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Rob Arnott of Research Affiliates released a significant paper today entitled “The Glidepath Illusion.” [1] Glidepath refers to the conventional asset allocation for retirement saving. Younger savers have a high allocation to equities which slowly “glides down” to a small allocation when retirement starts. This model only has two asset classes: equities and bonds, so the bond allocation rises towards retirement. The rationale for this Glidepath is that bonds are less risky than equities and near-retirees cannot tolerate the equity risk.

Rob decided to question the Glidepath model to see how it performed. He used actual equity and bond returns from 1871 through 2011. The key assumptions are the worker saved $1,000 real per year for 41 years. Real means that the actual amount increased at the same rate as inflation, so it went up over the 41 years in nominal terms.

Further, Rob tested three scenarios:

1) 80% equities/20% bonds gliding to 20%/80% (conventional recommendation)
2) 50% equities/50% bonds unchanged (~ balanced portfolio)
3) 20% equities/80% bonds gliding to 80%/20% (BACKWARDS to conventional recommendation)

Rob reports surprising results. The Inverse Glidepath had the best results.




Standard Balanced Inverse
80%/20% 50%/50% 20%/80%
Glidepath Glidepath


****************Ending assets*********************

Average $124.460 $137,870 $152,060
Minimum $49.940 $51,800 $53,040
10 percentile $73,550 $78,820 $79,300
50 percentile $119,760 $142,620 $148,240
90 percentile $177,400 $184,090 $227,760
Maximum $211,330 $209,110 $286,920



The inverse Glidepath has the best median, average, 10%, minimum, 90% and maximum return. Lest you think these results are purely as a results of the exact sequence of returns, Rob took each of the annualized returns and “randomized” them. The results were the same with the inverse Glidepath coming out on top.

Rob has written extensively that investors should be planning for lower returns going forward. Large factors are the low stock dividend yield and low bond yield the market currently has. For this study, he arbitrarily lowered the expected equity returns and bond returns. The results were the same with the inverse Glidepath coming out on top again.

BOTTOM LINE is these are significant results that we should strongly consider in retirement planning for young people. If you are already near retirement or in retirement, the results have less bearing on your asset allocation.

There is one other point which is also significant. The MINIMUM amount for the conventional Glidepath had $49,940. This is for a cumulative investment of $41,000. It proves if you are a really unlucky saver, you can do everything right and still retire close to broke.
The paper is 5 pages long, but is worthwhile IMO. If nothing else, you might read it and see if it applies to any investors you know.

Thanks,

Yodaorange


[1] Rob Arnott: The Glidepath Illusion (Free registration might be required.)
http://researchaffiliates.com/ideas/pdf/fundamentals/Fundame...
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There is one other point which is also significant. The MINIMUM amount for the conventional Glidepath had $49,940. This is for a cumulative investment of $41,000. It proves if you are a really unlucky saver, you can do everything right and still retire close to broke.
The paper is 5 pages long, but is worthwhile IMO. If nothing else, you might read it and see if it applies to any investors you know.


That's weird. When I tested a "dumb-money" strategy of investing a flat $1,000 per year in the S&P 500 over 40 years using actual returns, the *worst* result was a portfolio of about $421,000.

http://boards.fool.com/updated-know-nothing-investor-analysi...

My numbers are just nominal numbers. I guess that just goes to show you how much our purchasing power erodes over time.
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Yoda,

I need some forgiveness here for being ill equipped to test this myself....but if you singled out 1980 till 2011 would the bond inverse fund way out perform the 80% equity fund?

And if we guessed going forward that bonds will tank over the next twenty to thirty years.....well I think y'all get my drift....that study is a very poor way to see how bonds will fair.......

Dave
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Rob reports surprising results.

It really isn't surprising.

Part of the problem is that the post left out the standard deviation line from the chart in the article;

Standard deviation $37,670 $41,250 $57,010

In increasing the standard deviation, which is sometimes referred to as risk, from $37K to $57K is over a 51% increase in the standard deviation which is s huge amount.



The key assumptions are the worker saved $1,000 real per year for 41 years.........80% equities/20% bonds gliding to 20%/80% (conventional recommendation)

Huh?

In the article he uses an example of someone working from the age of 22 to 63. The conventional recommendation of the "age in bonds" would be to go from 22/78 to 63/27 over that time frame. He is using a more extreme set of values when he goes from 20/80 to 80/20 and this could skew the results.

This does feel not right and could be a red flag that he changed the assumptions until his premise looked better.
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Given a philosophy of primarily holding bonds, one would (if starting young) create a latter of 30 year bonds (each year buying new long bonds) and therefor be able to boost the average interest rate. It would allow someone who started at 20 years old to start recycleing their first bonds at age 50 and be two thirds through the second cycle at 70.

Jeff
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