Economist Harry Markowitz created the Modern Portfolio Theory in the 1950s and suggested the 60/40 portfolio as a stock and bond mix. Since then, it has become the default asset allocation for millions of investors.
In the 1990s, financial adviser Bill Bengen began researching the “safe withdrawal rate” for retirees, or the percentage of one’s nest egg that one can use to support oneself in retirement. He examined every 30 years since 1926 to determine which one did worse because he believed the average person needs their nest egg to endure at least 30 years. The worst 30-year retirement period began in 1966.
He then determined how much a person could have taken out in their first year of retirement without depleting their savings in less than 30 years. He assumed they held half of their money in medium-term government bonds and the other half in the S&P 500.
4.15% is the response. The 4% rule was created when he rounded that to 4%.
Can you withstand one more standard rule of thumb in finance? According to the “Rule of 100,” a person’s age should be subtracted from 100 to determine what proportion of their portfolio should be made up of stocks (the remainder being bonds).
You understand? Great.
Fantastic.
Let us now disregard all of that.
Allocation of U-Shaped Assets
In an excellent conversation with Paula Pant of Afford Anything, Bill Bengen argues that most people will be quite content with a 5% withdrawal rate.
To beTheule was created with almost no risk in mind. Its basis is the worst-case scenario in contemporary history. According to Bengen, you can reduce your stock holdings around the time of retirement, hold cash and bonds for a few years to get beyond the sequence of returns risk, and then increase your stock holdings again.
Let’s explain the sequence of return risk. It tuRetireesare when downturns occur. A market meltdown in the first few years of retirement is something you do not want because you will sell off too much of your portfolio too soon, and your portfolio will not recover even if the market does.
During the first few years of retirement, you reduce your stock exposure, then increase it again to take advantage of a 5% withdrawal rate. The difference between $800,000 and a $1 million nest egg is $40,000 if you need that amount in retirement.
All of that advice is still traditional, but it’s important to recognize its limitations and consider alternative strategies.
In a recent study, Aizhan Anarkulova, a professor of finance at Emory, and her colleagues discovered that a 100% equity asset allocation fared better than target date funds (TDFs) and traditional 60/40 portfolios.
We’re now deviating slightly from the usual path. Furthermore, real estate has not yet been introduced.
Anarkulova and her co-authors substituted geographic diversity for stock/bond diversity. They performed their calculations using what the authors call the “optimal portfolio,” which consists of 33% U.S. stocks and 67% foreign companies.
It should be no surprise that stock-only portfolios have generally done better than 60/40 stock-bond portfolios. After all, stocks have historically produced a far more significant return than bonds. Anarkulova’s ‘optimal portfolio’ not only outperformed TDFs and 60/40 portfolios but also generated 39% more wealth for retirees than TDFs and 50% more than 60/40 portfolios, offering a promising alternative.
Interestingly, the ‘optimal portfolio’ was not only more profitable but also safer than TDFs and 60/40 portfolios. The survey found that it ran out of money less frequently, providing a reassuring aspect of this alternative strategy.
My Allocation of Assets
About half of my investments should be in stocks, and the other half should be in real estate. I’m not a bond investor. For now, more on that.
When I mention ” real estate, “I refer to a wide variety of passive real estate assets, including equity investments (like real estate syndications, private partnerships, and equity funds) and debt investments (like debt funds and private notes).
No problems with renters, property managers, contractors, city inspectors, renovations, finance, or landlords. Billionaires beat the market in this way by investing in real estate.
I understand your thought process: Most investments need a minimum of $50,000 or greater!
Yes, but only if you invest alone. I make $5,000 investments at a time with other members of my Co-Investing Club.
By making very small investments, I can diversify among numerous locations and states, asset types, and operators. I currently possess a small stake in about 3,000 properties throughout the United States.
It also enables me to vary my time obligations. Our Co-Investing Club has invested in projects with nine to twelve-month turnaround times, one to three-year turnaround times, and four-year or longer turnaround times. This makes it easy to perform “lazy 1031 exchanges” to reduce my tax liability by spreading the repayments over time.
