How We Plan To Change Our Equity Allocation In Retirement

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So the other day I found myself on catching up on some of his content, and I read through a post The 2018 GCC Asset Allocation.

In it, Jeremy talks about his asset allocation in retirement and why he decided to get a bit more conservative and increase his bond allocation to about 10%, leaving equity allocation at 90%.

Now, to the average reader, this doesn’t sound conservative at all. But the last time I met up with him in Chiang Mai, I was surprised to learn that his equity allocation at the time was 100%. I almost spit out my Thai Tea.

“Dude, are you nuts?!? Aren’t you worried about sequence of return risk? Don’t you keep a cash cushion? What about your Yield Shield?!?”

His response: “Meh”

Among the FI bloggers I’ve met in real life, Jeremy is easily the most optimistic person I know. He’s the type of person who would fly into a city where he’s never been to without any idea where he was going to sleep that night and just “figure it out.” As an obsessive planner, that would make me go nuts.

In fact, the last time we met, he told me a story of how he almost drowned trying to learn how to surf. He had fallen off his surfboard and gotten sucked down by a current. He remembered trying to claw his way up to the surface and thinking “Boy, if I don’t surface in the next 10 seconds I’m going to run out of air!” But then he did surface and made it back to shore. His lesson learned? “Whee! Let’s do it again!”

The funny thing is his wife Winnie is the exact opposite of him. When they met, her and FIRECracker immediately started bonding over how to haggle with vendors in Thailand. Winnie had apparently spent an hour haggling to get 25 baht off for a pair of jeans. Jeremy’s reaction was “Who cares! That’s less than a dollar!” Winnie’s reaction was to say “Yes, but with this 25 baht, I can get an icecream!” This immediately endeared her to FIRECracker as that’s exactly how she thinks. Naturally, when Jeremy tried to get her to learn how to surf with him, her reply was “No thanks. I will be here on the shore not dying.”

So when he explained his shift in allocation thusly, I had to laugh.

I’m a firm believer in the 100% equity portfolio. Statistics are a beautiful thing. You might phrase my thinking as, “We’ve won the game, so let it ride! Woohoo!”

The Missus has a different point of view, more along the “We’ve already won the game, let’s stop playing” persuasion. And persuade, she did.

That’s so Winnie.

But that article made me think of what we planned to do with our equity allocation over time. We’re 60/40, a pretty conservative ratio relative to cowboy Jeremy over there.

During our accumulation phase when we were still working, the usual financial literature would suggest that we should have taken a pretty aggressive investing stance, maybe starting off with 100% equity. Instead, we started at 60/40. At the time, we were intending to increase our equity allocation as we got more comfortable with investing, but as luck would have it the 2008 crash hit, and we struggled to just stay at break even. Fortunately, our 60/40 allocation got us back to even in just a year, and as a result we were relatively gun shy and didn’t increase our equity allocation, staying at 60/40 for most of our accumulation phase.

Then we retired.

After we retired, we found the 60/40 allocation pretty useful, so we kept it. By shifting our fixed-income allocation towards higher yielding assets like Preferred Shares, REITs, and High-Yield bonds, we built our Yield Shield and comfortably weathered the storm of the Saudi oil crash that happened just as we retired.

However, after we managed to stave off that disaster by not selling into a market storm and instead eating into our cash cushion, a strange thing happened: the market went up. And up. And up!

When we retired in 2015, we had $1M. Now, 2.5 years later, despite not working, our net worth has grown to $1.25M.

This has caused us to re-evaluate our Yield Shield. Right now, our yield is sitting around 3%. When we had $1M, that meant $30k a year. But now that we have $1.25M, 3% is $37,500. Our cash cushion of $50k, which covered us for ($50k / [$40k spending – $30k yield = $10k]) 5 years now covering us for 20 years. Clearly we were being too conservative and leaving gains on the table.

So as our portfolio went up, the equity portion also went up due to market gains.

As our portfolio grew, our Yield Shield grew as well. And when that Yield Shield started approaching my living expenses, I started thinking, “Hmm. Maybe I should start allocating more towards equity!” After all, equity is future gains vs. current income. But if my current income is already enough to pay for my living expenses, it makes no sense to give up future gains if I don’t need any more current income.

So my plan in retirement is to gradually increase my equity allocation. This will have the effect of reducing my Yield Shield, but as long as that Yield Shield continues to match my living expenses, I see no reason to give up future gains for current yield if I don’t need it.

That being said, 100% equities seems a bit nutso to me. Modern Portfolio Theory assumes that you own at least 2 assets so that you can rebalance between them as markets go up or down. But with 100% equities, you lose that ability to rebalance. So even if markets just keep going higher and higher, I don’t think I ever want to go over 80% equities.

Now hopefully this is where the majority of our retired life ends up. Rising equity markets increase our portfolio size to the point that 3% or even 2% dividend yields is more than enough to support our living expenses. I will sacrifice excess yield to get future capital gains in a heartbeat. Plus, equities are an excellent hedge against inflation, while fixed income is not. So it makes sense to pivot over time towards equities if you’re still young and have lots of years of retirement left ahead of you.

At a certain point, though, I do plan on going into bonds. Specifically, when I reach the “traditional” retirement age of 65. It’s pretty far in the future (30 years, in fact!) but when I become old and gray, it might make sense to trim my equity exposure. After all, my exposure to inflation is naturally limited by my remaining years, and at that point I plan on gradually shifting to fixed income.

Over time, I plan on gradually reducing my equity exposure as I get older until I hit a floor of 20/80.

So that’s my multi-decade retirement plan for our portfolio. I’m curious as to what you think. Let us know in the comments!


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68 thoughts on “How We Plan To Change Our Equity Allocation In Retirement”

  1. Its perfect time for this post as my bonds part of portfolio is in negative where as the equities are in positive. Every time I (15days) am buying, very reluctantly pressing on buy button on VAB 🙁
    But as you said, it all depends the retirement age, which is 5 years from now, hence I continued to 60/40 and slightly drifted 70/30 recently.

    As a matter of fact I was waiting for a detailed article that you mentioned in recent post
    “That being said, there are a few things you can do to reduce the impact of rising interest rates while still keeping that nice buffering effect. And that will be the topic of next Wednesday’s post.”

    Could you care to post the alternative options/strategy to reduce the downturn of the bond value.

    As usual your blogs are the most effective and understandable to common man like me. (tried several other bloggers including Garth Turner’s posts, but the content bounces over my head )

  2. I’m in the GCC camp for asset allocation. I’m planning to FIRE this year and will go 90%+ into equities. Once the bnd yield goes over 3.5%, I will probably allocate more to bonds.

  3. There is a solid argument to go 80-100% equities but the real bitch is volatility tolerance. If you can stomach drawdowns of 40-50% in your portfolio, then that is the right way to go for someone as young as you both. What helps is if the portfolio is large enough (TBTF – “too big to fail”?) that the combined dividend yield from the portfolio covers all your living expenses. For me, a TBTF portfolio is when the dividend income from 100% equity portfolio covers 125% of your expenses. This way, even with dividend cuts during severe recessions, there is enough passive income coming your way so you don’t have to sell any shares. But today, with US CAPE-10 ratio above 33, it makes sense to very slowly ease up from 60% to 80-100% over time. Use corrections to bump up the equity allocation.

    1. I like that. TBTF. Still, there’s something about a 100% equity portfolio that just seems nutso. What do you rebalance if you only have one asset?

      1. Wanderer, The beauty of TBTF portfolio is that you don’t need to re-balance at all. If your equity portfolio is throwing off dividends equal or more than 125% of your living expenses, then what you do is simply save the 25% excess each year to fund any shortfall during the bear market where the dividends may get cut. This way, you aren’t selling a single equity share during the depths of the bear market – thereby eliminating the single biggest reason for portfolio longevity failure. Of course, there is a limit to this – if the dividends took several years to restore back to your expense coverage point, you will need to look at lifestyle expenses to avoid selling shares. But typically, a bear market lasts less than 18 months and generally, the dividends are restored to previous levels if not higher within 3 years (even if you look at the 2008-09 recession data). So, the 100% equity portfolio is not so “nutso” for someone with a TBTF portfolio size. Of course, very few are so fortunate to amass a portfolio so big and still retire early enough.

  4. I like the seriousness behind the jokes about Jeremy and Winnie agreeing on their financial approach together.

    Regardless of whether you keep combined or separate bank accounts, etc., a couple doing life together is still essentially a single “household” economic unit. And if you want the relationship to last, then there needs to be buy-in from all stakeholders 🙂

  5. Hi F&W,
    Are you still having these (Preferred Shares-CPD. REITs-XRE. High-Yield Bonds-HYI) in your fixed income portfolio apart from VAB?
    If yes, could you please share the allocation of these fixed income assets?
    I am currently 40% bonds with VAB only and sighting the interest rate increase and the downturn of bond value, I wanted to add riskier fixed income assets that you guys are having it.
    Would love to know the best percentage (30%) among them if I decided to go 70(E)/30(B) instead of 60/40.
    appreciate your take on this bonds subject more in detail.

  6. vbmfx looks like a good bet for a chunk of money in older age. the index should have enough bonds maturing constantly to take advantage of any rising interest rates due to inflation where the fund is buying new bonds at the higher coupon rate.

    i have about 15% of our total investments tied up in a couple of preferred etf’s and noticed the share price about 10% under par with current rising rates and inflation fears. i don’t need to sell them thankfully at this reduced price and they pay out a boatload each month. i did turn off automatic reinvestment on these in order to take advantage every other month of what might be a better buying opportunity, thus putting a little dry powder out there.

    rock on!

      1. bnd is an etf and vbmfx is an bond market index tracker. i overlaid them and it looks like bnd is a % higher since ’07 but can’t tell total return from that only price movement. i just did a search for bond index funds to see how the payout changed with changing interest rates. vbmfx goes all the way back to 1989 on the chart i found. to me it looks like 6 vs. half a dozen.

  7. Now you have opened the Pandora’s box, how do we NOT time the market, and what asset allocations will give the maximum return with minimum risk.

    Nobody really knows… one technique may work well now, (100% Equity) but looking at past market returns, that allocation was what caused people to jump off buildings, and bankrupted Hedge funds ( think Black Scholes ) Even Jeremy is seeing the light at his age, and risk tolerance, that Cash is King, in the words of Warren Buffet.

    60/40 is what I advise my Couch Potato friends, if they ask, its easy, its safe, and as you approach or actually enter the spending phase, you need to lower your risk by changing this allocation. Markets in the past have always recovered… eventually, but it has taken some of them 10 and 20 years to come back. So no, you did not lose, but the opportunity costs can be massive. This is why diversification is king, and having cash to re-balance back into equity vehicles.

    Remember that the calculation is a Percentage, not an amount, the amount automatically gets redistributed, based on the value, so therefore you don’t need to change your allocation throughout the market cycle, as long as you have an investment horizon that is double the current market cycle.

    I don’t, i retire in 5 years, and need cash for 2 University Students, therefore that portfolio is mostly cash and Bonds, with 30% Equity. RRSP’s are about 50/50, and during the last 2-3 years of this market cycle intend on keeping this balance.

    Everybody is different, which is why you need individual advice, from a qualified investment professional, not me.


    1. Yeah, I usually tell people to start with 60/40 too, and then creep up as they get more comfortable with investing. You really have no idea what it’s like to go through a downturn and watch your money plummet day by day until it actually happens. We went through it and survived, and even then I was gun shy about increasing my equity allocation.

  8. I suppose it depends on everyone’s own risk tolerance. I’m personally not hot on the idea of increasing my fixed income as I get older. Instead, I would rather consider upcoming potential circumstances. We are 9 years into a bull run. Yes, small 10% corrections like what we just had will happen (My balanced portfolio hardly moved that there was no reason to even rebalance). I was previously 60/40 but am currently 50/50 (since beginning of this year). I understand that I’m giving up so gains in the short term doing this but I accept it. I also accept that in the next couple of years, the likelihood of a recession increases as central bankers raise rates. As a result, a slightly lower return now is ok if I can bounce back from a recession faster by having more in safer stuff and have more to rebalance with. Once a 20%+ drop occurs, my intention is to go back to 60/40 or 70/30. My cost on a balanced portfolio would be the opportunity cost of maybe 1-2% per year until that happens.

    About a year before 2008-9 happened, I had done the same thing. Everyone I spoke to at that time thought I was stupid. When the shit hit the fan, all anyone was saying to me was “how did you know?”. My response was simply, I like my money and won’t put it into harms way more than needed.

    Overall, to me age is not the determining factor for asset allocation but circumstances. Everyone said house prices could only go up in Toronto and GTA. I sold my house and got the money from it in January 2017. There too, everyone said that I was stupid. Where are things now? Are houses only going up now? Quite the opposite. There too, I accepted that I would lose some potential gains but also accepted that a gravy train like that doesn’t last forever.

    All the power to Jeremy. Smart guy and I respect his position. I don’t have his nerves of steel, though. Currently, I’m 42, sitting on $1,025,000 with a 3.2% yield, all ETFs and small amount of cash. No debt and still working to increase the balance of the portfolio for another 2 years, 10 months. I’m very happy with how things have transpired to now.

    My advice. If your risk tolerance has changed and you are ok with a higher equity position, by all means do it. If it’s because of greed or envy (I only say this as you compare your returns to Jeremy’s), that isn’t a good reason to make the change. I say this all respectfully – you both have done very well and should be proud of what you’ve accomplished and doing it within your risk tolerance. I think there’s a very good reason he ended up with Winnie.

    1. I’m with the other Dave here (that is a weird name coincidence) and my situation is similar. That 10% correction woke me up a bit. I have magic number I want to hit then I think I’m following his lead to 66% assets in equities and the rest in cash or target/fixed income. Jeremy is a smart guy but after reading his post about intentionally over drawing his bank accounts b/c they were short on cash while in Japan – I’d just rather live with lower returns and my money lounging in a bank somewhere.

    2. Last thing I’ll add on the subject is that the YTD yield for my portfolio is sitting at 1.04% considering all distributions. If I had gone 60/40 instead, the return would be 1.24%. 70/30 would be 1.03%. 80/20 would give 1.10%. 90/10 would give 1.17% and 100/0 would give 1.24%. It’s still a little early in the year so these percentages don’t amount to much but it still is something to think about. If 60/40 = the same return as 100/0 and I could only chose between the 2, I would pick 60/40. Hands down.

    3. Well that’s market timing isn’t it? Using “circumstances” to make your investment decisions is trying to read the tea leaves just like every other active manager. I mean, it’s great that you pulled it off, but not everyone can do that.

      1. I suppose some might call it market timing. I’d prefer to call it rebalancing my assets to meet my risk tolerance. I don’t just apply rebalancing to an ETF portfolio but to all assets. Nothing more than that.

        I like my money nice and safe close to my bossom. LOL. You do what you gotta do regardless what others think but you also accept the consequences of your decisions. Ultimately, you can’t blame anyone else for your decisions.

        Lets hope for a nice return for all of us by year end.

  9. Weird – so you guys are getting MORE aggressive in early retirement? That’s definitely a departure from the norm since most of us get more conservative as we rely heavily on our investments for living expenses (to some extent at least). I actually went from 100/0 in 2016 to 90/10 in the past year, much for the same reason that Winnie did – “we already won the game, so let’s stop playing with 100% of the money”. Now I’m the happy owner of a bond fund that pays roughly 3% interest.

    1. Once our portfolio rises enough that our living expenses are covered by the S&P500’s dividend yield, yeah.

      But let’s remember that my “more” aggressive is still miles away from your “conservative.” 90/10 is higher than the 80/20 ceiling that I’d ever even consider.

      You and Jeremy really do have a lot of weird similarities, don’t you?

  10. I have been 90/10 pretty consistently but since I have a pretty hefty W2, real estate, and business asset allocation…not much concern about short term market returns.

    1. Right, that would be another reason to go 90/10. If this book or blog ever starts making serious money, that would also accelerate our equity allocation increases.

  11. We’re at about 80/20, but I’m increasing that to 70/30 if the stock market continues to go up like this. Timing the market is okay. 10% isn’t a huge deal.

    A while back, I read about having more fixed income when you retired. Then increase equity as you get older. So it’ll be something like 20/80 when you reach full retirement. Then gradually shift to 60/40 or something like that. This protects against big losses early on. That’s what kills most retirement portfolio. I’ll need to research more.

    1. Right, the higher fixed income definitely helped us whether the oil crash that happened right at 2015 when we retired, but I don’t know about going majority fixed income. 60/40 is as low as we took it, that seems like a nice sweet spot.

    2. much has been written about the right mix when retired , but if you have a good yieldshield when retired .then a 60/40 portfolio is still the way to go ….

  12. I’m in 100% equities right now and have been for the last couple of years. The recent correction made me realize that I have a very high risk for tolerance (I was actually expecting it to drop 40-50% and had mentally prepped myself for that). I’m still in the accumulation phase though and have a secure government job. Once I retire (I’m hoping in a few years from now if I can ever get out of the “one more year” syndrome), I will add some bonds to my portfolio. I don’t plan to add more than 40% though. I think 20% in equities is too conservative. Wouldn’t you still need growth in the event that you live well into your 90s?

    1. Well, depends on my spending patterns by that time but hopefully by then my portfolio will be so fucking big that I could live off a savings account.

      That’s the plan anyway 🙂

  13. i come to rising interest rates over next couple of years and more …….

    a great fixed income one in this environment is Preferred shares ETF .. such as ZPR

    it will do well in such a rate environment and pay great dividends …

    less bonds more Preferreds in fixed income ???

  14. Great article and discussion!

    I’m still at 100/0 but with new 2018 tax changes in US now controlling when I convert Trad to Roth IRA amount based on market environment. Since % of house equity of net worth is about 10% I treat that as if I were invested in bonds.

    I’d much prefer paying down my house prior before investing in bonds.

    1. Yes, I see not paying 3% on a mortgage like a cash investment. Its like a garunteed GIC, one that you know will reset at a higher interest rate every 5 years (This is Canada, and we don’t have 30 year terms that are worth shit)

      I have doubled up my payments, and did a lump sum this year.

  15. So when you change your allocation is this going to happen organically (e.g. not rebalancing the portfolio) or will you sell some of the yield shield to put towards equities, particularly if there is a bear market?

  16. That’s an excellent return over 2.5 years! I have a follow up question on the yield of a portfolio. If the overall yield on let’s say a $1 M portfolio is 3% ($30K total), what proportion is that yield from the equity versus the fixed income with a 60/40 portfolio? I’m confused on how to structure a portfolio to yield sufficient income for living expenses to reach FIRE. Also, is there is a relationship between this yield and the proper asset mix allocation? For example, if 40% of the portfolio is bonds, to get $30K, would require a return of 7.5% ($30K/400K) from the bond portion, which seems high to me. I know I’m missing something here and would really appreciate a clarifying example to bridge this gap! Again, it’s awesome that you’ve grown your portfolio without being tied to a 9-5 anymore! Thanks in advance.

    1. That’s a great question, and I really need to get around to writing an article about this since multiple people have asked. Expect one coming up soon! Ish.

  17. For full disclosure, I have not read the referenced article cited.

    Nevertheless, you article makes a great point of distinction. Your age and allocation at retirement matters to your safety net.

    If you are in your 30s or 40s or 50s, you should be willing to take more risk in the equity allocation. This is the curve, what happens if instead of living to 85 or 90, we end up living to 120 as Rick Edlemen points out in his latest book about the future?

    We would have a situation in which your risk at 65 might require a 70 to 80 allocation to equities not 20 or 30 as you propose.

    We use 50/50 to 60/40 not by reallocation but by capital or dividend gains. Due to above average market gains, we find ourselves in a 65/35 at this time.

    Since we use a bucket strategy to draw from our income bucket and in order to organically rebalance to the allocation, we take our withdraws from across the income and safery buckets equally.

    The result is a rebalance closer to 60/40 and if the market further corrects to a 50/50 which preserves capital.

    Another point. Gains or losses are not real until realized. Meaning that markets go up and down and dollars over time is the real protection.

    I am in my early sixties while my spouse is in her early fifties. Our income gap for essentials is $0 but for an active lifestyle with travel and restaurants another $20K without social security. So we can afford to take some risk.

    If we depended on the monies for income, once my money returns produce over the needs, we would take an annuity to secure the spending baseline need. Then the rest is house and play money.

    1. Sure, I’m still expecting life spans to cap out at 90-ish, but who knows? Maybe people will live to be 150 by then, and I’ll have to adjust my rebalancing strategy then. I’ll you know when I get there 🙂

      1. LOL! The point Edelmen makes was that historical trend indicate that current life expectancy are wrong and our financial plan thus allocation should reflect the trend. His claim is supported by findings at the Singularity University research.

        So, if life expectancy is going to be longer than anticipated due to unprecedented technologies breakthroughs then, Should out financial plan thus allocation reflect that reality?

        All I am raising is the point that life expectancy at best is an unknown variable and as such our Fiancial Plan and allocation should treat it as it.

        If you make the assumption of 90 years for example, What is the mitigation plan for the risk?

        Simple, a self sustaining financial plan and allocation for a long, long, period of time. ?

  18. 60/40

    Garth’s portfolio is 20 % bonds .. ( VSB for me )
    20 % Prefferd’s (ZPR .)

    both better in rising rate years ..

    for the Fixed income portion

    so its not really a traditional 60/40

  19. Interesting article. With crypto assets emerging as an entirely new (although highly volatile) asset class, have you guys considered or looked into even adding a small portion (IE 1-10%) of your portfolio into crypto?

    Obviously the block chain space is still in its infant stages and the price valuations are mostly derived from price speculation at this point, but I’ve read research (IE Chris Burniske) that shows BTC for example, is an asset which has zero to negative correlation with “traditional” investment vehicles like stocks and bonds and does not move in tandem with those markets…so it might make sense from a diversification perspective as well to “smooth out the ride” and possibly participate in their rise in value. What do you guys think?

  20. I always find people’s rationale for changing holding allocations interesting. Given your gains it’s worth getting more in equities.

    Right now I’m investing 25% Canadian equity, 25% bonds, 25% REITs and 25% international equities. Thanks for sharing!

      1. I love my REITs due to their monthly income and diversification, so they had to be a significant portion. I used to be 100% in stocks, but found it felt too risky, hence the bonds. And I agree with the sentiment that there are many opportunities outside of Canada, hence the international stock.

        Also, the 25×4 split is very easy for rebalancing. All 4 should be valued about the same. When I accumulate enough to buy new holdings I know I should buy in the fund with the lowest balance.

        1. sounds good, what is your favorite REIT? Our building is owned by Morguard.

          I am thinking to diversify into both Preferred and REIT etfs, as the market peaks.


    1. that’s 50/50 allocation, btw..may I know which funds your 25% international consists off? (VUN/XEF/XEC) or all of them ?

  21. I have the same Canadian portfolio as you have mentioned in your workshop. If I want to increase the allocation of equity to 80% and bond to 20%. what should be my exact allocation for my individual funds ???

  22. Good strategy overall on your part. It really all depends on your personality, risk tolerance and the kind of lifestyle that you want to live. A 60/40 allocation is a little too conservative for me. Currently, I’m still on 100% equity, however, when the market tanked for a few days three weeks ago, I felt the jolt and considering repositioning. Still on the sidelines and watching. I still believe that the market will still end up positive in 2018 but will most likely be a wild one. My 2 cents.

  23. Hi Wanderer — You site modern portfolio theory in this post and some of your others… but have you ever stopped and looked at the mathematics around it.

    I did. A smart math inclined guy like yourself might to do the same.

  24. Just found your site yesterday and doing a deep dive. Love the analytical angle. As a someone who retired at 42 without ever owning a lick of real estate (still don’t), I can relate to you two for sure.

    Only a few of differences between your approach to asset allocation and mine. One, right now, I’m just using cash instead of a bond allocation waiting on the Fed to get through the tightening cycle. I’ll probably swing back to some bonds this fall in anticipation of the end of that cycle.

    Two, I sometimes only use short-term investment grade bonds for the bond portion of a portfolio. (I build portfolios for people.) This has two advantages. One, a higher yield than anything that includes just government bonds, and 2) because of the shorter term duration of the bonds, they are less volatile. So they serve as fantastic ballast for a portfolio. These yield less than the “juiced” bond income portfolios you constructed with the “Garth” dude (yep, I read closely), but are certainly less volatile and probably less risky.

    Three, I’m heavier into emerging markets for a number of reasons beyond the scope of a comment here.

    As to going 100 percent equity, I agree with you rather than GCC. However, at a certain level of assets (well into seven figures), you can definitely lean hard towards equities because the dividend yields have you covered (as you mentioned in this post). The other great thing at a certain level of assets is you can basically self-insure almost everything (other than health).

    Love what you two are doing. I have a blog going, and I look to you two as inspiration for the punchiness, entertainment, and quality of your writing.

    Go Millennial Revolution!

    1. Thanks, Mighty Investor! Very cool to see we have similar views and to know someone else who FIRE’d without real-estate! Thanks for sharing your thoughts on our allocation.

  25. Any thoughts on how a pension plays into this? My mom and her husband have a pension that covers their lifestyle, travel, and some savings. What little she has I recommended she move into VTSAX(which is around $50k total). I advised her to put that into a VTSAX type investment too. The reason we did this is because a.) Her house is paid off, b.) pension covers her lifestyle and she can still save c.) She doesn’t have much outside of the pension. I think her biggest risk is not having more in investments. Thoughts? Should I recommend she put some allocation in a vanguard bond fund? She will approach RMD’s soon so I had thought of moving enough into the bond fund to allow her RMD’s to be painless as I believe RMD’s are not pro rata.

    1. If she has a pension that covers all her costs (and it’s solid), she doesn’t need to rely on fixed-income for yield, she can afford to take the risk. Go with 100% equities.

      Not sure what the bond fund has to do with RMDs. Are you trying to restrict gains to reduce taxes?

  26. I believe this thinking of asset allocation is over simplistic, in this traditional thought process there is no thought to how the volatility of the asset classes impacts the total portfolio’s return stream. Moreover, there is no attention paid to the economic bias of the asset classes.

    Although most investors mistakenly believe 60/40 is well balanced, the reality is that the traditional 60/40 allocation is 99 percent correlated to the stock market. The 60 is four times as volatile as the 40 and will therefore drive the total portfolio returns.

    Even the allocation you highlight as conservative has a 88% correlation to how equities performs.

    I think it might benefit your readers by thinking of asset class not as something that offers returns , but as something that offers different exposures to various economic climates, specifically as it relates to growth and inflation. There is no reliable way to determine which economic environment will be next so like you advocate to buy index funds, one should apply the same theory to your asset allocation – i.e. apply real diversification, a portfolio with 99% correlation to one economic environment is not balanced.

    In your post you are basically asserting that you have an economic bias to a growth environment (only one of the four possible economic environments). The reality is you have a one in five chance of picking a very bad 10-year period in which to invest in equities.

    Adding in TIPS and commodities will help rebalance the portfolio. You only need 20-30% allocation to equities to achieve the same return over the longer term and yet keep your sanity along the journey.

      1. Sure, a lot has been written on the concept of Risk Parity.

        From the initial studies of Harry Browne, to Ray Dalio and his all weather fund and most recently by investors like Alex Shahidi.

        The key argument against the 60/40 is that there is no exposure to rising inflation and very little to falling growth. Essentially, the portfolio should be reliably expected to perform well during rising growth and falling inflationary periods and very poorly in the opposite environments. As humans we tend to have short term memory and discount all the economic possibilities out there.

        I would highly recommend reading the book from Alex mentioned above, it goes into a lot of statistical analysis and comparisons with the conventional 60/40, more than I can hope to in this reply. But as a a high level overview see the article below:

        The conventional portfolio is conventional for a reason. I am not suggesting that people jump ship, but rather take the time to really question the thought process that developed the 60/40 and wether they find the arguments logical given how the economic machine works. Perhaps people want to have a portfolio biased to one environment, Each to their own, personally I would prefer to construct a portfolio that is able to achieve a economic neutral position while still providing healthy excess cash returns.

        BTW, love the blog and concepts, have been reading since the start. Hopefully this post adds some value to the debate.

  27. Hello!
    I need some clarification understanding something. In your Yield Shield series, you mentioned you will not stay on Yield Shield forever, and go back to pure indexing strategy because the Yield Shield strategy is just there to weather the Sequence of Returns risk for someone just entering retirement. But here it seems like you are keeping your yield shield and shifting them more towards equities? Am I reading that right? Would you recommend having VBTLX and VTSAX as your only 2 investments (as per Jim Collins) or keeping some yield / high dividend paying stocks and bonds in the mix?

    In my situation, for a specific context, my mother is 62 and we have a lump sum of cash we are looking to invest, and I’d like the income from stocks/bonds to cover most of her expenses….what would a solid allocation be for someone that age, who can keep a 5 year cash cushion for downturns? Thanks for your help!!

    1. Good question, Christine. Yes, in the long term we would back to a pure indexing strategy–similar to JLCollins, except we would include international stocks in our allocation.

      In your mom’s situation, since she’s 62, she likely has social security, which acts more like a yield shield. So if her living expenses minus social security is within 2% of her portfolio, she can go with a traditional indexing portfolio. In terms of allocation, it depends on her risk tolerance, social security/pensions, etc. You might want to talk to a CPA since we don’t have all the details of her particular situation.

      1. She definitely cannot go with just 2%, even with CPP added in (it’s a paltry amount), but would it be ok to withdraw 4% on a traditional indexing portfolio, or are you saying do the 2% withdrawal, and then have yield shield cover the rest (CPP, Preferred shares, etc)?

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