Grok’s Tip #11: Take Grok’s pledge.
Recently, looking at some of the bad behaviors during the recent boom years, graduating MBA students came up with the idea of an oath: http://mbaoath.org/take-the-oath/
Here is Michael Lewis’s comical take:http://www.businessweek.com/magazine/co ... 337514.htm
So I figure if MBA’s can have an oath, we Bogleheads can have one too and I figured I would start the ball rolling. Except I don’t really believe in oaths so perhaps let’s call this a pledge instead:
1) I will index at least half of my equities.
2) I will own some international equities
This has been a rough recent period for US investors with international equity allocations. Europe is looking like a train wreck, Japan has gone nowhere for DECADES, and the shine is off Emerging Markets. Stay the course I say! For example, see this for my recent thoughts on Europe.
William Bernstein of course said it much better than me.http://www.morningstar.com/cover/videoC ... ?id=397761
3) I will own at least 20% bonds in my portfolio:
Benjamin Graham’s rule of thumb was to always have at least 25% of your portfolio in bonds. And yet young and/or aggressive investors sometimes propose putting 100% (or more!) of their portfolio into equities. Vanguard itself puts 90% of the Target Date 2050 fund into stocks. The rationale for this seems to be the belief that, over long enough periods of time, stocks will beat bonds.
a) Looking decade by decade, stocks have only beat bonds in 3 of the past 5 decades:
(http://www.raymondjames.com/weisswealth ... Decade.pdf
b) Over the past 30 year period, Bonds have beat stocks.http://www.bloomberg.com/news/2011-10-3 ... ntury.html
The reality is, as William Goldman used to say “Nobody knows nothing”. Faced with uncertainty, wise investors spread their bets. Do yourself a favor- buy some bonds!
4) I will avoid funky bonds like junk bonds, convertibles, structured CDs, etc.
Take your risk on the equity side! (viewtopic.php?t=66322
5) I will own some ibonds or TIPs.
6) I will not try to time the market. (See William Goldman quote above!)
7) Instead I will evaluate my portfolio for rebalancing at least once a year.
Even if I am too chicken to rebalance (think March 2009) I promise not to sell out of my stocks
when the market is down (viewtopic.php?t=66636
8) I will not put more than 10% of my portfolio in the stock of my employer
(because maybe I work for the next Enron and don’t know it. Again see William Goldman quote above).
9) I will not put more than 10% of my portfolio in individual stocks
10) I will not sell covered calls:
Selling covered calls on your stocks has never made any sense to me. You cap the upside from holding stocks in exchange for a small option premium, yet get to keep all the downside. What a deal huh! This maneuver is so obviously boneheadedly wrong, it puts me in mind of a Seinfeld episode when George Costanza, faced with multiple life failures, decides that going forward he will do the “opposite” of his instincts. If selling covered calls is obviously wrong, then perhaps one should consider BUYING calls instead such as LEAPs.
Note I’m not really strongly recommending buying calls. I think the sensible thing for most people is probably to avoid options altogether. Relatedly, another thing to avoid would be buying callable bonds- i.e. bonds with an embedded call option in them. Again here you get to keep all the interest rate risk downside of holding these bonds (if interest rates spike they will lose value) but give away the interest rate upside (if interest rates fall they will be called away from you, usually at par) usually for small increase in yield.
Note: this tip is part of a series of investing tips. The full series can be found here:viewtopic.php?f=4&t=72045
| "You can only convince people who think they can benefit from being convinced."- Taleb