Unimportance of Asset Allocation in Retirement Planning
Unimportance of Asset Allocation in Retirement Planning
wsj article columnist replies to question around 70-30 vs 60-40 (behind paywall):
https://www.wsj.com/articles/ideal-asse ... 1628111980
and refers to this article:
https://www.advisorperspectives.com/art ... t-planning
"Spoiler alert – as the title hints, 75/25 versus 60/40 doesn’t matter that much."
best,
https://www.wsj.com/articles/ideal-asse ... 1628111980
and refers to this article:
https://www.advisorperspectives.com/art ... t-planning
"Spoiler alert – as the title hints, 75/25 versus 60/40 doesn’t matter that much."
best,
Re: Unimportance of Asset Allocation in Retirement Planning
There's a reason why Vanguard's LifeStrategy funds only come in 4 flavors: 80/20, 60/40, 40/60 and 20/80.
Some of us get way to "precise" with our AA.
Some of us get way to "precise" with our AA.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: Unimportance of Asset Allocation in Retirement Planning
This is why we put all new monies to stock and only rebalance twice a year, and then only if things are really out of whack. Simplicity over precision, when precision doesn't have much effect on the outcome.
Re: Unimportance of Asset Allocation in Retirement Planning
That type of comparison has been readily available for years on this Vanguard webpage with included charts with return, maximum gain and maximum loss information from 1926-2020: https://investor.vanguard.com/investing ... allocation
Average annual return for 70/30: 9.4%
Average annual return for 60/40: 9.1%
There isn't a tremendous amount of difference between individual 10% allocation bands but the difference between 90/10 and 60/40 compounded over several decades could be substantial. A portfolio comprised of Vanguard Total Stock Index and Vanguard Total Bond Index with $10k annual contributions starting in 1992 (the earliest year for Total Stock Index) would today be worth about $1.46 million if allocated 60/40. The same portfolio allocated 90/10 would be now be worth about $1.79 million or over 20% more than the 60/40 portfolio.
https://www.portfoliovisualizer.com/bac ... tion2_2=40
Average annual return for 70/30: 9.4%
Average annual return for 60/40: 9.1%
There isn't a tremendous amount of difference between individual 10% allocation bands but the difference between 90/10 and 60/40 compounded over several decades could be substantial. A portfolio comprised of Vanguard Total Stock Index and Vanguard Total Bond Index with $10k annual contributions starting in 1992 (the earliest year for Total Stock Index) would today be worth about $1.46 million if allocated 60/40. The same portfolio allocated 90/10 would be now be worth about $1.79 million or over 20% more than the 60/40 portfolio.
https://www.portfoliovisualizer.com/bac ... tion2_2=40
- TomatoTomahto
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Re: Unimportance of Asset Allocation in Retirement Planning
We are not technically retired (ie, my wife still works for a paycheck), but are retired in spirit (we have enough, she enjoys her work, etc). We don’t bother rebalancing, and probably will not unless there’s a huge sale on equities. We accumulate into equities, and the only rebalancing we do with new money is domestic vs international equities.
Rising equity glide slope and all that jazz.
I get the FI part but not the RE part of FIRE.
Re: Unimportance of Asset Allocation in Retirement Planning
Asset allocation is extremely important because there is an extreme range of choices 100/0 to 0/100. That does not imply that small differences in asset allocation produce large changes in outcome.
Once in retirement dependence of safe withdrawal rate on asset allocation is almost non-existent except at extremes. The largest driver is the luck of history when you begin your retirement and after that withdrawal rate. Asset allocation in retirement does affect wealth at death fairly significantly excepting that . . .
. . . even worse your outcomes before and after retirement will be one single experience out of a huge range of possible future outcomes, and those ranges of outcomes overlap tremendously. There is little prospective difference in being in one lottery compared to another one.
All of these things are well known. The article would have been much better if it had given a comprehensive picture of how things work rather than trying to talk about a non-answer.
Once in retirement dependence of safe withdrawal rate on asset allocation is almost non-existent except at extremes. The largest driver is the luck of history when you begin your retirement and after that withdrawal rate. Asset allocation in retirement does affect wealth at death fairly significantly excepting that . . .
. . . even worse your outcomes before and after retirement will be one single experience out of a huge range of possible future outcomes, and those ranges of outcomes overlap tremendously. There is little prospective difference in being in one lottery compared to another one.
All of these things are well known. The article would have been much better if it had given a comprehensive picture of how things work rather than trying to talk about a non-answer.
Re: Unimportance of Asset Allocation in Retirement Planning
Interesting that the lower bracket for bad outcome is practically the same for 60:40 thru 100:00. This may be true in theory if people can stick with same allocation over time but the problem is many would go to cash after a big market decline.
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Re: Unimportance of Asset Allocation in Retirement Planning
A 60/40 or 40/60 would work for most retired folks.
One of those four would work for just about 90% of folks.