55/45 vs 80/20 vs 100 over 20 Years

[Markola]

I’m hoping this Portfolio Visualizer link works for others. I backtested our actual 55/45 [Portfolio 1] against an 80/20 one [Portfolio 2] vs a 100% US Stock one [Portfolio 3]. I was stunned at the relative lack of difference across the 3 over the last 20 years. Caveats:
- Portfolio 1 has some international exposure
- The last 20 years is an arbitrary interval
- We have not had this asset allocation for 20 years. I ran the simple test to see if we are “missing the boat) by owning 45% bonds.

Still, the result was surprising and I thought worth sharing:

https://www.portfoliovisualizer.com...cation6_2=20&total1=100&total2=100&total3=100

In case it won’t open for you, the 20 year results as of today are:
Portfolio 1: 6.14% Compound Annual Growth Rate (CAGR)
Portfolio 2: 6.58%
Portfolio 3: 6.66%

These three portfolios were all actually at a tie at 2016 just three years ago.

 

[SnowballCamper]

Yes, does seem to go against the current mantra of diversifying across stocks and bonds. To me it highlights the difficulty in having a truly diversified portfolio, especially for a retail investor. I take this as a data point to reinforce using low cost as a selection criteria for investments.

Thanks.

 

[Markola]

I should give a key to the funds, which are all Vanguard index funds:
VTSMX = Total US Stock Market
VGTSX =. Total International Stock
VBISX = Short Term Bond
VBIIX = Intermediate Term Bond
VBLTX = Long Term Bond
VBMFX = Total US Bond Market

 

[Navigator]

I’m hoping this Portfolio Visualizer link works for others. I backtested our actual 55/45 [Portfolio 1] against an 80/20 one [Portfolio 2] vs a 100% US Stock one [Portfolio 3]. I was stunned at the relative lack of difference across the 3 over the last 20 years. Caveats:
- Portfolio 1 has some international exposure
- The last 20 years is an arbitrary interval
- We have not had this asset allocation for 20 years. I ran the simple test to see if we are “missing the boat) by owning 45% bonds.

Still, the result was surprising and I thought worth sharing:

https://www.portfoliovisualizer.com...cation6_2=20&total1=100&total2=100&total3=100

In case it won’t open for you, the 20 year results as of today are:
Portfolio 1: 6.14% Compound Annual Growth Rate (CAGR)
Portfolio 2: 6.58%
Portfolio 3: 6.66%

These three portfolios were all actually at a tie at 2016 just three years ago.

Your results certainly emphasize that average returns cannot be used for financial planning. Although a 100% stock portfolio usually outperforms a 55/45 portfolio over the long run, there are definitely periods of time when this is not true. A large reason for your results is your starting year of 1999 was at the peak of the dot com madness, when the stock market was insanely overpriced.

 

[NW-Bound]

At the trough of 2009, the balances of the 3 portfolios are: $121.7K, $94.5K, and $77K.

All 3 started from $100K in 1999, and imagine if you own Portfolio #3, and have been drawing on it for 10 years, how much lower than $77K would you go?

At 4% WR, that's at least $4K x 10 years = $40K of withdrawal, even if you do not adjust for inflation. You would better not draw any money and just live off SS, or pension if you have it.

Else, you would not have enough to recover.

No, the portfolios are not the same!

 

[NW-Bound]

In order to mimic FIRECalc, I modify the backtest to make an annual withdrawal of $4K or 4%, with COLA. The results are also inflation adjusted to 1999 dollar value.

The results show that a diversified portfolio has a higher balance at the end of 20 years. What I find surprising is that the 100% stock portfolio, while now the worst one, turns out better than I would think. Its balance is still worth $72K in 1999 dollars, and barring a crash like in 2009, should support another 10 years of withdrawal to make a successful 30-year retirement.

Note: you will have to select "Inflation Adjusted" on the graph to see the results in 1999 dollar value.

https://www.portfoliovisualizer.com...cation6_2=20&total1=100&total2=100&total3=100

 

[pb4uski]

At the trough of 2009, the balances of the 3 portfolios are: $121.7K, $94.5K, and $77K.

All 3 started from $100K in 1999, and imagine if you own Portfolio #3, and have been drawing on it for 10 years, how much lower than $77K would you go?

At 4% WR, that's at least $4K x 10 years = $40K of withdrawal, even if you do not adjust for inflation. You would better not draw any money and just live off SS, or pension if you have it.

Else, you would not have enough to recover.

No, the portfolios are not the same!

No need to imagine.... I just took that run and added 4% ($4,000) inflation adjusted withdrawals.... low point at Feb 28, 2009 were $77,541, $57,336 and $44,632 respectively. Scary.

 

[Markola]

Thanks Midpack. Are you sure it calculated back 30 years? I can only get it to run 23 years back to 1996.

 

[Markola]

Yes, does seem to go against the current mantra of diversifying across stocks and bonds. To me it highlights the difficulty in having a truly diversified portfolio, especially for a retail investor. I take this as a data point to reinforce using low cost as a selection criteria for investments.

Thanks.

I agree about costs but I guess I took the opposite lesson about diversification. I’d rather have the benefit of of portfolio “ballast” from lots of bonds tugging against falling stocks vs. suffering through the drama of a falling 100% stock portfolio if I’m going to end up at essentially the same place or better 20 years later.

 

[Midpack]

Thanks Midpack. Are you sure it calculated back 30 years? I can only get it to run 23 years back to 1996.

Whoops, thanks, good catch. It let me input a 1989 start but it didn’t calculate back that far

 

[Markola]

Your results certainly emphasize that average returns cannot be used for financial planning. Although a 100% stock portfolio usually outperforms a 55/45 portfolio over the long run, there are definitely periods of time when this is not true. A large reason for your results is your starting year of 1999 was at the peak of the dot com madness, when the stock market was insanely overpriced.

You are correct that the stock-weighted portfolios do better 20 years later if the starting point is in a bear market trough and 20 years later is a stock bull market. But if 20 years later is another trough, I think the graph shows that the components of these portfolios experienced mean reversion during bears, during which they go basically back to even.

 

[pb4uski]

FIRECalc seems to bear that out... if I chose the default assumptions and run 55/45, 80/0 and 100/0, I get success rates of 95.8%, 95.0% and 93.3%, respectively... not very different.

 

[COcheesehead]

FIRECalc seems to bear that out... if I chose the default assumptions and run 55/45, 80/0 and 100/0, I get success rates of 95.8%, 95.0% and 93.3%, respectively... not very different.

I heard someone a while back say something along the lines of...
equities may help your portfolio grow, but bonds make sure you have a portfolio to grow.

 

[Chuckanut]

One advantage of bonds is that they buffer stocks when a serious down market hits. When the stock market goes down 40% but one's net worth 'only' goes down 23% thanks to the bonds, many investors will be less motivated to sell at the bottom. I know, I know... But not everybody is as financially sophisticated as this group.

There is a lot to be said for the average person to have a chunk of his/her investments in more stable assets such as bonds, CD's and and even an annuity if it keeps them from panicking and selling at or near the bottom.

Even this group of financial mavens has a number of people with money in Wellesley.

 

[jIMOh]

I’m hoping this Portfolio Visualizer link works for others. I backtested our actual 55/45 [Portfolio 1] against an 80/20 one [Portfolio 2] vs a 100% US Stock one [Portfolio 3]. I was stunned at the relative lack of difference across the 3 over the last 20 years. Caveats:
- Portfolio 1 has some international exposure
- The last 20 years is an arbitrary interval
- We have not had this asset allocation for 20 years. I ran the simple test to see if we are “missing the boat) by owning 45% bonds.

Still, the result was surprising and I thought worth sharing:

https://www.portfoliovisualizer.com...cation6_2=20&total1=100&total2=100&total3=100

In case it won’t open for you, the 20 year results as of today are:
Portfolio 1: 6.14% Compound Annual Growth Rate (CAGR)
Portfolio 2: 6.58%
Portfolio 3: 6.66%

These three portfolios were all actually at a tie at 2016 just three years ago.

efficient frontier- take the lowest risk to get the same return

 

[jIMOh]

I agree about costs but I guess I took the opposite lesson about diversification. I’d rather have the benefit of of portfolio “ballast” from lots of bonds tugging against falling stocks vs. suffering through the drama of a falling 100% stock portfolio if I’m going to end up at essentially the same place or better 20 years later.

the efficient frontier agrees with you

 

[Markola]

It certainly appears that we are not missing the party by having nearly half of our portfolio in boring bonds, at least over a 20 year perspective. Personal finance writers enjoy talking about the importance of growth but it turns out that “Avoid unnecessary shrinking during bears” is equally important for sustainability. Yes, the last 20 years is an arbitrary period, and so is every other period, so what are you gonna do? We have a Vanguard Flagship Personal Advisor for various family communication and fairness reasons and now it his his job to make sure we keep our diversified portfolio intact and rebalanced for at least twenty more years, come what may, so that I can sleep well and know I’m probably doing about as well as we can. Cheers, Thanks All and YMMV!

 

[RenoJay]

Really depends which 20 year period you look at