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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76101  
Subject: Re: No bonds??? Date: 6/1/2005 2:53 PM
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Most financial planners recommend retirees hold 40% of their funds in bonds or fixed investments. Is there ever a case for a retirement portfolio to hold little in the way of bonds?


Most financial planners are full of prunes.

Here is an interesting article.

http://www.fpanet.org/journal/articles/2001_Issues/jfp1201-art6.cfm

He quotes Bill Bengen's work and another by Gordon Pye showing their conculsions on SWR's and on "conservative" mixes.

"In follow-up analyses, Bengen found that if he changed the asset allocation mix, he changed the sustainable 30-year withdrawal rates, which tended to peak at around 4.3 percent at stock allocations of between 50 percent and 75 percent.2 When he looked at rolling 30-year periods taken quarterly rather than annually, he found that the highest sustainable withdrawal rates were almost exactly the same, but were experienced in portfolios whose stock allocations fell in a narrower range between 55 percent and 65 percent.3

A subsequent analysis by Gordon Pye offered similar but not identical results. Instead of using actual historical returns, Pye created a Monte Carlo simulation model, which evaluated possible sequences of future returns on various asset categories. The Monte Carlo simulation tool created by Pye basically takes the range and standard deviation of historical returns and inflation and simulates possible future outcomes of these variables. Over a relatively short ten-year retirement period, Pye found that a stock portfolio was able to sustain withdrawals of four percent of the initial portfolio, inflation-adjusted, in 92 percent of the hypothetical future sequences of returns. When the analysis was extended to 20-year and 35-year time horizons, the 4 percent liquidation rate succeeded more than 80 percent of the time."

He then goes on to report his own findings. He has a figure which shows that for ANY mix of stocks and bonds, a 3.5% withdrawal rate (over a 30 year retirement) was the maximum safe rate for the period from 1964 to 1970. If you retired in that period, the maximum safe withdrawal rate was 3.5%. He has four model portfolios, a "conservative (20% stocks, 50% bonds, 30% cash)", "balanced (40%, 40%, 20%)", "growth (60%, 30%, 10%)", and "aggressive (85%, 15%, 0%)". His finding is counter-intuitive:

"the aggressive portfolio almost always outperformed the alternatives as an income-producing vehicle, and where it did underperform, the difference was relatively small. The same is generally true of the growth portfolio compared with the balanced, and the balanced compared with the conservative."

Aggressive is 85% stocks, 15% bonds. Draw your own conclusions. And don't base them on a single article.

cliff
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