Have you shifted to thinking about what you are going to do to Enjoy More NOW? It’s almost a year since the first official stay-at-home requirements for here. Patti and I are more than two weeks past our second vaccination. We feel like we are breaking out. We’ve shifted into, “What’s fun to do?” mode. That’s travel for us. We spent NO MONEY on travel this last year. I wrote in November that we retirees had more money at any time in our lives, and we all have about 10% more now. Worry about money can’t hold us back. It’s time to spend to enjoy! This post mentions a few things we have planned.

 

== Gotta travel ===

 

We both like to travel and like to target two big trips each year. I spent most of this week renewing the plans we had for two big trips that we did not take in 2020: England and Italy. I really like to lock in dates and concretely plant those future markers on the calendar. Just thinking about them makes us happy. I can imagine we’re there already. Anticipation = happiness.

 

We usually go to England – the Lake District – for two weeks in late May-early June; I think we’ve gone there about five times now. Patti bought the tickets to leave late August; we’re thinking that there will be no travel restrictions then. I made all the room reservations this week; I basically renewed the ones we had for last May. We stay in three places and in the same rooms; two still had our deposit from last year. We already are replaying our favorite hikes in our head.

 

 

Patti bought the airline tickets and I renewed the reservations for a walking trip to Tuscany for mid-October. Many of our friends have been there, but we have not. Our friend, Tina, will join us, and that will be fun. I booked that trip through a company that we have used when we went to Sicily. I had them stretch their one-week walking itinerary to almost two weeks for us.

 

== Shorter trips ==

 

We’re up for smaller trips this year. I’d like to shoot for a short trip at least once a month. We have two coming up: one night with six friends at the Omni Bedford Springs. That’s a terrific place two hours from here. Of course, Patti had to get the bargain, bargain rate!

 

We have a time-share for a week every other year on Hilton Head Island; that will be the first full week of April. The weather is good that week when it usually is darn chilly here. Patti does not want to fly, so we will drive. It’s about 11 hours and that is A LOT of driving for us. We have high school + college friends that we’ll visit in Lexington, VA on the way back. That will break up the driving to amounts I may be able to stand.

 

Our niece’s family is in DC, and Patti booked a couple of nights close to the fourth of July weekend in DC. We’ll stay the 4^th in the B&B we stayed in for the 4th in 2019. That was on the way back in Sharpsburg, MD near the Antietam Civil War Battlefield. The fourth of July parade in Shepherdstown, WV was a blast: a moving square dance in the parade was my favorite. We caught the Thursday night jam session at O’Hurley’s General Store. Our B&B as gave us a voucher for Nutter’s Ice Cream shop in Sharpsburg. The man in front of me bought this banana split; I think it was $6. I don’t think I’ll ever forget it.

 

 

We’ve talked about Montreal-Quebec and the eastern shore of Maryland, but we don’t have anything on the books. I’m leaning to the eastern shore. The weather would be terrific in May. Patti has a life-long friend in Columbia, MD. We’d visit on the way.

 

== Getting into shape ==

 

Our trips to Europe have always been active. We really like walking there. But I can no longer go and walk myself into shape there. I have to get in shape here to be able to comfortably walk six to eight miles. August is a long time from now, but the weather is better. We decided this was week to start to get into shape for walking. BOY, do I need to work to get into reasonable shape! We walked 1.5 miles, basically all downhill, to a park and had lunch with friends on Wednesday. Obviously, the return was basically all uphill. I was pooped. I pushing now to average three miles per day.

 

It also does not help that I am carrying more than a few extra pounds. I finally started to get back to the routine of weighing-in each morning. I’d guess I had a year hiatus. I was pleased at my first weigh-in and told Patti than I had only gained three pounds. I obviously misread, since the second reading said I was eight – maybe ten – pounds more than I weighed last year at this time. Not good. Bye-bye, Trader Joe’s coffee ice cream.

 

 

Conclusion: We all have to feel like we’re cautiously breaking out. It’s time to work at ENJOYING NOW. For Patti and me right now, that means planning trips. Whatever it is that you enjoy, GO FOR IT. You have more money now than you have ever had in your life; money worries can’t hold you back.

All investors should be able to answer the question, “Have I invested with the appropriate level of risk?” This raises a basic question, “What is financial risk?” It turns out that I don’t think that’s easy to answer. In my mind the financial industry uses a bizarre measure of risk, one that makes little sense to me. I think I’m super conservative: I have NO thought that I am assuming risk from my choice of stocks and bonds. Yet, financial folks would label Patti and me at our ages as irrationally aggressive. The purpose of this post is to describe how I think about how to invest for the least chance of loss and highest chance for gain. I conclude my view is likely a 35% better financial future for many investors.

 

== Minimize downdrafts in your portfolio? ==

 

The conventional thinking is that financial risk is measured by the degree of annual variations in return or portfolio value. Stocks are more variable in one-year return than bonds and therefore are riskier.

 

Investors focus on declines – they think a decline in the value of their portfolio is a loss even though they won’t sell anything from it for perhaps decades. The goal therefore is to assemble a portfolio – its mix of stocks and bonds – that meets a criterion that the investor likely has in their head as to what is an acceptable, decline in portfolio value.

 

Example: I feel I will explode with fear and lose sleep if my portfolio ever declines more than 25% from its peak value over a year. Examining historical returns, I can now construct a mix of stocks and bonds that meets that criterion.

 

Anyone who looks at this graph of the real annual return for stocks and bonds from 1926-2020 as the basis for their thinking about future stock and bonds returns has to find this appealing. Whoa. Those ups and downs look random, dramatic, and frightening. The emotional part of our brain shouts, “Look at all those times the green and orange lines are below 0! Look at those negative spikes for stocks at more than -30%. I’ll lose sleep if I hit one of those. Can I minimize the downturns? I need help!” (Financial folks love those last three words.)

 

 

Modern portfolio theory (MPT) adds sophistication to the process. Its author won the Nobel prize in 1952. It’s the underpinning of how financial folks construct portfolios for investors. MPT provides the math of how to pick a specific mix of stocks and bonds for a portfolio. MPT calculates the mix of stocks and bonds that is the optimum balance of best return and lowest variability in returns. (That link shows the math. It’s beyond description to me.) Once one has the optimum mix, one uses historical returns to find the acceptable, historical maximum portfolio decline.

 

The optimum mix differs for each holding period. A holding period is how long you hold an investment before you sell it for your spending. I display several optimum mixes for stocks and bonds from a graph that displays MPT calculations of risk-return for a number of holding periods from Figure 6.4 in Stocks for the Long Run, Fifth Edition, by Jeremy Siegel.

 

 

I’ll focus on the result for a 20-year holding period in this post: MPT finds that the best mix is 58% stocks and 42% bonds. A person who invested $10,000 would have a real expected portfolio return of 5.5% per year. $10,000 would accumulate to $29,200 in the same spending power in 20 years. That would be a relatively steady year-by-year ride.

 

 

== Model portfolios ==

 

The financial industry recommends investment portfolios that are grouped by wider time horizons – a number of holding periods. The industry then assigns labels to each general time horizon: aggressive, moderate, or conservative. I don’t track the logic for these labels unless they are meant to reflect greater tolerance for annual variability – primarily the maximum decline from a peak value for a portfolio.

 

I get the monthly Journal from the American Association of Individual Investors (See aaii.com). The January issue discusses recent changes to three recommended portfolios to lower the recommended portion of stocks in two of the portfolios. Here’s the detail on the three. I’d guess most investors would focus on maximum percentage decline for a portfolio to judge if they are an aggressive, moderate or conservative investor.

 

I summarize the moderate portfolio for an investor generally between ages 35-55: 60% stock and 40% fixed income. That’s generally someone with a life expectancy between 30 and 50 years; they’ll hold on to some portion of their investments now for perhaps more than 30 years. And then their heirs may hold some portion for decades more.

 

 

OUCH. That mix is VERY DIFFERENT ­– far lower in mix of stocks – from what one would derive from Nest Egg Care (NEC). Patti and I in our 70s; we clearly have a shorter time horizon than someone decades younger. I think I’m super-conservative, meaning I know we will NEVER run out of money; we are also best positioned for More over time. Our portfolio mix is about 80% stocks when I include the effect of a Reserve. (See Chapters 7 and 8, NEC.) What gives?

 

== Investing with the probabilities in your favor? ==

 

This approach is to construct a portfolio with the most obvious probabilities of the winning combination of stocks and bonds for a holding period. For some holding periods, the tradeoff of potential gain vs. loss is obvious. In others, the tradeoff is more difficult.

 

To try to figure this out you look at a graph that shows cumulative returns over time. Last week’s post shows a graph that includes intermediate bonds.) This graph hopefully engages the thinking part of your brain. It has the same ups and downs of the previous graph. They don’t look as frightening, and you can clearly see that stocks will outperform bonds by a wide margin over time.

 

 

The data is plotted on a semi-log scale. Each unit of distance on Y-axis is the same percentage change. The distance from 1 to 2 (a doubling or 100% increase) is the same distance as from 10 to 20 or 100 to 200. That also works for a decline: a 50% decline is the same distance on the graph: 2 to 1 is a 50% decline and that’s the same distance as for 200 to 100 or 80 to 40 as examples.

 

== The task ==

 

The task is to see how both stocks and bonds perform over different holding periods. Let’s assume I’m investing this year for money that I – at least in concept – will spend in the 20^th year from now. I want to know which one – stocks or bonds – declines less and which one grows more from the beginning to the end of a holding period. I don’t care about the wobbles or maximum percentage decline of my portfolio at any time in those 20 years: I want to know the mix of stocks and bonds that gives me the best chance for more in that 20^th year and least chance for loss.

 

I display a red horizonal bar at the bottom of the graph you can print from here. It’s 20-years long. I cut a 3X5 card to that length and slide it along points of the two curves to help answer key questions.

 

== What will outperform over the next 20 years? ==

 

I want to know: what’s the worst return for stocks and for bonds over 20-year segments? How many times do bonds outperform stocks and by how much? If returns are average over 20-years, how much do I have from stocks and how much from bonds?

 

Here’s what I conclude when I look at the two curves and use my 20-year measuring stick.

 

• I don’t need my measuring stick for this: stocks beat bonds by many multiples of return over the long run. The long-run or expected return rate for stocks is 7.1% and it’s 3.1% for bonds. (Intermediate bonds would be 2.2%.) .

 

Following the Rule of 72, stocks double every ~ten years and bonds double every ~23 years. In 20 years, stocks will have two doublings in the same spending power. Stocks will grow by 400% – from $10,000 to $20,000 and then $20,000 to $40,000. In 20 years, bonds will be about 90% of the way to their first doubling and will grow by 80%. Growth from stocks will be 3.6 times more, and I’d have more than twice as much to spend from stocks than bonds.

 

 

 

• The line for stocks is more wobbly – more variable in short-term returns – than the line for bonds.

 

• Stocks have several steep one to three-year declines, and bonds don’t decline that steeply over any one to three-year period. The four periods of steep declines for stocks are 1930-31, 1973-1974, 2000-2002, and 2008.

 

• Bonds have a similar decline from a peak as stocks. Bonds declined from a peak by 50% from 1964 to 1981. The biggest decline from a peak for stocks was 54% from 1929 to 1931.

 

• Bonds departed below their expected return line far more than stocks. Bonds had to increase by ~300% to get back to their long-run, expected return line, while stocks had to increase by ~80% from their greatest departure.

 

• Stocks have never declined for a 20-year holding period; they’ve always increased in real spending power. The worst 20-year period was 1969-1989; that was 3.8% real annual return, and that’s .7 percentage points better than the average return for bonds. Bonds declined in real spending power in each of the 14 consecutive 20-year periods from 1952 to 1965.

 

• The only times that bonds outperformed stocks over a 20-year period were during their Great Recovery, starting in 1982, after their 44 years of cumulative 0% return. The Great Recovery for bonds parallels the Great Squashing of inflation. Bond prices increase as interest rates fall; interest rates fall as inflation falls; inflation in 1979 was more than 13%; inflation has averaged less than 2% per year since 2009.

 

You have to slide the measuring stick along the two curves connecting points at the end to judge the relative steepness of the upward slope for bonds and for stocks. How many times is the slope steeper for bonds than it is for stocks? The candidate years start in the late 1980s. I can eyeball and find one example where bonds have outperformed stocks over 20 years.

 

 

I have to go the actual data to find that there were four cases where bonds outperformed stocks. In two of those periods, returns from bonds were about one percentage point more per year. In the other two, the return difference was small. Stocks outperformed bonds in the other 71 20-year periods, again, by an average of four percentage points per year.

 

 

== What does one conclude? ==

 

What’s the logical conclusion from this? I can’t construct a logical reason to hold ANY bonds for a 20-year holding period. Stocks have never declined in 20 years. The worst return rate for stocks was better than the average return rate for bonds. Bonds rarely beat stocks in return – and only in unusual times and then only by a small amount. In the OVERWHELMING number of cases stocks outperform bonds by a wide margin. Hold ONLY STOCKS for that long of holding period. Accept the annual variability. Accept the declines in your portfolio value along the 20-year ride. The alternative, focusing on how much annual downdraft you might accept, gives up 35% of your future.

 

 

== How do I sort this all out? ==

 

I go through all this same thinking using shorter and shorter holding periods and this is how it shakes out for me. I group the future into the cash for spending in the upcoming year and three holding periods; each holding period has a different mix of stocks and bonds. I don’t have one pile of money. I have three piles.

 

 

If I were in the Save and Invest phase of life, this is exactly how I would think about how I would construct my portfolio. I might even set up accounts with these groupings of holding periods and mixes of stocks and bonds. I’d forecast future spending needs. I might may very well have a need to sell from my portfolio in three to five years: money needed for the kids’ educational expenses would be a good example. I’d – at least conceptually – put the money I’m saving for that into the account with the appropriate mix of stocks and bonds.

 

Even in our Spend and Invest phase of life, I find it useful to think about our portfolio this way: I don’t have our accounts arranged by these holding periods, but every December I recast our returns for three holding periods.

 

 

Conclusion. When you are in the Save and Invest phase of life, you should think of your future spending as falling into different holding periods – I suggest three – and forecast your spending needs for each holding period. You’ll want a very high portion of bonds for the money you will spend in a year or two, but you’ll want 100% stocks for the longest holding period. I’d have 100% stocks for a holding period of seven and more years.

 

If you derive your total portfolio mix this way, you are engaging the thinking part of your brain. You are not being ruled by the intuitive, emotional part of your brain that focuses almost solely on avoiding temporary, deep downdrafts in the value of your total portfolio.

Two weeks ago I wrote about potential choices for bonds and displayed a number of options. The purpose of this post is to look at the pros and cons of intermediate-term vs. long-term bonds in more detail. In particular, I wanted to confirm the insurance value of intermediate-term bonds.

 

Whew! With the last post and this one, I think I’ve exhausted about all I could say about bonds. My conclusion is as before: any of the choices on the sheet I included two weeks ago will work out fine for your financial retirement plan. Intermediate-term bonds offer the same – and maybe slightly better – insurance protection as long-term bonds. Expected returns are about one percentage point lower for intermediate-term bonds than long-term bonds: when we don’t face a Most Horrible sequence of returns, we’ll accumulate less from intermediate-term bonds.

 

== The pattern of returns ==

 

I like to look at the pattern of returns. What does a graph tell me? I plot the cumulative real returns of stocks and the two types of bonds from 1926-2020. An obvious difference is the ~one percentage point difference in return between the two: roughly 3.1% expected real return for long-term bonds and 2.2% for intermediate-term bonds.

 

 

It’s hard to see that one pattern is better than the other in insurance value. The line for intermediate-term bonds looks less variable; I’d expect that: prices of bonds move in the opposite direction of the changes in interest rates. The prices of shorter-term bonds are not as sensitive to changes in interest rates: prices don’t fall as much when interest rates increase; prices don’t rise as much when interest rates decrease.

 

Both have a very long period of 0% cumulative return. It took took 48 years for the cumulative return for both to clearly surpass their level in 1936! Both decline fairly steadily in the period 1976-1981 when interest rates increased because inflation increased. (Inflation peaked at 13.3% in 1979.) Both show sharp recovery starting in 1981 as inflation and interest rates fell, and both have been fairly stable in return since about 2000.

 

== Compare performance in the ten worst years ===

 

This table shows that both long-term bonds and intermediate-term bonds provide similar insurance value in the ten worst years for stocks since 1926. I’m judging insurance value by the spread between stock and bond returns. Both average 27 percentage points BETTER than stock returns for those ten years.

 

 

Intermediate term bonds were equal or slightly better than long-term bonds in eight of the ten years, meaning that they gave a bigger percentage point spread. My eyeballs focus on are the two back-to-back devasting years of 1930-31 and 1973-74. Long-term bonds were better insurance value in the most recent worst years, 2000 and particularly in 2008.

 

From this display, I’d conclude intermediate-bonds clearly are no worse in insurance value than long-term bonds, but I wouldn’t conclude solely from this that they are better.

 

== The effect on ZERO CHANCE years and SSR% ==

 

We use a Retirement Withdrawal Calculator (RWC) to lead us to the decisions that lock in the number of years we want for ZERO CHANCE for depletion of our portfolio. For, example, at the start of our plan Patti and I decided on 19 years for ZERO CHANCE for depletion. We found our Safe Spending Rate (SSR%) = 4.40% (See Chapter 2, NEC). That’s the conclusion derived from FIRECalc, the only RWC I trust.

 

FIRECalc uses a measure for long term bonds – described as “Long Interest Rate” – as its default for the fixed income portion of our portfolio. I want to know: Would I change any of the three design decisions for our plan, particularly our SSR%, if I used intermediate-term bonds?

 

I choose to use the spreadsheet that I built for this post to compare the effect of long-term and intermediate-term bonds. I want to use my spreadsheet rather than FIRECalc for this since I know the source of data, and I’m not clear on the data sources for FIRECalc: I don’t think “Long Interest Rate” is the same as real annual returns for long-term bonds that I get from my data source that is an industry-standard source.

 

When I input my three planning decisions in December 2014 to the spreadsheet – using long-term bonds – I got 20 years to depletion; that actually was one more year than I get from FIRECalc. Here’s the pdf of that spreadsheet. When I change and use intermediate bonds, I get 21 years to depletion. Not much difference. Here’s the pdf of that spreadsheet.

 

 

 

I conclude that intermediate bonds clearly are not worse than long-term bonds. One could argue that they are slightly better. But I’m not substituting them as the default for the fixed income portion that I originally used in FIRECalc. In other words, I’m not going to increase the age-appropriate Safe Spending Rates (SSR%s) that I show on Graph 2-4 and in Appendix D in NEC. I might judge that the age appropriate SSR percentages that I calculated in NEC are a shade conservative – low – and I’m fine with that.

 

== Seek about 1% greater return per year? ==

 

You may be inclined to chase a bit higher potential return than I get from my choice IUSB – iShares Core Total USD Bond Market ETF. You could choose one of the intermediate-term corporate bond or long-term bond funds on the sheet. You might earn one percentage point per year better return over the long haul: 3.1% real return, not 2.2% real return. That would add ~.2% on the expected return on our total portfolio.

 

 

I’m not inclined to chase: I’m more comfortable owning a total US bond fund. I like saying, “Patti and I own almost every traded stock and bond in the world. More than 26,000. You can’t get more diversified than that.”

 

 

Conclusion: I examined in this post the pros and cons of intermediate vs long-term bonds for our portfolio. Long-term bonds average about one percentage point better in real return per year. Both give very similar insurance value – meaning they both had had far greater returns than stocks in years when stocks cratered. Intermediate bonds might offer a shade better insurance value – a bit longer stretch of ZERO CHANCE years to the first possible chance of depleting a portfolio.

 

I’m not changing from IUSB that Patti and I hold to a different kind of intermediate bond fund or to a long-term bond fund to chase after that one percentage point. I feel much better knowing that I am highly diversified – IUSB owns a bit of the vast majority of bonds traded in the US. I like saying ­– in combination with the stock funds we own – “Patti and I own a bit of almost every stock and bond traded in the world. More than 26,000. You can’t get more diversified than that.”

 

Texas! Wow, what a mess! No heat, light, or water for millions. Did Texas plan for the WORST or is this just much worse than anyone could logically expect? I don’t know the answer, but I do know I feel really good about our financial retirement plan. Total failure in Texas was complete loss of power. To me that’s analogous to depleting our portfolio in our lifetime. We nest eggers should know: that cannot happen. We’ve planned properly to avoid that disaster. This post contains nothing new. All this is in Nest Egg Care, but the purpose of this post is to go down the checklist that runs through my head in times like this. I’ve gone down this list enough times that I can check them off in my sleep.

 

== TODAY is the start of the Most Horrible ==

 

Our plan is built on the assumption that TODAY is the start of the Most Horrible sequence of financial returns for stocks and bonds in history. That’s a sequence that contains a two-year period with 49% real decline real stocks. They dropped in half in 24 months! That sequence is 14 years with cumulative -10% real return for stocks. It’s twice as bad for bonds over those years. Oh, that’s miserable.

 

We calculate our Safe Spending Rate (SSR%; Chapter 2) using that Most Horrible sequence in our Retirement Withdrawal Calculator. Those horrible returns drop our spending amount to LESS THAN HALF had we assumed, for example, expected or normal returns. (The opposite of this: when returns aren’t horrible, we will calculate to much greater safe spending over time.)

 

 

== Steps to take when stocks go COLD ==

 

Our spending rate is already set to be at a safe level, but we nest eggers know we can act during retirement to futher protect our portfolio – extend the years for ZERO CHANCE of depleting our portfolio. I think of four levels of protection.

 

• I never forget to Rebalance back to my design mix of stocks vs. bonds at the end of each year. Bonds are a major form of insurance to protect our portfolio. When stocks return less than bonds in a year – that’s happened in about one-fourth the years since 1926 – we disproportionately sell bonds. That’s just how the math works out when we rebalance. We’re using some of our bond insurance to buy time for stocks to warm up and get back to their normal temperature.

 

When stocks get back to normal temperature – outperforming bonds in about three-fourths of the years – we’re disproportionately selling stocks for our spending and, in effect, buying more bond insurance. That makes sense: our portfolio is bigger and there is more we want to protect.

 

• When stocks turn DANGEROUS, RECORD COLD, we just pull out the stops and don’t sell any of them for our spending. Texas: go to your underground storage of diesel fuel and the small generators you have stored there; take the fuel and small generators to warm the bigger generators at the power plants that are not operating; fire them up to unfreeze the pipes and valves; and get the power plant back on line. Our Reserve (Chapter 7, NEC) – typically one year of spending – is like that underground diesel fuel and our store of small generators. We hope we never use that fuel, and it’s pretty much a dead cost ­– we don’t earn much on it. But is unbelievably valuable when it’s really bad.

 

• We all should have another deeper layer of Emergency Reserves, and that’s the unused balance of our HELOC. It would have to be an almost life-threatening event to use that for our spending, but we should gain comfort knowing that it is there if we need it. Patti and I have one year of spending available we could tap from our HELOC. My friend, Alice, has close to five!

 

• The final action is to spend just a little less. Spending less has a big impact on the safety of our portfolio. Lower spending stretches the years of ZERO CHANCE for depleting. Patti and I have built up a pretty big safety cushion that translates to being able to stretch the NO CHANCE years for us to well past age 100.

 

Good market returns have given us that safety cushion. We have 19% bigger Investment Portfolio – stated in constant spending power – in December 2020 than we had in December 2014 at the start of our plan. That’s despite increasing withdrawals for our annual Safe Spending Amount (SSA, Chapter 2, NEC). If we chose this past December to withdraw the same $44,000 of spending power we withdrew in December 2014, our withdrawal rate would be 3.7%. That SSR% equates to more than 30 years for the first chance to deplete. See Graph 2-4 and Appendix D, NEC. I’ve annotated on our most recent calculation sheet here.

 

 

 

Conclusion. The power outage in Texas reminds me how important it is that our financial retirement plan always has have the WORST case in mind. We nest eggers have a plan that assumes we will face the Most Horrible sequence of stock and bond returns in history – starting today. We make the right decisions at the start of our plan. We know the actions we can take during our retirement to further protect our portfolio. We should be very confident that we will NEVER deplete our portfolio during our lifetimes.

In Nest Egg Care (NEC) I recommend two bond funds for your retirement portfolio. One for US Total Bonds (Patti and I own IUSB; you have a number of options.) and one for International Total Bonds (Patti and I own BNDX the ETF of the index fund VTABX; I still think that is about the only option). The purpose of this post is to look at US bond funds that are options to IUSB – iShares Core Total USD Bond Market ETF. IUSB is still at the top of my list of funds, but you might want to consider alternatives.

 

== Bonds are INSURANCE against DEVASTATION ===

 

We retirees – in the invest and spend phase of life – are selling securities for our spending each year. All of us should have a mix of stocks and bonds. Stock returns have been greater than bond returns in all but one of the last ten or so years. We are disproportionately selling stocks in those years to get the cash we need for our spending and then to rebalance to our design mix of stocks vs. bonds.

 

This pattern has repeated: we sell a lot of something that has done well and seems to be on track to do well – stocks – and we don’t sell much of something that hasn’t done as well and likely won’t do as well – bonds. Heck, in three of the last six years I’ve solely sold stocks to get the cash we will spend in an upcoming year, and then I sold more stocks to buy bonds to correctly rebalance. That seems very crazy, but that’s how rebalancing can work. Bonds can seem to be a heavy weight we are dragging along.

 

But we retirees can’t lose sight of why we hold bonds. We cannot forget how a year or two of HORRIBLE stock returns can DEVASTATE our portfolio. The odds are high that we’ll experience at least one really horrible year during our retirement. (See Chapter 7, NEC.)

 

We need to remember what HORRIBLE can look like. This chart from this post shows the periods of the most HORRIBLE stock returns. Here’s a snapshot:

 

 

Bonds are insurance against DEVASTATION when stocks crater. When we are hit with HORRIBLE returns for stocks, we sell LOTS of bonds our spending. If returns are really HORRIBLE, we use our Reserve (Chapter 7 NEC) and sell NO stocks. We sell bonds for our spending to buy time for stocks to recover.

 

== Criteria for our Insurance ==

 

The key criterion for insurance is that we want it to be there when we REALLY want it. Bonds are good insurance because their returns down follow the exact same pattern of the ups and downs of stocks. Stocks usually outperform bonds, but bonds outperform stocks when they crater.

 

The benefit of bonds is most clear in the years of MOST HORRIBLE returns for stocks. In the ten worst years for stocks, bonds averaged 27 percentage points greater return. 27 PERCENTAGE POINTS! Bonds have “been there for us” in each of those years, especially for the very worst ones.

 

 

== What to pick? ==

 

I think your buying decision for your bond insurance is similar to your buying decision for car insurance. Do you want GEICO, Allstate or Progressive? You may find some differences, but you know your choice will there when you need them. I think any choice of a diversified mix of bonds is going to have the same effect: their return will be MUCH BETTER in a year or years when stocks crater.

 

You have excellent alternatives for your bond insurance. I picked IUSB – iShares Core Total USD Bond Market ETF – in December 2014 and I won’t change that choice.

 

Why did I pick IUSB? I favored a Total US Bond fund (See Chapter 11, NEC). I like a total bond fund because it is the ultimate of diversification. With the two bond funds that we own, I can say, “Patti and I own almost every bond traded in the world. We’re not betting on a specific type or maturity of bond. We have the ultimate in diversification.” (I can say the same for our two stock funds.)

 

An article in Morningstar described IUSB as having a shade higher credit risk in its portfolio than other total bond funds; its credit profile was similar to portfolios of actively managed funds; it would outperform other total bond funds; and almost NO actively managed bond funds had better return.

 

Because of its mix of short, intermediate, and long-term bonds, the average maturity of all of IUSB’s bonds – ~6 years – falls into the Morningstar classification as intermediate bond.

 

Morningstar now describes IUSB as “Intermediate Core – Plus.” As I read this article, Core means no more than 5% of holdings are less than investment grade, while Core-Plus is no more than 8%. That seems like a small difference to me, but apparently that spells the return advantage.

 

The Retirement Withdrawal Calculator we should use, FIRECalc, uses Long Bond as its default for fixed income. I replaced Long Bond with intermediate bond (“5 Year Treasury” is close enough) and got the exact same Safe Spending Rate (SSR%).

 

 

== Some good alternatives for Total US Bond ==

 

This recent Morningstar article , “The Best Bond ETFs,” has a good list. On this chart, Choices for Bond Fund,  I focus on ones similar to IUSB, and I added a few I found on this site. Three are Core-Plus, four are Core, and three are intermediate-term corporate bond funds. Three are long-term bond index funds/ETFs.

 

Here are my highlights:

 

• FBND – Fidelity Total Bond ETF – was just two months old when I was first making decisions for our plan December 2014. FBND is actively managed with a higher expense ratio than IUSB, but it has returned about one percentage point more per year than IUSB over the last three to five years.

 

• The largest US total bond market ETF is AGG – iShares US Aggregate Bond ETF. BND – Vanguard Total Bond Market EFT – is also large. The crowd likes these two.

 

• You can narrow in on corporate bonds. This choice will also have no effect on the Safe Spending Rate (SSR%) you get from FIRECalc. The three corporate intermediate bond ETFs all have higher returns in the past years than my more diversified IUSB.

 

• I display four choices for long-term bonds, all index funds. I think BLV – Vanguard Long Term Bond ETF is closest to the default choice for fixed income in FIRECalc. All four have had greater historical returns than any of the intermediate-term bond funds, but price will be more sensitive to changes in interest rates.

 

Bond prices move in the opposite direction to interest rates. An increase in interest rates means lower bond prices: the bond is less valuable for the stated dollars of interest that it pays. Interest rates are as low as they’ve been in our lifetimes. They can’t go lower. (I think I’ve said that to myself four years in a row now!) They can only go higher. That means greater chances that bond prices will fall. Rates have increased slightly this year, and long-term bonds have declined more year-to-date than intermediate-term bonds.

 

 

Conclusion: We retirees own bonds as insurance against devastation of our portfolio from HORRIBLE stock returns. We pull out our insurance policy and disproportionately – and maybe solely – sell bonds for our spending when stocks crater. History tells us bonds have been very good insurance in the ten worst years of stock returns. I think almost any widely diversified bond fund or ETF is fine for your retirement portfolio. I like a total bond fund, which is the ultimate in diversification. This post displayed alternatives to the one I rely on – IUSB – iShares Core Total USD Bond Market ETF.

We retirees want to spend to ENJOY retirement, but we are governed as to how much is safe to spend by our over-riding concern: DON’T RUN OUT OF MONEY. Nest Egg Care (NEC) argues that you start your plan by choosing a number of years you want for ZERO CHANCE of depleting your portfolio. I’d consider those years as your “Retirement Period,” and the number of years you pick relate to your life expectancy. The purpose of this post is show how you can use the Social Security Life Expectancy calculator to pick the number of ZERO CHANCE years that will lead you to your annual Safe Spending Amount (SSA) .

 

== ZERO CHANCE years and Safe Spending Rate (SSR%) ==

 

I discuss the logic of how you pick the number of years you want for ZERO CHANCE of depleting your portfolio in Chapters 2 and 3, NEC. A plot of the risk of depleting a portfolio looks like a hockey stick. You have many years of ZERO CHANCE of depleting your portfolio; that’s the shaft length of the hockey stick. You have a rising risk in the years thereafter – typically when you are in your late 80s and 90s; that’s the blade of the hockey stick. NEC leads you through the decisions as to How Much to Spend and How to Invest to LOCK IN the shape of your hockey stick and describes how to lengthen the shaft of your stick if you need to or want to during retirement.

 

 

Example: at the start of our plan, my choice for ZERO CHANCE years – the shaft length of the hockey stick for Patti and me – was 19 years; that’s the life expectancy I got for Patti from the calculator I used at the time. With our decisions as to How To Invest, I knew that our Safe Spending Rate (SSR%) was 4.40%. (See Chapter 2, NEC). Our 4.40% times our Investment Portfolio value in December 2014 gave us our our annual Safe Spending Amount (SSA) for 2015.

 

We’re older now and Patti’s life expectancy is fewer years, and we play with a hockey stick with shaft length of 15 years. We see no reason to lengthen that becuase we now have LOTS of flexibility to lengthen it whenever we want. 15 years equates to 4.85% SSR%. About 10% more than at the start of our plan. Bigger SSR% = MORE $$$ TO ENJOY.

 

For this post I’m assuming you made the same decision I did. You have picked 1) your life expectancy; or 2) the life expectancy of your spouse if his/her life expectancy years is more than yours as the number of years you want for ZERO CHANCE of depleting your portfolio.

 

== The Social Security Life Expectancy calculator ==

 

When I wrote Nest Egg Care, I used the Vanguard Probability of Living Calculator – it’s no longer available – to find our life expectancies and to draw the graphs of our probability of being alive in any future year (See Chapter 3 and Appendix E, NEC). I now use the Social Security (SS) Life Expectancy Calculator to find Patti’s life expectancy as of each November 30. That’s the date I use to calculate our SSA for the upcoming calendar year.

 

As I tuned up my calculation sheet that I use every November 30, I found the SS calculator gives a different answer for Patti’s life expectancy than I got from the Vanguard calculator. The Vanguard calculator said that Patti’s life expectancy at her age this November 30 was 14 years. The SS calculator says it’s 15 years (rounding 14.9 years). The SS Calculator gives one added year of life expectancy.

 

 

I’m not sure why the Vanguard calculator gave one year less life expectancy than the SS calculator does now. Life expectancy calculators are driven by life expectancy tables and perhaps the most recent tables reflect slightly longer life expectancy. Example: the IRS used updated life expectancy tables that reflected almost two years longer life expectancies as the basis for the schedule for Required Minimum Distributions.

 

== Finding Life Expectancy on November 30 ==

 

Reader Ben sent me an email and said, in essence: “My birthday is in early June. I’m going to use November 30 as my calculation date. I’m almost exactly six months from that date. Do I round my age up or down for the calculation? My rounding will have an effect on the SSR% I test each year to see if I can increase my SSA.” (See Chapter 9, NEC.) The answer to Ben’s question shows how I now use the SS calculator.

 

I’ll assume Ben’s birthday is June 15, 1955. I can use Excel and find that June 15 is 168 days from November 30. Last November 30, Ben was 65 years and 168 days old.

 

 

What’s the life expectancy for a male age 65 and 168 days old? I can find that from the SS calculator, but I have to fiddle using today’s date. I’ll use today’s date, February 3, as I write this. I convert that to the number format in Excel and today’s date is 44230. I subtract 168 to find day 44062 in Excel, and then I put that in date format to find that was 8/19/20.

 

 

I then use 8/19/55 as Ben’s birthday and find life expectancy is 18.7 years. That was his life expectancy last November 30. I can repeat using 8/19/54 to find his life expectancy next November 30 = 17.9 years. And so forth. Ben can build a table for the next five or more years, rounding his life expectancy to whole years. The schedule I built adds the age-appropriate SSR% for each year from Appendix D.

 

 

== I adjusted our November 30 calculation sheet  ==

 

I followed this same approach to update Patti’s life expectancy and the age-appropriate SSR% I should be testing each year. I mentioned this change here. I repeated her life expectancy as 15 years; I previously had it at 14 years. The result is that I used 4.85% for our calculation of SSA this last November 30 and not 5.05% that I previously planned to use.

 

 

Since our portfolio return for the 12 months ending November 30 was far greater that the percentage we withdrew last year, Patti and I clearly were going to have a real increase in our SSA. Using 4.85%, our increase in our SSA was 9% – from $57,500 to $62,700; that’s stated in terms of an assumed original $1 million starting portfolio in December 2014. Had I used 5.05% the increase would have been to $65,300. That would have been 4% more, but I can’t consider that as a loss of some sort. I’m happier knowing the calculation is more precise.

 

 

Conclusion: When I wrote Nest Egg Care, I used the Vanguard Probability of Living Calculator to find the life expectancy that I use as the setting for the years I want for ZERO CHANCE of depleting our portfolio. Those years link to a Safe Spending Rate (SSR%) that I test each November 30 to find our annual Safe Spending Amount (SSA) for the upcoming calendar year. (See Chapters 2 and 9, NEC.) The Vanguard calculator no longer exists. I now use the Social Security Life Expectancy Calculator. It gives about one year longer life expectancy than Vanguard’s gave me six years ago. I show in this post how you can use the SS calculator find your years of life expectancy on your calculation date.

 

 

 

 

 

I added a January task to my annual work plan for our financial retirement plan. I display in this post the information I gathered on 1) 2021 tax brackets for Ordinary Income and 2) important income tripwires on a 2021 tax return that can be very expensive: cross a tripwire by $1 of too much income and your taxes – in effect – increase dramatically.

 

This information is more important for us retirees in the spend and invest phase of life. We have some degree of control over the taxes we pay each year unlike most folks in the save and invest phase of life. We get our cash to spend by selling securities from different kinds of accounts, each with a different impact on taxes we pay. And we have an ugly set of tripwires that younger folks don’t have. I’ll take my first cut at my decisions that will determine my taxes for 2021 in August. You can see my thinking last August here.

 

== Tax brackets for 2021 ==

 

I show the tax brackets for Ordinary Income for Married, Joint filers and a Single filer for 2021. The brackets adjust for inflation each year. That means in real terms, they are unchanged. (You also have income subject to Capital Gains Taxes, generally taxed at 15%; the point where that 15% rate kicks in increased slightly for 2021.)

 

 

I highlight two brackets with big increases in marginal tax rate. You get to keep more – pay less tax – if you can plan the sources of your Safe Spending Amount (SSA, Chapter 2, Nest Egg Care) to stay in a lower tax bracket now and in the future. Two brackets have big jumps in marginal tax, meaning you get to keep more if you can manage to not cross into those higher tax brackets: the ten percentage-point jump from the 12% bracket to the 22% bracket or the eight percentage-point jump from the 24% bracket to the 32% bracket.

 

== Medicare Tripwires ==

 

Tripwires are sneaky and important: cross a tripwire by $1 and your tax – in effect – jumps by a BIG amount. I want to be careful if I ever get close to a Medicare Premium tripwire that I could otherwise avoid. I show the tripwires for Married, Joint files and a Single filer here.

 

As an example, if Joint, Married filers accidentally cross a tripwire from too much income that they could otherwise avoid, they could see their Medicare Premiums increase by as much as $2,600 – they could lose more than $200/month in Social Security benefits because of $1 of too much income! Here’s more detail.

 

 

The tripwires that trigger much greater Medicare Premiums in the future did not adjust for inflation this year and that means they are really closer than they were before. The penalty when you cross a tripwire increased roughly in line with inflation, though.

 

Your MAGI – modified adjusted gross income – determines if you cross a tripwire that results in higher Medicare Premiums. For most all of us retirees MAGI is the same as Adjusted Gross Income (AGI): the sum of Ordinary Income and income taxed at Capital Gains tax rates before your Standard or Itemized deductions. That’s line 8b on your 1040 tax return.

 

There is a lag in effect as to when you incur higher Medicare Premiums as a result of the MAGI on your tax return: for example, you will file your 2020 return in April this year; your MAGI on this return will determine the added monthly Premiums, if any, that you pay throughout calendar 2022. That’s when you’d see lower monthly Social Security benefits.

 

 

 

Conclusion: I added a routine task in January for my retirement financial planning. I enclose in this post the tax brackets for Ordinary Income for 2021. I also enclose the tripwires of income that could result in a big increase in Medicare Premiums, a deduction in the monthly Social Security benefits that Patti and I receive. I’ll refer back to these two tables when I take my first cut of our 2021 tax plan in early August.

If you look at a portfolio structured by a financial advisor, it will have MANY different securities. For example, Patti and I own one security for US Total Stocks (FSKAX), but most financial advisors will have at least six securities for US stocks. Why is this? Is there some advantage to holding separate segments of the market that basically add to the whole rather than just owning whole? The purpose of this post it to suggest that an investor gains NOTHING by holding individual segments rather than the whole of the US Total Stock market.

 

 

== You already own it all ==

 

You already own the segments of the market when you own a Total Market fund like FSKAX. Morningstar has a feature called X-ray that its Premium members can use. The X-ray looks at the detailed holdings of a fund or group of funds to tell you what percentage you own of each of the boxes in a style box. Morningstar defines the parameters of each box. Here is its breakdown for FSKAX.

 

 

The style box for VTSAX, VTI, ITOT and other US Total Stock Market funds/ETFs would be identical: they all own the same ~3,500 stocks in proportion to their market value to the total market value of all stocks.

 

The X-Ray tells you that 72% of the value of FSKAX is Large Cap Stocks: 15% + 30% + 27%; that’s in line for the rough estimate of the value of the S&P 500 stocks as a percentage of the total value of all US stocks. The box says 29% is smaller company stocks: 20% is Mid-Cap and 9% is Small-Cap. (The boxes don’t add to 100% due to rounding.)

 

The box tells you that 34% of the value of FSKAX is Growth Stocks and 25% are Value stocks and the balance is in stocks that fall between the parameters Morningstar uses for Value or Growth.

 

== Example of a more complex portfolio ==

 

A number of years ago Patti’s brother put stock options in his privately-held company into a generation skipping Trust. The money in that Trust will not be in his estate at death; he’s by-passed estate tax on the amount in the Trust at his death. The ultimate value of the Trust flows to grandchildren (children of his three children). None of his children have children yet, and, assuming they will, the life of the Trust ends MANY decades from now. I volunteered to be Trustee. (Clearly this Trust will outlive me as Trustee.)

 

There was no money in the Trust – just stock options – for a number of years, so I had nothing to do. No tax return. Nothing. Then the company was purchased in 2012, and the stock options turned into REAL MONEY that had to be invested.

 

As Trustee of REAL MONEY, I got serious. I wanted advice on investing and some liability protection as to how the money was invested. I interview several firms and hired a local firm as the Trust’s investment advisor. Mike heads the firm: good guy. Mike suggested a portfolio developed by a king of asset allocation, now a part of Morningstar. The document I reviewed in 2012 stated that the model should outperform the market by two percentage points per year.

 

The total portfolio was 14 securities that covered US and International stocks and bonds. Quite an array. I show the portfolio design of six securities for the portion that was US stocks. The portfolio was all in low cost, passively managed ETFs with less than .2% total Expense Ratio, and Mike agreed to a REALLY LOW advisor fee. The total costs for the Trust are very low. I like that.

 

 

In 2012 I didn’t know about the Morningstar X-ray and how US stocks in total would fall into a style box. It took me some time to figure out what this splitting apart of the total was all about. The portfolio design was saying that it would outperform by 1) heavily over-weighting smaller company stocks and 2) heavily over-weighting value stocks. Compared to the current weights for FSKAX above, this portfolio was double-weighting the Smallest-Cap stocks, overweighting Mid-Cap by about 1.5X and underweighting Large Cap by about 30%. It flipped the weighting of Value with Growth.

 

 

== It has under-performed ==

 

The chart below is from my recent post. Over the past five years, the model’s over-weights have been EXACTLY WRONG. Value lagged Growth by roughly eight percentage points per year. Smallest company stocks lagged Large-Cap stocks by more than one percentage point per year.

 

 

I could construct how much the Trust should have now if I didn’t follow the model, but that would just depress me. I don’t want to do that. I’ll just leave it that the overweighting that I bought into was COSTLY.

 

== It makes no sense to me ==

 

As I learned more, I concluded that overweighting suggested by the PhD experts made no sense. You definitely don’t want to over-weight smaller company stocks: I find no logical basis or evidence of smaller company stocks outperforming over the past 40 years. I don’t have the same kind of data to explore the logic of why some recommend over-weighting Value, but clearly the recent evidence says that’s not a strategy to outperform.

 

== The model is more balanced now ==

 

The Morningstar model changed over time, and the 2019 allocation of the six segments shifted much more to Growth but still favors Value. It shifted more to Large Cap but still favors smaller company stocks. The results for 2020 say the model choices in 2019 were again on the exact wrong track! You guessed it: I’m not going to calculate how much more I would have had.

 

 

== Does splitting and rebalancing increase returns? ==

 

I asked Mike, “I notice the model’s allocation between Value and Growth is almost 50-50. What’s the advantage to holding 51% Value and 49% Growth and then rebalancing to that same 51-49 at the end of each year?” “Because you are always selling high and buying low. You’ll do better over time.”

 

This sounded logical, but I wasn’t sure. “Do you know of any studies that explain why this works?” “No.” Hmmm. I wanted to dig into this. I did not like the thought of the Trust paying tax just to rebalance. Trusts pay taxes at the highest marginal tax rate – 20% on all long-term capital gains, for example; 37% on short-term gains. The Trust is giving up some potential growth if it pays taxes earlier than it otherwise could.

 

Here’s my analysis: ignoring tax effects, the rebalancing argument does not hold water. Plug in tax effects, and the argument sinks like a rock.

 

The example here is for Large Cap stocks, but the result would have been the same had I picked Mid-Cap or Small-Cap. In this example, I start with a total of $10,000 ten years ago. I start with a mix of 51% for Value (VIVAX) and 49% for Growth (VIGAX). At the end of the year I rebalance to 51-49. Result: at the end of ten years I have less from the effort to rebalance back to 51-49 than if I had just held the fund that’s a blend (VLCAX). Rebalancing would look worse if I figured out this out on an after-tax basis.

 

 

== So why do they put you into six? Or more. ==

 

Cynical Tom thinks the added complexity just means financial advisors make more money. It’s about the optics: you think they are earning the amount you are paying them. (And you really haven’t translated the amount you pay to the amount of growth you are giving up over time: the added ~1% cost that you pay deducted from ~6% expected, real annual growth before the added cost = 15% less for you. Per year.) Why do folks pay?

 

• Six looks a lot more sophisticated than one. Your retirement financial plan is very important. The story is that it’s complex task to assemble a portfolio. You deserve the most precise, sophisticated plan our PhDs have developed. Talented PhDs and portfolio designs like this were only in the reach of the mega-rich years ago. A plan with lots of moving parts and a beautiful pie chart showing a bunch of slices supports this story. Our brains question a portfolio with just a few moving parts.

 

• You advisor and company can find data, if they stretch back to more than 40 years ago, that indicates that smaller company stocks will outperform. They can cite data and studies that say value will outperform growth. Overweighting in those two directions sounds like the very smart thing to do. Everyone wants to beat the market and these experts are telling you they can. You want to believe this. It’s a story that’s hard to resist.

 

• The rebalancing argument – always sell the high one to buy more of the low one – sounds perfectly logical. Obvious almost. All that rebalancing for the moving parts takes time and effort every year that you don’t want to spend. It’s worth paying your advisor and his firm to do this for you.

 

 

Conclusions: Financial advisors construct portfolios that are far more complex than they should be. I think they do this because it makes them look smart, talented, and hard working. The evidence suggests that their cost and the added complexity of your portfolio merely results in lower returns for you; that’s the same as more money for them. The optics and arguments for complexity are powerful. Don’t buy into them.

I like looking at the Vanguard Style Box (I call it a Nine Box.) at the end of the year to get a snapshot of what outperformed and what underperformed the US stock market as a whole. This post shows 2020 results. Large-Cap Growth again led the pack and by a WIDE MARGIN in 2020. Value lagged again but by MUCH WIDER MARGIN than in the past. I’ve displayed the Nine Box before: for 2017, and 2018 and 2019.

 

== Total US Stocks = +21.0% ==

 

I use the Vanguard index fund that focuses on each of the nine segments. I display for reference the 21.0% return for VTSAX – the index fund that holds ~3,600 all traded US stocks. (Patti and I hold the Total US Stock fund FSKAX = +20.8% in 2020; it was a bit more than VTSAX in 2019; I would expect the two to be virtually identical in return over time.)

 

The columns are Value, Blend, and Growth stocks and rows are Large-Capitalization (Cap), Mid-Cap, and Small-Cap stocks. The nine boxes aren’t equal in market value of the stocks they hold. Large-Cap represents about 80% of the total value of all US stocks, for example.

 

 

== Each very close to the actual index ==

 

I check the data that Vanguard provides as to how well these funds perform against their peer index. We’d expect each index fund to return just a shade less than the index Vanguard is trying to mimic – basically by each fund’s Expense Ratio. The Expense Ratio for these nine averages .06%, but on average these funds only trail their peer index by .02%. Vanguard has figured out a way to overcome a bit of their Expense Ratio.

 

 

== Relative to VTSAX = 21.0% ==

 

I show the percentage point difference in each box relative to VTSAX – the Total US Market fund.

 

 

Large Cap Blend was the same as VTSAX. The three growth boxes were FAR BETTER than VTSAX. The three value boxes were FAR WORSE. The mid- and small-cap blend boxes didn’t match VTSAX.

 

Large-Cap Growth was BY FAR the winner in 2020: +19 percentage points better than VTSAX. Wow, that is a big difference. It was the winner in the prior three years in 2020.

 

Large-Cap Value was almost 17 percentage points worse and Mid-Cap Value was about 19 percentage points worse. That spread between Large-Cap Growth and Large-Cap Value is a staggering 36 points.

 

== Five years: Large-Cap Growth leads ==

 

Large-Cap growth has led the pack over five years, but not nearly so dramatically as this year. That five-year difference compounds to a significant difference, however, about 20% more from VIGAX than VTSAX.

 

 

Every year I look at the Nine Box and think, “I really missed the boat by not tilting to Growth.” Then I say, “Would I have really bet on Growth after last year? Maybe I would have bet on Value, and I would have REALLY BEEN UNHAPPY.” And, “Could I possibly pick which box or boxes will outperform in the next five or ten years?” “No.” I’m happy just hitting the average of all those boxes. Betting on a box or tilt is adding uncertainty and risk to my financial retirement plan, and that’s the last thing I want to do.

 

== World stocks = 16.82% =

 

For reference: the total world market stock index, MSCI All Cap World Index = 16.82% for 2020. US stocks are roughly 55% of the total value of all stocks in the world. Total International Stocks (VTIAX) = 11.28% in 2020. (Patti and I own the ETF of this = VXUS = 10.69%.)

 

 

Conclusion: 2020 was another terrific year for US stocks. Total US stocks were +21%. That follows +31% last year. Every year some segments of the market outperform and some to underperform. All growth stocks outdistanced the average by a wide margin in 2020: Large-Cap Growth beat the market average by 19 percentage points. Value stocks lagged by a wide margin: Large-Cap value lagged by about 17 percentage points. We all wish we could predict the future and pick the box that will outperform the average. I don’t think anyone can. I’m sticking right in the middle with a Total Stock Market fund.