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Asset Allocation and Impact on Retirement Investment
Old 08-30-2023, 05:35 AM   #1
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Asset Allocation and Impact on Retirement Investment

I love this video illustrating how Asset Allocation can impact the success of your retirement.



In summary, the video illustrates how a 80/20 and 60/40 portfolio outperforms a 100% equity portfolio over a 23 year period from 2000-2023 based on the following assumptions:

- $2M Initial Amount
- $80K Fixed Withdrawal Amount

Below is a screenshot of the percentages used in each Asset Class.
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Old 08-30-2023, 08:00 AM   #2
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Isn't backtesting wonderful? You can fool around with parameters and select time periods to prove anything you want to prove. There is the little problem, of course, that backtesting is not predictive.
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Old 08-30-2023, 08:25 AM   #3
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We probably won't be seeing such a bond bull market again anytime soon.
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Old 08-30-2023, 08:29 AM   #4
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Originally Posted by OldShooter View Post
Isn't backtesting wonderful? You can fool around with parameters and select time periods to prove anything you want to prove. There is the little problem, of course, that backtesting is not predictive.

True, but history provides insights into what the future may hold- and allows one to try to manage their nest egg accordingly.

FWIW- Many other sources have reported similar findings over much longer time frames. Over long periods a 100% equity retirement portfolio generally offers minimal gains (even losses over some time periods) over a more balanced portfolio (like the 80/20 or 60/40 ratios backtested in the video).


For those interested- this website has been mentioned here before for backtesting retirement portfolios-

https://firecalc.com/
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Old 08-30-2023, 11:07 AM   #5
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Originally Posted by ERhoosier View Post
... FWIW- Many other sources have reported similar findings over much longer time frames. Over long periods a 100% equity retirement portfolio generally offers minimal gains (even losses over some time periods) over a more balanced portfolio (like the 80/20 or 60/40 ratios backtested in the video).
That kind of a survey is more like the right way to go about it. This video's asset allocations appear to be very carefully tuned to +/- 1% values, leading me to be more suspicious that just my general distrust of backtests.

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Originally Posted by ERhoosier View Post
... For those interested- this website has been mentioned here before for backtesting retirement portfolios-https://firecalc.com/
The data presentation appears to come from Portfolio Visualizer (https://www.portfoliovisualizer.com/)
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Old 08-30-2023, 04:30 PM   #6
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Originally Posted by OldShooter View Post
That kind of a survey is more like the right way to go about it. This video's asset allocations appear to be very carefully tunes to +/- 1% values, leading me to be more suspicious that just my general distrust of backtests.

The data presentation appears to come from Portfolio Visualizer (https://www.portfoliovisualizer.com/)
Correct.. Portfolio Visualizer Backtest Portfolio Asset Class Allocation

https://www.portfoliovisualizer.com/...nalysisResults
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Old 08-30-2023, 05:13 PM   #7
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Few things to note....


he's assuming the 100% equity portfolio is ALL in the S and P 500. My sense is diversifying that into small caps and international a bit would even out those numbers.


he's also assuming it's all in an IRA, if your money is also in taxable accounts the bond portion in his example is much less tax efficient which affects total return. And if you have 800K in bonds you're paying a truckload in taxes on interest. Whereas selling stocks to generate cash flow capital gains taxes are much lower.
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Old 08-30-2023, 05:34 PM   #8
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I thought the only portfolio that might not be swizzled for improved back testing was the 100% S&P because that's what so many claim to have held and is the standard that everything seems to get compared to. I didn't watch the video, so don't know where he got his allocations. If he pulled the allocations from a source which was published at the start of the analysis, that would give it more footing. Yes, you could shop around for AA recommendations published at the start of the analysis period, and report on the one that supports your position. And you could cherry pick the span, which is why the best analysis would include how the AA did over various spans.
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Old 08-31-2023, 07:52 AM   #9
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You can prove anything you want if you are free to pick the time frame and AA.

I have a spreadsheet with the return & yield data for S&P500 & 10-yr TBills, 1950 to 2017. From the risk standpoint, the best way to look at it is to see the annual returns (CAGR) for the *worst* 23 year period.

100/0 -- 6.4% starting 9/1959
80/20 -- 6.7% starting 9/1959
20/80 -- 5.5% starting 11/1951
60/40 -- 6.6% starting 1/1956
40/60 -- 6.3% starting 11/1959

It doesn't much matter what the AA is--the worst cases are all around 6.5 %.

The medians are:
100/0 -- 10.1%
80/20 -- 9.7%
20/80 -- 8.3%
60/40 -- 9.4%
40/60 -- 9.1%
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Old 08-31-2023, 08:14 AM   #10
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Using the same parameters for initial size and withdrawal, increasing withdrawals by the offical CPI inflation, starting with $2,000,000, 4% sWR taken monthly:

60/40 AA, start 1/1956 (the worst 23 year period for that AA), ending 1/1979:
Final value: $3,758,438
Total withdrawn: $2,632,300

Worst drawdown:
12/1972 ($3,858,278) to 9/1974 ($2,721,757)

So...for the worst 23 year period you've withdrawn a bit more than your initial amount, and ended with the portfolio almost twice the initial amount.



For constant $6667/mo withdrawals, no increase:
Final value: $4,926,222
Total withdrawn: $1,846,759
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Old 08-31-2023, 09:49 AM   #11
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That's very useful information... for someone FIRING in 2000! Too bad YT wasn't around until 2005 for them to watch the video published in 2023.



I don't see the value of talking about AA for a single specific past year. I'd like a bigger sample size than 1 and a longer draw period (he even mentions a 40-50 year draw period for an early retiree). Pick a different year, get different results.
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Old 08-31-2023, 09:59 AM   #12
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I don't see the value of talking about AA for a single specific past year. I'd like a bigger sample size than 1 and a longer draw period (he even mentions a 40-50 year draw period for an early retiree). Pick a different year, get different results.
Yeah. I want to see results for the period 2023-2043.
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Old 08-31-2023, 11:03 AM   #13
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It is not just the curve.

I know folks who went all in for equities, especially techs, in the early 2000's.

They lost half or more of their retirement equity. Then got scared and switched everything to low interest fixed income.

They missed the rallies. Their fixed income investments did not keep up with their personal rates of inflation.

Knee jerk, fear, and greed, combined with AA can be a blessing or curse.
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Old 08-31-2023, 11:04 AM   #14
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It is not just the curve.

I know folks who went all in for equities, especially techs, in the early 2000's.

They lost half or more of their retirement equity. Then got scared and switched everything to low interest fixed income.

They missed the subsequent rallies. Their fixed income investments did not keep up with their personal rates of inflation.

Knee jerk, fear, and greed, combined with AA can be a blessing or curse.

Many do not understand how sequence of returns can enhance or severely detract from a retirement plan.
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Old 08-31-2023, 11:24 AM   #15
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Quote:
Originally Posted by G-Man View Post

In summary, the video illustrates how a 80/20 and 60/40 portfolio outperforms a 100% equity portfolio over a 23 year period from 2000-2023 based on the following assumptions:

- $2M Initial Amount
- $80K Fixed Withdrawal Amount

Below is a screenshot of the percentages used in each Asset Class.
Ah yes, the power of picking your endpoint to "prove" your theory. If you run these exact numbers using any year since 2000 except 2000, 2001, and 2002 the 100% US Large Cap portfolio blows away the 80/20 and the 60/40 portfolio.

For example, here is what happens if you use 2008 as the start point. As you know, 2008-2009 was not a good year for equities. This is the result:

Portfolio 2008-2023.png

The only years in the past 30 years that Portfolio #2 (80/20) does better than 100% US Large Cap is with 1998-2002 as the starting years.
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Old 08-31-2023, 11:27 AM   #16
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Yeah. I want to see results for the period 2023-2043.
Yes, me too. I'm waiting for someone to post the results in the "Paranormal Stories" thread.
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Old 08-31-2023, 11:38 PM   #17
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Yes, me too. I'm waiting for someone to post the results in the "Paranormal Stories" thread.

I'm sure ERD50 will explain how it's not really paranormal.
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Old 09-01-2023, 08:54 AM   #18
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I agree that cherry picking is a staple of the statistics world, but we're overlooking the general idea that (emotions aside):

Volatility is your friend during the accumulation stage.
Volatility is your enemy during the withdrawal stage.

The more wild swings (down) you experience, the worse your performance will be in the withdrawal stage.
Having some bond exposure...or anything that reduced volatility...can actually improve performance. While everyone loves an S&P500 index fund, if you can find a similar total return but with less volatility you will come out ahead in the withdrawal stage.

If you're in the withdrawal stage and you have a -50% year and a +100% year, you're starting out in rough shape. Two flat years? Not too bad. Both scenarios were technically a total 0% return for two years.
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Old 09-05-2023, 03:20 PM   #19
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I have data for monthly returns of the S&P500 and 10-year T-bills from 1950 to 2017, where I can examine the statistics for various asset allocations.

For purposes of assessing risk during standard 4% SWR withdrawal, we figure the 36-month volatility and look at the portfolio values for the next 9 years. The highest 36-month portfolio volatility was for the 36 months beginning Dec 2007, for all the common asset allocations.

Starting with $10,000, 4% SWR (4% of initial value, increased each year by the official CPI inflation) monthly withdrawal, here are the figures for lowest portfolio value and final portfolio value for the next 9 years, for different AA's, rebalanced monthly.

100/0 - $4800 & $11,100
80/20 - $5600 & $10,800
60/40 - $6500 & $10,400
40/60 - $7500 & $9,800

The median 36-month volatility began Jan 1977. Those figures are:
100/0 - $8100 & $19,900
80/20 - $8500 & $19,900
60/40 - $9000 & $19,700
40/60 - $9400 & $19,300


The 10'th percentile (10% are lower, 90% are higher) volatility began Dec 1993. Those figures are:
100/0 - $9600 & $17,700
80/20 - $9700 & $16.900
60/40 - $9800 & $15,800
40/60 - $9900 & $14,600

The 90'th percentile (90% are lower, 10% are higher) volatility began Jan 1987. Those figures are:
100/0 - $9500 & $26,300
80/20 - $9700 & $23,700
60/40 - $10,000 & $21,200
40/60 - $10,100 & $18,700
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Old 09-05-2023, 03:31 PM   #20
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Yeah. I want to see results for the period 2023-2043.
Amen. If I'm still around I'll take it.
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