How Bonds could be Hurting Your Retirement

TL;DR

Conventional wisdom suggests that portfolios should contain bonds and asset allocations should shift towards bonds as retirement nears, but new research challenges this advice.

Transcript

conventional wisdom and popular personal financial advice suggest that portfolios should contain at least some bonds and that asset allocations should shift increasingly into bonds as investors move toward retirement investors often use rules of thumb like 100 minus their age in stocks or they use target date funds which systematically shift from s... Read More

Key Insights

• ⚾ Asset allocation advice based on a mix of stocks and bonds may need to be rethought.
• 🥅 Risk should consider the probability of not meeting future consumption goals, not just volatility.
• 🍉 An all-equity portfolio can outperform traditional asset allocation strategies for long-term investors.
• 😘 Bonds can be riskier than stocks over long horizons, with higher downside risk and lower recovery after crashes.
• 🛟 The dominance of all-stock strategies is more pronounced for longer life spans.
• 🥡 Psychological tolerance for volatility should not be taken for granted when considering asset allocation.
• ↩️ Expected returns and future market conditions are uncertain, and historical data may not be representative.

Questions & Answers

Q: Why is asset allocation advice typically based on a mix of stocks and bonds?

Conventional wisdom suggests that as retirement nears, portfolios should become less risky, and bonds are considered less risky than stocks.

Q: Is volatility the best measure of risk for long-term investors?

While volatility is important, risk should also consider the probability of not meeting future consumption goals.

Q: What did the recent research on asset allocation find?

The study found that an all-equity portfolio with 35% domestic stocks and 65% international stocks produced better outcomes for long-term investors across various measures, including retirement wealth accumulation and sustainability of retirement spending.

Q: Why did adding bonds to the all-equity portfolio result in worse outcomes?

Bonds, while less volatile, have higher downside risk in terms of purchasing power and do not recover as well as stocks after crashes. Bonds also have higher correlations with stocks at long horizons.

Summary & Key Takeaways

• Conventional asset allocation advice recommends a mix of stocks and bonds, with the allocation to bonds increasing as retirement approaches.

• Volatility is often used as a measure of risk, but risk should also consider the probability of not meeting future consumption goals.

• A recent study suggests that an all-equity portfolio, consisting of 35% domestic stocks and 65% international stocks, is optimal for long-term investors from early savings through retirement.