Eliminate Portfolio Risk

[Which Roger]

Since we can't predict the future, how much is "more than enough" can only be determined based on what has happened in the past. One reasonable definition of "more than enough" would be a 2% withdrawal rate. At this rate, FireCalc will give 100% success rate for just about any portfolio mix, from all stocks to all bonds.

So the question then becomes, "what if the future is worse than the worst case from the past"? For bonds, envision a case where we have inflation like the 1970s, it persists throughout the investor's lifetime, and interest rates are kept artificially low so governments can inflate their way out of debt. A 100% bond portfolio would not survive this scenario, even with a very low withdrawal rate.

For stocks, envision a case where they drop by 89% (like in the US during the depression) and stay at that level for the investor's lifetime. If this happened, the 100% stock portfolio would not survive very long even with a low withdrawal rate.

So, if you have "more than enough", and the future is no worse than the past, then asset allocation really doesn't matter, since any asset mix will survive. But if the future is worse then the past, you need to be diversified, because you cannot predict what this "worst" scenario will be.

 

[RetireAge50]

I am blown away by this forum. The insight, knowledge, and thoroughness is incredible. The opportunity cost of just letting the money do nothing is probably what will drive me to keep it invested.

 

[daylatedollarshort]

So, if you have "more than enough", and the future is no worse than the past, then asset allocation really doesn't matter, since any asset mix will survive. But if the future is worse then the past, you need to be diversified, because you cannot predict what this "worst" scenario will be.

I think it is also helpful to have low fixed expenses in retirement. Financial security doesn't just come from portfolio return, but also other factors such as how many years of living expenses a household has saved up and how many diversified sources of income there are.

If your fixed expenses are half or less of what you could spend in a given year, then in retirement you can still be saving money, or at least cut back easily on discretionary spending during low investment return periods.

 

[ERD50]

...The opportunity cost of just letting the money do nothing is probably what will drive me to keep it invested.

Going back to your OP, the ironic thing is, if one has a very large portfolio (relative to expenses), it really makes no difference if the AA is 0/100 or 100/0. If the portfolio is large enough for a 0/100 AA to survive inflation, then a 100/0 AA will survive volatility.

More money is always better.


-ERD50

 

[Khufu]

To the OP,

You might like to read "Worry-Free Investing" by Zvi Bodie which makes the case for the approach you are considering. IMO, you are right to reduce risk if you don't need it.