Just thinking and fiddling with numbers... Not really a question in here, unless I screwed something up. Just sharing a perspective and thought process I went through. Maybe it spurs some thought.
There have been some recent discussions on reducing stocks down to around 30% of your portfolio to have a more stable return, with correspondingly higher percentages of cash and bonds.
On the surface that seems more conservative and more stable. But is it really? I realize nobody can actually answer that question, bonds and bond funds have taken a bath the past few years. So that's not as reliable as it should be. I've thought about other vehicles, but most of them come with added maintenance. I don't really want added tasks, I want to live more.
The other idea is to actually either stay where I am or possibly even increase stock funds! Why would I do this? Even though it is more up and down, maybe the likelihood of it returning at least say 2-3% on average is actually higher. I use 2-3% because some of the threads I've read, people are trying to keep up with inflation. And that's actually a goal of mine as well.
Which brings me to some number crunching.. I'm starting at age 65 because that's where I am, it might be a bit different starting at a different age.
Scenario 1 - Estimate a return of 2%, inflation of 2%, and add in SS at age 70, and crunch numbers calculating to be at $0 at age 100. This would be the scenario where you convert your portfolio to something very conservative that yields 2%, assuming that is actually possible.
Scenario 2 - Estimate an immediate one time drop of 40%, i.e. make my starting amount 40% less than what I have. This is simulating a big drop in stocks early in the process when it would be most damaging. Then estimate a return of 5%, inflation 2%, SS at 70, crunch number calculating to be at $0 at age 100. The thought is... that if there is a 40% drop, averaging 5% return post the drop, seems reasonable and actually conservative.
What's interesting is... The two scenarios above give me almost exactly the same withdrawal amount. So effectively returning about the same amount over time.
Comparing the two approaches, it seems to me that either approach yields a conservative return (2%) pretty reliably. But the more conservative approach, i.e. low in stocks/high in bonds/cash, has little upside potential. You're sort of locked into the 2-3% return, if all goes well. Where as the heavier stock portfolio, if you can stand the ups/downs still reliably delivers a conservative return, but has much higher upside. If history is any indication, it will actually return a lot higher than listed, likely in the neighborhood of at least 6-8%, and wouldn't be too unusual for it to return 8-10%. But even if we have a big crash of 40% followed by modest returns of only 5%, it returns the same as a consistent 2% return.
Interesting exercise and, unless I'm missing something, has convinced me to stick with my ratio of 60/40. It's still fairly conservative, as all Bogleheads portfolios are, but has some upside potential. Remembering that even a 5% return after a big crash yields the same as a 2% consistent return without a crash will certainly help me mentally handle any drops that might happen.
There have been some recent discussions on reducing stocks down to around 30% of your portfolio to have a more stable return, with correspondingly higher percentages of cash and bonds.
On the surface that seems more conservative and more stable. But is it really? I realize nobody can actually answer that question, bonds and bond funds have taken a bath the past few years. So that's not as reliable as it should be. I've thought about other vehicles, but most of them come with added maintenance. I don't really want added tasks, I want to live more.
The other idea is to actually either stay where I am or possibly even increase stock funds! Why would I do this? Even though it is more up and down, maybe the likelihood of it returning at least say 2-3% on average is actually higher. I use 2-3% because some of the threads I've read, people are trying to keep up with inflation. And that's actually a goal of mine as well.
Which brings me to some number crunching.. I'm starting at age 65 because that's where I am, it might be a bit different starting at a different age.
Scenario 1 - Estimate a return of 2%, inflation of 2%, and add in SS at age 70, and crunch numbers calculating to be at $0 at age 100. This would be the scenario where you convert your portfolio to something very conservative that yields 2%, assuming that is actually possible.
Scenario 2 - Estimate an immediate one time drop of 40%, i.e. make my starting amount 40% less than what I have. This is simulating a big drop in stocks early in the process when it would be most damaging. Then estimate a return of 5%, inflation 2%, SS at 70, crunch number calculating to be at $0 at age 100. The thought is... that if there is a 40% drop, averaging 5% return post the drop, seems reasonable and actually conservative.
What's interesting is... The two scenarios above give me almost exactly the same withdrawal amount. So effectively returning about the same amount over time.
Comparing the two approaches, it seems to me that either approach yields a conservative return (2%) pretty reliably. But the more conservative approach, i.e. low in stocks/high in bonds/cash, has little upside potential. You're sort of locked into the 2-3% return, if all goes well. Where as the heavier stock portfolio, if you can stand the ups/downs still reliably delivers a conservative return, but has much higher upside. If history is any indication, it will actually return a lot higher than listed, likely in the neighborhood of at least 6-8%, and wouldn't be too unusual for it to return 8-10%. But even if we have a big crash of 40% followed by modest returns of only 5%, it returns the same as a consistent 2% return.
Interesting exercise and, unless I'm missing something, has convinced me to stick with my ratio of 60/40. It's still fairly conservative, as all Bogleheads portfolios are, but has some upside potential. Remembering that even a 5% return after a big crash yields the same as a 2% consistent return without a crash will certainly help me mentally handle any drops that might happen.
Statistics: Posted by ch4au2 — Mon Jan 22, 2024 6:03 pm — Replies 2 — Views 224