The tradeoff is you lock some of those gains down in safer assets. Probably the wrong choice for retirement earlier on, but if you need money during an economic crisis, say you got laid off, then that might change how it's viewed.
That’s very true, but he’s had the account for 30 years and assuming that means he started it young, 50% in bonds is borderline insane. It’s a lot more likely to cost you a large amount in retirement than bail you out in your 30’s.
Applying optimal portfolio theory to the long history of market returns suggests that the most risk-efficient allocation is something like 60% stocks and 40% bonds. The diversification reduces volatility faster than it reduces the overall return, so equity-like returns can be regained by using leverage on the portfolio.
Following this advice today is tricky thanks to the persistent yield inversion: you obviously can't improve returns by using short-term borrowing at 5% to invest in long-term bonds at 4%.
Isn't the point to change as you get closer to retirement? When your investments have a decade plus to recover, leave them in aggressive investments. There is a risk that a decade+ recession might mean delaying retirement, but in that situation delaying retirement is likely the best option even if your money was in s safe investment.
Once you are close to needing some amount of money, say X a year, then you don't have time for that X to recover, so the idea is to move X into a safer investment so it won't go up or down. Any money you don't need is still in aggressive options that have time to recover. Now you need X money every year, so you decide how many years you want to sacrifice growth for safety. Maybe 5 years, maybe 10 years. Call it Y years. Simulations show the historic optimal Y, though I don't recall the exact number and some people might want to gamble depending upon how much freedom they have to change X if needed. So X*Y is roughly the amount of money that needs to be in safer investments.
This all ends up being too complicated a math equation to optimize for the average person, so percentages are given that are much easier to follow which roughly work as a solution to this equation.
Individuals should be able to come up with their own plans based on what they want. For example, if I'm heading towards an early retirement, I might leave all my money in aggressive investments because if a market downturn hits, I'm okay with working a few more years before retiring. I'm also aiming for a retirement with big X spend a year, but have plans on how to live life if I have to move down to medium X or small X. Others might be aiming for a retirement of X and won't be able to make finances work with les than X, so they have to take a much safer approach to guarantee a retirement that doesn't lead to running out of money.
mattmaroon|1 year ago
Majromax|1 year ago
Following this advice today is tricky thanks to the persistent yield inversion: you obviously can't improve returns by using short-term borrowing at 5% to invest in long-term bonds at 4%.
SkyBelow|1 year ago
Once you are close to needing some amount of money, say X a year, then you don't have time for that X to recover, so the idea is to move X into a safer investment so it won't go up or down. Any money you don't need is still in aggressive options that have time to recover. Now you need X money every year, so you decide how many years you want to sacrifice growth for safety. Maybe 5 years, maybe 10 years. Call it Y years. Simulations show the historic optimal Y, though I don't recall the exact number and some people might want to gamble depending upon how much freedom they have to change X if needed. So X*Y is roughly the amount of money that needs to be in safer investments.
This all ends up being too complicated a math equation to optimize for the average person, so percentages are given that are much easier to follow which roughly work as a solution to this equation.
Individuals should be able to come up with their own plans based on what they want. For example, if I'm heading towards an early retirement, I might leave all my money in aggressive investments because if a market downturn hits, I'm okay with working a few more years before retiring. I'm also aiming for a retirement with big X spend a year, but have plans on how to live life if I have to move down to medium X or small X. Others might be aiming for a retirement of X and won't be able to make finances work with les than X, so they have to take a much safer approach to guarantee a retirement that doesn't lead to running out of money.
ChrisMarshallNY|1 year ago
It still makes more than I spend, but we’ll see what the future brings.