Own bonds after you retire?
Posted: Thu May 16, 2024 6:22 am
Retirement is still some way off for me, but this was really interesting:
Many of you have probably read or read about this recent paper by Cederberg et al recommending 100% equities not just before but even after retirement: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice https://papers.ssrn.com/sol3/papers.cfm ... id=4590406
Tyler of PortfolioCharts questioned why that study excluded foreign bonds,
(scroll down to Portfolio Charts vs. Cederberg)
TLDR: the ideal equity weighting after retirement goes down to 60% when including foreign bonds in a portfolio, with the other 40% being bonds and possibly some gold.
https://portfoliocharts.com/charts/glob ... wal-rates/
Automated transcript from a recent podcast interview, including spelling errors from the AI (49 mins into the podcast)
So the interesting thing for me is that one of the first things that I did is I took my settings, I pared it down to the exact same assumptions that we used in the Cederberg study, what they did, at least in the section of the paper, where they found that not just that 100% stocks was correct, but that it specifically found that 35% domestic and “and 65% foreign was the ideal percentage. But they were looking at combinations of domestic stocks, foreign stocks and domestic bonds, those were the three asset options and various percentages.
So I used every country that I had, they had many more than me, but I used my 10, and I used those three assets. And the issue thing to me is that I found is I was able to basically replicate the results. So even using less years of data, but with a similar amount of countries, is that they found that 35% domestic was right.
I also found that 100% stocks overall was the best allocation, but mine was about 20% domestic, but that's close enough, I would say, that was on the margin of error. But the important thing is, I also am able to add more assets to consideration. So if you just add foreign bonds to consideration, which was interestingly excluded from the Cederburg study entirely, then the 100% finding no longer holds.
It goes down to 60% stocks. If you take away the foreign stocks and just leave the domestic stocks and domestic bonds, the ideal portfolio is still not 100% stocks. It's about 60%, I believe.
So really, while I can replicate their findings, the only way you can really do that is to look at the very worst case scenarios in countries like Spain in the 70s coming out of Francisco Franco, where their currency was having all kinds of problems. And you're restricting your asset options to where you have two domestic things, domestic stocks, domestic bonds, and your only foreign outlet relief valve is foreign stocks. So if you think about in that case, think of it like a pressure cooker, where you really raise the pressure on your portfolio to the worst case scenario you can come out, and the only hole you allow for the steam to escape happens to be foreign stocks. It really shouldn't be a surprise that 100% stocks rises to the top as the best case scenario. But if you open the option field to other assets like foreign bonds or other commodities or cash, then you get very different answers.
https://podcasts.apple.com/jp/podcast/m ... 0655629930
Many of you have probably read or read about this recent paper by Cederberg et al recommending 100% equities not just before but even after retirement: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice https://papers.ssrn.com/sol3/papers.cfm ... id=4590406
Tyler of PortfolioCharts questioned why that study excluded foreign bonds,
(scroll down to Portfolio Charts vs. Cederberg)
TLDR: the ideal equity weighting after retirement goes down to 60% when including foreign bonds in a portfolio, with the other 40% being bonds and possibly some gold.
https://portfoliocharts.com/charts/glob ... wal-rates/
Automated transcript from a recent podcast interview, including spelling errors from the AI (49 mins into the podcast)
So the interesting thing for me is that one of the first things that I did is I took my settings, I pared it down to the exact same assumptions that we used in the Cederberg study, what they did, at least in the section of the paper, where they found that not just that 100% stocks was correct, but that it specifically found that 35% domestic and “and 65% foreign was the ideal percentage. But they were looking at combinations of domestic stocks, foreign stocks and domestic bonds, those were the three asset options and various percentages.
So I used every country that I had, they had many more than me, but I used my 10, and I used those three assets. And the issue thing to me is that I found is I was able to basically replicate the results. So even using less years of data, but with a similar amount of countries, is that they found that 35% domestic was right.
I also found that 100% stocks overall was the best allocation, but mine was about 20% domestic, but that's close enough, I would say, that was on the margin of error. But the important thing is, I also am able to add more assets to consideration. So if you just add foreign bonds to consideration, which was interestingly excluded from the Cederburg study entirely, then the 100% finding no longer holds.
It goes down to 60% stocks. If you take away the foreign stocks and just leave the domestic stocks and domestic bonds, the ideal portfolio is still not 100% stocks. It's about 60%, I believe.
So really, while I can replicate their findings, the only way you can really do that is to look at the very worst case scenarios in countries like Spain in the 70s coming out of Francisco Franco, where their currency was having all kinds of problems. And you're restricting your asset options to where you have two domestic things, domestic stocks, domestic bonds, and your only foreign outlet relief valve is foreign stocks. So if you think about in that case, think of it like a pressure cooker, where you really raise the pressure on your portfolio to the worst case scenario you can come out, and the only hole you allow for the steam to escape happens to be foreign stocks. It really shouldn't be a surprise that 100% stocks rises to the top as the best case scenario. But if you open the option field to other assets like foreign bonds or other commodities or cash, then you get very different answers.
https://podcasts.apple.com/jp/podcast/m ... 0655629930