Hydroman said:
So what I have gathered so far is that volatility does not matter much to those on a COLAed pension that covers basic living expenses and so that group does not make any adjustments in their equity/FI ratio based on age. Not sure what those without the benefit of a pension are doing. None have reported in.
I think everyone should stop polling the audience and work out the math for their own situations. ER is hard enough, but if people can't do math then ER is impossible.
I'm not sure if "those on a COLAed pension that covers basic living expenses" is a jibe or if I should play it as a straight comment, so I'll play it straight.
The pension and the COLA have nothing to do with volatility. (If you want a pension with a COLA then go buy a Vanguard inflation-indexed annuity. Compared to what I paid for mine, Vanguard is a bargain.) The pension and the COLA also have nothing to do with our personal rate of inflation, although the COLA is indexed to CPI-U. My pension happens to cover most of my living expenses because I can only surf one longboard at a time, and because our teenager is more interested in hanging out with her posse than she is in blowing our budget on woo-hoo vacations. Four years from now, when she's out the door to college, I suspect the ol' entertainment budget is gonna experience a double-digit percentage spending increase. I might even "need" a new longboard by then.
But back to portfolio math. The effect of downward volatility IS reduced by how many years' expenses are in cash-- a known quantity of money available at a known time. I believe the only way to achieve that "cash" is through a CD or a money market, or maybe even a bond ladder, but not a bond fund. If you don't need to sell equities for a few years to provide living expenses, then you don't have to care about volatility. By the time it's necessary to sell equities for cash then hopefully dividends or a market recovery have carried the portfolio over the bear market and will enable it to recover. We keep two years' expenses in cash, Frank Armstrong recommends as much as seven, and most people could probably sleep comfortably in between those ends of the bell curve. Note that Bernstein analyzes stock/bond portfolios but doesn't do the same sort of detailed analysis for stock/cash.
My concern with adjusting the equity/FI ratio with age is that only equities have been proven to beat inflation. Bonds, FI, & beaver cheese provide the diversification that reduces volatility, but they do not beat inflation. Raising the "FI" portion of the portfolio with age will eventually begin losing to inflation. I can't predict when that'll happen but I bet that it'll happen at least two decades before both people of a couple have died. If my portfolio had followed that equity/FI ratio, I wouldn't feel comfortable knowing that my spous's only protection against inflation was to spend the principal in ever-increasing chunks. Not even Ty Bernicke's cat food can turn that problem around.
If you can sidestep volatility with a cash stash instead of reducing volatility through diversification, then you don't have to care about volatility. And if you can stay in a high-equity portfolio, then you'll also continue to beat inflation.
But you have to do whatever makes you sleep at night. If low volatilty and lower returns with a lifetime of inflation corrosion lets you sleep at night, then sweet dreams...
