I was reading Asset Dedication (a 2004 book that proposes a bucket strategy) over the weekend. They suggest having a bond bucket that covers the next 5- to 10-years of spending. They argue that frees you to invest the remainder of your portfolio in whatever will earn you the highest return.
What I found most interesting are the sky-high returns they casually say that investors can “expect”.
For now, assume that they expect to average 8 percent total return per year on their overall portfolio. This tends to be the default return rate that many financial advisors use for conservative portfolios.
In their defense, they don’t say you are guaranteed to get 8%. Only that “there is about a 77 percent probability of getting 8 percent or better”.
For the record, over the past 20 years (March 1997–March 2017) has returned 7.5% (with dividends reinvested). So the couple from the book is probably disappointed that their conservative investment advice turned out to be not so conservative after all.
What is even more shocking is that the authors later on have an example of a couple that has their growth portfolio invested entirely in small cap stocks and is assuming an 11% rate of return.
the Browns’ 11 percent target return rate on their nest egg is referred to as their minimum acceptable return (MAR)
Over the past decade, Vanguard’s small-cap value fund has returned 7.77%. That’s very far off from the 11% the Browns were expecting.