Fascinating interview! A key takeaway from the video for me was that an internationally diversified all-equity portfolio can be safer (lower ruin probability) than a target date fund, or a 100% domestic equity portfolio. It gives the lowest overall risk during the retirement.🙂
This is a mind blowing stuff. This single episode (and paper) made me not only reconsider my entire portfolio, but more importantly, rethink the concept of risk and risk tolerance. Amazing.
I really appreciate Professor Cederburg's work here -- especially the observations about long-term versus short-term asset class correlations. I'd love to see him extend his work to include the combination of a target-date fund with some small-cap value equities. Our backtesting (only to 1928) shows those combinations have provided declining volatility along with higher returns and resilience, something I think many investors would prefer.
Thank you, Professor Cederburg, and the TRRP Team. Brilliant discussion. Let me see if I understand the topline research results: Financial Ruin (Running Out of Money) Probabilities for Four Asset Allocation Strategies During Retirement: 100% T-Bills 34%, Target Date Funds 17%, 100% US Equities 17%, 50% US Equities/50% International Equities 8%. If that is correct, Vanguard is always hammering me to increase my international equity exposure so I should be glad that I listened to them. 3.4% is the "safe" withdrawal rate for the 50% US Equities/50% International Equities (VTI/VXUS) and the diversified equity strategy has a lower ruin % as well when considering sequence of returns and a higher (5%) withdrawal rate.
This is a fascinating topic. I like how the case for 60/40 US stocks/US bonds only looks good under the assumption of random monthly draws and independently and identically distributed market values, an assumption that is extremely implausible. I also found the long-term relatively low correlation between home country and ex-home country surprising. The relatively high correlation between stocks and bonds of the same country was a stunning finding as well. My only reservation is sequence of risk at the beginning of drawdown. My plan was to have three years of treasuries to cover three years of catastrophic market behavior. This would not be a percentage of the total but geared to costs for these years. Over time, this would be a smaller percentage of the total. At some point I would not need even this.
Interesting. I was thinking 2 years of TIPS for myself, for first 10 years of retirement. Mostly so that I can sleep at night. After 10 years of retirement, I would likely have used those 2 years on bad years and I'd stay 100 stocks.
@@williamcruz5869 Yes, we're thinking along the same general lines. And yes, not being able to absorb early retirement market cataclysms would keep me up at night. Of course I would inflation adjust the amount in treasuries.
I would like to hear more about the practical implementation of this strategy and in particular the cash buffer. 1) how often would you sell the stocks to fund your retirement (monthly, quarterly, yearly?). 2) how many months of reserve in cash would you keep in your bank account for day-to-day spending and emergency fund. Because I think a lot more people would be okay with 100% stocks if they had say 2-3 years of spending money in cash/GICs. Where as right now, more people have 60/40 portfolio and much smaller cash buffer. And then the question is, could you optimize the short term 2-3 year bucket with bonds to protect yourself from touching the 100% stock portfolio during a draw down.
Professor Cederburg did say they tried to model with 5-10% bonds and the returns were just better with 100% stocks, so getting a cash buffer is likely going to underperform long term. Short term it might smooth out the volatility at the cost of lower overall return, I think psychology becomes a major factor at that stage. I know I would want to have a solid cash buffer even if I knew it statistically would mean a slight hit on the return, just for peace of mind. 95% stocks with a 5% cash buffer is still likely to outperform a 60/40 (or a 20/80 in your retirement years if you have a life strategy type product)
@@sarchmaster5779 I could be wrong, but I think the difference with their modelling of say 5% bonds is that they would still sell proportional amounts of stocks and bonds. e.g if they needed to withdraw $1000, they would still sell $950 of stocks and $50 bonds. Of course, in that scenario 100% stocks would still work better long term as the return on stocks is higher than bonds. I am talking about a scenario where if stocks drop you would stop selling stocks for a period of time and draw down the cash only. My hypothesis using this method is that the drag on returns from the small amount of cash will be outweighed by not touching the stocks during a stock drop.
@@sarchmaster5779 Perhaps try as cash buffer not as a percentage of total assets, but as a multiple of your months living expenses. I.e. 1 year of savings.
If investing a lump sum is almost always better than dollar cost averaging, I would have to assume that the inverse holds as well: it’s best to withdraw money monthly rather than once and holding cash for the year (at least as far as maximizing returns).
@@Will140f Actually, you can't (logically) draw that conclusion from the premises. If a statement is true, the inverse of the statement is not necessarily true. However, the contrapositve has the same truth value as the original statement. In this example of "If you lump sum, then you will likely outperform DCA" the contrapositive is "If are NOT likely to outperform DCA, then you aren't investing in a lump sum"
Question for Ben: The paper specifically discusses only developed markets, yet Dr. Cederburg stated he recommends VXUS (which includes emerging markets) for US investors as the international component. Since the study did not include emerging markets, would it not be more prudent to exclude them from the 50/50 split if one wanted to (hopefully) replicate the results of the study going forward? Thanks in advance. Huge fan and grateful for the education you provide.
If you wanted to replicate the study, yes, but I don’t see a good reason to do that. The study’s sample is based on data availability, not a recommendation for optimal portfolios. The average returns of the DMS data 1900-2022, which include emerging markets, and Scott’s bootstrap data, are pretty similar anyway. -Ben
Thanks for a great episode! I have spent my last 30 years in 100% equities. I retired a couple of years ago and have reduced my equity position to about 80%. This conversation was excellent in helping investors think about the big picture. Awesome content!!
Interesting 80%. Semi retired (still consulting) took over from advisor in Oct and met with accountant to help unwind the chaos w/o big tax hit. Def moving from 60/40 to 80-90% with obv cash on side incl dry powder. It’s a mind thing.
Based on cederburg's findings it may be preferable to invest in inflation protected bonds for your fixed income share, tax implications notwithstanding.
What an amazing conversation! Need to revisit this and reflect upon these fascinating insights. Also curious what other thought leaders (like Wade Pfau, Michael Kitces, etc) on retirement planning think of these findings.
@@rationalreminder fantastic! Coincidentally, I just finished studying the reading on portfolio management in my cfa level 1 course earlier this week, so the timing of your conversation with Scott is great! For sure, I’m now confused at an even higher level 😂
Great episode, thank you for having Scott back and the longer conversation with him. The results are fascinating, I always thought that staying in equities would be better if one can stomach the potential volatility when retired (on a large amount), but having real research and data to support this is fantastic.
Question - assuming I have a stomach for volatility, can I implement this approach for RESP? I.e. forget about bonds and focus solely on globally diversified all-equity ETFs: e.g. ZEQT. My favourite episode yet by the way! I originally heard this advice from the Financial Mentor podcast, but it was anecdotal, with no evidence to back it up. Glad to know it holds up in a study!
Great episode as usual! Here were some questions that came to mind while listening: 1. Does the 50/50 domestic/international being optimal vary at all based on the home country? E.g. that’d be a negative home bias for a US investor but a major positive bias for a Canadian one. 2. Was there any research into unhedged or partially hedged international bonds to see whether they had a similar effect to TIPS or international stocks? 3. For the bonds modeled, was there any examination of term exposure and its effects or did they just use a domestic aggregate bond index? 4. Is he actually planning to include taxes in future models? I know you briefly touched on relative fees for domestic vs international, but with a 10% savings rate assumption it wouldn’t be unrealistic for someone’s entire savings to be in tax-advantaged accounts where the drag of non-reimbursed foreign taxes when holding international would probably be >10x the difference in stated expense ratios. 5. Any chance of an extension to additional risk factors? E.g. would a domestic SCV allocation reduce the marginal impact of international or would an equity portfolio of 100% SCV make a bond allocation more beneficial?
To answer your first question, I quote from their paper: "An allocation strategy of 50% to US stocks and 50% to international stocks is roughly in line with global equity market weights, which should be appealing to American investors. For investors in other countries, an even allocation across domestic and international markets would represent a strong home bias. In the Internet Appendix, we demonstrate that reducing the domestic stock weight to 35% (and investing 65% internationally) produces small performance improvements relative to the Stocks/I strategy. This 35% domestic weight remains a large home bias for non-US investors, but we show that further reductions in domestic investments come at a cost of worse performance. As such, our results suggest that non-US investors should have a home bias in their equity portfolios."
I believe first two were discussed in first video as someone said here in paper. Type of bonds too as part of study limitations. Maybe rewatch first video. Incr video play speed if needed/wanted.
I'm on my third time through this thing. Still gleaning new info. This is all very academic in detail, but the bigger picture it draws could help a lot.
I’d be interested to see a similar comparison between the 60/40, all equity, and a risk parity portfolio levered up to the same volatility as all equities. I’d imagine things could change when you’re not constrained to investing just 100% of assets.
Tapped like before watching. Last talk w/Scott was one of most valuable and helpful on investing I’ve seen. Edit: Bonds in deflation vs study’s inflation? Per paper 35% non U.S. domestic/ 65% int’l - does int’l incl U.S.? Two funds sounds great but prob not viable for retirement drawdowns? Look fwd to more of his studies. Best to all in 2024.
I think the big question is "what does this mean for the Tangency portfolio?" Like is it like value stocks where it's done systematically? Am I underweighting tech stocks by some flawed assumption in the efficient market hypothesis? I'm sure y'all are a few steps ahead of me and are already exploring these ideas, but it opens up a lot of big questions Kudos for sharing it and just getting the knowledge out there
In the earlier discussion of Scott's paper Ben mentioned in comments that you would ask Scott how the situation changes for those in their 40s and early 50s. I cannot find where this was discussed. Thanks!
@@jmc8076 I skimmed through both papers and didn't see it either. From the US data one usually concludes that stocks are superior over the 20 year horizon. What I am asking is whether this remains true with the international data.
Is was not clear from the interview if the home country bias (HCB) applies to investors in small countries with their own currency, like Canada? Perhaps the way the data were calculated, it averaged investors across all developed countries? Since most developed country investors are either in the Euro zone or the US, 35-50% domestic may make sense to most investors worldwide, but not to investors in Canada or Australia?
Are there any retirement calculators that model their results the same way that was done by Prof. Cederburg for the research that was covered during this video?
Ben, have they looked at 100% US stock during accumulation phase (so that exUS does not drag on returns) and then switching to 50/50 US/exUS in retirement for the diversification benefits that allow the lower ruin rate? Best of both worlds? The study seems to suggest during withdrawal period, international serves as a better diversifier than bonds or in other words doing the job of what bonds are supposed to do better than bonds themselves. That being said, did they offer a benefit or hindrance during the accumulation phase? Seems having gone 100% VTI versus 100% VT during accumulation would have yielded a higher retirement balance. Then, switching to VT or VTI/VXUS during retirement for the diversification benefits in preventing ruin probability would yield the overall beat outcome out of anything no?
They never look at US stocks, only domestic stocks. They set this up as the experience of a representative investor in domestic stocks drawing from the return experiences of all countries in the sample. International stocks dominate domestic in accumulation and decumulation. -Ben
@@rationalreminder thanks Ben, in this example it is basically just domestic stocks from a currency perspective, based on where one lives. However, given the US total stock market outperformance, they did not look at domestic as it applies to a US citizen in this study? Just domestic in general? Wouldn’t US being used as the domestic piece here change the outcomes a bit? For example, are they saying that if one lived in europe and so they were 50% europe stocks and 50% rest of world, they would have the same outcome and success as somebody living in the US doing 50% VTI and 50% VXUS? Reason I ask is, for a US citizen specifically to benefit from this, would you recommend they just simply buy VT and hold all stocks at global market cap weight and call it a day?
@rennaway8728 they are using block bootstrap to simulate each investor lifecycle. This means you might have a 10 year block of US returns, a 10 year block of German returns, and so on all strung together to create a possible return experience for a representative investor. International is pulled from the same period for each block and includes the cap weighted international ex-domestic portfolio. Looking at the U.S. domestic experience would likely suggest that everyone should be overweight U.S. stocks, but the point of their data set up is to avoid this exact issue. U.S. historical returns are not necessarily representative of U.S. expected returns. -Ben
What does he suggest for the US-ex (global stocks) percentage of all stocks in a portfolio during working years? I heard about the during-retirement period, but not working years.
Something I need a bit of clarity on to understand this method properly: Scott Cederburg references developed countries multiple times throughout this interview as being the international stock asset classification; however, in the paper being discussed, some of the developed countries on pages 35 - 36 are inclusive of _emerging_ markets. In a previous paper, _ Stocks for the Long Run Evidence from a Broad Sample of Developed Markets_ , the same authors include *emerging* markets on their “Developed country sample”. (Page 33) Cederburg also anecdotally mentioned VXUS as an example of a diversified international asset, but that ETF is 25% weighted with *emerging* markets. The question is, when addressing “developed markets”: does this simply mean TOTAL International ex-(Home Country)? Cederburg does say this as well in the video, but only once. I understand researchers use different terminology during their studies, but it confused the less intelligent (me) among the populace.
A very fascinating topic to think about. But is the main result really surprising? We know a 4% withdrawal from a 60/40 portfolio is not sustainable and you can only withdraw around 2.5%(?) from that portfolio longterm for decent failure rate. The study withdraw MORE for LONGER, so higher equity ratio is expected to be more optimal? like if we increase withdrawal to 6% then it will be even more in favor of 100% equity.
VTI is US only. VXUS is international developed and EM. My point was his study data was 38 developed markets only (did not include EM) yet he recommended VXUS for the international portion. @@jmc8076
Would really like to understand the difference between this analysis and his earlier 2023 paper "The Safe Withdrawal Rate..." that shows 60/40 allocation having a a higher safe withdrawal rate than 100% stocks.
Fascinating and thought provoking, but I experience the psychological aspect as I'm hesitant to implement it. I did tweak exposure to currency-areas though. It seems as if large swaths of the financial sector have failed to realize that the globalization of the equity market actually provides a form of value-hedging through exposure to multiple currency areas.
My early thought is that a TDF is 30% stock in retirement. So yes 100% stock beats that. But I wouldn’t expect it to have a lower failure rate than 75% stock portfolio.
Very thought provoking. But, if markets are efficient, and it becomes widely accepted that an all-equity portfolio is safe, wouldn't asset prices adjust accordingly, which would change the returns going forward?
It depends on what safe means and for who. Not everyone is a long-term investor. Not everyone has real liabilities (like insurance companies). Volatility is very hard to live with no matter how safe stocks are in the long-run. Not to mention that the future could be different from the past. -Ben
Would having an all-stock 50-50 international portfolio in your brokerage account and standard target date fund in your retirement accounts be a good middle ground here long-term, within the context of his research and maximizing long-term gains?
That’s an interesting point. My work has an RRSP/401K match program that I use up to the maximum my employer will match, but because I can’t control asset allocation in that RRSP, I have another one of my own that I use. Target date funds are pretty much always worse, however it can be be worth utilizing any company match programs you have, but don’t contribute beyond the matched amount to a target date fund
Although Ben seems largely against housing as an investment, I own a house (well, the bank owns 66% at present until I’ve paid it all off) but I think being able to sell my house in retirement, or at least borrowing against it, could allow me to get through tougher years in the market during retirement. Alternatively, since the house will be paid off before I’m retired, if things get REALLY tight I can rent it out to generate some cash flow and then rent a cheap small apartment for myself for the years I need any extra money.
Curious--why does this study give a different result than something like the Trinity study that shows better chance of not running out of money if you did hold some bonds?
I have the opposite problem. Given my experience in the last 15 years in the US I can't figure out why anyone invests in bonds at all. To be fair, it is a very biased sample.
I had just started to get into bonds, now I'm not so sure. This is so contrary to conventional wisdom, I hope you follow up in future episodes to see if these findings change your recommended allocation strategy.
Don’t know if I have the stomach for 100% stock but worth thinking about. We’re in US and planning to wait to take SS (so drawing down investments at a higher rate initially). Wonder how 100% stock would hold up under those conditions.
It looks like this works because international stocks outperform bonds, but underperform domestic US stocks. As a result, the international stocks act like better performing bonds in the traditional portfolio.
They don’t look at US stocks specifically. Domestic stocks refers to the domestic return experience of a representative investor drawing from the return experience of all countries in the sample. International beats domestic any way you measure it. -Ben
Did I get the idea right? 50% ACWI + 50% ACWI currency hedged should do the trick for a swiss investor? Historically we a have had a strong (safe haven) currency but our cap weighted stock market is so concentrated that the home country bias gives me bit of a headache. Any thoughts? Thanks for the great episode and new revelations!
Correct (I'm Swiss too and wondered the same). Not sure if it HAS to be 50/50, he mentions there's not a huge difference in outcomes between different % of home country bias it just has to be there to an extent. Also 50% was chosen because it's already close to the US market cap and somewhat close to the eurozone market cap, not based on an analysis for each given country. Lastly fully agree, investing in CH stocks is behaviorally difficult 😅 and your 2nd pillar is already 30-40% in CH stocks anyways.
Re: Timestamp 6:59 - Dave Ramsey NEVER advises holding bonds in your portfolio regardless of where you are along your investing timeline. He advocates an all equities portfolio (75% US, 25% International). Ramsey usually catches a lot of heat for this advice. It seems that that the main finding of this study vindicates Ramsey's position.
I have about 10% bond in my portfolio. Should I sell them for equity? I’m very disciplined and won’t touch my money if huge market downturns. I invest and don’t touch it.
I never understood why anyone would ever leave the equity market. The capital preservation is a flawed strategy. Because NO ONE ever needs access to their entire portfolio on any given date and as long as you don’t sell, the trajectory of the markets is forever upwards. So regardless if you draw $2,000/month or so from a $1 million portfolio or more, you still won’t ever run out because the S&P 500 ETFs has returned on average more than 10% over the last 20-30 years. So where is the logic in converting to bonds when you can clearly make way better returns in equities. I never understood this. Even in downturn years, the succeeding years always give higher returns and you are still only drawing $2000 or maybe slightly higher adding inflation to the overall withdrawal as stated in the video.
It’s flawed to assume that the S&P will continue to generate the same returns of the past 30 years over the next 30 years. Though yes, essentially 0 percent of people will need to “cash out” their entire portfolio upon retirement
I don’t care about the TDF. Almost a straw man. It’s 30% stocks during retirement which will clearly underperform. I’m interested in riding equity glide path or 75/25 portfolio comparisons.
Great content, I've been an avid follower for years and listened to every episode, but... For the fantastic quality of the podcast we have gotten so used to - please, please arrange for proper audio/microphones for your guests too! Listening to the tinny echo-y inputs compared to yours is really painful at times (and nearly makes me stop the playback). Maybe a NY2024 decision? :)
U.S. stocks have outperformed international by 400% since 1994, the year John Bogle published his first book Bogle On Mutual funds where he said international investing is completely unnecessary. I’m so thankful I found that book and followed his advice. International has higher costs, is more complex due to having to deal with the foreign tax credit every year, and is less tax-efficient due to its higher dividend yield. No way I’m paying more fees and taxes for a highly correlated asset (0.89) which offers minimal diversification. U.S. crushed international by double digits again in 2023. Thank you Jack!
This paper/episode said that having an all domestic portfolio had a higher failure rate than a 50/50 domestic/international portfolio, during withdrawals at least
ok. you made me watch 90 mins of geek talk during my holiday break. and I finished it with great excitement.
You’re welcome.
-Ben
Fascinating interview! A key takeaway from the video for me was that an internationally diversified all-equity portfolio can be safer (lower ruin probability) than a target date fund, or a 100% domestic equity portfolio. It gives the lowest overall risk during the retirement.🙂
Probably the best Rational Reminder episode I’ve ever seen! So fascinating.
This is a mind blowing stuff. This single episode (and paper) made me not only reconsider my entire portfolio, but more importantly, rethink the concept of risk and risk tolerance. Amazing.
I really appreciate Professor Cederburg's work here -- especially the observations about long-term versus short-term asset class correlations. I'd love to see him extend his work to include the combination of a target-date fund with some small-cap value equities. Our backtesting (only to 1928) shows those combinations have provided declining volatility along with higher returns and resilience, something I think many investors would prefer.
Chris, You are doing great work too !! Always remember that. 🙏
Thank you, Professor Cederburg, and the TRRP Team. Brilliant discussion. Let me see if I understand the topline research results: Financial Ruin (Running Out of Money) Probabilities for Four Asset Allocation Strategies During Retirement: 100% T-Bills 34%, Target Date Funds 17%, 100% US Equities 17%, 50% US Equities/50% International Equities 8%. If that is correct, Vanguard is always hammering me to increase my international equity exposure so I should be glad that I listened to them. 3.4% is the "safe" withdrawal rate for the 50% US Equities/50% International Equities (VTI/VXUS) and the diversified equity strategy has a lower ruin % as well when considering sequence of returns and a higher (5%) withdrawal rate.
This is a fascinating topic. I like how the case for 60/40 US stocks/US bonds only looks good under the assumption of random monthly draws and independently and identically distributed market values, an assumption that is extremely implausible.
I also found the long-term relatively low correlation between home country and ex-home country surprising. The relatively high correlation between stocks and bonds of the same country was a stunning finding as well.
My only reservation is sequence of risk at the beginning of drawdown. My plan was to have three years of treasuries to cover three years of catastrophic market behavior. This would not be a percentage of the total but geared to costs for these years. Over time, this would be a smaller percentage of the total. At some point I would not need even this.
Interesting. I was thinking 2 years of TIPS for myself, for first 10 years of retirement. Mostly so that I can sleep at night.
After 10 years of retirement, I would likely have used those 2 years on bad years and I'd stay 100 stocks.
@@williamcruz5869 Yes, we're thinking along the same general lines. And yes, not being able to absorb early retirement market cataclysms would keep me up at night. Of course I would inflation adjust the amount in treasuries.
I would like to hear more about the practical implementation of this strategy and in particular the cash buffer.
1) how often would you sell the stocks to fund your retirement (monthly, quarterly, yearly?).
2) how many months of reserve in cash would you keep in your bank account for day-to-day spending and emergency fund.
Because I think a lot more people would be okay with 100% stocks if they had say 2-3 years of spending money in cash/GICs. Where as right now, more people have 60/40 portfolio and much smaller cash buffer.
And then the question is, could you optimize the short term 2-3 year bucket with bonds to protect yourself from touching the 100% stock portfolio during a draw down.
Professor Cederburg did say they tried to model with 5-10% bonds and the returns were just better with 100% stocks, so getting a cash buffer is likely going to underperform long term.
Short term it might smooth out the volatility at the cost of lower overall return, I think psychology becomes a major factor at that stage. I know I would want to have a solid cash buffer even if I knew it statistically would mean a slight hit on the return, just for peace of mind.
95% stocks with a 5% cash buffer is still likely to outperform a 60/40 (or a 20/80 in your retirement years if you have a life strategy type product)
@@sarchmaster5779 I could be wrong, but I think the difference with their modelling of say 5% bonds is that they would still sell proportional amounts of stocks and bonds. e.g if they needed to withdraw $1000, they would still sell $950 of stocks and $50 bonds. Of course, in that scenario 100% stocks would still work better long term as the return on stocks is higher than bonds.
I am talking about a scenario where if stocks drop you would stop selling stocks for a period of time and draw down the cash only. My hypothesis using this method is that the drag on returns from the small amount of cash will be outweighed by not touching the stocks during a stock drop.
@@sarchmaster5779 Perhaps try as cash buffer not as a percentage of total assets, but as a multiple of your months living expenses. I.e. 1 year of savings.
If investing a lump sum is almost always better than dollar cost averaging, I would have to assume that the inverse holds as well: it’s best to withdraw money monthly rather than once and holding cash for the year (at least as far as maximizing returns).
@@Will140f Actually, you can't (logically) draw that conclusion from the premises. If a statement is true, the inverse of the statement is not necessarily true. However, the contrapositve has the same truth value as the original statement. In this example of "If you lump sum, then you will likely outperform DCA" the contrapositive is "If are NOT likely to outperform DCA, then you aren't investing in a lump sum"
Question for Ben: The paper specifically discusses only developed markets, yet Dr. Cederburg stated he recommends VXUS (which includes emerging markets) for US investors as the international component. Since the study did not include emerging markets, would it not be more prudent to exclude them from the 50/50 split if one wanted to (hopefully) replicate the results of the study going forward? Thanks in advance. Huge fan and grateful for the education you provide.
If you wanted to replicate the study, yes, but I don’t see a good reason to do that. The study’s sample is based on data availability, not a recommendation for optimal portfolios.
The average returns of the DMS data 1900-2022, which include emerging markets, and Scott’s bootstrap data, are pretty similar anyway.
-Ben
Thanks for taking time to answer my question!@@rationalreminder
What a fantastic guest and discussion. RR is such a boon to investors.
Thanks for a great episode! I have spent my last 30 years in 100% equities. I retired a couple of years ago and have reduced my equity position to about 80%. This conversation was excellent in helping investors think about the big picture. Awesome content!!
Interesting 80%. Semi retired (still consulting) took over from advisor in Oct and met with accountant to help unwind the chaos w/o big tax hit. Def moving from 60/40 to 80-90% with obv cash on side incl dry powder. It’s a mind thing.
Based on cederburg's findings it may be preferable to invest in inflation protected bonds for your fixed income share, tax implications notwithstanding.
What an amazing conversation! Need to revisit this and reflect upon these fascinating insights. Also curious what other thought leaders (like Wade Pfau, Michael Kitces, etc) on retirement planning think of these findings.
We ask Wade, David Blanchett, and Michael Finke about this paper in an upcoming episode.
-Ben
@@rationalreminder fantastic! Coincidentally, I just finished studying the reading on portfolio management in my cfa level 1 course earlier this week, so the timing of your conversation with Scott is great! For sure, I’m now confused at an even higher level 😂
Great episode, thank you for having Scott back and the longer conversation with him. The results are fascinating, I always thought that staying in equities would be better if one can stomach the potential volatility when retired (on a large amount), but having real research and data to support this is fantastic.
Looked forward to this!! Thanks Ben, Cameron and Scott...amazing!!
Thank you! This was very very insightful and re-iterated my thoughts.
Question - assuming I have a stomach for volatility, can I implement this approach for RESP? I.e. forget about bonds and focus solely on globally diversified all-equity ETFs: e.g. ZEQT.
My favourite episode yet by the way! I originally heard this advice from the Financial Mentor podcast, but it was anecdotal, with no evidence to back it up. Glad to know it holds up in a study!
Great episode as usual! Here were some questions that came to mind while listening:
1. Does the 50/50 domestic/international being optimal vary at all based on the home country? E.g. that’d be a negative home bias for a US investor but a major positive bias for a Canadian one.
2. Was there any research into unhedged or partially hedged international bonds to see whether they had a similar effect to TIPS or international stocks?
3. For the bonds modeled, was there any examination of term exposure and its effects or did they just use a domestic aggregate bond index?
4. Is he actually planning to include taxes in future models? I know you briefly touched on relative fees for domestic vs international, but with a 10% savings rate assumption it wouldn’t be unrealistic for someone’s entire savings to be in tax-advantaged accounts where the drag of non-reimbursed foreign taxes when holding international would probably be >10x the difference in stated expense ratios.
5. Any chance of an extension to additional risk factors? E.g. would a domestic SCV allocation reduce the marginal impact of international or would an equity portfolio of 100% SCV make a bond allocation more beneficial?
To answer your first question, I quote from their paper: "An allocation strategy of 50% to US stocks and 50% to international stocks is roughly in
line with global equity market weights, which should be appealing to American investors. For
investors in other countries, an even allocation across domestic and international markets would
represent a strong home bias. In the Internet Appendix, we demonstrate that reducing the domestic
stock weight to 35% (and investing 65% internationally) produces small performance improvements
relative to the Stocks/I strategy. This 35% domestic weight remains a large home bias for non-US
investors, but we show that further reductions in domestic investments come at a cost of worse
performance. As such, our results suggest that non-US investors should have a home bias in their
equity portfolios."
Thanks
I believe first two were discussed in first video as someone said here in paper. Type of bonds too as part of study limitations. Maybe rewatch first video. Incr video play speed if needed/wanted.
I'm on my third time through this thing. Still gleaning new info. This is all very academic in detail, but the bigger picture it draws could help a lot.
I’d be interested to see a similar comparison between the 60/40, all equity, and a risk parity portfolio levered up to the same volatility as all equities. I’d imagine things could change when you’re not constrained to investing just 100% of assets.
things would change a lot, i am surprised no one is pointing this out
@@bonsuer1 Cliff Asness actually just published a paper in response to this one, basically arguing the point above
Tapped like before watching. Last talk w/Scott was one of most valuable and helpful on investing I’ve seen. Edit: Bonds in deflation vs study’s inflation? Per paper 35% non U.S. domestic/ 65% int’l - does int’l incl U.S.? Two funds sounds great but prob not viable for retirement drawdowns? Look fwd to more of his studies. Best to all in 2024.
I think the big question is "what does this mean for the Tangency portfolio?" Like is it like value stocks where it's done systematically? Am I underweighting tech stocks by some flawed assumption in the efficient market hypothesis?
I'm sure y'all are a few steps ahead of me and are already exploring these ideas, but it opens up a lot of big questions
Kudos for sharing it and just getting the knowledge out there
Algos, rate manipulation and computers like Alladin more influence then other factors.
In the earlier discussion of Scott's paper Ben mentioned in comments that you would ask Scott how the situation changes for those in their 40s and early 50s. I cannot find where this was discussed. Thanks!
I’ve read the paper but can’t recall if it was incl. I think in first video Scott mentioned a new study on retirement.
@@jmc8076 I skimmed through both papers and didn't see it either. From the US data one usually concludes that stocks are superior over the 20 year horizon. What I am asking is whether this remains true with the international data.
Is was not clear from the interview if the home country bias (HCB) applies to investors in small countries with their own currency, like Canada? Perhaps the way the data were calculated, it averaged investors across all developed countries? Since most developed country investors are either in the Euro zone or the US, 35-50% domestic may make sense to most investors worldwide, but not to investors in Canada or Australia?
What about using part of your portfolio at retirement to buy an annuity (25%-50%, let's say) and then the rest 100% stocks?
I wish a litte more emphasis could be put onto the long run correlation between domestic and international pre-globalization and globalization era.
Are there any retirement calculators that model their results the same way that
was done by Prof. Cederburg for the research that was covered during this video?
Great episode. So lets see if we can actually project the past to the future. But good to see that internationally diversified equity is a good choice
Ben, have they looked at 100% US stock during accumulation phase (so that exUS does not drag on returns) and then switching to 50/50 US/exUS in retirement for the diversification benefits that allow the lower ruin rate? Best of both worlds? The study seems to suggest during withdrawal period, international serves as a better diversifier than bonds or in other words doing the job of what bonds are supposed to do better than bonds themselves. That being said, did they offer a benefit or hindrance during the accumulation phase? Seems having gone 100% VTI versus 100% VT during accumulation would have yielded a higher retirement balance. Then, switching to VT or VTI/VXUS during retirement for the diversification benefits in preventing ruin probability would yield the overall beat outcome out of anything no?
They never look at US stocks, only domestic stocks. They set this up as the experience of a representative investor in domestic stocks drawing from the return experiences of all countries in the sample. International stocks dominate domestic in accumulation and decumulation.
-Ben
@@rationalreminder thanks Ben, in this example it is basically just domestic stocks from a currency perspective, based on where one lives. However, given the US total stock market outperformance, they did not look at domestic as it applies to a US citizen in this study? Just domestic in general? Wouldn’t US being used as the domestic piece here change the outcomes a bit? For example, are they saying that if one lived in europe and so they were 50% europe stocks and 50% rest of world, they would have the same outcome and success as somebody living in the US doing 50% VTI and 50% VXUS?
Reason I ask is, for a US citizen specifically to benefit from this, would you recommend they just simply buy VT and hold all stocks at global market cap weight and call it a day?
@rennaway8728 they are using block bootstrap to simulate each investor lifecycle. This means you might have a 10 year block of US returns, a 10 year block of German returns, and so on all strung together to create a possible return experience for a representative investor. International is pulled from the same period for each block and includes the cap weighted international ex-domestic portfolio.
Looking at the U.S. domestic experience would likely suggest that everyone should be overweight U.S. stocks, but the point of their data set up is to avoid this exact issue. U.S. historical returns are not necessarily representative of U.S. expected returns.
-Ben
@@rationalreminder thank you, Ben! Would you say that VT would be a decent choice for a single fund portfolio to hold in this case?
We don’t use it at PWL but it’s certainly a well diversified holding.
-Ben
What does he suggest for the US-ex (global stocks) percentage of all stocks in a portfolio during working years? I heard about the during-retirement period, but not working years.
Something I need a bit of clarity on to understand this method properly:
Scott Cederburg references developed countries multiple times throughout this interview as being the international stock asset classification; however, in the paper being discussed, some of the developed countries on pages 35 - 36 are inclusive of _emerging_ markets.
In a previous paper, _ Stocks for the Long Run Evidence from a Broad Sample of Developed Markets_ , the same authors include *emerging* markets on their “Developed country sample”. (Page 33)
Cederburg also anecdotally mentioned VXUS as an example of a diversified international asset, but that ETF is 25% weighted with *emerging* markets.
The question is, when addressing “developed markets”: does this simply mean TOTAL International ex-(Home Country)?
Cederburg does say this as well in the video, but only once.
I understand researchers use different terminology during their studies, but it confused the less intelligent (me) among the populace.
I'd love to see static allocations in retirement compared with declining equity and rising equity strategies using Scott's data and block bootstrap.
A very fascinating topic to think about. But is the main result really surprising?
We know a 4% withdrawal from a 60/40 portfolio is not sustainable and you can only withdraw around 2.5%(?) from that portfolio longterm for decent failure rate. The study withdraw MORE for LONGER, so higher equity ratio is expected to be more optimal? like if we increase withdrawal to 6% then it will be even more in favor of 100% equity.
Search (google not YT) Bengen’s current holdings thru interview this year. Very interesting.
Excellent research and interview🤠👍
VT = VTI + VXUS, for the most part. this can simplify the portfolio a little bit
Any thoughts on market cap total world stock allocation instead of a 50/50 allocation? Was emerging markets not included?
I think you’ll find if you rewatch (incr play speed) one of two funds Scott advised for US friends is VTI that incl EMs.
VTI is US only. VXUS is international developed and EM. My point was his study data was 38 developed markets only (did not include EM) yet he recommended VXUS for the international portion. @@jmc8076
Would really like to understand the difference between this analysis and his earlier 2023 paper "The Safe Withdrawal Rate..." that shows 60/40 allocation having a a higher safe withdrawal rate than 100% stocks.
That was for only domestic stocks.
-Ben
@@rationalreminder Ah I see, an international sampling of what domestic stock results could look like. Thank you.
Fascinating and thought provoking, but I experience the psychological aspect as I'm hesitant to implement it. I did tweak exposure to currency-areas though.
It seems as if large swaths of the financial sector have failed to realize that the globalization of the equity market actually provides a form of value-hedging through exposure to multiple currency areas.
This is pretty much what I’m doing as I can’t see benefits to bonds.
Amazing episode!
Does this mean we throw out asset liability matching strategies that actuaries have used for decades to fund short medium and long term liabilities?
So if I live in Canada is domestic just Canada or North America?
My early thought is that a TDF is 30% stock in retirement. So yes 100% stock beats that. But I wouldn’t expect it to have a lower failure rate than 75% stock portfolio.
Very thought provoking. But, if markets are efficient, and it becomes widely accepted that an all-equity portfolio is safe, wouldn't asset prices adjust accordingly, which would change the returns going forward?
It depends on what safe means and for who. Not everyone is a long-term investor. Not everyone has real liabilities (like insurance companies). Volatility is very hard to live with no matter how safe stocks are in the long-run. Not to mention that the future could be different from the past.
-Ben
Would having an all-stock 50-50 international portfolio in your brokerage account and standard target date fund in your retirement accounts be a good middle ground here long-term, within the context of his research and maximizing long-term gains?
That’s an interesting point. My work has an RRSP/401K match program that I use up to the maximum my employer will match, but because I can’t control asset allocation in that RRSP, I have another one of my own that I use. Target date funds are pretty much always worse, however it can be be worth utilizing any company match programs you have, but don’t contribute beyond the matched amount to a target date fund
Although Ben seems largely against housing as an investment, I own a house (well, the bank owns 66% at present until I’ve paid it all off) but I think being able to sell my house in retirement, or at least borrowing against it, could allow me to get through tougher years in the market during retirement. Alternatively, since the house will be paid off before I’m retired, if things get REALLY tight I can rent it out to generate some cash flow and then rent a cheap small apartment for myself for the years I need any extra money.
I can't watch this video now but I will watch it later and leave another comment then.
Okay I will watch it right now.
Curious--why does this study give a different result than something like the Trinity study that shows better chance of not running out of money if you did hold some bonds?
Trinity study only uses US data.
-Ben
I have the opposite problem. Given my experience in the last 15 years in the US I can't figure out why anyone invests in bonds at all. To be fair, it is a very biased sample.
I had just started to get into bonds, now I'm not so sure. This is so contrary to conventional wisdom, I hope you follow up in future episodes to see if these findings change your recommended allocation strategy.
Don’t know if I have the stomach for 100% stock but worth thinking about. We’re in US and planning to wait to take SS (so drawing down investments at a higher rate initially). Wonder how 100% stock would hold up under those conditions.
Thanks
It looks like this works because international stocks outperform bonds, but underperform domestic US stocks. As a result, the international stocks act like better performing bonds in the traditional portfolio.
They don’t look at US stocks specifically. Domestic stocks refers to the domestic return experience of a representative investor drawing from the return experience of all countries in the sample. International beats domestic any way you measure it.
-Ben
Did I get the idea right? 50% ACWI + 50% ACWI currency hedged should do the trick for a swiss investor? Historically we a have had a strong (safe haven) currency but our cap weighted stock market is so concentrated that the home country bias gives me bit of a headache. Any thoughts?
Thanks for the great episode and new revelations!
Bump 😂.
Correct (I'm Swiss too and wondered the same).
Not sure if it HAS to be 50/50, he mentions there's not a huge difference in outcomes between different % of home country bias it just has to be there to an extent. Also 50% was chosen because it's already close to the US market cap and somewhat close to the eurozone market cap, not based on an analysis for each given country.
Lastly fully agree, investing in CH stocks is behaviorally difficult 😅 and your 2nd pillar is already 30-40% in CH stocks anyways.
I want a cage match between Asness and Cederburg.
We will get one (in the form of an updated Cederburg paper).
-Ben
Re: Timestamp 6:59 - Dave Ramsey NEVER advises holding bonds in your portfolio regardless of where you are along your investing timeline. He advocates an all equities portfolio (75% US, 25% International). Ramsey usually catches a lot of heat for this advice. It seems that that the main finding of this study vindicates Ramsey's position.
Even a stopped clock is right twice a day
I have about 10% bond in my portfolio. Should I sell them for equity? I’m very disciplined and won’t touch my money if huge market downturns. I invest and don’t touch it.
If you are still accumulating, probably.
10% won’t have any hugely significant impact but yea, long term it’s probably wise to go full equity
I never understood why anyone would ever leave the equity market. The capital preservation is a flawed strategy. Because NO ONE ever needs access to their entire portfolio on any given date and as long as you don’t sell, the trajectory of the markets is forever upwards. So regardless if you draw $2,000/month or so from a $1 million portfolio or more, you still won’t ever run out because the S&P 500 ETFs has returned on average more than 10% over the last 20-30 years. So where is the logic in converting to bonds when you can clearly make way better returns in equities. I never understood this. Even in downturn years, the succeeding years always give higher returns and you are still only drawing $2000 or maybe slightly higher adding inflation to the overall withdrawal as stated in the video.
It’s flawed to assume that the S&P will continue to generate the same returns of the past 30 years over the next 30 years. Though yes, essentially 0 percent of people will need to “cash out” their entire portfolio upon retirement
I don’t care about the TDF. Almost a straw man. It’s 30% stocks during retirement which will clearly underperform.
I’m interested in riding equity glide path or 75/25 portfolio comparisons.
Great content, I've been an avid follower for years and listened to every episode, but...
For the fantastic quality of the podcast we have gotten so used to - please, please arrange for proper audio/microphones for your guests too!
Listening to the tinny echo-y inputs compared to yours is really painful at times (and nearly makes me stop the playback).
Maybe a NY2024 decision? :)
At least some wired or wireless ear/headphones should do better than pure laptop mics.
U.S. stocks have outperformed international by 400% since 1994, the year John Bogle published his first book Bogle On Mutual funds where he said international investing is completely unnecessary. I’m so thankful I found that book and followed his advice. International has higher costs, is more complex due to having to deal with the foreign tax credit every year, and is less tax-efficient due to its higher dividend yield. No way I’m paying more fees and taxes for a highly correlated asset (0.89) which offers minimal diversification. U.S. crushed international by double digits again in 2023. Thank you Jack!
This paper/episode said that having an all domestic portfolio had a higher failure rate than a 50/50 domestic/international portfolio, during withdrawals at least
I believe the paper is averaging results across all developed countries as "domestic". It is not looking at US results.@@CodaBroda