William P . Bengen
William P . Bengen
THE BIG PICTURE picted in Figures 2 and 3 , which split the 88-year period into two parts for clarity . These are the only two charts I have ever constructed that might be considered “ wall art .” ( It ’ s very colorful , indeed !)
Each column in Figures 2 and 3 represents the asset allocation of a single retiree producing his or her highest safe withdrawal rate . Each asset class is represented by a bar of its own color , and the size of each bar matches the percentage that asset represents of the total portfolio .
Here are some trenchant observations we can take from these charts :
1 . Over time , different asset classes dominate the portfolios . In many cases only one asset class ( other than the invariant 5 % Treasury allocation ) makes up the entire portfolio .
2 . There is a close correlation between these two charts and our line graph . The asset classes with dominant 10-year returns in Figure 1 usually dominate the asset allocation of the corresponding retiree in Figures 2 and 3 .
3 . Rarely do more than two asset classes ( aside from U . S . Treasury bills ) appear in the same allocation .
4 . Bonds contribute virtually nothing to the allocation after the early 1930s . Perhaps this is not surprising , given their low returns compared with stocks . However , this is a dramatic contrast with our standard allocation of 40 % to bonds .
5 . The two most dominant asset classes overall are U . S . small company and U . S . micro-cap stocks . Again , this is perhaps not surprising , as they are the asset classes with the two highest long-term returns .
I hope you agree with me that Figures 2 and 3 are quite extraordinary . They indicate that the optimal allocation is almost never the 55 %/ 45 % standard I have assumed in previous discussions , and that rarely are more than two stock asset classes required to permit the optimum result . Table 1 lists the average unconstrained allocation across all retirees .
Overall , the average allocation is 91.2 % stocks and 8.8 % fixed income . That ’ s a long way from our standard 55 %/ 45 % portfolio !
Before we consider the ramifications of these observations , consider Figure 4 , which depicts the individual SAFEMAX values generated by the unconstrained allocation . Let ’ s compare it to the safe withdrawal rate for our “ standard ” allocation . ( As you can see , the unconstrained SAFEMAX is higher for every single retiree .) The difference is quite consider-
TABLE 1
Unconstrained Asset Allocation ( Avg .)
ASSET CLASS
% AVERAGE ALLOCATION
U . S . Large Company Stocks 10.20 U . S . Small Company Stocks 41.75 U . S . Mid-Size Company Stocks 4.33 U . S . Micro-Cap Stocks 20.95 International Stocks 14.00 Interm-Term U . S . Govt Bonds 3.77 U . S . Treasury Bills ( Forced ) 5.00 Total 100.00 able : The average SAFEMAX is 11.72 % for the portfolio with unconstrained allocations , while it ’ s only an average 7.25 % for the standard allocation . This represents an increase of 59 % in SAFEMAX !
Two other features of Figure 4 are worth noting . The peak SAFEMAX for the unconstrained allocation is an astounding
FIGURE 4
Individual SAFEMAX For ‘ Standard ’ And ‘ Unconstrained ’ Allocations
30 years of longevity , tax-advantaged account , 5 % U . S . Treasury Bills , remainder of allocation as specified
■ 5 % TB , 40 % intermediate-term gov ’ t bonds , 55 % Equal-Weighted ■ Unconstrained Allocation
SAFEMAX %
54 44 34 24 14
4 Jan 1926
Jan 1936
Jan 1946
Jan 1956
Retirement Year
TABLE 2
Test Change To Asset Allocation
ASSET CLASS
Jan 1966
Jan 1976
Jan 1986
FIGURE 5
Individual SAFEMAX For ‘ Standard ’ And ‘ Test ’ Allocations
30 years of longevity , tax-advantaged account , 5 % U . S . Treasury Bills , remainder of allocation as specified
■ Standard Allocation 55 % Stocks / 45 % Fixed Income ■ Test Allocation 63 % Stocks / 37 % Fixed Income
SAFEMAX %
20 18 16 14 12 10 8 6 4 Jan 1926
Jan 1936
Jan 1946
Jan 1956
Retirement Year
Jan 1966
Jan 1976
Jan 1986
% STANDARD % TEST ALLOCATION ALLOCATION
U . S . Large Company Stocks 11 15 U . S . Small Company Stocks 11 15 U . S . Mid-Size Co . Stocks 11 11 U . S . Micro-Cap Stocks 11 11 International Stocks 11 11 Interm-Term U . S . Govt Bonds 40 32 U . S . Treasury Bills 5 5 Total 100 100
Jan 1992
Jan 1992
MAY 2024 | FINANCIAL ADVISOR MAGAZINE | 17