Interesting webpage on AA

[pb4uski]

I saw this interesting webpage on Vanguard's AA at different ages. First time I had seen it so I figured I would post it.

https://advisors.vanguard.com/VGApp/...ls?fundId=0682

[Dawg52]

According to the charts, someone my age(58) should have roughly 70% in stocks. Seems pretty aggressive to me. I have less than half that allocated to stocks. My allocation is closer to the 74 and over bracket. Oh well....I feel old so I invest like an old guy.

[growing_older]

Or, you've already won the game to reach FI and don't need the additional risk. It's one thing to see that stocks have higher long term results, but it's quite another to ride the roller coaster up and down, accepting the possibility that it might be down when you really really needed it to be up.

[Huston55]

Quote:

Originally Posted by Dawg52 According to the charts, someone my age(58) should have roughly 70% in stocks. Seems pretty aggressive to me. I have less than half that allocated to stocks. My allocation is closer to the 74 and over bracket. Oh well....I feel old so I invest like an old guy.

70% stocks IF you're retiring at 65, right? If you're retired or retiring within the year, looks like ~43% stock allocation. Still more than you have but, closer.

What's missing from this is an accounting for guaranteed income streams, and how that should affect AA. For example, some would say that guaranteed, COLAd income streams should be counted as part of one's bond allocation. I'm not sure I'm in that camp yet - need to study it more. But, in my case, it dramatically changes my AA (from~ 65/35 to ~35/65).

[ERD50]

Quote:

Originally Posted by growing_older Or, you've already won the game to reach FI and don't need the additional risk. ...

An AA heavily weighted with fixed income could be the risky position.

FIRECALC shows that lots of fixed income reduces the success rate. How do you define 'risk'?

-ERD50

[rbmrtn]

Quote:

Originally Posted by growing_older Or, you've already won the game to reach FI and don't need the additional risk. It's one thing to see that stocks have higher long term results, but it's quite another to ride the roller coaster up and down, accepting the possibility that it might be down when you really really needed it to be up.

+1. I think they are assuming retirement at age 65 and would still be in accumulation phase until then.

[pb4uski]

Click on the View Chart by Age - it defines AA in terms of years before, at or after retirement. The target AA at retirement is 65 stocks/35 bonds.

Pretty mainstream but perhaps a bit more stocks than this group at retirement. Actually pretty close to my AA of 60/40.

For younger folks (20-40) their target is 90/10 and 70% domestic/30% international within equities.

[pb4uski]

Quote:

Originally Posted by growing_older Or, you've already won the game to reach FI and don't need the additional risk. It's one thing to see that stocks have higher long term results, but it's quite another to ride the roller coaster up and down, accepting the possibility that it might be down when you really really needed it to be up.

I think it depends. If you have won the game the remaining risk is inflation. If you have won the game bigtime, then perhaps you could dial down the risk, but if you have just won the game then you need equities to provide a hedge against inflation. Interesting that their AA for someone who is 7+ years into retirement is still 30/70, presumably because stocks act as a hedge against inflation.

[Midpack]

Interesting chart (by age) and I like that they've split out TIPS, foreign equity and cash, many recommendations just show equity:bond pie charts by age. But there's nothing wrong with varying what we do as individuals with a 10% plus/minus adjustment in equity/bonds (or more) depending on risk tolerance, age/longevity, how FI you are/not, etc.

[foxfirev5]

A long time ago I realized that a high equity stake wasn't my style. I really boosted the savings and got the balances up there. ( The high interest rates of those days didn't hurt). My 45/40/15 equity/bond/cash AA also let me sleep through the dips and crashes and stay the course.

[rbmrtn]

A few years ago I read an article from Paul Merriman at fundadvice on portfolio risk.

FundAdvice.com - The perfect portfolio

Figure 7 is a table showing returns for various % stock allocation. With 30-40% stock you can capture most of the return and significantly reduce drawdown risk.

[Dawg52]

Quote:

Originally Posted by rbmrtn A few years ago I read an article from Paul Merriman at fundadvice on portfolio risk. FundAdvice.com - The perfect portfolio Figure 7 is a table showing returns for various % stock allocation. With 30-40% stock you can capture most of the return and significantly reduce drawdown risk.

From the link(1970-2008).......

Let’s start with the assumption that you are comfortable with the very minimal risk of the all-fixed-income portfolio of T-notes, but that you are not satisfied with the 8.3 percent compound return. Let's also assume that you could be satisfied with the 9.5 percent return of the all-equity portfolio, but that you’re not comfortable with the risks.

The question is: Where do you fit in between?

If anyone can guarantee the next 38 years to be anything like the previous, give me the T-Bill portfolio for comfort sleeping. I'm closer to the 30/70 model to hedge my bets.

[Spanky]

Quote:

The question is: Where do you fit in between?

for us: 50/50 mix should suffice.

[Lsbcal]

This is a good starting point for thinking through one's AA. This is the first time I've seen VG do such a nice chart (with good color too) and tables on AA.

Anyway, one needs to look at their full picture which includes: expenses, pensions, SS, when one might downsize the house, life expectancy, the range and order of equity/bond returns, etc. This sort of sounds like FIRECalc to me. What do you think?

P.S. The chart is pretty close to my AA at 65.

[ERD50]

Quote:

Originally Posted by Dawg52 .... If anyone can guarantee the next 38 years to be anything like the previous, give me the T-Bill portfolio for comfort sleeping. I'm closer to the 30/70 model to hedge my bets.

I don't get this at all - how could a T-Bill portfolio make you sleep well?


FIRECALC - 3.5% WR, 35 Years, default 75/25 - 99.1% success rate.

FIRECALC - 3.5% WR, 35 Years, 100% 5 Year Treasuries - 50.9% success rate.

FIRECALC - 3.5% WR, 35 Years, 100% 30 Year Treasuries - 41.5% success rate.

If you use the "Investigate changing my allocation" tab entry, you'll find success rates are pretty flat between 40/60 EQ/Fixed and 100/0 EQ/Fixed. Success drops off pretty sharply below 40/60. I consider 'hedging my bets' to stay near the middle of that range ~ 70/30.

-ERD50

[Dawg52]

Quote:

Originally Posted by ERD50 I don't get this at all - how could a T-Bill portfolio make you sleep well? FIRECALC - 3.5% WR, 35 Years, default 75/25 - 99.1% success rate. FIRECALC - 3.5% WR, 35 Years, 100% 5 Year Treasuries - 50.9% success rate. FIRECALC - 3.5% WR, 35 Years, 100% 30 Year Treasuries - 41.5% success rate. If you use the "Investigate changing my allocation" tab entry, you'll find success rates are pretty flat between 40/60 EQ/Fixed and 100/0 EQ/Fixed. Success drops off pretty sharply below 40/60. I consider 'hedging my bets' to stay near the middle of that range ~ 70/30. -ERD50

I was basing it on the data provided in the link. An 8.3% rate for a FI portfolio vs 9.5% for an all equity portfolio, what is there not to get?

[Lsbcal]

Quote:

Originally Posted by Dawg52 I was basing it on the data provided in the link. An 8.3% rate for a FI portfolio vs 9.5% for an all equity portfolio, what is there not to get?

Not sure what link you are referring to.

Part of this may be the definition of FI. If you look at this VG site: https://personal.vanguard.com/us/ins...io-allocations
it shows:
100% bonds, return=5.6% (1926 to 2011)
60/40, return = 7.8%
100% equity, return = 9.9%
The bonds here are (I think) intermediate ones, Barclays U.S. Aggregate Bond Index.

"T-bills" refers to near cash Treasuries of much shorter duration. Hence lower returns expected over the long term.

[Dawg52]

Quote:

Originally Posted by Lsbcal Not sure what link you are referring to. Part of this may be the definition of FI. If you look at this VG site: https://personal.vanguard.com/us/ins...io-allocations it shows: 100% bonds, return=5.6% (1926 to 2011) 60/40, return = 7.8% 100% equity, return = 9.9% The bonds here are (I think) intermediate ones, Barclays U.S. Aggregate Bond Index. "T-bills" refers to near cash Treasuries of much shorter duration. Hence lower returns expected over the long term.

I quoted rbmrtn originally, therefore I was referring to his link. I also quoted part of the article in the link that my numbers came from. And followed with a wink. Not sure why this is hard to follow.

Reread my post here.... http://www.early-retirement.org/foru...ml#post1262135

[Lsbcal]

Sorry Dawg52, I didn't read your original link but rather the link in the OP. The link you reference provides a graph that uses data for 1970 to 2008. One should be careful using this time span because from about 1982 to the present we've been in a historically unprecedented declining rate environment. The all FI portfolio (T-Notes in your link) is then goosed by this.

I just posted an interview link in another thread to a Gus Sauter interview with a very brief discussion of the current expected returns for bonds. Might be worth a read.

[Dawg52]

Quote:

Originally Posted by Lsbcal Sorry Dawg52, I didn't read your original link but rather the link in the OP. The link you reference provides a graph that uses data for 1970 to 2008. One should be careful using this time span because from about 1982 to the present we've been in a historically unprecedented declining rate environment. The all FI portfolio (T-Notes in your link) is then goosed by this.

No problem and I agree. The highlighted part is why I winked.