| ASSET ALLOCATION Great book. Looking at Figures 8.6A & 8.6B, there are only small periods of time when having a large percentage of bonds would optimize portfolio performance. However, your common recommendation is 40% bonds and 5% cash. It seems like both of those positions are a hedge against poor stock market performance. However, they are riskier during times of higher inflation. It seems to me that it might be better to treat them as hedges against stock market performance. You at one point suggest holding sufficient cash for one year’s distribution. That seems very prudent. Would it then make sense to hold enough of your portfolio in bonds to likewise hedge against a prolonged bear market, rather than treating it as a fixed percentage? That would seem to match the concept of moving more of your portfolio toward stocks in later years. I would suggest holding one years anticipated withdrawal as cash and perhaps four years in bonds. Depending on the value of your holding that might or might not be 40%. It would be interesting to see some of your models run that way. Assuming a SAFEMAX of 5%, that would be 5% cash and 20% bonds. J. Hi J., Thank you for your note and your interest in my research, as well as your excellent questions, which I will address in order. Bonds are essential primarily during stock bear markets. Outside of that, their low returns is a drag on portfolio performance. A study has been recently published, advocating for 100% equity allocation at all times: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4590406. I haven’t tested the conclusions of this paper with my own database, but I soon will. It’s possible that even higher withdrawal rates may be available to those who can tolerate the volatility of an all-equity portfolio. The 5% cash allocation I recommend is not really a hedge, it’s a recognition that cash needs to be readily available to fund withdrawals. Otherwise, we risk being forced to sell investments at an inconvenient time. There is a chart in book (Figure 8.1) which shows the effect of running a 20% bond allocation for the 10/1/1968 retiree. Withdrawal rates drop from 4.7% to 3.7%, which is a steep price to pay for safety. I suspect that it would be even worse for most other retirees, including those lucky enough to retire into a stock bull market. I’ll have a lot more to say about high stock allocations in the near future. Please stay tuned. I appreciate your continued interest.
Best regards.
Bill Bengen |
A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.
The new book by William P. Bengen.
