75/25 is the new 60/40?

[big-papa]

Not retired (but close) and currently around 60/40. Once SS starts, I will probably let it drift upwards over time. "Success rate" as defined by prematurely running out of money before running out of life is immaterial to me as I plan to use a variable withdrawal method. With many of the variable withdrawal methods, a higher stock-to-bond ratio generally results in higher average withdrawals, but with more volatility in the withdrawals.

Regardless, adaptability in some form or another would be prudent.

 

[pb4uski]

It's wider than that. More like 40/60 to 100/0 (or maybe 90/10, depending how you eyeball that).

-ERD50

The way that I eyeball it is that the width depends on what you can accept for a success rate.

• 55/45 to 70/30 are 95% success
• 50/50 and 75/25 to 90/10 are 90% success

 

[brett]

Ours varies from 55/45 to 65/35. Comfortable with that range. So far so good. We were at 75/25 prior to retirement and that worked very well for us.

 

[brett]

Ours varies from 55/45 to 65/35. Comfortable with that range. So far so good. We were as high as 85/15 prior to retirement and that worked very well for us in the upswing.

 

[GenXguy]

I'm about 42% equities, was about 80% less than 2 years ago, but I'm very close to retirement now and have well more than my target stash amount.

 

[Midpack]

I thought someone posted it here, but I don’t think there’s a big difference. I think they said something like, a 60/40 portfolio had just about the same success rate in FireCalc as a 40/60. So I think you’re either fine or you went into retirement with a very thin margin of success.

There’s not a big difference in probability of success from 60:40 and 75:25, arguably from 30:70 to 100:0 - but there is a significant difference in ending balance low-high-average. Here are FIRECALC results in graph form based on one set of assumptions (you might choose others) from a recent thread.

https://www.early-retirement.org/forums/f28/portfolio-required-v-equity-asset-allocation-101660.html

https://www.early-retirement.org/forums/f28/probability-of-success-at-varying-equity-aa-101694.html

 

[Lsbcal]

I’m currently at 60/40, but according to this blurb, Jeremy Siegel says 75/25 is now necessary due to low interest rates on bonds. I thought holding 40% allocation in bonds was advantageous so that we could buy more equities during downturns (rather than seeking bond interest as the primary objective). Thoughts?

https://www.cnbc.com/2020/02/08/whartons-jeremy-siegel-60-40-portfolio-doesnt-cut-it-anymore.html

I think it would be unwise NOW to boost stock allocations. Why not keep a 60/40 allocation until well into a recession and then coming out of it consider moving to 75/25? That would be tough to do but has been very profitable in the past. Let's face it, making fairly large AA changes is a market timing call and I think market timing can be done only with great care.

There is too much recency in the Siegal article. For instance, he mentions real rates being negative now and so bonds are not full of value. But it wasn't that long ago that 5yr TIPS were at just over 1% (I bought some in late 2018).

If rates go up very gradually, one can do OK with the bond portfolio content. I think we saw that in late 2016 to late 2018 where intermediate bonds did about as well as short term bonds even with rising real rates, then intermediate bonds did really well in 2019 when real rates went down quickly.

 

[audreyh1]

There is too much recency in the Siegal article. For instance, he mentions real rates being negative now and so bonds are not full of value. But it wasn't that long ago that 5yr TIPS were at just over 1% (I bought some in late 2018).

If rates go up very gradually, one can do OK with the bond portfolio content. I think we saw that in late 2016 to late 2018 where intermediate bonds did about as well as short term bonds even with rising real rates, then intermediate bonds did really well in 2019 when real rates went down quickly.

Exactly!

And even suddenly interest rate moves tend to reverse within a year, resulting in an overall gradual change. Rebalancing takes advantage the bond volatility as well as stock volatility.

 

[Lsbcal]

Exactly!

And even suddenly interest rate moves tend to reverse within a year, resulting in an overall gradual change. Rebalancing takes advantage the bond volatility as well as stock volatility.

Bonds are really confusing to me. For example, I bought 5 year TIPS at what was a top area in real rates. To do this I sold VFIDX (intermediate investment grade) that proceeded to go on a tear in 2019 which kind of upset me as I like to win in the short and long term. But I guess things will work out as my TIPS won't mature until April 2023 so I get the higher real rates through then.

When another group of TIPS mature this April I'll probably buy intermediate bonds and hope rates don't go up too fast.

 

[RockyMtn]

My guess is Dr. Siegel is currently trying to drive investments into his namesake funds mentioned in the OP's link.

+1 on this. You can't hardly watch CNBC for longer than an hour before he pops up pushing his WisdomTree ETF's.

 

[Scratchy]

The article is conflating holding fixed income as part of a target AA and fixed income for interest income.

Exactly. And after any swing in the market one can find lots of articles like this one, advocating a change in strategy with specious reasoning. The swings are not a new market, they are part of the market. On average, jumping ship does not pay off.

 

[Digger1000]

Other than $2700 in checking I'm 100% stocks. I retired 3 years ago at 51. If the S&P drops 67% my withdrawal will be 4.6% compared to 1.5% today. And I retired on much less than a million. I checked on my SS the other day with social security and I was shocked how'll much I'll get at age 70 without ever working again. It was a ton more than I was expecting. Way more(SS alone) than a dummy like me needs to live on.

 

[Scratchy]

I checked on my SS the other day with social security and I was shocked how'll much I'll get at age 70 without ever working again. It was a ton more than I was expecting. Way more(SS alone) than a dummy like me needs to live on.

Was your social Security estimate based on no further social security contributions? I believe the default estimate from the website sometimes assumes further contributions. There is potential to get misled. Hopefully this was not the case in your instance.

 

[Dtail]

Was your social Security estimate based on no further social security contributions? I believe the default estimate from the website sometimes assumes further contributions. There is potential to get misled. Hopefully this was not the case in your instance.

Was thinking the same thing, but the word "site" was not mentioned, so figured it was a call to SS.

 

[audreyh1]

Bonds are really confusing to me. For example, I bought 5 year TIPS at what was a top area in real rates. To do this I sold VFIDX (intermediate investment grade) that proceeded to go on a tear in 2019 which kind of upset me as I like to win in the short and long term. But I guess things will work out as my TIPS won't mature until April 2023 so I get the higher real rates through then.

When another group of TIPS mature this April I'll probably buy intermediate bonds and hope rates don't go up too fast.

I basically diversify over duration (cash including CDs, short-term high quality bonds and intermediate high-quality bonds) for a couple reasons. One is the practical considerations of covering several years of expenses in fixed income if needed (ladder feature), the other is you never know how different sections of the yield curve are going to behave.

When equities are happy, corporate bonds outperform. But I hold bonds for when equities are unhappy, so I tend to have a low exposure to corporate bonds.

 

[Scratchy]

Was thinking the same thing, but the word "site" was not mentioned, so figured it was a call to SS.

Ah, yes agree!

 

[Digger1000]

Ah, yes agree!

Yes it was a call to SS. It wouldnt allow me to setup an account online so I had to call in. The reason I couldnt set it up online is because I borrowed money once in my life. In 1983. $1500. And not because I wanted to but my uncle thought it would be good to borrow some money. I've never had a credit card only a debit card. Which is used like a CC.

Yes my SS amounts at 62,67,70 are based on $0 earnings every year from now on. I made sure of that.

 

[triangle]

Upset the asset allocation?

Perhaps I am misunderstanding what you write, so please correct me. If equities drop significantly, then wouldn’t an investor buy more equities to preserve his asset allocation? And if he is a retiree, where would he get the cash to buy more equities? I would have to sell bonds.

Perhaps I am using the term a bit loosely.

Part of what I meant is the emotional reaction as mentioned by @audreyh1, that a person who followed all the conventional advice of being more invested in equities when younger and then shifting more into bonds as they get older, that this older person who is in better positioned to take advantage of the drop in equities (since they have more bonds than the younger person) might be more reluctant to do so. Trying to "buy the dip" or dollar cost average on the way down is difficult to execute. Does one wait until a 15% drop in equities and then start buying? Wait until 20%, 30%, 40%, etc. It is akin to marketing timing which is obviously hard to optimize in real life.

But I was also referring to bond portion acting more as a ballast in the portfolio (this is mostly how I view bonds), where for the sake of this discussion someone in or nearing retirement might keep 1 year of cash in a money market, 2-3 years in very short term bonds, another N years in longer duration bonds, and the rest in equities. So if there were a collapse in stock prices they could start to rely on the bonds for financial support and mostly ignore the equity portion for some years while waiting for it to recover, to help avoid the sequence of return risk. That even though this persons asset allocation had became unbalanced because of the drop in equities, that the cash and bond portion of their assets (regardless of the percent of the original allocation) was more sacrosanct on an absolute number basis since they could not bear to loose it and really jeopardize their financial future.

So while I agree that one should periodically rebalance, I believe it is hard to ideally rebalance, especially out of safer vehicles into more risky ones if the market is highly volatile at that time a person needs to do so. Rebalancing from stocks back into bonds after a big stock market run-up should be easier for the person who has already reached financial success/retirement, but even then the fear-of-missing-out might cause them to delay selling equities and buying bonds.