OK, I get it. Bernstein's "Intelligent Asset Allocator" recommends adding bonds to reduce portfolio volatility while adding return. What I don't get from "AA" is the bias for 10-20% bonds (at any cost) and the admonition against small-cap growth (SCG). He spends the entire book teaching asset allocation and not chasing performance or momentum. He freely admits that the last 70 years are not necessarily prologue. Then he shoots down SCG on its dismal record but doesn't temper this by admitting that a SCG hedge might not be a bad idea. And as someone has already pointed out, this is where the next Microsoft is coming from.
But has his AA plan been examined in today's interest-rate environment? Where "Interest rates can't possibly get any lower"? Where bonds are going to be crunched by the next rate increase? (Stand by for the day after the Nov elections.) I'm partway into "Four Pillars" without finding any solutions, but the history is more interesting than the analysis. Maybe I should just hold my criticism until "Birth of Plenty" comes out.
I could let these questions pile up if he offered alternatives. For example, let's go back to the bond-allocation question. I have a govt COLA pension now and spouse will get her own in 17 years. She'll work part-time for the next three-five years (very low portfolio withdrawal rate) and then we'll step up the burn for 12-14 years until her pension kicks in. At that point we'll be sixty and presumably blessed with another four decades of longevity (and Tricare Retired). Our retirement portfolio burn rate never exceeds 5% during the low-income years and it'll drop below 3% after the second pension kicks in. Even if it rises to (*shudder*) 8% for 10 years we'll still survive.
So, with two COLA pensions and a portfolio expected to survive the worst we've seen in this millennium, why start owning bonds? We keep two years' expenses in cash (CDs & MMs) and that worked well during the 2000-2003 "trial period". We're replenishing that cash stash from 2003's runup and we'll draw it down again during 2004-5 if necessary (not so far). I agree that bonds could tamp down the volatility but with low withdrawal rates it hardly seems necessary. And with bond funds ducking every time Greenspan burps... I'm really afraid to put 10% of ANYTHING into them.
Our retirement portfolio allocation is more chunks than slices. The tax-deferred portion is less than 20% of the total, spread among two conventional IRAs (Roth conversions coming soon), a tiny 401(K), and two tinier Roths. Aside from the two years' cash, the portfolio is 37% Tweedy Browne Global Value (TBGVX), 30% Berkshire Hathaway (BRK.B), 28% iShares S&P600/Barra Small-cap Growth ETF (IJT), and 5% iShares Dow Jones Select Dividend Industrials ETF (DVY). Most of the tax-deferred is TBGVX and a couple percent is IJT but the rest of the portfolio is all taxable accounts. Everything else is spoken for-- the kid's college fund is on track and contributed to from expenses. Roth contributions are part of our budgeted expenses. We don't do REITs since we own a rental and might buy more.
My point is that this portfolio is already heavily weighted toward tax-efficient value, mostly large-cap but a significant minority of small-cap. Intelligently allocating assets would seem to endorse 28% in hard-core small-cap growth, even despite Bernstein's prejudice against this category. (It didn't hurt a bit last year!) I wouldn't want to go 100% value for the same reason that he doesn't like growth-- value has underperformed for significant periods and may do so again. SCG has been a long-term laggard and may also be due for reversion to the mean. Our portfolio withdrawals will have the flexibility of harvesting whichever category has had the better year.
And while bonds would tamp out volatility, why bother? The volatility is breath-taking but we operationally tested 40% and survived with only minor emotional scarring (healed by 2003). With a two-year stash of expenses, and withdrawal less than 5%, you'd think that the portfolio would weather another bear-market correction without needing to risk losing money on bond funds during rising interest rates.
I'm deeply prejudiced against mutual-fund expenses/management, and I am a Buffett-head. That subjectivity aside, has anyone else noted Bernstein's inconsistencies? Anyone have a better solution?
But has his AA plan been examined in today's interest-rate environment? Where "Interest rates can't possibly get any lower"? Where bonds are going to be crunched by the next rate increase? (Stand by for the day after the Nov elections.) I'm partway into "Four Pillars" without finding any solutions, but the history is more interesting than the analysis. Maybe I should just hold my criticism until "Birth of Plenty" comes out.
I could let these questions pile up if he offered alternatives. For example, let's go back to the bond-allocation question. I have a govt COLA pension now and spouse will get her own in 17 years. She'll work part-time for the next three-five years (very low portfolio withdrawal rate) and then we'll step up the burn for 12-14 years until her pension kicks in. At that point we'll be sixty and presumably blessed with another four decades of longevity (and Tricare Retired). Our retirement portfolio burn rate never exceeds 5% during the low-income years and it'll drop below 3% after the second pension kicks in. Even if it rises to (*shudder*) 8% for 10 years we'll still survive.
So, with two COLA pensions and a portfolio expected to survive the worst we've seen in this millennium, why start owning bonds? We keep two years' expenses in cash (CDs & MMs) and that worked well during the 2000-2003 "trial period". We're replenishing that cash stash from 2003's runup and we'll draw it down again during 2004-5 if necessary (not so far). I agree that bonds could tamp down the volatility but with low withdrawal rates it hardly seems necessary. And with bond funds ducking every time Greenspan burps... I'm really afraid to put 10% of ANYTHING into them.
Our retirement portfolio allocation is more chunks than slices. The tax-deferred portion is less than 20% of the total, spread among two conventional IRAs (Roth conversions coming soon), a tiny 401(K), and two tinier Roths. Aside from the two years' cash, the portfolio is 37% Tweedy Browne Global Value (TBGVX), 30% Berkshire Hathaway (BRK.B), 28% iShares S&P600/Barra Small-cap Growth ETF (IJT), and 5% iShares Dow Jones Select Dividend Industrials ETF (DVY). Most of the tax-deferred is TBGVX and a couple percent is IJT but the rest of the portfolio is all taxable accounts. Everything else is spoken for-- the kid's college fund is on track and contributed to from expenses. Roth contributions are part of our budgeted expenses. We don't do REITs since we own a rental and might buy more.
My point is that this portfolio is already heavily weighted toward tax-efficient value, mostly large-cap but a significant minority of small-cap. Intelligently allocating assets would seem to endorse 28% in hard-core small-cap growth, even despite Bernstein's prejudice against this category. (It didn't hurt a bit last year!) I wouldn't want to go 100% value for the same reason that he doesn't like growth-- value has underperformed for significant periods and may do so again. SCG has been a long-term laggard and may also be due for reversion to the mean. Our portfolio withdrawals will have the flexibility of harvesting whichever category has had the better year.
And while bonds would tamp out volatility, why bother? The volatility is breath-taking but we operationally tested 40% and survived with only minor emotional scarring (healed by 2003). With a two-year stash of expenses, and withdrawal less than 5%, you'd think that the portfolio would weather another bear-market correction without needing to risk losing money on bond funds during rising interest rates.
I'm deeply prejudiced against mutual-fund expenses/management, and I am a Buffett-head. That subjectivity aside, has anyone else noted Bernstein's inconsistencies? Anyone have a better solution?