Onward
Thinks s/he gets paid by the post
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The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40.
A random walk down dangers in diversification
The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40.
I think that allocation [Bogle's recommended "age= % in bonds" formula] is particularly wrong today because we are in an age of financial repression. ... Europe and Japan are having trouble reining in budget deficits, and we have high debt in the U.S., too. (The governments) are deliberately keeping interest rates down. Even a U.S. bond index fund is not the right thing to do, because BND [Vanguard Total Bond Market ETF] is about two-thirds government or agency bonds.
The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40.
- Cash: 5 percent
- Dividend growth stocks, emerging market bonds and tax-exempt bonds: 27.5 percent
- REITs: 12.5 percent
- Stocks: 55 percent
You use that as a starting point and move allocations up or down, depending on your age.
"And, Americans can avoid the risk of outliving their assets by ... working longer,...."
What's happening to interest rates/bond rates is not originating in the market. It is the result of deliberate government policies that are external to the market, which then get priced into the products (by the market).From the report linked I take it Burton believe's market timing does work on bonds but not stocks.
A self-inflicted bullet to the head works too, and probably less painful....
Year | Inflation |
2000 | 3.4 |
2001 | 2.8 |
2002 | 1.6 |
2003 | 2.3 |
2004 | 2.7 |
2005 | 3.4 |
2006 | 3.2 |
2007 | 2.8 |
2008 | 3.8 |
2009 | -0.4 |
2010 | 1.6 |
2011 | 3.2 |
2012 | 2.1 |
2013 | 1.5 YTD |
From the report linked I take it Burton believe's market timing does work on bonds but not stocks. Also apparently he is totally discounting the possiblity that the "government interference" that is occuring could result in deflation as opposed to inflation, which would make bonds the best performing asset class.
Here's the inflation since 2000. Except for 2009, there was no deflation. Looking forward, it is difficult to see how it can recur.
Year Inflation 2000 3.4 2001 2.8 2002 1.6 2003 2.3 2004 2.7 2005 3.4 2006 3.2 2007 2.8 2008 3.8 2009 -0.4 2010 1.6 2011 3.2 2012 2.1 2013 1.5 YTD
No matter how you spin it, he's in essence saying increase your stock allocation (w dividend growth stocks) and put your (now reduced by some unknown amount) TBM into emerging market bonds (no risks there?) and tax-exempt bonds. IOW, he's saying change your AA to favor stocks, without being direct. Of course higher stock allocation (historically) provides a greater return, but risk increases as well...would be nice for folks recommending bond fund alternatives acknowledge risk too.Very interesting. Thanks for posting.
Here's what Malkiel now recommends.
The updated portfolio for an investor in his or her 50s would look like:I just thought about EM sovereign bonds yesterday, and have dipped my toe in that. Public debt load of EM countries is lower than that of developed ones.
Cash: 5 percent
Dividend growth stocks, emerging market bonds and tax-exempt bonds: 27.5 percent
REITs: 12.5 percent
Stocks: 55 percent
You use that as a starting point and move allocations up or down, depending on your age.
No matter how you spin it, isn't he in essence saying increase your stock allocation (w dividend growth stocks) and put your (now reduced by some unknown amount) TBM into emerging market bonds and tax-exempt bonds?
Malkiel (and everybody else including yours truly) is basically telling investors that the 30 year bond party is over and to push your equity risk tolerance to the max.
I like to follow two rules of thumb regarding asset allocation. In a normal market, where good quality intermediate bonds can deliver a 2% real return, we are "moderate" investors.
Rule 1: A conservative investor should have his age in fixed income. Moderate investor age-10. Aggressive investor age -20. Since all good quality short to intermediate fixed income is so expensive, I allow our port to go from moderate to aggressive.
Rule 2: Fixed income allocation = annual SWR X 10. E.g. SWR = 3% FI = 3% ext.
Our port: 65% equities + 35% FI. Age = 56. Gross AWR = 3.50%. TER = 0.76%. Term = 39 years.
(Bold added). I think it is generally a mistake to use "risk" and "volatility" interchangeably (I do it too, and I know it is accepted shorthand in the "biz"). Stocks do have higher volatility, but if we are worried about staying ahead of inflation over the long haul and producing enough return to retire starting with a "pot" less than 50x annual spending, then a broad portfolio of stocks has less risk (of the we kind should care about) than a portfolio of 80% bonds.Of course higher stock allocation (historically) provides a greater return, but risk increases as well...would be nice for folks recommending bond fund alternatives acknowledge risk too.
Though bond funds seem unlikely to provide a real return in the mid/long term ahead of us, stocks are still subject to more volatility - even high quality dividend growth stocks.
That's the thing. Cash has "risk" too -- the risk of inflation and after-tax returns not keeping up with inflation (let alone growing).(Bold added). I think it is generally a mistake to use "risk" and "volatility" interchangeable (I do it too, and I know it is accepted shorthand in the "biz"). Stocks do have higher volatility, but if we are worried about staying ahead of inflation over the long haul and producing enough return to retire starting with a "pot" less than 50x annual spending, then a broad portfolio of stocks has less risk (of the the we should care about) than a portfolio of 80% bonds.