Bogleheads take on bond tent

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randomguy
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Re: Bogleheads take on bond tent

Post by randomguy »

loukycpa wrote: Sun Jan 23, 2022 7:09 pm Wade Pfau and Michael Kitces have a paper on this worth a read.

"We find, surprisingly, that rising equity glide-paths in retirement – where the portfolio starts out conservative and becomes more aggressive through the retirement time horizon – have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios."

https://papers.ssrn.com/sol3/papers.cfm ... id=2324930

I believe Karsten Jeske has looked at this also and has confirmed the same through research.

Thoughts?
Image

Is going from 94.6% to 94.7% worth any complexity? Bond tents, Buckets, Rising glide paths, and so on consisting give these type of result where you get some marginal benefits at best over just holding something in the 40/60-60/40 range.
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Re: Bogleheads take on bond tent

Post by abuss368 »

vineviz wrote: Sun Jan 23, 2022 6:43 pm
Svensk Anga wrote: Sun Jan 23, 2022 5:55 pm
willthrill81 wrote: Sun Jan 23, 2022 5:39 pm
I wouldn't pay any attention at all to anything Sam Dogen says. Remember that it was he who declared the forward safe withdrawal rate to be 0.5%, as discussed in this thread.
Sounds like someone who retired early with too aggressive a portfolio and came to regret it when markets showed their ugly side.
He's also not actually retired. He writes a blog (which provides income via referral and affiliate links), manages a handful of rental real estate properties, has written at least one book, etc.
Vince -

Are you a fan of Financial Samurai?

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
UsualLine
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Re: Bogleheads take on bond tent

Post by UsualLine »

Vineviz,

Do you believe in the so-called "sequence of returns risk"? https://www.investopedia.com/terms/s/sequence-risk.asp

If so, is there nothing to be done to mitigate that risk other than having a portfolio appropriate to your risk tolerance?
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Re: Bogleheads take on bond tent

Post by willthrill81 »

UsualLine wrote: Sun Jan 23, 2022 8:55 pm Vineviz,

Do you believe in the so-called "sequence of returns risk"? https://www.investopedia.com/terms/s/sequence-risk.asp

If so, is there nothing to be done to mitigate that risk other than having a portfolio appropriate to your risk tolerance?
I'm not vineviz, but certainly he does. Everyone should because it's a mathematical fact that the ordering of returns impacts the final portfolio result when regular withdrawals or contributions are being made.

His point, which I heartily concur with, is that a high bond allocation in the beginning of retirement that inverts to a high stock allocation later in retirement (i.e., the 'bond tent' approach) has not produced consistent benefits.

There are many things that can be done to mitigate some of the effects of the risk. The more flexible one's withdrawals are and the lower the amount being withdrawn, the less sequence of returns risk the retiree is exposed to. To that end, eliminating debt by retirement is helpful simply because it allows for greater flexibility in how much one withdraws. Having to pay something like a mortgage from your portfolio when your portfolio is performing poorly would be a classic example of sequence of returns risk. However, it should be noted that withdrawal flexibility reduces the impact of sequence of returns risk on your portfolio, but it means that the amount you withdraw from your portfolio is more exposed to that same risk.

Also, there are portfolio construction techniques that have historically done a very good job at mitigating sequence of returns risk as indicated by the techniques resulting in a higher safe withdrawal rate (SWR) than has been see with total market funds.
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Re: Bogleheads take on bond tent

Post by UsualLine »

willthrill81 wrote: Sun Jan 23, 2022 9:03 pm His point, which I heartily concur with, is that a high bond allocation in the beginning of retirement that inverts to a high stock allocation later in retirement (i.e., the 'bond tent' approach) has not produced consistent benefits.
Bond tents are not intended to produce "consistent" benefits. They are intended to improve the worst cases the retiree faces. The good cases will be hurt but they will be fine anyway.
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Re: Bogleheads take on bond tent

Post by willthrill81 »

UsualLine wrote: Sun Jan 23, 2022 9:15 pm
willthrill81 wrote: Sun Jan 23, 2022 9:03 pm His point, which I heartily concur with, is that a high bond allocation in the beginning of retirement that inverts to a high stock allocation later in retirement (i.e., the 'bond tent' approach) has not produced consistent benefits.
Bond tents are not intended to produce "consistent" benefits. They are intended to improve the worst cases the retiree faces. The good cases will be hurt but they will be fine anyway.
But that's the key point: in the bad cases, the bond tent sometimes works and sometimes doesn't. More often than not, it doesn't.
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Re: Bogleheads take on bond tent

Post by vineviz »

willthrill81 wrote: Sun Jan 23, 2022 9:18 pm
UsualLine wrote: Sun Jan 23, 2022 9:15 pm
willthrill81 wrote: Sun Jan 23, 2022 9:03 pm His point, which I heartily concur with, is that a high bond allocation in the beginning of retirement that inverts to a high stock allocation later in retirement (i.e., the 'bond tent' approach) has not produced consistent benefits.
Bond tents are not intended to produce "consistent" benefits. They are intended to improve the worst cases the retiree faces. The good cases will be hurt but they will be fine anyway.
But that's the key point: in the bad cases, the bond tent sometimes works and sometimes doesn't. More often than not, it doesn't.
Exactly: it’s roughly as likely to make the bad cases worse as it is to make them better.
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Re: Bogleheads take on bond tent

Post by UsualLine »

I am sincerely puzzled at vineviz coming out so strongly against the concept of the "bond tent". So I'd like to try coming at it a little more generally, without specifying bonds necessarily...

During a long-term investor's lifetime there is one time period where volatility is especially dangerous - the window around the time they retire. It is dangerous because of SORR. It seems like simple common sense to lower one's normal portfolio volatility during that window. This common sense feeling is given some rigor and quantitative guidelines by Kitces, Pfau, and ERN, all referenced earlier in the thread.

I wonder at your reaction to stating the problem that way? If you still claim that it "doesn't work" I would like to understand better, especially if you have some references. I am in my own retirement window right now so the issue is a big focus of mine.

One reference claiming that it does help is ERNs safe withdrawal series #19. 60%->100% stock glidepath has lower failure rate than 60% or 80% or 100% fixed for example. I wish I knew how to paste a picture in here.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 12:22 am During a long-term investor's lifetime there is one time period where volatility is especially dangerous - the window around the time they retire. It is dangerous because of SORR. It seems like simple common sense to lower one's normal portfolio volatility during that window. This common sense feeling is given some rigor and quantitative guidelines by Kitces, Pfau, and ERN, all referenced earlier in the thread.
I agree that it seems intuitive to many people that a bond tent should work, but lots of things that are "intuitive" aren't true and the concept of a "bond tent" is one of them.

Let me put it this way, for every rising equity allocation glide path in retirement there exists an equally risky constant asset allocation that will produce the same probability of success or failure.

Here's table 2 from the Pfau and Kitces paper. Notice how when you move northeast from the diagonal (constant allocation) line you don't see a universal improvement nor a statistically significant improvement. A 0% to 100% glide produces slightly less success than a constant 50% allocation. A 30% to 80% glide produces the same success as a constant 50% allocation. And so forth.

Image

Furthermore the people who are finding stronger "support" for the glide path are generally making the same error, which is using historical data to "simulate" the different choices. Because they are generally looking for failures, they are always looking at the same historical 30-year period (roughly 1966 to 1995). That period offers lessons for SORR and SWR management, for sure, but it is just one period with one sequence of returns. Over-optimizing for that single period of history won't protect future retirees, who face a different sequence of returns.

There is no magic bullet that will improve retirement outcomes. Maintaining a diversified portfolio, maintaining an equity allocation as high as you can comfortably tolerate, and maintaining either spending flexibility or a low initial withdrawal rate are the only things that will legitimately help.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Bogleheads take on bond tent

Post by dknightd »

I'm using something that looks like a bond tent. It appears there is more than one thing that might be called a bond tent. Anyway, here is my plan (still in progress).
A few years before I retired I started selling stocks to reduce volatility in my portfolio (I did not want a big drop just before I pulled the payroll plug).
When I retired I planed to have 25-30 % of my holdings in stock (I was 50-60% during most of my accumulating years). That meant most of my money was in either stable value or bond funds. I used some of that money to buy an SPIA. I have a "bucket" of stable value that will cover what SS will eventually provide. I have a smaller bucket that I plan to use to buy another SPIA or two. When I claim SS at 70, the plan is to have SS and SPIA cover comfortable enough living expenses. I'll be back at 50-60% stocks which will provide discretionary spending and some inflation protection.
So I purposely went from something like 60/40, then down to 30/70, and will end up with something like 60/40. Sort of looks like a "bond tent".

This may not be the best plan for eventual final net worth, or total spending, but it suits me.
I'm fairly confident we will be comfortable, and that there will be some money for higher discretionary spending.

So far this has been going well. This year presented a wrinkle. I had budgeted 3% inflation in my bridge to SS bucket. But this year inflation was higher. Luckily stocks had done better than expected, so I could move some of that money into stable value and still keep my desired allocation. Essentially I used some of the discretionary money to reinforce the comfortable money.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: Bogleheads take on bond tent

Post by dknightd »

vineviz wrote: Mon Jan 24, 2022 6:43 am There is no magic bullet that will improve retirement outcomes. Maintaining a diversified portfolio, maintaining an equity allocation as high as you can comfortably tolerate, and maintaining either spending flexibility or a low initial withdrawal rate are the only things that will legitimately help.
This is true. Using a bond tent, or not, probably does not make much difference in the long run. But it did help me sleep at night, which is priceless ;)
Perhaps my "equity allocation as high as you can comfortably tolerate" simply changed. For the few years right around retirement my tolerance for volatility was lower than it was during other periods of my life.

edit: I know I'm performing probably unnecessary mental accounting. But I'm comfortable with that. A little mental gymnastics is good for a person. And I have absolutely no jitters when I see the stock market go down. In fact, if it goes down much further I'll probably have to put more money into stocks (but that money will not come from my bridge to SS bucket)
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: Bogleheads take on bond tent

Post by martincmartin »

vineviz wrote: Sun Jan 23, 2022 8:37 pm McClung wrote: "A Rising Glidepath strategy showed a moderate improvement over traditional rebalancing for some realistic retirement cases when based on equivalent stock-bond averages, but this improvement was not consistent over broader testing."

He's describing what I pointe out earlier: the rising glidepath doesn't consistently improve outcomes, and when it has in the past the effect has been small.
The phrase "rising glidepath" has two meanings: a specific strategy in that 2013 paper, and a more general meaning of any strategy where the percentage of equities goes up over time. I think we all agree that the specific strategy from the 2013 paper is a weak performer. Even Pfau and Kitces have moved on to bond tent.

McClung evaluates a number of different withdrawal strategies. Most of them, and all of the top performers, increase stocks over time. Perhaps the simplest one that could be called a bond tent is "bonds first": when withdrawing for living expenses, take from bonds until they're gone and you're at 100% stocks. Other than that, move between stocks and bonds, including never rebalancing.

Code: Select all

                Fixed AA | Bonds First | Prime
US worst case     4.0%   |   4.4%      |  4.4%
UK worst case     3.0%   |   3.7%      |  3.7%
Japan worst case  3.3%   |   3.5%      |  3.8%

US 90%            4.7%   |   5.0%      |  5.2%
UK 90%            3.8%   |   4.2%      |  4.2%
Japan 90%         4.6%   |   5.2%      |  5.6%
(Figures 29 through 32)
The worst case, as you say, is only a single time period in the entire history. However, bond tent (bonds first) outperforms all 3 countries. To look at other time periods, we can look at the 90%. Again, the bond tent outperforms.

Figure 37 compares worst case, 90%, 80% and 50% for the 3 countries, plus some simulation results, and using large cap stocks instead of total stock market. Although there are a few cases where the fixed asset allocation does better, the bonds first strategy almost always beats it.

He concludes by saying:
Backtesting clearly shows that eliminating this occasional tilt toward a high stock percentage increases known risk. ... Although it’s tidier and more comforting to have a fixed stock-bond ratio, it comes at a cost. ... Despite the data, retirees can still choose to maintain a bond floor, selling stocks as needed to maintain a minimum bonds percentage. ... While this is a viable option for retirees who are uncomfortable with a low bond percentage, it’s important to understand that across four datasets (SBBI, Shiller, UK, Japan) this consistently lowered performance during difficult retirement periods. On the other hand, when combined with a variable-withdrawal strategy, the loss in income is divided across many years without a major impact — this is briefly revisited in Chapter 10. Bounding the lower bond level isn’t recommended based on the data, but an otherwise strong retirement plan can handle it.
And to the point about other periods, we would expect bond tent to outperform in those times too, since the bear markets were shorter than the 16 year one from 1966 - 1982. Only a 20+ year bear market would make bond tent perform worse.

Is the effect large enough to be worth using bond tent over a fixed AA with annual rebalancing? That's a personal choice. If you're a "no one was ever fired for buying IBM" type, then probably not. In fact, you might even want to stick with age in bonds or some other decreasing glide path, as used in target date funds. Personally, I'm planning to use a bond tent, although with a bond floor of maybe 25% or 20%.
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Re: Bogleheads take on bond tent

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willthrill81 wrote: Sun Jan 23, 2022 9:03 pm His point, which I heartily concur with, is that a high bond allocation in the beginning of retirement that inverts to a high stock allocation later in retirement (i.e., the 'bond tent' approach) has not produced consistent benefits.
Can you provide more details of the analysis that hasn't shown consistent benefits? I feel like there's some paper I haven't seen that describes these.
Also, there are portfolio construction techniques that have historically done a very good job at mitigating sequence of returns risk as indicated by the techniques resulting in a higher safe withdrawal rate (SWR) than has been see with total market funds.
Are you referring to the golden butterfly, or something else? Do tell! I've learned a lot from these forums, and am eager to learn more.
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Re: Bogleheads take on bond tent

Post by vineviz »

martincmartin wrote: Mon Jan 24, 2022 7:25 am McClung evaluates a number of different withdrawal strategies. Most of them, and all of the top performers, increase stocks over time. Perhaps the simplest one that could be called a bond tent is "bonds first": when withdrawing for living expenses, take from bonds until they're gone and you're at 100% stocks. Other than that, move between stocks and bonds, including never rebalancing.
A withdrawal strategy isn't the same thing as an asset allocation strategy.

They are related and interact, obviously, but they are working at different problems.
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Re: Bogleheads take on bond tent

Post by martincmartin »

vineviz wrote: Mon Jan 24, 2022 6:43 am Let me put it this way, for every rising equity allocation glide path in retirement there exists an equally risky constant asset allocation that will produce the same probability of success or failure.
Do you have a reference for this? I've done this optimization, using Simba's back testing spreadsheet and a computer program I've written, and it's simply not true. The best "bond tent" allocations outperform the best constant allocations, for the reason that everyone has said: they guard against the bear market at the start of retirement, and are then better able to take advantage of the following recovery; if the bear market comes at any other time, it's not as dangerous and any strategy will succeed.
Here's table 2 from the Pfau and Kitces paper.
Agree that the non-bond-tent simple rising equity glide path isn't significantly better. It's a kind of straw man, and not what we're talking about here in a thread about bond tents.
Because they are generally looking for failures, they are always looking at the same historical 30-year period (roughly 1966 to 1995).
The four worst bear markets for a 30 year retirement, historically in the U.S., are:

1966 - 1982 (16 years)
1937 - 1948 (11 years)
1906 - 1920 (14 years)
2000 - ??

Bond tent works well for those, again because they're followed by a recovery.

All other times are simply not as stressful for a 30 year retirement with ~ 4% withdrawal rate. The Great Depression doesn't even make the list, because things recovered so well. Again, this isn't my opinion, this is what the analysis you suggested tells us.
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Re: Bogleheads take on bond tent

Post by martincmartin »

vineviz wrote: Mon Jan 24, 2022 7:39 am
martincmartin wrote: Mon Jan 24, 2022 7:25 am McClung evaluates a number of different withdrawal strategies. Most of them, and all of the top performers, increase stocks over time. Perhaps the simplest one that could be called a bond tent is "bonds first": when withdrawing for living expenses, take from bonds until they're gone and you're at 100% stocks. Other than that, move between stocks and bonds, including never rebalancing.
A withdrawal strategy isn't the same thing as an asset allocation strategy.

They are related and interact, obviously, but they are working at different problems.
I thought a withdrawal strategy was about how much to withdraw, not about the source of those funds (equities vs bonds)?
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Re: Bogleheads take on bond tent

Post by dbr »

martincmartin wrote: Mon Jan 24, 2022 8:01 am
vineviz wrote: Mon Jan 24, 2022 7:39 am
martincmartin wrote: Mon Jan 24, 2022 7:25 am McClung evaluates a number of different withdrawal strategies. Most of them, and all of the top performers, increase stocks over time. Perhaps the simplest one that could be called a bond tent is "bonds first": when withdrawing for living expenses, take from bonds until they're gone and you're at 100% stocks. Other than that, move between stocks and bonds, including never rebalancing.
A withdrawal strategy isn't the same thing as an asset allocation strategy.

They are related and interact, obviously, but they are working at different problems.
I thought a withdrawal strategy was about how much to withdraw, not about the source of those funds (equities vs bonds)?
Withdrawal strategies in general are about both. That goes away in the case of people who start from the beginning assuming an asset allocation plan. For a lot of people that asset allocation would not change at all through retirement. A possible exception is bridge periods after the paycheck stops and a person starts Social Security, during which one might hold some separate funds and maybe mess around with Roth conversions. Some people at some point might pick a time to buy an SPIA and with that change the asset allocation. Some people sell real estate or their house and adapt a new allocation.

But what we are really talking about here is people who get the idea that the asset allocation should be variable during retirement. That means withdrawing "from" one thing or another, or setting up buckets that have different asset allocations and pulling money and moving money around among them. Bernstein, when he says things like put 20x in safe assets and have a risk portfolio for discretionary spending is linking asset allocation and withdrawal planning. Peeling off a bunch of money and setting up a TIPS LMP is another version of that although the LMP should really be put in the class of someone buying a poor man's albeit inflation indexed annuity.

My own practice is to just hold a rebalanced asset allocation and manage withdrawals as such. I think this is simple and convenient. I am not sure I will go so far as to classify the others as some kind of odd mental accounting, but a lot of it sure seems like it.
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Re: Bogleheads take on bond tent

Post by vineviz »

martincmartin wrote: Mon Jan 24, 2022 7:47 am Do you have a reference for this? I've done this optimization, using Simba's back testing spreadsheet and a computer program I've written, and it's simply not true.
It's hard for me to say where the error might lie in the analysis that you are examining, but it's almost certainly one of the errors that I've seen everyone else make: either portfolios with different levels of risk are being compared, or its over-fitting the historical time series data.
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Re: Bogleheads take on bond tent

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vineviz wrote: Mon Jan 24, 2022 6:43 am

There is no magic bullet that will improve retirement outcomes. Maintaining a diversified portfolio, maintaining an equity allocation as high as you can comfortably tolerate, and maintaining either spending flexibility or a low initial withdrawal rate are the only things that will legitimately help.
Well said.
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Re: Bogleheads take on bond tent

Post by petulant »

To be clear, the original 2013 paper by Kitces and Pfau was based on a Monte Carlo simulation with varying asset return assumptions including historical returns. It was not based purely on historical periods. It found "modest" improvements, per a later paper by both. Presentations developed at the time may have looked at historical periods, but the paper was a Monte Carlo simulation. https://papers.ssrn.com/sol3/papers.cfm ... id=2324930
https://www.kitces.com/blog/should-equi ... ly-better/

They also performed similar research using historical information and continued to find their view supported, but they extended it to valuation models and began advocating that bond tents are more important in "high valuation" environments like the ones prevalent over the last few years. BH vigorously debate valuation-based decision-making. https://papers.ssrn.com/sol3/papers.cfm ... id=2497053
https://www.kitces.com/blog/valuation-b ... lidepaths/

Note that Pfau and Kitces are affiliated with McLean Asset Management, which is primarily an AUM RIA. They do benefit from more complex strategies that appear to create value and sustain lock-in. However, I do not believe this is the key issue with their research here. Both tend to argue overall that the best withdrawal strategy from a financial, risk, and psychology perspective is a baseline annuity for income with "bonuses" from a more equity-heavy portfolio of non-annuitized assets. Their research on the rising equity glidepath is actually intended to model what happens as an annuity's principal is consumed: the notional principal value of the annuity is declining, meaning that the overall equity exposure as a % of total wealth is rising. They see an annuity+risk portfolio approach as having value both from 1) the mortality pooling effect of annuities and 2) the rising equity glidepath. They don't need that large of a pure benefit since the higher late-life equity risk might be fine due to impending mortality credits. To be clear, that might mean that the practical strategy actually using their research would be to delay social security, buy an annuity, and then still have an *apparently* fixed allocation like 70/30 for the portfolio starting at social security age, which they would argue in reality is a rising equity glidepath as the annuity is consumed.
https://www.kitces.com/wp-content/uploa ... outs-1.pdf
https://www.kitces.com/wp-content/uploa ... ndouts.pdf

Further, to be clear, none of this research impacts bond tents specifically as a bridge to social security spending. A bond tent designed to bridge to social security at age 70 can be a very good strategy depending on the overall risk preferences and wealth of the retiree.
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Re: Bogleheads take on bond tent

Post by willthrill81 »

martincmartin wrote: Mon Jan 24, 2022 7:29 am
willthrill81 wrote: Sun Jan 23, 2022 9:03 pm Also, there are portfolio construction techniques that have historically done a very good job at mitigating sequence of returns risk as indicated by the techniques resulting in a higher safe withdrawal rate (SWR) than has been see with total market funds.
Are you referring to the golden butterfly, or something else? Do tell! I've learned a lot from these forums, and am eager to learn more.
Check out Portfolio Charts, written by BH poster Tyler9000. You can view the historic SWRs of each of the portfolios listed there. Virtually all of them had higher SWRs since 1970 than the 3-fund portfolio many espouse here.
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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Mon Jan 24, 2022 6:43 am Here's table 2 from the Pfau and Kitces paper. Notice how when you move northeast from the diagonal (constant allocation) line you don't see a universal improvement nor a statistically significant improvement. A 0% to 100% glide produces slightly less success than a constant 50% allocation. A 30% to 80% glide produces the same success as a constant 50% allocation. And so forth.

Image

Furthermore the people who are finding stronger "support" for the glide path are generally making the same error, which is using historical data to "simulate" the different choices. Because they are generally looking for failures, they are always looking at the same historical 30-year period (roughly 1966 to 1995). That period offers lessons for SORR and SWR management, for sure, but it is just one period with one sequence of returns. Over-optimizing for that single period of history won't protect future retirees, who face a different sequence of returns.

There is no magic bullet that will improve retirement outcomes. Maintaining a diversified portfolio, maintaining an equity allocation as high as you can comfortably tolerate, and maintaining either spending flexibility or a low initial withdrawal rate are the only things that will legitimately help.
Thanks for the detailed response. I went and read the paper and even learned how to post images. :happy

1. I note that you draw different conclusions from the paper than the authors themselves did. Granted the gains using glidepaths aren't very large vs static, but they are there.

2. They studied very gradual glidepaths, linear over the portfolio life. ERN has found that steeper glidepaths make a bigger difference. This makes intuitive sense: to limit the lower growth/lower volatilty portfolio to the time that volatility is most dangerous. He specifically found that for his early retiree with 60 year horizons, a 60->100% glidepath over 10 years produced the best results.

3. They use Monte Carlo analysis and ERN uses historical returns. He talks about the implications of those choices in #20. Basically, the mean-reversion which is observed in historical data should make a glidepath look better since a sequence of bad returns is more likely to be followed by a sequence of good returns.

4. I disagree with the objection that the SWR cases are focused on one historical period. This is exactly what one would expect if using historical analysis to find the most stressful cases. All the other historical cases are included and found less stressful.

I find ERNs work here pretty compelling, to give credit where due. Specifically these two posts:

https://earlyretirementnow.com/2017/09/ ... lidepaths/
https://earlyretirementnow.com/2017/09/ ... lidepaths/

Image

ERN points out ... "if I’m OK with a 5% failure probability conditional on a CAPE>20, then the static stock allocation of 80% would give me an SWR of 3.47%. The glidepaths would have allowed between 3.57% and 3.63%. Only an additional 0.16%, but that’s about 5% more consumption every year!"

So yeah, I'm not arguing that a rising equity glidepath is a magic bullet, but that doesn't mean it is not worth doing. It makes sense, is supported by data, and is easy to implement as part of annual rebalancing. I believe it will make whatever "baseline" portfolio and withdrawal plan I settle on a little bit safer.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 9:52 am
4. I disagree with the objection that the SWR cases are focused on one historical period. This is exactly what one would expect if using historical analysis to find the most stressful cases. All the other historical cases are included and found less stressful.
Yes, it's what you'd expect. And it's a problem when it leads to drawing general conclusions from a model that is over-fitted to a particular historical scenario.
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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Mon Jan 24, 2022 9:59 am
UsualLine wrote: Mon Jan 24, 2022 9:52 am
4. I disagree with the objection that the SWR cases are focused on one historical period. This is exactly what one would expect if using historical analysis to find the most stressful cases. All the other historical cases are included and found less stressful.
Yes, it's what you'd expect. And it's a problem when it leads to drawing general conclusions from a model that is over-fitted to a particular historical scenario.
I think it is a fair point that claiming a 10 year 60->100% glidepath is optimal would be over-fitting. But one has to choose something.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 10:42 am
I think it is a fair point that claiming a 10 year 60->100% glidepath is optimal would be over-fitting. But one has to choose something.
Indeed, and we can choose something that doesn't suffer any of the biases I mentioned earlier: a constant asset allocation throughout retirement. No other approach will be better in general, and no other approach is simpler to implement.
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Re: Bogleheads take on bond tent

Post by lostdog »

loukycpa wrote: Sun Jan 23, 2022 7:09 pm Wade Pfau and Michael Kitces have a paper on this worth a read.

"We find, surprisingly, that rising equity glide-paths in retirement – where the portfolio starts out conservative and becomes more aggressive through the retirement time horizon – have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios."

https://papers.ssrn.com/sol3/papers.cfm ... id=2324930

I believe Karsten Jeske has looked at this also and has confirmed the same through research.

Thoughts?
I read Karsten's paper. This definitely helps more with an early retirement 40+ years. The fixed 75/25 to 80/20 allocation is not far behind the rising equity path. The 75/25 and 80/20 is the easiest to implement.

https://earlyretirementnow.com/2017/09/ ... lidepaths/

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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Mon Jan 24, 2022 11:17 am
UsualLine wrote: Mon Jan 24, 2022 10:42 am
I think it is a fair point that claiming a 10 year 60->100% glidepath is optimal would be over-fitting. But one has to choose something.
Indeed, and we can choose something that doesn't suffer any of the biases I mentioned earlier: a constant asset allocation throughout retirement. No other approach will be better in general, and no other approach is simpler to implement.
I would contend that someone with a constant asset allocation throughout retirement is taking on an extra helping of risk, namely SORR, in the window around their retirement date. They are getting compensated for that risk with higher expected returns on good sequences where the higher returns don't really matter. Why take on that extra risk if the return doesn't matter?
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Re: Bogleheads take on bond tent

Post by MattB »

UsualLine wrote: Mon Jan 24, 2022 9:52 am 2. They studied very gradual glidepaths, linear over the portfolio life. ERN has found that steeper glidepaths make a bigger difference. This makes intuitive sense: to limit the lower growth/lower volatilty portfolio to the time that volatility is most dangerous. He specifically found that for his early retiree with 60 year horizons, a 60->100% glidepath over 10 years produced the best results.
I'm sorry but this seems laughably out of touch with the range of possible future equity returns.

It's easy to construct a reasonable scenario where a "60->100% glidepath over 10 years" produces catastrophic results.

Let's say the market gains 10% in each of years 1, 2, ..., 10, before losing 50% in year 11. That sequence of returns may be a problem for this retiree, who still has a 49 year time horizon.

I don't see a crash at year 11 as less likely than a crash in one of the years 1 through 10. Or, more generally, I don't see a crash in year X as any more likely than a crash in year Y, where X and Y are some arbitrary years in a retiree's future. If nothing else, this suggests a retiree is subject to sequence of returns risks throughout their entire time horizon. The magnitude of those risks may decline over time, though I'm not sure on that. But those risks don't disappear because a retiree has made it through 1/6th of their planned retirement length.

You may be able to game the system to beat past return sequences. Say 1965 was a bad year to retire because stocks did poorly for 10 years after that. Then a 60->100% glidepath over 10 years may produce the best results, or better results than 60/40 over 60 years. But that single situation can't or perhaps more correctly shouldn't be generalized to the range of future possible returns, especially not when one is considering retiring with an extraordinarily long time horizon.
Last edited by MattB on Mon Jan 24, 2022 1:06 pm, edited 2 times in total.
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Re: Bogleheads take on bond tent

Post by MattB »

vineviz wrote: Mon Jan 24, 2022 11:17 am Indeed, and we can choose something that doesn't suffer any of the biases I mentioned earlier: a constant asset allocation throughout retirement. No other approach will be better in general, and no other approach is simpler to implement.
This should be pinned somewhere, if it's not already.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 12:55 pm
I would contend that someone with a constant asset allocation throughout retirement is taking on an extra helping of risk, namely SORR, in the window around their retirement date.
This is exactly the “intuitive but false” view that it seems many have adopted.

A 50>>100 glide path (or a bond tent with that profile) exposes the investor to no more or less risk than a fixed allocation with the same average equity weight ( eg a constant 75%).
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Re: Bogleheads take on bond tent

Post by UsualLine »

MattB wrote: Mon Jan 24, 2022 12:55 pm Let's say the market gains 10% in each of years 1, 2, ..., 10, before losing 50% in year 11. That sequence of returns may be a problem for this retiree, who still has a 49 year time horizon.

I don't see a crash at year 11 as any less likely than a crash in one of the years 1 through 10. Or, more generally, I don't see a crash in year X as any more likely than a crash in year Y, where X and Y are some arbitrary years in a retiree's future. If nothing else, this suggests a retiree is subject to sequence of returns risks throughout their entire time horizon. The magnitude of those risks may decline over time, though I'm not sure on that. But those risks don't disappear because a retiree has made it through 1/6th of their planned retirement length.
The whole idea of SORR is that bad results early in retirement (early in the sequence) are more damaging to a decumulator than bad results later. Try putting your 11 returns in a spreadsheet with a withdrawal each year. Move the bad year around in the sequence and see how the end results turn out.

MattB wrote: Mon Jan 24, 2022 12:55 pm You may be able to game the system to beat past sequences of return. Say 1965 was a bad year to retire because stocks did poorly for 10 years after that. Then a 60->100% glidepath over 10 years may produce the best results, or better results than 60/40 over 60 years. But that single situation can't or perhaps more correctly shouldn't be generalized to the range of future possible returns, especially not when one is considering retiring with an extraordinarily long time horizon.
The result came out of ERN backtesting multiple strategies over all the 60 year sequences he has data for, going back to 1871. It does not come from looking at a "single situation". Yes, there are just a few driving cases, which is a natural, expected outcome from the analysis approach.
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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Mon Jan 24, 2022 1:03 pm
UsualLine wrote: Mon Jan 24, 2022 12:55 pm
I would contend that someone with a constant asset allocation throughout retirement is taking on an extra helping of risk, namely SORR, in the window around their retirement date.
This is exactly the “intuitive but false” view that it seems many have adopted.

A 50>>100 glide path (or a bond tent with that profile) exposes the investor to no more or less risk than a fixed allocation with the same average equity weight ( eg a constant 75%).
Do you acknowledge that SORR is "a thing"? willthrill81 said above that you did, but I guess you haven't said it yourself.
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Re: Bogleheads take on bond tent

Post by MattB »

UsualLine wrote: Mon Jan 24, 2022 1:15 pm
MattB wrote: Mon Jan 24, 2022 12:55 pm Let's say the market gains 10% in each of years 1, 2, ..., 10, before losing 50% in year 11. That sequence of returns may be a problem for this retiree, who still has a 49 year time horizon.

I don't see a crash at year 11 as any less likely than a crash in one of the years 1 through 10. Or, more generally, I don't see a crash in year X as any more likely than a crash in year Y, where X and Y are some arbitrary years in a retiree's future. If nothing else, this suggests a retiree is subject to sequence of returns risks throughout their entire time horizon. The magnitude of those risks may decline over time, though I'm not sure on that. But those risks don't disappear because a retiree has made it through 1/6th of their planned retirement length.
The whole idea of SORR is that bad results early in retirement (early in the sequence) are more damaging to a decumulator than bad results later. Try putting your 11 returns in a spreadsheet with a withdrawal each year. Move the bad year around in the sequence and see how the end results turn out.
You're correct: The whole idea of SORR is that bad results early in retirement (early in the sequence) are more damaging than bad results later. This is due in part to the fact that people tend to need more income from their portfolios early in retirement. Spending tends to decline as one ages. And people have income from social security to buttress their spending later in life.

But you seem to be missing the point. SORR risks don't go away because one's made it through some arbitrary length of retirement. Do you consider SORR risks gone 10 years into a 60 year retirement plan?

Point made differently: Does someone retiring with a 50 year time horizon have SORR risks? The answer is obviously yes. They do. Just as someone with a 40 year time horizon does. Or a 30 year time horizon. Or a 20 year time horizon.

SORR risks don't go away because one's made it through some arbitrary length in a retirement plan. You can either spread risk evenly through retirement with a fixed AA or concentrate that risk somewhere in retirement with a sloping AA. There is no free lunch.
Last edited by MattB on Mon Jan 24, 2022 1:41 pm, edited 2 times in total.
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Re: Bogleheads take on bond tent

Post by dbr »

MattB wrote: Mon Jan 24, 2022 1:32 pm
You're correct: The whole idea of SORR is that bad results early in retirement (early in the sequence) are more damaging than bad results later.

But you seem to be missing the point. SORR risks don't go away because one's made it through some arbitrary length of retirement. Do you consider SORR risks gone 10 years into a 60 year retirement plan?

Point made differently: Does someone retiring with a 50 year time horizon have SORR risks? The answer is obviously yes. They do. Just as someone with a 40 year time horizon. Or a 30 year time horizon. Or a 20 year time horizon.

SORR risks don't go away because one's made it through some arbitrary length in a retirement plan. You can either spread risk evenly through retirement with a fixed AA or concentrate that risk somewhere in retirement with a sloping AA. There is no free lunch.
More than that you know neither the average return nor the sequence if the returns until it is all over.

On the other hand, the likelihood that 2010-2020 in the US stock market does not represent a favorable SOR is pretty low at least up to 20 or maybe 30 years out. On 40-60 years, I wouldn't make that estimate.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 1:17 pm
vineviz wrote: Mon Jan 24, 2022 1:03 pm
UsualLine wrote: Mon Jan 24, 2022 12:55 pm
I would contend that someone with a constant asset allocation throughout retirement is taking on an extra helping of risk, namely SORR, in the window around their retirement date.
This is exactly the “intuitive but false” view that it seems many have adopted.

A 50>>100 glide path (or a bond tent with that profile) exposes the investor to no more or less risk than a fixed allocation with the same average equity weight ( eg a constant 75%).
Do you acknowledge that SORR is "a thing"? willthrill81 said above that you did, but I guess you haven't said it yourself.
Of course I acknowledge it’s a thing, and it matters a lot to many retirees.

I’m only pointing out that a bond tent doesn’t address it.
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Re: Bogleheads take on bond tent

Post by UsualLine »

MattB wrote: Mon Jan 24, 2022 1:32 pm But you seem to be missing the point. SORR risks don't go away because one's made it through some arbitrary length of retirement. Do you consider SORR risks gone 10 years into a 60 year retirement plan?

Point made differently: Does someone retiring with a 50 year time horizon have SORR risks? The answer is obviously yes. They do. Just as someone with a 40 year time horizon does. Or a 30 year time horizon. Or a 20 year time horizon.

SORR risks don't go away because one's made it through some arbitrary length in a retirement plan. You can either spread risk evenly through retirement with a fixed AA or concentrate that risk somewhere in retirement with a sloping AA. There is no free lunch.
Sorry, I think you are the one missing the point. Yes in fact I do consider that SORR is largely gone after 10 years into retirement. That is what the researchers have shown. You seem to be mentally restarting the clock with the 50, 40, 30 year horizon. But the researchers are not resetting the clock and recalculating SWR, they are looking at one SWR for an entire retirement.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 1:57 pm
Sorry, I think you are the one missing the point. Yes in fact I do consider that SORR is largely gone after 10 years into retirement. That is what the researchers have shown. You seem to be mentally restarting the clock with the 50, 40, 30 year horizon. But the researchers are not resetting the clock and recalculating SWR, they are looking at one SWR for an entire retirement.
SORR is always concentrated in the NEXT few years of whatever withdrawal period you’re using.

For instance if you have two more withdrawals left to take then returns of -50% then +50% is much worse than the inverse.
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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Mon Jan 24, 2022 1:50 pm
UsualLine wrote: Mon Jan 24, 2022 1:17 pm
vineviz wrote: Mon Jan 24, 2022 1:03 pm
UsualLine wrote: Mon Jan 24, 2022 12:55 pm
I would contend that someone with a constant asset allocation throughout retirement is taking on an extra helping of risk, namely SORR, in the window around their retirement date.
This is exactly the “intuitive but false” view that it seems many have adopted.

A 50>>100 glide path (or a bond tent with that profile) exposes the investor to no more or less risk than a fixed allocation with the same average equity weight ( eg a constant 75%).
Do you acknowledge that SORR is "a thing"? willthrill81 said above that you did, but I guess you haven't said it yourself.
Of course I acknowledge it’s a thing, and it matters a lot to many retirees.

I’m only pointing out that a bond tent doesn’t address it.
I don't see why you said my statement you quoted is false. There is an identifiable risk early in retirement. With a constant asset allocation your are not doing anything to mitigate that risk. So you are taking it on. And you are getting compensated for taking it on. What is false about that?
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Re: Bogleheads take on bond tent

Post by willthrill81 »

UsualLine wrote: Mon Jan 24, 2022 1:57 pmSorry, I think you are the one missing the point. Yes in fact I do consider that SORR is largely gone after 10 years into retirement. That is what the researchers have shown.
No, they have definitely not because it's not true.

You can quickly verify this for yourself using FIRECalc. Using a 60/40 AA, it indicates the success rate of the '4% rule' for 30 years to be 95.9%. For a 20 year period, the SWR with the closest success rate (96.2%) was 4.9%. For a 10 year retirement, the SWR with the closest success rate (96.2%) was 8.3%.

In the first instance (i.e., '4% rule'), the needed average real returns with no volatility are 1.22%. In the 20 year instance, the needed average real returns with no volatility are -.19%. And in the 10 year instance, the needed average real returns with no volatility are -3.20%.

The reason the needed returns were lower for shorter time frames (but with the same historic success rate as the '4% rule') was due to HIGHER sequence of returns risk in shorter periods.

It's completely erroneous to say that there is sequence of returns risk with a 30 year retirement but not with a 20 year, 10 year, or any other retirement length.
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Re: Bogleheads take on bond tent

Post by AlphaLess »

mrpotatoheadsays wrote: Sun Jan 23, 2022 9:37 am
martincmartin wrote: Sun Jan 23, 2022 9:08 am Also, there are around 4,000 stocks in the U.S. stock market. S&P 500 is just large cap stocks, a segment of the total stock market.
The US Total Market Index and S&P 500 Index are large-cap blend indexes. From 1928 to 2020, the US Total Market Index returned 9.9% while the S&P 500 Index returned 10.0%. Because of the market-cap weighting, the returns of smaller equities have been insignificant.

"Buy the total market" is nothing more than a sales pitch. Investors who purchased Total Market indices did not receive the benefits of mid-cap and small-cap equities.
To a first approximation, that is correct.

What were the Sharpe ratios?
Tax efficiency?
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Re: Bogleheads take on bond tent

Post by climber2020 »

UsualLine wrote: Mon Jan 24, 2022 12:55 pm I would contend that someone with a constant asset allocation throughout retirement is taking on an extra helping of risk, namely SORR, in the window around their retirement date. They are getting compensated for that risk with higher expected returns on good sequences where the higher returns don't really matter. Why take on that extra risk if the return doesn't matter?
It matters if you have a few early years of stellar stock returns (with occasional rebalancing) followed by a crash that takes the better part of a decade to recover. Someone with a bond tent could miss out on all those early returns and be dialing up the risk as the market is heading downhill. A mid-late 1990s retirement, for example.
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Re: Bogleheads take on bond tent

Post by dbr »

climber2020 wrote: Mon Jan 24, 2022 2:12 pm
UsualLine wrote: Mon Jan 24, 2022 12:55 pm I would contend that someone with a constant asset allocation throughout retirement is taking on an extra helping of risk, namely SORR, in the window around their retirement date. They are getting compensated for that risk with higher expected returns on good sequences where the higher returns don't really matter. Why take on that extra risk if the return doesn't matter?
It matters if you have a few early years of stellar stock returns (with occasional rebalancing) followed by a crash that takes the better part of a decade to recover. Someone with a bond tent could miss out on all those early returns and be dialing up the risk as the market is heading downhill. A mid-late 1990s retirement, for example.
That's why you can't make up scenarios in which one bad thing happens and forget about the 99 scenarios where that bad thing does not happen and something else does happen that goes the other way around. Getting it all laid out with the proper probabilities often results in it doesn't make any difference. And if you did know the market was going to crash at any particular time you would make sure to bail just before it happens and get back in just before it recovers. Of course it is that "just before" part that is tricky.
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Re: Bogleheads take on bond tent

Post by willthrill81 »

climber2020 wrote: Mon Jan 24, 2022 2:12 pm
UsualLine wrote: Mon Jan 24, 2022 12:55 pm I would contend that someone with a constant asset allocation throughout retirement is taking on an extra helping of risk, namely SORR, in the window around their retirement date. They are getting compensated for that risk with higher expected returns on good sequences where the higher returns don't really matter. Why take on that extra risk if the return doesn't matter?
It matters if you have a few early years of stellar stock returns (with occasional rebalancing) followed by a crash that takes the better part of a decade to recover. Someone with a bond tent could miss out on all those early returns and be dialing up the risk as the market is heading downhill. A mid-late 1990s retirement, for example.
Correct. It's just as easy to craft a realistic situation in which a bond tent would make matters worst as one in which it improved the situation.

The bond tent strategy is just another of those strategies which intuitively seem like they should work but actually don't.
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Re: Bogleheads take on bond tent

Post by MattB »

UsualLine wrote: Mon Jan 24, 2022 1:57 pm Yes in fact I do consider that SORR is largely gone after 10 years into retirement.
This is where you're mistaken.
vineviz wrote: Mon Jan 24, 2022 2:05 pm SORR is always concentrated in the NEXT few years of whatever withdrawal period you’re using.
Vineviz has it correct.
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Re: Bogleheads take on bond tent

Post by MattB »

willthrill81 wrote: Mon Jan 24, 2022 2:11 pm It's completely erroneous to say that there is sequence of returns risk with a 30 year retirement but not with a 20 year, 10 year, or any other retirement length.
I never thought I would agree with you on something. Wonders never cease. :sharebeer
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Re: Bogleheads take on bond tent

Post by vanbogle59 »

willthrill81 wrote: Mon Jan 24, 2022 2:17 pm The bond tent strategy is just another of those strategies which intuitively seem like they should work but actually don't.
I think this is basically irrefutable, assuming one is comparing apples to apples. I mean there is only one real pool of money. You cannot possibly push more of it into a lower yielding asset class and expect the overall performance to improve.

It seems to me the discussion breaks down when one side looks at the period when SS is turned on as safe, and the time before that as risky.
If you accept that idea, then having more safe assets during the risky window would be desirable.
Similarly, during the safe window, it's more comfortable to grow the risky bucket.

But that idea is entirely based in feelings.
Feelings which I suspect I will share quite intensely. Especially if the market starts misbehaving between my retirement and my 70th birthday.
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Re: Bogleheads take on bond tent

Post by vineviz »

UsualLine wrote: Mon Jan 24, 2022 2:10 pm
vineviz wrote: Mon Jan 24, 2022 1:50 pm
UsualLine wrote: Mon Jan 24, 2022 1:17 pm
vineviz wrote: Mon Jan 24, 2022 1:03 pm
UsualLine wrote: Mon Jan 24, 2022 12:55 pm
I would contend that someone with a constant asset allocation throughout retirement is taking on an extra helping of risk, namely SORR, in the window around their retirement date.
This is exactly the “intuitive but false” view that it seems many have adopted.

A 50>>100 glide path (or a bond tent with that profile) exposes the investor to no more or less risk than a fixed allocation with the same average equity weight ( eg a constant 75%).
Do you acknowledge that SORR is "a thing"? willthrill81 said above that you did, but I guess you haven't said it yourself.
Of course I acknowledge it’s a thing, and it matters a lot to many retirees.

I’m only pointing out that a bond tent doesn’t address it.
I don't see why you said my statement you quoted is false. There is an identifiable risk early in retirement. With a constant asset allocation your are not doing anything to mitigate that risk. So you are taking it on. And you are getting compensated for taking it on. What is false about that?
This part is not true: "someone with a constant asset allocation throughout retirement is taking on an extra helping of risk".

It's not true because they are taking the SAME amount of sequence of returns risk as someone using a bond tent or rising equity glide path. The bond tent just moves the risk around without actually reducing it.
Last edited by vineviz on Mon Jan 24, 2022 3:06 pm, edited 1 time in total.
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Re: Bogleheads take on bond tent

Post by WhiteMaxima »

Fix income is not safe but low voliative than equity. High inflation will eat away fix income purchase power. Long term, equity out perform inflation and fix income.
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Re: Bogleheads take on bond tent

Post by vineviz »

WhiteMaxima wrote: Mon Jan 24, 2022 2:59 pm Fix income is not safe but low voliative than equity. High inflation will eat away fix income purchase power.
Not if the fixed income is indexed to inflation, as it would be with TIPS or Series I savings bonds.
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Re: Bogleheads take on bond tent

Post by UsualLine »

MattB wrote: Mon Jan 24, 2022 2:40 pm
UsualLine wrote: Mon Jan 24, 2022 1:57 pm Yes in fact I do consider that SORR is largely gone after 10 years into retirement.
This is where you're mistaken.
vineviz wrote: Mon Jan 24, 2022 2:05 pm SORR is always concentrated in the NEXT few years of whatever withdrawal period you’re using.
Vineviz has it correct.
Ok, here is the reference I have been looking for.

https://www.kitces.com/blog/understandi ... d-decades/

Kitces says: ...it turns out that the true driver of sequence of return risk and safe withdrawal rates are the returns that the retiree earns over the first decade – and specifically, the real returns over the first decade, that provide an indication of whether the retirement portfolio will have produced enough real growth to keep up with inflation-adjusted spending for the rest of retirement.
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