I am interested in FIRE, and have been playing around with different portfolios in Portfolio Analyzer. The free account only lets you look at 10 years of data at a time.
In very basic terms, my understanding is that investing 100% in a low cost index fund that tracks the whole market or even just the S&P 500 should produce higher returns in the long run than investing some in equities and some in bonds. But the value of bonds is that they are supposed to reduce volatility and portfolio drawdown, which is much better psychologically for the investor. Loosely, when equities go down, bonds go up, and vice versa.
A period of time that really scares me from a FIRE perspective is 2000-2010, because it’s a decade that had had 2 economic shocks and had a negative stock market return. When I test $2 million with $60k inflation adjusted annual withdrawals and an 80/20 portfolio in portfolio analyzer against a 100% S&P 500 portfolio, I get:
End Balance 80/20
$1,505,174
End balance 100%
$1,156,600
Best Year 80/20
23.60%
Best Year 100%
28.50%
Worst Year 80/20
-28.61%
Worst Year 100%
-37.02%
So the bonds did their job very well from 2000 to 2010. They reduced returns in good years, but they reduced drawdown by more in bad years. But then when I look at 2014 to 2024 with the same scenario, I get very different results:
End Balance 80/20
$4,191,416
End Balance 100%
$5,142,196
Best Year 80/20
26.78%
Best Year 100%
31.33%
Worst Year 80/20
-17.23%
Worst Year 100%
-18.23%
The bonds really didn’t reduce drawdown much at all, but they reduced overall performance fairly substantially.
I’m sure there are many nuances here that I don’t understand, but do recent changes in the bond market mean that it is more closely correlated with equities, and so investing in bonds loses some of its value in reducing volatility? Or was the last 10 years a blip?
In very basic terms, my understanding is that investing 100% in a low cost index fund that tracks the whole market or even just the S&P 500 should produce higher returns in the long run than investing some in equities and some in bonds. But the value of bonds is that they are supposed to reduce volatility and portfolio drawdown, which is much better psychologically for the investor. Loosely, when equities go down, bonds go up, and vice versa.
A period of time that really scares me from a FIRE perspective is 2000-2010, because it’s a decade that had had 2 economic shocks and had a negative stock market return. When I test $2 million with $60k inflation adjusted annual withdrawals and an 80/20 portfolio in portfolio analyzer against a 100% S&P 500 portfolio, I get:
End Balance 80/20
$1,505,174
End balance 100%
$1,156,600
Best Year 80/20
23.60%
Best Year 100%
28.50%
Worst Year 80/20
-28.61%
Worst Year 100%
-37.02%
So the bonds did their job very well from 2000 to 2010. They reduced returns in good years, but they reduced drawdown by more in bad years. But then when I look at 2014 to 2024 with the same scenario, I get very different results:
End Balance 80/20
$4,191,416
End Balance 100%
$5,142,196
Best Year 80/20
26.78%
Best Year 100%
31.33%
Worst Year 80/20
-17.23%
Worst Year 100%
-18.23%
The bonds really didn’t reduce drawdown much at all, but they reduced overall performance fairly substantially.
I’m sure there are many nuances here that I don’t understand, but do recent changes in the bond market mean that it is more closely correlated with equities, and so investing in bonds loses some of its value in reducing volatility? Or was the last 10 years a blip?
Statistics: Posted by I-Know-Nothing — Sat Aug 24, 2024 9:38 am — Replies 1 — Views 237