This is simply sequence-of-returns risk in a different dress. I (still) don't see anything here that isn't routinely discussed in ER-land. Besides, people are implying these are the only two ways portfolios could fail. They aren't. What if either of those scenarios occurs in year two? What if we're about to hit a 1929-32 sequence this October?jacob wrote: ↑Thu Jul 18, 2019 7:31 amThe point that c_L makes is the important one. Within the traditional investing framework, presuming that we're looking at a 60 year horizon, there is no difference between a 90% drop after 10 years and spending oneself out of money and a 30% drop after 40 years that doesn't quite recover and running out of money in years 59. They both count as equal failures, but they are materially very different. The latter sucks but the former is catastrophic. Yet this is obscured when one statistically calculates the 5% failure rate ... Or even a 0% failure rate insofar the sampling space was inadequate.
Yes, and in recent years I have come to appreciate the benefits of a fixed-income allocation in a wasting portfolio. It's not so much that bonds give you some vague sense of "diversification". It's that they give you something to sell that hasn't crashed yet while you wait for stocks to come back. (I mean, that is diversification in so many words, but materialized as an actionable benefit). So take the longest time horizon you think stocks will be down for, and allocate that period of living expenses towards bonds. It doesn't need to be the whole period, just long enough to make you feel secure you'll have ridden out most of the worst times.In terms of "actionable" strategies, this suggests that the somewhat common or at least not uncommon strategy to have N months of cash at hand to ride out recessions is a smart idea.
Note "bonds" in this context broadly means "some asset that at least tracks inflation and has extremely low chance of defaulting". So shorter-term Treasuries, TIPS, MLPs and maybe consumer staples stocks (as mentioned before, if the USD hyperinflates, Pampers will become priced in euro or gold or some similarly more stable asset). I in fact have a portion of my portfolio thusly allocated, to savings bonds, back when you could buy a lot more of them than you can now and at far more attractive terms.