Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
50% to 55% equities starting retirement seems like a good but not too conservative allocation, with a ramping up over the next 10 to 15 years to an allocation above 65%.
Unfortunately both points of view seem to conflict for most people.
you would be quite wrong as most retirees are in the 40-60% range and not only meet their income goals but sleep well too. you will always have some exhibiting bad investor behavior at any allocation .
the cash level really does not matter much in all cases . cash adds no benefits even in down markets . bonds tend to go up when stocks plunge and that make cash really only a convenience .
my total bond fund is up 4.50% ytd , my go anywhere bond fund is up almost 8% ytd . it is not just about interest anymore than dividends are only what counts about a stocks total return .
rebalancing from stocks and bonds and creating cash generally produces better returns than trying to maintain cash buffers .
in a down market it is always stocks that will NOT be sold since you may actually be buying stocks and selling bonds . if you raised enough cash you may still find yourself buying stocks if markets plunge enough in order to rebalance .
cash buffers are a mental thing and offer nothing that normal rebalancing does not.
lots of studies on whether holding a few years of cash matters .all came to the same conclusion . bonds will likely outperform cash in a down market and rebalancing tends to work better than holding more than current spending in cash.
cash buffers offer a mental comfort ,not a financial one .
as michael kitces points out :
Executive Summary
Cash reserve strategies that hold aside several years of spending to avoid liquidations during bear markets are a popular way to manage withdrawals for retirees. In theory, the strategy is presumed to enhance risk-adjusted returns by allowing retirees to spend down their cash during market declines and then replenish it after the recovery. Yet recent research in the Journal of Financial Planning reveals that the strategy actually results in more harm than good; while in some scenarios the cash reserves effectively allow the retiree to “time” the market by avoiding an untimely liquidation, more often the retiree simply ends out with less money due to the ongoing return drag of a significant portfolio position in cash. As a result, the*superior strategy for those who want to alter their asset allocation through market volatility (the effective result of spending down cash in declines and replenishing it later) appears to be simply tactically altering asset allocation directly, without the adverse impact of a cash return drag. Nonetheless, this still fails to account for the psychological benefits the client enjoys by having a clearly identifiable cash reserve to manage spending through volatility – even though the reality is that it results in less retirement income, not more.
Thanks for the article. I agree it's more about comfort. But most of us need that comfort in market crashes. In general, I agree with you on bonds, too. But it really does depend on what kind. Corporate bonds didn't do so well in 2008 (yes, I know you like to tell me it was an outlier, but I'm not so sure). Funds with a large helping of high yield bonds got hammered. I bought extra shares of Loomis Sayles Bond in 2008, when it lost over 22%, and that really paid off--wish I'd bought more. But your bonds do need to lean toward mid to high quality bonds to go up in a market downturn. Funds like Loomis Sayles Bond or even somewhat more conservative FSICX weren't good diversifiers in the 2008 downturn.
2008 saw treasury bonds soar . most total bond funds were up 5 or 6% .although fidelity was down a bit from the tiered cdos . but in any case rebalancing had you not selling stocks to raise cash but possibly raising cash and buying stocks from selling bonds which went down the least .
in any case no stocks would have been sold . bonds generated far more appreciation too up to that point so cash instruments tend to generally lag behind bond performance . high yield is really more stock like and while it certainly should be part of a portfolio of bond funds it should be a small part unless a screaming bargain like last year . even then it should be considered a proxy for stock , not bonds . we sold off a fair amount of stocks in the models and replaced them with high yield last year .
so not only did they have 40% less volaitity than the s&p 500 but clocked in at a 19% gain beating a total market fund .
there are likely very few situations that bonds will not out perform cash instruments ,especially when you look at the years prior and the interest given up .
had i believed rising short term rates would have squelched bonds and not held the bond funds i do , i would have seen almost a 30k difference this year . i can actually fall 50K or so in bond fund value and still be a bit a head of cash instruments since rates started rising .
so generally you are going to find that using years of cash instead of bonds are going to hurt you needlessly . anything more than current years spending and at best a 2nd year in reserve is likely over kill and that 2nd year is not even really needed except for mental comfort .
rebalancing stocks and bonds always does the trick directly .
Last edited by mathjak107; 11-07-2017 at 02:29 AM..
you would be quite wrong as most retirees are in the 40-60% range and not only meet their income goals but sleep well too. you will always have some exhibiting bad investor behavior at any allocation .
Research in the relatively new field of behavioral investing has clearly shown that the vast majority of investors do a horrible job of managing their investments. What feels well typically works very poorly.
Research in the relatively new field of behavioral investing has clearly shown that the vast majority of investors do a horrible job of managing their investments. What feels well typically works very poorly.
I am a student of behavior economics and Richard Thaler. Your point is valid. One of the resulting questions is how much of that behavior is natural instinct v how much is learned and how much is the result of manipulation of basic instincts
by MathJak107: had i believed rising short term rates would have squelched bonds and not held the bond funds i do
A year ago, after the election, I specifically remember you were very bearish on bonds, which included bond funds (suggesting cash holdings and equities over bonds) because of the hit bonds had recently taken. IIRC you went into long term treasuries as a result of your growing fear. You did believe bonds were going to be squelched and significantly squelched.
i was negative on bonds if bonds started to fall because pre election they were' and suggested that cash instruments and stocks would do better if that continued to happen and i still feel that way . but bonds still have not stumbled . i made a lot of money on those long term treasuries after the election .
it was not even a case of i bought the long term treasuries because rates were rising on bonds . it was a case that if anything caused stocks to stumble or spook , long term treasuries would soar despite the pressure from rates so it became a different issue then when it was business as usual.. more often than not that defensive model out performed a 60/40 mix over so many more rolling time frames so while it was more defensive it still held high gain potential .
my defensive portfolio was not abandoning assets and running to cash instruments at that time pre election ., it was buying assets with the power to do as well as stocks or better if they had to . gold was my biggest winner from that slide over as well as long term treasuries . the model did well and beat a 60/40 mix over that time frame i used it .
Last edited by mathjak107; 11-07-2017 at 07:50 AM..
Research in the relatively new field of behavioral investing has clearly shown that the vast majority of investors do a horrible job of managing their investments. What feels well typically works very poorly.
so you think that them going higher than 40-60% in equities would improve their behavior ? of course not .
if you pop on over to the early retirement forum you will find most have stayed the course right through 2008 and most are 40-60% equity . wellesly income is not only a very very popular retirement fund but if you look at investor returns vs fund returns the difference is one of the smallest spreads you can find .
so most investors in wellesly are not going anywhere when the going gets tough .
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
