This is correct until it is not correct. With large enough portfolio size the conservative investor will be safer. You can certainly minimize risk with a 30/70 portfolio but you need many years of expenses for this to be true. What I want to show with the Monte Carlo model is which portfolios above 25x expenses share similar risk. The goal will be to get a better grasp of what is risky and to put numbers behind the term. Excel will let me fit a picture in the background of a chart so I will need to figure out how to make a color map of expected returns. I'll try to figure this out for part 2 so we can see expected returns along with the Monte Carlo portfolio failure rate curves.I believe Rick Ferri indicated that many prefer a 30/70 mostly because it was low volatility. Of course since we experienced 2022 many will go even further and drop the bond to short or even cash. Abc132 is pointing out that your withdraw is better if you have higher equity.Some the recommended asset allocations at retirement being discussed in this thread (like 70%/30%) for myself are too aggressive for my sense of risk/benefit. I suspect that I am not alone in this sentiment. The last 5-years before retirement is a critical time for one’s portfolio. The behavioral finance aspects of risk tolerance get outweighed by one’s the hard reality of one’s risk capacity to bear losses based on anticipated income needs.
For me, this is a key difference between an accumulation investor and distribution investor.
In my opinion, the risk that you run out of money is far greater than short term volatility. To mitigate this risk, the investor must learn to stomach the risk. This is especially if you cannot collect social and have no pension. You do not have to go super high equity. The standard 60/40 or even 50/50, but failure to overcome your fear of short term volatility might mean you run out of money.
Examples:
Is 80/20 at 40x or 60/40 at 30x riskier and by how much?
If I have a 100/0 portfolio how much fixed income do I need to add to reduce risk by an order of magnitude (10x less failure chance)?
Statistics: Posted by abc132 — Mon Jan 01, 2024 3:01 am — Replies 21 — Views 2527