When we looked at the 1960s/70s it didn’t look like having bonds in our retirement portfolio helped us much. That was a bit surprising, especially considering it is widely considered the “worst” time to have retired in US history.
Are there any time periods where holding bonds made a significant difference in our retirement incomes?
The Great Depression
We just spent a lot of time looking at the 1960–1970 retirement which featured the third worst crash in US stock market history.
But what about the two crashes that were bigger? How did 100% equities fare then? Maybe those are when a 60/40 portfolio saved our bacon?
Let’s look at the years around the Great Depression from 1927 to 1932.
Thanks to the fame of the “4% Rule”, I think that most retirees have a mental benchmark around that number. So in the charts below, what we care most about are when withdrawals drop below $40,000. The further they drop below $40,000 the more worried the retiree will be.
The 60/40 portfolio does marginally better through the heart of the Great Depression but the differences don’t really seem that large. In any case, the withdrawals are always well above $40,000 (4% of our initial portfolio).
By 1928 the gap is larger, in some years more than $10,000. Someone would have preferred the 60/40 portfolio — since the withdrawals are generally higher — but even the 100/0 portfolio doesn’t do horribly. There are only 3 years where withdrawals drop below $40,000 and they are only slightly below. Someone with a 100/0 portfolio probably doesn’t have to adjust their lifestyle at all.
A 1929 retirement is where we see real difference emerge. The 60/40 portfolio stays above $40,000 year virtually throughout the entire Great Depression. But the 100/0 portfolio spends most of it under $40,000. And quite a few years are under $30,000. The average gap between the two portfolios is over $9,800 a year. Which might be the difference between sleeping well at night and not.
By 1930 we already see the gap narrowing again. 60/40 would still clearly be the preferred portfolio — outperforming by $9,000 a year on average. But the 100/0 portfolio breaks $40,000 quite often and only has 3 or 4 dips that are uncomfortably below that.
In 1931 the 60/40 outperformance is almost entirely gone. The 100/0 portfolio is fine, with only 3 years very marginally under $40,000.
And by 1932 it is totally gone, with the 100/0 portfolio outperforming at all times (and usually by substantial amounts).
That leaves us with only 2 years to consider: 1929 when a 100/0 portfolio is definitely painful and 1930 when it is tolerable but probably uncomfortable.
The 2000 & 2008 Crashes
We can do the same investigation around the more recent crashes.
60/40 handles the crash better but the discomfort with 100/0 isn’t substantial either way.
In 1999, though 60/40 clearly does better. It drops below $40,000 but only by a relatively small amount and doesn’t stay there long. The 100/0 portfolio, by contrast, takes a few years to recover.
Here’s what 60/40 really separates itself from 100/0. The 100/0 portfolio spends nearly 15 years under $40,000. And for a brief period even under $30,000. The absolute difference between the two isn’t large…only around $5,000 a year on average. But when you’re right on the borderline of your expenses, that $5,000 seems significant.
As with the Great Depression, we can see that the gap begins to narrow as soon as the crisis is past. 60/40 would still be preferred but 100/0 only 2 years of real pain.
And by 2002, 100/0 is again the clearly preferred choice.
We see the same pattern again…there’s one year in the heart of the crash, when 60/40 offers protection from a significantly impaired retirement. The year immediately after isn’t fun but is probably bearable. The year immediately before is fine and the two years after is also fine.
But that still leaves us with 1929, 1930, 1999, and 2000 when 60/40 is clearly better. Surely it is better to skip the 100/0 allocation — even though it works most of the time — just in case we have the super bad luck to retire right before the next 1929 or the next 1999.
Right?
Maybe. But let’s check something else first.
1909, 1911, 1912
Let’s look at the years when 60/40 does worst and compare it to 100/0 during that same time period.
If you had retired in 1912 with a 60/40 portfolio you would have spent nearly a decade under $40,000 and nearly 5 years under $30,000. That’s exactly the kind of thing we were trying to avoid!
So 60/40 didn’t save us…but the 100/0 portfolio was only the tiniest bit better.
Now that we’ve done a qualitative look…next time, let’s try to quantify all of this a little bit.
