Which Roger
Thinks s/he gets paid by the post
- Joined
- Jun 5, 2013
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Since we can't predict the future, how much is "more than enough" can only be determined based on what has happened in the past. One reasonable definition of "more than enough" would be a 2% withdrawal rate. At this rate, FireCalc will give 100% success rate for just about any portfolio mix, from all stocks to all bonds.
So the question then becomes, "what if the future is worse than the worst case from the past"? For bonds, envision a case where we have inflation like the 1970s, it persists throughout the investor's lifetime, and interest rates are kept artificially low so governments can inflate their way out of debt. A 100% bond portfolio would not survive this scenario, even with a very low withdrawal rate.
For stocks, envision a case where they drop by 89% (like in the US during the depression) and stay at that level for the investor's lifetime. If this happened, the 100% stock portfolio would not survive very long even with a low withdrawal rate.
So, if you have "more than enough", and the future is no worse than the past, then asset allocation really doesn't matter, since any asset mix will survive. But if the future is worse then the past, you need to be diversified, because you cannot predict what this "worst" scenario will be.
So the question then becomes, "what if the future is worse than the worst case from the past"? For bonds, envision a case where we have inflation like the 1970s, it persists throughout the investor's lifetime, and interest rates are kept artificially low so governments can inflate their way out of debt. A 100% bond portfolio would not survive this scenario, even with a very low withdrawal rate.
For stocks, envision a case where they drop by 89% (like in the US during the depression) and stay at that level for the investor's lifetime. If this happened, the 100% stock portfolio would not survive very long even with a low withdrawal rate.
So, if you have "more than enough", and the future is no worse than the past, then asset allocation really doesn't matter, since any asset mix will survive. But if the future is worse then the past, you need to be diversified, because you cannot predict what this "worst" scenario will be.