 8% withdrawal rate, and if the market doesn't recover quick a year or two of big withdrawals turns that into a 10%+ withdrawal rate. That is unsustainable in most cases. Now you get to watch the slow portfolio death spiral... or go back to work.

Recent studies have shown the years where you should be most conservative are in the first 5 - 10 years of retirement. These same studies support making your allocation more conservative around retirement and then making it more aggressive further into retirement.

I don't see why having a high bond proportion makes much logical sense.

Bonds aren't in the portfolio for returns. If you go in thinking that bonds seem terrible. Bonds are there as a hedge to soften the blow when there is a crash plus to create rebalancing opportunities. Again, 60/40 has historically earned about 1-1.5% less than a 100% stocks portfolio per year, but in a major crash it drops significantly less. The reason the drop is less is because high quality bonds tend to go up when stocks go down, and the reason the average returns are so similar is due to rebalancing. If bonds go up when stocks go down then you have even more money in bonds when it comes time to rebalance... aka buy stocks at their lows.
« Last Edit: December 18, 2016, 07:27:07 AM by Indexer »


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