Do asset allocations even matter?

5 min readMay 17, 2017


In my last post I closed by wondering whether we should all just use 100% equity allocations in retirement.

Before I come back to that in more detail, I wanted to explore how different asset allocations do or don’t affect our retirement.

We know that 1966 was the worst year for retirement in US history. If you had a portfolio of 100% stocks and were using a variable withdrawal scheme like VPW then your withdrawals would look like:

Our spending takes a massive nosedive as the bear market and inflation of the late 1970s eats into the portfolio. You go from $50,000 to nearly $20,000 income…and it isn’t until after the 20th year of retirement that it climbs back above $40,000 again.

I don’t think anyone would be surprised by the chart above. “Of course you got pummelled! You were at 100% equities!” But would a more conservative portfolio actually have made a difference?

By switching from 0% to 40% bonds — something most us would consider a fairly large change toward the conservative side — it appears to make…not very much difference. I mean, sure the green line is higher than the blue line. But the average difference is only $2,400 a year once the market collapses. Since that’s the average that means some years are less — $1,800 — and some are a bit more — $2,800. That’s not nothing but it sure doesn’t feel like we’ve somehow escaped much pain by holding all of those bonds.

And don’t forget the we also had lower income for the first eight years of retirement thanks to all those bonds. Over the entire 30 year retirement the total income difference between the two approaches is only $14,588. That’s only 1.2% of the total income over your retirement.

What if we go really extreme…instead of just going from 0% bonds to 40% bonds…let’s go from 0% bonds to 65% bonds.

Again…the 35% stock portfolio does better…the green line is mostly higher after the crash. But only by $2,800 on average. You still lost money in the early years (over the entire 30-year retirement you come out $9,519 behind the 100% equity portfolio). The total amount is relatively small relative to your total withdrawals.

How is it that going from 100% stocks to 35% stocks doesn’t actually seem to help us avoid…exactly what we’re trying to avoid? There was a big market crash and our retirement is still fucked. What the hell?

And if we look at 9 different asset allocations — including 6 different harvesting strategies that dynamically change your asset allocation — they all seem pretty damn similar. There are definitely differences from best to worst — but you’re still going to be spending over a decade withdrawing substantially less money than you originally expected.

Withdrawal Strategies

All of the above is done using Variable Percentage Withdrawals (VPW) strategy. Maybe there’s something special about that results in the characteristics we’re seeing. So let’s go back to our 1966 benchmark year and try a few other variable withdrawal strategies. Does the asset allocation make a significant difference with any of them?

It ran out of money in all scenarios….hence going to $0

Each withdrawal strategy looks different…but within each strategy the asset allocation appears to make only very minimal differences.

Again, going from 100% equities to 35% equities makes a surprisingly small difference heading into the worst retirement bear market in US history.

It certainly doesn’t appear that having bonds is really giving us significant downside protection on what we really care about — our income in retirement.

Different Years: the 1960s-70s

Maybe there’s something weird & unique with 1966. Let’s switch back to the VPW withdrawal strategy and check a few more years…

What’s going on? Why doesn’t our asset allocation matter? Does this mean we might as well get rid of all our bonds, since they don’t seem to offer any downside protection to our retirement income?

When you read people talking about risk parity portfolios, they often have a graphic like this…

stolen from

In a traditional 60/40 portfolio, stocks only make 60% of the portfolio on a dollar-weighted basis but they make up 90% of the “risk”.

I think the charts above are reflecting that dynamic at work.

Every variable withdrawal scheme looks at your current portfolio and uses that (possibly with modifications, limits, and tweaks) to determine this year’s withdrawal. And since the risk of your portfolio is dominated by equities, that means your withdrawals are almost entirely determined by equities as well.

Admittedly, we’ve been hyper-focused on the bear market of the 1970s — which had a kind of long-grinding nature compared to say the sharper but shorter 2008 crash — in this post…but so far it doesn’t look like asset allocation matters at all, at least when it comes to downside protection. Can that really be true?!?




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