VBND vs VAF vs VGB

As mentioned throughout this thread, it depends what you are trying to achieve.

In my particular circumstance we have enough stashed away that most Monte Carlo type simulations say we should fine even if our investments earned zero% from now until cark-time.

Including a GFC type event.

But, being somewhat pessimistic, 'most' isn't quite good enough.

I'm not looking at bonds to increase my returns, and it is annoying that they have done so well in the last year or so as people pile in chasing returns.

I want them for their traditional role of negative correlation to equities to mitigate SORR.

Sure the attached chart is a back test. And things may be different going forward. But we are also always told that 'this time it is different' is usually incorrect.

 

In many cases deep down one knows what needs to be done but unfortunately there is this thing known as “risk tolerance” that complicates the matter.

 

Nice chart @sfdoddsy

But like @Nodrog it aligns with some of my bias

Warren buffet talked of a 90% share index 10% bond index for his estate, but 10% of $89 billion is a huge re-balancing kitty

 

I doubt he would leave $89 billion. I think more than 99% of it has already been committed to go to charity (Bill and Melinda Gates foundation). Whatever is left would be split between his wife and kids but you are right it will still be a very large sum.

Cheers,
Oracle.

 

It will come as no surprise I'm sure that I don’t like that graph.

Actually, I find it so nauseating it makes me want to go and find @Nodrog spewing picture.

Anchoring to a previous peak and then concluding how good are bonds in a draw down might give you a warm fuzzy feeling as a bond investor but it just leaves you as one of the crowd pandering to your fears and missing the forest for the trees.

Much better to evaluate the impact of bonds in context of how you are likely to interact with the markets.

* Using STW and Vangaurd AUS Fixed interest funds as per @sfdoddsy comparison.
* Using a time period of “Earliest in Common” (Aug 2001) instead of cherry picking a peak.

Initial chart simulates an accumulation phase starting balance of 150K and adding 2K per month for the 17 years of available data. (unfortunately can't inflation adjust simulation)

Portfolio A is 100% STW
Portfolio B is 70% STW, 30% Bonds rebalanced monthly


Result.


This second chart simulates the withdrawal phase. Starting balances are the ending balances from accumulation and $10,000 a month is withdrawn (a high withdrawal rate to stress the results)



Show me again how bonds help with sequence of return risk in real life - because I'm too thick to see it. Bond component has already caused portfolio B ending balance to be below starting balance and will continue to accelerate out the back door with more time. Yes portfolio A is more volatile but closing balance is above starting balance and it has a good chance of punching on over time.

Lowering the withdrawal % by means of ditching bonds and amassing more capital in accumulation phase, now that offers true sequence protection.

 

@dunno it appears that for many investors the widely recommended retreat to bonds in the years leading up to and earlier stages of retirement as protection against SORR has been somewhat of a con. The highly popularised Lifecycle Funds based on concerns around Sequence Risk and safe guarding capital as the retiree ages also appear to be a terrible idea for many.

I had always been a near 100% equities believer for decades but in more recent times fell victim to many of the so called experts research / views in regard to SORR. This has turned out to be a mistake. To be honest your posts on PC in regard to this area have been far more helpful to me that all the other stuff I read put together. I’m very grateful to you for this so a big thanks. As a result I’m back on track and where I belong ie Equities all the way.

 

Maybe not a terrible idea for many, but perhaps not a good idea for some. I think you need to go back to this matrix to put things in perspective.



In reality, most people fall into the third scenario and most of the commentary and thinking around lifecycle etc is aimed towards keeping them from slipping into scenario 4.

But you and I would guess a few others on here from what I have read, @SatayKing @Islay @truong @kierank even @Snowball at a different level come to mind as people involved in the equity threads, which seem to have conservative spending in relation to their means. That’s not to say all are frugal, probably far from it in some cases, it’s just that spending is based on something other than capacity to spend and hence with capital growing faster than spending you get into a situation of only needing a low withdrawal rate from capital. The grouping on PC mentioned above and probably quite a few others here in a similar situation are not the norm for the wider population, but are a good real life example of the benefits of striving to get to scenario 1 type situation.

I suspect where you wandered was into following the well-meaning advice which is really intended for scenario 3 people and hence by investing conservatively dropped yourself into scenario 2. Not the end of the world, you can afford to be extra cautious especially around retirement zone if you want but its not necessary either. If you love equities you can certainly bare the risk and it’s most likely optimal for your heirs or charities that you do so.

Being basically on the right path (harvesting Equity risk premium) over an extended time means a few misstep's and side excursion wont greatly alter the destination. You like I can attest to that.

Ps, thanks for your comments on the content but I don’t think they are justified. The praise should go to anybody that can find a snippet of insight and then test and apply it to themselves. On that basis I thankyou for finding something useful.

 

I am definitely Scenario 1.

 

[Exit, stage right] @kierank?

As of late I suspect in some respects capital may be growing faster than income. I haven't done those numbers as it isn't a matter which greatly impacts or concerns me.

For how long the capital v income generated by the capital will continue I do not know but will it tempt some to ignore the income component? All fine and dandy until it reverts, which it will at some stage.

 

Sorry, I should have qualified that pertaining more to the investing community as opposed to say the disinterested person in the street.

But yes I’d say you’re correct with:

It appears I was not alone. I read and followed countless discussions on Boglehead forums and elsewhere relating to this area. Even those of reasonable wealth after reading Bernstein and others were spooked into excessively conservative asset allocations during the SORR zone and retirement in general. I fell victim to this myself to a degree. In hindsight some of Bernstein’s views were just plain silly.

 

Geez @dunno

I have a 10% allocation to bonds primarily as a war chest during my accumulation years which I though was lean and you now have me pondering if 10% is too much

The Vanguard Target Retirement Funds stay at 90% stocks from the beginning up until 25 years before retirement, i.e. up until age 40

The draw down/distribution image is interesting, retiring whilst on a bull market or a bear market depending on Mr Markets unknown mood can have significant impact on whatever size portfolio you have, for those consuming less than they are spending they can likely cruise through enjoying the view, for others its probably a 'hang on tight' scenario

Whats your thoughts on the below

Why shouldn’t my asset allocation be 100% stocks during the accumulation phase?

 

LOL. He certainly does challenge one’s beliefs. Took a bit of getting used to at first but now I love it.

 

10% may be too much!
10% may be too little!

In reality 10% is fairly marginal – it’s not going to make a lot of difference to volatility or return. On the return front, rebalancing effect “may” have some chance of negating a 10% bond drag.

In relation to my key thought on your link.

His bolded take away.



I can’t argue with that – If you are happily employed, and want a smooth ride, increase both your bonds and your savings rate to achieve your goals.

I come to the question as somebody who made their wealth predominantly from investing not from a career and high savings rates, so I don’t relate fully to his takeaway. So, there is my blind spot to the question of bonds in accumulation. I predominantly look at bonds through an investment prism. I don’t naturally look at it as a balance between lowering volatility and increasing savings. As somebody who lives solely from capital, savings from other sources doesn't enter my equations.

Important thing is that you are pondering your situation. I’m sure you will come to a thoughtful decision that suits you.

 

I would tend to agree whole heartedly with that quote about building career and savings, and not relying on investment returns. Very similar to michael kitces and his talks about human capital compounded over many years. I myself just got a 15k pay rise promotion a few months back and was already saving in excess of 70% of my income before this promotion. Natural tendancy is to inflate ones lifestyle and matching income with spending! Not this little vegemite, no lifestyle creep happening here.

Savings rate, living below ones means and no debt will mean one wont blow him self up if and when the **** hits the fan!

 

What the 2020s Will Look Like For the Markets - A Wealth of Common Sense

 

Portfolio allocation models

 

Lots of strong opinions based on assumptions. So many variables that make the actual advice business much more difficult than the textbook. What if the client was taking many times more risk than the market through active enterprise but already had enough capital to retire, all public market equities still ? No cash, no fixed interest ? Let’s keep him up at night worrying about the markets eh, in addition to what he is already worrying about?

It’s all situational folks. That’s it.

 

@dunno.
Sorry about the timescale of the Sharesight chart. I had it on hand and hadn't realised the two went back further.

But, in a worse case scenario, how would your second chart look for the chap who timed his retirement (for better or worse) for February 2008?

As I mentioned, for me accumulation isn't the issue (although more never hurts). It is preservation.