75/25 is the new 60/40?

[Downtown]

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

 

[davebarnes]

We are close to 75/25.
1. Not to buy during downturns as I am not a market timer.
2. Enough bonds to cover 8+ years of a large/long stock market downturn.
3. If we had twice as much money, then our allocation ratio would be 86/14.
4. I figure you are either an optimist or a pessimist. If you are an optimist, then you have to believe that the overall economy will improve over the long run. If you are a pessimist, then buy ammo, gold, and MREs.
5. Would like to leave something for our daughter in 30+ when her mother dies. The current models say that will be between $100K and $14M.

 

[Rickt]

Hard to say what is right......one only finds out their risk tolerance during a major correction/bear market.

As a retiree living on income from our investment portfolio, low yields do bother me, so I made a compromise 70/25/5. The 5% cash portion will cover upto 3 years of our living expenses and hopefully we won't need to sell equities at their lows. It remains to be seen how we actually react when we experience a bear market. I did stay put in 4th quarter of 2018 even though I was scared the correction might shave off 50% off our equity holdings.

 

[audreyh1]

It depends on how large your investment portfolio is compared to your withdrawal needs. As ours is more than adequate we are quite comfortable with 50/50 allocation in retirement. I feel no need to be 75/25. A fairly low equity allocation can still help keep up with inflation.

And yes, I’ll be drawing on those bonds when rebalancing in a down market. I don’t rely on my bonds for interest income. That’s not the point.

Note that the article is selling something.

 

[braumeister]

No such thing as a "right" AA for a retiree. It all depends on your situation. I'm at 50/50 but I have both a pension and SS income that between them more than cover all my essential expenses. The portfolio is just for discretionary spending.

Obviously, I'm not typical (and very lucky) so what I do with my AA applies only to me. You always have to look at the big picture, as it applies to you.

 

[Jerry1]

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.

 

[UnrealizedPotential]

I will stick with my 50/50 asset allocation. If I was collecting my pension and SS, then 75/25 might become interesting. I want to protect as much as I can what I have in assets so far and have at least some chance for growth. I think 50/50 AA does that for me.

 

[RobbieB]

I like this guy because he thinks like me -

And I get enough crap from a financial guru acquaintance of mine that thinks 80-20 is way out of line for my age. You know a little "pastey" for the next time eh...

 

[jimbee]

Ten years ago, Dr. Siegel said this: "...People ask me about what fraction [of a portfolio] stocks or bonds should be. I don’t recommend that because it varies with each individual’s financial circumstances. You can’t generalize. It depends on your age, your other assets, what kind of income and pensions you’re expecting…"

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

2010 interview with Dr. Siegel.
https://knowledge.wharton.upenn.edu...-for-bonds-and-why-interest-rates-will-go-up/

 

[RobbieB]

If his advice leads people to buy equities that will also keep the price up.

 

[ERD50]

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.

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

-ERD50

 

[Jerry1]

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

-ERD50

Thanks.

 

[N02L84ER]

We were at 75/25 going into 2008. It was a rough ride. We are much less stressed with 60/40 now.

 

[38Chevy454]

I think the article is valid in identifying the low interest rate environment and how fixed income returns are less than dividend yield rates. This is nothing new, several discussions on here about the low returns for fixed income investments.
It is also a personal decision that is influenced by people's risk tolerance, amount of margin in their savings, anticipated heir inheritance, and required withdrawals for living. So there is no right answer 75/25 for everyone.
I am heavy on equities now vs many on the board, about 75/25 thanks to recent equity gains. Just a coincidence, my target is 70/30 personally. But I also have advantage of a pension for some of my income needs which allows me to be higher equity allocation.

 

[Montecfo]

I'm around 70 pct equities. With bind yields so low I tend to think a higher allocation to equities makes sense.

I also think you should seek quality inn n your bind portfolio. Accordingly in do not view junk bonds or Reits as part of the bond allocation. And I hold a lot of cash.

 

[Scratchy]

I believe in setting an AA according to risk tolerance and staying the course. That means not tinkering with it for the reasons given by the author of this article. If one starts doing that, where does it end?

 

[triangle]

In theory one could (should?) buy sell bonds and buy equities in a big downturn, but who can do that in practice? Since there would be fear in the air and it would upset the asset allocation of the person who is now older and presumably even more conservative. While I do think bonds provide necessary ballast for the portfolio, mine leans aggressive where some of the bond portion is in utilities and reits (stocks) as well as cash and short term bonds. I do wonder what will happen if rates are forced to increase due to rising corporate or government debt, whether or not a rise of 100-200 basis points could be "absorbed" by the stock market over a few years or would that would trigger a big recession and selloff.

 

[North Texas Cajun]

In theory one could (should?) buy sell bonds and buy equities in a big downturn, but who can do that in practice? Since there would be fear in the air and it would upset the asset allocation of the person who is now older and presumably even more conservative ...

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.

 

[audreyh1]

In theory one could (should?) buy sell bonds and buy equities in a big downturn, but who can do that in practice? Since there would be fear in the air and it would upset the asset allocation of the person who is now older and presumably even more conservative. While I do think bonds provide necessary ballast for the portfolio, mine leans aggressive where some of the bond portion is in utilities and reits (stocks) as well as cash and short term bonds. I do wonder what will happen if rates are forced to increase due to rising corporate or government debt, whether or not a rise of 100-200 basis points could be "absorbed" by the stock market over a few years or would that would trigger a big recession and selloff.

Who can do that in practice? It can be scary, but I managed in 2008 after assuring myself that I had enough remaining in fixed income to ride our many more years if necessary. And that’s just it, if your fixed income allocation is small, you may not have enough to do both.

In terms of “rates forced to increase” - well we’ve already been through years of it not happening, and then we did have it happen in 2018, finally with a good 20% stock market correction, yet it reversed itself in 2019. It’s just impossible to predict interest rate changes. Surely the last 10 years have demonstrated that.

 

[audreyh1]

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.

He’s simply pointing out how psychologically difficult it can be to do that in a nasty bear market, and that is true. Although I’m not sure about the “upset the asset allocation” remark.

 

[audreyh1]

I believe in setting an AA according to risk tolerance and staying the course. That means not tinkering with it for the reasons given by the author of this article. If one starts doing that, where does it end?

The article is conflating holding fixed income as part of a target AA and fixed income for interest income. But that’s not how it works. A target AA and rebalancing indicates a total return approach, and I don’t try to live off interest paid from fixed income, or worry about portfolio yield in general, whether from stocks or bonds. That’s beside the point.

Traditionally, (long ago) stocks had to yield more than bonds because they were considerably riskier, so his lamentation about SP500 yield exceeding 10 year treasuries seems rather silly in the historical context.

Very illogical article overall and obviously designed to promote his funds.

 

[North Texas Cajun]

He’s simply pointing out how psychologically difficult it can be to do that in a nasty bear market, and that is true. Although I’m not sure about the “upset the asset allocation” remark.

If you read my comment, you’ll see that his “upset the asset allocation” remark is exactly the part I questioned and asked him to clarify. And it sounds as if you are also questioning that remark.

But since you made a different point, I’ll comment about that as well. Hundreds of thousands of investors - and probably many more than that - continued buying equities during the so-called “Great Recession”. Most just stuck with their 401k planned investment mix. But many correctly rebalanced their portfolios to their desired asset allocation. It wasn’t difficult at all if your investment horizon is long term and you believe in the long term health of the U.S. economy. ,

 

[DrRoy]

Currently 58/42, but I'm getting about 4% on the bonds.

 

[donheff]

I moved to 60/40 a few years back on the premise that we had won the game and didn't need the volatility. That premise is still true but we are getting older and are leaning more towards legacy. The AA has drifted up to 65/35 and we plan to let it go toward 70%. As we get older still we may consult the kids about their risk tolerance on our portfolio

 

[Dtail]

Sticking with 55/45.
With my GTE yields guaranteed through 2024 and current SVF yields, I am fine with my current yield from the bond side.