Over the last year or two, there has been a lot of talk about some recent studies suggesting that bonds are riskier than stocks and that we need to be much more conservative about safe withdrawal rates than is conventionally thought. Ben Felix has amplified these findings in podcasts and videos. Following the release of one video, confused Redditors started to post and ask things like:
Suddenly people are thinking that bonds are risky and they shouldn’t hold any because Ben Felix says that they are worse for your portfolio. But is that really the right conclusion to draw from the studies? I’d like to interrogate that question here.
A word of caution: I got deep into this subject and ended up writing 5,000+ words so this post goes on for a while. But the TL;DR is that I am skeptical about the study’s conclusions, mainly because of its use of allocations exclusively to domestic bonds from small countries with non-reserve currencies.
Recent study by Scott Cederburg
Scott Cederberg et. al. published a paper at the end of 2022 called “The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets.” This paper sought to address two very important flaws in the “4% Rule” paper- longevity risk and survivorship bias. Basically, the original 1994 paper by Bill Bengen which gave birth to the 4% Rule used exclusively US domestic stocks and US bonds when analyzing historical 30-year withdrawal periods for an individual investor. The problem with that approach is:
- Married couples include not one but two individuals, increasing the likelihood that at least one of them will live longer than 30 years (longevity risk).
- In the 20th century, the US has been lucky at avoiding catastrophes that have plagued other developed market countries. This makes its stock market’s exceptionally good returns since 1900 and its bonds’ exceptional stability a pretty extreme outlier compared to the rest of the world (survivorship bias).
Incidentally, the US has also seen very substantial stock valuation increases in recent decades which has buoyed realized returns but lowers expected future returns. Thus, if you are assuming that the good fortunes of US stocks and bonds over the last 75-125 years will repeat for the next 25-50 years, you are betting on an outlier to persist and that is a dubious strategy.
To address the US survivorship bias in Bengen’s findings, Cederberg et. al. used the Global Financial Database with monthly stock and bond returns for 38 developed countries going as far back as 1890 and up to 2019, incorporating only the periods of time that the countries qualified as “developed”. They modeled multiple different domestic and international stock and bond portfolio allocations for global investors using a sophisticated block bootstrap method to simulate returns for millions of instances. As I understand it, this method randomizes a sequence of cross-country returns, but only somewhat randomized by keeping together blocks of time periods (averaging 10 years). This way, they are not simply basing assumptions on the exact sequence of historical returns like Bengen’s study did, but they are also not completely scrambling the outcomes the way a traditional Montecarlo simulation would. This block method makes sense because assets like stocks and bonds tend to move in relationship to each other and because asset returns tend to occur in sequential time-series patterns (for example you wouldn’t ever have the three worst or three best historical return years occur in a row). The study then factors (heterosexual) married couples’ longevity into the simulations using life expectancy data from US social security actuary tables.
The paper’s conclusion is that a 4% safe withdrawal rate is far too optimistic and “a 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year.” Ben Felix amplifies this finding in a video titled The 2.7% Rule for Retirement Spending where, presumably accounting for slightly better outcomes using global cap weighting and value-tilting, he offers his own assessment: “drawing on a comprehensive data set that accounts for survivorship and easy data biases spanning 38 developed countries from 1890 to 2019, and accounting for longevity risk, gives a much more realistic and sobering view on the safe withdrawal rate which I estimate at 2.7 percent.”
Gut check: 2.7% is an absurdly low withdrawal rate
Many investors are familiar with the basic equation that retiring using the 4% rule requires having 25x your annual living expenses saved up in your portfolio (100%/25 = 4%). In very broad strokes, this 4% annual withdrawal rate accounts for an historic worst-case real compound annual growth rate (CAGR) of roughly 1.5% for a 50/50 US stocks/bonds portfolio over 30-year periods since 1926. This incorporates some particularly bad sequences of returns such that your portfolio starting with 25 years of living expenses grows JUST enough to sustain your 4% annual withdrawals and last for 30 years before depleting completely.
But a 2.7% withdrawal rate? That means you’d have 37 years of living expenses saved up for a 30-year retirement. I’m going to repeat that for emphasis: a 2.7% withdrawal rate means you’d have saved up 37 years worth of annual expenses which you are hoping lasts you just 30 years. In rough terms, you are envisioning that, due to some unimaginably bad market circumstances and an awful sequence of returns, your portfolio will not even be able to keep up with inflation and will thus net a negative time-weighted real return over three decades of withdrawals. Ouch. This is such a wildly pessimistic worst case scenario that Frank Vasquez from Risk Parity Radio has quipped “with that low a withdrawal rate, your strategy is essentially just to not spend your money.”
When I first saw the 2.7% figure it got my attention (and many other peoples’) because Ben Felix and the Rational Reminder crew are easily some of the most knowledgeable and informative financial content creators out there. My prior suspicion had been that global diversification could actually improve Bengen’s safe withdrawal rates by mitigating the worst-case early sequence drawdowns of US retiree cohorts (1928-29, 1966-68, 1999-2000), but these guys are saying you should actually be MUCH more conservative than 4%. Ordinarily, this kind of contrarian take moves the needle on my “bullshit-o-meter” because almost since The 4% Rule was first published, finance media has been taking cheap shots at it as a clickbait scare tactic, often to get anxious retired folks into following their advice or selling them profitable investment products and services like high-fee management, annuities, and whole life insurance. “The 4% Rule is Dead” or “The 60/40 Portfolio is Dead” is a headline as timeless as any I can remember, and is frequently published by a wealth management company that can “help you” not worry about uncertainty (for a fee). An expert group from Morningstar on the other hand estimated safe withdrawal rates at a much rosier (but still conservative) 3.3% in 2021 based on market conditions at that time and has since revised it back up to 4%. Also in 2021, Bengen updated his original findings to say he felt 4.7% was now safe, a finding corroborated by others. I don’t really think RR would stoop to clickbait pandering for attention, so I was left wondering- what gives with the big disparity in SWR estimates between these sources?
Why are the study’s models producing such poor outcomes?
I’ve taken a deeper look at the study’s methodology and what some other investment and retirement content creators had to say about it and I have to admit I am pretty skeptical of how its findings have been presented. My primary frustration with the Cederberg study has to do with their unusual choice of asset allocation in the model portfolios as that seems to be a big driver of the low worst-case returns their models produced. On the admirable side, the study uses a range of six different possible stock/bond allocations from 0% stocks to 100% stocks, titrating up in 20% increments, and they even include a target date fund simulation which has a glide path that starts at 90% stocks up to 20 years before retirement, goes to around 50/50 at retirement age, and down to 10% stocks 15 years thereafter (more conservative than any TDF I know of, but still reasonable I suppose). On the negative side, however, they use a pretty excessive domestic bias for the stocks allocation (I believe it’s 60% domestic and 40% international for all investors no matter how small their country’s market) and what seems to me to be an unreasonably extreme allocation of 100% domestic bonds for the bonds in all cases regardless of the country. The study makes no mention about how they arrived at those particular allocations - they are simply presented as self-evident and assumed to be representative of what is typical.
So in attempting to mitigate the US survivorship bias in Bengen’s data, they’ve introduced stock and bond returns from 37 other developed countries and they do their model runs mixing those return sequences into the pool of possible outcomes with an equal chance for each country. But because safe withdrawal rates reflect the worst-case scenarios, now your safe withdrawal rate is essentially going to be based on the worst-case returns from not just one great big geographically-isolated world power like the US, but 10-year (on average) outcomes from 37 different countries as small or varied as Chile, Singapore and Greece, using allocations that hold a majority of stocks in one of those countries’ markets. And in all cases, the portfolios are only using DOMESTIC bonds in the sequences. Again, if I’m understanding this correctly (it’s not terribly clear in the paper), that means that when the model introduces a random period of stock returns from a random country into the Montecarlo simulation, the bonds portion for that period will always be 100% allocated to the corresponding domestic bonds of that country. So for that sequence, you may effectively be poisoning your portfolio with an allocation of speculative national bonds from a single, relatively small country that could have had a period devastated by war or sovereign crisis.
If you want to see how deeply using only domestic bonds distorts the data, take a look at what the study says the safe withdrawal rate with 99% success for a 100% bond portfolio would be in the developed markets sample: 0.14%. That’s right, with a 100% (domestic) bonds allocation, in order for your portfolio to survive for 30 years in all but the worst 1% of cases, you’d need to have saved up 714 years of living expenses (over $50M for an average American household today). Now you can see what we are probably talking about there is what it would have taken an investor with a 100% bonds portfolio to survive an extreme episode of inflation like in central Europe (perhaps Germany?) during the period of the World Wars. That kind of return data now impacts the worst-case scenarios in the study.
Shortcomings of simplistic asset allocation
This is the exact same issue I had with this team’s subsequent 2023 papers, Long-Horizon Losses in Stocks, Bonds, and Bills, and Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice, which basically concluded that adding any bonds is worse for your portfolio on average in the long run. Of course it is when your allocations have exclusively domestic bonds and your data includes war-ravaged republics or speculative bonds from small countries with non-reserve currencies! Ben Felix used this paper as the basis for the video How Bonds could be Hurting Your Retirement with a thumbnail that says “Bonds Are Riskier Than Stocks?”. These titles - both for the paper and the video - are starting to get under my skin a little now because they are obviously designed to arrest your attention with their contrarian take. The words “beyond the status quo” even suggest that some critical flaw in conventional thinking that no else sees has been uncovered. But has it really?
Ben Felix says on the RR podcast that the paper shows that “being 100% in equities with a big chunk of international equities [domestic/international split 50/50] dominates any other asset allocation: target date fund, any of the stocks minus age type of things, anything that has bonds in it basically gets dominated by this all stock portfolio.” They brought Scott Cederberg on the RR podcast to discuss the findings and didn’t hold back their awe: “That was amazing. The findings are just incredible. As the title of the paper suggests, it really does challenge the thinking on life cycle asset allocation, which is something. I'm still thinking about it, what we do with it. How do we go forward from here knowing what we know now?” This is probably my favorite investing podcast but personally, I’m not nearly as moved by the study.
The paper asserts that “an even mix of 50% domestic stocks and 50% international stocks held throughout one’s lifetime vastly outperforms age-based, stock-bond strategies in building wealth, supporting retirement consumption, preserving capital, and generating bequests,” and, more specifically, as Ben reiterated, “a constant allocation of 50% to domestic stocks and 50% to international stocks throughout one’s lifecycle dominates QDIAs in all retirement outcomes.” But, as in the original Bengen paper, there are serious flaws with the asset allocations modeled. This paper uses eight different asset allocation strategies: 1. a target date glide path, 2. fixed 60/40 stocks/bonds, 2. internationally-diversified 60/40, 4. 120-age in stocks, 5. internationally-diversified age-20 in stocks, 6. everything in cash, 7. Everything in domestic stocks, and 8. 50/50 domestic/international stocks. However, in every instance run through the model, once again, the bonds and bills used are always domestic. So an Argnetinan investor is using exclusively Argentinian bonds, a Lithuanian investor is using Lithuanian bonds, and a South Korean investor is using South Korean bonds. Instead of modeling all investors with the safer bonds of countries with global reserve currencies, they give them speculative bonds from smaller developed country governments. And what is really skewing the findings is that their asset allocations give equities the benefit of global diversification - using cap weighting for international stocks - but they don’t afford the same global diversification for the bonds in any of the models, and then they conclude that bonds are universally riskier. As far as I can tell, not once in any of the studies do they ever run a model that incorporates internationally-diversified bonds in any ratio. This omission is a big problem for me.
Not all countries’ bonds are created equal
By far the majority of bonds traded in the world are those of the countries with major reserve currencies: the US dollar, Euro, Japanese yen, Swiss franc, and the British pound, plus the Canadian dollar, and Australian dollar. All the other countries in the world, including “non-traditional” reserve currencies, make up less than 5% of both the ForEx reserves and the traded bonds by cap weight, and their bonds may be considered speculative - they are much riskier because the countries are smaller, less stable, less wealthy, have smaller militaries, etc. This is a critical consideration in asset allocation - optimal bond allocation should include a large proportion (really a majority) of the treasury bonds from countries with global reserve currency holding countries because they are the ones that benefit most from the “flight to safety” effect during times of market turbulence. But the study doesn’t diversify the bonds at all. Imagine if you flip the diversification in the study and the bond allocation used 50% domestic and 50% in an international cap-weighted index, and then for equities it used only domestic? I think you’d get completely reversed conclusions about whether stocks or bonds are safer!
Since 1450 there have been six major world reserve currency periods. Portugal (1450–1530), Spain (1530–1640), Netherlands (1640–1720), France (1720–1815), Great Britain (1815–1920), and the United States from 1921 to today (or 1944 if you are counting from the Bretton Woods Agreement). World reserve currencies do change but those changes tend to happen gradually even if the collapse of Dutch guilder was a bit more dramatic. There is a reason why reserve currencies exist and why these are the bonds investors should primarily be using in their portfolios - because they are most stable, the most liquid, and provide the best safe haven. This is definitely NOT my area of expertise, or even an area I have a lot of knowledge, but I’ll borrow an excerpt from one paper's abstract which happens to do a good job of explaining it succinctly using Greece as a recent example:
Bonds are traditionally more stable and less volatile than equity as instruments to safekeep one’s money… Government bonds carry with them an additional level of stability and security given that they are underwritten by a country’s treasury. But, is that so? Knowledge and observations from the recent Greek debt crisis that involves massive default on government issued sovereign bonds illustrate the real problem may not just be that Greece does not have control over the currency in which the government bonds are denominated in. What is perhaps more important is that a country needs to have a reserve currency that it issues in order to underwrite the issuing of government bonds with less risk of massive economic outage when the country defaults. To understand this point, consider the case where a country issues government bonds to finance operational expenditure of the government and civil service. Such issuance carries a higher risk of default because it indicates that the government lacks cash and operational means to finance the civil service. But, in the case of a government with a reserve currency such as the United States, this fact could be forgiven as the government would print more money through quantitative easing to ameliorate any anxiety in the bond market should government finance shows any signs of weakness. Basically, the operating principle for issuing government bond with support of a reserve currency is that the sheer size of international holdings of the reserve currency such as U.S. dollar provides critical ballast for supporting and ameliorating any possible negative effects should the U.S. government default on its debt. This monetary effect could be explained by the buttressing role of a reserve currency. But, it also cast a mirror on other countries’ need for prudency in issuing government bonds since they do not have the stabilizing support of a reserve currency. Crucially, as the Greek debt crisis shows, a country needs to own the reserve currency to enjoy its stabilizing benefits on government bond issuance, a borrowed reserve currency like in Greece’s case does not work.
Numerous countries have experienced catastrophic currency collapses which may be in the period Cederburg studied, including Germany, Hungary, Argentina, and Chile. Some of these were important currencies although none of them were world reserve currencies. These collapses wreaked havoc on their domestic bond markets and no doubt significantly impact the returns of the study. Because the study uses an equal chance of every country’s bonds being used in the simulations, you are getting lots of bad results from bad bond allocations. I raised this point in a previous post which u/ben_felix responded to directly:
“It is certainly true that many of the countries have had bad inflation outcomes ex post, but we can't say ex ante which current developed countries will have bad inflation outcomes. It would not have been obvious in 1890 that the U.S. would have the outcome that it has had.” Ben adds “The Cederburg data is only sampling from countries during periods where those countries are classified as developed… The authors are aware of the issue that including non-developed countries could skew the data, and are addressing it with the developed classification.”
So the implication here is that bad inflation or currency collapse or other sovereign black swan events can’t be anticipated, and thus it is appropriate all developed market bonds be treated as having an equal (or equally unknowable) chance of such an occurrence, independent of whether or not they have reserve currency status. I’m not sure I agree with that but as an amateur, I’d be out of my league trying to make a strong argument against more knowledgeable academics and professionals.
But as a reminder, the target date fund asset allocation they model in the study used 55% domestic stocks (from any one of the 38 countries), 35% international stocks (from the other 37 countries), and 10% DOMESTIC bonds (always from the same country as the domestic stocks). Later in the glide path for the TDF, they add DOMESTIC bills. I’m not terribly familiar with the allocation conventions of international countries (that would be interesting to know for these purposes), but the allocation used strikes me as a target date fund that doesn’t actually exist anywhere in the real world. For a comparison, Vanguard’s popular target date funds (they are the largest provider of TDFs) use both cap-weighted global equities, AND cap-weighted global bonds, starting from 90/10 and moving to 30/70. They also happen to use TIPS in drawdown phase which are not modeled in the study because they didn’t exist historically but could have vastly changed the results had they been simulated. So unfortunately this study isn’t telling us how today’s target funds might be expected to perform, it’s only modeling a theoretical TDF allocation using exclusively domestic bonds which might not be a portfolio that exists anywhere or possibly ever did.
What Do Other Retirement & Investing Writers Have to Say?
I was first alerted to the potential shortcomings of this study by Frank Vasquez of Risk Parity Radio. Here’s what he had to say about it in Episode 306:
“The problem is this database they are using, which they think is very sophisticated because it takes data from 39 countries over a very long period of time. But, as I pointed out in Episode 251, nobody is actually going to invest like they are modeling in this paper, because what they are essentially modeling is people in countries with weak currencies and weak bond markets still going whole hog 40% into those weak currencies and weak bond markets. So, as I pointed out in Episode 251, this terribly skews what they’re looking at if you compare what a real investor would do, and a real investor is only going to invest in sovereign debt that’s in the strongest currencies and the strongest bond markets. In today’s parlance, you would not expect people to be investing in the bond markets of places like Turkey, or South Africa, or Argentina. People who are going to invest in sovereign bond markets are going to stick to places denominated in Dollars or Euro or Yen or something like that. And because what they are modeling is not something that I think any intelligent investor would actually be holding, it’s really only of academic interest in terms of the raw numbers that it spits out. And I made that point to the Rational Reminder guys on their YouTube channel, so I hope that they take a more critical look at what Cederburg is doing because I realize he put so much effort into doing this and constructing this but that doesn’t make it more valuable. It makes it more academically interesting and that’s about it."
Frank Vasquez can be a bit of a self-professed wildcard so I wanted to check some other sources. Here are what a few other investing content creators had to say about these studies:
Rob Berger: Ben Felix And The 2.7% Safe Withdrawal Rate
“What they did for each of those countries on a monthly basis is got return data - stocks and bonds and inflation - and of course some of these countries it's more than 100 years of data and so they end up with thousands of months of data and they just ran simulations over this data. The problem with that is it bears absolutely no resemblance with how you or I might actually invest. If we wanted to move beyond the United States, what would we do? Well we'd add an international index fund- pretty simple. And it's not going to focus on countries the way that this study did, it's going to be generally based on market cap. So if a country has a lot of publicly traded companies with high market caps, it'll be reflected in an index more so than say a smaller country that doesn't have as great a market cap, and in fact today we can get an entire global portfolio with a single ETF very inexpensively and diversify across not only the U.S and developed countries but also emerging markets. Very easy to do. But they didn't actually study it that way and I asked him about that and the answer was basically that's just not how they chose to do it.”
Also… “In these simulations, one spouse is going to die at say point A whenever that is and then the second spouse dies at point B. They made no assumptions about how income or spending would change after the death of the first spouse. And the reality is both will change, right? Certainly, Social Security will change- when one spouse dies your tax brackets will change. A single tax filer has different brackets in the U.S anyway than someone married filing jointly but expenses can change and will change significantly. You've got of course expenses like health care, health insurance, food, clothing, travel for just one person instead of two. Maybe you get rid of a car when a spouse dies, maybe it's easier to downsize and so spending can go down significantly after a spouse dies, and that is not reflected in the study at all. And I've confirmed that with the authors. Again, what they did may be perfectly fine for an academic setting. Unfortunately, though I don't think it has, for the reason I just described, a whole lot of practical applications for you and me.”
Ralph Antoine from Banker On Wheels: Should You Invest 100% In Equities?
For anyone who managed Institutional Fixed Income Portfolios, seeing Argentina or Turkey amongst Developed Markets will raise eyebrows 🤨. It’s not because an economy’s agriculture labour share dropped below 50%, or they joined the OECD that makes their Fixed Income Markets comparable to the U.S. Yet, in the study you have the same likelihood to be in a U.S. or another country’s investor’s shoes, adjusted for length of the data series.
Over 25% of the observations in this study come from South America, the Middle East, or Eastern/Southern Europe. For example, Argentina – considered developed market during a few decades in this study – spent 26% of time in default since 1824 – including two defaults during the time it was in the study’s sample!
Are these Bonds acting like true diversifiers, or become an additional source of correlated risk (see 🤓 Geeky Section below)? Can they be used in ‘alternative world’ simulations for a U.S. Investor? How much do high correlations in these Emerging Markets skew overall Equity/Bond dynamics? Even Southern Europe (although technically developed) should ideally have some sovereign risk diversified away, as recent history has shown. Best market practice for Investors in some countries may e.g. include a basket of currency-hedged G-7 Bonds to reduce volatility and credit risk. In other similar papers, including from Dimson, Marsh, and Staunton the samples – while not perfect – are much more reasonable.
Bottom line: this paper highlights a massive gap between academics and real-world finance. Such research would greatly benefit from the validation of market practitioners to ensure relevance and accuracy.
The Geeky Section 🤓
The comparisons with traditional portfolios (as designed by the study) are not appropriate outside a few core Developed Countries like the U.S., the UK or Canada – The TDF, the local 60/40 or local 120-age Equity Portfolios have most/all of their assets in local Equities/Bonds making a 50% International Equity 50% Local Equity Portfolio a very attractive proposition, even for skeptics like me. If you’re retired in Turkey or Greece, would you rather have 50%-70% of your assets in Junk Bonds that may quickly lose value or diversify your risk with high-quality U.S. Blue Chips that can hedge inflation? For a lot of smaller/unstable countries (yet part of OECD or having below 50% labor participation in agriculture, as per authors’ definition), the choice seems rather a no-brainer.
Tyler from Portfolio Charts: What Global Withdrawal Rates Teach Us About Ideal Retirement Portfolios
“The stated goal of the paper is to test the effectiveness of popular lifecycle funds consisting of shifting percentages of stocks and bonds over time. As part of that process, the authors clearly have strong opinions about the importance of using data free of typical US bias. While I applaud their effort, in this context it’s important to understand that their chosen methodology is quite unique. From pooling randomized data from 38 countries and treating it all as fungible to utilizing actuarial tables for variable retirement length, their simulation system is nothing like the classic withdrawal rate methodologies...”
“If you just look at domestic stocks and bonds, the ideal portfolio is 30% stocks and 70% bonds. The SWR is just miserable in the worst case of Spain in the 70’s. If you only allow an investor to choose a foreign stock fund, then of course that will look better than the other options. If you allow foreign bonds instead of foreign stocks, however, then the ideal stock allocation actually goes down to just 20%. And if you allow the option of both foreign stocks and bonds, then the ideal portfolio is still only 60% stocks. Clearly the asset options matter.”
Karsten Jeske of Early Retirement Now and author of the Safe Withdrawal Rate series: 100% Stocks for the Long Run?
“The BTSQ paper is mostly a cute academic study with some fancy methodological bells and whistles. It will be published in a good finance journal. But it does not apply to actual retirees today, certainly not in the U.S. But who knows? Maybe one day, I realize that future US equity and bond returns might look like 1914 German returns! If my Fidelity statements start coming in with an early-1900s Kaiser Wilhelm II stamp one day (with a pickelhaube helmet!), I might dig out the BTSQ paper again.” (This is a cheeky excerpt but his is probably the most thorough rebuttal and worth a read on its own).
Cliff Asnes raises an important point for the authors: It’s ‘not financial analysis, it is finger painting’: Billionaire investor rips new paper that tells investors to only buy stocks
“This only-a-little-new new paper makes one statement that is just an indefensible whopper. They state, “Given the sheer magnitude of US retirement savings, we estimate that Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy.” This is very poor economic reasoning. It’s a violation of the same principle supporting my long-time rant that “there are no sidelines”! Equities are already 100% owned. If some investors read this “new” paper and decide to buy more equities, they have to buy those equities from other investors. This can force the price up, and the expected future return down, but everyone can’t suddenly have double the normal amount of equity dollar return out of thin air. Claiming there are trillions being left on the table is really just non-economic hype… The bottom line is diversification works, theory works (eventually), owning one asset is suboptimal, extrapolating the winning country over a period of valuation increases is dangerous, finance 101 is actually helpful – and we’ll likely have to do this again after the next bull market.”
Building a better study
In summary, what is most unfortunate about this study to me is that the methodology has a lot of potential to be useful but doesn’t historically model real-world portfolios that most investors are actually using today. It neither helps us understand what to expect from common portfolios like Vanguard TDFs, nor what might be an optimal portfolio, because it studied such bizarre asset allocations (particularly for bonds) instead of ones that professionals use and recommend. Whether that was an oversight or was done intentionally to make bonds look worse, allowing the authors to make a bunch of waves with catchy headlines confusing people into thinking that conventional portfolio constructions are deeply flawed, I don’t know. I will give the authors and Ben Felix the benefit of the doubt and assume they just weren’t accounting for how dramatically asset allocation can skew the outcomes when it comes to using domestic vs globally-diversified bonds, or at least bonds of reserve currencies. But I caution everyone not to react to these findings too strongly and suddenly start thinking that all bonds are inherently risky or that you need to save up 37 years of spending (or 714 years for that matter) in order to enjoy a comfortable retirement.
A better study would have been one that uses globally cap-weighted stocks AND globally cap-weighted bonds, although I’m not sure if enough data exists about the historic cap-weighting of global bond markets to create that. But at least they could have used 50% domestic and 50% international for the bonds to incorporate global diversification and mitigate the domestic bias in their fixed income allocation just like they did for equities. With that diversification, they could have tested a greater variety of fixed stock/bond allocations and different glide path models, even including a rising equities glide path, in an earnest attempt to find the allocation and glide path that produced the highest SWR. That would build on the work of The Safe Withdrawal Rate Series by giving us a globally diversified perspective in both stocks and bonds. Instead, what we got was an analysis that seems to tell us something we could have already known intuitively: stocks outperform bonds in the long run, and using exclusively domestic bonds from countries with non-reserve currencies makes for worse outcomes than the US has experienced.
So what should your retirement asset allocation and safe withdrawal rate be? I will save my thoughts on that for another long post one day. But spoiler alert - while there are some good ideas out there, I don’t really know what the answer is. SWR’s will always just be guidelines for making basic planning assumptions, and future returns will always be unknown. What we need to rely on to be successful are diversified, dynamic, flexible and comprehensive drawdown strategies - not merely a fixed withdrawal rate - and everyone can agree on that.
