How Bonds could be Hurting Your Retirement
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- Опубликовано: 7 фев 2024
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References: zbib.org/1611ae243d984b4bb1fe...
Conventional wisdom and popular personal financial advice suggest that portfolios should contain at least some bonds and that asset allocations should shift increasingly into bonds as investors move toward retirement, but new research suggests that this thinking is due for an update.
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The co-author of Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice explains his research on the Rational Reminder podcast ruclips.net/video/y3UK1kc0ako/видео.html
I love it when research suggests the best thing to do is the easiest.
It's not necessarily easy to sit through large draw downs psychologically, but yes, from an effort perspective holding stocks and not selling them except when you need to certainly seems like the easiest strategy in the world.
It makes sense. Anything more complicated is harder to manage and complexity increases management effort exponentially.
Joke's on them, I'll do the easiest thing anyway even when they don't suggest it!
Sure. But for now, this is extreme outlier advice. Yes, Cederberg is a smart guy and Ben is top notch the best one out there... But there's a lot of confirmation bias from RR community types that tend to be more risk averse, and this advice is still a massive outlier. I would not take this as gospel. Nothing in science should be after one popular study (that has absurd assumptions to start).
@@Omar-et7sbI view the RR community as less risk averse than the general population, so long as those risks are compensated. (Unless that was just a typo) 😊
I really like these short videos that summarize the key points of Rational Reminder episodes. They are a great way to review the subject matter and share with others to introduce the topics.
7:23 _"Now, before you run off and dump your bonds-"_
F-k!! I knew I should have watched til the end first! ( oДo)
Thanks for selling your bonds to me at firesale 😎
Same 😢
as ben graham once stated "volatility is not risk", it's the psychology of the investor during times that's the risk
Few have a 200-years investment time horizon. Vol has to be considered, or you can view it as 'net of whipsaw'.
Behavioral risk is the biggest risk IMO. Bonds help mitigate that risk.
@@Gr8thxAlot And if you are taking out a lump sum in drawdown once a year, I don't think you want your portfolio to go down by anything up to about 50%. It's called sequence of returns risk
Your ability to find and consume scientific research, to extract the core message and to communicate conclusions effectively and accurately is impressive. I am a huge fan of this channel! Much value added in 10min videos 👏
Thanks for all the knowledge shared, Ben!
Thank you for presenting this topic. Valuable information received and appreciated! Keep it up!
Dude, this work you are doing here is changing so many lives! Thank you Ben!
Wow, such intellectual honesty from an apostle of Modern Portfolio Theory.
Fabulous take on the Vanguard research.
I know a lot of people say to never look at your portfolio on a daily basis but personally I think it trains your resolve. As the portfolio grows you slowly get introduced to bigger daily swings and become accustomed to thousands of dollars coming/going daily...and you start to believe it's all imaginary until you retire.
I only look at it when it crashes. Really steels my resolve if you know what I mean.
I agree. I have my retirement accounts at Fidelity along with my regular checking etc. So I see it more often than I used to. And yes, seeing up or down by several thousands in a day is pretty normal now. I know I am not going to change anything at all until retirement.
Totally agree. Assuming you have a reasonable level of discipline to begin with, it normalizes big swings and makes you see your portfolio value for what it really is: some numbers on a screen.
I’m with all of you on this. I feel more informed and less likely to make an emotional bad decision when I see it every day.
I look at mine every weekend. I agree it has numbed me a bit to big swings, but I have also found myself sometimes wasting money and thinking "that's nothing compared to how much I lost in the market last week" which is _not_ so great sometimes.
I’m currently 100% in stocks but always kind of took for granted that I would slowly move into more bonds as I got closer to retirement. Thanks for the video , some food for thought that’s for sure 👍
thank you, switching all my VBAL to VEQT (all $2000 of them)
Great content but a question rarely asked is "do we need to tolerate volatility? Do we need the optimum outcome?" for some they may have far more than they could ever spend and dont need to have anything in equities as they could live the rest of their life in luxury being 100% bonds and still have millions left over. Others however will need to optimize their balance as much as possible to eke out even a modest retirement. Our financial situations are all very different and we not only need to understand the risks of asset allocation (amongst others) but whether or not those risks even apply to our situation.
Even if you are rich, 100% bonds risks poverty if there is ever hyper inflation, as in 1923 Germany. Stocks fall but then recover.
That's where Treasury Inflation Protected Securities come into play. If I were richer than I ever needed to be, that is ALL I would invest in.@@george6977
@@george6977 Which is why, IMO, having a TIPS ladder to protect a minimum lifestyle expense may make sense for those with large portfolios who want to de-risk their lives.
Risk is not just volatility - very good point
Love these videos on current academic findings!
Best financial analyst on RUclips
Fascinating results re bonds, especially given the recently apparent volatility of bonds.
Thank you, Ben. Brilliant and valuable analysis. I am a new subscriber and appreciate this summarized overview. I thought Professor Scott implied that "domestic" meant US stocks (where the study was performed) not just the country the investor happened to live in. He cited in your longer PWL interview VTI and VXUS as a possible portfolio.
Thank you for revisiting this research paper. The authors conclusions make sense to me. Bonds smooth out the ride but have a performance cost in most time periods.The international/domestic stock portfolio may be the better answer to sequence of return risks in retirement. Of course, when everyone starts doing it, it won’t work anymore. This is obviously a ripe area for more research and hopefully that will occur and we will have more data and answers.
Given that the persistence of the equity risk premium is unknown, I think the best way to hedge against possible future scenarios is to hold at least some bonds, maybe 5-10%. Holding 100% stocks and no bonds feels like you would be putting too much trust that these studies have no flaws and the findings will persist in the future. I'd rather not take that risk. And the plus point of some bonds is that if you are a disciplined investor, you will have some liquidity to rebalance and buy more equities when they drop (which they will at some point) which should i theory help your returns... although interesting that the study didn't find this type of rebalancing would improve the outcome.
I'm so glad you add the "psychological" parts onto your videos... as investing is so much more than just numbers. Of course it's interesting learning that the expected returns of 100% stocks in 20 years time is going to be whatever % higher vs holding some bonds... but even knowing this, I won't change how I invest, it's not worth the cost of the stress I would have every time the market takes a dip.
I lean much more towards a low risk portfolio, I understand that will probably get worse financial returns, but I don't care... I like sleeping at night not worrying what the stock market is doing. That to me is worth more than the few % a year I'm leaving on the table.
I've been through some equity drawdowns, it was painful but I was far away from making stupid things with portfolio. I think I know myself enough and I am ready for future drawndowns, let it even be more than 50%. What I am not ready for is if drawdown lasts for the long period of time. I think I would drop the towel after being 10 years under water or so.
Investing in equities is not a perfect solution to preserve wealth but there is nothing better out there. We have no choice but to invest.
Great video, Ben! Thank you for your quality content.
What would be the precise definition used for long horizon risk that you mention in order to say bonds and even cash can actually be riskier then stocks in this timeframe?
I’d ballpark that at around 10 years. If you look at the probably of real losses on stocks, bonds, and cash that’s where the differences start to be significantly in favour of stocks.
I got rid of all target-date and bond funds from my portfolios 5-10 years ago - I felt I was comfortable with the extra volatility of stocks anyway and I'd rather have the higher returns when I'm younger (35-45).
I feel so validated rn. My brother, who is like me in terms of his risk tolerance, asked me how he should invest his savings for retirement, and I told him to put 1/3 into a Canadian stock ETF, 1/3 into a US stock ETF, and 1/3 into an international stock ETF. Glad to know we're close to optimal!
Great, data-driven video. Super helpful as always 😎 Thank you 🙏
Thanks Ben. I am 100% stocks and am going to stick this way until I am at least 65.. maybe longer if I live that long.
If you can stomach the ride, it seems to make sense for me at least.
Same here. VTSAX till I die.
this is fascinating. really good stuff, research-backed, and i'd never heard about this before
Finally Someone saying what I have been thinking for some time now. The dogmatic never wanted to admit it but there it is. Bonds do go down amd when they do it takes longer to recover. Thank you!
P.s. not saying bonds have zero place in a portfolio, just always said not for everyone at every time., ie asset allocation based on age is silly and TDFs will give a lower return ad long as investors weather the storms and don't sell at losses in down markets.
Before I watch this video, since I started "late", at 27, I invested basically all of my retirement deposits in low cost ETFs/Mutual Funds that track different benchmarks in my country or internationally since I wanted this money to grow the most and felt I could invest in bonds later when it made sense to. Now I just turned 37, I'm still not sure when investinsting some of my new deposits in bonds will feel like the optimal strategy. I'll definitely feel like bonds make more sense closer to retirement, but I'm guessing that's about 30-35 years away so I'm not feeling the pressure to do it either.
Very good presentation.
I also have a 35/65 domestic/intl split.
Amazing video as always Ben!
This is fascinating. I have a very high risk tolerance but keep 20% bonds because of the research showing this is approximately when risk vs. return becomes linear. It helps psychologically too but I never thought of risk as presented in the video. Thanks as always Ben!
Or consider a gold etf allocation PHYS and bond proxy stocks like utility companies.
@@essenceflow REITs too
A lot of people on forums are conflating the behavioral side with the academic side. First we need to continue to research what’s optimal based on data. Then we can apply a behavioral filter.
But as a defensive reflex, many are putting the behavioral cart before the horse.
Excellent information! I've been thinking about this, if having bonds would always be the best solution to reduce risk of long-term investments. Correlation is sometimes negative but other times (like this last inflationary crisis) correlation is positive, which negates the protection bonds may give to stocks in times of bear markets. In the end it's all about the risk, yes, but bonds or stocks, it doesn't seem to matter much. The big question is how much a person can stomach from stock market crash downfall. If you can stomach a lot, then perhaps the best is to go all on stocks for the long run, as Ben is suggesting, and I suspected could be the case.
Superbly done. The longer discussion in your podcast was nicely compressed.
You might have puzzled American investors, who should NOT have 35% US equities, but maybe 65% US and 35% ex-US.
The paper suggests 50/50 U.S. ex-U.S., but in the appendix they show small improvements from going 35/65 domestic / international.
That would indeed imply 35% U.S.
Didn't they say 50/50 for US investors in the paragraph in the video?
@@BenFelixCSI My mistake then. But the idea of including some home country bias would then be rejected, since the US has around 60% of the world market, correct?
Home country bias is only for non-U.S. investors.
35% domestic is a large overweight to any country other than the U.S.
The paper looks at 50/50 throughout, but in the appendix they show small additional improvements for going 35/65. 35% is a more reasonable allocation for non-U.S. investors (which is what I am).
Thank You Sir!
I think this leaves out some important considerations. Volatility is fine in your earning years, but sequence of returns risk is real. Doesn't matter your risk tolerance when you retire into a recession and your portfolio collapses 50%. So it makes sense to reduce equity exposure as you near retirement, whether that is cash, bonds, or gold. Second, I don't think it is realistic to expect a US citizen to invest 65% internationally, that seems extremely high and overweights global market cap, and introduces currency conversion risk, foreign taxation, and geopolitical risks, none of which are compensated by excess returns.
The research shows that sequence of returns is not as big of a risk as inflation.
For a U.S. investor they are suggesting 50% domestic / 50% international. I’m in Canada though.
You might retire at the worst time, but by then your protfolio is already much larger than if you had allocated some of it to less long-term profitable assets (like bonds).
Also, retirement is not the end. There are still decades left for your protfolio to recover and grow. You can also decide to keep working until markets recorrect before retiring (assuming you are still a very valuable worker).
@@hagaiak interestingly, the retirement success result is independent of what happens in the pre-retirement period. That was one of the first things I ask Scott Cederburg about the paper. They also look at the worst periods for stocks and find that all equity still beats the other allocations. This is likely related to the high correlation of domestic stocks and bonds at long horizons.
I think they should have included real estate in the study, as for so many retirees, their home is still their largest asset. But i guess it is way harder to accumulate reliable data for home prices..
When owning a home, holding at least a small fraction in bonds (or a savings account) would also make sense, since you could be hit by a large repair bill, while the stock market is down.
Nevertheless really interesting results!
Absolutely love your channel and it no nonsense flavor. So retired at 62; considering the S&P is at record highs with the Shiller cape at close to 34, can i afford to look at long term market risk (mean reversion) or do i need to be a market timer and keep some cash with 35 percent in treasuries, until we see that inevitable, yet overdue market correction?
Hi Ben - love the channel - if you DO want to have bonds in your portfolio, what should that bond bucket look like? Is the Global Agg best or should you be all gov, or all corp, or using some sorts of factors?
Great video! Greetings from Germany!
Marc kurze Frage: warum sollten wir 35 % unserer Aktien in Deutschland haben? Unsere Rente, Arbeit, Immobilie und Tagesgeld ist doch schon in Deutschland. Das ist doch ein Klumpenrisiko. Oder übersehe ich da etwas ? Danke
@@in_my_mind7781 Er sprach von "currency zone" also 35% in EU, nicht in Deutschland.
@in_my_mind7781
Exactly, there have been times when home bias would have been sub optimal in Germany, Austro-Hungary, Russia, China or Japan.
@@in_my_mind7781 @in_my_mind7781
Also wenn ich es richtig verstanden habe, dann ist damit der eigene Währungsraum gemeint, sprich für die BRD wäre es aktuell der Euro-Raum. Es soll einen wohl vor Währungsrisken abfedern. Letztendlich läuft es wohl auf nen ACWI + aktuell 20% Europa extra.
Und wie Ben im Video schon gesagt hat, wahrscheinlich brauchst du dafür echt Stahleier um das einfach stumpf durchzuziehen. Zumindest spannende Insights.
What about more heuristic drawdown strategies? i.e when stocks crash, deplete the bonds first and don't sell stocks rather than maintaining a fixed allocation.
Very informative video, thank you Ben! I wonder, is there a big difference in expected outcome from let's say the optimal 100% stocks and a 80-20 split (such as VGRO?)? For someone with significant assets, selling all their VGRO and buying VEQT would trigger a lot of capital tax which might erase that difference?
The thing about psychology during volatility and 'tolerance' isn't going to be something many elder couples have unless they are doing their own portfolio management, or are getting advice from a professional on a regular basis. Which if they're using a Target Date fund, they're more than likely not doing. Therefore the shift to bonds is probably better as as the person gets closer to retirement they're probably going to be looking at the account balance more and thus notice the swings more of which they have no emotional experience with prior with the invest and forget approach during their working years.
Those who are more active in paying attention to those things could build up a tolerance and do better at handling volatility, knowing to cash out when markets are good and hold when things are bad to reduce drawdown, rather then vise versa which is what most people would do emotionally. "It's losing money, pull out before I lose it all", etc.
Thank you the great content. It would be interesting to get more of your thoughts on inflation linked bonds and their role in a portfolio. As it becomes clearer that inflation is the biggest risk over long horizons, inflation linked bonds seem to be underused by most investors (especially if equity risk premiums decline, reducing attractiveness of stocks)
There is some interesting research that suggests varying allocations between equities and TIPS depending on their relative expected returns. I don’t know how practical it is, but it’s certainly interesting.
It’s discussed in this podcast episode.
ruclips.net/video/0Mlb_iHAugM/видео.htmlsi=U7CcHd4hlRbxe_nw
I read The Missing Billionaires after watching your show and was pretty impressed. I don't see myself implementing anything like that without an advisor because it sounds way too difficult to pull off as a DIY investor.@@BenFelixCSI
Great Video!!
I think these lifestyling funds are aimed at people who intend to buy an annuity at retirement. They are aligned to the annuity rates. You wouldn't want a large chunk of your portfolio going down by say 40 or 50% when you are close to retiring, unless you have another reliable source of income and can afford to wait for your portfolio to recover. And don't forget sequence of returns if you are doing a drawdown. Plus hindsight is a wonderful thing, the trouble is you can only get hindsight after the event. If we had a crystal ball we'd all be very rich and retiring early with no money worries. Why didn't anyone tell us before 2021 that buying bonds at that time was a very bad idea and we should wait until bond prices went down significantly like they have since 2021!!!
A timely video! Thanks!
Great video! Thank you!
The main theme of this is a major mind f*ck! I think I'll change my allocation target to something like 45% US equities, 45% international equities, and 10% bonds. This is based on what he said at the end, and knowing myself. And for my clients, I have to really think over my allocation recommendations, but I think they'll more like the advice in the video to the degree I think my clients and handle it.
The definition of risk (chance of failure of your plan) is brilliant -- volatility is risk, the chance of failure is risk. :)
Thanks Ben. Food for thought.
Love the concept of incorporating human capital into portfolio analysis e.g. those in risky cyclical jobs should be more defensive in their portfolio. On the concept of home bias, a 21 year old is long the job market for the next xyz years untill retirement and is essentially decreasing their " position size" with each year they work in the labour market. Therefore increasing your home bias in your portfolio might make sense as you age.
But I will leave that to a proper study, rather than trying to figure it out in the youtube comments.
Very interesting. That does make sense.
A big question that comes to mind here is what kind of bonds are we talking about. Because if it's something like a zero coupon US treasury bond paid 30 years in the future, I'd argue that the bond is saffer because the payout is exact and with very high probability while relying on the market means assuming a decend performance of said market over 30 years, which is historically backed-up, but there's no way to quantify how likely that is in the far future.
They use 10-year treasuries. I somewhat agree with your comment but a couple things to keep in mind: your 30-year bond is only safe in nominal terms. It can still lose badly to inflation. TIPS solve this but they can be very tax inefficient, potentially disastrously so.
Have the studies mentioned considered the impact of rebalancing? For example, what would be the impact of rebalancing from LT bonds to equities during market crashes (with supposedly bonds prices up and equities prices down) using bills and other cash equivalents for expenses?
I’ll have to read the paper. But it’s not consistent with other research out there. What I’ve read has found:
High stock allocations are necessary if you plan on a high withdrawal rate. They also in some timeframes result in the highest final wealth (if the risk works out). But they have fail more often largely due to the sequence of returns risk.
So not just about “not wanting to live through 50% drawdowns” with a 100% stock portfolio. It’s that in many of those scenarios the portfolio fails.
Yes, its departure from other research is what makes it interesting. They are able to replicate more traditional advice by using US data and monthly sampling, which is what most other research uses. Their use of broader data and longer block sampling is what makes their insights unique.
@@BenFelixCSI
Is this research based on recency bias? Surely holding some bonds in 1929 would have been wise.
@@glorydays1565 this paper's conclusions are not new. The strength of the conclusions is, but if your prior was that nominal bonds are good diversifiers for long-term investors, your information is at least 20 years out of date.
@glorydays1565 I don’t disagree at all. I spent lots of time in the video talking about why not to sell your bonds based on this study.
@glorydays1565 I can’t control how people use the information in my videos, but I will sleep well knowing I provided a balanced perspective.
I thought I was so smart with all my target date funds. Sounds like I'll be shifting some things around on the merit of some due diligence reading of the literature here.
Traditionally, target date funds were recommended as people used to buy annuities at retirement.
Amazing research presented concisely and clearly. Well done! One question: What is the logic behind 35% domestic versus one global index? Does it make sense in small markets? (Switzerland, Singapore etc.)? Does it make sense in markets such as Argentina, Turkey? In markets that show low growth for decades?
The logic is missing, which I find a bit bothersome. It's likely related to currency effects which implies that currency hedging could get you to a similar place. If I were in a smaller market I would be hesitant to have a large home country bias. It's important to note that this research is based on developed markets, so the insights are not necessarily applicable to emerging market countries.
Great video Ben. Would love another one of a similar length explaining the different way to look as risk when investing. I think what you are saying in this video is that Bonds/FI carries a risk of not achieving sufficiently high returns to support consumption in retirement, compared to stocks which are risky due to volatility. Are there any other major ways to view risk?
I did a video on that years ago. I should recreate it now that I have information like the paper in this video.
ruclips.net/video/thNrIsU88y8/видео.htmlsi=7EuFGFw0DOq2Nwpz
@@BenFelixCSI haha perfect, more content. Thanks Ben.
I think it depends upon the market.
If rates are lower in the future, bonds make sense.
The opposite way, bonds are riskier.
If you look at your portfolio from the perspective of a multi-generational asset, it makes little sense to shift strategies over time.
Why would the domestic stocks be important? Why should i invest in eurostocks as well as the s&p500? Wouldn't an all s&p portfolio perform just as well, if not better? And if i would invest domestic, why eurostocks instead of the aex? (I'm dutch) Thanks for you insights!!!
Bonds are great if you have a planned expense or if you want a small cushion for unforeseen events
Thanks Ben for not uploading this video during market time. I was so close to dump all the bones watching the video half way :)
😂
Probably best not to dump any bones. Your body might need those.
I have always distrusted the bond portion philosophy and have avoided it... I prefer to base things on some research than my "feelings."
How do the outcomes changes when employing a factor tilted portfolio?
Superb video - Thanks.
For me this is where Index Funds earn their place. What is it? 96% of managed portfolios less well than the Index?
I have bad behavior when i take a big hit on stocks. I feel bonds really suck too. I decided to substitute cash and bonds with Berkshire Hathaway stocks and Whole life insurance with participations. I use covered call ETF in tax sheltered accounts so while it is still stocks, it brings some high yield and soothes the swings over time, way faster yield than bonds too. As I pay down my crap (mortgage) I feel I will do less dumb things if I see stocks crashing so I may go gradually towards more adventurous stock allocation. Human factors are the killer and until I accepted it, I was comdemned to take too much risk and consequentially do more crap and have sucking returns.
No way would I be doing whole life insurance as an "investment" (unless super high net worth and/or special needs child.) I think Ben has covered (pun intended) covered calls and found the strategy lacking.
Haven't seen you analyze the BTSX portfolio which typically features stable dividend stocks and bond proxy dividend stocks.
In summary...VT/VEQT/XEQT/ZEQT (most likely) for the win, with the right "investinal fortitude." As always, an educationally entertaining and edifying presentation!!! 👍👍👍
Just need Blackrock or Vanguard to make an all in one equity ETF with small cap value tilt so I don't have to manually purchase AVUV/AVDV on top of XEQT.
@@SPECTREFTW Absolutely agreed! Avantis or Dimensional should do this and make it available for purchase in CAD.
Great info, especially since it goes against conventional wisdom!
I wonder if Real Return Bonds in Canada follow the same pattern? My understanding is they adjust returns for inflation, but I honestly get pretty confused when I try to read the Bank of Canada's description of how they work.
I think they function the same as TIPS in the US
Thanks Ben. You mentioned that financial advisors might be hesitant to recommend this approach due to the psychological strain it might impose on their retirement-age clients.
As a portfolio manager yourself, is there a certain type of client for whom you WOULD recommend this strategy?
The psychological aspect is very important. We definitely have clients in portfolios like this. Fewer of them would be retirees though.
I just traded all my bonds for the S&P 500 today. It looks like the index fund is at an all time high though!
Yes.
My understanding was that bonds held near retirement help reduce sequence of return risk. Is sequence of return risk outweighed by the risks discussed in this paper?
Exactly. That’s what makes this finding so interesting.
The authors also tested the various asset allocations in the worst periods for stocks and still found the all stock portfolios to be dominant.
Not the presentation I was hoping to hear as a 50 year old hoping to retire in five years. I have bonds based in part on the five year old video from the channel suggesting that bond indexing was a good decision; doesn’t the current video contradict previous views expressed almost 100%? Unfortunately, I can’t dump my bonds as they are down 20 percent and I would lose RRSP contribution room. As well, aren’t bond investors poised to see a snap back with projected future interest rate cuts? Wouldn’t it be silly to sell at a loss when it can only get better for those of us who embraced the 60/40 recommended (not necessarily by yourself but by many) before the interest rate hikes began? It also seems like with equity indexes at an all time high now, bonds might be a contrarian move with a longer time horizon. Thank you!
Please Ben, drop us your skincare or daily routine...Like how do you manage to look better in each video?? 😏😂
Do you think the Monte Carlo simulations that you use for your own safe withdrawal rate calculations might understate SWR because they don't include mean reversion?
Ben is there a reason to hold actual bonds when you could have a High-yield Savings Account or keep your money in something like SPAXX? I know the yield is slightly higher but it feels kinda silly to lock up the money for marginally better gains.
I covered that here ruclips.net/video/KdzOlRRHOU8/видео.htmlsi=UPllNI54nZEy_Mor
Cash / HISA does not give you any protection against falling interest rates.
Is sensitivity analysis of probability of ruin, yield at retirement and legacy based on shorter contribution periods anywhere to be found?
Hey Ben, I really appreciate the informative video. I was wondering if you had any advice for those who are younger investors in college with a long time horizon and high risk tolerance, as in volatility is something that I am pretty much indifferent to. As an American would it make the most sense to just put my investments all into VOO, or is it worth diversifying further. I understand that there are different methods such as small cap value and international, but was just looking for any input you might have. Thanks!
That’s all S&P 500. You will get wildly different opinions on this, but I would prefer more diversification.
@@BenFelixCSI Maybe I’ll do US total market and some international. Thanks for the response!
I have heard that bonds often act opposite to stocks in most market phases. Hence, I hold bonds as part of my portfolio, which is regularly rebalanced.
I wonder whether the study looked into mixed stock/bond portfolios that were regularly rebalanced or whether the allocations were kept separately, because I guess it might have an effect on the outcome. (?)
All portfolios in the study are rebalanced. There are two important points to consider here. 1. The stock-bond correlation has varied considerably over time, sometimes negative but sometimes positive and 2. At long horizons the stock-bond correlation has been positive.
A 50% draw down of a portfolio that has 8x over 30 years is a lot easy to live with then a 50% draw down of a portfolio that has only 3x over same time due to having to much in fixed income, bonds , dividend funds. Build the biggest pile to weather the storms
I can't find any reference to rebalancing in the strategy description in the papers. Are we to assume the results shown are without any?
They apply monthly rebalancing. It’s not stated in the paper but the co-author mentioned it in a discussion. community.rationalreminder.ca/t/episode-284-prof-scott-cederburg-challenging-the-status-quo-on-lifecycle-asset-allocation-discussion-thread/26531/153?u=benjamin_felix
I’m going to invest 100% to stocks and in the years leading up to retirement shift my allocation in favour of bonds.
For an investor who wants to allocate his wealth "one shot" in a all country world ETF, how it is useful to look at tue P/E ratio waiting it returns to the histotical median?
All very well, however personal investment psychology is even more important. He should have started with the psychology part. If the investor cannot stay the course, the self-inflicted damage can be large.
I have 10% long govt bonds because that will take me through a 5 year equity downturn. I believe the research, but need that psychological crutch.
Great video, Ben! I recall on your (also great) podcast with three guests on retirement income myths that the guests unanimously seemed to strongly reject Scott Cederburg's interesting view --- saying that going with all stocks is too risky (and, in fact, more risky) than going with a traditional mixture with bonds for the average person. I am curious: if Scott's research team were to debate the three dissenters on whether all stocks would typically be best for those who can manage bad investor behavior (by not selling on dips) who do you think would win?
I don’t think the retirement super nerds said the all stock strategy is too risky. I tried to capture their rebuttals in this video.
1. Future returns are unknown
2. Stock expected returns may have decreased
3. People can’t stomach all stocks.
Those points are hard to disagree with, but I think Scott’s research is still useful for thinking about asset allocation.
@@BenFelixCSIThanks so much for the reply and the good work!
Thank you!
So, in theory, if you invested in this all-equity portfolio starting as a young adult and stuck with it your entire life, you would be better off. In theory. But what if you are in your sixties and you are just learning about this now. You have a nice nest egg of 25x your yearly living expenses and a life expectancy of 25 years. Would it make any sense to switch to that strategy now, given the sequence of return risks? I don't think so! But, I'd like to hear your opinion. Have you done a video on the book "The Missing Billionaires." It's a very different approach.
I had Victor and James on my podcast. They’re great.
The research discussed in this video would indeed suggest switching to the all equity portfolio at retirement.
Edit to add:
ruclips.net/video/0Mlb_iHAugM/видео.htmlsi=ZqFsl8b3d5tNtPS7
Thanks. I'll check it out.@@BenFelixCSI
Hey just had a question
I'm from India and here many actively managed funds have been able to beat the market consistently over 15-20yr period
Is it because india is growing so we are able to have such high growth or is it something else and do you think it will die down in 25-30yrs
I'd expect inflation adjusted bonds change the calculation. I'm guessing they were left out of the study because there's not a large enough sample?
Yes, they would likely earn a place in the portfolio. The data are too limited to test. Canada has cancelled their real return bond program. Inflation protected bonds also have some weird tax issues that can be problematic.
@2:31 Prof. Scott Cederburg on great RR podcasts. Good non Cdn YT sources say overweight Cda now vs US. Edit: worth reading SC’s orig study. Always DYOR. Thx Ben.
this makes sense.
Ben: What do you think of Michael McClung's "Living Off Your Money," where he suggests never rebalancing your portfolio unless stocks gain 25%+ real return? This will cause the stock allocation to grow larger over time in retirement, sometimes for many years on end.
I have not seen it. Based on the research in this video, anything that increases your stock allocation is probably good.
good work
Bond are way safer than stocks, but they have an interest rate risk, which means you need to either let your bond mature instead of selling them in a increasing rate environnement or effectivelly hedge duration.
What about US investors holding VBTLX /BND ? The total US bond market? Same results?
I part from Ben on basically two topics. I am likely wrong on both, since Ben is an icon and I am an internet dude but this is one. Simply put, you can't brush aside the behavioral/psychological effect of downwards volatility in retirement like Cederberg did and just say "there's also risk of falling short". This is one of those times when reasonable > rational. Extended drawdowns of stock only allocations in retirement are SERIOUS lose-sleep situations, while most retirees simply hold back on spending if needed when they have a balanced portfolio (often going with fixed income/dividends only until markets "recover"). The real, practical risk of portfolios going to zero are often absurd in their applicability to real life. No one would drive a bus towards a cliff and accelerate instead of breaking.
But a stock only portfolio during a serious bear market would be hard to sustain and simply spending less on a portfolio with no Fixed Income is difficult.
We don’t disagree on that! I spent quite a bit of time in the video emphasizing the importance of the psychological impact.
@@BenFelixCSI Thanks Ben! You are right, but the conclusion left me thinking you agree with Cederberg, just with a "proceed with caution" sign and I think that's where I assumed we depart. But you are right, I am adding some conjecture...
I used to hate on the 60/40 and the 80/20 + SPIA plans but as I get older... no surprise... I feel more and more inclined towards them.