2022 proved this is a flawed strategy. You would have drawn from the bonds when they were down, and it takes years for bonds to recover from double-digit losses. It’s not that hard to keep 2-3 years of expenses in low risk cash equivalents and replenish periodically by selling equities. In my case that is 10-20% of my portfolio.
The goal is not to never draw down on a asset that has lost value, the goal is to create a portfolio that is bulletproof over the first ten years to avoid sequence of return risk. We really are talking about risk mitigation here, not overall returns. Pointing to a specific few months where the selling is inefficient does not negate the long-term strategy. Yes...a down bond year will depleat the well, but a 70/30 strategy provides about 7.5 years of bond spending. Those bonds also appreciate when not being used which can mitigate the downturn.
The view is the product of a multi-decade bond bull run that saw massive interest rate declines. In an inflationary environment bonds are dead money imho. You are leaving money on the table for the illusion of safety.
Agreed! Buckets are overrated. Check out https://bcktstr.com a free portfolio back testing tool I wrote, where the strat you shared is one of the options...
I like your concept of simplicity and no buckets. But here's my vote for an even simpler approach, from Bogleheads, the Variable Percentage Withdrawal method. Eight years into retirement using VPW, now age 70. No buckets, no rebalancing, no SORR, handing out legacy dollars along the way with a warm hand as they say.
I like a 100% equities retirement. I have the equivalent of a US 401K plan which has been compulsory since 1992.This has the well diversified part of the retirement fund.
I also have my own investments outside of the 401K equivalent.
Volatility ( sequencing risk) is normal.Dividend payments are very stable and rising.The share price trading range across 1 year would be say a 20% drop and a 20% rise,so for that 1 year you are under water . Most years the value of the portfolio increases. The dividend payments don't fall because the share prices are volatile.
The 401K equivalent averages a 9% return over a long period ( since 1992). I draw 9% every year. From 2015 ( my retirement ) the 401K had $430K in it 10 years later it now has 415K in it.
The 100% equities outside of that produces dividends that were the equivalent of my earned income. They have risen every year since then.The value of the portfolio is around 40% higher than when I retired,perhaps 50%.
A US equivalent would perhaps be retire on 1 January 2015 with the S+P 500 at whatever it was. Live off the dividend income since then,and money from the 401K.. So the rise in dividends of the 500 since 2015,and the rise in share prices is what I have now and for the future.Income in retirement is higher than income when I worked. I think it will continue like that, the 500 index will be volatile,how stable would the dividends be? .What seems to be a worldwide problem is people die with more than they had on the day they retired.That is certainly true for me
Checking the S+P chart the closest I can get to 1 Jan 2015 is the index at 2100. The magnificent 7 have lifted it a lot and outperformed my index. The theory is still the same,the rise in the index and the stability of the dividends over my ( hopefully ) long retirement
Looking at the index on a phone is difficult. Checking the all ordinaries then 1 Jan 2015 was 5400,now it is 9137. It started on 1 Jan 1980 at 500.I pick individual companies ( since the mid 1980s ) and from 1 Jan 2015 have outperformed the index by at least 1% ,or use the index or the index +1% since 2015 to get an idea of how it works
How did you arrive at a 70/30 starting allocation? There’s something that made you pick the 30%. Was it taking your spending needs from portfolio investments for the first 5-8 years and dividing by your overall account balance? If so, then you did a form of bucketing/time segmentation. The only thing you changed was the formula for replenishment. In your case, you’re just choosing not to replenish. I’m not criticizing what you’re suggesting. I just think that you are doing the thing that you say you don’t like, but in an implicit way.
Agreed. I had picked a 70/30 allocation years ago before I was thinking more upon it. It is in a sense bucketing to cover 7.5 years of the first ten…but much simpler and allows greater equity growth.
Please give us your data after 5 years of doing this method. I'd be curious.
"If the S&P 500 is higher than it was last quarter, I will draw my cash from the equities side of the portfolio." -- seems sane and simple. But, I wonder if by pulling money out, you're missing out on future gains? Have you run any simulations to test this?
I think I would rather see how this program works if I compare the current quarter S&P level to the level I started the program at. If two quarters ago went down 50% and the last quarter went up 1% I still would not want to take money out of that bucket. I asked AI "If invested in the S&P500 January of 2000 how long would it take to get back to parity after factoring 8% gain compounding every year on the original investment?" It said 21 years.
A very Reasonable point. You might want to use the Year high as opposed to the last quarter or something similar. Believe it or not, I believe it would still work just using the last quarter s & p even if you are just starting to move back up.
Thank you for the concept. Given that bonds carry some degree of risk and the returns are not significantly greater then a money market fund (or do you disagree with this thought?), what do you think of keeping all or some of that 30% in a money market fund with the other 70% in equities? Do you mind sharing the asset mix of your equity portfolio meaning individual stocks or index funds will app allocations? Also, are your bonds held in a fund of some sort or individual bonds?
I think you can play around with the bond allocation. If you want to go half bonds/half money market, that may add in a little efficiency depending on the money market return. Both bonds and cash do worse than equities, so long term you want to glide toward equities...which is what this plan does. As far as equity allocation, I am more Bogleheads. 70% total US, 30% total international. You can play with this however you want. I am not so convinced about small-cap value, but many are. I hold no individual stocks and only etfs and mutual funds.
2022 proved this is a flawed strategy. You would have drawn from the bonds when they were down, and it takes years for bonds to recover from double-digit losses. It’s not that hard to keep 2-3 years of expenses in low risk cash equivalents and replenish periodically by selling equities. In my case that is 10-20% of my portfolio.
The goal is not to never draw down on a asset that has lost value, the goal is to create a portfolio that is bulletproof over the first ten years to avoid sequence of return risk. We really are talking about risk mitigation here, not overall returns. Pointing to a specific few months where the selling is inefficient does not negate the long-term strategy. Yes...a down bond year will depleat the well, but a 70/30 strategy provides about 7.5 years of bond spending. Those bonds also appreciate when not being used which can mitigate the downturn.
The view is the product of a multi-decade bond bull run that saw massive interest rate declines. In an inflationary environment bonds are dead money imho. You are leaving money on the table for the illusion of safety.
https://claude.ai/share/0fff1844-3df3-4333-bf09-46868b3c4565
Interesting results from claude on the backtest
Agreed! Buckets are overrated. Check out https://bcktstr.com a free portfolio back testing tool I wrote, where the strat you shared is one of the options...
I like your concept of simplicity and no buckets. But here's my vote for an even simpler approach, from Bogleheads, the Variable Percentage Withdrawal method. Eight years into retirement using VPW, now age 70. No buckets, no rebalancing, no SORR, handing out legacy dollars along the way with a warm hand as they say.
I like a 100% equities retirement. I have the equivalent of a US 401K plan which has been compulsory since 1992.This has the well diversified part of the retirement fund.
I also have my own investments outside of the 401K equivalent.
Volatility ( sequencing risk) is normal.Dividend payments are very stable and rising.The share price trading range across 1 year would be say a 20% drop and a 20% rise,so for that 1 year you are under water . Most years the value of the portfolio increases. The dividend payments don't fall because the share prices are volatile.
The 401K equivalent averages a 9% return over a long period ( since 1992). I draw 9% every year. From 2015 ( my retirement ) the 401K had $430K in it 10 years later it now has 415K in it.
The 100% equities outside of that produces dividends that were the equivalent of my earned income. They have risen every year since then.The value of the portfolio is around 40% higher than when I retired,perhaps 50%.
A US equivalent would perhaps be retire on 1 January 2015 with the S+P 500 at whatever it was. Live off the dividend income since then,and money from the 401K.. So the rise in dividends of the 500 since 2015,and the rise in share prices is what I have now and for the future.Income in retirement is higher than income when I worked. I think it will continue like that, the 500 index will be volatile,how stable would the dividends be? .What seems to be a worldwide problem is people die with more than they had on the day they retired.That is certainly true for me
Checking the S+P chart the closest I can get to 1 Jan 2015 is the index at 2100. The magnificent 7 have lifted it a lot and outperformed my index. The theory is still the same,the rise in the index and the stability of the dividends over my ( hopefully ) long retirement
Looking at the index on a phone is difficult. Checking the all ordinaries then 1 Jan 2015 was 5400,now it is 9137. It started on 1 Jan 1980 at 500.I pick individual companies ( since the mid 1980s ) and from 1 Jan 2015 have outperformed the index by at least 1% ,or use the index or the index +1% since 2015 to get an idea of how it works
How did you arrive at a 70/30 starting allocation? There’s something that made you pick the 30%. Was it taking your spending needs from portfolio investments for the first 5-8 years and dividing by your overall account balance? If so, then you did a form of bucketing/time segmentation. The only thing you changed was the formula for replenishment. In your case, you’re just choosing not to replenish. I’m not criticizing what you’re suggesting. I just think that you are doing the thing that you say you don’t like, but in an implicit way.
Agreed. I had picked a 70/30 allocation years ago before I was thinking more upon it. It is in a sense bucketing to cover 7.5 years of the first ten…but much simpler and allows greater equity growth.
Please give us your data after 5 years of doing this method. I'd be curious.
"If the S&P 500 is higher than it was last quarter, I will draw my cash from the equities side of the portfolio." -- seems sane and simple. But, I wonder if by pulling money out, you're missing out on future gains? Have you run any simulations to test this?
I think I would rather see how this program works if I compare the current quarter S&P level to the level I started the program at. If two quarters ago went down 50% and the last quarter went up 1% I still would not want to take money out of that bucket. I asked AI "If invested in the S&P500 January of 2000 how long would it take to get back to parity after factoring 8% gain compounding every year on the original investment?" It said 21 years.
A very Reasonable point. You might want to use the Year high as opposed to the last quarter or something similar. Believe it or not, I believe it would still work just using the last quarter s & p even if you are just starting to move back up.
Not too dissimilar from my philosophy. I've been 90/10 for 35 years with no intention to rebalance.
Thank you for the concept. Given that bonds carry some degree of risk and the returns are not significantly greater then a money market fund (or do you disagree with this thought?), what do you think of keeping all or some of that 30% in a money market fund with the other 70% in equities? Do you mind sharing the asset mix of your equity portfolio meaning individual stocks or index funds will app allocations? Also, are your bonds held in a fund of some sort or individual bonds?
I think you can play around with the bond allocation. If you want to go half bonds/half money market, that may add in a little efficiency depending on the money market return. Both bonds and cash do worse than equities, so long term you want to glide toward equities...which is what this plan does. As far as equity allocation, I am more Bogleheads. 70% total US, 30% total international. You can play with this however you want. I am not so convinced about small-cap value, but many are. I hold no individual stocks and only etfs and mutual funds.