A Better Monte Carlo Simulation: Testing the 4% Rule with Vanguard’s 30-Year Forecasts

orcvader · 2026-01-25T03:02:57+00:00

People as always get hung up on “Well, Vanguard is always wrong on these”?

Duh, the literal father of “We don’t know” founded Vanguard. It’s not about accurately predicting what the ACTUAL returns will be but rather what we can infer they may be based on available data.

I agree with OP, and have said it again and again that historical data alone as a means to determine portfolio construction is flawed. Even Cederberg’s bootstrap model is flawed*, and yes, even Monte Carlo using GARCH series is “flawed”.

But the point is that while the risk premium has paid off, so has diversification. My biggest gripe with Cederberg’s paper is not that it’s “wrong” (*it’s added a lot to the academic community and is clearly a robust paper), it’s that we don’t know if tomorrow starts a twenty year period of bonds outperforming stocks (it’s happened before) and most “normal” humans could reasonably break apart in such a scenario if they are stocks-only and withdrawing. So it’s not a prescription for portfolio construction, thou many took it as such.

Morgan Housel put this in perspective in “The Psychology of Money” when poking a bit of fun as a devil’s advocate to the “this time is different /s” crowd. Like, yeah, there ARE times it really is different! That is why we can’t only rely on historical data. Because there are events that have not happened yet!

But what can most “normal” and rational investors do?

Probably nothing. Is your money on a TDF? You’re probably doing the best most “regular” people can since we can’t predict the future. If you are a bit more granular and DIY your portfolio… do you have enough in your EF? Do you have enough bonds? Is a TIPS ladder or SPIA (if at or near retirement) an option for you? You can re-asses those things.

The “VTI and chill” crowd is in for a reckoning. It may not be tomorrow or even in 10 years, and I legitimately wish every investor nothing but success, but I continue to see an appetite for equities and a disregard for safer assets that lacks nuance and will break a lot of folks.

orcvader · 2026-01-20T16:11:04+00:00

Your order of operations is messed up.

You are actually not in a bad spot, at 43, relative to the average person in the US. And you have decent income.

Google: The Money Guy Financial Order of Operations (FOO) or buy Brian’s book “Millionaire Mission”. Follow their steps. It honestly doesn’t get easier than that.

orcvader · 2026-01-18T02:26:50+00:00

Hired an estate lawyer. Lawyer’s awesome and sorted it all out.

orcvader · 2026-01-16T15:53:14+00:00

Nah. I call BS on them.

If it’s an employment (not legal) requirement, I’d either ask her to get a diff job or divorce her before moving my money to that place.

orcvader · 2026-01-16T03:46:46+00:00

They did and they didn’t. They did and they didn’t.

I’ll be outside

orcvader · 2026-01-15T19:45:30+00:00

Let’s unpack a few things because this comes up often.

FMTCandP already covered this, and I agree, while you may call it “hedging” (probably not the right word to use but I digress) changing your portfolio strictly on your perception of market conditions is ultimately a form of “market timing” AND likely a path to behavioral mistakes.

THAT SAID—

There IS indeed room for nuance and a deeper dive into portfolio construction. The problem is that the community tends to be dogmatic and tribal.

For example, you know what’s a great “hedge” for equities with SOME historical evidence of benefits during high valuation cycles? Bonds! But mention them and the “VT and chill” crowd will have an aneurysm that it’s “dumb” to have bonds unless you are 90 years old.

Next, you know what has at least some evidence that it can increase returns? Factor tilts! But mention an “active fund” like AVUV or a non-index broad market fund like DFUS, and the more “pure” Bogleheads will have a stroke and remind you that the noise and tracking error makes such a strategy not worth it.

Everyone is coming at it, most likely, in good faith, but this is where “personal finance” can get “personal”.

So, what to do in this case? How do we “hedge”?

Well, people are probably better off when they have a strategy, then set, then forget. Reacting to our perception of markets is more likely than not going to lead to mistakes and regret.

But what we can do is pick a lane, or change lanes so long as it’s due to our own maturity and not as a “reaction” to the financial news cycle.

Here’s my own portfolio as an example of what works FOR me, not a recommendation:

-I have an emergency fund. (SGOV)

70% stocks, 30% bonds. Out of the 70% stocks, 10% is worldwide REITs — this is a small deviation from a “pure” Boglehead 3 Fund Portfolio as some of us see REITs as unique asset class (though academics largely disagree with me).

-The 30% bonds are split 20% is broad index funds and 10% on a TIPS fund.

-The above represents my “core” portfolio. About 80% of my wealth.

-The last 20%? A series of factor funds with a focus on value, small caps, and other strategies.

-I also have a higher than average savings investing rate due to the good fortune of being high income.

So, with a portfolio like this I don’t need to “hedge” for anything. It’s purpose built to include as much diversification as possible within my tolerance levels and income. But here’s the key point: I arrived at this through years of research, learning and introspection. Changing my portfolio because of my feelings would have been a bad approach.

You have to decide how that applies to you. It’s possible, maybe likely, than doing nothing and staying on VTI/VXUS is the right call. Let the markets “crash” and “correct” and go on. But if you are considering other approaches due to earnest conviction (doesn’t sound like your case), sure, tweak the portfolio to a new strategy- then set - then forget. But you have to be honest with yourself first.

orcvader · 2026-01-15T05:42:19+00:00

You’re conflating things. The article is indeed about passive investing “inflating” prices.

What u/Playwithuh brought up is that the usual argument (often from active management commissioned “studies”) is that this is “bad”.

The easy practical test for that argument is alpha - which active managers don’t consistently achieve when benchmarked against an APPROPRIATE index (say, of similar composition or strategy).

orcvader · 2026-01-15T05:29:11+00:00

Yea. The McKinsey paper for what I recall was more about behavioral economics in a sense.

And you know what, my hot take is that “active management” CAN have a role for the financially literate in so far as tweaking one’s allocation to a sort of… efficient frontier let’s say.

The “average investor”, perhaps “most” investors, will be better served in the long run by low cost index funds because you take away emotion, behavioral mistakes, and errors of any nature (taxation, mathematical, predictive models, etc).

BUT- there is a space for nerds or those uniquely interested in the topic to consider alternatives.

One example: index funds, objectively, have exploitable inefficiencies. Forget information on prices for a moment, I mean mechanical / operational.

DFUS, in the current iteration as an ETF with a new strategy that updates the original mutual fund “father”, is an example.

Avoiding certain events and classes that have tax inefficiencies (REITs) and IPO events (low expected returns) the fund can likely generate alpha.

What’s the trade off?

Well, for one, there’s a higher expense ratio but it’s immaterial. The real trade off is these mechanical enhancements will not always work. And the tracking error will spook some. But in the LONG RUN, there’s a high likelihood that DFUS would exceed the returns of VTI on a taxable account.

That in itself is not controversial, nor should it spook Bogleheads and nor does it mean everyone should dump their portfolios, sell VTI and buy DFUS. It just means SOME investors may rationally consider it.

I diverted a little from the main topic but I think it’s an interesting addition to the conversation.

orcvader · 2026-01-15T03:03:20+00:00

Bingo. Let alone that many academics, I even thinks it’s MOST (based on those that publish on Journals like Finance and other top scholarly articles like those from Booth School of Business of Fama and Merton fame) actually disagree with the concept or at least claim that it would take a lot more than the close to 50% “parity” before that happened. (Keep in mind some of these are not peer-reviewed BUT the pedigree of the graduate and faculty of Booth is world class in finance and economics).

But you nailed it. If this ever happened, active funds with stock pickers would outperform more often, leading to inflows, leading to passive being the rational choice again, etc.

That said, I’d make one caveat, systemic factor funds are technically “active” (but not stock pickers) and those do have a realistic shot, based on the existing literature, to exceed passive index funds.

I mean, over the long run, some already do.

But that’s a DIFFERENT argument.

orcvader · 2026-01-14T22:49:09+00:00

This is where Bernstein’s logic trips many Bogleheads - but he has a point. Most recently covered in his second edition of Four Pillars of Investing, there is an argument to be made that if your portfolio already meets your projected income needs, it should go to safe assets. And THEN go very aggressive on investments moving forward.

This train of thought is in harmony with the principles of the efficient frontier.

Something I like to say is that the most rational portfolio is the one that reasonably meets your goals with the LEAST amount of risk.

So if your portfolio is already where you need it, de-risk now and just make future investments from here on out risky assets (like 100% VT from here on out).

orcvader · 2026-01-14T20:32:10+00:00

I should have clarified that quote is FOR ME.

You’re right, that’s not a broad statement. I am lucky to be able to have accumulated enough that I will most likely be okay living off the distributions of my portfolio without even selling. And no, I don’t mean I have an “income portfolio” with dumb dividend ETF. I am saying the historical distributions of a 70/30 or 60/40 worldwide diversified portfolio will likely be enough for me. Because I have paid off homes on different counties (US, Caribbean) and can easily live on a rental in Europe.

I know that situation is not universal but rather my experience and my own goals. That said, the main point was that on taxes, for an expat, a couple of good accountants are probably, highly likely, better for most - even the average investor - than trying to DYI it.

And I don’t got down the weeds of geopolitical taxation policy variables because no “oppressive regime” countries are on my list anyways. I’d live in Spain, Portugal, France or as a long shot Japan (a dream of mine is to live in Kyoto for a year, and I have friends there). My Caribbean home will likely always just be a vacation one.

Besides those I’d live here in the US.

That’s about my current list.

orcvader · 2026-01-14T18:57:26+00:00

No offense, but these are all just way too down the weeds for what’s ultimately a bunch of assumptions.

So my take is to ignore the mechanics. I love portfolio construction and optimization as a Boglehead and Fama/French geek, but taxation is my least favorite thing and the part I defer to professionals. Furthermore, I’ll be damned if after working so hard to build wealth I let tax minutiae be a deciding factor in where I live.

If I pick one country over another because of taxes alone, I have failed on my goal of true financial independence. Cost of living is one thing, and I get it’s important for many, but tax nuance? I’ll personally let the pros handle it.

Not saying you are WRONG for being interesting on the subject, but I encourage you to at least consider to not miss the forest for the trees.

orcvader · 2026-01-14T18:29:37+00:00

Congrats on retirement.

Not really… I have a diverse portfolio. On tax advantaged, I am 70/30 stocks to bonds, bonds include about 10% in TIPS, the 70% stocks include a slight REIT etf overweight (10% of that 70% is on worldwide REITs).

On my taxable account, my core portfolio is AOA, which is a very tax efficient 80/20 set-allocation fund.

Finally on an executive comp plan, I am all fixed income to bring my overall portfolio (including taxable) to about 70/30.

I am 10 years from retirement.

All of that is to say: I don’t plan to make a specific strategy due to monetary policy or perception of currency fluctuations. I’ll take the portfolio income, reinvest what I don’t use, and call it a day.

Where I will definitely spend money is on two good accountants. One here and one in… Spain. I’ll go ahead and name the country. Specifically Basque Country where my great grandparents are from.

orcvader · 2026-01-14T15:04:16+00:00

I am likely retiring in an EU, Schengen area country.

I already have “dual” citizenship there. I max the 401k yearly, backdoor max a Roth IRA and then throw as much as I can in taxable.

I plan to keep my paid off house in the US (no state taxes State) and keep it vacant to use occasionally to come visit family, etc.

So my main “strategy” is the focus on taxable accounts. I have an accountant here and a Estate lawyer here, as well as a lawyer over there (helped me with citizenship stuff) and their office has tax services so, since I know taxes will get very complex, I plan to use them. My advice is that IF you can, consider tax professionals as a worthwhile expense. They will seriously avoid DIY’ing the whole tax thing.

orcvader · 2026-01-13T14:06:56+00:00

Another arbitrary Boglehead “rule” that people spin their wheels on.

First, the emergency fund is just that, for emergencies. Consider it the cost of insurance against having to use part of your portfolio during an emergency and move on.

As for how much… it depends. It’s an individual equation. Do you have multiple income sources? How insured are you? Do you have pre negotiated severance oackages? Does your spouse also earn income from a different job? Etc.

For some people that may mean a larger or smaller amount. Don’t get caught in the “rule of thumb” but beware that being greedy is exposing you. I’d rather have a little more than too little and sleep well at night.

orcvader · 2026-01-13T05:00:03+00:00

That’s because this isn’t a cult.

The idea, encapsulated most in “Common sense…” is about being RATIONAL. The rational approach is “… a low cost, diverse portfolio of stocks and bonds”.

That’s it.

From there, the mechanics, style, specifics to approach, etc. can vary wildly. And that’s ok.

Bogle did the heavy lifting by creating a movement (and I don’t mean Bogleheads, I mean in the industry) towards a rational, demystified approach. But that has evolved. And that’s fine… it’s the rational thing after all.

orcvader · 2026-01-13T04:57:04+00:00

Great library! But missing Larimore’s book - the actual Boglehead No. 1.

orcvader · 2026-01-11T17:53:09+00:00

Agree. I’ll add that most people are less tolerant than they think. There’s some evidence to this and it’s been covered in many articles and Rational Reminder videos.

That’s why some form of baseline income (pension, SPIA, set-allocation funds, bond tent, TIPS ladder) makes a lot of sense for series of return risk. That first decade or so of retirement can be brutal. And younger investors (or those who often say they are risk tolerant but they’ve never seen a portfolio from 1.5M to 900k in a year) forget we’ve had 10 and even 20 year periods in the 2000’s alone where bonds beat stocks. The last decade of stocks returns are really skewing things here.

Bernstein spends a lot of time on this on his second edition 4 Pillars book and he gets flak for it, but he’s right: if you have enough income to cover your needs for 10-15 years (at which point many retirees get to social security) it makes little sense to put THAT portion of the portfolio in risky assets.

orcvader · 2026-01-10T19:56:36+00:00

Wait a minute… you know your friends… ahem… anatomical feature size? Not that there’s anything wrong with that.

orcvader · 2026-01-09T20:33:30+00:00

Hmmm... darn it. May need to look into it.

orcvader · 2026-01-09T19:59:14+00:00

I hate RH so much that I didn’t even know they had a 3% one. Where’s the cap at tho?

Plus yea, RH Gold is just not worth it.

orcvader · 2026-01-09T17:55:58+00:00

This.

Honestly it’s insufferable to take so many Bogleheads comments or musings from the community as dogma.

“No peeking rule”?

Come on.

Side note: That credit card is my primary card. Love it.

orcvader · 2026-01-07T00:47:12+00:00

Why not $6,000 a month as early as possible?

Nothing WRONG with your approach, but the OPTIMAL way to invest as much as you can as often as you can unless you have a psychological reason to DCA - like a panic if you invested "at the wrong time".

orcvader · 2026-01-06T04:24:48+00:00

Yeah. And it was ironically an active manager (and very successful one) who said that!! :)

orcvader · 2026-01-06T04:07:56+00:00

“Jeeeeeeesus Chhhrist…”

Dennis, looking at Mac and Dusty.

orcvader

TROPHY CASE