TN_Boy wrote: Fri Nov 21, 2025 10:18 am
I don’t think the “10 years of good health” analogy is valid. I KNOW that everybody will get sick and die.
While (presumably) everyone will die, not everyone will get seriously sick before, and in fact for sure not everyone will get out of health insurance more than they paid in.
I do NOT know that a valuation metric which has been wrong for a decade or more will tell me much, if anything, about 30 years of returns.
So the specific concept in question is valuation cycles. Some of the prominent valuation cycles for US stocks are represented in this chart:
These are 10-year rolling periods, so not only could valuation changes contribute positively to returns over 10 years, they could look that way for many consecutive years.
Historically, though, there has eventually been a period of valuations contractions. This is a risk, and the analogy is that thinking if a valuation contraction hasn’t shown up in 10-15 years, it never will, is equivalent to thinking if you haven’t been seriously ill yet, it implies you never will. It isn’t valid logic in either context because we know it can take much longer than 10-15 years for the risk in question to materialize.
Now what IS true is profitably predicting the timing of these cycles for the purposes of switching back and forth from US stocks and bonds/cash has proven basically impossible.
But the idea there is a RISK of such a valuation contraction happening during the next long period? It should not be so hard for people to understand why that is in fact a risk, and that what happened recently does not somehow prove that risk has gone away.
Why do I have a mix of nominal bonds and TIPS for my fixed income? Because there is no liability matching anywhere in that portfolio. I have different asset classes and I rebalance, the combination of withdrawals and some explicit rebalancing keeping the asset allocation roughly at the desired values.
So far this doesn’t really explain your decision. You have an allocation to nominal bonds to which you rebalance because you want an allocation to nominal bonds to which you rebalance.
But what is the actual purpose of that?
I am making one key prediction/assumption — that the portfolio return over my retirement will not be substantially less than it has been in prior historical periods. But if that’s wrong, what should I do different? Never retire? Work until my portfolio was more like 50x expenses?
So there is a good news/bad news sort of situation.
The bad news is because asset prices in general are higher, and expected returns in general lower, than they were in, say, the mid-1960s, if you use a mid-1960s-style portfolio, you should probably be using a lower “safe” withdrawal rate than 4%, which would indeed mean having to either trim your retirement spending goals, or accumulate longer, than you would if asset prices were lower and expected returns higher.
The good news is you are not in fact stuck with a mid-1960s-style portfolio.
One important change is it is now easy for investors to do globally-diversified stock portfolios. Long story short, valuation cycles vary by country, so this is a diversifiable sort of risk.
And then for USD investors, you now have available TIPS. TIPS are more efficient at moderating Sequence of Real Returns Risk than nominal USD bonds, so by using TIPS instead of nominal USD bonds, you can increase the “safe” withdrawal rate.
A few years ago, when USD bond pricing was just really bad, I think this still meant a “safe” withdrawal rate was likely under 4%, just not as far under 4% as it would have been with only US stocks and only nominal USD bonds.
But now, I do think a “safe” withdrawal rate is significantly over 4%, largely thanks to improved TIPS pricing.
