@wallace471 Yes, "sticker prices" is a key phrase! What a mess. It's as bad as shopping for a new car. There are so many variables. It's good to be on the safe side, but I always counsel clients hard in this area. Are the kids willing, able, and motivated, or is this the parents' choice? Would they prefer to get started at a 2-year college, trade, or tech school? In the Kiss Your Money Hello book I have a whole chapter on how not to pay for higher education. Most folks can dramatically decrease their costs if they're willing to team up with their kids and do a little work. And I say in there, if the kids are pushing back and unwilling to help out, are they ready for college and all the work that entails? There are lots of options most folks aren't even aware of, and the steps to get free higher education start around 7th grade.
And while we're on the topic, it's October, if you have a kid going to higher ed, FILE THAT FAFSA now! The aid is first come, first served and when it's gone it's gone. It's simpler now and easier to fill out. Even if you think you'll get no help, file it.
Morningstar has published their "The State of Retirement Income" report for 2023.
A synopsis of the report findings is available here: https://www.morningstar.com/retirement/good-news-safe-withdrawal-rates
They note that a 4% withdrawal rate may now be applicable for a 30 year time horizon.
I was also interested in their (30 year) return projections for input into PRC, per our various prior discussions on this thread.
Attached is a summary of that for various asset classes and uses the M-star inflation value.
Case for buy and hold US Stocks over 20 plus years from Motley Fool:
Over the very long-term, no asset class has outperformed the (US) stock market on an annualized return basis. But over shorter timelines, the performance of the iconic Dow Jones Industrial Average(^DJI0.82%), broad-based S&P 500(^GSPC0.59%), and innovation-driven Nasdaq Composite(^IXIC0.55%), is no more predictable than a roll of the dice or flip of a coin.
... the best example of history and perspective working in investors' favor might just be the dataset Crestmont Research updates on a yearly basis.
The analysts at Crestmont examined the rolling 20-year total returns (including dividends) of the S&P 500 dating back to 1900. Though the S&P didn't come into existence until 1923, its components could be found in other major indexes prior to 1923. This made it relatively easy for analysts to back-test their calculations to 1900, which ultimately yielded 104 rolling 20-year periods (1919-2022).
The jaw-dropping takeaway from Crestmont's rolling 20-year total returns data is that all 104 periods would have generated a profit for investors. Regardless of whether you, hypothetically, purchased at a temporary peak or were lucky enough to buy an S&P 500 tracking index during a bear market, you'd have made money as long as you held your position for 20 years.
No matter what's to come for Wall Street -- even if it is a big move lower for stocks in the short-term -- a long-term, optimistic, and opportunistic investor mindset is, historically, a virtually foolproof moneymaking strategy. https://www.fool.com/investing/2023/12/03/money-supply-great-depression-big-move-for-stocks/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
So, based on this article and numerous others I have read, given a 20 year plus time horizon, does it really matter what your asset allocation is? 60/40, 90/10, 40/60? No it doesn't. Does it matter if you add developed international stocks? No it doesn't. Do you need to rebalance every year? Not really. Set up your asset allocation and your index funds and then leave it alone. My only caveat is to take advantage of big changes that only happen rarely, like doing ROTH conversions during a big market drop, buying US Treasuries (and CDs for that matter) when they make a big and quick jump in yield, or playing around with your MAGI to get the best ACA (ObamaCare) tax breaks. Is Pizza Man morphing into Lasagne man, maybe ????.
More evidence for Buy & Hold from Schwab: https://finance.yahoo.com/news/forget-timing-market-schwab-research-110000932.html
I agree with: “Set up your asset allocation and your index funds and then leave it alone.” For me it also means: Do not follow the smart gurus and the prediction articles. Also, do not use Timing; meaning, do not “take advantage of big changes that only happen rarely.”
Asset Allocation does matter. There is a different between 60/40, 90/10, 40/60 and adding international. They will all make money in the long run; the question is how much, and how much risk are you willing to take if you need to use the money.
Do you need to rebalance every year? Not necessarily. But eventually, if you do nothing, 40/60 will turn into 60/40. Do you want to take this risk?
All good points. But for me taking advantage of the rare events, which I do not consider timing, has saved me $10,000's and allowed me to retire early. Following the great recession of 2008-2011, I moved to an asset allocation of close to 90/10. The following 10 years resulted in BIG US stock index returns that allowed us to retire early. In March 2020 when the stock market tanked due to COVID-19, I did a big ROTH conversion which resulted in good returns in the following run-up, plus no taxes in the future, not to mention the likely reverting to pre-TCJA 2017 tax rates. That ROTH conversion has also allowed us to greatly reduce our MAGI for 2023 (and will also for 2024/2025) which allowed us to get the enhanced ACA rebates (Obama Care) saving us about $8,000/yr as well as greatly reducing our State and Federal tax bill. As far as rebalancing, if you believe in Wade Pfau's Rising Glide Slope https://www.quantitativesingularity.com/wp-content/uploads/2018/08/Retirement_RisingEquityGlidePath_ssrn-id2324930-2.pdf then increasing stock allocation is not so bad.
Anyone else have thoughts??
I try to fight the urge to market time, but sometimes will play around the edges. Usually when I try, I am way too early and move money long before whatever turn I was predicting happens, if it ever does.
It's good to keep an honest scorecard, it's easy for me to remember the few thousand $ I put into the market just before the March 2020 bottom (within minutes of the bottom), but I was surprised when looking back through my records that I was holding ten times that much cash as part of my fixed income 2021, but made sure I got it into bonds by early 2022 as I saw rates inching up and I didn't want to miss out. I dang sure didn't miss out ????
My latest experiment is to start lengthening bond duration by adding some BLV under the theory that surely we're done with the bond bear by now. (There is a good theory of duration matching to have your bond duration match 1/2 your retirement length). We'll see how this adventure goes.
Here is a great memo from Howard Markets that speaks to this issue. I find that he is a very thoughtful investor who does not experiment much. I have the view of "Don't try to predict just be prepared". This creates a portfolio that is short on big bets and long on diversification.
https://www.oaktreecapital.com/insights/memo/taking-the-temperature
@ricke, I think I may have heard that rule of thumb but based on my research, the holding period needs to be greater than the duration and depending on the interest path it could be up to two times the duration. So I keep that range in mind when I am buying bond funds.
Also, those looking for great fixed income returns, look at MYGA's, 5 year rates between 5.5% and 6%. Probably won't last for awhile anyway but MYGAs are slower to respond to interest changes that we have seen in the recent run up and elevator ride down.
This probably does not fit in this thread but since there have been a few comments on market timing which is a decision, I am including it here.
We all have an investment strategy and an investment decision process by default, or we would be paralyzed. However, I think it is always good to reflect on our strategy and decision-making process from time to time. Although I have a background in decision analysis, I found this recent podcast by Howard Marks and Annie Duke to be a good reminder of some of the elements that can improve our decision making. It is a little long, but I hope you enjoy it as much as I did.
The paradox is it's best to set things up optimally, then do the necessary minor housekeeping at end of year or other appropriate time, but if you're into this stuff, the interweb knows it and you get fed a constant stream of click-baity articles with all kinds of cool new strategies and techniques.
Thus, there's an urge to implement, kind of like going shopping when you don't need anything and getting lured in by on-sale items and product positioning. I enjoy the stories of people who find long-lost 401ks or other accounts that haven't been touched in decades due to neglect and have outperformed the experts 🙂
I always remind clients that get caught up in this exercise that if something happens to them, where does that leave the spouse or partner that's not the financial driver in the family? With a complicated thing that has to be managed? Will they then be forced to turn to those high-price advisors, planners, or insurance people for help, and get fleeced? Will you make a mistake as you age, if it's a ladder or other thing that requires management?
Simple is better for lots of non-math reasons. Maybe just tinker, speculate, and dabble in your brokerage or get a new hobby 🙂
I recently came across some interesting portfolio asset allocation material revolving around the website https://portfoliocharts.com/
If you are not familiar with it, the (free) website enables modeling of the performance of portfolios that use a variety of asset classes (domestic and foreign) with a number of interesting tools. It is very user friendly, and provides examples and methodologies associated with the portfolio analysis. The asset database appears to range from 1970 to the present (avoiding calamities like the Great Depression, World Wars, etc). The website offers many tools to model portfolio behavior/performance.
Various (static) portfolio examples are provided, and their performance based upon many different metrics are available: https://portfoliocharts.com/portfolios/ Some of these could serve as inputs to PRC, depending on the asset classes available.
An example is a standard US 60 (US Large Cap Blend, e.g. VTI)/40 (US Int Term Bond, e.g. AGG) portfolio, for example: https://portfoliocharts.com/portfolios/classic-60-40-portfolio/
Using the Performance link for the 60/40, a few example metrics provided with a 10 year horizon include:
Real CAGR = 5.7% (Median - 10 years) with a Standard Deviation = 11.5%
Real Withdrawal Rates = 4.1% (Safe), 3.1% (Perpetual), 3.4% (Long Term)
Ulcer Index = 12.4 (a metric which combines drawdown and recovery time, lower = sleep better)
For the "distribution phase" during retirement, the concept of Risk Parity portfolios have also been introduced on the website. An informative and entertaining website/podcast on this topic is also available: https://www.riskparityradio.com/
An example presented on Portfolio Charts is the "Golden Butterfly" portfolio which has 20% Large Cap Blended (e.g. VTI), 20% Small Cap Value (e.g. VIOV), 20% ST US Treasuries (e.g., SHY), 20% LT US Treasuries (e.g. VGLT), 20% Gold (e.g. GLDM)
Using the Performance link for the Golden Butterfly, a few example metrics provided with a 10 year horizon include:
Real CAGR = 6.2% (Median - 10 years) with a Standard Deviation = 8.3%
Real Withdrawal Rates = 6.0% (Safe), 4.6% (Perpetual), 4.8% (Long Term)
Ulcer Index = 3.7
A test of this portfolio is also tracked at https://www.riskparityradio.com/portfolios
Portfolio Charts also provides a tool to examine withdrawal rates here: https://portfoliocharts.com/charts/withdrawal-rates/
Finally, the concept of global equities was also recently addressed in Portfolio Charts using a new tool: https://portfoliocharts.com/charts/global-withdrawal-rates/
The associated blog post is informative: https://portfoliocharts.com/2024/04/01/what-global-withdrawal-rates-teach-us-about-ideal-retirement-portfolios/
Here, portfolios from various (developed) country markets (including the US) are compared in aggregate. They can also be specifically chosen, and worst case scenarios for the market can also be chosen depending on the countries included in the tool analysis. This effort involved more than 8000 portfolios reflecting the possible asset class combinations!
An interesting discussion on this development with the Portfolio Charts creator is now available on the Many Happy Returns podcast:
https://many-happy-returns.captivate.fm/episode/building-a-bulletproof-retirement-portfolio
and a synopsis of the study is available at their associated Pensioncraft website ( https://pensioncraft.com/videos/what-is-the-safe-withdrawal-rate-in-retirement/) and YouTube channel: https://www.youtube.com/watch?v=JvzlEBxvgns
According to the current Portfolio Charts analysis ( https://portfoliocharts.com/charts/global-withdrawal-rates/), the global portfolio with the best safe withdrawal rate metric (4.52%) an Ulcer Index (8.52) consisted of 10% Domestic Stock (Large Cap Blend), 30% Foreign Stock (Developed Large Cap Blend), 20% Domestic Bonds (10 Y Government Bonds), 10% Commodities (e.g. GSG), 30% Gold (e.g. GLD). If applying this portfolio in the US market, the Annual Return Tool indicates that the average real CAGR = 5.6% with a standard deviation = 11%.
For a US only portfolio applying this tool, the best safe withdrawal rate metric (5.63%) an Ulcer Index (4.40) consisted of 40% Domestic Stock, 0% Foreign Stock, 30% Domestic Bonds, 0% Commodities, 30% Gold. According to the Annual Return tool for such a portfolio, the average real CAGR = 5.7% with a standard deviation = 9.2%.
Lots of considerations to ponder here with these tools and associated inputs to PRC!
Interesting article from Morningstar, 60/40 asset allocation is back. From a review of the report by USA Today:
If you invest according to the classic 60/40 rule, with three-fifths of your nest egg in stocks and two-fifths in bonds, then take a moment to pat yourself on the back: It’s a pretty good strategy. ● That’s the conclusion of a recent report from Morningstar, the financial services firm. ● The 60/40 portfolio isn’t so popular these days. It laid an egg in 2022, when both stocks and bonds tanked. Some observers concluded the 60/40 rule was dead. In 2022, Morningstar reports, investors could have done better by diversifying their portfolio beyond stocks and bonds, adding in such assets as real estate and gold.
Over the longer term, however, the 60/40 portfolio has performed consistently well. A “plain-vanilla” 60/40 portfolio, comprising stocks and investment-grade bonds, earned about 15% interest in 2024, Morningstar found.
To measure its merits, Morningstar compared it against two other portfolios: one made up entirely of stocks, the other broadly diversified across 11 kinds of assets.
Over 10 years, the stock portfolio gained 12.7% a year, compared with 8.3% for the 60/ 40 mix and 6% for the diversified portfolio.
Over 20 years, stocks yielded 10.4% a year, versus 7.8% for the 60/40 mix and 6.7% for the diversified portfolio.
Morningstar also looked at “risk-adjusted” returns, a calculus that considers the risk-to-reward ratio of each investment strategy. Looking at rolling, 10-year averages, after adjusting for risk, the analysis found that a 60/40 portfolio outperformed an all stock portfolio roughly four-fifths of the time over the past five decades.
The point of the paper, according to one author, is to illustrate that a simple 60/40 portfolio performs pretty well. An everyday investor does not necessarily have to branch out into commodities, gold and real estate to diversify.
“The takeaway point is that diversification doesn’t have to be overly complicated,” said Amy Arnott, portfolio strategist at Morningstar and co-author of the April 22 report. “You are getting a pretty significant diversification benefit just from adding bonds.”
The 60/40 rule relies on a fundamental principle of investing: Stocks can yield robust annual returns, but they are volatile. Bonds provide modest but stable income.
Bonds are supposed to provide a hedge against stocks. When stocks go down, bonds go up – or, at least, they don’t go down very much.
In 2022, however, the financial market seemed to turn upside down. Stocks lost 18.6% of their value that year, as measured by the S& P 500. Bonds lost 13.7% of their value, according to the Vanguard Total Bond Market Index. Inflation pushed that figure to 20%, the worst bond return in 97 years, according to a NASDAQ analysis.
Those numbers prompted many investors to hunt for alternatives to bonds. But the April Morningstar report suggests that a simple portfolio of stocks and bonds can still offer enough diversification for the average investor.
Morningstar is not saying that a 60/40 portfolio will outperform the stock market. Instead, its analysis found that a 60/40 mix generally offers a relatively high return relative to the risk. When you balance reward against risk, the 60/40 portfolio often does better than either the stock market – which is inherently risky – or a more varied portfolio. “We’re saying that if you take risk into account,” a 60/40 portfolio “did historically outperform a stocks-only benchmark,” Arnott said. “You’re getting a smoother ride, basically.”
That said, Arnott cautions that the 60/40 portfolio isn’t for everyone.
“If you are a younger investor, in your 20s or 30s, you don’t necessarily have to have a 40% position in bonds,” she said. “I think the 60/40 portfolio is most appropriate for somebody who is approaching retirement, or in retirement.”
The longer your money remains invested, the greater advantage you will gain by keeping most of it in stocks, financial experts say. If you won’t need the money for another 20 or 30 years, you will have plenty of time to ride out bear markets.
“It makes sense for long-term investors to be mostly in the stock market, as long as they can stand the ups and downs,” said Robert Brokamp, a senior adviser at The Motley Fool. “Now, for those who are close to or in retirement, then I think the 60/40 is actually a good starting point, because you need to balance risk and reward.”
Catherine Valega, a certified financial planner in Winchester, Massachusetts, advises most of her working-age clients to keep at least 80% of their investments in stocks, “and sometimes as high as 100%,” she said. “The 60/40 is way not aggressive enough if you are a younger investor.”
Valega is wary of the bond market. Bonds have been volatile in 2025, largely because of President Donald Trump’s ongoing trade war and uncertainty about interest rates and inflation.
Instead, Valega has been looking for high returns on cash-equivalent investments, including certificates of deposit and money market funds. Both have consistently offered interest rates of 4% or higher this year. They can provide stability to an investment portfolio, just like bonds.
The paper is better than the cover article, discussing how all assets have been more tightly correlated recently, so diversification benefits have been less powerful than in the past. But as to whether that will continue in the future, we are left, as always, with "no one knows."
@hines202 to bring your very nice summary down to a single example: What made me personally decide to invest 25-50% in an ex-us index is thinking about Japanese investors during the 30 years of returns 1989-2019. Those investing only in Japanese stocks (with Japan having an amazing economy at that time, mind you) would have made 0% real return over that span. But Japanese investors that invested globally (eg including USA and Europe) would have had very nice returns.
I view my international funds as hedging that kind of risk during the forty years or so our funds have to last. It could be a Japan scenario, or any where the USA has a more singular effect than the rest of the world. @Ricke article notes that correlations have increased over the past decade (which makes sense given the regime of globalization). But that correlation has not been a physics law of nature: there are a million ways things could start diverging again. So my hedging that risk is not the same as a statistical examination of how often it occured, or backtesting--simply realizing that is a risk I want to protect against, and finding the most efficient way to do so (at the possible cost of higher returns if that risk never materializes).
