New Trend [Asset Allocation]

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New Trend [Asset Allocation]

Postby stemikger » Mon Dec 31, 2012 8:51 am

Has anyone noticed that many of the professionals are recommending higher asset allocation models for long term investors than they did 5 years ago? When I came here I was around 45 and I had 70% in equities and 30% in bonds and many told me I was too aggressive. I slowly lowered my AA and I have been at 60/40 since.

I am reading the book The Elements of Investing by Malkiel and Ellis and for someone in their 40s and 50s their low end is 65/35 for Malkiel and Ellis is even higher at 85/15 for someone in their 40s. I also noticed this in Money magazine and on the radio other gurus seem to be recommending higher AA.

The only person who hasn’t flipped flopped on this is Mr. Bogle.

Is this because bonds are paying practically nothing right now? Or that they foresee the market has changed going forward and you need to take more equity risk to get the returns of yesterday with less risk.
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Re: New Trend

Postby bUU » Mon Dec 31, 2012 8:59 am

It also has to do with time horizons increasing (i.e., people generally living longer).
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Re: New Trend

Postby Random Walker » Mon Dec 31, 2012 10:10 am

I've read Ellis' Winning The Loser's Game several times. Every time I read it I come away with a desire to maintain my aggressive AA. I think it is because he makes it clear that inflation is one of our biggest enemies. Put that together with the fact that we are living longer than ever and I can see why people keep tweaking upwards their AA recommendations.

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Re: New Trend

Postby nisiprius » Mon Dec 31, 2012 10:22 am

Random Walker wrote:...the fact that we are living longer than ever
bicker wrote:It also has to do with time horizons increasing (i.e., people generally living longer).
No, it doesn't. That's a rationalization. People keep repeating it because it sounds plausible, but the numbers don't support it.

Life expectancy at age 65 has been increasing, yes, but only by about one year per decade, and would, at the most, justify an increase in recommended stock allocation of a couple of percent higher than twenty years ago--not the 15-20% that has actually occurred. Longevity is not the explanation for the change in advice.

Image

I don't have numbers, but I honestly believe that medical advances have made a big extension in the expectation of quality life. But there hasn't been all that big a change in the life span, years until death, itself. Life expectancy at birth is a statistical average. Its increases mostly reflect improvements in infant and child mortality. The years when the big tombstones of the parents were typically surrounded by many little tombstones of their buried children are gone.

But it's not as if people customarily died in their thirties and forties a century ago, apart from women dying in childbirth. It was reasonably common for people to live to a ripe old age in their eighties and nineties. In the early 1900s, the Boston Post used to award ornate canes to the oldest man living in each of 700 Massachusetts towns,
Image
and the recipients were often in their 90s.
Last edited by nisiprius on Mon Dec 31, 2012 10:38 am, edited 1 time in total.
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Re: New Trend

Postby nedsaid » Mon Dec 31, 2012 10:32 am

Maybe people aren't saving enough and are hoping that a stock heavy portfolio will bail them out.

It might also have to do with interest rates being so low. This is why I have not rebalanced my portfolio, it is hard to be enthusiastic about 2-3 percent yields. I am still buying bond funds with 40 percent of my new money, though I am not enthusiastic about it.

The third factor is that the market has been flat since 2000 and historically stock markets do very well after long periods of under performance. There is no guarantee this will happen.
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Re: New Trend

Postby WendyW » Mon Dec 31, 2012 10:33 am

'
This old allocation seems to have gone the way of the dodo...

Equities = 100 - age

Now it seems to be at least...

Equities = 110 - age
...or...
Equities = 120 - age
...or even...
Equities = 130 - age

I'm a supporter of these higher allocations to equities, as equities have historically "won" in the long term.

I find it reassuring that all of the major target date funds are using a 120-age or 130-age allocation to equities.
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Re: New Trend

Postby bUU » Mon Dec 31, 2012 10:39 am

nisiprius wrote:
Random Walker wrote:...the fact that we are living longer than ever
bicker wrote:It also has to do with time horizons increasing (i.e., people generally living longer).
No, it doesn't. That's a rationalization. People keep repeating it because it sounds good, but the numbers don't support it. Life expectancy at age 65 has been increasing, yes, but only by about one year per decade, and would, at the most, justify an increase in recommended stock allocation of a couple of percent higher than twenty years ago--not the 15-20% that has actually occurred. Longevity is not the explanation for the increase.
You do realize, I hope, that you contradicted yourself, implying that the increase has nothing to do with people living longer and then admitting at least as much as it would explain "a couple of percent".

Beyond that, you seem to imply that that 4% increase would necessarily map to only a 4% change in the asset allocation split. Why? There are so many factors that go into moving the depletion curves for retirement savings out 4% that saying that a 4% change in the asset allocation split would account for it doesn't make sense to me. Perhaps I'm missing something important.
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Re: New Trend

Postby l2ridehd » Mon Dec 31, 2012 11:03 am

Two other major factors that impacts this split is retirement age. The average age when people retire has moved up 4.4 years in the past 30 years. That is huge. And the current recommendation among most planners is work a few more years and also take SS at 70 vs 65 or 62. All of those factors should have an impact on equity/bond split. Take those along with the 2% increase in life span and maybe 110 - age is a better planning tool for today's investor.
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Re: New Trend

Postby whaleknives » Mon Dec 31, 2012 11:54 am

WendyW wrote:This old allocation seems to have gone the way of the dodo...Equities = 100 - age

It seems there's always been a wide range in John Bogle's recommendations for stock allocation. Bogle on Mutual Funds (1994) gives "bond. . . roughly equal to your age" as "A Simple Rule of Thumb", but in the same chapter his "Basic Allocation Model" figure shows a 70/30 stock/bond split for the older accumulation phase, and 60/40 for the younger distribution phase. You are left to decide how and when to transition.

Maybe more folks retired younger then. Does anyone have any trends on average retirement ages?
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Re: New Trend

Postby nisiprius » Mon Dec 31, 2012 11:57 am

bicker wrote:
nisiprius wrote:
bicker wrote:It also has to do with time horizons increasing (i.e., people generally living longer).
No, it doesn't. That's a rationalization. People keep repeating it because it sounds good, but the numbers don't support it. Life expectancy at age 65 has been increasing, yes, but only by about one year per decade, and would, at the most, justify an increase in recommended stock allocation of a couple of percent higher than twenty years ago--not the 15-20% that has actually occurred. Longevity is not the explanation for the increase.
You do realize, I hope, that you contradicted yourself, implying that the increase has nothing to do with people living longer and then admitting at least as much as it would explain "a couple of percent".
I could engage in some self-protective rhetoric, but instead I'll just say "you're right."
Beyond that, you seem to imply that that 4% increase would necessarily map to only a 4% change in the asset allocation split. Why? There are so many factors that go into moving the depletion curves for retirement savings out 4% that saying that a 4% change in the asset allocation split would account for it doesn't make sense to me. Perhaps I'm missing something important.
OK, show me how you calculate the appropriate change in stock allocation for an additional 2-year life expectancy at age 65. I'll bet you've never done it yourself, and I'll bet you can't find me a print source in which anyone has.

As Wikipedia says, {{citation needed}}--show me some source, any source, that shows that the quantitative change in investment advice is derived from a quantitative calculation based on slightly increased life expectancy, as opposed to life expectancy just being a facile after-the-fact explanation of a change that's happened for some other reason.

I think it's just fashion and trendiness. The Great Bull Market of the 1990s, the publication of Jeremy Siegel's Stocks For The Long Run, and self-interest of the investment industry, which had to work so hard to get 401(k) savers to accept stocks in the first place and is worried about what will happen if they can't get people to forget 2008-2009.

I fancy that in 2006 some Vanguard people met in a conference room and said "We'd better up the stock allocations in the target funds, everyone else is doing it and we're out of step."

I don't think the small increase in longevity explains higher stock allocations any more than it explains the increased popularity of body piercing.
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Re: New Trend

Postby Levett » Mon Dec 31, 2012 12:22 pm

Wendy wrote: "as equities have historically "won" in the long term."

Wendy, I ask politely: how long is the "long term?"

I also ask--no less politely: how do you define "winning?"

Thanx.

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Re: New Trend

Postby nisiprius » Mon Dec 31, 2012 12:26 pm

1) The difference in life expectancy between males and females at age 65 is about three years. This is almost as large as the increase in life expectancy overall over the last couple of decades. If longevity is an important factor justifying the increase in recommended stock allocations, then, all along, recommended stock allocations should have be significantly higher for females than they are for males. Were they? Are they?

Has anyone even seen a guide that suggests that women should have higher stock allocations than men?

Here are Morningstar's benchmark glide slopes for target retirement fund asset allocations.
Image
The steepest slope of the steepest curve is Aggressive, at age 55, where the stock allocation is declining 1.86% per year.

2) So, if people are retiring, say, 4 years later than they were twenty years ago, everyone is 4 years farther from retirement, which would justify at most 7-8% boost in stock allocation prior to retirement. I'd appreciate any data anyone can bring to bear on what the actual change in "average recommendation" has been.

3) If they are retiring 4 years later, but only living 2 years more, then they are living 2 years less in retirement then they were twenty years ago, and the recommended stock allocation in retirement should be less than before. Is it?
Last edited by nisiprius on Mon Dec 31, 2012 12:28 pm, edited 1 time in total.
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Re: New Trend

Postby bUU » Mon Dec 31, 2012 12:28 pm

nisiprius wrote:OK, show me how you calculate the appropriate change in stock allocation for an additional 2-year life expectancy at age 65.
The point I made is that you cannot do it simply. You'd have to ask the experts who are putting the recommendations how each of them arrived at those numbers, but it seems most likely to me that they didn't arrive at them by applying a modifier to the old asset allocation breakdowns but rather worked out the new asset allocation breakdown from scratch, assessing all the aspects of the financial environment that will have impact.

nisiprius wrote:I think it's just fashion and trendiness.
What makes you think that the old asset allocation breakdown recommendations were any different? What makes you think that the old asset allocation breakdown recommendations were biased sufficiently toward equities to start with?

nisiprius wrote:I don't think the small increase in longevity explains higher stock allocations any more than it explains the increased popularity of body piercing.
You've gone back to rhetorical corruption-to-absolutism.
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Re: New Trend

Postby hazlitt777 » Mon Dec 31, 2012 12:36 pm

stemikger wrote:Has anyone noticed that many of the professionals are recommending higher asset allocation models for long term investors than they did 5 years ago? ......

The only person who hasn’t flipped flopped on this is Mr. Bogle.

Is this because bonds are paying practically nothing right now? Or that they foresee the market has changed going forward and you need to take more equity risk to get the returns of yesterday with less risk.


Yes, I have. I think many of us see ourselves as facing an unusually high inflation prone investment environment. I am seeing three responses to this, speaking very generally:

Bogle: Hold fast, keep your allocation and rebalance.
Malkiel and Ellis etc: Do a little tactical asset allocation, increase your allocation a bit toward equities to compensate.
Permanent Portfolio: Hold Fast, keep your allocation and rebalance, but include gold.
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Re: New Trend

Postby ofcmetz » Mon Dec 31, 2012 12:57 pm

stemikger wrote:Has anyone noticed that many of the professionals are recommending higher asset allocation models for long term investors than they did 5 years ago? When I came here I was around 45 and I had 70% in equities and 30% in bonds and many told me I was too aggressive. I slowly lowered my AA and I have been at 60/40 since.

I am reading the book The Elements of Investing by Malkiel and Ellis and for someone in their 40s and 50s their low end is 65/35 for Malkiel and Ellis is even higher at 85/15 for someone in their 40s. I also noticed this in Money magazine and on the radio other gurus seem to be recommending higher AA.

The only person who hasn’t flipped flopped on this is Mr. Bogle.

Is this because bonds are paying practically nothing right now? Or that they foresee the market has changed going forward and you need to take more equity risk to get the returns of yesterday with less risk.



I think some may be doing this because of the low expected future returns on bonds. I am saving more than I would otherwise rather than adopting a more aggressive allocation. It's kind of a hard sell to tell people to save more when you could just tell them to own less bonds and own more dividend paying stocks.

I haven't noticed big change in recommended asset allocations in general. Would be interesting I guess to see what authors/ professionals have changed their recommendations over the last few years. I read the Element of Investing and quite enjoyed it. I did find the recommended asset allocations to be on the aggressive side just as I find the Vanguard Target Retirement Funds to have allocations on the aggressive side.
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Re: New Trend

Postby Watty » Mon Dec 31, 2012 1:23 pm

"..the pirates code is more what you'd call "guidelines" than actual rules. " Barbossa in Pirates of the Caribbean.

New Trend


There is nothing new about there being a wide range of suggestions on what the best asset allocation is.

The targeted date retirement funds (2040,2050, etc) have had major differences between fund families for as long as they have existed.

"..the pirates code is more what you'd call "guidelines" than actual rules. " Barbossa in Pirates of the Caribbean.
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Re: New Trend [Asset Allocation]

Postby Aptenodytes » Mon Dec 31, 2012 1:42 pm

A simple explanation would be that in the old days the advice was based on very rough intuition and guesswork. 100-age in equities was a good round number that sufficed in the absence of anything better. But it was essentially made up.

In the interim we've had the accumulation of databases, research, and scenario tools that let us do better than guesswork. So my hypothesis is that it isn't so much that advisers are getting more aggressive, but that they are basing their advice on more robust data and methods.
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Re: New Trend [Asset Allocation]

Postby Levett » Mon Dec 31, 2012 3:55 pm

"Has anyone even seen a guide that suggests that women should have higher stock allocations than men?"

No, I haven't.

What I have seen is that women a) invest more conservatively than men; b) trade less; c) tend to be prudent money managers.

My wife displays all three attributes--very much to her credit and success. :beer

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Re: New Trend [Asset Allocation]

Postby pennstater2005 » Mon Dec 31, 2012 4:19 pm

I've tinkered with my AA over the last few months until I finally settled on something I'm comfortable with. I decided this based on actual need for risk/return. I sleep great.
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Re: New Trend [Asset Allocation]

Postby sls239 » Mon Dec 31, 2012 4:19 pm

It isn't so much that they've thrown out the 100-age and substituted 130-age, they've abandoned the straight line altogether. You happened to have been in the age bracket most affected by this change from straight lines to "glide-paths" as this change occurred.
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Re: New Trend [Asset Allocation]

Postby umfundi » Mon Dec 31, 2012 8:03 pm

I fancy that in 2006 some Vanguard people met in a conference room and said "We'd better up the stock allocations in the target funds, everyone else is doing it and we're out of step."


That is more dead on than you could ever imagine. Vanguard upped their stock allocations because the competitors were showing better returns.

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Re: New Trend [Asset Allocation]

Postby lloydbraun » Mon Dec 31, 2012 8:11 pm

You also have to remember that Bogle recommends that you include expected social security income as part of your bond allocation, which would increase one's stock mutual fund holdings relative to bond mutual fund holdings.
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Re: New Trend [Asset Allocation]

Postby hazlitt777 » Tue Jan 01, 2013 9:06 am

I forgot to mention that in a recent interview Mr. Bogle recommended, or at least gave his blessing to a larger allocation of ones bonds to corporate bonds.

p.s.

The link to that interview use to be here: viewtopic.php?f=10&t=106760
but is gone now for some reason.
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Re: New Trend [Asset Allocation]

Postby Call_Me_Op » Tue Jan 01, 2013 9:34 am

One major factor not mentioned often (enough) is need to take risk. Of course, this requires you to project needed income and be comfortable with that number. For example, a 50 year-old with expenses of 30k/year and a net-worth of over 2 million does not need to take much risk; 30% in equities is more than adequate.

Age-based formulas make little sense. If you want to take as much risk as you can stomach, use the formula:

Equity Allocation (%) = 2*tolerable loss (%)
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Re: New Trend [Asset Allocation]

Postby Beagler » Tue Jan 01, 2013 9:59 am

This question could be aimed at the managers of VG's TR Funds, who have made the funds far more aggressive since their inception. I'm aware of no sentinel financial publications that would have informed such changes.
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