Will An All-Equities Portfolio Provide Superior Retirement Vs. An All-Bond Portfolio?

by: Lowell Herr

We are trying to answer the assertion that the stock to bond ratio does not make a significant difference when it comes to retirement planning. Yesterday, I posted two blog entries that dealt with the beginning arguments. Here is the link to the first entry and the link to the second one where I focused on the all-bond portfolio. In this blog post I will show the results of an all-equity portfolio. The same assumptions will be used in the all-equity portfolio as with the all-bond portfolio. Only the ETFs are changed.

All-Equity Portfolio: The following equity portfolio consists of nine ETFs. The ETFs provide coverage of developed international markets, emerging markets, domestic REITs and international REITs. Readers will find all these ETFs used in many of the portfolios tracked here at ITA Wealth Management.

As will the all-bond portfolio, four years of historical data is used for the projections. These ETFs generate a projected return 2.34% points above that projected for the S&P 500 (NYSEARCA:SPY). We pay for that aggression with a projected standard deviation of 19.91%. One could tone down the portfolio uncertainty or volatility by employing the ITA Risk Reduction model (ITARR).

Scrolling down the screen shot, one sees that the portfolio is not well diversified as the Diversification Metric is only 10%. That is 30% points below our goal when setting up the asset allocation plan for a portfolio.

(Click to enlarge)Click to enlarge

Retirement Projections: Now we come to the projections that answer the question as to whether or not the stock-to-bond ratio makes any difference in retirement planning, as argued by the financial planner. Checking out the Monte Carlo projections, we see there is not much difference in the early years. With the all-equity portfolio we have a 10% chance of running out of money at age 79 whereas the age was 78 with the all-bond portfolio. The big difference comes in the later years. With the stock oriented portfolio we have a 50% chance of "hitting the wall" at age 115. The projections definitely favor an all-equity portfolio vs. an all-bond portfolio.

Given the two choices, I will definitely go with the all-equity portfolio and then use an ITARR model as an overlay to reduce portfolio uncertainty.

(Click to enlarge)Click to enlarge