30/70 asset allocation is the best overall?

[Chuckanut]

Here is an interesting article by Rick Ferri in which he claims that for those already retired a 30/70 asset allocation is the best overall, combining much less volatility with descent growth.

I bring this up because of a recent session doing 'what-if' tests with Firecalc. It seems that my preferred success rate (100%) does not decrease below that level as I add more bonds until my AA ratio gets to be about 20/80. In fact, some of the higher bond levels show larger possible end of life accumulations - I assume because at sometime I would have avoided a big hit in a down market.

The Center of Gravity for Retirees

I propose the center of gravity for those who have accumulated enough for retirement to be 30% stocks and 70% bonds. This is a conservative mix that has enough equity to growth with inflation and enough fixed income to keep portfolio volatility at bay. Historically, a 30/70 allocation has earned the highest Sharpe ratio. This is the point on the efficient frontier that has earned the best risk-adjusted return as illustrated in Figure 2.

 

[marko]

This does fly in the face of conventional wisdom. I'll be interested in hearing what the collective wisdom of this forum will have to say. This sounds sort of like that "just don't lose the money" pitch.

....and here I just got myself back to 60/40!!!! Crap!

 

[Big_Hitter]

anyone sitting on a 30/70 will learn the meaning of the word "duration" in a year or two

 

[MichaelB]

Here is an interesting article by Rick Ferri in which he claims that for those already retired a 30/70 asset allocation is the best overall, combining much less volatility with descent growth.

Most of the discussions here focus on return. Rick Ferri is making a point about volatility, which is very important for those of us in the withdrawal phase.

An interesting feature of a 30/70 portfolio is its resilience to losing money in down markets. Figure 3 illustrates the annualized rolling 5-year risk and returns of 30/70 portfolios (blue) compared to 60/40 portfolios (yellow). There was only one down period from 1928-1932.

 

[Chuckanut]

FWIW, I think it is probably that the 30/70 ratio is based upon a person whose retirement is mostly dependent on one's personal financial investments with minimal pension/annuity/rental-income, etc. YMMV.

 

[Running_Man]

If the goal is to maximize the possibility of maintaining present spend pattern then one would go with the 30/70 as the reduced drawdowns offset the bad bear markets in early retirement. In the early years with major market declines you would be buying nearly as much stock at the lower prices with a 30/70 portfolio as you would with an 80/20 portfolio without incurring as much in losses.
The results are similar to the Permanent Portfolio which holds 25% stocks.

 

[ripper1]

anyone sitting on a 30/70 will learn the meaning of the word "duration" in a year or two

+1

 

[Fermion]

70% of your portfolio with negative real interest rates and not insignificant interest rate risk?

No thanks.

 

[Running_Man]

For those that continue for years to feel that interest rates are too low to hold bonds, (this article advocated 5 year treasuries), if interest rates were to climb 3 percent in the next year which do you think would perform worse 5 year treasuries or the US stock market?

 

[Donzo]

Wellesley holds about 10 percent more stock than this, is considered conservative and has performed well over time. There are life strategy funds that mirror this suggestion. I have money I need over the next 10 years invested very conservative and get more stock exposure out further down the money trail. Personally, I think 30 percent is to conservative for a long time horizon (ER).

 

[Big_Hitter]

if interest rates jump 3 percentage points then a 5-yr treasury bond fund would lose 15%

 

[RetireBy90]

Here is an interesting article by Rick Ferri in which he claims that for those already retired a 30/70 asset allocation is the best overall, combining much less volatility with descent growth.

I bring this up because of a recent session doing 'what-if' tests with Firecalc. It seems that my preferred success rate (100%) does not decrease below that level as I add more bonds until my AA ratio gets to be about 20/80. In fact, some of the higher bond levels show larger possible end of life accumulations - I assume because at sometime I would have avoided a big hit in a down market.

The Center of Gravity for Retirees

Thanks for the post. I don't think I would go to that AA. I will FIRE in 2 years, told the boss last week so I'm somewhat committed. I'm having a hard time in my head thinking of even a 50/50 as I will need those funds 30 years from now. However, reading the post I must make myself at least consider something like this. Gotta think out of the box and consider all options.

 

[mathjak107]

with rates soon to be shifting course eventually not something I would do nor would i base past performance on anything on .

 

[Big_Hitter]

I think a better approach would be to go 30/70 with the 70 in a "stable value" fund, like T Rowe Price or something similar - it has an effective duration of 0 and the annual RORs have been much higher than cash - that's probably what I'll be doing when I start drawing down

 

[ERD50]

...
I bring this up because of a recent session doing 'what-if' tests with Firecalc. It seems that my preferred success rate (100%) does not decrease below that level as I add more bonds until my AA ratio gets to be about 20/80. ...

If you are 'deep' within 100% SWR territory, then looking at pass/fail isn't going to be very sensitive to AA. You won't really get much information from that kind of a comparison.

Better to use the investigate functions to find a marginally 100% success rate, and then us that marginally SWR with the 'Investigate changing my allocation' selection.

To make a parallel, it's kind of like if someone said that a bench mounted rifle and scope is no more accurate than a Saturday Night Special handgun, because both of them can hit the broad side of a barn. That test is not sensitive enough to tell you which is better.

-ERD50

 

[REWahoo]

...descent growth.

Another marvelous oxymoron...

Wellesley holds about 10 percent more stock than this, is considered conservative and has performed well over time.... Personally, I think 30 percent is to conservative for a long time horizon (ER).

+1

I've posted this FIRECalc chart countless times. Anything less than ~40% equities shows a significant drop off in survival rate over a 30 year time frame:

 

[harley]

Thanks for the post. I don't think I would go to that AA. I will FIRE in 2 years, told the boss last week so I'm somewhat committed. I'm having a hard time in my head thinking of even a 50/50 as I will need those funds 30 years from now. However, reading the post I must make myself at least consider something like this. Gotta think out of the box and consider all options.

I think it depends on your source of retirement income. As Chuckanut says, this MIGHT be OK if your income is based solely upon investments, although I sure wouldn't feel comfortable with it. But if you have income from secure pensions, rentals, etc. I think it would be foolish to consider an AA like this. Now if you consider your pensions and rental income as part of your bond allocation, maybe. But even then I don't think I'd go much below 50/50.

 

[marko]

I've posted this FIRECalc chart countless times. Anything less than ~40% equities shows a significant drop off in survival rate over a 30 year time frame:

Ok, but if I'm reading the chart correctly, there seems to be no improvement/advantage of going more than about 50% stocks. Why take on more risk?

 

[nash031]

I think it depends on your source of retirement income. As Chuckanut says, this MIGHT be OK if your income is based solely upon investments, although I sure wouldn't feel comfortable with it. But if you have income from secure pensions, rentals, etc. I think it would be foolish to consider an AA like this. Now if you consider your pensions and rental income as part of your bond allocation, maybe. But even then I don't think I'd go much below 50/50.

Agree. I can't see going below 60/40 (presently 85/15 accumulating) with a military pension accounting for somewhere around 50% of retirement income. I view that as "fixed" already, which reduces volatility and provides income in downturns to help reduce required withdrawals.

 

[REWahoo]

Ok, but if I'm reading the chart correctly, there seems to be no improvement/advantage of going more than about 50% stocks. Why take on more risk?

There is no reason unless you want the opportunity for more growth - the age old risk/reward issue. I've been at 45% since 2008 (down from 55%) and find that to be the "Goldilocks number" for me.

 

[braumeister]

Here is an interesting article by Rick Ferri in which he claims that for those already retired a 30/70 asset allocation is the best overall, this week.

Fixed it for ya!

 

[audreyh1]

Ok, but if I'm reading the chart correctly, there seems to be no improvement/advantage of going more than about 50% stocks. Why take on more risk?

It has to do with terminal value. A higher equity % will give you a higher terminal value, on average, without sacrificing survivability up to about 75 to 80% equity. So some folks consider 75% equity to be the sweet spot - if you can live with the volatility!

Us? I think we'll stick with around 50% for a while. I would be reluctant to drop below 40/45% until quite a bit older. Maybe 30% when we turn 80?

Remember, all, that Rick Ferri is probably targeting the 65 year old retiree with this advice, and it reminds me a bit of Bernsteins "won the game" argument. I think I did read that article a while back and it seemed like he was ignoring the long term effects of inflation, just like Bernstein.

 

[foxfirev5]

The suggestion is really not far off from the old age in bonds rule for most people already retired. While dropping to 30% equities is not in my plan, the article makes me feel a little better about my 42-45% equity allocation. I'm coming up on ER just before age 60 in less than a year. With no significant pension, I need to protect myself for the first few years.

 

[HF63]

if interest rates jump 3 percentage points then a 5-yr treasury bond fund would lose 15%

I do not see the Fed raising rates any time soon!

Imagine what a 3% in crease will do the government debt.

 

[marko]

It has to do with terminal value. A higher equity % will give you a higher terminal value, on average, without sacrificing survivability up to about 75 to 80% equity.

By "terminal value" do you mean what's left of the portfolio at the end of one's life?

So you're saying that anything over the ~50% AA would only benefit the heirs while creating perhaps a stress induced early departure for the benefactor?

Now THERE'S a sweet spot to calculate: high volatility stress=early departure vs low stress longevity=outliving your money!