Even really bad markets tend to last only 3 or 4 years. Why would I keep 20 years worth in bonds and sacrifice future returns? Especially if I'm able to earn some income during down years and/or reduce my spending.
*50% is a commonly used figure for people entering retirement, but use whatever % you wish. Count years, not a percentage.
While I mostly agree with you, there are plenty of periods outside of the really bad times in the markets where bonds dramatically outperform stocks. Bonds outperformed stocks during every single 1999-X and 2000-X period, every 2001-X except where X=2013, and 9 out of the last 13 rolling 5 year periods.
well... yes... but also no. What's critical here is the time period you are concerned with. Let me explain. Historically, equities have trumped bonds over all 20 year periods, and most 10 year periods. The OP was asking about a portfolio with a 50+ year time line. Therefore, I'd advocate to have a large a percentage in an index fund as is prudent.
But, you bring a good point of that there are large periods when bonds have beaten stocks. So let's take a look at why. Looking back at the last 60 years, stocks have had years of +40.4% growth and -37% losses. Comparing that to bonds, the first obvious question is "which bonds". If we're looking at 10 yr US bonds* the spread is from -11 to +32%
What's peculiar is how a few very bad stock years have set up stocks to return less than bonds, particularly in the time frames you mentioned. In the last 60 years, the SP has had a loosing year just 13 times, and has only lost 10% or more five times. Three of those were whoppers: -37% (2008), -26.4% (1974) and -22.1% (2002). On the other hand, the SP has recorded >10% gains 34 out of the last 60 years.
Predictably, bonds have been much less volatile, with fewer big loss decades but fewer big gain decades too. Not surprisingly, during the years when stocks recorded +10% gains the bond market almost always lagged behind.
All of which brings this back to how much in bonds one should have in their portfolio during retirement. And it is
a personal choice. But personally, I want to have enough that I don't have to sell shares of my SP500 fund during these down periods, but leave the bulk of my assets where historically they do best over 10+ year time lines - in the stock market. Since the index has returned to previous levels within 4 years in all previous years, that is my baseline.