Retirement Game-Changer: Has Vanguard Got It Wrong?

In this video, I show you new evidence that a 100% stock portfolio offers better diversification, wealth at retirement and recovery from market crashes than a target date fund that gradually reduces the stock allocation over someone's lifetime.

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DISCLAIMER
All information is given for educational purposes and is not financial advice. Ramin does not provide recommendations and is not responsible for investment actions taken by viewers. Figures that are quoted refer to the past and past performance is not a reliable indicator of future results.

[rogerathome]

Hi Raman, it would be helpful if you could put in a link to the paper you are mentioning for those wanting to do some further reading

[goober-llwx]

I think things like these targeted retirement date funds are "derisking" people too early and doing them some real harm...

[fredgoul]

Thanks for the video. I have seen the lifestyling approach from numerous providers. I assumed it was industry wide. Why single out vanguard? This seems a bit unfair to vanguard. Wouldn't it be better to question whether the industry has it wrong?

[supernumex]

The traditional glide path of increasing bonds is only useful to limit the sequence of returns risk in the first few years after retirement. Increasing the glidepath by increasing stocks makes sense after the first few years of retirement.

Perhaps there can be a more heuristic approach to this. Have your main "invested" portfolio allocation be unchanged e.g 90% stocks 10% bonds and never change this throughout your lifetime or retirement. However, as you approach retirement you build up a buffer of cash-like investments (e.g money market funds, certificate of deposits, or even high interest savings accounts) to be able to cover 5 years of spending to reduce your sequence of returns risk. Depending on your wealth, this could result in different overall allocations. Then during your retirement you periodically sell from the 90% stock portfolio to top-up the cash buffer. If there is a heavy crash in stocks, then you can wait it out a few years before selling more stocks.

[meibing]

Have said it for years 100% stocks is the way to go in retirement. Just be ready to wether the storms.

[jannl]

I must say this hasn’t come as much of a surprise. Been looking for a justification to add bonds to my portfolio and yet to see one. Well maybe as a way to take short term advantage of a suppressed Bond market and/or inflated Equity market. But thats market timing which doesn’t usually work out well.

[blackbaron]

Thanks Ramin

I've always held equity over bonds because of the returns and for having actual ownership, albeit indirectly.

This vindicates my approach, at least broadly and as I approach retirement I will largely keep it going.

[ianschofield]

Hi Ramin, great video as usual sir! I retired two years ago. I combined two personal pensions in to a sipp and put it all into global stock funds. I use my cash isa(s) as ‘shock absorbers’. That way if the market crashes I just use the cash until stocks recover. I watched a couple of your videos about buying bonds individually, rather than funds, but decided that it was too much trouble.
I find cash and stocks and share isa(s) to be an integral part of investing for retirement.

[Radictor]

I'd say transitioning majority weighting from stocks to bonds over time and age is wrong. Look at the bond market crash with the Liz Truss gov, a lot of people would have lost money in the bonds market due to the sudden crash. Yes, bonds are "less risky", it does not mean there's no risk. I'd hover around 50/50 as you get older, and weighted higher in stocks when you're younger.

[sebfox]

Hi Raman, love your spectroscopy. Thanks for all your hard work.

[MarkCW]

Thanks Ramin, I've always liked having a mixture of US and World ETFs.

[frederickwoof]

As I only retired 18 months ago I'm in the process of consolidating my pensions. I just transferred into one (vanguard). But now wondering about the bond/equities allocation, currently 14.5% bonds. Also whether funds should be accumulation or dividend.

[__Rum-Ham__]

Interesting video Ramin.

I personally like the idea of global diversification, purely due to the unpredictability of the markets and the pitfalls of an 'eggs in one basket' approach. You see a lot of people advocating for 100% S&P 500 but that approach would make me a bit uneasy!
A 50:50 domestic:international split is an interesting idea but I'd be reluctant to commit 50% to the FTSE 100, so that approach would probably be better-suited to US investors (at least historically).
The gradual increase in % bonds is a really interesting point. Fortunately I have a couple of decades until I need to start thinking about retirement but the idea of being 100% stocks at age 60 sounds risky, given the unpredictably of the markets. It would suck to take a huge hit due to a financial crisis at your time of retirement!

[johnscully]

Hi Raman - in the UK I feel we have poor access to bonds other than through a fund or through gilts, and its difficult to learn and understand about them and that there are two fundamentally different approaches to using them, which I would describe as 'the certainty method' i.e. hold to maturity e.g. bond ladder, and the 'uncertainty method' i.e. bond funds and not holding to maturity. These two very different approaches are often both described as investing in 'bonds' but can have very different outcomes. You may have covered this topic already and I have missed it (sorry), but if you haven't I think a lot of UK based viewers would find it very useful. Bad analogy: Bonds are a tool, and there is more than one way of using them, just like you can use a screwdriver to open paint cans and tighten screws 😊

[amjster]

Thanks for sharing your thoughts Ramin, another great video. Takes me back to my undergraduate dissertation on International Portfolio Diversification which came to a similar conclusion, so pleased to hear it here. Well done.

[djplt]

Viewing this with the risk/return model, does this mean the risk/return on bonds/stocks and their correlations look different depending on your time frame?

So stocks have a high risk month to month but decade to decade they have a lower risk.

The correlation/ covariance of stocks/bonds is positive over there long term, so over long time periods combining them gives you a lower return/risk ratio.

[oceansunsetak]

I started investing in 1997 with an advisor who picked stocks 10 years of negative returns. 2007 sold all stocks I put all my money on a Vanguard and Fidelity balanced fund plus a Target date I was 55 then. when I was 60 I decided to invest any new money in equites. I had great Returns on the stock funds for the past 10 years but not so great Returns on the target date fund

[danguee]

I love your intelligent, contextual, highly knowledgeable take on all these issues for us, Ramin. Very good stuff!

[kevinu.k.]

Great video.
I have retired and currently don't take an income from my investments. I have some 20% of my funds in the money market. I am giving consideration to having 100% in lower risk index funds.
It does not make sense to me that a retired person does not want to grow their investments at the best rate possible. After all I am looking toward building a legacy for those who come after me.
So - This Vanguard paper seems wrong footed to me.

[wrincht]

I noticed the £-$ crash hedge a couple of years ago and now mainly invest in 45-20-20% US-EU-UK stocks (individual companies), with small components in US medium treasures (IEF) and gold.