I have found it ironic and infuriating that gurus change their "long-term" recommendations--lets say, every five years or so. Even worse that target-date retirement funds change their actual allocations. You're supposed to commit to these funds for thirty or forty years, but the funds themselves won't commit to a consistent strategy.
Around 2006, Vanguard increased the stock allocation across the board in all of their target-date funds, by varying amounts of as much as 15%-to-20%-of-portfolio. That was enough to UNDO more than ten years of de-risking in the fund. It also was bad market timing on Vanguard's part.
The general idea that you should reduce stock allocation with age is sound. It's based on the idea that your salary is a relatively low-risk asset, and that the grand total of all your future earnings (appropriately discounted for interest rate and adjusted for inflation) continuously decreases, because you have fewer and fewer earnings years ahead of you. Your "human capital" declines with age. If stocks crash, you have less and less ability to rebuild out of savings.
It turns out that a straight-line "age in bonds" path isn't quite right according to the financial economics model, and the paths that come out of the models call for an S-shaped curve, with stock allocation staying relatively high up to about age 40, and most of the de-risking done between ages 40 and 60.
Around 2006, Vanguard increased the stock allocation across the board in all of their target-date funds, by varying amounts of as much as 15%-to-20%-of-portfolio. That was enough to UNDO more than ten years of de-risking in the fund. It also was bad market timing on Vanguard's part.
The general idea that you should reduce stock allocation with age is sound. It's based on the idea that your salary is a relatively low-risk asset, and that the grand total of all your future earnings (appropriately discounted for interest rate and adjusted for inflation) continuously decreases, because you have fewer and fewer earnings years ahead of you. Your "human capital" declines with age. If stocks crash, you have less and less ability to rebuild out of savings.
It turns out that a straight-line "age in bonds" path isn't quite right according to the financial economics model, and the paths that come out of the models call for an S-shaped curve, with stock allocation staying relatively high up to about age 40, and most of the de-risking done between ages 40 and 60.
Statistics: Posted by nisiprius — Sat Jul 20, 2024 6:32 am — Replies 2 — Views 260