Does allocation matter?

The recent downdraft in markets spooked people. It spooked me. A woman I know, retired, was going to call her advisor and was dead convinced he had her in too much risk. She pressed me: "You do all that blog math magic stuff, tell me..."  I did NOT want to get between her and her advisor but with enough disclaimers, I obliged, especially since my guess is that the advisor, while competent, probably does not dabble in economics or actuarial science and my perspective would be different rather than necessarily conflicting. 

I told her as a prior that my guess was that the allocation probably did not matter much and that spending was a stronger lever. But I took a look. I won't divulge personal details but let's say we have someone in mid to early 60s, a reasonable wodge of financial assets, social security, a few small deferred annuities in the future, a risk position that was relatively high[1], and a spend that as far as I could tell, was at or under 4%.  The exact numbers were less important than the general sense.

I plugged that into a consumption utility simulator[3] and got this in the figure below. Based on this I figured she probably could trim her risk and I think she got him to give in on that.  Otherwise, the idea that allocation doesn't matter too much over a broad range still (sorta) stands. For her spend rate, if it were me, I would (tax issues excepted) trim risk way back, which is what I do for myself but i think she'll be OK but only over the long run and only if the world stays normal. That last assumption is key and my guess is that the world will not be normal for a good long while.

The commentary in the figure speaks for itself in terms of residual conclusions[2] so I'll leave it at that. The third unspoken lever (besides allocation and spending) that is not imagined here is "when to retire" but that was mooted in this case.  I could have broached the idea of immunizing spend via life income (annuities) but didn't. Probably should have.

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[1] Let's arbitrarily call it like this on "levels" of risk:

- 0-30%        Low risk position
- 30-80%      Mid risk
- 80-100%+  High risk

I just made that up but it's not totally unreasonable.

[2] It's implicit in the figure but I'll make it explicit. High spend rates with very low allocations to risk are a bad combo. Low spend rates with either low or high risk are a better bet than that.  Spend rates move the needle in the middle more than allocation does.

[3] covered here in more detail:

• A Wealth Depletion Time Model