Ode to Risk
Personally, I am convinced after research that the best way is to be 100% in equity. Here are my arguments.
High level argument
In-detail argument (no withdrawal)
- Let’s admit that the worst after 10 years is substantially rosier in the 50/50 than the 100/0 (0.91x vs 0.67x). However, note that this reflect a single series of event in the past 100 years. Also note that the difference is 73%.
- The worst 25% percentile of the 50/50 allocation are always similar or worse than the worst 25% percentile of a 100/0 allocation (After 1 year, 0.99x vs 0.96x). This is in-line with the fact that only about ¼ of the years returned negative return over the last 100 years.
- This means that you can expect only better result or about in 75% of the case with a 100/0 allocation than a 50/50 allocation.
- The worst 50/50 is the same as the worst 100/0 after 23 years of investing at 1.5x. This is highly interesting for the most conservative folks out there. After 20+ years, you are just losing money by having a lower allocation.
- In other words, you are certain (based on historical results) to have a lower results with a 50/50 allocation after 20 years. Thus you are trading an uncertain gain for a certain loss going for a 50/50 allocation.
- At 30 years, the average 50/50 is worse than the worst 25% of 100/0 (5.47x vs 5.78x). If you fear the worst 25%, than be happy to know that you would beat on average of 100/0 beat it after 30 years.
- I have an easy time to concede that we want to minimize our lost. However, it makes no sense to aim for it.
- At 30 years, we see that the best 75% of 50/50 is a little underneath the worst 25% of 100/0 (6.58x vs 5.78x). We could be tempted to think that the upside (75%) of a 50/50 is enough rosy. However, it is almost the same as the worst (25%) of a 100/0.
- In other word, if I’m unlucky, I will do more than a lucky conservative (50/50) would make.
- It’s easy to see that the worst of 100/0 is lower most of the time than the 75/25. However, please note the size. Having 74% vs 64% is a difference of 10%. In other words, 100,000$ over a million. If the size difference was bigger I might concede this, but at this level, it is not enough significant. Can’t you take a 10% cut in your spending for a year?
- At the worst 25%, they are always similar or worse in the 75/25 than the 100/0 scenario.
- At 22 years, the worst 75/25 match the worst 100/0 at 1.5x.
- At 30 years, the best 75% of 75/25 is the same as average of 100/0.
In-detail argument (withdrawal)
- We can see the difference of the worse between 50/50 to 100/0 is only 15%. However, after 10 years, the difference of the average is 22%.
- Thus you would lose more on average for a lower pain in the short term.
- At 7 years, all allocations are having similar worst 25% (0.9x). This means that on most case (75%) if would be advantageous to be in 100/0 after 7 years.
- At 22 years, all allocation are having similar worst (0.63x). It would be thus just advantageous to be in 100/0 than the other allocation.
- At 30 years, you are sacrificing more than 1x (ie your entire initial withdrawal) with going with a 50/50 rather than a 100/0.
- Low derisking gain going at a 50/50 for a major loss often.
- Gain of a low equity is only felt in the worst scenario. Even then as time passed, the worst of 100/0 is better than all the other allocation.
- The worst 25% results are better in a 100/0 almost all the time. All better odd returns better results in a 100/0.
- After 30 years you would always lose out using a lower allocation.