Stocks Versus Bonds: Which Best Help Meet Retirement Goals?

Ted

FYI: At a conference hosted by Boston University in 2006, Nobel Prize-winning economist Paul A. Samuelson asked the audience whether personal finance was an exact science. He answered his own question with remarkable wit and wisdom: “Of course, the answer to that is a flat no. If this disappoints anyone in the audience, now is a good moment to rectify your miscalculation by leaving.”

Yet one of Mr. Samuelson's many contributions to the field of economics has been to build mathematical (dare we say, “scientific”) models to better understand how to optimize personal finance decisions, such as: How much should individuals save for retirement? How should they allocate their investment portfolio throughout their lifetime?
Regards,
Ted
http://www.investmentnews.com/article/20161222/BLOG09/161229981?template=printart

AndyJ

Another incredibly ignorant article: "bonds" = Treasuries only. It's a disease; somebody needs to roll out a vaccine.

hank

AndyJ said:

Another incredibly ignorant article: "bonds" = Treasuries only. It's a disease; somebody needs to roll out a vaccine.

Absolutely correct Andy. We'd all be better off if we'd substitute fixed income for bonds in our discussions. I find bonds (and the entire world of fixed income) incredibly complex to discuss. Leads to discussions similar to two trains passing in the night on completely different tracks.

Crash

I actually think I "get" that, AndyJ and hank.

AndyJ

The main thing that's missing with that kind of analysis is that it leads to investing only in assets at the extreme ends of the risk spectrum, when it's more diversified and can provide a better return: risk ratio overall, depending on how you do it, to invest across the spectrum rather than just at the two ends.

MJG

Hi Guys,

I couldn't agree more with you that the referenced article is extremely weak and confusing. That's especially disappointing given the credentials and professional positions of the authors. The article could and should have been more informative and far more explicit.

There is little doubt that we grossly under-save for retirement. By how much? The shortfall is huge. Here is a Link that provides nice summary graphs that highlight the shortfall:

http://www.businessinsider.com/how-much-average-family-saved-for-retirement-2016-3

The referenced piece quotes Paul Samuelon. He's one smart economist. He famously remarked that " I hate to be wrong. But I hate more to stay wrong". So do I. Constant investment learning is crucial to success.

Having a diversified portfolio is necessary for that success. When young, a portfolio top-heavy in equities and other high return, perhaps volatile holdings, is very acceptable. Later, bond products could be added to,attenuate that volatility if so desired.

However, I personally recommend and practice retaining equity-like positions in my portfolio. Like most folks, I under-saved a little preparing for my retirement. Playing catchup is risky but sometimes necessary business.

Best Wishes.

sma3

There are other views that are better elucidated.

I just finished reading James Cloonan ( head of AAII) book on "Level 3 investment" where he makes the case that there has only been one ( 1929) situation where the SP500 has not recovered from a bear market in five years. So it must follow that that the only investment calculation required is to put four years of retirement expenses ( or college expenses or emergency money etc ) into safe assets and the rest into small cap (micro would be preferable he insists ) stocks and don't worry. He has interesting data to prove that as long as you didn't sell at the bottom in 2008-2009 you made out fine, even if you retired that year,

The question is will the next correction be equal to 1929, or will the general market take a decade to recover like the Nasdaq did?

I wonder how the market can keep climbing with job growth anemic, hourly average wages flat, declining stock earnings and the huge public debt.

If he is right we should be close to 80% invested... but what if he is wrong and the SEC has a good reason for requiring a statement "that past performance does not guarantee future results"?

Nick_de_Peyster

You tell me what happens and I'll tell you which is the better investment. Seriously, why is this a binary choice? What about diversification?

Nick de Peyster
http://undervaluestocks.info/