Better Stocks Than Bonds in Retirement

[Luvtoride]

Interesting article in Morningstar regarding Asset Allocation strategy in retirement. I hope the link works.

https://www.morningstar.com/article...tterstocksthanbondsinretirement&elqTrack=true

This may be preaching to the choir here, as many of you speak about your high allocations of equities during your retirement years. This article looks at the historical withdrawl rates (using 20 year periods) "possible" based on assets lasting at least 30 years, for 3 portfolios-
1) Aggressive 100% equities
2) Moderate 50% equities, 40% bonds and 10% cash
3) Conservative 90% bonds, 10% cash

I'm not sure if its a complete surprise, but the Aggressive portfolio results in the highest level of safe withdrawls for almost all simulated periods. In addition, this AA results in a higher capital preservation rate (also analyzed in 20 year historical simulations) than the other strategies.

The one area this analysis didn't consider was "sequence of return" risks during any particular 20 year simulation period used.

I know there are many here who tend to have lower equity exposure to help "sleep at night", especially after dips like we've seen since Black Friday, but this article makes a strong case that retirement portfolios should have more equity exposure than typically used during the distribution phase.

I know many here have 100% equity portfolios. You may be onto the best strategy.
Interesting to think about.

 

[Lsbcal]

Good article. FWIW, I have 70% in stocks at this time.

You can do some of these studies yourself with the VPW spreadsheet available on (somewhere) on the Boglehead site. I think the VPW spreadsheet is an insightful resource and can answer some questions using its historical data.

 

[Montecfo]

I'm about 75 pct equity. Low rates dictate this.

 

[FREE866]

Yep. I've had countless conversations about this over the years even before I retired. I think stocks are just psychologically a very scary word to some people. Also, the insurance industry is a multi billion dollar industry that pushes a "you need guaranteed income" message at every chance they get.

 

[flyingaway]

If you did not panic sell in 2000 and 2008, maybe it is OK for you too have 90% stocks.

 

[BizzyC]

At 56 yrs. old, I am basically 100% equity, 0% bonds.

At first it freaked me out to go against the advice of the experts and shun bonds. The thing that really made me change the way I look at it is thinking about the equity in my house as "bond-ish". In light of that, I'm 47% equity, 5% "bond-ish".

 

[BizzyC]

At 56 yrs. old, I am basically 100% equity, 0% bonds.

At first it freaked me out to go against the advice of the experts and shun bonds. The thing that really made me change the way I look at it is thinking about the equity in my house as "bond-ish". In light of that, I'm 47% equity, 5% "bond-ish".

I meant 47% equity, 53% "bond-ish"

 

[kgtest]

Interesting article in Morningstar regarding Asset Allocation strategy in retirement. ...

I know there are many here who tend to have lower equity exposure to help "sleep at night", especially after dips like we've seen since Black Friday, but this article makes a strong case that retirement portfolios should have more equity exposure than typically used during the distribution phase.

I know many here have 100% equity portfolios. You may be onto the best strategy.
Interesting to think about.

The recent dips don't scare me in terms of SORR. Not having 'enough' would scare me more. I am 100% equities and will be likely until I pass away. Even my written advice to my executor states to stay in that allocation.

BUT...I(and my family) have income properties (for now). There is a strong argument that we might divest some of those and just diversify into US equities in the near future.

I am still accumulating FWIW but DF who has been retired 5 years now is also in 100% equities and arguably more riskier (higher growth potential) than what I have. He has 'won' the game with plenty of fixed income SS, Pension and rents covering expenses where he feels comfy with that strategy. Our focus is largely on tax planning at this point of the journey.

The last time I owned bonds I was 27 and didn't know better. Thankfully this forum set me straight and its been nothing but solid returns since.

 

[RobbieB]

I'm quite pleased and non anxious with my "Pareto" 80-20 AA -

 

[ejman]

Interesting that according to the chart in the Morningstar link the over performance of 100% stocks compared to the balanced portfolio pretty much ended by 1984. From that point on it's comparable between the two. Clearly bond performance impacted that but interesting that 1990 to 2019 balanced portfolio stills outperforms 100% stocks. I found a similar effect when comparing Wellington to S&P 500 for period 2000-2020. Wellington outperforms S&P 500.

 

[USGrant1962]

Interesting that according to the chart in the Morningstar link the over performance of 100% stocks compared to the balanced portfolio pretty much ended by 1984. From that point on it's comparable between the two. Clearly bond performance impacted that but interesting that 1990 to 2019 balanced portfolio stills outperforms 100% stocks. I found a similar effect when comparing Wellington to S&P 500 for period 2000-2020. Wellington outperforms S&P 500.

Not unexpected when interest rates have done nothing but go down since 1981, driving a massive bull bond market. https://www.multpl.com/10-year-treasury-rate Not a lot of room for that to repeat.

But as far as stocks vs bonds, most heat maps of SWR have always shown that high stock AA has higher survivability. But with a bumpier ride along the way. See ERN's work for example:

In FIRECalc if you take the default values, go to the investigate tab, and "Investigate Changing My Allocation" you will see that portfolio survival is pretty flat from 40% to 90% stocks, with only a small drop off above 90%. What that doesn't show is the likely higher residual portfolio value with higher equities.

 

[Chuckanut]

In FIRECalc if you take the default values, go to the investigate tab, and "Investigate Changing My Allocation" you will see that portfolio survival is pretty flat from 40% to 90% stocks, with only a small drop off above 90%. What that doesn't show is the likely higher residual portfolio value with higher equities.

The big issue FireCalc deals with is the ability to survive significant market downturns and come back. And from what I can see most of that issue can be neutralized by limiting the chances that a poor sequence of returns scenario will ruin your plan. That usually means more bonds/cash-equivalents in the earlier years.

However, at a certain point there aren't that many years left, so survivability becomes less of an issue. At that point why not let stocks increase in value as they become a larger percentage of the one's holdings? If you're healthy enjoy the money. If not, let the money help pay for better care, and take some of the load off your loved ones. Finally, you can leave it your heirs.

 

[DawgMan]

Interesting. Makes sense assuming you can live with significant volatility. I have gone round and round with myself in regards to what to do with my bond allocation. As someone who has made (at least as of yesterday) peace with a 60/40 allocation, alternative AAs have crossed my mind IF I believe we are on a a steady path of interest rate increases. But then again, we have been saying that for the last 10 years and my short term and intermediate tern bond ETFs have done their job. Assuming a WR of less than 4% (say maybe closer to 3% or less), IF one believes it is different this time, I suppose you could make an argument for more of stock/cash AA whereby your cash represents X years of spending (say 5 - 7 - 10 yrs, enough to ride out longer historical bear markets), effectively turning your AA say closer to something like 75/25 (if you were 60/40 before). Sure you may only get .5% on your cash today, but if interest rates increase, your future savings rate will hopefully increase. In theory, your increased stock allocation over time should provide more juice to the future portfolio value while the cash allows you to pay your bills and ride out the additional volatility.

But then again, I look at most 3 - 5 yr total return stretches of my bond ETF's since 2008 and they have performed better than any similar stretch of cash.

Oh what to do, what to do....

 

[Markola]

^^^^^ Dawgman, all that, yes, plus Murphy’s Law dictates that just as soon as I got more aggressive with stocks (eat the forbiddened fruit of attempted timing) in this high PE environment, stocks would absolutely nosedive and then the panic-stricken herd would pile into bonds, driving up their prices. So, at age 56 we’re staying the course at 50/50 and taking some comfort in having 40% of equities in international, where PEs are lower, decent part time consulting income that I could grow to full time if the SHTF during the highest SORR period, blossoming home equity, and factoring in maximum SS at 70.

 

[chassis]

The article in the OP is not a surprise.

Look at SPY with 50 day and 200 day moving average lines. Interest rate spreads are lower than they have been in a while. Labor is coming into the workforce. Demand is strong.

I am bullish.

 

[OverThinkMuch]

Interesting article in Morningstar regarding Asset Allocation strategy in retirement. I hope the link works.

https://www.morningstar.com/article...tterstocksthanbondsinretirement&elqTrack=true
...
3) Conservative 90% bonds, 10% cash

That last scenario is impractical for early retirement, except for extremely low withdrawal rates. When I've run simulations, allocating less than 30% stocks has much higher failure rates in 40 or 50 year retirements.

 

[thepalmersinking]

My discount broker, who,’s company I will not mention said cash at this point is better than holding bonds. 90% equities 10% cash

 

[Markola]

The bond market is usually a little more staid and predictable than other assets, but I defy anyone to be able to make convincing bond predictions within the current context. We have both a roaring economy, with an inflation spike, yet yields are at historic lows and the yield curve is flat as the Fed tries to curtail historically-easy money policies while avoiding another taper tantrum. Add to that a new Covid variant.

I, for one, am not budging from my usual internationally-diversified portfolio of 50/50 stock and bond index funds and remembering that my investing time horizon is several decades. The current whacky situation will just have to sort itself out within the self-cleansing black boxes of my index funds. Here’s a thoughtful article, originally from Barron’s, that explores and explains the conundrums.

https://newsnationusa.com/news/fina...drum-the-bond-market-isnt-following-its-lead/

 

[chassis]

My discount broker, who,’s company I will not mention said cash at this point is better than holding bonds. 90% equities 10% cash

+1 cash and equities are a durable way to grow capital with acceptable volatility for many investors. Time horizon = perpetuity.

 

[Luvtoride]

Mark, interesting article. The numbers of what the Fed is purchasing is mind boggling! I guess no matter what history has shown, there can always be new scenarios like we’re in today that cause the conundrum for policy makers and economists.
As for your allocation, I’m sure it is fine and has worked well for you, I think Morningstar was just trying to make a point that higher equity allocations in retirement are not such a bad thing as some investors might fear.
And who knows, maybe even Morningstar’s analysis won’t hold true for the next 20 year period due to the unusual circumstances we’re in now.
“Past performance is not a guarantee of future results”.

 

[Lsbcal]

The bond market is usually a little more staid and predictable than other assets, but I defy anyone to be able to make convincing bond predictions within the current context. We have both a roaring economy, with an inflation spike, yet yields are at historic lows and the yield curve is flat as the Fed tries to curtail historically-easy money policies while avoiding another taper tantrum. Add to that a new Covid variant.

...

Markola, not to take away anything from your post but the yield curve is not flat. Generally I monitor the yield differential between the 3 month and 10 year Treasuries. At the end of November it was 139 basis points. That is pretty steep. When that flattens there has been a pretty good (but not perfect) correlation with recessions after some months delay.

Here is a nice Fed chart (grey stripes are recessions):

Yes, yields are very low. I am thankful that 1/2 of our bonds are in inflation indexed bonds. The rest in short term investment grade which has given off about zero return over the last 12 months. Ugh.

 

[Markola]

^^^^^. Yes, Luvtoride, I don’t question Morningstar’s article at all. We are 50/50 at age 56, and our portfolio will start getting significant spending relief in just 14 years, when we take max SS at age 70. And home equity by then should be too big to ignore, plus we’ll likely want to downsize by then, maybe freeing up some dough. And who knows what will be our situation and the global economic context by then? So many variables that make the Morningstar boilerplate time horizon and survivability calculations irrelevant to us and, I bet, most people’s situations.

We use Vanguard Personal Advisor Services and they have inputted all the above plus our spending plans, into their software, spitting out a 90% success ratio. I run all the same through Personal Capital’s software as a backup and get the same result. That’s good enough for us and how we, personally, choose to cut through the noise and near-term market lunacy.

 

[Chuckanut]

Here's another view in how to fight back in inflationary times:

https://arstechnica.com/science/202...ing-to-get-stirred-up-by-starships-potential/

Since it's behind a paywall I'll toss in some quotes. There is also a great graphic showing the types of stocks and their average real returns in times of high inflation.

Before you overhaul your portfolio, however, you should bear these basic truths in mind: Fear is a good investing philosophy only for the people who sell it. The more Wall Street agrees that a forecast is inevitable, the more likely the future is to repudiate it. And you’re probably already better protected against a decline in purchasing power than you might realize.

Fortunately, the stock market overall has outpaced moderate rises in the cost of living. From 1927 through 2020, according to Dimensional, U.S. stocks as a whole outperformed inflation by an average of 4.9 percentage points annually in years when rises in the cost of living were above the median. If your stock portfolio is already well diversified, it should be able to keep pace with modestly rising prices.


You can also add TIPS, or Treasury inflation-protected securities. Even though they aren’t cheap, they still offer protection against unexpected jumps in consumer prices down the road. So do inflation-protected savings bonds, or I bonds.


What you probably don’t need is to inflate your fees and your risk, for real, to protect against inflation that might turn out to be a phantom.

 

[Luvtoride]

Asset Allocation for Retirees: What Will the Future Bring?

John Rekenthaler of Morningstar has a follow up column today from the one I posted here on Friday.
This one is not quite as optimistic about the future of equities based on Morningstar's Investment gurus forecast for the markets over the next 20-30 years. He admits that if one were comfortable with past performance, using Friday's article and skipping this one would be fine.

In this article he makes the argument that Stocks are at their 2nd highest valuation in history (behind 1999 and having just beat out 1929 for 2nd place) so there may be turbulent times ahead for equities in this rarefied air.

This article results in the stock/bond model being more advantageous if this scenario does play out over the next 2 to 3 decades.
Interesting reading.


https://www.morningstar.com/article...rretireeswhatwillthefuturebring&elqTrack=true

 

[Markola]

^^^^ The only way I can see to mitigate somewhat the risk of such high current U.S. stock valuations is to have a meaningful international position.