A 1989-vintage guideline. Age 65: 0% to 20% stocks!

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A 1989-vintage guideline. Age 65: 0% to 20% stocks!

Post by nisiprius »

Google Books finds me an article, "Investing for Retirement," by Warren Boroson, ABA Journal, February 1989, p. 80-82. His suggested asset allocations for retirees and near-retirees is an eye-opener:

Image

I don't know what to make of this but it amply confirms my impressions that the conventional wisdom has just been getting more and more and more aggressive over time, for no very good reason that I can determine. (Don't say "people are living longer" or I'll scream... between 1989 and 2007, life expectancy at age 65 increased by about one year).

It is interesting that of late cash has become passé, virtually eradicated from the portfolio. As noted in another thread, Vanguard's investor questionnaire never suggests any short-term reserves at all, no matter what answers you give it. Yet in 1989 it was suggested that retirees keep 30-50% of their portfolio in cash.

What piques me is not whether these allocations were right or wrong, but the obvious evidence of faddishness and trendiness in investment advice. In 1989, we were being told that retirees should have 0-20% in stocks, 50% bonds, and 30%-50% cash. Today, Vanguard Target Retirement 2010 would put someone at retirement in 47.53% stocks, 51.94% bonds, and a whopping 0.53% short-term reserves. There is just no conceivable theory under which both of these recommendations could be right.
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Post by beardsworth »

I suspect it's because in 1989 the inflation of the late 70s/early 80s––a bad time for stocks and for long–term bond funds––was still in recent memory, as was the sudden crash of 1987. It was still a fairly good period for bond and CD rates. . . . At the other end of the time continuum, the relative current aggressiveness still bears fond memories of the greatest bull market for stocks in any living person's lifetime.
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Post by tfb »

Do we know if this was mainstream back then or just one person's opinion? There are bearish recommendations today as well.
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Post by Manbaerpig »

if memory serves, money market accounts in the late 80s were paying 5%+
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Post by sport »

Manbaerpig wrote:if memory serves, money market accounts in the late 80s were paying 5%+
In the early 80s they were paying 14 to 18%.

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Post by nisiprius »

jsl11 wrote:
Manbaerpig wrote:if memory serves, money market accounts in the late 80s were paying 5%+
In the early 80s they were paying 14 to 18%.

Jeff
And everyone was perfectly aware that that was only a few percent more than inflation.
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Post by Beantown85 »

nisiprius wrote:
jsl11 wrote:
Manbaerpig wrote:if memory serves, money market accounts in the late 80s were paying 5%+
In the early 80s they were paying 14 to 18%.

Jeff
And everyone was perfectly aware that that was only a few percent more than inflation.
But money market accounts certainly aren't paying a few percent more than inflation right now.
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Post by vlad »

I agree with that old guideline.
If you have to take a risk greater than 20% stocks, you should keep working, not take on the risk.
It's just common sense - which is apparently in short supply in this age of marketing.
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Post by nisiprius »

Well, here's what Working Mother magazine had to say in 1988. "Up to 60% of savings," not counting emergency fund, in "Short-term Treasuries, EE savings bonds, zero coupon bonds." 60%! No more than 30% in "municipal bonds or bond funds." No more than 40% in "blue-chip mutual funds." And :) no more than 7% in gold and precious-metal funds.

Image
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Post by vlad »

Perhaps a little too conservative, but a heck of a lot smarter than the current idea that everyone - even retirees - should have 50%-90% in stocks.
But this was before the greed heads on Wall Street and their mouthpieces in the media started the mass brainwashing of the suckers.
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Post by alec »

I bet if you look at TIAA-CREF's publications in the late 80's you'd see a lot of annuitization talk.

edited to add: Good lord, that article could've been written last week if we just changed a couple of interest rates. It appears that personal finance "journalists" have been writing the same crud since the 1980's.
Last edited by alec on Thu Apr 21, 2011 8:13 pm, edited 1 time in total.
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Re: A 1989-vintage guideline. Age 65: 0% to 20% stocks!

Post by LH »

nisiprius wrote:Google Books finds me an article, "Investing for Retirement," by Warren Boroson, ABA Journal, February 1989, p. 80-82. His suggested asset allocations for retirees and near-retirees is an eye-opener:

Image

I don't know what to make of this but it amply confirms my impressions that the conventional wisdom has just been getting more and more and more aggressive over time, for no very good reason that I can determine. (Don't say "people are living longer" or I'll scream... between 1989 and 2007, life expectancy at age 65 increased by about one year).

It is interesting that of late cash has become passé, virtually eradicated from the portfolio. As noted in another thread, Vanguard's investor questionnaire never suggests any short-term reserves at all, no matter what answers you give it. Yet in 1989 it was suggested that retirees keep 30-50% of their portfolio in cash.

What piques me is not whether these allocations were right or wrong, but the obvious evidence of faddishness and trendiness in investment advice. In 1989, we were being told that retirees should have 0-20% in stocks, 50% bonds, and 30%-50% cash. Today, Vanguard Target Retirement 2010 would put someone at retirement in 47.53% stocks, 51.94% bonds, and a whopping 0.53% short-term reserves. There is just no conceivable theory under which both of these recommendations could be right.
well.....

people ARE living longer : P

I dunno, you found some examples. That does not a trend make. Interesting question though. Really, over past couple years, things have become more conservative.
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Post by retcaveman »

vlad wrote:Perhaps a little too conservative, but a heck of a lot smarter than the current idea that everyone - even retirees - should have 50%-90% in stocks.
But this was before the greed heads on Wall Street and their mouthpieces in the media started the mass brainwashing of the suckers.
Did the change to more aggressive allocations coincide with the move from DB pension plans to DC plans like 401k's? The message was/is something like, "without a pension, you must invest (risk) more in the stock market in order to have enough money to retire."
"The wants of mortals are containers that can never be filled." (Socrates)
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Post by vlad »

If people are indeed living longer, in a rational objective world fixed annuities would be more rather than (I would guess) less popular. But how often do we hear that such an option is a good idea for at least some of one's retirement dollars?
I attribute the overpopularity of equities to (1) intentional and unintentional bad advice from the usual corrupt and clueless sources and (2) the idea that optimistic Americans seem to have that we will win the lottery because we are so deserving.
The fact that in the last couple of years unwarranted optimism has been replaced with undue pessimism means that stocks are (temporarily I think) out of favor and they are (temporarily I think) a good buy.
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Post by joe8d »

What piques me is not whether these allocations were right or wrong, but the obvious evidence of faddishness and trendiness in investment advice. In 1989, we were being told that retirees should have 0-20% in stocks, 50% bonds, and 30%-50% cash. Today, Vanguard Target Retirement 2010 would put someone at retirement in 47.53% stocks, 51.94% bonds, and a whopping 0.53% short-term reserves. There is just no conceivable theory under which both of these recommendations could be right.
Under "Normal" conditions,MMF's would be paying at least the inflation rate.
All the Best, | Joe
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Post by vlad »

Of course, caveman, the advice that "without a pension, you must invest (risk) more in the stock market in order to have enough money to retire" is awful. It's like saying if you can't afford to lose any money at the casino you shouldn't avoid it, you should just bet more. Unfortunately, some planning tools do just that.
I do think it is valid to risk more when you are far from retirement and have time to recover from losses, but for most of us that recovery becomes more difficult for many reasons as we approach retirement.
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Post by neverknow »

tfb wrote:Do we know if this was mainstream back then or just one person's opinion? There are bearish recommendations today as well.
Looks mainstream (for the times) to me. I began investing in the early 80's -- where middle of the road common advice (Money Magazine) was for a working person ... 60% equities / 40% bonds -- and the way I heard it was that if you earned 1-2% over inflation, you were doing good.

I have no idea when this advice changed. It never changed for me, but then -- neither has my hairstyle (or preferred dress).

Nice to see this, nisiprius. Makes me feel a little less conservative - retired and allocated at 10% equities, 40% bonds, 50% cash. Frankly -- I know how to say "enough".
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Post by vlad »

I would bet it ebbs and flows although recently thanks to the bombardment of misinformation from the internet, mass media and advertising perhaps has reached greater extremes, as apparently in all magnified discourse.
In the 1970s stock investing clubs were all the rage - until the crash, when everybody swore off stocks.
Ditto the 1990s - until the crash of 2008.
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Post by alec »

vlad wrote:Of course, caveman, the advice that "without a pension, you must invest (risk) more in the stock market in order to have enough money to retire" is awful. It's like saying if you can't afford to lose any money at the casino you shouldn't avoid it, you should just bet more. Unfortunately, some planning tools do just that.
:thumbsup
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Post by jb1934 »

tfb wrote:Do we know if this was mainstream back then or just one person's opinion? There are bearish recommendations today as well.
Interesting question. How about "age in bonds". What's the
evolution of that term/belief/advice?
That means for a million dollar portfolio a 65 yr old has to be ready for a 50% hit on his $350000 equity holding and a 10 yr. window for it
to bounce back. Seems a bit risky for the average joe.
Early in life I had noticed that no event is ever correctly reported in a newspaper.( I wonder if they had a financial/business section then)
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Post by nisiprius »

Before 401(k)'s, the audience for retirement portfolio advice would probably have been small and tended to consist of relatively wealthy individuals with no desire to take risk. I think there were probably three factors causing a shift in "generally accepted investment theories:"

a) Widespread adoption of 401(k)s, a sudden need to give people advice, a desire to promote the mainstream investment product (stock-based mutual funds), and a perceived need to overcome the general public's "irrational" fear of stocks.

b) The 1994 publication of Jeremy Siegel's Stocks for the Long Run, which seems like a close parallel to the 1924 publication of Edgar Lawrence Smith's Common Stocks as Long Term Investments.

c) The happy coincidence (? or self-fulfilling prophecy?) of Siegel's book emerging just in time for the final runup of the Great Bull Market of the 1990s.

But the question really is this. What's the good of investment advice that tells you what to do over your entire investment lifetime, when in fact the mainstream advice itself changes every decade or so?

It's the same question, writ large, as the seemingly simple question "what is the glide slope of Vanguard's target-date retirement funds?" An actual investor who bought Vanguard Target Retirement 2035 at inception in 2003 would have seen something like this: a 1% reduction in stock allocation three years in a row, then a 15% increase, then 1% reductions the next few years... The correct answer seems to be that the glide slope that an investor will experience cannot be predicted in advance!

Actually, given the relatively short period of time between the creation of the LifeStrategy funds and the Target Retirement Funds, and the increasing sense of vague controversy and malaise surrounding target-date funds in general, it will be very interesting to know how long the target-date funds actually last. I don't mean Vanguard will kill them, I just mean they will become passé and people will dump it for the Next Thing long before they've moved very far down the glide slope. Of the people who have most of their retirement savings in Target Retirement 2035 today, how many will really be saying, in 2050, "I've stuck with it, and it still comprises most of my holdings today?"
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Post by Rodc »

But the question really is this. What's the good of investment advice that tells you what to do over your entire investment lifetime, when in fact the mainstream advice itself changes every decade or so?
Like company earnings, advice has to be cyclically adjusted. :)

Average the advice over a period of at least one, preferably two, nominal cycles.

:)
Last edited by Rodc on Fri Apr 22, 2011 10:48 am, edited 1 time in total.
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Post by Beantown85 »

nisiprius wrote:Image
Interesting to see they view bonds and stocks as both having "moderate" risk, and no mention of a difference in potential benefit.
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Post by pkcrafter »

We are still living as if the anomaly of 1990 stock returns is the norm.


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Post by DaleMaley »

Venita VanCaspel's 1978 book The New Money Dynamics was one of the first books on financial planning.

She focused the book on the accumulation versus distribution phase........except for high inflation destroying the value of bonds during retirement.

Back then, she was recommending a mix of common stocks, stock mutual funds, limited partnerships in real estate and energy. The term of asset allocation is not even mentioned in her book.
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Post by vlad »

I think the answer to nisprius' question is that most mainstream advice is usually biased and wrong and hence should be ignored. Retirement target funds have another problem - although the concept on which they are based seems sound, the implementations are not individualized, are limited to mutual funds only and are sometimes employ erratic allocations. They also vary substantially by fund family.
The only positives are that they usually employ lower cost index funds, decrease risk with age and are perhaps less likely to irrationally change allocations than many individual investors. So a naive investor could do worse.
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Post by sport »

The problem with target date funds is that they have to compete with target date funds from other companies. During a time when the market increases, investors become more attracted to stocks (you know, buy high...) and they compare performance when making a buying decision. Of course, the funds with the higher stock allocations are the best short term performers under these conditions. Accordingly, the uninformed investors are attracted to these funds. This causes the target date funds to tend towards excessive aggressiveness for competitive reasons.

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Post by gotherelate »

neverknow wrote:Looks mainstream (for the times) to me. I began investing in the early 80's -- where middle of the road common advice (Money Magazine) was for a working person ... 60% equities / 40% bonds -- and the way I heard it was that if you earned 1-2% over inflation, you were doing good.

I have no idea when this advice changed. It never changed for me, but then -- neither has my hairstyle (or preferred dress).

Nice to see this, nisiprius. Makes me feel a little less conservative - retired and allocated at 10% equities, 40% bonds, 50% cash. Frankly -- I know how to say "enough".
neverknow
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Post by Easy Rhino »

the first book seems to have a pretty sharp glideslope. a 40% drop in stocks in 5 years?
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Post by seugene »

alec wrote:
vlad wrote:Of course, caveman, the advice that "without a pension, you must invest (risk) more in the stock market in order to have enough money to retire" is awful. It's like saying if you can't afford to lose any money at the casino you shouldn't avoid it, you should just bet more. Unfortunately, some planning tools do just that.
:thumbsup
Stock market is not the same as casino gambling. The expected return of the latter is negative, for the former it is positive and higher by a large margin. That makes it very rational and prudent to invest with stocks, but not to play with chips.

Add inflation to the picture, and the advice you speak of is not that bad in the end.
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Post by VictoriaF »

nisiprius wrote:Before 401(k)'s, the audience for retirement portfolio advice would probably have been small and tended to consist of relatively wealthy individuals with no desire to take risk. I think there were probably three factors causing a shift in "generally accepted investment theories:"

a) Widespread adoption of 401(k)s, a sudden need to give people advice, a desire to promote the mainstream investment product (stock-based mutual funds), and a perceived need to overcome the general public's "irrational" fear of stocks.

b) The 1994 publication of Jeremy Siegel's Stocks for the Long Run, which seems like a close parallel to the 1924 publication of Edgar Lawrence Smith's Common Stocks as Long Term Investments.

c) The happy coincidence (? or self-fulfilling prophecy?) of Siegel's book emerging just in time for the final runup of the Great Bull Market of the 1990s.
There could also be the fourth factor:
d) Psychological bombardment of the TV audience with the ticker tape data later supplemented with the Internet access to the market data.

When you observe stock prices moving you start seeing trends. And when you see trends you want to make predictions and take advantage of them. Just like people exposed to the brand name drug advertisements demand prescriptions from their physicians, people assimilated to stocks expect to see a lot of them in their portfolios. The industry is happy to oblige.

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Post by ruralavalon »

VictoriaF wrote:
nisiprius wrote:Before 401(k)'s, the audience for retirement portfolio advice would probably have been small and tended to consist of relatively wealthy individuals with no desire to take risk. I think there were probably three factors causing a shift in "generally accepted investment theories:"

a) Widespread adoption of 401(k)s, a sudden need to give people advice, a desire to promote the mainstream investment product (stock-based mutual funds), and a perceived need to overcome the general public's "irrational" fear of stocks.

b) The 1994 publication of Jeremy Siegel's Stocks for the Long Run, which seems like a close parallel to the 1924 publication of Edgar Lawrence Smith's Common Stocks as Long Term Investments.

c) The happy coincidence (? or self-fulfilling prophecy?) of Siegel's book emerging just in time for the final runup of the Great Bull Market of the 1990s.
There could also be the fourth factor:
d) Psychological bombardment of the TV audience with the ticker tape data later supplemented with the Internet access to the market data.

When you observe stock prices moving you start seeing trends. And when you see trends you want to make predictions and take advantage of them. Just like people exposed to the brand name drug advertisements demand prescriptions from their physicians, people assimilated to stocks expect to see a lot of them in their portfolios. The industry is happy to oblige.

Victoria
This seems nothing more or less than recency bias as the explanation for changing "mainstream" allocation advice.

In other words for experts, jounalists, ordinary investors and everyone else " . . .your most recent experience carries more weight . . . ." and "the human tendency to estimate probabilities not on the basis of long-term experience but rather on a handfull of the latest outcomes", all for neurologically hard-wired reasons. J Zweig, Your Money & Your Brain, pp. 72-74 (2007).
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Post by nisiprius »

Here's another data point. Burton Malkiel's A Random Walk Down Wall Street. Let's look at the lifecycle allocation guide for "Age: Late Sixties and Beyond." In every case noted, he uses the same description: "Life-style: Enjoying leisure activities but also guarding against major health costs. Little or no capacity for risk."

Comparing the 1990 and the 2011 editions:

CASH:
1990, 10% cash, "money market fund"
2011, 10% cash, "money market fund or short-term bond fund (average maturity 1 to 1-1/2 years."

BONDS:
1990, 60% bonds, "20% no-load short- or intermediate-term bond fund; 20% no-load GNMA fund; 20% no-load high-grade bond fund." (High grade? Whazzat?)
2011, 35% bonds, "Zero coupon Treasury bonds, no-load high-grade bond fund, some Treasury inflation protection securities."

STOCKS:
1990, 30%, "15% high-income stock fund, 15% growth and income or 'value' fund."
2011, 40%: one-half in U. S. stocks with good representation of smaller growth companies; one-half international stocks, including emerging markets."

REAL ESTATE:
1990 zero, zip, nada, not mentioned.
2011, 15%: "Portfolio of REITS."

REITS are stocks; he specifically suggests the Vanguard REIT Index Fund, VGSIX, elsewhere, and he explicitly describes them as "part of one's equity holdings." They are certainly comparable in risk to stocks in general.

So, from 1990 to 2011, we see increases in risk in every category. Even in "cash," a flat recommendation for a money market fund becomes a choice of that or a short-term bond fund.

Bond allocation decreases a whopping 25%. If we use 70 as our age, and if I (arbitrarily) add cash to bonds as both being low-risk assets, we have gone from "age in cash-and-bonds" to "age - 25 in cash-and-bonds."

Stock-and-REITS go from 30% to 55%.

Within stocks, he goes from suggesting that none of one's stocks be international to suggesting that half of them should be. Just to be clear, he certainly does mention international stocks in the 1990 edition, but only for younger investors; for "mid-twenties" he suggests 70% stocks including "15% international stock fund."

The point is, international stocks and the rest of the world were there in 1990. The average long-term total return of the stock market was not very different in 1990 than it is now (total return from 1926 through 1989, inclusive, was 10.3%); and longevity at age 65 has increased less than 2 years and can't account for more than about 2% of the 25% by which his suggested stock allocation has increased.

I see no explanation in the nature of stocks, bonds, and cash in themselves that would account for the huge shift in recommendations; the only explanation I can see is "fashion" and "zeitgeist."

(I have the first edition on request through the local interlibrary loan network and look forward to comparing it with the others, but the 1990 edition seems to be the earliest one with the title "A Random Walk down Wall Street : Including a Life-cycle Guide to Personal Investing" so I don't know whether it will give us any 1970s-vintage portfolio suggestions).
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Post by rmark1 »

IIRC, Ben Graham in 'The Intelligent Investor', 1949, recommended for the defensive (or passive) investor an initial 50/50 mix of stocks and bonds, varying from 25/75 to 75/25 depending on whether the investor was disquieted in his own mind as to prices having moved too far from a fair value. The stock portfolio was to have 12-15 large, prominent, conservatively financed companies, bonds maybe US savings bonds.

As to 401k's leading to a need for increased investing advice, remember the '3 legged stool' of Social security, company pension, and personal investment never applied to most workers - at the high point circa 1970 only 45% of workers had a pension.

What has changed is the slow rise in real income made increased investment possible, plus the widespread availablity of 'standardized' funds.
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Post by iceport »

nisiprius wrote: REAL ESTATE:
1990 zero, zip, nada, not mentioned.
2011, 15%: "Portfolio of REITS."

REITS are stocks; he specifically suggests the Vanguard REIT Index Fund, VGSIX, elsewhere, and he explicitly describes them as "part of one's equity holdings." They are certainly comparable in risk to stocks in general.

So, from 1990 to 2011, we see increases in risk in every category. Even in "cash," a flat recommendation for a money market fund becomes a choice of that or a short-term bond fund.

Bond allocation decreases a whopping 25%. If we use 70 as our age, and if I (arbitrarily) add cash to bonds as both being low-risk assets, we have gone from "age in cash-and-bonds" to "age - 25 in cash-and-bonds."

Stock-and-REITS go from 30% to 55%.
nisiprius,

Just out of curiosity, when did REIT mutual funds become widely available and reasonably economical to use? Vanguard's REIT index was launched in 1996, but I don't know what was available before that.

Also in fairness to Malkiel, without intending to contradict your larger point, my impression was that Malkiel liked REITs in no small part for their income production. That's why he recommends increasing the REIT allocation as one ages. In that context, it's not too much of a stretch to think he swapped part of the bond allocation into the REIT allocation.

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Post by neverknow »

Kiplingers Personal Finance Feb 1984
http://books.google.com/books?id=IQQEAAAAMBAJ&pg=PA26

Thanks nisiprius, I've never looked in Google Books before.

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Post by Noobvestor »

nisiprius wrote:Here's another data point. Burton Malkiel's A Random Walk Down Wall Street. Let's look at the lifecycle allocation guide for "Age: Late Sixties and Beyond." In every case noted, he uses the same description: "Life-style: Enjoying leisure activities but also guarding against major health costs. Little or no capacity for risk."

Comparing the 1990 and the 2011 editions:

CASH:
1990, 10% cash, "money market fund"
2011, 10% cash, "money market fund or short-term bond fund (average maturity 1 to 1-1/2 years."

BONDS:
1990, 60% bonds, "20% no-load short- or intermediate-term bond fund; 20% no-load GNMA fund; 20% no-load high-grade bond fund." (High grade? Whazzat?)
2011, 35% bonds, "Zero coupon Treasury bonds, no-load high-grade bond fund, some Treasury inflation protection securities."

STOCKS:
1990, 30%, "15% high-income stock fund, 15% growth and income or 'value' fund."
2011, 40%: one-half in U. S. stocks with good representation of smaller growth companies; one-half international stocks, including emerging markets."

REAL ESTATE:
1990 zero, zip, nada, not mentioned.
2011, 15%: "Portfolio of REITS."

REITS are stocks; he specifically suggests the Vanguard REIT Index Fund, VGSIX, elsewhere, and he explicitly describes them as "part of one's equity holdings." They are certainly comparable in risk to stocks in general.

So, from 1990 to 2011, we see increases in risk in every category. Even in "cash," a flat recommendation for a money market fund becomes a choice of that or a short-term bond fund.

Bond allocation decreases a whopping 25%. If we use 70 as our age, and if I (arbitrarily) add cash to bonds as both being low-risk assets, we have gone from "age in cash-and-bonds" to "age - 25 in cash-and-bonds."

Stock-and-REITS go from 30% to 55%.

Within stocks, he goes from suggesting that none of one's stocks be international to suggesting that half of them should be. Just to be clear, he certainly does mention international stocks in the 1990 edition, but only for younger investors; for "mid-twenties" he suggests 70% stocks including "15% international stock fund."

The point is, international stocks and the rest of the world were there in 1990. The average long-term total return of the stock market was not very different in 1990 than it is now (total return from 1926 through 1989, inclusive, was 10.3%); and longevity at age 65 has increased less than 2 years and can't account for more than about 2% of the 25% by which his suggested stock allocation has increased.

I see no explanation in the nature of stocks, bonds, and cash in themselves that would account for the huge shift in recommendations; the only explanation I can see is "fashion" and "zeitgeist."

(I have the first edition on request through the local interlibrary loan network and look forward to comparing it with the others, but the 1990 edition seems to be the earliest one with the title "A Random Walk down Wall Street : Including a Life-cycle Guide to Personal Investing" so I don't know whether it will give us any 1970s-vintage portfolio suggestions).
First, Nis, I just want to say: this is great - I've been thinking about doing this for a variety of books by Boglehead-recommended authors, but haven't found (read: made) the time for it yet. Thanks for going through this exercise and illustrating the major differences. VERY enlightening. Second, my only 'defensive' comment of the change: TIPS really are a new and different instrument previously unavailable - I think adding those and allowing for some changes around that is fine, but agree with your overall points regardless.
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Post by nisiprius »

petrico wrote:Just out of curiosity, when did REIT mutual funds become widely available and reasonably economical to use? Vanguard's REIT index was launched in 1996, but I don't know what was available before that.

Also in fairness to Malkiel, without intending to contradict your larger point, my impression was that Malkiel liked REITs in no small part for their income production. That's why he recommends increasing the REIT allocation as one ages. In that context, it's not too much of a stretch to think he swapped part of the bond allocation into the REIT allocation.

--Pete
Yes, good points.

Yes, I can look at his statements in 1990 and 2007 and imagine he is saying "I've always liked REITS, but in 1990 I couldn't recommend any good way for ordinary investors to use them; now, thanks to the introduction of VGSIX, I can."

However, the 2007 edition mentions four REIT mutual funds in the "address book" section, two of which were available in 1990: Stratton Monthly Dividend REIT (1972) and Fidelity Real Estate (1986). He seems to think these funds are a reasonable way to get REIT exposure in 2007, but not in 1990. I wonder what was wrong with them in 1990?

In 1990, he writes, in the footnote to pp. 303-4,
Burton Malkiel wrote:There are some Real Estate Investment Trusts (REIT) that work on the same principle as a closed-end fund and allow the investor to buy a diversified portfolio of holdings.... In principle I like these investments. Many of these trusts invest in mortgages rather than equity interests in real estate, however. Moreover it is very difficult for professionals (let alone individual investors) to evaluate these investments.
In 2007, and probably earlier, he writes:
I strongly suggest you invest some of your assets in REITs.... Unfortunately, the job of sifting through the hundreds of outstanding REITS is a daunting one.... Individuals could stumble badly by purchasing the wrong REIT. Now, however, investors have a rapidly expanding group of real estate mutual funds that are more than willing to do the job for them.... There are also low-expense REIT index funds (listed in the Address Book...)
In any case, while it's reasonable enough to argue for VGSIX as a portion of one's equity allocation, carving the REIT allocation out of the bond allocation rather than the equity allocation, if that's what he did, represents a big increase in risk.

The Vanguard REIT Index Fund (VGSIX) makes junk bonds look tame.

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Post by nisiprius »

Seems like a good place to collect other "blasts from the past." The Investing in Retirement: The Vanguard Guide to Managing Your Retirement Assets, ©1996, authorship credited to "The Vanguard Group." Title page credits "Vanguard Contributors: Author, Craig Stock; Editor, James Norris; Research and Production, Maria Bruno, Karen Chesky." On pp. 141-145 it makes these recommendations. "Reserves" appears to mean "short-term cash reserves" and does not seem to include short-term bonds.

Young Retiree (Before Age 60)
Bonds 40%, Stocks 60%

Early Retiree (Ages 60-74)
Reserves 20%, Bonds 40%, Stocks 40%

Senior Retiree (Ages 75+)
Reserves 20%, Bonds 60%, Stocks 20%

Once again we see that it was customary to include cash reserves within the "investment portfolio," and a significant amount.

We notice that the portfolios are drawn with a broad brush--stocks percentage varies in 20% jumps with no pretense of finer tuning. If I reinterpret the "age in bonds rule" to mean "stock allocation = 100 - age," then

* For the "early retiree" the allocation is in pretty good accordance with the rule, ranging from 5% more conservative to 9% more aggressive.

* Life expectancy at age 75 is around 12 years, so let's say the "senior retiree" range is 75-95. The allocation then starts out 5% more conservative than the rule, but by age 95 is still at 20% stocks.

* By comparison, the Vanguard Target Retirement funds are 30% stocks, 65% bonds, 5% cash at age 75 and above.
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Post by Noobvestor »

nisiprius wrote:Seems like a good place to collect other "blasts from the past." The Investing in Retirement: The Vanguard Guide to Managing Your Retirement Assets, ©1996, authorship credited to "The Vanguard Group." Title page credits "Vanguard Contributors: Author, Craig Stock; Editor, James Norris; Research and Production, Maria Bruno, Karen Chesky." On pp. 141-145 it makes these recommendations. "Reserves" appears to mean "short-term cash reserves" and does not seem to include short-term bonds.

Young Retiree (Before Age 60)
Bonds 40%, Stocks 60%

Early Retiree (Ages 60-74)
Reserves 20%, Bonds 40%, Stocks 40%

Senior Retiree (Ages 75+)
Reserves 20%, Bonds 60%, Stocks 20%

Once again we see that it was customary to include cash reserves within the "investment portfolio," and a significant amount.

We notice that the portfolios are drawn with a broad brush--stocks percentage varies in 20% jumps with no pretense of finer tuning. If I reinterpret the "age in bonds rule" to mean "stock allocation = 100 - age," then

* For the "early retiree" the allocation is in pretty good accordance with the rule, ranging from 5% more conservative to 9% more aggressive.

* Life expectancy at age 75 is around 12 years, so let's say the "senior retiree" range is 75-95. The allocation then starts out 5% more conservative than the rule, but by age 95 is still at 20% stocks.

* By comparison, the Vanguard Target Retirement funds are 30% stocks, 65% bonds, 5% cash at age 75 and above.
Awesome! Keep 'em coming - at some point, I personally think this would make an excellent addition to the Wiki - helpful resource to point people to when thinking about how recommendations change over time, and the dangers therein.
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Post by alec »

Noobvestor wrote:
nisiprius wrote:Seems like a good place to collect other "blasts from the past." The Investing in Retirement: The Vanguard Guide to Managing Your Retirement Assets, ©1996, authorship credited to "The Vanguard Group." Title page credits "Vanguard Contributors: Author, Craig Stock; Editor, James Norris; Research and Production, Maria Bruno, Karen Chesky." On pp. 141-145 it makes these recommendations. "Reserves" appears to mean "short-term cash reserves" and does not seem to include short-term bonds.

Young Retiree (Before Age 60)
Bonds 40%, Stocks 60%

Early Retiree (Ages 60-74)
Reserves 20%, Bonds 40%, Stocks 40%

Senior Retiree (Ages 75+)
Reserves 20%, Bonds 60%, Stocks 20%

Once again we see that it was customary to include cash reserves within the "investment portfolio," and a significant amount.

We notice that the portfolios are drawn with a broad brush--stocks percentage varies in 20% jumps with no pretense of finer tuning. If I reinterpret the "age in bonds rule" to mean "stock allocation = 100 - age," then

* For the "early retiree" the allocation is in pretty good accordance with the rule, ranging from 5% more conservative to 9% more aggressive.

* Life expectancy at age 75 is around 12 years, so let's say the "senior retiree" range is 75-95. The allocation then starts out 5% more conservative than the rule, but by age 95 is still at 20% stocks.

* By comparison, the Vanguard Target Retirement funds are 30% stocks, 65% bonds, 5% cash at age 75 and above.
Awesome! Keep 'em coming - at some point, I personally think this would make an excellent addition to the Wiki - helpful resource to point people to when thinking about how recommendations change over time, and the dangers therein.
How about an example of:

All those "model portfolios" you read constantly change over time and have little practical value because they're based on no calculations, modeling, or really anything you really care about.

To me all these model allocations seem like there are five people in a lunch room and a vote is taken. "Well, everyone but Jim thinks that a 65 yr old should have 10% cash so we'll just bump it up to 15%. Everyone okay with that? Good, send it to the printer."
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Post by biasion »

Cash and bonds used to pay very nice rates, and the CPI was a better indicator of inflation, over which most fixed income used to pay you a nice premium.

On the other hand today interest rates are below the stated inflation, which is 1/3 of the real inflation. Have you bought food or gas or (decent, I'm not saying a foreclosed fixer upper triple decker) house lately?

Fixed income is less volatile for the short term, but sheesh, you have to take a ton of risk if you want to have even the remote possibility of your portfolio not losing purchasing power over taxes and inflation.
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Post by joe8d »

Once again we see that it was customary to include cash reserves within the "investment portfolio," and a significant amount.
MMF rates in the past were good and so that made a lot of sense then.I remember when the I-Bonds first came out with the 3%+ real plus inflation,The total yield was basically comparable to MMF rates at the time.
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Post by neverknow »

joe8d wrote:
Once again we see that it was customary to include cash reserves within the "investment portfolio," and a significant amount.
MMF rates in the past were good and so that made a lot of sense then.
Cash presently has a horrible spin to it ...

$100 in perpetually rolling over CD's beginning in 1965 -- or $100 in the S&P 1965 (assuming 2% dividends reinvested). In what year did equities out perform cash (6 month CD's)? 1993 -- 28 years later.

(data taken from St Louis Fed Reserve data, and Jan S&P figures for each of those years).

These are the facts.

It is spending less then you earn, and the power of compounding that gets you where you want to go.

Yes, cash is presently negative "real" ... it was negative real in 1975 and 1977 also.

28 years. Think about it. Imagine you are 60 years old ... and are waiting patiently in equities for 28 years for those equities to outperform boring old 6 month CD's. In the mean time, you keep getting older -- and the market goes through several of it's breath taking runs (both up and down).

No one is out there marketing CD's to you. No money in it. Plenty of folks selling you equities. This is a great country for selling you stuff, but just because it is being sold -- doesn't mean it is in your best interest. Buyer Beware.
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Post by at ease »

...the Fed. Gov. "TSP" (employee retirement savings plan, like a 401) has a a retirement income fund called L-Income that is for those in retirement....it has 20% stock + 6% bonds + 74% Government intermediate like securities.....

so, it seems the 20% stock concept for those in retirement is still around..
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Post by Bongleur »

Perhaps the difference in the AAs then & now amounts to nothing more than attempting to achieve the same amount of yield given different recent market conditions?

And if the old advice was in 20% chunks of AA... do we really have any evidence that today's percentage-slices are statistically better?
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Post by nisiprius »

alec wrote:All those "model portfolios" you read constantly change over time and have little practical value because they're based on no calculations, modeling, or really anything you really care about.

To me all these model allocations seem like there are five people in a lunch room and a vote is taken. "Well, everyone but Jim thinks that a 65 yr old should have 10% cash so we'll just bump it up to 15%. Everyone okay with that? Good, send it to the printer."
Well, I am increasingly coming to think that's true, and that it's a real philosophical problem. I think some of the cognitive dissonance I feel about "55% international" etc. is because I was actually paying enough attention 20 years ago to realize that the confident expertise of today is utterly different from the confident expertise of twenty years go. I don't mean "the old advice was right and the new advice is wrong." I mean that if the advice changes that much that quickly, can any of it be right? I mean that it's mostly trends and fashions--like dietary advice!--and that even the broad-brush "suggested allocations" are false precision.

I think Malkiel's suggested allocations are mostly what Malkiel likes--and what's common currency in the investment community--not anything that can be weighed or measured or proven.

See, there are two broad possibilities.

a) There is a thing called the "stock market" that is eternally the same. Part of its eternal nature is that it ebbs, flows, exhibits secular bulls and primary bears, and so forth. Part of its nature is that it has a long-term real return of 7%, and that it undergoes fluctuations that are big and persistent but can be assigned statistical values. Or fractals or GARCH models or something. It has ranges of outcomes that are statistically partially predictable in a useful way, over periods of time resembling an investing lifetime.

b) The stock market is a succession of independent episodes pretty much disconnected from each other. There is a bull market, then it dies and a new bear market is born, with no carryover from one to the next. Each is a new world. You need to invest one way in the 1990s and a different way in the 2000's. Things change. A few hundred rich guys trying to fake out Jay Gould is just plain not the same thing as a million workers automatically putting 8% of their paycheck into a defaulted-choice target fund every month.

The idea of eternal investment truths and long-term strategies assumes model A.

The problem is that model A is just not consistent with someone of Burton Malkiel's stature saying "10% international" in 1990 and "50% international" in 2011.

The "Wall Street"/CNBC view is model B. Of course they assume that the game is to spot what kind of market you're in early on, detect the pattern, forecast the future, and invest according to forecast. We all know though that the evidence is overwhelming that nobody actually can, and that the pattern of "first one kind of market, than another" is only seen after the fact--and is probably as arbitrary and illusory as the boundaries of the constellations.

That's all pretty nihilistic, I guess....
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Post by Random Poster »

neverknow wrote:$100 in perpetually rolling over CD's beginning in 1965 -- or $100 in the S&P 1965 (assuming 2% dividends reinvested). In what year did equities out perform cash (6 month CD's)? 1993 -- 28 years later.

(data taken from St Louis Fed Reserve data, and Jan S&P figures for each of those years).

These are the facts.
Shouldn't the applicable comparison be "in what 6-month period did equities out perform cash (6 month CD's)"?

Otherwise, aren't you comparing annual data to 6 month data? And, if so, I don't see how that is a particularly fair comparison.
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Post by bogle_graham »

Great Post Nisiprius!

What about
C.) This thing called the "stock market" is a measure of human and capitalistic growth which in real terms (earnings, etc.) grows at about 7% and is statistically partially predictable. While perception of how to correctly invest in this growth suffers from recency bias which can last for decades.

i.e. financial planners and financial advice respond to the ups and downs of the market in the same way that most people do. During downturns, more bonds is considered "prudent" by financial planners, while during bull markets more stocks is considered "smart".
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Post by Noobvestor »

nisiprius wrote:
alec wrote:All those "model portfolios" you read constantly change over time and have little practical value because they're based on no calculations, modeling, or really anything you really care about.

To me all these model allocations seem like there are five people in a lunch room and a vote is taken. "Well, everyone but Jim thinks that a 65 yr old should have 10% cash so we'll just bump it up to 15%. Everyone okay with that? Good, send it to the printer."
Well, I am increasingly coming to think that's true, and that it's a real philosophical problem. I think some of the cognitive dissonance I feel about "55% international" etc. is because I was actually paying enough attention 20 years ago to realize that the confident expertise of today is utterly different from the confident expertise of twenty years go. I don't mean "the old advice was right and the new advice is wrong." I mean that if the advice changes that much that quickly, can any of it be right? I mean that it's mostly trends and fashions--like dietary advice!--and that even the broad-brush "suggested allocations" are false precision.

I think Malkiel's suggested allocations are mostly what Malkiel likes--and what's common currency in the investment community--not anything that can be weighed or measured or proven.

See, there are two broad possibilities.

a) There is a thing called the "stock market" that is eternally the same. Part of its eternal nature is that it ebbs, flows, exhibits secular bulls and primary bears, and so forth. Part of its nature is that it has a long-term real return of 7%, and that it undergoes fluctuations that are big and persistent but can be assigned statistical values. Or fractals or GARCH models or something. It has ranges of outcomes that are statistically partially predictable in a useful way, over periods of time resembling an investing lifetime.

b) The stock market is a succession of independent episodes pretty much disconnected from each other. There is a bull market, then it dies and a new bear market is born, with no carryover from one to the next. Each is a new world. You need to invest one way in the 1990s and a different way in the 2000's. Things change. A few hundred rich guys trying to fake out Jay Gould is just plain not the same thing as a million workers automatically putting 8% of their paycheck into a defaulted-choice target fund every month.

The idea of eternal investment truths and long-term strategies assumes model A.

The problem is that model A is just not consistent with someone of Burton Malkiel's stature saying "10% international" in 1990 and "50% international" in 2011.

The "Wall Street"/CNBC view is model B. Of course they assume that the game is to spot what kind of market you're in early on, detect the pattern, forecast the future, and invest according to forecast. We all know though that the evidence is overwhelming that nobody actually can, and that the pattern of "first one kind of market, than another" is only seen after the fact--and is probably as arbitrary and illusory as the boundaries of the constellations.

That's all pretty nihilistic, I guess....
Not to toot my own horn *too* much, but it is precisely this variability that leads to portfolios like mine with a series of 50/50 splits between assets with different risk/reward profiles hedging against and playing into various economic cycles/scenarios.

First I split US and international equities , because it is close to market weights but biased neither toward home nor away from home. Then I split international into developed and emerging, simply because emerging tends to behave less like developed (US or ex-US), so again: a prediction-free approach. In parallel, I split between small/value and large/blend to get the most diversification within styles as possible. Finally I split between inflation- and deflation-protecting, relatively-safe fixed-income assets - adding a little more than someone my age might otherwise because of the higher risk/reward profile of the equities involved.

In short: I feel like I have a arrived at a pretty beautiful little agnostic portfolio ... will US outperform international? Small or value outperform growth or large? Inflation or deflation come along to wreck things now and then? Beats me. Whereas, for me at least, holding mostly large (though yes, I realize the market is mostly large), or way more US than ex-US, or whatever, might always be things I would question/regret down the line, or be tempted to change. 50/50 makes staying the course easier. But to each their own, of course. The only thing I 'doubt' is not holding even more fixed-income assets, but that will change naturally as I accumulate more and/or get older regardless.

But I digress ... I agree there is some apparent dissonance, and truly wonder how people with things like, say, US-heavy portfolios, or who have gone entirely to equities (or high-yield bonds) to flee safe bonds, etc... will manage when things swing around on us again, as they invariably do. Most of all, though, the back-testing problem is a big one - I try not to look too hard at it save to get some vague sense of risk/return on the equities v bonds side to make sure I'm in the ballpark of what I'm going for ... nit-picking beyond a certain point is just asking for disappointment when things change.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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