You are thinking about it backwards. Humans have a tendency to buy high and sell low. It seems to be a psychological benefit of some sort that holds us back in abstract market scenarios.

By having a fixed percentage portfolio you are forcing yourself to sell high and buy low.

This was also the only basic strategy that mathematically beats the market based on papers I read during undergraduate (there may be others now). Basically, by splitting investments among higher and lower investments that are out of phase you can make sure that you are moving money out of an investment before it falls and into it before it rises.

What I find interesting is that the advantage only works with discrete periods of rebalancing. Instantaneous rebalancing doesn’t provide any advantage. I do not understand why but I saw a paper that showed that being able to take advantage of phase shifts in nearly correlated signals goes to zero as delta t goes to zero.

If you can time the market, then by all means, do that. The reason periodic rebalancing works, is because stocks and bonds don’t exclusively go up (or down). By rebalancing you can take advantage of a racheting effects as a result of signal variance. By rebalancing at set times, you can overcome the psychological effects of waiting just one more day to get gains that then evaporate while you watch.

I’m having a hard time finding the paper around instantaneous rebalancing eroding the effects (or any good papers atm). But you can model this very easily. You can take 2 signals that randomly walk up or down. One at a “high apr” and one with a “low apr”. I’m not sure if it matters, but typically I’d expect the lower apr to have lower variance of the 2. Most of the literature around rebalancing assumes lower volatility of at least one asset class, but I’m not convinced it’s necessary from some of the math I’ve seen. You may need to add an assumption of correlation between the 2. Be sure to include code that if a signal reaches 0 it stays there. Be sure to backtest as well. Few strategies work in a bear market, but rebalancing is expected to still outperform when markets go down.

Kelly criterion is another thing to look up. It’s a mathematical look at betting stategies and what’s the biggest bet you can afford to make in the long term given that no bet is 100% gauranteed.

You're making this sound more complicated that it is. Correlations, random walks, backtesting, strategies, rebalancing, kelly criterion, have nothing to do with this.

Bonds give you cash later. Cash loses value over time.

Stocks give you a participation in the best companies in the world.

Bonds versus S&P I know which one I'm holding. Good luck with your thing.

Your falling for the same trap as most novice investors - past performance has no predictive value of future performance.

In fact, high performing equities if anything tend to fall and regress to the mean.

> In fact, high performing equities if anything tend to fall and regress to the mean.

Ok, honest question. Have you ever looked at the S&P, say over 50 years? Just simple yes or no.

Yes, have you?

It’s pretty clear high performing company don’t maintain it.

I'm talking about the index.

No, you haven't.

Because if you did, you woulnd't be looking at an exponential and saying "but but but it reverts!!!!"

Please give me an example of a company that has consistently produced annual return higher than the SP500 average over 50+ years (hell, 20+ years).

The answer is there are none. Company tend to have stretches of very high returns, followed by flat or decreasing periods.

So what most people do - buy a stock that has already gone up a lot, are basically buying high and selling low.

The question is whether "thing that did well in the past" is more or less likely to do well in the future than "thing that did less well in the past." This seems to vary somewhat by "thing."

The tradeoff is you lock some of those gains down in safer assets. Probably the wrong choice for retirement earlier on, but if you need money during an economic crisis, say you got laid off, then that might change how it's viewed.

That’s very true, but he’s had the account for 30 years and assuming that means he started it young, 50% in bonds is borderline insane. It’s a lot more likely to cost you a large amount in retirement than bail you out in your 30’s.

Applying optimal portfolio theory to the long history of market returns suggests that the most risk-efficient allocation is something like 60% stocks and 40% bonds. The diversification reduces volatility faster than it reduces the overall return, so equity-like returns can be regained by using leverage on the portfolio.

Following this advice today is tricky thanks to the persistent yield inversion: you obviously can't improve returns by using short-term borrowing at 5% to invest in long-term bonds at 4%.

Wouldn’t the most risk-efficient strategy both depend on a large number of factors and also, in any case, start off with a higher allocation of equities and move over time to a higher allocation of bonds?

The stock market has never not outperformed bonds over a 45 year period, maybe even half that, so if you’re 20 and putting 40% of your savings in an account you can’t touch until your 65, you’re kind of just chucking money down a well right?

> Wouldn’t the most risk-efficient strategy both depend on a large number of factors and also, in any case, start off with a higher allocation of equities and move over time to a higher allocation of bonds?

Not really. The most risk-efficient strategy optimizes the ratio between expected return (less the risk-free rate) and volatility (standard deviation), regardless of the absolute value of those parameters.

If that optimal allocation has too much risk, such as for the near-retiree, then the investor can keep a fraction of their portfolio in the mix and the other half in cash (money market, paying the risk-free rate). If the allocation has too little risk, then the inverse applies: borrow on margin (at approximately the risk-free rate) to invest more than 100% of net assets into the mix.

Right but a 25 yr old’s retirement account has practically zero risk. If you functionally can’t withdraw the money for decades anyway, there’s approximately zero chance a dollar invested in bonds will outperform a dollar invested in equities.

Ending up at 60/40 might be a good plan, but starting there seems a waste of money.

I am not sure that anyone recommends that 22 year olds put 40% of their retirement portfolio in bonds! That is insanely conservative.

That's where leverage comes in. Under more ordinary conditions, the 22 year-old would have something like 80% in equities and 50% in bonds, using leverage to have a net 130% invested.

Under current conditions, that allocation is more questionable. The yield inversion means that the expected value of a leveraged bond investment is about zero (borrowing at a higher short-term rate to lend at a lower long-term rate), so any portfolio gains come from anti-correlation of bond and stock prices. However, the current market worry is more about stagflation than a traditional recession, such that inflation leads to both higher interest rates and lower equity returns (through equity de-leverage).

Where do you get the leverage and what does it cost? To be clear: Leverage isn't free. It is borrowed money -- financing -- for your positions. For most retail people, they will struggle to pay less than 5% per year, and usually much more. Here is a list of margin rates from Interactive Brokers: https://www.interactivebrokers.com/en/trading/margin-rates.p...

A never once, did I am read any sensible long-term retail strategy that recommended the use of leverage, let alone persistent leverage. This is a strange post.

What does your portfolio look like?

Isn't the point to change as you get closer to retirement? When your investments have a decade plus to recover, leave them in aggressive investments. There is a risk that a decade+ recession might mean delaying retirement, but in that situation delaying retirement is likely the best option even if your money was in s safe investment.

Once you are close to needing some amount of money, say X a year, then you don't have time for that X to recover, so the idea is to move X into a safer investment so it won't go up or down. Any money you don't need is still in aggressive options that have time to recover. Now you need X money every year, so you decide how many years you want to sacrifice growth for safety. Maybe 5 years, maybe 10 years. Call it Y years. Simulations show the historic optimal Y, though I don't recall the exact number and some people might want to gamble depending upon how much freedom they have to change X if needed. So X*Y is roughly the amount of money that needs to be in safer investments.

This all ends up being too complicated a math equation to optimize for the average person, so percentages are given that are much easier to follow which roughly work as a solution to this equation.

Individuals should be able to come up with their own plans based on what they want. For example, if I'm heading towards an early retirement, I might leave all my money in aggressive investments because if a market downturn hits, I'm okay with working a few more years before retiring. I'm also aiming for a retirement with big X spend a year, but have plans on how to live life if I have to move down to medium X or small X. Others might be aiming for a retirement of X and won't be able to make finances work with les than X, so they have to take a much safer approach to guarantee a retirement that doesn't lead to running out of money.

It really depends upon your age, your financial situation, what you want to do in terms of passing down money--and, as you suggest--if retirement means opening the money funnel on extravagant vacations... If you're comfortable with your ongoing situation with very conservative investments, that's probably what you should do. If you want to play the typical equity numbers over a reasonable timeframe, that may be a better bet. I've certainly been ratcheting down my equity, especially individual stocks, over time even if the expected value is probably lower.

Well, what’s done is done. I was planning to bail, back in my 30’s, but changed my mind, and stayed for almost 27 years.

It still makes more than I spend, but we’ll see what the future brings.

That’s the great thing about saving, even if you do it suboptimally, it still is a lot better than the opposite.

And in hindsight it’s almost always suboptimal.

You can do insanely stupid things of course.

But saving in some remotely rational and diversified way is better than not saving at all even if some bets turn out to be better than others.

I think that this holding stocks and bonds and then re-balancing every year or so is advice from back in the 1980's when historically bonds got under valued when stocks boomed and vice versa, so this made sense. I don't think that works so well now, especially when we had zero or negative interest rates for such a long time. If you can tolerate the risk (have a large amount of assets relative to your spending), investing in close to 100% stocks for retirement makes more sense.

Interest rates haven't been near zero for a while. I am not sure the logic of being 100% in stocks still makes sense right now, especially since you can get 4-5% interest in cash accounts and bonds are also starting to pay higher rates. Stocks are high right now too, and it's hard to see that stocks will deliver high returns from this point. Looking ahead, there are plenty of risks of inflation returning, especially in the US, and so I suspect rates are unlikely to fall back as fast as a lot of people are assuming.

The volatility of stocks is much higher than that of bonds or some other asset classes. If your time horizon is shorter than, say, five years, or if you are the sort of person who checks your portfolio daily, keeping a portion of your portfolio in bonds will drastically reduce your personal volatility.

I have an inherited IRA that I am required to take mandatory withdrawals from; I keep part of it in bonds so that I don't have to sell my stock funds when they're down.

Not underperforming but with less risk. If something goes to the moon there is high chances it will drop back to the ground. So you want to put some of that growth into something that will keep on flying.

I guess we think about risk very differently.