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Is Your Parent's Asset Allocation Appropriate These Days?

Bozo
  |     |   1,375 posts since 2011

I have read so much here (and elsewhere) about the "beauty" of a "set-and-forget" 50/50 (or 60/40) asset allocation. Backward-looking analyses (of which there are as many as there are graduate students), all trumpet such allocations.

Indeed, these allocations (50% equites in a balanced equity fund and 50% in a balanced bond fund) are so ubiquitous that I call them "your parents' fund"). Conservative funds even suggest rotating to 40/60, or even 30/70, as one advances in age. The key is always fixed-income in that percentage to the right of the backward slash. Should it really be in bond funds?

To invest in bond funds, one must make a great leap of faith. First, in a rising-rate environment (in which we now appear to be), bond funds will take a "hit" in the short-term, but recover in the long-term. Which recalls the adage, "in the long-term, we are all dead". Second, in a rising-rate environment, will bond funds ever out-perform other alternatives in 401Ks, such as stable-value funds  or in-service transfers to IRA CD ladders (if available).

I respectfully submit that folks suggesting asset allocations should look forward, not back. Performance based on the greatest bull run in history of the bond market is just that. That bubble has burst, if you hadn't noticed.

Mind you, I'm not suggesting a 30/70 asset allocation is all that bad an idea. What I AM suggesting is that the fixed-income be in laddered CDs (IRA or otherwise). The days of bond funds are over.

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Bozo
  |     |   1,375 posts since 2011
Oops, my apologies. I guess asset allocations, such as 60/40, have the fixed-income to the right of a forward slash. Not a backwards slash.

Moving right along, safe- or sustainable-withdrawal rates (SWRs) are predicated, to a large degree, on what folks think might happen to their nest-eggs. The common wisdom was a 4% SWR was "safe" or "sustainable". When the purveyors of the common wisdom began to see yields on bond funds drop, they reacted by reducing the 4% to 3.5%, then (gasp) 3%. Never did it cross their minds that a rotation from bond funds (which had already begun to run out of steam) into CD ladders (which, by definition, always had a head of steam), might alter the SWR back into 4% territory. After all, if your CD ladder is throwing off 2.0% effective (with no interest-rate risk), pulling 2.0% from your equities should last just about forever. The dividend yield on VTSAX is, you guessed it, right around 2%.

Bottom line: Harvesting a no-brainer yield from a CD ladder, coupled with harvesting dividends from an index equity fund, well, that gets you to a 2% withdrawal rate right out of the blocks. The remaining 2%/annum from principal? I think of it lasting much longer than I will.
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