BFRAME wrote: ↑Tue Jun 22, 2021 5:59 am
I don't actually believe you or I or anyone has fundamentally different long-term "risk tolerance" in the end. Your desire not to live in poverty in retirement is more or less the same as mine. Maybe you're fine living with a slightly lower standard of living, or want to have more upside potential. But I would posit that our tolerance for risk of ruin is nearly identical -- right around 0%.
For the last 30 years, your risk of ruin might not have varied much whether you were 60/40 or 100/0. But was this strategy or just luck? If bonds had returned <1%, then 10k/yr annual contribution for the last 30 years would have yielded $2.6 million for a 100/0 portfolio, and $1.5 million for a 60/40 portfolio. This is a meaningfully large difference. And if we fall into a period where both bonds and stocks under-perform historical returns for the next 10-20 years, the 60/40 portfolio might leave you with very little to live off of for 20+ years.
BFRAME, I suggest learning about the surprising
mathematics of retirement investing. Even if stocks were to significantly outperform bonds as they often did in the past (there's no such guarantee written on stock certificates), a small reduction in spending would allow an investor to use a less volatile 60/40 portfolio all lifelong and still retire with dignity.
Our wiki's
VPW Accumulation And Retirement Worksheet contains an Accumulation sheet (
screenshot) which uses the type of calculation found in the "mathematics of retirement investing" thread to estimate an adequate retirement portfolio contribution amount during accumulation given the investor's chosen asset allocation and current financial situation (age, salary, portfolio balance, target financial independence age, and future pensions). The estimate has to be recalculated at least once a year and on every major personal circumstance change.
When using this sensible approach, a less volatile portfolio improves stability during accumulation. The impact of personal circumstance changes or major portfolio fluctuations on portfolio contributions is reduced when using a balanced portfolio. This is similar to the impact of using a less volatile portfolio during retirement with a sensible portfolio withdrawal method (like VPW) which adapts withdrawal amounts to portfolio returns.
BFRAME wrote: ↑Tue Jun 22, 2021 5:59 am
This isn't about personal risk -- it's about making sure your portfolio has the appropriate upside potential to ensure you will have enough when you retire. The last 30+ years have baked in this idea that the difference between 60/40 and 100/0 is just about personal risk tolerance to market down turns, in part because there was little difference in terms of return. But will this necessarily be the case going forward? I just feel this whole "personal risk tolerance" idea of selecting your stock/bond split is falling into the trap of assuming the future will be like the past.
Bonds, like stocks, are marketable securities; their price is set by sellers and buyers agreeing on a price to transact or, if you prefer, by the
Law of supply and demand.
I have no pretension to know more than all stock and bond investors as a group. I'm willing to accept their average return. The (free float)
Global Stock-and-Bond Portfolio has a balanced allocation which is currently very close to 60/40 stocks/bonds. I'll be happy to get average returns (not too far from those of the global stock-and-bond portfolio) every day, month, year, and decade of my life by holding an all-in-one globally-diversified 60/40 stocks/bonds index ETF, very similar to the LifeStrategy Moderate Growth Fund (VSMGX) but with a different home bias.
VPW''s accumulation worksheet helps me contribute sufficiently to my portfolio during accumulation, while holding a balanced portfolio. I anticipate to continue holding this same globally-diversified balanced index portfolio during retirement. VPW's retirement worksheet will help me withdraw an adequate amount from my portfolio (as illustrated in
this thread) to combine with pensions (current or delayed). The VPW approach will help me spend most of my portfolio using return-adjusted withdrawals and will never expose me to a risk of premature portfolio depletion.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)