They have a choice of two investments:
(a) 100% in equities, which return -30% in the first year, then 6% a year from there on.
(b) 50% in equities, with the same returns as (a), the other 50% in bonds, which return a level 2% a year (i.e. an ERP of 4% after year 1).
Each year, the withdrawal of 45k is taken from equities or bonds in proportion to their value at the time.
After 30 years, the residual fund value under (a) is 235k; under (b), the residual fund value is 150k.
There is a bit of sleight of hand here Colm. You are putting all the equity losses into the period before most of the drawdowns have been made!
Spread the 30% loss over the first five years, then assume a more aggressive recovery to get the same average return over the period. So about a 7% negative return for 5 years, then a positive 7% return for the next 25 years.
In this scenario the residual value of the fund under (a) is -€113k, and (b) is -€24k. So basically there is too much drawdown in the yearly years for you to be able to grow your way out of trouble. In the scenario with 50% bonds they actually do have the effect of mitigating the sequence risk on the equity share of the portfolio, despite having a much lower average return, and you nearly break even.
Don't get me wrong. I am not a bond fanatic. An equity risk premium exists, and the younger you are the more heavily you should be invested in equities. At age 40 you should be thinking about the value of your portfolio in 50 years time, not in 25 when you'll retire and over that horizon equities will almost always do better.
I've said earlier on this thread that there is basically no upside to bond prices right now given that yields are at or close to their natural floor given the zero lower bound for interest rates. So if bonds outperform equities in the near future it will very likely be because of falls in equity prices, not increases in bond prices.
But, and this is a big but, an all-equity investment strategy in retirement can have a nasty downside given the difficulty of growing your way out of a very bad set of returns earlier in the period as demonstrated. If it was me at 65 with a full SPC, mortgage paid off and kids through college I would aim to be in about 80% equities and gradually reduce that to 50% by 85.
Otherwise I don't think that any ex ante strategy is totally robust to every set of circumstances. It makes sense to deviate if the world changes around you by rebalancing or changing your lifestyle. You've done every well - and I'm glad for you - but it's been a lucky time and place to do so and I doubt the next 11 years will be as fruitful as the last!
