I am 38 and have been investing via work sponsored 401K plans for the last decade. I've made some terrible mistakes along the way, and figured it was time to educate myself and take more control of my financial future.
I began my education by simply speaking with friends/co-workers who I considered more knowledgable about investing than myself. Through various discussions, I came to the following conclusion:
1.) My wife and I have very stable careers.
2.) We are maxing out our work sponsored 401K plans and ROTH IRAs.
3.) We are contributing to our childrens' edvest accounts.
4.) We have 6 months of expenses saved.
5.) We have 20+ years until retirement.
6.) We pray for significant drops in stocks so that we can acquire them up at low prices.
leading to...
7.) We have nothing but time on our sides, so we should be investing in 100% equities.
Well, so I thought, until I read All About Asset Allocation, by Richard Ferri. In his book, he makes a compelling case for even the most aggressive investors to contain at least 20% bonds in their portfolio. I'm hoping that someone could provide clarification on his arguments? Below are his thoughts on making his case.
First argument
This is an intriguing statement, but I can't help but feel as though he's suggesting that I should be market timing somehow. Or is he suggesting that simple rebalancing will achieve this effect of buying low and selling high? It’s not very clear.when stocks fall in value, investors should take that opportunity to buy more stocks. a 100 percent stock portfolio precludes this from happening. A 20 percent bond allocation will allow stocks to be purchased in a down market.
Second argument
If I understand correctly, he's suggesting that negatively correlated assets help reduce risk, while increasing returns. Or in other words, by dampening the market highs and lows, you stand to gain more via compounded returns over the long run. This part confuses me. Could someone shed light as to how this compounding of returns works by compressing the highs and lows?higher volatility of returns leads to lower compounded returns and vice versa. Accordingly, any strategy that lowers the return volatility of the portfolio without lowering the simple average return will increase the compounded return.
I'd really like to understand more about his arguments before ditching my 100% equity allocation strategy and adopting an 80/20 stock/bond allocation strategy.
Thanks so much for taking the time to read this post and potentially offer any useful insight!