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Old 03-05-2015, 02:26 PM   #41
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Originally Posted by Fred123 View Post
The average expected outcome for a 100% equities portfolio is lower than a more diversified portfolio. You can verify this by playing with your favorite retirement calculator. Or google "efficient frontier" for the theoretical explanation.

This bring me to one of my favorite rants: the way people greatly overestimate their intuition about the statistics of investing. Even people who deal with this every day make mistakes about probability (google "monty hall problem"). That's why I generally run screaming from anyone who insists on the reliability of their gut investing instinct.
Yes but thats AAs and frontiers assume an annual withdrawal.....what if you don't have to make any withdrawals
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Old 03-05-2015, 02:27 PM   #42
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In terms of portfolio survival, if you are withdrawing from it, I don't think you want more than 80% stocks, or even 75%, maybe.

But if you are just letting the money run for your heirs and not drawing on it - 100% stocks still beats over long periods of time. You can argue whether the risk adjusted return is worth it.

Over very long periods of time, various portfolio allocation performance will usually look something like this.


But any given decade you might underperform with 100% stocks. You'll also underperform with 80% stocks.
from https://dougcronk.wordpress.com/2010...040-asset-mix/
Just my point, without withdrawals 100% equites wins. Risk is not a factor.
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Old 03-05-2015, 03:29 PM   #43
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Originally Posted by Fred123 View Post
The average expected outcome for a 100% equities portfolio is lower than a more diversified portfolio. You can verify this by playing with your favorite retirement calculator.
I couldn't verify it.
FIRECalc:
Scenario: Zero withdrawals, 30 year window, 750K start. Give average ending portfolio values:
1) 100% equities: $1,462,771
2) 95S/5b (5 yr Treasuries): $1,391,266.
3) 90s/10b : $1,321,511
4) 80s/20b: $1,187,568

If withdrawing 4% of year end value per year, all else constant as above:
1) 100% equities: Average ending port value: $1,040,924.
2) 95s/5b: $987,963.
3) 90s/10b: $936,605
4) 80s/20b: $838,789.

If "average ending portfolio value" is the measure of merit, then 100% equities looks like a winner. It wasn't much affected by 4% withdrawals: with or without withdrawals, the 80s/20b portfolio ended on average, at 80-81% of the 100% equities avg value.
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Old 03-05-2015, 03:51 PM   #44
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Sorry, that's not sophisticated enough. You need to run it through a bevy of calculators using statistical regression analysis along with future assumptions based on historical Monte Carlo algorithms modified by analytic recursive analysis of the mean differentiation integral of the standard deviation mode based on the last 78 years of market backward trailing averages.
Of course you are right. I will have to rethink our strategy of using SS to cover our basic living expenses and having the pensions and investment returns leftover for non-essentials and continued savings.
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Old 03-05-2015, 05:26 PM   #45
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Yes but thats AAs and frontiers assume an annual withdrawal.....what if you don't have to make any withdrawals
OK, I misread the no withdrawal part. If you never touch the accounts then 100% stocks does give you the greatest return. But, then why not just give it away now?
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Old 03-05-2015, 05:58 PM   #46
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FWIW, Efficient Frontier graphs don't assume withdrawals. They only assume annual rebalancing.
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Old 03-05-2015, 07:44 PM   #47
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FWIW, Efficient Frontier graphs don't assume withdrawals. They only assume annual rebalancing.
Yes but in this context they were being used with withdrawals to see where various AAs fell on the curve so that the retiree can balance risk and return.

If risk is removed from income generation, what should the AA of any remaining funds be. Does the retiree stick with a 60/40 AA as before on the basis that it gives the "best" risk to return ratio to leave money to heirs or do they "swing for the fences" now.
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Old 03-05-2015, 08:25 PM   #48
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In what context? You've lost me.
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Equity Glide Paths - some new thoughts.
Old 03-05-2015, 11:42 PM   #49
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Equity Glide Paths - some new thoughts.

Efficient frontier doesn't care about withdrawals. It just shows relationship between risk and return for various sock/bond combinations. The classic way I had it explained to me was to start with a portfolio of 100% Bonds. If you add a more risky, higher return, asset to this, you end up with LESS risk and more return. The efficient frontiers graphed above should be read looking at how much risk you can accept, then finding the AA that gives best return.

If you don't NEED the money, I suppose you could say you have a very high risk tolerance, and would invest 100% in the highest return asset. Of course, that is no guarantee you'll end up with the most money. That's where the risk comes in.


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