Under what conditions is a 50/50 portfolio worse than any other?

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Phyneas
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Phyneas »

mmcmonster wrote: Sun Nov 28, 2021 12:56 pm
Phyneas wrote: Sun Nov 28, 2021 10:34 am
mmcmonster wrote: Sun Nov 28, 2021 6:10 am My concern about 50/50 portfolios (25% treasuries, 25% TIPS) is that the 60/40 was devised in a period where treasuries had much better returns than current and much better returns than current forecasts for the future.

If you are not dependent on income from the bonds half of your portfolio, that's totally fine... but I don't see a 4% SWR with 60/40 (let alone 50/50) as something we should target. It may work out, but I'm not confident.
You feel that a higher allocation to equities is necessary? I have the ability to go up to 70% equities before my SWR threshold is threatened in a big and prolonged downturn - something like that?

Regardless of the equity level, do you think that 50/50 TIPS/nominal is a sensible long-term position for bonds? I know that if you're going higher equities you're supposed to go longer bonds, but I'm not comfortable holding most of my bonds at a long duration under the present very-1940'ish situation.
I think that if you're worried about the allocation of the Bonds in your portfolio, you're in a good place. :D

Don't get me wrong. I've been messing with my bond allocation all year. I currently have 20% state muni, 44% total muni, 17% Total Bond, 7% treasury, and 12% TIPS.

I'm going to increase my TIPS to ~30-40% by next Spring. But I figure this is something I'll do as I'm in the process of winning the game.

The exact allocation of my Bonds doesn't matter too much, so long as overall it's something that can blunt any drops in my total portfolio when the Stocks portion takes a dive.
Those are some interesting percentages on the bond side :). What sort of durations do/will you hold for the TIPS?
60% AVGE | 20 Year TIPS LMP | 5% Cash
pascalwager
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by pascalwager »

Phyneas wrote: Sun Nov 28, 2021 1:13 pm
nisiprius wrote: Sun Nov 28, 2021 7:17 am
50% stocks (VTI+VXUS), 50% bonds. The bonds are there for ballast and hopefully some anti-correlation, not income, so they are treasuries only, split 50/50 between long and short, The long and short are split between nominals and inflation-protected.
1) The portfolio is fine. I like it because, well, it's not wildly different from mine. Being old, retired, and conservative/risk-averse/fraidycat I have less than 50% in stocks. Always having been worried about inflation I have more than 50% of my bonds in TIPS and I bonds. Both my nominal bond fund (Total Bond) and TIPS fund (Vanguard Inflation-Protected Securities) have a mix of terms--long, short, and intermediate--and I haven't and won't bother to figure out what the percentages are.

I don't know what you mean by "worse than any other." I think that for many purposes, your portfolio is as good as any normal, traditional, centrist retirement savings portfolio. Many will argue that yours is worse than their favored portfolio but I don't think that's what you're asking. I think there's a swarm of portfolios that are all "good," of which you simply cannot prove that any of them is any better than any other. Thirty years from now you will know which did best, but you still won't know if it was "the best portfolio" or whether it was just the luck and the breaks of that time period.

John C. Bogle wrote
Successful investing involves doing just a few things right and avoiding serious mistakes.
I can't think of a plausible scenario in which your portfolio would do so much worse than any major target-date fund that you would call it "a serious mistake."

2) 50/50 is fine, but your reasoning for 50/50 is flawed. The problem is that all equal splits depend on how you've chosen to define the boundaries and categories you're splitting between. The assumptions you're hoping to avoid, cutting the Gordian knot with a 50/50 sword, just get smuggled in when you ask "splitting between what." You're kidding yourself when you think you've achieved some objective goal with an "equal" split between subjectively defined categories. We can see this in your own example. Why not ⅓ each stocks, nominal bonds, and TIPS? Why not ⅕ each stocks, long nominal, short nominal, long TIPS, and short TIPS? Why not a tenth each large-cap growth, large-cap blend, large-cap value, mid-cap growth, mid-cap blend, mid-cap value, small-cap growth, small-cap blend, small-cap value, and bonds? Why not a fifth each stocks, bonds, rental income property, commodity futures, and collectible gold coins? Oh, sure, I personally think stocks and bonds are almost natural categories (but preferred stocks are bond-like and junk bonds are stock-like and are REITs "just" stocks?)

By the way, "I don't know so I'll put equal amounts in each" has a name, "naïve diversification."

3) I think cap-weighting is a much more "natural" division than equal-weighting. However, I'm not so sure that it applies if the assets in question don't trade freely and frictionlessly against each other within a single unified market. Anyway, look up the thread on Bill Sharpe's preferred portfolio for arguments that the natural, prediction-free, viewpoint-free division is according to the total capitalization of stocks and bonds. Fortunately for your view, that turns out not to be wildly different from 50/50. Something close to 40/60, I think.

4) I can cite three major authorities who have said something nice about 50/50 naïve diversification between stocks and bonds. (I'll leave it as an exercise to look them up if you don't know who these people were).

Benjamin Graham:
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums.
Harry Markowitz:
I should have computed the historical co-variances of the asset classes and drawn an efficient frontier. Instead, I visualized my grief if the stock market went way up and I wasn’t in it–or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions 50/50 between bonds and equities.
John C. Bogle:
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
5) It's reasonable to expect very low correlation between stocks and Treasury securities. This doesn't come solely from pragmatic observation, but also from the different fundamental nature of equity and debt.

6) There's spirited debate about this but I, for one, think it is totally unsound to rely, in any important way, on anticorrelation. It drives me bananas that you so often hear short sound-bite "of course, take-it-for-granted" asides saying that the two "have" negative correlation. The correct statement is that they "have had" negative correlation for twenty years. Following thirty-five years of positive correlation, which followed a period of negative correlation, and so on. My sound bite is "zero correlation with big fluctuations." Of course the sophisticates think they know the reasons for those fluctuations and think they make predictions based on them. You should keep the long-term picture of stock-bond correlation in your mind just the way you keep the long-term picture of stock performance in your mind:

Image

7) You need to define much more carefully what you mean by "better" and "worse."

8) The difference between 60/40 and 50/50 is negligible. That's why Vanguard thinks they cover the range adequately with only four LifeStrategy funds, allocated 80/20, 60/40, 40/60, and 20/80.

9) Obviously in any period of time when stocks are outperforming bonds, which is usually but not always, 50/50 will underperform portfolios with more stocks, and outperform portfolios with less stocks. However, if you use almost any measure that takes risk into account in any way, the picture changes. Oddly in view of the cultish adherence to 60/40, over most long periods of time, the highest risk-adjusted return as measured by the Sharpe ratio has been much lower than either 60/40 or 50/50. It has been more in the ballpark of 25/75. That is one of the fundamental bases of "risk parity" strategies. It is way more complicated than that, and involves belief systems about specific asset classes, and I don't personally like it, and the real-world performance of "risk parity" funds has included stumbles so bad that AQR abandoned the strategy in their own main risk parity fund... but anyway.

10) Bogleheads place a lot of weight on Bogle's exhortation, "Stay the course." You need to have enough conviction in your portfolio to stick to it. Virtually all presentations of strategies involve backtesting that assumes investors who did stay the course. You may not get the expected results from a backtested portfolio that you follow, but you sure as heck won't get the expected results if you don't follow. A long-term strategy that's revised frequently isn't a long-term strategy.
A lot to respond to here - first of all, thank you for the really detailed and thoughtful response:

1. Thirty years from now I want to say that I avoided any real huge mistakes, and that I'm still as comfortable going forwards as I am today. I'm not trying to increase my portfolio as much as humanly possible, but nor do I want to risk running out of money later on. I just want to avoid a really bad portfolio design that either motivates me to behavioral mistakes, or has some inherent flaw in it. If this has neither quality, and it has enough growth in it for the long-term while not being more risky than I'm comfortable with, then it's the right one for me. So far as I can tell, 50/50 accomplishes all of that for my circumstances.

2. I talked about this a bit in my reply to your other post, but I'm not so much seeking to split my chances of being right, as knowing that I'm not guessing at all, and thus won't be tempted to ever second-guess myself (literally).

3. I remember reading through at least one thread on here that deals with the Global Market Portfolio, which is along the same lines as what you're discussing. I think there is also a live link somewhere on bogleheads.org that shows the current allocation of it on a Google Sheet I think - ah yes, here it is. Thank you for the thread link for the Sharpe portfolio though, I'll take a look through it, you always learn something from other portfolio alternatives.

4. I know all three quotes by heart :)

5/6. I agree, and it's one of the major reasons why I stayed away from the All Seasons Portfolio or any version of risk parity - you're taking a 100% concentration risk on a single strategy to make your portfolio work. It's also why I stayed away from all LTTs. You never know when the correlations will go against you, even marginally, hence the preference for at least half in STTs. I've read Bernstein's take that if your worried about inflation vs deflation, inflation is far more likely, so you should be all STTs, and I don't necessarily disagree with it, but again, I don't want to guess either way. I also noticed in Simba that TBM, despite holding a lot of corporates and so on, tends to do pretty well in every environment, which reinforces the idea, at least to me, that diversification in bonds, even if done imprecisely, is just as important as in stocks, even where correlations don't appear to always be on your side.

7. I struggled with how exactly to describe it. I'm looking for outliers in how the components work together, something obvious to others that I've missed about how long and short bonds work together, or nominal bonds and TIPS. The concern is a false sense of safety in splitting the difference between Portfolio A that does well in Scenario 1, and Portfolio B that does well in Scenario 2, and yet the 50/50 does well in neither of them for some reason that isn't obvious at first sight. For instance, maybe a 30/70 portfolio is always better than a 50/50 for some reason I wouldn't think of. I didn't think it was a problem, and I still don't, but I wanted to ask just in-case.

8. I'd disagree with this a bit on the basis that I've noticed in Simba, for whatever it's worth, that tipping over the edge of allocations can result in significant differences in performance past thresholds for some reason. Usually it happens at the very edges (a 0/100 vs 10/90 portfolio), but I've seen it a few times going from a 20/80 to a 30/70 or a 50/50 to a 60/40. But it may not really be an issue over longer time periods, I was looking at very specific and in some cases short-er spans.

9. It's really interesting how often that 25/75 or 30/70 portfolio comes up the winner - I noticed that too in Simba. I didn't feel it would work for me though on account of the large bond holding and the consequent lower real growth. I'm looking at a longer retirement than most, so I can't afford taking any risks running out of money early, especially right at the 'usual' retirement age when I couldn't go back to work even if I had to. I should have mentioned in my original post that i am 37 though, that was an oversight that would have provided a lot more context to my question.

10. This is a paramount concern for me, the moreso because I already have experience with strategy-churn and I know how unproductive it is.
The GMP is the Sharpe World Bond/Stock Portfolio (WBS).

Also, note that if you do decide to go with a fixed AA such as 50/50, you generally should not rebalance back to 50/50, or you're doing active investing. Sharpe's Formula 15 in his AAAP paper provides an alternative method of rebalancing.

I personally use the WBS because it allows me to avoid allocation decisions and minimizes rebalancing (adjusting). I do use TIPS on the side.
VT 60% / VFSUX 20% / TIPS 20%
Northern Flicker
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Northern Flicker »

mmcmonster wrote: Sun Nov 28, 2021 6:10 am My concern about 50/50 portfolios (25% treasuries, 25% TIPS) is that the 60/40 was devised in a period where treasuries had much better returns than current and much better returns than current forecasts for the future.
60/40 was devised without TIPS in the mix. The proposed portfolio has 75% in stocks + TIPS. It takes both less inflation risk and less market risk than a conventional 60/40 portfolio with 40% in nominal bonds.
longinvest
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by longinvest »

nisiprius wrote: Sun Nov 28, 2021 7:17 am 3) I think cap-weighting is a much more "natural" division than equal-weighting. However, I'm not so sure that it applies if the assets in question don't trade freely and frictionlessly against each other within a single unified market. Anyway, look up the thread on Bill Sharpe's preferred portfolio for arguments that the natural, prediction-free, viewpoint-free division is according to the total capitalization of stocks and bonds. Fortunately for your view, that turns out not to be wildly different from 50/50. Something close to 40/60, I think.
I'll add that an estimate of free-float capitalization weights is published monthly on the linked "Bill Sharpe's preferred portfolio" thread along with links to index fact sheets. Here's the latest entry:
longinvest wrote: Sun Nov 21, 2021 4:36 pm This post documents the monthly return and asset class weights as of October 31, 2021 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The October 2021 return was:
  • Global Stock-and-Bond Portfolio: ((60.78% X 5.08% (global stocks)) + (39.22% X -0.19% (global bonds))) = 3.01% (USD)
    • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
    • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return
As of October 31, 2021 the weights were:
  • Global stocks: $78,154,396 million USD Market cap -- 61.81%
    • FTSE Global All Cap Index (GEISLMS) -- Net MCap
  • Global bonds: $48,285,770 million USD Market cap -- 38.19%
    • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value
For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its October 2021 return was 2.94%.
My own portfolio is entirely invested into a globally-diversified all-in-one 60/40 stocks/bonds index ETF, very similar to VSMGX but with a different home bias appropriate for me.

One beauty of holding a low-cost all-in-one index fund or ETF is that the portfolio is mostly (passively) rebalanced with the cash flows of other investors! That's quite tax efficient and it reduces the need for fund managers to (actively) rebalance, selling one asset to buy the other. It has other benefits, too. I suggest to read the "One-Fund Portfolio" thread for details.

Vanguard's LifeStrategy Moderate Growth Fund is invested into over 28,000 global stocks and bonds through four underlying total-market index funds. That's impressive. There are maybe 250 trading days per year; it would take more than a human lifetime to buy one security per trading day to accumulate such a portfolio! I think that it's a good enough portfolio for U.S. investors who seek broad diversification with a fixed lifelong moderate allocation.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
mmcmonster
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by mmcmonster »

Phyneas wrote: Sun Nov 28, 2021 1:33 pm
mmcmonster wrote: Sun Nov 28, 2021 12:56 pm I think that if you're worried about the allocation of the Bonds in your portfolio, you're in a good place. :D

Don't get me wrong. I've been messing with my bond allocation all year. I currently have 20% state muni, 44% total muni, 17% Total Bond, 7% treasury, and 12% TIPS.

I'm going to increase my TIPS to ~30-40% by next Spring. But I figure this is something I'll do as I'm in the process of winning the game.

The exact allocation of my Bonds doesn't matter too much, so long as overall it's something that can blunt any drops in my total portfolio when the Stocks portion takes a dive.
Those are some interesting percentages on the bond side :). What sort of durations do/will you hold for the TIPS?
LOL. That's what I happen to have, and it grew organically.

My tax-deferred accounts are full of treasury bonds. the rest of bonds are in taxable. My Investor Policy Statement said <25% of bonds in state muni funds. So the rest was total muni until this year, when I decided to add TIPS.

Keeping things simple is important, particularly for when my family has to pick up when I leave them. So my fixed income is entirely in mutual funds, no individual bonds. VBTIX, VWIUX, VPALX, VAIPX. All intermediate term.
Northern Flicker
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Northern Flicker »

longinvest wrote: One beauty of holding a low-cost all-in-one index fund or ETF is that the portfolio is mostly (passively) rebalanced with the cash flows of other investors! That's quite tax efficient and it reduces the need for fund managers to (actively) rebalance, selling one asset to buy the other.
What primarily makes a world market index fund like VT free from needing to rebalance is holding the stocks at market cap weight, not packaging them together in one fund. In the absence if changes to free float and in the absence of other index changes like adding China A-shares to VXUS, holding VTI and VXUS at global cap weight would be equivalent to holding the same securities packaged in a single fund. No rebalancing would be needed, whether explicit, or from cash flows of other investors in the fund.

Index changes can require rebalancing, but do not typically create much advantage for the single fund. Changes to free float happen at the individual security level. They will require small adjustments to the weighting of an individual stock, but generally are not significant enough to change the relative weighting. Cash flows of other investors into the individual funds will still be as effective to rebalance.

Now consider larger index changes, such as adding China A-shares to the index. This changes the relative weighting of countries in the indices. If your allocation is to hold world market cap, the single fund solution will not require you to rebalance. But as soon as you introduce any home country bias, the change in country weights can require some rebalancing. But if the home country equities are isolated in a separate fund, such as when a US investor holds VTI and VXUS, then no rebalance is needed to naintain the ssme home country bias. Use of the single fund solution will require a rebalance to maintain the same home country bias.

Another point concerns from where the cash flows to purchase the added subclass are generated. If someone holds VTI and VXUS and China A-shares are added, the cash flows to buy China A-shares would come from or otherwise would flow to non-US DM and other EM equities. The relative weight of US and non-US does not change (level of home country bias does not change), but the relative weight of EM and DM changes.

If instead, a US investor held VTI, VEA, and VWO when China A-shares were added to VWO, China A-shares would reduce only the weighting of other EM equities. The US and DM weightings would not change.

For US investors, the total world fund VT also gives up the foreign tax credit in a taxable account.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Beensabu »

Northern Flicker wrote: Sun Nov 28, 2021 1:59 pm
mmcmonster wrote: Sun Nov 28, 2021 6:10 am My concern about 50/50 portfolios (25% treasuries, 25% TIPS) is that the 60/40 was devised in a period where treasuries had much better returns than current and much better returns than current forecasts for the future.
60/40 was devised without TIPS in the mix. The proposed portfolio has 75% in stocks + TIPS. It takes both less inflation risk and less market risk than a conventional 60/40 portfolio with 40% in nominal bonds.
Say what now? Please explain, because you lost me.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Northern Flicker »

50% stock will have less market risk than 60% stock.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by pseudoiterative »

Phyneas wrote: Sun Nov 28, 2021 1:15 am b) Is there anything that can be done to improve it, without guessing at the outcomes?
There's a few other dimensions to think about if you're willing to entertain the possibility of large and interesting times such as war or revolution, systemic problems with the financial system, or small and interesting failure modes such as your broker going bankrupt or absconding with your money, or some part of the government getting confused and deciding it really doesn't like you for some reason (c.f.Terry Gilliam's Brazil, etc).

Does that suggest a change in bond / stock ratio of financial instruments? Not really.

Does that suggest that you might want to split your financial instruments across a number of different counterparties to limit the blast radius if anything goes wrong with one? Perhaps. Does that suggest you might want to think about the ratio of electronic financial assets to other forms of value that could be robust to some of the financial system failure modes? (e.g. owning your house or other physical bits of infrastructure that lower your cost of living in the event your financial assets somehow were to no longer exist or were made inaccessible).

edit: re: the brokerage going bankrupt, there's a reasonable amount of information in the "When the brokerage goes bust !?" thread, so my speculation about that failure more can be ignored.
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Phyneas
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Phyneas »

pascalwager wrote: Sun Nov 28, 2021 1:52 pm
Phyneas wrote: Sun Nov 28, 2021 1:13 pm
nisiprius wrote: Sun Nov 28, 2021 7:17 am
50% stocks (VTI+VXUS), 50% bonds. The bonds are there for ballast and hopefully some anti-correlation, not income, so they are treasuries only, split 50/50 between long and short, The long and short are split between nominals and inflation-protected.
1) The portfolio is fine. I like it because, well, it's not wildly different from mine. Being old, retired, and conservative/risk-averse/fraidycat I have less than 50% in stocks. Always having been worried about inflation I have more than 50% of my bonds in TIPS and I bonds. Both my nominal bond fund (Total Bond) and TIPS fund (Vanguard Inflation-Protected Securities) have a mix of terms--long, short, and intermediate--and I haven't and won't bother to figure out what the percentages are.

I don't know what you mean by "worse than any other." I think that for many purposes, your portfolio is as good as any normal, traditional, centrist retirement savings portfolio. Many will argue that yours is worse than their favored portfolio but I don't think that's what you're asking. I think there's a swarm of portfolios that are all "good," of which you simply cannot prove that any of them is any better than any other. Thirty years from now you will know which did best, but you still won't know if it was "the best portfolio" or whether it was just the luck and the breaks of that time period.

John C. Bogle wrote
Successful investing involves doing just a few things right and avoiding serious mistakes.
I can't think of a plausible scenario in which your portfolio would do so much worse than any major target-date fund that you would call it "a serious mistake."

2) 50/50 is fine, but your reasoning for 50/50 is flawed. The problem is that all equal splits depend on how you've chosen to define the boundaries and categories you're splitting between. The assumptions you're hoping to avoid, cutting the Gordian knot with a 50/50 sword, just get smuggled in when you ask "splitting between what." You're kidding yourself when you think you've achieved some objective goal with an "equal" split between subjectively defined categories. We can see this in your own example. Why not ⅓ each stocks, nominal bonds, and TIPS? Why not ⅕ each stocks, long nominal, short nominal, long TIPS, and short TIPS? Why not a tenth each large-cap growth, large-cap blend, large-cap value, mid-cap growth, mid-cap blend, mid-cap value, small-cap growth, small-cap blend, small-cap value, and bonds? Why not a fifth each stocks, bonds, rental income property, commodity futures, and collectible gold coins? Oh, sure, I personally think stocks and bonds are almost natural categories (but preferred stocks are bond-like and junk bonds are stock-like and are REITs "just" stocks?)

By the way, "I don't know so I'll put equal amounts in each" has a name, "naïve diversification."

3) I think cap-weighting is a much more "natural" division than equal-weighting. However, I'm not so sure that it applies if the assets in question don't trade freely and frictionlessly against each other within a single unified market. Anyway, look up the thread on Bill Sharpe's preferred portfolio for arguments that the natural, prediction-free, viewpoint-free division is according to the total capitalization of stocks and bonds. Fortunately for your view, that turns out not to be wildly different from 50/50. Something close to 40/60, I think.

4) I can cite three major authorities who have said something nice about 50/50 naïve diversification between stocks and bonds. (I'll leave it as an exercise to look them up if you don't know who these people were).

Benjamin Graham:
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums.
Harry Markowitz:
I should have computed the historical co-variances of the asset classes and drawn an efficient frontier. Instead, I visualized my grief if the stock market went way up and I wasn’t in it–or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions 50/50 between bonds and equities.
John C. Bogle:
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
5) It's reasonable to expect very low correlation between stocks and Treasury securities. This doesn't come solely from pragmatic observation, but also from the different fundamental nature of equity and debt.

6) There's spirited debate about this but I, for one, think it is totally unsound to rely, in any important way, on anticorrelation. It drives me bananas that you so often hear short sound-bite "of course, take-it-for-granted" asides saying that the two "have" negative correlation. The correct statement is that they "have had" negative correlation for twenty years. Following thirty-five years of positive correlation, which followed a period of negative correlation, and so on. My sound bite is "zero correlation with big fluctuations." Of course the sophisticates think they know the reasons for those fluctuations and think they make predictions based on them. You should keep the long-term picture of stock-bond correlation in your mind just the way you keep the long-term picture of stock performance in your mind:

Image

7) You need to define much more carefully what you mean by "better" and "worse."

8) The difference between 60/40 and 50/50 is negligible. That's why Vanguard thinks they cover the range adequately with only four LifeStrategy funds, allocated 80/20, 60/40, 40/60, and 20/80.

9) Obviously in any period of time when stocks are outperforming bonds, which is usually but not always, 50/50 will underperform portfolios with more stocks, and outperform portfolios with less stocks. However, if you use almost any measure that takes risk into account in any way, the picture changes. Oddly in view of the cultish adherence to 60/40, over most long periods of time, the highest risk-adjusted return as measured by the Sharpe ratio has been much lower than either 60/40 or 50/50. It has been more in the ballpark of 25/75. That is one of the fundamental bases of "risk parity" strategies. It is way more complicated than that, and involves belief systems about specific asset classes, and I don't personally like it, and the real-world performance of "risk parity" funds has included stumbles so bad that AQR abandoned the strategy in their own main risk parity fund... but anyway.

10) Bogleheads place a lot of weight on Bogle's exhortation, "Stay the course." You need to have enough conviction in your portfolio to stick to it. Virtually all presentations of strategies involve backtesting that assumes investors who did stay the course. You may not get the expected results from a backtested portfolio that you follow, but you sure as heck won't get the expected results if you don't follow. A long-term strategy that's revised frequently isn't a long-term strategy.
A lot to respond to here - first of all, thank you for the really detailed and thoughtful response:

1. Thirty years from now I want to say that I avoided any real huge mistakes, and that I'm still as comfortable going forwards as I am today. I'm not trying to increase my portfolio as much as humanly possible, but nor do I want to risk running out of money later on. I just want to avoid a really bad portfolio design that either motivates me to behavioral mistakes, or has some inherent flaw in it. If this has neither quality, and it has enough growth in it for the long-term while not being more risky than I'm comfortable with, then it's the right one for me. So far as I can tell, 50/50 accomplishes all of that for my circumstances.

2. I talked about this a bit in my reply to your other post, but I'm not so much seeking to split my chances of being right, as knowing that I'm not guessing at all, and thus won't be tempted to ever second-guess myself (literally).

3. I remember reading through at least one thread on here that deals with the Global Market Portfolio, which is along the same lines as what you're discussing. I think there is also a live link somewhere on bogleheads.org that shows the current allocation of it on a Google Sheet I think - ah yes, here it is. Thank you for the thread link for the Sharpe portfolio though, I'll take a look through it, you always learn something from other portfolio alternatives.

4. I know all three quotes by heart :)

5/6. I agree, and it's one of the major reasons why I stayed away from the All Seasons Portfolio or any version of risk parity - you're taking a 100% concentration risk on a single strategy to make your portfolio work. It's also why I stayed away from all LTTs. You never know when the correlations will go against you, even marginally, hence the preference for at least half in STTs. I've read Bernstein's take that if your worried about inflation vs deflation, inflation is far more likely, so you should be all STTs, and I don't necessarily disagree with it, but again, I don't want to guess either way. I also noticed in Simba that TBM, despite holding a lot of corporates and so on, tends to do pretty well in every environment, which reinforces the idea, at least to me, that diversification in bonds, even if done imprecisely, is just as important as in stocks, even where correlations don't appear to always be on your side.

7. I struggled with how exactly to describe it. I'm looking for outliers in how the components work together, something obvious to others that I've missed about how long and short bonds work together, or nominal bonds and TIPS. The concern is a false sense of safety in splitting the difference between Portfolio A that does well in Scenario 1, and Portfolio B that does well in Scenario 2, and yet the 50/50 does well in neither of them for some reason that isn't obvious at first sight. For instance, maybe a 30/70 portfolio is always better than a 50/50 for some reason I wouldn't think of. I didn't think it was a problem, and I still don't, but I wanted to ask just in-case.

8. I'd disagree with this a bit on the basis that I've noticed in Simba, for whatever it's worth, that tipping over the edge of allocations can result in significant differences in performance past thresholds for some reason. Usually it happens at the very edges (a 0/100 vs 10/90 portfolio), but I've seen it a few times going from a 20/80 to a 30/70 or a 50/50 to a 60/40. But it may not really be an issue over longer time periods, I was looking at very specific and in some cases short-er spans.

9. It's really interesting how often that 25/75 or 30/70 portfolio comes up the winner - I noticed that too in Simba. I didn't feel it would work for me though on account of the large bond holding and the consequent lower real growth. I'm looking at a longer retirement than most, so I can't afford taking any risks running out of money early, especially right at the 'usual' retirement age when I couldn't go back to work even if I had to. I should have mentioned in my original post that i am 37 though, that was an oversight that would have provided a lot more context to my question.

10. This is a paramount concern for me, the moreso because I already have experience with strategy-churn and I know how unproductive it is.
The GMP is the Sharpe World Bond/Stock Portfolio (WBS).

Also, note that if you do decide to go with a fixed AA such as 50/50, you generally should not rebalance back to 50/50, or you're doing active investing. Sharpe's Formula 15 in his AAAP paper provides an alternative method of rebalancing.

I personally use the WBS because it allows me to avoid allocation decisions and minimizes rebalancing (adjusting). I do use TIPS on the side.
Thanks for the heads-up about the AAAP re-balancing rules, I reviewed the paper and found an online calculator at FTSE that does it for you automatically, so I won't muck up the math.

How much re-balancing does the WBS require? Presumably people can move out of stocks and bonds unequally and into a third asset class, so the ratios change, though you'd have a direct resource to use to keep it updated anyway.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by ScubaHogg »

nisiprius wrote: Sun Nov 28, 2021 11:48 am
ScubaHogg wrote: Sun Nov 28, 2021 11:17 am
Phyneas wrote: Sun Nov 28, 2021 1:15 am I've looked at the Golden Butterfly, All Seasons, and Permanent Portfolios, and while interesting, I do worry that they are essentially back-tested to perfection, and may have nothing to do with the future.
Without endorsing I’ll just say the the PP was published in ~1982. So it’s had a 38 year out of sample return to compare to its pre-1982 returns. In my mind that’s not really “back tested to perfection”

https://www.portfoliovisualizer.com/bac ... tion4_1=25
Except that is NOT the Permanent Portfolio that was published in 1982. The one that was published in 1982 was embodied in the Permanent Portfolio mutual fund, PRPFX, and managed by real people making real investments using real money. Harry Browne personally was one of the advisors. Yes, of course, it has an expense ratio, currently 0.83% but higher in past.

Still, PRPFX is the real out-of-sample test.

I don't know how to plot it together with an "Asset Class" backtest in PortfolioVisualizer, I guess I can actually superimpose the two charts graphically. I tinted the mutual fund reddish.

Image
An even better out of sample test then!
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by GaryA505 »

We had another whole thread on the idea of a 50/50 portfolio a while back. Some good stuff there.

viewtopic.php?f=10&t=338016
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by nisiprius »

Phyneas wrote: Sun Nov 28, 2021 11:54 am...Doesn't PRPFX stray from the PP allocations though? It's talked about quite a bit on gyroscopicinvesting, how it doesn't reflect the PP as Harry Browne designed it....
PRPFX was personally advised by Harry Browne. How can it "not reflect the PP as Harry Browne designed it?"

A side note is that in 2012, Global X launched the Global X Permanent ETF Fund, PERM, reflecting the revised 4x25 version of the portfolio--but it was liquidated just five years later.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by dogagility »

Beensabu wrote: Sun Nov 28, 2021 1:13 pm Actually, consistently contributing at 50/50 and not rebalancing has had a CAGR very close to a 100/0 portfolio...
What do you mean by very close? A difference of 1-2%?

If that's what you mean, I would not call that "very close". Historically (e.g. 1987-2021), that 1-2% difference over 20-30 years of accumulation ends up being a very large (six figure) absolute amount of portfolio value.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by invest2bfree »

Phyneas wrote: Sun Nov 28, 2021 1:15 am My preference has always been for a portfolio that doesn't guess at the outcome of the markets - an all seasons type portfolio. I know that back-tests can show you what hasn't ever worked, but it can't show you what will work, and I have no rational basis for believing that a 60/40 portfolio going forward will out-perform a 30/70 portfolio over my investment period. I've looked at the Golden Butterfly, All Seasons, and Permanent Portfolios, and while interesting, I do worry that they are essentially back-tested to perfection, and may have nothing to do with the future.

As such, the only thing I can think of is to just go 50/50. 50% stocks (VTI+VXUS), 50% bonds. The bonds are there for ballast and hopefully some anti-correlation, not income, so they are treasuries only, split 50/50 between long and short, The long and short are split between nominals and inflation-protected.

Assuming this meets my risk tolerances (it does, need = 45%, want = 30%, can = 70%) and investment objectives (it probably does, assuming we don't have 3% returns and 5% inflation for the next 56 years straight):

a) Is there anything obviously wrong with this approach, something glaringly obvious in my own blind spot, and;

b) Is there anything that can be done to improve it, without guessing at the outcomes? For instance, inflation-protected only on the short end and nominals on the long end of the bonds? Or adding 5% gold, or something else mechanical and obvious?

I figure that if you go 50/50 you can only ever be half wrong, but is this itself wrong? Can a 50/50 actually be much worse than picking an overweight to bonds or stocks?
Personally I have been thinking about a portfolio like this for myself.

I want to use Ben Graham's allocation system to jump to 75/25 when there is a selloff more than 30%.

Looking at my mindset I dont think I can site through a 35% loss.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by loukycpa »

Beensabu wrote: Sun Nov 28, 2021 1:13 pm
loukycpa wrote: Sun Nov 28, 2021 7:58 am
Blue456 wrote: Sun Nov 28, 2021 6:33 am
loukycpa wrote: Sun Nov 28, 2021 6:29 am A younger person in the accumulation phase would not be well served by this portfolio. For a retired person sure.
That really depends. Dr. Bernstein recommends 50:50 for young person until first prolonged recession is experienced. He makes a case that higher allocation can lead to panic, stock sale and permanent loss during prolonged and severe downturn such as 2008 or Dotcom. So there is a behavioral aspect of being always half right and a loss that is limited to only half of one portfolio.
Ok sure if you want to consider the behavioral aspect. If you have a high proclivity to buy high and sell low then any substantial allocation to equities could be a problem. This person should really be steered toward a target date fund.

From an optimal portfolio perspective, with negative real interest rates today on bonds, if 50/50 turns out to be the optimum allocation for a young accumulator over the next 30 years it is going to be rough sledding.
Actually, consistently contributing at 50/50 and not rebalancing has had a CAGR very close to a 100/0 portfolio while cutting max drawdown by 1/3 and decreasing time to recovery. It was like having a 66/34 portfolio and rebalancing annually. The equity allocation rises over the course of bull markets and resets during crashes. And all you have to do is set automatic contributions to 50/50. It's kind of an interesting method for those accumulators who know they're prone to behavioral error: contribute at a more moderate AA than you would normally and forget about rebalancing on either end because the market will do it for you.
Time period? How can CAGR be close to 100/0 if stocks have historically outperformed bonds over the long term?
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Beensabu »

loukycpa wrote: Mon Nov 29, 2021 7:18 pm Time period? How can CAGR be close to 100/0 if stocks have historically outperformed bonds over the long term?
What PV has to show us. Jan 1987 - Oct 2021.

It is the effect of the rising equity allocation during bull markets due simply to not rebalancing. It's not inconsistent with stocks outperforming bonds over the long term at all.
dogagility wrote: Mon Nov 29, 2021 4:43 pm
Beensabu wrote: Sun Nov 28, 2021 1:13 pm Actually, consistently contributing at 50/50 and not rebalancing has had a CAGR very close to a 100/0 portfolio...
What do you mean by very close? A difference of 1-2%?

If that's what you mean, I would not call that "very close". Historically (e.g. 1987-2021), that 1-2% difference over 20-30 years of accumulation ends up being a very large (six figure) absolute amount of portfolio value.
Yes. I am indeed calling the difference between 19.43% and 18.21% over almost 35 years very close.

If that's not close enough for you, let's cherry pick the Jan 1987 - Sep 2002 period, shall we? 26.77% vs 26.43%

Or another cherry picked date range, let's go with Jan 1987 - Feb 2009. 19.41% vs 19.92%

The returns of all basic stock:bond AAs converge at some point during a real big bear market. Any excess return of an aggressive allocation over a more moderate/conservative allocation is the simply the return of the most recent bull market.

Stocks outperform bonds over the long term when we look back because we spend most of the time outside the convergence points. It looks like a huge $$$ difference over the long-term, because portfolios are usually a lot larger after 30 years or so of regular contributions.

From Feb 2009 - Oct 2021, 35.02% vs 32.39% CAGR made a bigger difference for someone starting with a $1m portfolio vs a $5k portfolio.

I really have become convinced that a moderate/conservative AA is ideal for accumulators. Really, you just want to be equity heavy for the last bull market before retirement, and then dial it down again before the market takes it back. Maybe dial it up again temporarily midway through retirement to try to catch a few years of one more big bull (only if you need to), and then back down.

Never forget that all AAs converge periodically. Because they do.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by sandan »

pseudoiterative wrote: Sun Nov 28, 2021 4:43 pm
Phyneas wrote: Sun Nov 28, 2021 1:15 am b) Is there anything that can be done to improve it, without guessing at the outcomes?
There's a few other dimensions to think about if you're willing to entertain the possibility of large and interesting times such as war or revolution, systemic problems with the financial system, or small and interesting failure modes such as your broker going bankrupt or absconding with your money, or some part of the government getting confused and deciding it really doesn't like you for some reason (c.f.Terry Gilliam's Brazil, etc).

Does that suggest a change in bond / stock ratio of financial instruments? Not really.

Does that suggest that you might want to split your financial instruments across a number of different counterparties to limit the blast radius if anything goes wrong with one? Perhaps. Does that suggest you might want to think about the ratio of electronic financial assets to other forms of value that could be robust to some of the financial system failure modes? (e.g. owning your house or other physical bits of infrastructure that lower your cost of living in the event your financial assets somehow were to no longer exist or were made inaccessible).
There is also the supply chain risk even when the financial system is still okay.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Jaymover »

I think the problem going forward is that it is a low yield world and there are no ways around it. The most pessimistic Credit Suisse forecast is that stocks will give a 3% real return, a typical 70/30 balanced a 2% real return and diversified bonds a -0.5% real return. I presume then that 50/50 might then give you 1.5% real return.

This is real return and so if inflation picks up then it really makes no differenc what your asset allocation is, unless you are overweight in bonds and therefore will lose to inflation over time. The thing is that going 100 percent stocks instead 50:50 in an ultra low yield future will only give you a trifling 1.5% extra return in exchange for a whole lot of extra risk. The 1.5 percent extra is not insignificant if you are young and have 30 years of investing ahead of you but may not be so important for someone older who may prefer to just keep up with inflation and sleep well at night.

I hope the Credit Suisse forecasts are way too pessimistic but it is sad for those hard working younger people who may not get to share the gravy train that their predecessors have been on for the last few decades.

Another point is that your 50 percent stock allocation may have tilts toward more risky and possibly more rewarding assets like EMs, small caps etc and so may actually be as risky as a 60/40.

In the end make a choice and stick with it (unless personal circumstances change) as varying your AA too much will likely be detrimental to your long term returns.

I wish to note that me owning a 50/50 for the last two years would have been dissappointing for me but this will change in future, at some point we don't know when.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Phyneas »

nisiprius wrote: Mon Nov 29, 2021 2:27 pm
Phyneas wrote: Sun Nov 28, 2021 11:54 am...Doesn't PRPFX stray from the PP allocations though? It's talked about quite a bit on gyroscopicinvesting, how it doesn't reflect the PP as Harry Browne designed it....
PRPFX was personally advised by Harry Browne. How can it "not reflect the PP as Harry Browne designed it?"

A side note is that in 2012, Global X launched the Global X Permanent ETF Fund, PERM, reflecting the revised 4x25 version of the portfolio--but it was liquidated just five years later.
I'm not surprised PERM folded after 5 years. When you move the start and end date sliders on the PP to snapshot different start and end date periods, it only out-performs during periods of high market stress, and then it really does shine, but the rest of the time it seriously under-performs in growth, regardless of its efficiencies and elegant design. Also, that 0.49% MER couldn't have helped - you can currently do the PP for a weighted MER of 0.065% (VTI+VGLT+SGOV+IAUM), and even back then it would have been around 0.11% I'm guessing.

In terms of PRPFX, I only meant that the Permanent Portfolio that Harry Browne published in his book was a fairly rigid 4x25 structure. If he ran the mutual fund differently then I'm not sure why he would have done that (would actually be quite interesting to know), but in any event, it actually proves the point that had he stuck to the original design, it would have done a lot better.

I wanted to ask - how do you feel about the 25/25 short and long bonds vs something like 25% BND/25% SCHP. I've been going over the correlations argument in my mind, and I am a bit concerned that the short/long idea is an artifice of post-1975 back-testing on my part. I don't like holding corporate bonds on the basis that if you want to take more risk, do it on the equities side, especially due to their high correlation with equities. But as discussed earlier, you can't and shouldn't rely on the correlations argument entirely (though I'm not sure I can think of a situation where corporate bonds have a lower correlation with equities than treasuries do). Is there a strong argument to be made that, correlations aside, limiting yourself to treasuries only, will hurt you in the long-run in terms of draw-downs or CAGR?
Last edited by Phyneas on Tue Nov 30, 2021 1:11 am, edited 2 times in total.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Phyneas »

GaryA505 wrote: Mon Nov 29, 2021 1:55 pm We had another whole thread on the idea of a 50/50 portfolio a while back. Some good stuff there.

viewtopic.php?f=10&t=338016
That's the thread that got me thinking of it originally! The fifth post down was what got me thinking about this sort of 50/50/50/50 idea specifically.
Last edited by Phyneas on Tue Nov 30, 2021 12:56 am, edited 1 time in total.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Phyneas »

invest2bfree wrote: Mon Nov 29, 2021 5:02 pm
Phyneas wrote: Sun Nov 28, 2021 1:15 am My preference has always been for a portfolio that doesn't guess at the outcome of the markets - an all seasons type portfolio. I know that back-tests can show you what hasn't ever worked, but it can't show you what will work, and I have no rational basis for believing that a 60/40 portfolio going forward will out-perform a 30/70 portfolio over my investment period. I've looked at the Golden Butterfly, All Seasons, and Permanent Portfolios, and while interesting, I do worry that they are essentially back-tested to perfection, and may have nothing to do with the future.

As such, the only thing I can think of is to just go 50/50. 50% stocks (VTI+VXUS), 50% bonds. The bonds are there for ballast and hopefully some anti-correlation, not income, so they are treasuries only, split 50/50 between long and short, The long and short are split between nominals and inflation-protected.

Assuming this meets my risk tolerances (it does, need = 45%, want = 30%, can = 70%) and investment objectives (it probably does, assuming we don't have 3% returns and 5% inflation for the next 56 years straight):

a) Is there anything obviously wrong with this approach, something glaringly obvious in my own blind spot, and;

b) Is there anything that can be done to improve it, without guessing at the outcomes? For instance, inflation-protected only on the short end and nominals on the long end of the bonds? Or adding 5% gold, or something else mechanical and obvious?

I figure that if you go 50/50 you can only ever be half wrong, but is this itself wrong? Can a 50/50 actually be much worse than picking an overweight to bonds or stocks?
Personally I have been thinking about a portfolio like this for myself.

I want to use Ben Graham's allocation system to jump to 75/25 when there is a selloff more than 30%.

Looking at my mindset I dont think I can site through a 35% loss.
It's an interesting idea, but I'd be worried about having to market time the re-balance on the way back up. I.e. the market drop ~30%, you go to 75% equities and then as the market recovers, how do you decide when to sell back down to 50% equities? Or do you mean that you actually just let it ride all the way up until the next crash and do the same thing again?
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Phyneas »

Jaymover wrote: Mon Nov 29, 2021 11:39 pm I think the problem going forward is that it is a low yield world and there are no ways around it. The most pessimistic Credit Suisse forecast is that stocks will give a 3% real return, a typical 70/30 balanced a 2% real return and diversified bonds a -0.5% real return. I presume then that 50/50 might then give you 1.5% real return.

This is real return and so if inflation picks up then it really makes no differenc what your asset allocation is, unless you are overweight in bonds and therefore will lose to inflation over time. The thing is that going 100 percent stocks instead 50:50 in an ultra low yield future will only give you a trifling 1.5% extra return in exchange for a whole lot of extra risk. The 1.5 percent extra is not insignificant if you are young and have 30 years of investing ahead of you but may not be so important for someone older who may prefer to just keep up with inflation and sleep well at night.

I hope the Credit Suisse forecasts are way too pessimistic but it is sad for those hard working younger people who may not get to share the gravy train that their predecessors have been on for the last few decades.

Another point is that your 50 percent stock allocation may have tilts toward more risky and possibly more rewarding assets like EMs, small caps etc and so may actually be as risky as a 60/40.

In the end make a choice and stick with it (unless personal circumstances change) as varying your AA too much will likely be detrimental to your long term returns.

I wish to note that me owning a 50/50 for the last two years would have been dissappointing for me but this will change in future, at some point we don't know when.
You're right, it's a significant problem. I have an extremely low cost of living, so my SWR is around 1.5-2%, so 10 years of 3% real is fine, even a prolonged period of it would be, though not if inflation is consistently higher, then I'd have to increase the equity allocation based on my cost-inflation-growth models. How long did Credit Suisse say they projected that for?

I do have a small position in more aggressive investments, and I have been thinking about the small cap value tilt as an increasingly viable idea (or just splitting the US total market into equal weights of small, mid and large caps). I'm not a big fan of EM, I hold it at market-cap weights, but I don't trust it enough to go above that.

I agree as well about young people getting into the investing world. They have to face increasing inflation, job uncertainty, high national debt loads, low wages, low interest rates on their savings, and a potentially bleak stock market (at least in the short term). And for a lot of them, the housing market is increasingly out of reach as well, and that's an extremely important life goal for a lot of people. Plus kids are extremely expensive now. It must look like the future is moving further and further out of reach for them.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by firebirdparts »

I think good reasons have been given on the original question.

To me, it's worth noting that 50/50 portfolios in the past have given a zero withdrawal rate when they were concentrated in the wrong country. It's a bit odd that the USA seems to be a higher yield country without particularly being at a notable risk for a total loss on the bond side. If you try to pick a country that you think is safe, they would all have lower expected yields on the bond side. Stocks might be debatable.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by JnyVuko »

invest2bfree wrote: Mon Nov 29, 2021 5:02 pm I want to use Ben Graham's allocation system to jump to 75/25 when there is a selloff more than 30%.

Looking at my mindset I dont think I can site through a 35% loss.
Wouldn't that be market timing?
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by GaryA505 »

invest2bfree wrote: Mon Nov 29, 2021 5:02 pm
Phyneas wrote: Sun Nov 28, 2021 1:15 am My preference has always been for a portfolio that doesn't guess at the outcome of the markets - an all seasons type portfolio. I know that back-tests can show you what hasn't ever worked, but it can't show you what will work, and I have no rational basis for believing that a 60/40 portfolio going forward will out-perform a 30/70 portfolio over my investment period. I've looked at the Golden Butterfly, All Seasons, and Permanent Portfolios, and while interesting, I do worry that they are essentially back-tested to perfection, and may have nothing to do with the future.

As such, the only thing I can think of is to just go 50/50. 50% stocks (VTI+VXUS), 50% bonds. The bonds are there for ballast and hopefully some anti-correlation, not income, so they are treasuries only, split 50/50 between long and short, The long and short are split between nominals and inflation-protected.

Assuming this meets my risk tolerances (it does, need = 45%, want = 30%, can = 70%) and investment objectives (it probably does, assuming we don't have 3% returns and 5% inflation for the next 56 years straight):

a) Is there anything obviously wrong with this approach, something glaringly obvious in my own blind spot, and;

b) Is there anything that can be done to improve it, without guessing at the outcomes? For instance, inflation-protected only on the short end and nominals on the long end of the bonds? Or adding 5% gold, or something else mechanical and obvious?

I figure that if you go 50/50 you can only ever be half wrong, but is this itself wrong? Can a 50/50 actually be much worse than picking an overweight to bonds or stocks?
Personally I have been thinking about a portfolio like this for myself.

I want to use Ben Graham's allocation system to jump to 75/25 when there is a selloff more than 30%.

Looking at my mindset I dont think I can site through a 35% loss.
The problem with waiting for a sell-off to increase your equity allocation is that while you are waiting you could be missing all the gains, and you accomplish nothing.

I have a friend who was convinced the stock market was overvalued 3 years ago, so has been invested in all bonds and has been waiting for "the big dip" ever since. Meanwhile, during those 3 years a 75/25 portfolio has gained 50%-60%. He's still waiting because each time it reaches new highs he gets even more reluctant to get back in! :wink:
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by galeno »

We've come to the same conclusion. Our port is 50% TWSM + 45% TWBM + 5% CASH.
KISS & STC.
pascalwager
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by pascalwager »

Phyneas wrote: Mon Nov 29, 2021 2:21 am
pascalwager wrote: Sun Nov 28, 2021 1:52 pm
Phyneas wrote: Sun Nov 28, 2021 1:13 pm
nisiprius wrote: Sun Nov 28, 2021 7:17 am
50% stocks (VTI+VXUS), 50% bonds. The bonds are there for ballast and hopefully some anti-correlation, not income, so they are treasuries only, split 50/50 between long and short, The long and short are split between nominals and inflation-protected.
1) The portfolio is fine. I like it because, well, it's not wildly different from mine. Being old, retired, and conservative/risk-averse/fraidycat I have less than 50% in stocks. Always having been worried about inflation I have more than 50% of my bonds in TIPS and I bonds. Both my nominal bond fund (Total Bond) and TIPS fund (Vanguard Inflation-Protected Securities) have a mix of terms--long, short, and intermediate--and I haven't and won't bother to figure out what the percentages are.

I don't know what you mean by "worse than any other." I think that for many purposes, your portfolio is as good as any normal, traditional, centrist retirement savings portfolio. Many will argue that yours is worse than their favored portfolio but I don't think that's what you're asking. I think there's a swarm of portfolios that are all "good," of which you simply cannot prove that any of them is any better than any other. Thirty years from now you will know which did best, but you still won't know if it was "the best portfolio" or whether it was just the luck and the breaks of that time period.

John C. Bogle wrote
Successful investing involves doing just a few things right and avoiding serious mistakes.
I can't think of a plausible scenario in which your portfolio would do so much worse than any major target-date fund that you would call it "a serious mistake."

2) 50/50 is fine, but your reasoning for 50/50 is flawed. The problem is that all equal splits depend on how you've chosen to define the boundaries and categories you're splitting between. The assumptions you're hoping to avoid, cutting the Gordian knot with a 50/50 sword, just get smuggled in when you ask "splitting between what." You're kidding yourself when you think you've achieved some objective goal with an "equal" split between subjectively defined categories. We can see this in your own example. Why not ⅓ each stocks, nominal bonds, and TIPS? Why not ⅕ each stocks, long nominal, short nominal, long TIPS, and short TIPS? Why not a tenth each large-cap growth, large-cap blend, large-cap value, mid-cap growth, mid-cap blend, mid-cap value, small-cap growth, small-cap blend, small-cap value, and bonds? Why not a fifth each stocks, bonds, rental income property, commodity futures, and collectible gold coins? Oh, sure, I personally think stocks and bonds are almost natural categories (but preferred stocks are bond-like and junk bonds are stock-like and are REITs "just" stocks?)

By the way, "I don't know so I'll put equal amounts in each" has a name, "naïve diversification."

3) I think cap-weighting is a much more "natural" division than equal-weighting. However, I'm not so sure that it applies if the assets in question don't trade freely and frictionlessly against each other within a single unified market. Anyway, look up the thread on Bill Sharpe's preferred portfolio for arguments that the natural, prediction-free, viewpoint-free division is according to the total capitalization of stocks and bonds. Fortunately for your view, that turns out not to be wildly different from 50/50. Something close to 40/60, I think.

4) I can cite three major authorities who have said something nice about 50/50 naïve diversification between stocks and bonds. (I'll leave it as an exercise to look them up if you don't know who these people were).

Benjamin Graham:
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums.
Harry Markowitz:
I should have computed the historical co-variances of the asset classes and drawn an efficient frontier. Instead, I visualized my grief if the stock market went way up and I wasn’t in it–or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions 50/50 between bonds and equities.
John C. Bogle:
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
5) It's reasonable to expect very low correlation between stocks and Treasury securities. This doesn't come solely from pragmatic observation, but also from the different fundamental nature of equity and debt.

6) There's spirited debate about this but I, for one, think it is totally unsound to rely, in any important way, on anticorrelation. It drives me bananas that you so often hear short sound-bite "of course, take-it-for-granted" asides saying that the two "have" negative correlation. The correct statement is that they "have had" negative correlation for twenty years. Following thirty-five years of positive correlation, which followed a period of negative correlation, and so on. My sound bite is "zero correlation with big fluctuations." Of course the sophisticates think they know the reasons for those fluctuations and think they make predictions based on them. You should keep the long-term picture of stock-bond correlation in your mind just the way you keep the long-term picture of stock performance in your mind:

Image

7) You need to define much more carefully what you mean by "better" and "worse."

8) The difference between 60/40 and 50/50 is negligible. That's why Vanguard thinks they cover the range adequately with only four LifeStrategy funds, allocated 80/20, 60/40, 40/60, and 20/80.

9) Obviously in any period of time when stocks are outperforming bonds, which is usually but not always, 50/50 will underperform portfolios with more stocks, and outperform portfolios with less stocks. However, if you use almost any measure that takes risk into account in any way, the picture changes. Oddly in view of the cultish adherence to 60/40, over most long periods of time, the highest risk-adjusted return as measured by the Sharpe ratio has been much lower than either 60/40 or 50/50. It has been more in the ballpark of 25/75. That is one of the fundamental bases of "risk parity" strategies. It is way more complicated than that, and involves belief systems about specific asset classes, and I don't personally like it, and the real-world performance of "risk parity" funds has included stumbles so bad that AQR abandoned the strategy in their own main risk parity fund... but anyway.

10) Bogleheads place a lot of weight on Bogle's exhortation, "Stay the course." You need to have enough conviction in your portfolio to stick to it. Virtually all presentations of strategies involve backtesting that assumes investors who did stay the course. You may not get the expected results from a backtested portfolio that you follow, but you sure as heck won't get the expected results if you don't follow. A long-term strategy that's revised frequently isn't a long-term strategy.
A lot to respond to here - first of all, thank you for the really detailed and thoughtful response:

1. Thirty years from now I want to say that I avoided any real huge mistakes, and that I'm still as comfortable going forwards as I am today. I'm not trying to increase my portfolio as much as humanly possible, but nor do I want to risk running out of money later on. I just want to avoid a really bad portfolio design that either motivates me to behavioral mistakes, or has some inherent flaw in it. If this has neither quality, and it has enough growth in it for the long-term while not being more risky than I'm comfortable with, then it's the right one for me. So far as I can tell, 50/50 accomplishes all of that for my circumstances.

2. I talked about this a bit in my reply to your other post, but I'm not so much seeking to split my chances of being right, as knowing that I'm not guessing at all, and thus won't be tempted to ever second-guess myself (literally).

3. I remember reading through at least one thread on here that deals with the Global Market Portfolio, which is along the same lines as what you're discussing. I think there is also a live link somewhere on bogleheads.org that shows the current allocation of it on a Google Sheet I think - ah yes, here it is. Thank you for the thread link for the Sharpe portfolio though, I'll take a look through it, you always learn something from other portfolio alternatives.

4. I know all three quotes by heart :)

5/6. I agree, and it's one of the major reasons why I stayed away from the All Seasons Portfolio or any version of risk parity - you're taking a 100% concentration risk on a single strategy to make your portfolio work. It's also why I stayed away from all LTTs. You never know when the correlations will go against you, even marginally, hence the preference for at least half in STTs. I've read Bernstein's take that if your worried about inflation vs deflation, inflation is far more likely, so you should be all STTs, and I don't necessarily disagree with it, but again, I don't want to guess either way. I also noticed in Simba that TBM, despite holding a lot of corporates and so on, tends to do pretty well in every environment, which reinforces the idea, at least to me, that diversification in bonds, even if done imprecisely, is just as important as in stocks, even where correlations don't appear to always be on your side.

7. I struggled with how exactly to describe it. I'm looking for outliers in how the components work together, something obvious to others that I've missed about how long and short bonds work together, or nominal bonds and TIPS. The concern is a false sense of safety in splitting the difference between Portfolio A that does well in Scenario 1, and Portfolio B that does well in Scenario 2, and yet the 50/50 does well in neither of them for some reason that isn't obvious at first sight. For instance, maybe a 30/70 portfolio is always better than a 50/50 for some reason I wouldn't think of. I didn't think it was a problem, and I still don't, but I wanted to ask just in-case.

8. I'd disagree with this a bit on the basis that I've noticed in Simba, for whatever it's worth, that tipping over the edge of allocations can result in significant differences in performance past thresholds for some reason. Usually it happens at the very edges (a 0/100 vs 10/90 portfolio), but I've seen it a few times going from a 20/80 to a 30/70 or a 50/50 to a 60/40. But it may not really be an issue over longer time periods, I was looking at very specific and in some cases short-er spans.

9. It's really interesting how often that 25/75 or 30/70 portfolio comes up the winner - I noticed that too in Simba. I didn't feel it would work for me though on account of the large bond holding and the consequent lower real growth. I'm looking at a longer retirement than most, so I can't afford taking any risks running out of money early, especially right at the 'usual' retirement age when I couldn't go back to work even if I had to. I should have mentioned in my original post that i am 37 though, that was an oversight that would have provided a lot more context to my question.

10. This is a paramount concern for me, the moreso because I already have experience with strategy-churn and I know how unproductive it is.
The GMP is the Sharpe World Bond/Stock Portfolio (WBS).

Also, note that if you do decide to go with a fixed AA such as 50/50, you generally should not rebalance back to 50/50, or you're doing active investing. Sharpe's Formula 15 in his AAAP paper provides an alternative method of rebalancing.

I personally use the WBS because it allows me to avoid allocation decisions and minimizes rebalancing (adjusting). I do use TIPS on the side.
Thanks for the heads-up about the AAAP re-balancing rules, I reviewed the paper and found an online calculator at FTSE that does it for you automatically, so I won't muck up the math.

How much re-balancing does the WBS require? Presumably people can move out of stocks and bonds unequally and into a third asset class, so the ratios change, though you'd have a direct resource to use to keep it updated anyway.
Sharpe suggests checking the WBS deviation every month-or-so, but the rebalancing has been nil for me.

The WBS market values change continuously, of course. I have a WBS rebalancing table that shows the rebalancing trades just as continuously, whether or not money is to be added/removed. My automated Google spreadsheet shows everything: fund values, various percentages, % deviation, and rebalancing trades.

Once you've developed a personalized, automated spreadsheet, WBS investing is almost effortless.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by nigel_ht »

Phyneas wrote: Sun Nov 28, 2021 1:15 am I know that back-tests can show you what hasn't ever worked, but it can't show you what will work, and I have no rational basis for believing that a 60/40 portfolio going forward will out-perform a 30/70 portfolio over my investment period. I've looked at the Golden Butterfly, All Seasons, and Permanent Portfolios, and while interesting, I do worry that they are essentially back-tested to perfection, and may have nothing to do with the future.
Financial markets aren’t totally random so back testing is one of the few tools we have to make strategic plans.
I figure that if you go 50/50 you can only ever be half wrong, but is this itself wrong? Can a 50/50 actually be much worse than picking an overweight to bonds or stocks?
Yes. Both logic and back testing can show where 50/50 is worse than an allocation with more equities.

Logically stocks provide more growth than bonds. Anytime the rate of spending exceeds the rate the portfolio grows the risk of premature depletion occurs. At age 37 and the possibility to live to say 97 means you have a 60 year time horizon.

Image

If your desired or required withdrawal rate is 3.75% then 50/50 is historically much riskier than 100/0 for 60 year duration.

At 3% it doesn’t matter.
Van
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Van »

It seems to me that a 50/50 portfolio could be worse than my current 15/85 portfolio for someone like me, if there is a prolonged bear market. I'm 80 years old.
Jaymover
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Jaymover »

Phyneas wrote: Tue Nov 30, 2021 1:07 am
Jaymover wrote: Mon Nov 29, 2021 11:39 pm I think the problem going forward is that it is a low yield world and there are no ways around it. The most pessimistic Credit Suisse forecast is that stocks will give a 3% real return, a typical 70/30 balanced a 2% real return and diversified bonds a -0.5% real return. I presume then that 50/50 might then give you 1.5% real return.

This is real return and so if inflation picks up then it really makes no differenc what your asset allocation is, unless you are overweight in bonds and therefore will lose to inflation over time. The thing is that going 100 percent stocks instead 50:50 in an ultra low yield future will only give you a trifling 1.5% extra return in exchange for a whole lot of extra risk. The 1.5 percent extra is not insignificant if you are young and have 30 years of investing ahead of you but may not be so important for someone older who may prefer to just keep up with inflation and sleep well at night.

I hope the Credit Suisse forecasts are way too pessimistic but it is sad for those hard working younger people who may not get to share the gravy train that their predecessors have been on for the last few decades.

Another point is that your 50 percent stock allocation may have tilts toward more risky and possibly more rewarding assets like EMs, small caps etc and so may actually be as risky as a 60/40.

In the end make a choice and stick with it (unless personal circumstances change) as varying your AA too much will likely be detrimental to your long term returns.

I wish to note that me owning a 50/50 for the last two years would have been dissappointing for me but this will change in future, at some point we don't know when.
You're right, it's a significant problem. I have an extremely low cost of living, so my SWR is around 1.5-2%, so 10 years of 3% real is fine, even a prolonged period of it would be, though not if inflation is consistently higher, then I'd have to increase the equity allocation based on my cost-inflation-growth models. How long did Credit Suisse say they projected that for?

A few people on this forum think the CS forecast is too pessimistic. I think it is 10 years. It was a well publicized report demonstrating intergenerational inequality (young people having to self fund retirement now with no prospects of large compounding returns).

I do have a small position in more aggressive investments, and I have been thinking about the small cap value tilt as an increasingly viable idea (or just splitting the US total market into equal weights of small, mid and large caps). I'm not a big fan of EM, I hold it at market-cap weights, but I don't trust it enough to go above that.

I agree as well about young people getting into the investing world. They have to face increasing inflation, job uncertainty, high national debt loads, low wages, low interest rates on their savings, and a potentially bleak stock market (at least in the short term). And for a lot of them, the housing market is increasingly out of reach as well, and that's an extremely important life goal for a lot of people. Plus kids are extremely expensive now. It must look like the future is moving further and further out of reach for them.
I go with general Vanguard ideas which seem to be about 5% EM and 5% Small caps on an 80/20 portfolio. This puts my overall portfolio heavily weighted in small caps for growth. It hasn't been that great over a two year period due to the Virus, would have been better with just a 2 or 3 fund portfolio, but if world economy ever booms again then it will probably help. The tilts are a little off the cycle so help with diversification. Also, EM stocks generally give great yield which makes a difference long term. Gonna stick with it, no messing around with my little tilts and we all cant just be dependent on the FAANGs to fund our possibility of retirement.
Last edited by Jaymover on Tue Nov 30, 2021 4:28 pm, edited 1 time in total.
Van
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Van »

50/50, 60/40, 80/20, 100/0 etc. etc. It all depends on: how old you are, the size of your portfolio, your main investing objective right now and so on. There is no one size fits all.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Jaymover »

nigel_ht wrote: Tue Nov 30, 2021 3:06 pm
Phyneas wrote: Sun Nov 28, 2021 1:15 am I know that back-tests can show you what hasn't ever worked, but it can't show you what will work, and I have no rational basis for believing that a 60/40 portfolio going forward will out-perform a 30/70 portfolio over my investment period. I've looked at the Golden Butterfly, All Seasons, and Permanent Portfolios, and while interesting, I do worry that they are essentially back-tested to perfection, and may have nothing to do with the future.
Financial markets aren’t totally random so back testing is one of the few tools we have to make strategic plans.
I figure that if you go 50/50 you can only ever be half wrong, but is this itself wrong? Can a 50/50 actually be much worse than picking an overweight to bonds or stocks?
Yes. Both logic and back testing can show where 50/50 is worse than an allocation with more equities.

Logically stocks provide more growth than bonds. Anytime the rate of spending exceeds the rate the portfolio grows the risk of premature depletion occurs. At age 37 and the possibility to live to say 97 means you have a 60 year time horizon.

Image

If your desired or required withdrawal rate is 3.75% then 50/50 is historically much riskier than 100/0 for 60 year duration.

At 3% it doesn’t matter.
The table indicates 75 percent stocks is the sweet spot.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by GaryA505 »

Van wrote: Tue Nov 30, 2021 4:20 pm 50/50, 60/40, 80/20, 100/0 etc. etc. It all depends on: how old you are, the size of your portfolio, your main investing objective right now and so on. There is no one size fits all.
Correct! If you're 80 and spending 5% per year, 15/85 lets you sleep really well, and we all know how important proper sleep is!

I'm 70 and doing sort of a "bond tent" as I slide into retirement. Currently at 40/60 but plan to glide to 60/40 over the next few years. HOWEVER, I only need to withdraw about 2%-3% per year and I need to plan for 40-45 years due to my family situation so a higher allocation is reasonable. I won't be around to see the final result but at least I have a plan!
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by tennisplyr »

Retired 10 years: personally have been at 50/50 for 30+ years…some years I could have done better, some years worse with an alternate AA.
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by invest2bfree »

GaryA505 wrote: Tue Nov 30, 2021 11:30 am
invest2bfree wrote: Mon Nov 29, 2021 5:02 pm
Phyneas wrote: Sun Nov 28, 2021 1:15 am My preference has always been for a portfolio that doesn't guess at the outcome of the markets - an all seasons type portfolio. I know that back-tests can show you what hasn't ever worked, but it can't show you what will work, and I have no rational basis for believing that a 60/40 portfolio going forward will out-perform a 30/70 portfolio over my investment period. I've looked at the Golden Butterfly, All Seasons, and Permanent Portfolios, and while interesting, I do worry that they are essentially back-tested to perfection, and may have nothing to do with the future.

As such, the only thing I can think of is to just go 50/50. 50% stocks (VTI+VXUS), 50% bonds. The bonds are there for ballast and hopefully some anti-correlation, not income, so they are treasuries only, split 50/50 between long and short, The long and short are split between nominals and inflation-protected.

Assuming this meets my risk tolerances (it does, need = 45%, want = 30%, can = 70%) and investment objectives (it probably does, assuming we don't have 3% returns and 5% inflation for the next 56 years straight):

a) Is there anything obviously wrong with this approach, something glaringly obvious in my own blind spot, and;

b) Is there anything that can be done to improve it, without guessing at the outcomes? For instance, inflation-protected only on the short end and nominals on the long end of the bonds? Or adding 5% gold, or something else mechanical and obvious?

I figure that if you go 50/50 you can only ever be half wrong, but is this itself wrong? Can a 50/50 actually be much worse than picking an overweight to bonds or stocks?
Personally I have been thinking about a portfolio like this for myself.

I want to use Ben Graham's allocation system to jump to 75/25 when there is a selloff more than 30%.

Looking at my mindset I dont think I can site through a 35% loss.
The problem with waiting for a sell-off to increase your equity allocation is that while you are waiting you could be missing all the gains, and you accomplish nothing.

I have a friend who was convinced the stock market was overvalued 3 years ago, so has been invested in all bonds and has been waiting for "the big dip" ever since. Meanwhile, during those 3 years a 75/25 portfolio has gained 50%-60%. He's still waiting because each time it reaches new highs he gets even more reluctant to get back in! :wink:
Iam not missing anything still have 50% in the game.

Iam 47 and have 50x saved excluding SSN. If there is a 25%+ sell off (Arbitrary number anyway) will move to 75/25. Stay at 75/25 until market is 25% above the previous highs. Then go back to 50/50.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Leesbro63 »

I gave this a lot of thought years ago and continue to think about it. For the past 25 years (about the time I found "Vanguard Diehards" at Morningstar, the precursor of this forum) I've been between between 55/45 and 60/40, with minimal active rebalancing (meaning that mainly new money is the only rebalancing). The conundrum is no different than in Ben Graham's day....short term risk of stocks versus long term risk of fixed income. 50/50 to 60/40 seems to be about the sweet spot. In hindsight, I wish I had been more aggressive when I started this at 37 (I'm now approaching 62). But I'm not sure that being more aggressive would have not caused me to panic sell in 2008 or 2020. I've come to understand myself that less is more. And 55/45 has been a good place for me. (I do admit that I don't like 45% of my portfolio earning nearly zero. But converting that to stock seems like an even bigger fool's errand.)
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by dogagility »

Beensabu wrote: Mon Nov 29, 2021 8:09 pm
loukycpa wrote: Mon Nov 29, 2021 7:18 pm Time period? How can CAGR be close to 100/0 if stocks have historically outperformed bonds over the long term?
What PV has to show us. Jan 1987 - Oct 2021.

It is the effect of the rising equity allocation during bull markets due simply to not rebalancing. It's not inconsistent with stocks outperforming bonds over the long term at all.
dogagility wrote: Mon Nov 29, 2021 4:43 pm
Beensabu wrote: Sun Nov 28, 2021 1:13 pm Actually, consistently contributing at 50/50 and not rebalancing has had a CAGR very close to a 100/0 portfolio...
What do you mean by very close? A difference of 1-2%?

If that's what you mean, I would not call that "very close". Historically (e.g. 1987-2021), that 1-2% difference over 20-30 years of accumulation ends up being a very large (six figure) absolute amount of portfolio value.
Yes. I am indeed calling the difference between 19.43% and 18.21% over almost 35 years very close.

If that's not close enough for you, let's cherry pick the Jan 1987 - Sep 2002 period, shall we? 26.77% vs 26.43%

Or another cherry picked date range, let's go with Jan 1987 - Feb 2009. 19.41% vs 19.92%

The returns of all basic stock:bond AAs converge at some point during a real big bear market. Any excess return of an aggressive allocation over a more moderate/conservative allocation is the simply the return of the most recent bull market.

Stocks outperform bonds over the long term when we look back because we spend most of the time outside the convergence points. It looks like a huge $$$ difference over the long-term, because portfolios are usually a lot larger after 30 years or so of regular contributions.

From Feb 2009 - Oct 2021, 35.02% vs 32.39% CAGR made a bigger difference for someone starting with a $1m portfolio vs a $5k portfolio.

I really have become convinced that a moderate/conservative AA is ideal for accumulators. Really, you just want to be equity heavy for the last bull market before retirement, and then dial it down again before the market takes it back. Maybe dial it up again temporarily midway through retirement to try to catch a few years of one more big bull (only if you need to), and then back down.

Never forget that all AAs converge periodically. Because they do.
You're advocating that a 50/50 non-rebalanced portfolio is "ideal" for an accumulator? What is this ideal?
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Beensabu »

dogagility wrote: Fri Dec 03, 2021 5:22 pm
Beensabu wrote: Mon Nov 29, 2021 8:09 pm
loukycpa wrote: Mon Nov 29, 2021 7:18 pm Time period? How can CAGR be close to 100/0 if stocks have historically outperformed bonds over the long term?
What PV has to show us. Jan 1987 - Oct 2021.

It is the effect of the rising equity allocation during bull markets due simply to not rebalancing. It's not inconsistent with stocks outperforming bonds over the long term at all.
dogagility wrote: Mon Nov 29, 2021 4:43 pm
Beensabu wrote: Sun Nov 28, 2021 1:13 pm Actually, consistently contributing at 50/50 and not rebalancing has had a CAGR very close to a 100/0 portfolio...
What do you mean by very close? A difference of 1-2%?

If that's what you mean, I would not call that "very close". Historically (e.g. 1987-2021), that 1-2% difference over 20-30 years of accumulation ends up being a very large (six figure) absolute amount of portfolio value.
Yes. I am indeed calling the difference between 19.43% and 18.21% over almost 35 years very close.

If that's not close enough for you, let's cherry pick the Jan 1987 - Sep 2002 period, shall we? 26.77% vs 26.43%

Or another cherry picked date range, let's go with Jan 1987 - Feb 2009. 19.41% vs 19.92%

The returns of all basic stock:bond AAs converge at some point during a real big bear market. Any excess return of an aggressive allocation over a more moderate/conservative allocation is the simply the return of the most recent bull market.

Stocks outperform bonds over the long term when we look back because we spend most of the time outside the convergence points. It looks like a huge $$$ difference over the long-term, because portfolios are usually a lot larger after 30 years or so of regular contributions.

From Feb 2009 - Oct 2021, 35.02% vs 32.39% CAGR made a bigger difference for someone starting with a $1m portfolio vs a $5k portfolio.

I really have become convinced that a moderate/conservative AA is ideal for accumulators. Really, you just want to be equity heavy for the last bull market before retirement, and then dial it down again before the market takes it back. Maybe dial it up again temporarily midway through retirement to try to catch a few years of one more big bull (only if you need to), and then back down.

Never forget that all AAs converge periodically. Because they do.
You're advocating that a 50/50 non-rebalanced portfolio is "ideal" for an accumulator? What is this ideal?
Yes. Early (1st 2/3s of the way through) accumulators, anyway.

It is the equivalent of having a higher equity allocation (which people seem to love recommending to accumulators) and rebalancing annually.

There are only two actions necessary, both of which can be automated:

- saving regularly
- directing contributions at 50/50

A non-rebalanced moderate/conservative portfolio will become heavier in equities during a bull market. It will reset in a bear market (right along with that 100% equities portfolio). Both will converge to the same total return at least once during accumulation. It is possible to be entirely hands off for 20 years or so. Isn't that a good thing?

All AAs converge at some point during a bear market. The excess return of an equity heavy portfolio over a more moderate/conservative portfolio is simply the return of the most recent bull market. There is no need for an accumulator to have to accept the volatility of maintaining a high equity allocation portfolio. It doesn't even matter until the last bull market.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Phyneas
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Phyneas »

Leesbro63 wrote: Wed Dec 01, 2021 8:14 am I gave this a lot of thought years ago and continue to think about it. For the past 25 years (about the time I found "Vanguard Diehards" at Morningstar, the precursor of this forum) I've been between between 55/45 and 60/40, with minimal active rebalancing (meaning that mainly new money is the only rebalancing). The conundrum is no different than in Ben Graham's day....short term risk of stocks versus long term risk of fixed income. 50/50 to 60/40 seems to be about the sweet spot. In hindsight, I wish I had been more aggressive when I started this at 37 (I'm now approaching 62). But I'm not sure that being more aggressive would have not caused me to panic sell in 2008 or 2020. I've come to understand myself that less is more. And 55/45 has been a good place for me. (I do admit that I don't like 45% of my portfolio earning nearly zero. But converting that to stock seems like an even bigger fool's errand.)
"short term risk of stocks versus long term risk of fixed income" is probably the best way I've ever heard it described, perfectly succinct. If you don't mind, I have two questions:

1) Do you have any advice on constructing the bond portion of the portfolio, i.e. splitting nominals and inflation protected short and long versus just going with the TBM (or a 50/50 BND/SCHP)?

2) What were the crashes like with your more conservative portfolio? Were you tempted even at that AA to maybe sell, or did it not phase you?
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Leesbro63
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Leesbro63 »

Phyneas wrote: Sun Dec 05, 2021 9:49 am
Leesbro63 wrote: Wed Dec 01, 2021 8:14 am I gave this a lot of thought years ago and continue to think about it. For the past 25 years (about the time I found "Vanguard Diehards" at Morningstar, the precursor of this forum) I've been between between 55/45 and 60/40, with minimal active rebalancing (meaning that mainly new money is the only rebalancing). The conundrum is no different than in Ben Graham's day....short term risk of stocks versus long term risk of fixed income. 50/50 to 60/40 seems to be about the sweet spot. In hindsight, I wish I had been more aggressive when I started this at 37 (I'm now approaching 62). But I'm not sure that being more aggressive would have not caused me to panic sell in 2008 or 2020. I've come to understand myself that less is more. And 55/45 has been a good place for me. (I do admit that I don't like 45% of my portfolio earning nearly zero. But converting that to stock seems like an even bigger fool's errand.)
"short term risk of stocks versus long term risk of fixed income" is probably the best way I've ever heard it described, perfectly succinct. If you don't mind, I have two questions:

1) Do you have any advice on constructing the bond portion of the portfolio, i.e. splitting nominals and inflation protected short and long versus just going with the TBM (or a 50/50 BND/SCHP)?

2) What were the crashes like with your more conservative portfolio? Were you tempted even at that AA to maybe sell, or did it not phase you?
Thank you for liking my comment about the short term risks of stocks versus the long term risks of bonds.

I've been a disciple of Dr. Bernstein on bonds. Meaning I've been in short term muni bond funds (all of my fixed income is in taxable accounts). Unfortunately, I've been short-term bonds since 2003, waiting for interest rates to return to "historical levels", and not wanting the risk of longer-term bonds. But Bernstein and I have been wrong. In hindsight, I should have listened to Rick Ferri, the Marine, and just followed the plan. Which would have been intermediate term muni bonds funds or the Vanguard Total Bond Market fund for tax-sheltered accounts. That being said, I'm conservative by nature and the short term bond funds allowed me to stay the course with my equity allocation. If I had to start my portfolio all over again today, I'd still pick the short term bond funds based on today's nearly zero percent interest rates. But if I could go back in time, I would have done the Rick Ferri bond intermediate bond allocation and not the Bernstein short term bond allocation. In other words, I was a fraidy cat about interest rates in 2003 and was wrong. But it doesn't stop me from being a fraidy cat about interest rates today.

What where the crashes like? 2008 was gut-wrenching. I almost panic sold, but didn't. Rick Ferri was saying, in 2008, that this might be a final opportunity for Boomers to turbocharge their retirement funds. He turned out to be right. That thinking helped me to not panic-sell, but didn't give me the guts to actually buy more. The 2020 crash was different. I lost even more dollars, but never thought of selling. Truthfully my overall portfolio had grown so much from 2008 that even if the stocks went to zero (which I didn't really think would happen), I felt I'd be OK with my fixed income reserves. The other difference is that 2008 really did seem like we would go into a 1930s Depression. Whereas in 2020, I just knew that the world wouldn't stop for long. And frankly my thinking then and now is that people won't obey lockdowns for very long. Not being political, just my investment thinking that you can't legally end economic activity. So 2020 didn't bother me as much.

Despite my conservative nature and the mistakes I've fessed up to here (too little stock allocation while young and bond durations that were too short for almost 20 years now), my overall return has been just below 7% (average per year) since 1997. With inflation low during this period, I've done well. I honestly don't expect to do as well going forward, if, for no other reason, than there is no tailwind available from the bond portion of the portfolio. If I can keep up with taxes and inflation, I'll be satisfied.
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Phyneas
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Phyneas »

Leesbro63 wrote: Sun Dec 05, 2021 10:35 am
Phyneas wrote: Sun Dec 05, 2021 9:49 am
Leesbro63 wrote: Wed Dec 01, 2021 8:14 am I gave this a lot of thought years ago and continue to think about it. For the past 25 years (about the time I found "Vanguard Diehards" at Morningstar, the precursor of this forum) I've been between between 55/45 and 60/40, with minimal active rebalancing (meaning that mainly new money is the only rebalancing). The conundrum is no different than in Ben Graham's day....short term risk of stocks versus long term risk of fixed income. 50/50 to 60/40 seems to be about the sweet spot. In hindsight, I wish I had been more aggressive when I started this at 37 (I'm now approaching 62). But I'm not sure that being more aggressive would have not caused me to panic sell in 2008 or 2020. I've come to understand myself that less is more. And 55/45 has been a good place for me. (I do admit that I don't like 45% of my portfolio earning nearly zero. But converting that to stock seems like an even bigger fool's errand.)
"short term risk of stocks versus long term risk of fixed income" is probably the best way I've ever heard it described, perfectly succinct. If you don't mind, I have two questions:

1) Do you have any advice on constructing the bond portion of the portfolio, i.e. splitting nominals and inflation protected short and long versus just going with the TBM (or a 50/50 BND/SCHP)?

2) What were the crashes like with your more conservative portfolio? Were you tempted even at that AA to maybe sell, or did it not phase you?
Thank you for liking my comment about the short term risks of stocks versus the long term risks of bonds.

I've been a disciple of Dr. Bernstein on bonds. Meaning I've been in short term muni bond funds (all of my fixed income is in taxable accounts). Unfortunately, I've been short-term bonds since 2003, waiting for interest rates to return to "historical levels", and not wanting the risk of longer-term bonds. But Bernstein and I have been wrong. In hindsight, I should have listened to Rick Ferri, the Marine, and just followed the plan. Which would have been intermediate term muni bonds funds or the Vanguard Total Bond Market fund for tax-sheltered accounts. That being said, I'm conservative by nature and the short term bond funds allowed me to stay the course with my equity allocation. If I had to start my portfolio all over again today, I'd still pick the short term bond funds based on today's nearly zero percent interest rates. But if I could go back in time, I would have done the Rick Ferri bond intermediate bond allocation and not the Bernstein short term bond allocation. In other words, I was a fraidy cat about interest rates in 2003 and was wrong. But it doesn't stop me from being a fraidy cat about interest rates today.

What where the crashes like? 2008 was gut-wrenching. I almost panic sold, but didn't. Rick Ferri was saying, in 2008, that this might be a final opportunity for Boomers to turbocharge their retirement funds. He turned out to be right. That thinking helped me to not panic-sell, but didn't give me the guts to actually buy more. The 2020 crash was different. I lost even more dollars, but never thought of selling. Truthfully my overall portfolio had grown so much from 2008 that even if the stocks went to zero (which I didn't really think would happen), I felt I'd be OK with my fixed income reserves. The other difference is that 2008 really did seem like we would go into a 1930s Depression. Whereas in 2020, I just knew that the world wouldn't stop for long. And frankly my thinking then and now is that people won't obey lockdowns for very long. Not being political, just my investment thinking that you can't legally end economic activity. So 2020 didn't bother me as much.

Despite my conservative nature and the mistakes I've fessed up to here (too little stock allocation while young and bond durations that were too short for almost 20 years now), my overall return has been just below 7% (average per year) since 1997. With inflation low during this period, I've done well. I honestly don't expect to do as well going forward, if, for no other reason, than there is no tailwind available from the bond portion of the portfolio. If I can keep up with taxes and inflation, I'll be satisfied.
I favour short bonds myself, and I agree with Dr. Bernstein's recommendation of them for the long-run. The 40 year bull run in bonds was something of an aberration arising out of the 1981 peak, but over the really long-run, short bonds (especially if you could leverage them) have been better than long bonds. But then again, you never know, we might go to negative rates, so you have to hedge your chances. Intermediaries are a good approximation for a short/long barbell, but I'd prefer the latter for the chance of being able to sell one or the other at an opportune time rather than having to sell intermediates regardless of the conditions, but if you have a long investing horizon and are accumulating, I agree, it's probably simplest and best just to buy ITTs.

I watched the 2008 meltdown on tv but had been out of the markets for a year or two by then (I'd dabbled from 2005 onward but didn't do well and didn't like it), so I missed actually going through it personally. I was sick during the 2020 crash so I couldn't focus on it at all, though I regret that a bit as I lost out on the experience of it.

It's difficult building an AA when you've only seen the good times of the market, especially trying to do it during an incredibly volatile overall period. I really have no idea how you build a portfolio that is supposed to survive financial repression, stagflation, and normalcy at the same time, so I'm hoping 50/50 is no worse than anything else I can come up with!
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Charles Joseph
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Charles Joseph »

I am 50/50 stocks/bonds, now 2 1/2 years from retirement. I was searching threads about the benefits/pitfalls of my asset allocation, and I'm bumping up this post from Dude2 because it's one of the best things I've read on Bogleheads about asset allocation and risk tolerance. It helped me. Perhaps it will help others. Thanks Dude2.
Dude2 wrote: Sun Nov 28, 2021 5:23 am It may be true that the greater the percentage of bonds, the greater the portfolio is exposed to inflation risk. Stocks and bonds both may be negatively affected due to inflationary economies, but bonds have no mechanism of recovery. Once the money has been eaten away, it's gone. This isn't implying that stocks will recover but that they have the possibility of doing so. Therefore, a big takeaway for people is to include TIPS more as a function of bond percentage. Very recently nobody believed unexpected inflation could happen -- that the Fed couldn't even scare up the level of inflation they were aiming for. This may be very short lived and go back into that mode -- in which case nobody is going to care again. Lots of irrational exuberance on the TIPS side of late. I'm mostly talking about rational exuberance for TIPS based on high bond percentage. Arguments can be made that TIPS are the more perfect bond, and that isn't recency bias talking. We can go down the rabbit hole of that discussion. There are plenty of threads to examine already.

In general your concepts of holding short and long and worrying about short with TIPS etc. -- that all seems like too much to me. Have you seen FIPDX, i.e. something akin to the total bond market of TIPS? I try to use that because I believe in holding total markets and let the market decide proportions for me. That being said, TIPS are a small percentage of the total bond market, i.e. less than 10% of Treasuries, around 4% of TBM, possibly less than 2% of total world bond market. Also, the market knows nothing about my personal need for the money which should be a factor in the duration I select.

Anyway, those facts do not free us from the need for inflation protection with high bond percentages. A TIPS liability matching portfolio can be a nice way to solve this problem, and also the mechanics of it force people to buy and hold to maturity, guaranteeing face value of the bond in case deflation rears its head. LMP addresses the problem we are actually trying to solve, i.e. sufficient income to last us the rest of our lives, not just an arbitrary pot of money. Taking risk is generally necessary to get to where we have any hope of reaching a solution. In addition, what pot size is enough to weather all storms -- it doesn't solve the problem per se.

All of this is theoretical. Social Security is inflation adjusted. Your income at work is hopefully inflation adjusted. The point is that the more bonds you have, the more inflation risk, and the less reward potential. That is a scary position to be in. Stocks hide many ills inside of themselves and have historically compensated investors for their risks. Is 50% of them enough? I've been 50/50 since 2008, and things are fine. There is I think always in investing a luck factor, no matter what plan you pick and stick to. Figuring out a way to earn more and spend less is a good approach; otherwise, the 60/40 portfolio is often the go-to answer. Splitting hairs between 40/60, 50/50, and 60/40 has lead most to determine it didn't matter much. Even those with 100/0 are often beat into submission to recognize that 80/20 is pretty much the same. Nobody knows the answer, and this is a what helps you sleep at night kind of thing. 2008 obviously shook me to the core (and this was not that long after the dot com bubble). That was my investment lifetime. People older would have told me about similar crises that came before. If you can't handle the heat, lower the burner on stocks until you can. That's what drove me to 50/50.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by dbr »

Charles Joseph wrote: Sat Jan 28, 2023 9:04 am I am 50/50 stocks/bonds, now 2 1/2 years from retirement. I was searching threads about the benefits/pitfalls of my asset allocation, and I'm bumping up this post from Dude2 because it's one of the best things I've read on Bogleheads about asset allocation and risk tolerance. It helped me. Perhaps it will help others. Thanks Dude2.
Dude2 wrote: Sun Nov 28, 2021 5:23 am It may be true that the greater the percentage of bonds, the greater the portfolio is exposed to inflation risk. Stocks and bonds both may be negatively affected due to inflationary economies, but bonds have no mechanism of recovery. Once the money has been eaten away, it's gone. This isn't implying that stocks will recover but that they have the possibility of doing so. Therefore, a big takeaway for people is to include TIPS more as a function of bond percentage. Very recently nobody believed unexpected inflation could happen -- that the Fed couldn't even scare up the level of inflation they were aiming for. This may be very short lived and go back into that mode -- in which case nobody is going to care again. Lots of irrational exuberance on the TIPS side of late. I'm mostly talking about rational exuberance for TIPS based on high bond percentage. Arguments can be made that TIPS are the more perfect bond, and that isn't recency bias talking. We can go down the rabbit hole of that discussion. There are plenty of threads to examine already.

In general your concepts of holding short and long and worrying about short with TIPS etc. -- that all seems like too much to me. Have you seen FIPDX, i.e. something akin to the total bond market of TIPS? I try to use that because I believe in holding total markets and let the market decide proportions for me. That being said, TIPS are a small percentage of the total bond market, i.e. less than 10% of Treasuries, around 4% of TBM, possibly less than 2% of total world bond market. Also, the market knows nothing about my personal need for the money which should be a factor in the duration I select.

Anyway, those facts do not free us from the need for inflation protection with high bond percentages. A TIPS liability matching portfolio can be a nice way to solve this problem, and also the mechanics of it force people to buy and hold to maturity, guaranteeing face value of the bond in case deflation rears its head. LMP addresses the problem we are actually trying to solve, i.e. sufficient income to last us the rest of our lives, not just an arbitrary pot of money. Taking risk is generally necessary to get to where we have any hope of reaching a solution. In addition, what pot size is enough to weather all storms -- it doesn't solve the problem per se.

All of this is theoretical. Social Security is inflation adjusted. Your income at work is hopefully inflation adjusted. The point is that the more bonds you have, the more inflation risk, and the less reward potential. That is a scary position to be in. Stocks hide many ills inside of themselves and have historically compensated investors for their risks. Is 50% of them enough? I've been 50/50 since 2008, and things are fine. There is I think always in investing a luck factor, no matter what plan you pick and stick to. Figuring out a way to earn more and spend less is a good approach; otherwise, the 60/40 portfolio is often the go-to answer. Splitting hairs between 40/60, 50/50, and 60/40 has lead most to determine it didn't matter much. Even those with 100/0 are often beat into submission to recognize that 80/20 is pretty much the same. Nobody knows the answer, and this is a what helps you sleep at night kind of thing. 2008 obviously shook me to the core (and this was not that long after the dot com bubble). That was my investment lifetime. People older would have told me about similar crises that came before. If you can't handle the heat, lower the burner on stocks until you can. That's what drove me to 50/50.
If I had to write an essay on this I would be very tempted to just plagiarize the above.

I am very dubious that it is possible to engineer detailed schemes for allocating assets, directing and withdrawing money, and so on that actually are much more effective than more approximate plans.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by nisiprius »

Phyneas wrote: Tue Nov 30, 2021 12:41 am...In terms of PRPFX, I only meant that the Permanent Portfolio that Harry Browne published in his book was a fairly rigid 4x25 structure.
In his later books... according to what I've read.
If he ran the mutual fund differently then I'm not sure why he would have done that (would actually be quite interesting to know), but in any event, it actually proves the point that had he stuck to the original design, it would have done a lot better.
The mutual fund did stick to the original design. Craig Rowlandson has acknowledged this in forum postings and in his book, The Permanent Portfolio. But he doesn't go into much detail, he brushes it aside in favor of backtesting the 4x25 portfolio, which would have performed better.

The mutual fund had costs, and possibly there were difficulties managing the gold part of the portfolio before the days of the GLD exchange-traded product. Nevertheless, I insist that PRPFX is a legitimate view of what happened in the real world with real money using the portfolio as it really existed, under the direct guidance of the man who designed it.

Backtests with the 4x25 portfolio are an exercise in 20/20 hindsight.
  • The Vanguard Wellington Fund, VWELX is a legitimate view of 60/40 stocks/bonds in the real world with real money by real investors.
  • The Massachusetts Investors' Trust, MITTX, is a legitimate view of broadly diversified US stocks in the real world with real money by real investors.
  • The Permanent Portfolio Fund, PRPFX, is a legitimate view of the Permanent Portfolio in the real world with real money by real investors.
In Craig Rowlandson's words:
craigr wrote: Mon Jul 26, 2010 3:04 pm The commercial fund is an early incarnation of Browne and Coxon's ideas they developed in the late 1970s. The fund was a built in a way to tend to favor inflation because it holds more gold, silver and Swiss Francs and relatively little in bonds and stocks. It also holds some other real asset producers like timber, etc. The past 10 years have allowed it to perform well because the stock market has been so bad and the fund overweights assets that tend to do well when the markets do poorly.
---
Browne simplified his ideas and by 1987 presented his more balanced version of the portfolio in his book "Why the Best Laid Investment Plans Usually Go Wrong". This presented the 25% split of stocks, bonds, cash and gold...
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Leesbro63
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Leesbro63 »

dbr wrote: Sat Jan 28, 2023 9:40 am
Charles Joseph wrote: Sat Jan 28, 2023 9:04 am I am 50/50 stocks/bonds, now 2 1/2 years from retirement. I was searching threads about the benefits/pitfalls of my asset allocation, and I'm bumping up this post from Dude2 because it's one of the best things I've read on Bogleheads about asset allocation and risk tolerance. It helped me. Perhaps it will help others. Thanks Dude2.
Dude2 wrote: Sun Nov 28, 2021 5:23 am It may be true that the greater the percentage of bonds, the greater the portfolio is exposed to inflation risk. Stocks and bonds both may be negatively affected due to inflationary economies, but bonds have no mechanism of recovery. Once the money has been eaten away, it's gone. This isn't implying that stocks will recover but that they have the possibility of doing so. Therefore, a big takeaway for people is to include TIPS more as a function of bond percentage. Very recently nobody believed unexpected inflation could happen -- that the Fed couldn't even scare up the level of inflation they were aiming for. This may be very short lived and go back into that mode -- in which case nobody is going to care again. Lots of irrational exuberance on the TIPS side of late. I'm mostly talking about rational exuberance for TIPS based on high bond percentage. Arguments can be made that TIPS are the more perfect bond, and that isn't recency bias talking. We can go down the rabbit hole of that discussion. There are plenty of threads to examine already.

In general your concepts of holding short and long and worrying about short with TIPS etc. -- that all seems like too much to me. Have you seen FIPDX, i.e. something akin to the total bond market of TIPS? I try to use that because I believe in holding total markets and let the market decide proportions for me. That being said, TIPS are a small percentage of the total bond market, i.e. less than 10% of Treasuries, around 4% of TBM, possibly less than 2% of total world bond market. Also, the market knows nothing about my personal need for the money which should be a factor in the duration I select.

Anyway, those facts do not free us from the need for inflation protection with high bond percentages. A TIPS liability matching portfolio can be a nice way to solve this problem, and also the mechanics of it force people to buy and hold to maturity, guaranteeing face value of the bond in case deflation rears its head. LMP addresses the problem we are actually trying to solve, i.e. sufficient income to last us the rest of our lives, not just an arbitrary pot of money. Taking risk is generally necessary to get to where we have any hope of reaching a solution. In addition, what pot size is enough to weather all storms -- it doesn't solve the problem per se.

All of this is theoretical. Social Security is inflation adjusted. Your income at work is hopefully inflation adjusted. The point is that the more bonds you have, the more inflation risk, and the less reward potential. That is a scary position to be in. Stocks hide many ills inside of themselves and have historically compensated investors for their risks. Is 50% of them enough? I've been 50/50 since 2008, and things are fine. There is I think always in investing a luck factor, no matter what plan you pick and stick to. Figuring out a way to earn more and spend less is a good approach; otherwise, the 60/40 portfolio is often the go-to answer. Splitting hairs between 40/60, 50/50, and 60/40 has lead most to determine it didn't matter much. Even those with 100/0 are often beat into submission to recognize that 80/20 is pretty much the same. Nobody knows the answer, and this is a what helps you sleep at night kind of thing. 2008 obviously shook me to the core (and this was not that long after the dot com bubble). That was my investment lifetime. People older would have told me about similar crises that came before. If you can't handle the heat, lower the burner on stocks until you can. That's what drove me to 50/50.
If I had to write an essay on this I would be very tempted to just plagiarize the above.

I am very dubious that it is possible to engineer detailed schemes for allocating assets, directing and withdrawing money, and so on that actually are much more effective than more approximate plans.
I've come to a similar conclusion at age 63 and am 50/50, but would like to be 55/45 and hopefully will get there naturally. All of the retirement calculators show the need for "more than minimum" equity to have a good long-term result. I probably wouldn't suggest less than 40% equity for someone with more than a 20 year horizon.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Logan Roy »

Phyneas wrote: Sun Nov 28, 2021 1:15 am My preference has always been for a portfolio that doesn't guess at the outcome of the markets - an all seasons type portfolio. I know that back-tests can show you what hasn't ever worked, but it can't show you what will work, and I have no rational basis for believing that a 60/40 portfolio going forward will out-perform a 30/70 portfolio over my investment period. I've looked at the Golden Butterfly, All Seasons, and Permanent Portfolios, and while interesting, I do worry that they are essentially back-tested to perfection, and may have nothing to do with the future.
I think one you can say has been reasonably forward tested is the Permanent Portfolio. It was designed by Harry Browne in the 1970s (afaik), although was it only published in the early 90s? Either way, it's had several decades running forward now, and performance has been as remarkably consistent as it always was. Perhaps less so just recently.

I don't think the Permanent Portfolio's quite right for today's investor. For a start, TIPS weren't available when it was invented. I also don't think you need the 25% cash, as monetary policy's become this powerful deflation hedge. But I do think the Permanent Portfolio is a decent example of All Weather investing working in theory and practice. I don't know quite what the perfect All Weather portfolio would look like going forwards, but I think it would be some combination of stocks, TIPS and gold/commodities. Maybe something like 50:30:20.

My problem with 50:50 is while the world's got such high levels of debt, there's going to be real incentive to keep real yields negative. That is: you'd usually be buying bonds on yields lower than current or expected inflation. Which means there'd be very little scope for the bond part of a portfolio not to lose (in real terms). Ray Dalio: you'd be absolutely crazy to hold bonds right now. I'm not sure bonds have fallen enough yet for that not to be the case – they did have a 40 year bull market.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by Leesbro63 »

Logan Roy wrote: Sat Jan 28, 2023 10:51 am
My problem with 50:50 is while the world's got such high levels of debt, there's going to be real incentive to keep real yields negative. That is: you'd usually be buying bonds on yields lower than current or expected inflation. Which means there'd be very little scope for the bond part of a portfolio not to lose (in real terms). Ray Dalio: you'd be absolutely crazy to hold bonds right now. I'm not sure bonds have fallen enough yet for that not to be the case – they did have a 40 year bull market.
So what's the alternative to 50% bonds? 100% Stocks?

I do agree that "why it might actually really be different this time" is record debt-to-GDP.
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by GaryA505 »

dbr wrote: Sat Jan 28, 2023 9:40 am
Charles Joseph wrote: Sat Jan 28, 2023 9:04 am I am 50/50 stocks/bonds, now 2 1/2 years from retirement. I was searching threads about the benefits/pitfalls of my asset allocation, and I'm bumping up this post from Dude2 because it's one of the best things I've read on Bogleheads about asset allocation and risk tolerance. It helped me. Perhaps it will help others. Thanks Dude2.
Dude2 wrote: Sun Nov 28, 2021 5:23 am It may be true that the greater the percentage of bonds, the greater the portfolio is exposed to inflation risk. Stocks and bonds both may be negatively affected due to inflationary economies, but bonds have no mechanism of recovery. Once the money has been eaten away, it's gone. This isn't implying that stocks will recover but that they have the possibility of doing so. Therefore, a big takeaway for people is to include TIPS more as a function of bond percentage. Very recently nobody believed unexpected inflation could happen -- that the Fed couldn't even scare up the level of inflation they were aiming for. This may be very short lived and go back into that mode -- in which case nobody is going to care again. Lots of irrational exuberance on the TIPS side of late. I'm mostly talking about rational exuberance for TIPS based on high bond percentage. Arguments can be made that TIPS are the more perfect bond, and that isn't recency bias talking. We can go down the rabbit hole of that discussion. There are plenty of threads to examine already.

In general your concepts of holding short and long and worrying about short with TIPS etc. -- that all seems like too much to me. Have you seen FIPDX, i.e. something akin to the total bond market of TIPS? I try to use that because I believe in holding total markets and let the market decide proportions for me. That being said, TIPS are a small percentage of the total bond market, i.e. less than 10% of Treasuries, around 4% of TBM, possibly less than 2% of total world bond market. Also, the market knows nothing about my personal need for the money which should be a factor in the duration I select.

Anyway, those facts do not free us from the need for inflation protection with high bond percentages. A TIPS liability matching portfolio can be a nice way to solve this problem, and also the mechanics of it force people to buy and hold to maturity, guaranteeing face value of the bond in case deflation rears its head. LMP addresses the problem we are actually trying to solve, i.e. sufficient income to last us the rest of our lives, not just an arbitrary pot of money. Taking risk is generally necessary to get to where we have any hope of reaching a solution. In addition, what pot size is enough to weather all storms -- it doesn't solve the problem per se.

All of this is theoretical. Social Security is inflation adjusted. Your income at work is hopefully inflation adjusted. The point is that the more bonds you have, the more inflation risk, and the less reward potential. That is a scary position to be in. Stocks hide many ills inside of themselves and have historically compensated investors for their risks. Is 50% of them enough? I've been 50/50 since 2008, and things are fine. There is I think always in investing a luck factor, no matter what plan you pick and stick to. Figuring out a way to earn more and spend less is a good approach; otherwise, the 60/40 portfolio is often the go-to answer. Splitting hairs between 40/60, 50/50, and 60/40 has lead most to determine it didn't matter much. Even those with 100/0 are often beat into submission to recognize that 80/20 is pretty much the same. Nobody knows the answer, and this is a what helps you sleep at night kind of thing. 2008 obviously shook me to the core (and this was not that long after the dot com bubble). That was my investment lifetime. People older would have told me about similar crises that came before. If you can't handle the heat, lower the burner on stocks until you can. That's what drove me to 50/50.
If I had to write an essay on this I would be very tempted to just plagiarize the above.

I am very dubious that it is possible to engineer detailed schemes for allocating assets, directing and withdrawing money, and so on that actually are much more effective than more approximate plans.
If you ever write that essay, be sure to include at least a paragraph o the "luck factor". It seems that all the famous investment researchers have ignored that one. :wink:
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
dbr
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Re: Under what conditions is a 50/50 portfolio worse than any other?

Post by dbr »

GaryA505 wrote: Sat Jan 28, 2023 11:57 am

If you ever write that essay, be sure to include at least a paragraph o the "luck factor". It seems that all the famous investment researchers have ignored that one. :wink:

Sometimes I do try to make a point that the single largest determinant of your investing outcome is when you were born, when you work and save, when you retire, and when you die. There are no promises. I agree not enough attention is paid to this.
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