A late evening howdy from Mr. Catch,
What justifies more than 20% of a portfolio in equities ?
'Course part of the difficulty is which equity areas. Developed countries, emerging markets or ?
Well, I suppose we have younger aged investors who would hope to make up a lower and/or slower market for years ahead. Not sure whether to define younger as under 50 or ?
Equity company(s) earnings?
I won't dismiss that as the population continues to grow, that there won't be a need for energy and agriculature. EM countries may demand and/or need more from these areas. There are the good old multinational/blue chip companies. There are the equity dividend payers, too; which should include utility companies.
No doubt there will be sectors and cap size areas that may fair better than other in the years ahead.
Taxes (which was discussed at FA) will be going up at various levels of government. Michigan's new Republican folks have started playing this game. They are playing funny with a tax shift to attract new business to MI by restructuring the business tax (which did need a fix); but this is being done with changing the laws on taxation of pensions and also eliminating many credits on the MI tax laws, including deductions for dependent children and related. So, while they have not changed the tax rate as a %, they have adjusted the tax upon families to cause a true and higher rate of taxation on gross income. I have noted to the governor, lt-governor and the treasurer; that they are playing a game from some modeled program via a computer and hope that they also programmed the impact of the fact that for every dollar they choose to pull from the household for their grand scheme, is a dollar that will not be placed into the local economy.
The above leads to the other connected situations of debt burdens. I expect no grand plans from D.C.; and even if and when the Euro Zone gets a signed agreement for Greece and others in line, how in the heck will they pay off anything? Related is that Federal monies coming back to states for programs is likely to continue to be reduced, which places even more burden upon states. I sure can't bitch about MI and taxes too much; as I am aware of local, city, county and state taxes in other areas of this country that would cause me to refuse to move to that state.
So, how could one convince me as to the viability of owning more that 20% in equities? I look backward (not counting dividends) to price levels at high points in Sept or Oct of 2007 for the major indexes globally and try as I might, to determine how in the heck are these levels to be attained again in the next 5 years?
Ok, I am away to pillow time...the 6:15am alarm will soon remind me of a new day.
Thank you and regards,
Catch
Comments
I beat you up this morning by about 30 minutes. It is now about 6:40 Eastern and the sun is now coming up over the Carolinas. I would say that the answer to your question is a simple one. Simply stated one’s equity allocation would be related to one’s tolerance for risk. Usually a capital presentation portfolio does have some equity in it about 10 to 20 percent. A conservative allocation would have about and up to the 40% range in equity. A moderate allocation would be one that has up to about 60% in equities and an aggressive allocation would have up to about 80% in equities. These are by my rule of thumb and the allocations will vary somewhat by brokerage house.
So again, it can be said, that ones tolerance for risk will determine one’s equity allocation within one’s portfolio. And, don’t forget cash … this will vary too based upon certain factors. And, with this bonds fill in the rest.
Have a good day and good investing,
Skeeter
Other side: there's a level of debt saturation in society (especially developed society) that can't continue to leverage up. There will have to be a deleveraging at some point, although if there is one, my guess is that it will not be voluntary (or pretty.) In other words, we can't continue along the same road and structural issues will have to be addressed - if not, new crises could easily emerge.
I can see a lot of different possible scenarios down the road.
I lean towards the first side, and think equities (and particularly real assets - commodities/commodity/inflation-related equities/real assets like important/productive infrastructure) will do better over the next 5-10 years. There will be bumps along the road, as with anything.
As I noted yesterday, I have balanced funds, but no fixed income only funds and am 0% cash (well, a little bit cash after yesterday, but it's just going to be moved into something else). I fully admit that that approach could be wrong, but that's the risk I'm willing to take at this point, as I still think there's more risk in betting on deflation than inflation. I'd rather bet more on inflation and get that wrong than bet on deflation and get that wrong.
I'm younger than most on the board though, and how one invests really depends entirely on risk tolerance, age and situation. I would definitely not recommend my portfolio for someone nearing retirement age or especially in retirement age.
Regards-OJ
His question, I think, is similar to my apparently failed attempt to get a plain-English narrative of how the transition from barter to coinage/printage actually occurred, and how it actually works today.
In this case, I think Mark is hoping for an answer more in line with Scott's, below: again, a plain-English justification for holding more than his (probably arbitrary) 20%, based not upon some formulaic percentage but rather upon a rational analysis of the present world economic/political situation, and what the probabilities are going forward.
Regards- OJ
I appreciate your commenting; but I don't know what you mean by "John Bogle's portfolio", unless the old axiom about one's age in bonds and the remainder in equites.
What is John Bogle's portfolio?
Thank you,
Catch
I agree; but what is the portfolio mentioned?
Too busy to try to find his many writings and/or speeches to determine the nature.
Thank you and take care,
Catch
Now for Catch's portfolio. He has a big allocation to non investment grade bonds. These bonds have equity like characters so it is not that he has no exposure to stock market. He has more exposure than he thinks.
I/we don't have more equity related exposure than we think we don't know about.
I posted in June or July that a full M* report indicated about 43%. That may be down a bit right now; but is close to the 35-40 percent area.
We have not run an M* on our holdings since the June/July period.
As to Mr. Bogle, per johnN's note; I presume he means the "one's age in bonds thing".
Many of the rules and axioms of the past 50 years or so, are only reference points; that do not fit well into the era of investing in which we now find ourselves.
Thank you for your input,
Catch
I can certainly understand a stance dictating no more than 20% in equities these days, given the current circumstances, with the biggest, darkest cloud hanging over us all the way from Euro-land. Surely, if cap. preservation is the goal, up to 20% equities may serve to simply shield against inflation. I swear, FOOD inflation is already rampant, whether or not some irrelevant, hypothetical gov't statistic tells us it is a threat. I just bought a dozen eggs today. Those eggs oughta be GOLDEN, for the price I paid!
One's time-horizon surely must be a factor in the Big Picture, too. More holdings in equity funds is not only justified but advisable, given the ups and downs of Mr. Market. There are technical indicators; there are fundamentals; there are range-bound trends, etc. etc. etc. But given the utter folly of attempting to time the Market over long-ish periods, the safest thing, it seems to me, is at the present time counter-intuitive: own MORE equities NOW, before the share prices climb any higher.
I do believe profits going forward will not be anything like the go-go- 1990s. Smaller profits from equities would point anyone who is on the younger side toward holding a bigger percentage of a portfolio in equities---if that person's risk tolerance will allow for it. And again: risk-tolerance, I think, needs to become a counter-intuitive sort of animal. The truly risky thing has become a matter of investing too conservatively, according to standards and definitions of a Day gone by---which actually wasn't very long ago. The 2008 Crash was a watershed. And since then, if it actually does ever happen that Regulators figure out how to do the work of regulating and are not told to go to sleep on duty, as before----- profits will "suffer" as a result, also.
http://www.dallasnews.com/business/headlines/20111106-brazil-china-and-other-emerging-markets-trail-u.s..ece
Yes, the S&P is crushing EM economies in 2011. Wanna make money in 2012 and beyond? Buy emerging Asia (and Montenegro and Jordan and Kazakhstan) THIS year, then.
Below is the M* of our portfolio from July 23, 2011. We use the free M* available at TR Price's web site. We have not yet used Financial Engine.
We don't mind criticial review of our holdings or methods, so don't worry about any of that. Our Funds Boat is for all to view and comment upon; and hopefully be of some value to us and all here at MFO.
OK, gett'in near pillow time at this house.
Take care of you and yours,
Catch
.......MORNINGSTAR PORTFOLIO VIEW below.......
NOTE: as of Nov, 2011, cash and equity holdings are both reduced from what is shown here
Asset Class %
Cash 12.28
U.S. Stock 13.12
Foreign Stock 4.05
Bond 62.97
Other 7.58
Not Classified 0.00
Stock Style %
Large Value 11.01
Large Core 14.47
Large Growth 29.64
Mid-Cap Value 12.57
Mid-Cap Core 7.75
Mid-Cap Growth 7.60
Small Value 6.78
Small Core 4.67
Small Growth 5.40
Not Classified 0.10
Stock Sector Portfolio %
Cyclical 68.79
Basic Materials 5.51
Consumer Cyclical 58.36
Financial Services 2.89
Real Estate 2.03
Defensive 9.54
Consumer Defensive 5.51
Healthcare 3.75
Utilities 0.27
Sensitive 21.67
Communication Services 2.57
Energy 7.45
Industrials 3.59
Technology 8.06
Not Classified 0.00
Stock Type Portfolio % VS S&P 500
High Yield 0.11 0.23
Distressed 3.57 0.67
Hard Assets 6.91 13.29
Cyclical 69.64 43.93
Slow Growth 5.14 14.80
Classic Growth 0.75 6.73
Aggressive Growth 5.52 16.15
Speculative Growth 0.87 1.98
Not Classified 7.50 2.22
Fees & Expenses Average Mutual Fund Expense Ratio (%) 0.75
World Regions %
North America 61.02
UK/Western Europe 4.20
Japan 0.87
Latin America 2.33
Asia ex-Japan 1.83
Other 0.30
Not Classified 29.45 (AAARRRGGGHHH !!!!!)
Stock Stats Average for This Portfolio Relative to S&P 500 (1.00=S&P)
Price/Earnings Forward 14.46 1.03
Price/Book Ratio 2.14 1.02
Return on Asset (ROA) 7.74 0.91
Return on Equity (ROE) 18.47 0.88
Project Earnings Growth-5 Yr (%) 12.77 1.29
Yield (%) 4.38 2.58
Avg Market Capitalization ($ mil) 10,260.29 0.20
Bond Style %
High-Quality Short-Term 0.00
High-Quality Intermed-Term 0.00
High-Quality Long-Term 0.00
Medium-Quality Short-Term 3.53
Medium-Quality Intermed-Term 14.77
Medium-Quality Long-Term 0.00
Low-Quality Short-Term 16.10
Low-Quality Intermed-Term 33.45
Low-Quality Long-Term 5.28
Not Classified 26.88 (AAARRRGGGHHH !!!!!)
Thanks for the nice write and your insights.
Hoping that you and yours are hanging in there.
Regards,
Catch
As I said your portfolios direct equity exposure is less than 20%. However, you have 54% in HY. HY is your indirect equity risk exposure. This asset class has much higher correlation with underlying equities.
If you were to replace these HY bonds with very safe investment grade bonds and have the same risk exposure of your original portfolio, you would have to up your equity percentage. You might perhaps, say, 30-35% equity in such a portfolio.
I am not sure why the intense interest in John Bogle’s portfolio. He has never been considered an especially astute investor although he is an acknowledged financial expert. Fully understanding financial matters and translating that understanding into prescient investment choices are not necessarily closely correlated attributes.
But there is one attribute that is money in the bank: John Bogle does practice what he preaches. He has long championed a portfolio bond/equity mix that reflects your current age. Since he is currently in his 80s, Bogle’s bond holding percentage is in the 80 % bracket.
MarketWatch writer Robert Powell reported on his portfolio in 2010. Here is the Link to that article:
http://www.marketwatch.com/story/bogles-in-bonds-but-should-you-be-2010-05-20
John Bogle has always been a man whose word can be completely trusted even if you do not subscribe to his market views or his investment philosophy.
Best Regards.
In the meantime, high-quality companies have dividend yields that a much more attractive than CDs and short-term Treasuries. Yes, they are indeed more volatile. But we would argue that in many ways stocks as a whole are more attractive than they have been in a long time, both for pricing and for macro reasons.
Certainly one option would be to use some alternative strategies (long-short, absolute return, etc.) to reduce overall portfolio volatility, which would allow, perhaps, for a greater stock allocation than one might otherwise consider.
The future is unknown, and there are always problems and potential disasters, but I am more positive for stocks' long-term potential than bonds, for sure. You can be conservative in your stock selection, and you can be aggressive. And there are so many good managers that have done a decent job of limiting downside.
" I am not sure why the intense interest in John Bogle’s portfolio."
I don't believe we were having an intense disucssion regarding Bogle's feelings about portfolio mix regarding an investor's age. My original question was to whether that is what johnN was pointing to with his comment about John Bogle's portfolio.
While I am familiar with Mr. Bogle's past comments about investing, his methods are not used at this house.
Regards,
Catch
You're singing my song, but with more precision. Thanks.
" First, I agree that a person's investment goals, risk tolerance, and time horizon are the most important factors in deciding how much one should allocate to stocks. But I also think it is important to remember that we are near the end of a 30-year bull market for bonds. Interest rates will go up, whether quickly or not, or by how much, we do not know. But they will go up. Folks who own long-term Treasury funds, for example, could be seriously hurt when that happens."
>>>>>I am not aware of a method to determine that a given investment sector (I relate this to the U.S.) is about to end or begin from such a long time frame of moving in one direction or another. Who says that the 30 year bond bull is finished? I don't have a problem with monitoring commonly used items; such as 50 and 200 moving averages and related techinicals. I am familiar with the theories of those who note "wave" theories that deal with a variety of time frames within other time frames. I don't believe someone like Robert Pretcher has performed any better with his investment calls, versus this house since 1978. We all know there are far too many professional and bright minds who got their investment clocks cleaned in the market melt. Many of them could have used the most simple of methods of the 50/200 day moving averages to protect some of their investments.
"Folks who own long-term Treasury funds, for example, could be seriously hurt when that happens."
>>>>>Most assuredly. Not unlike any other investment sector.
"In the meantime, high-quality companies have dividend yields that a much more attractive than CDs and short-term Treasuries. Yes, they are indeed more volatile. But we would argue that in many ways stocks as a whole are more attractive than they have been in a long time, both for pricing and for macro reasons."
>>>>>I am sure there were many from 2007 right through the burn of Lehman; who continued to attempt to determine what is and/or was undervalued; until they found what undervalued really was into March of 2009.
"Certainly one option would be to use some alternative strategies (long-short, absolute return, etc.) to reduce overall portfolio volatility, which would allow, perhaps, for a greater stock allocation than one might otherwise consider."
>>>>>Yes, except our house will exclude the long-short group.
"The future is unknown, and there are always problems and potential disasters, but I am more positive for stocks' long-term potential than bonds, for sure. You can be conservative in your stock selection, and you can be aggressive. And there are so many good managers that have done a decent job of limiting downside."
>>>>>Ah, yes; the future! I will not disagree that there are and will continue to be equity and bond sectors that will have there day to allow we investors to be in the right place at the right time. I am speaking only to the aspect of the positive; as we currently do not use etf's to "short" a market move, although this is a possible path in the future with a small percentage of our assets.
I will note, that living in Michigan; but not being involved directly with the auto industry and all of the small related supportive companies and businesses, I watched as the largest impact changes started in the mid-1980's with the auto industry. For whatever reasons, I can reflect that both the unions and auto companies appeared not to understand the changes taking place. To this day, our house has and continues to benefit from "watching" the unwind of the manufacturing sector in Michigan and similar states. Michigan and many similar states were already in a downturn and unwind much ahead of the market melt in 2008.
I/we at this house continue to attempt to use Michigan as an economic model of change with the resulting after-effects. The state still has some manfacturing, is still a large producer of various agricultural products and tourist still draws a lot of money. I use as much of what Michigan "was" and what it has and will continue to become to measure what we see in other states, the U.S. overall and the major developed countries of the world. Michigan, of course; can not print money and must balance a budget; so there are some factors that one can not directly relate or measure against other areas or governments.
But, finding the various and most complex factors that are affecting Europe, which in turn affects all of the other connected economies; and even to the extent of watching a state like California dance around its problems; we try to mesh all of this together to obtain an investment plan.
Our house remains less optimistic related to the continued unwind. And the unwind/overhang is not being allowed to unwind properly, in my opinion. I understand the grand thoughts and plans of the politicians for various programs; and some could actually allow for a slow unwind. I became age 64 this month; and I do not know that I will live to see anything in this country that will reflect in a familiar economic pattern as to what I have seen in my life.
As to investing and where to be. Yes, we all have our plan based upon what we are best suited to attempt to understand of a most complex investment world. Some of the positive gains of our investments will indeed come from the luck of being in the right place at the right time; although we may place some of this luck to the value of learned experiences and the resulting intuition.
The perversion of so many factors that affect our investments will continue. U.S. bond prices/yields are perverted by intervention of the FED, with the "hope" of folks buying or refinancing homes from the very low mortgage rates. Will the bond traders eventually force the hand of low interest rates. It is totally possible. They have other places in which to play as of today. The unemployment numbers will likely continue to be perverted, too. I fully expect to find unemployment rates to continue to move downward, and there will shouts of joy and grand speeches; but the newly employed will be at a much lower pay scale and so the gains will not be so grand for the consumer or economy.
Well, one could write a small book here about all of this, eh? Our house will attempt to preserve capital with the tough task of adjusting risk to stay ahead of the inflation creep.
Bob C., thank you for your efforts and continued input to all here, at MFO. We all become wiser from the mixing of thoughts.
Take care of you and yours,
Catch
Excellent. I recall last year (I think); you were in western PA, down by the river, yes?
Regards,
Catch
Lot a interesting discussion on this one. Unfortunately, Ol Joe seems to think answers should be
"reasoned and well-structured" so had to really think hard here. Guess I'd start off asking Catch why he'd even consider putting 19.999% in equities if he believes they won't deliver a substantially better return than cash and bonds over his chosen time frame? After all, the latter 2 are certainly less volatile and more predictable. Less likely to get ya cussing or smashing things against the wall too.
Catch, you've hinted at what you consider your time frame or investment horizon - but am not sure what you consider it to be - maybe just missed it. At 65 I'm thinking in terms of 15-20 years - being in reasonably good health and disciplined about diet exercise, etc. Keep in mind too that most people don't need the $$ all at once, but take it out in small increments. That means shouldn't get hurt too bad if have to endure a 1-2 year bear market. Ain't any guarantees about any of this - either your own longevity or the future returns of equities. Having said that, gotta think most observers would expect stocks to out perform cash and bonds over the time span I mentioned, 15-20 years.
Everybody's different and I'd never second guess somebody else's decision. Myself, at last check couple months back, had around 40-50% equities counting what's in balanced funds. And, like you, got some additional holdings in junk bonds, so we got the old *** hanging out there a bit. Big chunk in TRRIX and my returns run close to theirs. Am lagging a little this year probably due to having avoided investment grade bonds which the fund holds. Am also overweight in natural resources, commodities, and foreign currencies compared to that fund - so get jerked around a little more by these.
So like others said, depends a lot on your risk tolerance and investment time horizon. I've never agreed with Bogle re bond allocation, - though I respect his views on a great many things. Truth is you can find at least one respected member of the financial community to support just about any point of view. Am loath to nominate any one "expert" here as not able to defend their each and every action over the years or prove that one is smarter than the other. Take care.
I am not aware of a method to determine that a given investment sector (I relate this to the U.S.) is about to end or begin from such a long time frame of moving in one direction or another. Who says that the 30 year bond bull is finished?
Unlike many, I've not been one willing to predict that bonds will drop in price in the next [fill in the blank] months/years. Go back over posts from the past few years, and you'll see lots of predictions about interest rates going back up. So to that extent, I agree with you that predicting movement is a fool's game. That said, it is nevertheless easy to predict that bonds will not appreciate significantly.
There is no theoretic justification for a negative interest rate. Even Japan hasn't dipped much below zero in nominal rates. See, e.g. this 1998 Money article saying the same thing. Or this 1993 ABC (Australian Broadcasting Co.) program transcript saying the same.
Well, the latter points out that people will pay for the convenience of the bank holding their money, so in effect they are getting negative nominal interest. (Much like BofA, Wells Fargo, etc. were expecting people to pay even more dearly for the privilege of loaning them money.) But aside from such minor noise, interest rates cannot go below zero.
Let's look at Treasury rates. They are sitting around 2% for a 10 year bond. (Data from treasury.gov.) What's the best case for these bond holders? That interest rates suddenly drop to zero. In that event, their cash flow of 20% principal (over 10 years) is discounted at 0%, to produce a NPV of 120% (a 20% instantaneous gain in bond value). That's the absolute "best" case. Realistically, rates don't drop that quickly (when's the last time you saw rates cut in half in a year's time). If we still want to speculate that interest rates could drop to zero, we should pick some slightly more sane time period than zero days. How about three years? That would give an average rate of return around 7%. Okay, but still only slightly better than the long term average return in bonds. Not exactly what one would call a bull market, when put in historical terms.
Finally, for those who are interested in Bogle's thoughts (around 2000 he suggested that bonds would outperform stocks over the next decade, which they did; in 2010 he suggested the reverse for the next ten years) - here's a video interview from Oct 2010, entitled: Why you should keep bonds for bumps in the road. Apologies for the ad at the beginning; don't know how to avoid it.
I think I would do what rono is doing, only 5-10% in equities as 'play money' while put the rest in HY bonds/CDs/Cash/ US T - vehicles if I am about to retire. Don't want to mess around with the wrong ideas and loose everything. I don't believe I have enough wit to 'withstand' another major crash but these are my opinions...
Ultimately, you are the one that decide how much you should be in stocks, how much you want to take risks, and how many Tums you can take at night
please do share w/ us what you'll likely do
I believe this is the article link [could not find it but he is ~ 20s% in equities as I remembered]
http://www.marketwatch.com/story/keep-investing-simple-bogle-says-2010-06-06