FYI: Despite most investors’ belief that past performance matters, a large body of academic research has found little-to-no evidence that more managers than would be randomly expected persistently outperform the market on a risk-adjusted basis.
Regards,
Ted
http://www.etf.com/sections/index-investor-corner/swedroe-past-performance-deceives?nopaging=1

There's also this: https://twitter.com/search?q=are%20high%20yield%20bonds%20the%20canary%20in%20the%20coal%20mine%3F&src=typd
and this: https://seekingalpha.com/article/4122879-junk-bond-bubble-bursting-eyes
There is I believe some evidence junk is a leading indicator for the stock market itself.

FYI: The top junk bond exchange-traded funds fell to their lowest intraday levels since March on Thursday, victims of a broader flight to safety as a Republican-led proposed corporate U.S. tax cut seemed on the verge of a delay.
Regards,
Ted
http://www.reuters.com/article/us-investment-bonds-highyield-etf/junk-bond-etfs-fall-to-more-than-7-month-lows-idUSKBN1D92UH

Yes, the 12% allocation = 3 years at 4% each year. Perhaps even one year higher dependent on comfort levels.
The main reason I brought up this issue of cost basis is I have a personal belief that market drawdowns will become more severe during recessions than historical norms going forward. Mostly due to algos/computer trading and ETF proliferation and other pin action things that those two affect that we are not aware of. This is a new phenomenon therefore an investor must be cautious when back testing. One could argue that my opinion is wrong, but the truth is no one really knows yet. Therefore, IMHO cost basis becomes a more important aspect of portfolio management for investors who have the luxury of time.

@msf
>> using asset allocation is mathematically equivalent to using buckets with rebalancing.
yeah, it is from him that I got my construct notions
>> I think one can do better with, say, an 88/12 (cash) bucket strategy without rebalancing.
and this is what I am moving to, though you do have to sell, to replenish cash, a kind of rebalancing, seems to me
>> After waiting it out one can replenish the cash bucket from equities. So I'm comfortable keeping a three year cushion.
I do less than that; maybe should reconsider. Three years in cash, huh.
>> Right now, though, I'd use cash for that cushion because bonds add risk and don't add much to returns.
I often wonder about my Pimco allotment. Why not bail into cash? (Greed.)
>> If a retiree (inferred from the "no income" hypothesis) has $1M and needs $40K/year, staying completely out of the market isn't unreasonable. A 65 year old male can get an annuity paying $40K/year, with 3% annual adjustments, for about $840K. He can have fun with the rest - invest, travel, build a legacy, save for unexpected expenses. Annuities are another way to mitigate risk, as Pfau discusses in his Forbes column cited previously.
My wife has posed, if we have enough to cover expenses (@4% withdrawal), actually just enough, why not go even more conservative than our 50-50 (including SS as bond)? I usually mutter about travel, emergencies, housing loans / help / gifts to kids, future education help to grandkids, health surprises (we do have LTC), and greed.

Hi Guys,
It's not at all surprising that we quickly miss Ted's daily references. He is definitely an MFO asset who enhances the usefulness of this site.
In his temporary medical absence, I'll contribute a reference that he unfailingly makes:
http://awealthofcommonsense.com/2017/11/how-to-deal-with-market-moving-news/
The article does a reasonable summary, but I believe it misses a few significant actions that an individual investor can easily do to address changing market conditions. In the spirit of the article, I propose at least one additional "avoid" rule. Avoid an immediate decision. Allow some time to more fully assess the market's reactions by not reviewing your portfolio's current value on a daily basis. That frequent review encourages an overreaction and over-trading.
In addition to the avoidance rule set, I would also propose a "just do it" action. An investor should use a Monte Carlo simulation tool (many available for free on the Internet) to test the robustness of his portfolio to the uncertainties of future market returns.
History demonstrates the random nature of future returns. Predicting these returns is hazardous duty and failures greatly exceed accurate forecasts. Monte Carlo methods were specifically designed to address this randomness and noisey data characteristic. You can use this tool to explore numerous what-if future scenarios in a few minutes on the computer. These codes run thousands of possible time sequential histories based on easily changed inputs. Please give this powerful tool a chance to assess the range of possible portfolio performance outcomes using a probabilistic framework. Given the uncertainties, probabilities are the best we can do.
As a goal, I always attempted to reach a 95% plus portfolio survival likelihood. In the rare likelihood of portfolio failure, flexibility is always a saving policy.
Best Regards

A sequence of return risk always exists so long as there are withdrawals. If there are no withdrawals, it doesn't matter whether the market starts off down and then goes up, or starts off well and then declines, so long as it winds up in the same place.
That leads to the (rhetorical) question: why use a 50/50 mix rather than simply a diversified equity portfolio? One reason is real though not especially rational - emotional discomfort in seeing numbers drop (for all the non-Vulcan investors out there :-)). Another reason is pragmatic. Withdrawals when the market is down eat away at a larger percentage of the portfolio; keeping a bond (or cash) allocation mitigates that risk.
To be clear. We're all talking about mitigating sequence risk. We just have different views on the best way to do that. There's an interesting column by Kitces, where he shows that using asset allocation is mathematically equivalent to using buckets with rebalancing. In other words, the 50/50 portfolio is the same mitigation strategy as drawing from bonds/cash in down markets so long as one rebalances periodically.
I think one can do better with, say, an 88/12 (cash) bucket strategy without rebalancing. Except for the dotcom bubble (that took 31 months from peak to trough), markets have generally bounced back in three years. At least most of the way. After waiting it out one can replenish the cash bucket from equities. So I'm comfortable keeping a three year cushion. Starting now, or starting anytime. Right now though, I'd use cash for that cushion because bonds add risk and don't add much to returns.
The reason why I continue to return to the threshold question about when declines matter, is that corrections are both frequent and erratic. Like the saying that indexes predicted nine out of the last five recessions (Samuelson), one may be out of the market most of the time if one is constantly concerned about the inevitable next correction/bear. (Look at how many years people have been saying that the bond market is about to decline - we're coming up on a decade now.)
If a retiree (inferred from the "no income" hypothesis) has $1M and needs $40K/year, staying completely out of the market isn't unreasonable. A 65 year old male can get an annuity paying $40K/year, with 3% annual adjustments, for about $840K. He can have fun with the rest - invest, travel, build a legacy, save for unexpected expenses. Annuities are another way to mitigate risk, as Pfau discusses in his Forbes column cited previously.
Unlike the 95% success rate you mentioned, the annuity provides a 100% success rate (assuming that the AA rated insurance company doesn't fold).
I agree with you in being concerned about a 5% chance of failure. It's not like you get 20 lifetimes and get to discard one of them. You've only got one shot at this, and you don't want to be the 1 in 20 who goes broke.
Perhaps I've misread posts, but a response I've read seemed to say to me, "well, these 5% outliers aren't real, but just artifacts of the way the simulators work." You're never going to see in real life, for example, three years in a row of 20% declines, even if they do show up in random simulations.
I take that not as reassurance, but reason for concern that the simulators have fundamental flaws in their design. So while I might agree that the 5% won't actually happen, I'm less sanguine about the accuracy of the other 95% of predictions.

Thanks for posting the Dan Fuss article. I own NEFZX which is a Loomis Sayles bond fund and they have dialed it way down also. It's duration is listed by Morningstar at 3.13 years with maturity being 4.6 years along with a yield of 3.49%.

msf, did not mean to totally direct the post to you but I will answer you now. Not to get too far down in the weeds....my OP suggests that long term savings rate is important and is within direct control of the investor and secondly, at what price you establish a cost basis of your portfolio is critical.
To put my second point in understandable terms: Would you invest $1M TODAY requiring a $40,000 inflation adjusted cash flow needs given that this market is up 3.5X from the lows? How would you answer that?
I am drawing a conclusion from your excellent analysis that investing anytime with an appropriate withdrawal rate is acceptable. Maybe I misunderstand. I just would not feel comfortable with my $$ taking that approach after this particular bull run.
If you need a mitigating sequence risk strategy rather than the 50/50 portfolio we began with then maybe you are suggesting you would not.
The 95% success rate with 4% withdrawals you see in so many portfolio allocation simulation strategies looks really good unless you are in the 5% that went to zero. What was the reason for these 5%?

I'm still wondering why you ignored a 19.4% drop in the market.
Regarding the "above Portfolio Visualizer success rate analysis thru 2017 assumes ..." It makes no assumptions at all. That's what I was trying to convey in saying that backtesting works with real data. It takes the market as it performed; there are no odds, assumed or otherwise. Run it, run again, run it again, and you'll get the identical result over and over, because the past performance of the market doesn't change.
These results of past investments are as real and meaningful as your statement that the last two (bear) market drops were 57% and 49%.
I stated that I have significant issues with existing tools for simulations of future results. So I'm in agreement that these tools have major limitations, not just under current market conditions, but anytime. That said, I disagree with some aspects of your concerns.
Most simulation tools use mean and standard deviation to project future results. Think bell curve centered at some point above zero (since the average return is positive). So the way they work, they figure that more than half the time the market moves up - there are more points to the right of zero than to the left. They don't assume equal odds.

A problem is that returns aren't symmetric like a bell curve. There are slightly more up days than down days, even though the up days aren't (on average) as big as down days. Here's Forbes' data on the DJIA from October 1, 1928 through January 28, 2016:
https://www.forbes.com/sites/mikepatton/2016/01/29/fast-facts-on-the-dow-jones-stock-index/#145fcc6a6972
"An investors quality of life can be affected if annual income is reduced by a significant amount due to decreases in portfolio value (with static 4% withdrawal program)."
I didn't use a "static 4% withdrawal program." I used as static, inflation adjusted dollar amount independent of portfolio performance.
Using your $1M pot, I started with a $3,333/mo ($40K/year) draw, and adjusted that draw only for inflation. I did not increase or decrease the draw based on the value of the portfolio. I mirrored what Bengen did in his original 4% rule analysis. Only later did he suggest modifying the amount withdrawn based on portfolio value.
In your question about what to do with a $1M inheritance, you didn't say how this person with no assets and no income was living. For the sake of argument, I'll assume his cash flow needs are $40K/year (4%), inflation adjusted.
There are many ways of mitigating sequence risk. I've posted this link before:
https://www.forbes.com/sites/wadepfau/2017/04/12/4-approaches-to-managing-sequence-of-returns-risk-in-retirement/#2b188f486fcf
I like Buffett's approach (which is one of the ideas in the article above - buffer assets, avoid selling at a loss). Buffett suggested keeping 10% in short term treasuries (effectively cash) and the rest in the S&P 500. Personally I'd up the cash figure to 12% or so, and diversify the equity portfolio more broadly, but that's the general idea.

More thoughts...If you had no income and had no assets and inherited $1M today tax free..... would you invest it all in the market today at a 4% withdrawal rate (many people are 4-5.5%)?

This article sheds some light on the topic and one fund (VWINX) succeeded at providing a 4% withdrawal and capital appreciation.
long-term-growing-income-open-end-mutual-fund-possible

More thoughts...If you had no income and had no assets and inherited $1M today tax free..... would you invest it all in the market today at a 4% withdrawal rate (many people are 4-5.5%)? This Bull market is up 3.5 times since 3/9/2009 low. Or for that matter DCA into the market?
The above Portfolio Visualizer success rate analysis thru 2017 assumes equal odds of markets moving higher vs markets moving lower from this huge bull run as of today. I personally do not like those odds.
Cost basis is critical. These withdrawal rate calculators/simulations often focus on did the investor run out of money altogether (success rate analysis)? I would argue that permanent impairment of capital can occur without going to zero. An investors quality of life can be affected if annual income is reduced by a significant amount due to decreases in portfolio value (with static 4% withdrawal program).
I am not against buy and hold but I am a proponent of establishing a cost basis with some degree of caution.

right; we have been exceedingly lucky
if I do some sims with other ratios, will report
yeah, okay, did a few wack ones:
It is scary to imagine how one would respond and cope with, say, DODGX 2000-2012 and 1% annual contrib, especially when you click inflation-adjusted. CAGR under 5%. No withdrawals. With 10% annual withdrawal instead, it still is not zero at the end. Hmm. Must run some more-plausible ones.

Art Cashin and sidekick Bob Pisani discussed the action of the stock rally. Art gives President Trump partial credit for the stock market rally in the past year, but he notes that many world markets have rallied in the past year and the roots of the rally stem from the global economies. Art's hair was a mess, like he just got out of his convertible.
https://www.cnbc.com/video/2017/11/08/cashin-this-rallys-roots-are-in-the-global-economy.html?play=1

I ran it through Oct 2017. It's this decade that picked up the slack. Without rerunning it, I recall that the max drawdown (roughly from start to somewhere in 2009) was about 1/3 (i.e. 2/3 of original value remaining). So it must have gone up by a factor of about 3/2 (including withdrawals) to roughly break even since then.

"For an investor in retirement down 57% and continuing to withdraw for income he won't care whether its called a correction or bear market."
For an investor in retirement down 19.4% and continuing to withdraw for income he won't care whether it is called a correction (-19%) or a bear market (-20%).
Yet you ignored a drop of this magnitude even though names don't matter. Was it too small a drop? How large does a market decline have to be for you to care?
We've got at least one fan here of Monte Carlo simulation. I've given many reasons why I find existing tools (not the concept) inadequate. But they apply to probabilistic future projections. Backtesting shows what would have actually happened - no probabilities involved since real market data are used over real periods.
So just for fun I ran portfolioVisualizer from Oct 2007 to Oct 2017 with a representative 50/50 retirement portfolio (SPY/AGG), rebalanced annually. I started monthly withdrawals at 0.33% of the start amount (i.e. 4% annual rate) and increased the withdrawal amount just for inflation.
http://traderhq.com/illustrated-history-every-s-p-500-bear-market/
https://www.portfoliovisualizer.com/backtest-portfolio
Compound aggregate growth rate (CAGR) was positive - around 1.8%/year. It was even positive after adjusting for inflation (about 0.1%/year real return).
Ran the same simulation starting March 2000, except I had to pick another bond representative (AGG started Sept 2003). So I used VBMFX. Sure enough, with two crashes within a decade, that one didn't come out as well.
CAGR was still positive, at 0.23%/year, but after adjusting for inflation, the portfolio lost 1.9%/year in real value. About 18 years after starting, the retiree's portfolio in nominal dollars was up only 4.2% from where it started.
Still, not the dire straits it seems you were expecting.

Fairport-based Manning & Napier acquired 75% of Rainier more than a year ago after a period of heavy outflows from Seattle-based Rainier. While the three Rainier Funds still don't formally carry the Manning & Napier name (eg., Rainier Large Cap Equity Instl), we've updated the MFO ScoreCard (and our master names list) to reflect it (click image to enlarge).

The MFO 5-Year Great Owl Manning & Napier Rainier International Discovery Series I RAIIX is contractually sub-advised by Rainier. Its portfolio manager is Henrik Strabo.
On the whole, however, the Manning & Napier fund family has not rated well on the absolute-return driven MFO Scorecard (OSC means Oldest Share Class, ASC means All Share Classes), click on image to enlarge:

Similarly, it has no funds on the MFO Honor Roll and 7 on the MFO Three Alarm list (click image to enlarge):

All that said, Manning & Napier's overall numbers suggests a firm that focuses more on risk adjusted returns and capital preservation than absolute returns, which drive the ScoreCard, Honor Roll and Three Alarm designations.
The irony is that their philosophy states: "A Focus on Absolute Returns - A focus on price can help investors avoid permanent loss of capital and is aimed at maximizing absolute returns over the long-term."
David profiled positively Manning & Napier Pro-Blend Conservative Term Series S EXDAX in 2015 and Manning & Napier Disciplined Value Series I MNDFX in 2011.
Since inception, they both hold an MFO Rating of 5, or top quintile in their categories, as do 8 other funds in Manning & Napier's line-up (click image to enlarge):

>> how much you don't lose is more important than how much you make.
This is one of those assertions you see all the time, but if I had followed it over the last half-century, I would have to be still working.
In other words, the ability to wait it out, keep investing, and the comparative shortness until breakeven, have paid off.
http://money.cnn.com/2015/02/26/investing/stock-market-crash-bubble-investing/index.html
http://i2.cdn.turner.com/money/dam/assets/150226110022-crash-recovery-bar-780x439.jpg
Some (much) of it clearly is luck in the timing. Trying to retire in 2000 was brutal, if not impossible for many, and the same for 08 even if that turned out not so bad, since the memory of 2000 was so vivid.

For an investor in retirement down 57% and continuing to withdraw for income he won't care whether its called a correction or bear market. The pain is the same. Good luck NOT timing the market. Re: 1% cash...IMHO how much you don't lose is more important than how much you make.

For all the criticisms of LSBDX as being highly volatile, it's beaten or matched the standard benchmark (Barclays US Aggregate) and nearly done so with its benchmark index (Barclays Government/Credit), falling 0.14% short/year over three years (but better over 1, 5, 10, 15). That's despite an abysmal 2008.
After 59 years in the business, 26 years managing this fund, Fuss' record is more likely the real article than random chance success. So when he takes this free wheeling fund to its most conservative position ever, it's worth taking note. (Unlike some other bond fund managers who shall remain nameless, Fuss doesn't go out of his way seeking the spotlight.)

The Loomis Sayles Bond Fund has reduced its risk exposure to the lowest since its inception in 1991

Here's a much more extensive article on his macro views (Oct 19, 2017):
https://www.advisorperspectives.com/articles/2017/10/19/dan-fuss-warns-of-geopolitical-risks-and-higher-rates-1