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Something to consider with this argument: I would guess Buffett and his wife are worth 100's of millions, so 10% in short term bonds or cash is not that risky compared to the average investor.
If I remember correctly, Peter Lynch recommended that everyone invest 100 percent of their assets in stocks. He claimed that over the long term, even if you bought at a market top, you would do well. I believe he convinced some universities to place all of their funds in the market.
So what if you are ready to retire with say a million dollars in savings, and you have determined with your expenses that the million dollars will last you the rest of your life (and your spouses) and then some. Isn't there a "sleep well factor" here where you don't have to worry about the what if's?
There is more thought involved then just putting all your faith in the fact that the past 20 years shows 100% stocks out performs a balanced portfolio 90+% of the time. Isn't the mantra 'past performance doesn't guarantee future results'? Let's face it. The market can drop 80%, and Warren Buffet still doesn't have to worry about he and his wife's life style being interrupted.
The author of that piece is engaging in journalistic malpractice.
Let's talk about that 95-year (1920-2015) period cited..
a) No individual investor's investing timeframe is 95 years. Not when an investor is beginning his/her their accumulation phase; certainly not when they are in, or approaching, retirement.
b)Those "on average" returns are just that-- arithmetic averages. Those returns are not smooth, but often extreme -- up and down. Recovering one's capital after the commencement of a bear may take the better part of a decade. Sometimes less, sometimes longer. Examples of "longer" include the US after the 1929 high (+20 years to recover) and Japan, post 1988 (which has not yet recovered its peak). If one is 100% in equities during one of these secular peaks, and in/entering retirement -- meaning you are pulling money out regularly --- you may find yourself in the unenviable position of running out of dough before you die.
c)Citing the example of the 95-year record of the US stock market is "observer bias". How did stocks perform during that 95 years in other markets? London? Paris? Rome? Berlin? Presumably, some of those equity markets were wiped out.
But yeah, 100% equities, sure. Go to Vegas and put your IRA on "red".
100% equities, sure. Go to Vegas and put your IRA on "red".
it is totally NUTS to be take on such aggressive asset allocation. Everyone need to assess their own risk tolerance and investment horizon before they take on someone else advice. Time like today many are glad they have a balanced asset allocation.
"..(In his heart of hearts, I suspect, Mr. Buffett is probably a 100 percent kinda guy.)"
That is a quote.
I think its 'wild' the author has the ability to intuit what is in another person's 'heart of hearts' -- and that he is so confident of that he puts it in writing and incorporates that psychic telepathy into his 'analysis"/advice...
For me, a balanced portfolio with somewhere between 40% to 60% equity, and at times perhaps up to 70% equity when loaded with special investment positions (spiffs) has been the best allocation for me through my accumulation years of investing. Now that I am in retirement, I have dialed my equity allocation back to 45% to 55% equity and I hold more dividend paying funds than I did during my accumulation years, thus a I felt a higher lower parameter was in order (45%). Should I load a spiff I could if I felt warranted and then hold up to 60% equity.
Advocating any position to one of its extreme end points is always sure to stimulate a debate. That’s especially true if the subject matter is financial since no universal laws exist in that discipline. It all depends.
It all depends on the special needs and circumstances of the individual investor. What’s good for you is almost assuredly not optimum for me. I have never had the courage or conviction to go 100% into equities. On the other hand, I have never been so emotionally or practically apprehensive to be 100% out of the equity marketplace.
I suppose I am a believer in the ubiquitous 80/20 rule which seems to loosely govern a host of different endeavors. That guideline has typically defined my end points of either complete market optimism or pessimism.
Everything is obvious once you know the outcome. Explanations and claims to prescience are forever forthcoming. But given the uncertainties of the future, especially Black Swan events, those claims are often disingenuous.
I take solace in a Bertrand Russell quote. He said: “The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” I hope so since I always have persistent doubts about the marketplace.
Mark Twain captured the problem well with a famous and familiar quote. Twain said: “ It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Doubling down on Twain’s wisdom, he also said that “It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt”. Writers must run that gauntlet with each article.
I wonder if the author of the referenced article included consideration of a dedicated money pocket to accommodate emergency needs in his portfolio allocation? I do. And in my accounting scheme, I assign that safety net segment as part of my bond allocation. Each of us has his own system of scoring and sorting the major unit categories.
For what limited value it provides, my current portfolio is at about 35% equities. Since I adjust in incremental steps by nature ( I’m never positive that my decision is absolutely correct), that allocation is slightly below my longer term planned allocation. I am somewhat skeptical about near term market returns.
I thought the article was well researched. Although I do not practice the author’s conclusion, I do appreciate his perspective. It is a worthwhile read and might prompt some investors towards a more aggressive equity asset allocation. It all depends.
This has been a nice, informative, and friendly discussion. Thank you all.
If I was half as smart as Buffett with his 60-70 years of investing experience behind me I'd be 100% in equities.
Alas, the most courage I can muster is a cornucopia of good balanced funds supplemented by a few smaller "bets" on focused equity funds I think might produce outsized gains at some future point (about 20% of holdings).
I suggest that everyone reread Warren Buffett's article published in the New York Times on October 16, 2008. That is when he told us he was investing his personal funds in the market. (The rest of his wealth was in Berkshire Hathaway)
Buffett gave us a good review of his concept that bad news is an investor's best friend, and that you can't time the market.
It's interesting that he had been holding his cash in U S Government bonds. Apparently, prior to that date, he wasn't a 100 percent invested sort of guy. Had he foreseen the 2008 crash?
He bought the market too early, as he warned he might. As stocks continued downward, to March 2009, he was criticized for it. Now His timing and philosophy look pretty solid.
Just as stocks have outperformed bonds over 90 years, the small cap value universe has been the stock universe that has produced the highest alpha premium ( shown academically https://docs.google.com/document/d/1kToqLWLISRk4n4YnSzv1hT5kBN54l5CvhwGgDwJKPJI/edit?usp=sharing ). One aspect to look at in planning an accumulation strategy, is to know where one falls in the "investment life cycle". If one falls in the 20 - 50 age demographic, then it makes sense and as early as possible, that one would want to maximize the growth of their stake with an initial core accrual of SCV; and preferably in a self directed tax deferred account. From there, as their investment options within work 401k plans become more restricted, they can add other universes or styles, such as growth and large cap stocks ( as these tend to be common style offerings the many 401k plans ). The compounding power of the small cap value in the beginning years of the cycle is can assure, statistically, that terminal asset value into spending phase will be highest. This is a simple fact that investors don't realize. And the "time" factor holds an advantage in being able to riding out the volatility and "in and out of favor" idiosyncratic to SCV.
Even holding increasing allocations of stocks (vs. bonds) into the "final" years of life (in the retirement phase) has shown to provide the best extension of assets ( study by R. Weigands "Market Signals for When to Employ a Bonds-First Withdrawal Sequence to Extend the Longevity of Retirees’ Portfolios" ). This newer thinking about investment glide path allocations in retirement years has shown that an investor / retiree spend from bonds first and stocks last ( and build a "safe money" fund or bucket of approx. 2 years of expenses which can be used if needed or spent before bonds). Under the small cap value premise, near retirement, as the core small cap would have had maximal grown over x years, an investor could convert some of the stake to bonds and "safe money". The small cap would continue grow maximally into retirement.
As for an investor in the "present environment" who has a large stock allocation and is considering retirement, a "sequence of returns" risk may be high right now. This being a scenario where an investor chooses retirement at the "top" of or a declining equity market, and proceeds to spend out of the account (as the asset value is declining); a double whammy .. One option is to use a tactical asset allocation process for X % of assets ( sell to cash / bond allocation during signaling ). This can help protect assets during a percentage of the decline ( historically ). A simple tactical model involves the signaling using a price/ moving average cross of the S&P500 and long bond fund https://docs.google.com/document/d/1XwZjcWy7KlSwA7xi0rax7nevIBCtW0Uu4UZFH-Hc1ns/edit?usp=sharing ( example shown here using the NDX for equity proxy ). As one never knows when the nadir and subsequent viable "turn up" of a market decline will be, a price vs. long moving average can at least provide a mathematical trigger vs. a "guess". Unfortunately, the equity to cash allocation signal occurred on 01/02/2016, - 7% ago via S&P500.
Comments
Derf
There is more thought involved then just putting all your faith in the fact that the past 20 years shows 100% stocks out performs a balanced portfolio 90+% of the time. Isn't the mantra 'past performance doesn't guarantee future results'? Let's face it. The market can drop 80%, and Warren Buffet still doesn't have to worry about he and his wife's life style being interrupted.
Let's talk about that 95-year (1920-2015) period cited..
a) No individual investor's investing timeframe is 95 years. Not when an investor is beginning his/her their accumulation phase; certainly not when they are in, or approaching, retirement.
b)Those "on average" returns are just that-- arithmetic averages. Those returns are not smooth, but often extreme -- up and down. Recovering one's capital after the commencement of a bear may take the better part of a decade. Sometimes less, sometimes longer. Examples of "longer" include the US after the 1929 high (+20 years to recover) and Japan, post 1988 (which has not yet recovered its peak). If one is 100% in equities during one of these secular peaks, and in/entering retirement -- meaning you are pulling money out regularly --- you may find yourself in the unenviable position of running out of dough before you die.
c)Citing the example of the 95-year record of the US stock market is "observer bias". How did stocks perform during that 95 years in other markets? London? Paris? Rome? Berlin? Presumably, some of those equity markets were wiped out.
But yeah, 100% equities, sure. Go to Vegas and put your IRA on "red".
"..(In his heart of hearts, I suspect, Mr. Buffett is probably a 100 percent kinda guy.)"
That is a quote.
I think its 'wild' the author has the ability to intuit what is in another person's 'heart of hearts' -- and that he is so confident of that he puts it in writing and incorporates that psychic telepathy into his 'analysis"/advice...
Advocating any position to one of its extreme end points is always sure to stimulate a debate. That’s especially true if the subject matter is financial since no universal laws exist in that discipline. It all depends.
It all depends on the special needs and circumstances of the individual investor. What’s good for you is almost assuredly not optimum for me. I have never had the courage or conviction to go 100% into equities. On the other hand, I have never been so emotionally or practically apprehensive to be 100% out of the equity marketplace.
I suppose I am a believer in the ubiquitous 80/20 rule which seems to loosely govern a host of different endeavors. That guideline has typically defined my end points of either complete market optimism or pessimism.
Everything is obvious once you know the outcome. Explanations and claims to prescience are forever forthcoming. But given the uncertainties of the future, especially Black Swan events, those claims are often disingenuous.
I take solace in a Bertrand Russell quote. He said: “The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” I hope so since I always have persistent doubts about the marketplace.
Mark Twain captured the problem well with a famous and familiar quote. Twain said: “ It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Doubling down on Twain’s wisdom, he also said that “It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt”. Writers must run that gauntlet with each article.
I wonder if the author of the referenced article included consideration of a dedicated money pocket to accommodate emergency needs in his portfolio allocation? I do. And in my accounting scheme, I assign that safety net segment as part of my bond allocation. Each of us has his own system of scoring and sorting the major unit categories.
For what limited value it provides, my current portfolio is at about 35% equities. Since I adjust in incremental steps by nature ( I’m never positive that my decision is absolutely correct), that allocation is slightly below my longer term planned allocation. I am somewhat skeptical about near term market returns.
I thought the article was well researched. Although I do not practice the author’s conclusion, I do appreciate his perspective. It is a worthwhile read and might prompt some investors towards a more aggressive equity asset allocation. It all depends.
This has been a nice, informative, and friendly discussion. Thank you all.
Best Wishes.
Alas, the most courage I can muster is a cornucopia of good balanced funds supplemented by a few smaller "bets" on focused equity funds I think might produce outsized gains at some future point (about 20% of holdings).
But, I'm not Buffett.
Buffett gave us a good review of his concept that bad news is an investor's best friend, and that you can't time the market.
It's interesting that he had been holding his cash in U S Government bonds. Apparently, prior to that date, he wasn't a 100 percent invested sort of guy. Had he foreseen the 2008 crash?
He bought the market too early, as he warned he might. As stocks continued downward, to March 2009, he was criticized for it. Now His timing and philosophy look pretty solid.
Regards,
Ted
http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=0
One aspect to look at in planning an accumulation strategy, is to know where one falls in the "investment life cycle". If one falls in the 20 - 50 age demographic, then it makes sense and as early as possible, that one would want to maximize the growth of their stake with an initial core accrual of SCV; and preferably in a self directed tax deferred account. From there, as their investment options within work 401k plans become more restricted, they can add other universes or styles, such as growth and large cap stocks ( as these tend to be common style offerings the many 401k plans ). The compounding power of the small cap value in the beginning years of the cycle is can assure, statistically, that terminal asset value into spending phase will be highest. This is a simple fact that investors don't realize. And the "time" factor holds an advantage in being able to riding out the volatility and "in and out of favor" idiosyncratic to SCV.
Even holding increasing allocations of stocks (vs. bonds) into the "final" years of life (in the retirement phase) has shown to provide the best extension of assets ( study by R. Weigands "Market Signals for When to Employ a Bonds-First Withdrawal Sequence to Extend the Longevity of Retirees’ Portfolios" ). This newer thinking about investment glide path allocations in retirement years has shown that an investor / retiree spend from bonds first and stocks last ( and build a "safe money" fund or bucket of approx. 2 years of expenses which can be used if needed or spent before bonds). Under the small cap value premise, near retirement, as the core small cap would have had maximal grown over x years, an investor could convert some of the stake to bonds and "safe money". The small cap would continue grow maximally into retirement.
As for an investor in the "present environment" who has a large stock allocation and is considering retirement, a "sequence of returns" risk may be high right now. This being a scenario where an investor chooses retirement at the "top" of or a declining equity market, and proceeds to spend out of the account (as the asset value is declining); a double whammy .. One option is to use a tactical asset allocation process for X % of assets ( sell to cash / bond allocation during signaling ). This can help protect assets during a percentage of the decline ( historically ). A simple tactical model involves the signaling using a price/ moving average cross of the S&P500 and long bond fund https://docs.google.com/document/d/1XwZjcWy7KlSwA7xi0rax7nevIBCtW0Uu4UZFH-Hc1ns/edit?usp=sharing ( example shown here using the NDX for equity proxy ). As one never knows when the nadir and subsequent viable "turn up" of a market decline will be, a price vs. long moving average can at least provide a mathematical trigger vs. a "guess". Unfortunately, the equity to cash allocation signal occurred on 01/02/2016,
- 7% ago via S&P500.