Investing - Theory, News & General • Essentially target date funds become too conservative

...Hardly journalistic fodder. This is empirical research that shows diversified 100% equities is safer than TDF. Now those are not the only 2 options in the world, but it is clear 100% equities has a higher survival rate than a TDF...

What research is that? Is this the single brand-new study, Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice, by Aizhan Anarkulova, Scott Cederburg, and Michael S. O'Doherty, or is there more?

The Achilles heel of studies claiming "higher survival rate" for something is hidden assumptions about what survival rate is acceptable, or what withdrawal rate is assumed. To illustrate the problem, I use the Vanguard Retirement Nest Egg Calculator. Changing only the withdrawal rate and the stock/bond allocation, we find that at a 3% withdrawal rate (i.e. $30,000/year from a $1 million portfolio), a 50/50 stock/bond allocation had a 99% success rate, and 100% stocks had a 94% success rate. 100% stocks had a six times higher failure rate than a balanced portfolio.

On the other hand, at a 7% withdrawal rate, 50/50 had a 32% survival rate, while 100% stocks had a 53% survival rate, so 100% stocks certainly had a higher survival rate. For the comparison of survival rates to be meaningful, you have to start out a priori with an assumption of how much risk the retiree is willing to take. Once again, the answer depends on risk tolerance, but this is often hidden by an a priori unexplained assumption that there is a "right" probability of ruin, and, often, that 5% is acceptable.

The Titan submersible made 90 dives, and survived 89 of them, so it had a 98.8% survival rate.

My recent thread linked below has failure rates clearly demarked on the graph.
You can choose your failure rate and which AA has the least risk, or find portfolios with similar risk for your preferred chance of failure.

viewtopic.php?f=10&t=419511&newpost=761 ... ead#unread

The 30/70 AA in a target date fund is too conservative for a 25x portfolio. It may not be for bigger portfolios - more to come.

Excellent post! (graphs removed for space considerations)

The goal is not to have an AA that after the fact has the best SWR. Your graphs show that is impossible. The goal of the target date fund is to manage risk regardless of the outcome.

To your points, we can't just look at SWR we also have to consider returns. If we have a Japan-like worst SWR outcome we get great returns. If I remember correctly it was over 200x expenses with 100% stocks and a Boglehead savings rate. Taking that 1.8% SWR at 100/0 AA we see that they could spend 3.6 years of expenses per year. If the Japan investor followed a target date path they might have gotten 120x expenses (a pure guess) and they could spend 4.2% of that, per your graph. That's 5.0 years of expenses per year. These worst Japan cases are actually very good outcomes. The target date fund helped to manage risk and we had no need for an after the fact optimum.

While Japan is often touted as some awful sequence it was the opposite. The same was true for the US year 2000 retirement. These US and Japan low SWR cases are some of the richest times to retire if you follow the target date approach. If the "best" SWR is conservative because of aggressive growth in accumulation then we are managing risk well without needing to hit the optimum.

I'm not familiar with UK or Germany. The UK seems to show that heavy stocks was better and I suspect target date approach will have done well - de-risking doesn't hurt us if we got better accumulation returns with stocks.

I am unsure of Germany but the other 3 cases TDF was a nearly optimal approach given what we didn't know in advance.

Comments?

Statistics: Posted by StillGoing — Fri Dec 29, 2023 2:04 am — Replies 79 — Views 6658