Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

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Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby SC Hoosier » Wed Feb 06, 2013 9:52 pm

In their book "The Elements of Investing", one of them, not sure which, say that investors with high risk tolerance can be 100% equities up to 50 years old. I subscribe to this view as well. What are your thoughts?
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100% Stocks? Absolutely

Postby EDN » Wed Feb 06, 2013 10:17 pm

Highest risk, highest expected return. Absolutely viable option. I myself am 100% stocks.

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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Johm221122 » Wed Feb 06, 2013 10:23 pm

In the right situation yes I agree, stable job, emergency fund, paid off house, pension etc...could definitely make this an option for some
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Re: 100% Stocks? Absolutely

Postby SC Hoosier » Wed Feb 06, 2013 10:24 pm

EDN wrote:Highest risk, highest expected return. Absolutely viable option. I myself am 100% stocks.

Eric


Glad to see I'm not alone, Eric. Thanks for the reply.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby SC Hoosier » Wed Feb 06, 2013 10:26 pm

Johm221122 wrote:In the right situation yes I agree, stable job, emergency fund, paid off house, pension etc...could definitely make this an option for some
John


I have all but the pension and I'm 37.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby john94549 » Wed Feb 06, 2013 10:27 pm

I turned 50 years of age in 1997. Had I been 100% in equities, I would have been a happy investor. I might not have been quite as happy on my 53d birthday, however (and certainly would not have been on my 54th, and would have been downright cranky on my 55th).

By definition, anyone 100% in anything is taking a huge risk. Diversification does not mean holding a diverse basket of equities, in my judgment. Diversification entails holding diverse asset classes, of which equities is but one.
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The Global Equity Market is Very Diversified

Postby EDN » Wed Feb 06, 2013 10:38 pm

john94549 wrote:I turned 50 years of age in 1997. Had I been 100% in equities, I would have been a happy investor. I might not have been quite as happy on my 53d birthday, however (and certainly would not have been on my 54th).

By definition, anyone 100% in anything is taking a huge risk. Diversification does not mean holding a diverse basket of equities, in my judgment. Diversification entails holding diverse asset classes, of which equities is but one.


The world market cap of equities is $33T or so, entails 11,000 companies spread across 44 different countries--that maybe "just one asset class", but its big and diverse enough to reasonably encompass someone's wealth. Assuming you've tilted to small and value in each of these regions since 2000, you've outpaced bonds and had more wealth for the additional volatility -- as you'd expect. Its just a risk/return tradeoff. It isn't right for everyone, but its not wrong like timing the market or holding a concentrated portfolio. 100% equities isn't taking a "huge risk", it is taking a risk that has historically been (and we'd expect to continue to be) commensurate with its return. The only 100% allocation that hasn't carried its weight is 100% bonds (20/80 has been safer with higher returns and is almost assured to be so going forward).

With interest rates at historical lows, young investors should think very, very hard before they go adding bonds to portfolios.

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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby SC Hoosier » Wed Feb 06, 2013 10:49 pm

With interest rates at historical lows, young investors should think very, very hard before they go adding bonds to portfolios.


Yes!!! Preach it, Eric!!!
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby nisiprius » Wed Feb 06, 2013 11:08 pm

THIS is what Malkiel and Ellis said. I'm not sure how you get from this to "Ellis AND Malkiel say 0% bonds under age 50 is OK."

[Edited] More like "Malkiel does not recommend 0% bonds for investors in their twenties, but Ellis says it might be OK for the most aggressive investors up to their early forties."

Image

And, before taking this advice precisely at face value, consider this. This is what Burton Malkiel was saying...

Image

Image

...in 1990.

So, please tell me, what changed? Did the essential nature of stocks and bonds change? Did stocks become less risky? Do people live to be TWENTY years older than they did in 1990? Was Malkiel wrong in 1990 and right today? Was he right in 1990 and wrong today?
Last edited by nisiprius on Thu Feb 07, 2013 6:56 am, edited 6 times in total.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Rick Ferri » Wed Feb 06, 2013 11:11 pm

SC Hoosier wrote:
With interest rates at historical lows, young investors should think very, very hard before they go adding bonds to portfolios.


Yes!!! Preach it, Eric!!!


Toto, we're not in 2008 anymore! The market will never go down again and we will never have to worry about emotional selling because, we'll we're sooooo educated now after the financial crisis. Everything is wonderful, isn't it, Toto?
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Leesbro63 » Wed Feb 06, 2013 11:43 pm

Rick Ferri wrote:
Toto, we're not in 2008 anymore! The market will never go down again and we will never have to worry about emotional selling because, we'll we're sooooo educated now after the financial crisis. Everything is wonderful, isn't it, Toto?


+1
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Random Walker » Wed Feb 06, 2013 11:53 pm

I'm 50 and have an aggressive heavily tilted 80/20 AA. I've read Ellis' Winning The Loser's Game a few times. And every time I read it I want to get more aggressive with the AA. He really instills appreciation for the effect of inflation over time. I can see living to between 90 and 100. I'm scared of outliving the money. So I completely understand being aggressive @50, especially if still accumulating.

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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby am » Wed Feb 06, 2013 11:56 pm

Thought 80/20 has a better risk adjusted return, plus you can get some additional return from rebalancing.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby grabiner » Thu Feb 07, 2013 12:07 am

SC Hoosier wrote:In their book "The Elements of Investing", one of them, not sure which, say that investors with high risk tolerance can be 100% equities up to 50 years old. I subscribe to this view as well. What are your thoughts?


Ability to take risk depends on more than age.

How secure is your job?
How far are you from planned retirement?
Will you have a pension in retirement?
How large is your current portfolio, compared to what you expect it to be at retirement? (If you didn't start saving much until your children graduated from college, and are now saving a lot, then you may have only a small part of your retirement portfolio already saved and can take more risk. If you can't afford to save much for retirement at all but have inherited a large portfolio, you need to be more conservative.)
How much of your portfolio is intended for your heirs? (Some retirees have much larger portfolios than they need to spend in retirement, and can put 100% of the remainder in stocks.)

With the right answers, it's reasonable for a 50-year-old to be 100% stocks: a teacher, intending to retire at 65 with a pension, would be a natural example.

I am 44, with 90% stock with the risk of 100% stock due to slice-and-dice, and expect to keep this portfolio for several more years.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby pascalwager » Thu Feb 07, 2013 12:20 am

If Malkiel's views on investing are presumed to be final, then why would he need to revise his book every few years?

The Elements of Investing was published in 2010; but currently, Malkiel/Ellis don't seem to be willing to encourage holding any bonds, although Malkiel allows for some munis, dividend stocks, and foreign bonds for those needing interest income. Going forward, the main function of stocks may be to balance the losses in the bond portion of the portfolio, but Malkiel/Ellis don't seem willing to hold this kind of portfolio.

When I was first introduced to portfolio theory (1995), it was assumed that short term bonds would provide a small real return. Today, when informed that the primary portfolio stabilizing element is likely to continuously shrink, potential new investors might be discouraged from investing--so maybe better not to even mention bonds.
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Mr. Bogle's rough rule of thumb.

Postby Taylor Larimore » Thu Feb 07, 2013 12:28 am

SC Hoosier wrote:In their book "The Elements of Investing", one of them, not sure which, say that investors with high risk tolerance can be 100% equities up to 50 years old. I subscribe to this view as well. What are your thoughts?


My thought is that very few young (or old) investors can tolerate the large losses in their life savings of a 100% stock portfolio during a long and bad bear market. Even if they hang on (not knowing how much worse it will be), it is not worth sleepless nights.

Jack Bogle did not arrive at his rule of thumb (percentage of bonds should roughly equal our age) by accident.

Best wishes.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby ofcmetz » Thu Feb 07, 2013 12:37 am

I have a stable job, pension, emergency fund, etc.

That said, I don't have the fortitude or even the need to be 100% stocks. I'm happy with a stable value fund paying 3%. The 55% in equity and 15% in TIAA Real Estate, make it much easier for me to sleep and to worry about other things than my portfolio. In short it helps me stay the course.

If you have the willingness and ability to take the risk, then more power to you.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby MoonOrb » Thu Feb 07, 2013 1:32 am

Did they introduce some new research or something that suggests an asset allocation including bonds no longer serves to reduce volatility? Or are they all like "The bond market is going to collapse any day now!!!!1111!!!!!"
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby lindisfarne » Thu Feb 07, 2013 2:09 am

15 year rolling returns (1973-2009).
History suggests 100% equities can pay off ... if you "stay the course" in the years where you lose 30-40% of your value.
But can you? It's probably easier if the first few years are "up" years where your gains are high, or if you have been in the stock market a while & realize it has its ups and downs (and you don't doubt that an "up" always follows a "down"). Lots of people didn't believe that a few years ago, & pulled money out while the market was low, and are now trying to get back in at higher prices.

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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby stemikger » Thu Feb 07, 2013 2:50 am

SC Hoosier wrote:In their book "The Elements of Investing", one of them, not sure which, say that investors with high risk tolerance can be 100% equities up to 50 years old. I subscribe to this view as well. What are your thoughts?


I also read this book. It is Charles Ellis that said this. He also said in the same book that at 70 he was 100% in stocks. Burton Malkiel is the more conservative one and that is why the book showed two different asset allocation models from each of the author's risk tolerance. Charles Ellis fears people will not be aggressive enough to outpace inflation and Burton Malkiel has counseled too many young people that would not be able to handle the volatility of a 100% equities portfolio.

Warren Buffett also believes in a 100% stock portfolio for someone in their 50s. He even suggests for someone who does not want to evaluate companies to simply put their money in a stock index fund and leave it there.

On a side note, Dave Ramsey (who is certainly not in the category of any of the men mentioned above) also recommends 100% stock portfolio. However, he also recommends managed funds in four different categories.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby TheEternalVortex » Thu Feb 07, 2013 4:56 am

Age is hardly the most important factor in determining your allocation to bonds.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby leo383 » Thu Feb 07, 2013 6:57 am

Here's Ellis recommending 100% stocks for those under 40:

http://www.kiplinger.com/article/invest ... folio.html

40-50 10% bonds, up to a max of 50% bonds.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby nisiprius » Thu Feb 07, 2013 7:12 am

A critical factor is: what do real investors really do when stocks drop? I've seen the same throwaway statement in several places, notably Chuck Jaffe's column, where he said here that
Chuck Jaffe wrote:studies show that average investors bail out when losses move beyond 20%.
I've seen this elsewhere, but always as a throwaway, never citing a source.

It's very important to know the numbers here, the range, and how one can tell how one personally stacks up against the average. Some silly questionnaire simply asking " If I owned a stock investment that lost about 31% in 3 months, I would..." doesn't hack it. One might as well ask people "Are you a) a man, or b) a mouse?"

In late 2008, a work colleague in his forties told me that he had just sold everything in his 401(k) and gone completely to money market. He said "I can't hack the volatility, I've lost almost half my savings." I didn't know the guy real well. I was shocked by his precipitous move, but at the time I certainly did not want the responsibility of suggesting anything to him. But I did ask him, "were you 100% in stocks?" He looks at me and says, verbatim quote, "Oh, no, certainly not. A lot of it was international." As I say I didn't know him or his investments really well.

I think he believed that "stocks" meant "mutual funds with the word 'stocks'" in their name. EIther that or he had a bad mental model from what to expect from international "diversification."

Since I don't know anything about his background, I don't know what advice he was or was not given about allocation. And since our employer's sales dropped 70% month over month and we were both let go, I lost contact with him and can't prove he didn't buy back in in February and make out like a bandit.

Nevertheless, yes, this one anecdotal data point from my personal experience convinces me that a culture of overconfidence has induced people to assume stock allocations in excess of their risk tolerance.

Here, make that two anecdotal data points:
I once upon a time liked to review [my transaction reports]. Now, they're a catastrophe. My losses are staggering even in the most plain vanilla index funds. In the emerging markets and developed markets, investments that had once provided immense gains, the losses are worse. Even in my beloved RQI, the high-income, leveraged REIT index fund, the losses are beyond belief.

Instead of just jumping off my balcony, which wouldn't get me more than a broken leg, I am going to try to make some sense of what has happened…. I am more than the mere composite of the stocks and bonds I own. I hate myself for being so dependent on how much money I have for my self image. As for retirement, well, I get sick and bored if I am not on the road most of the time anyway. The reason I am not suicidal right now is that I have a wife who would be fine with it if we had to live a more modest life style.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Call_Me_Op » Thu Feb 07, 2013 7:55 am

I think people tend to forget that there really is a chance that things can get really bad like 1929 again at some point in the future. I would be an emotional wreck if I lost 90% of my life savings and didn't know whether I was going to lose even more - or if it would ever come back. I'll keep by bonds and cash, thank you.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby YDNAL » Thu Feb 07, 2013 9:40 am

SC Hoosier wrote:In their book "The Elements of Investing", one of them, not sure which, say that investors with high risk tolerance can be 100% equities up to 50 years old. I subscribe to this view as well. What are your thoughts?

My thought.... Just irresponsible and careless use of the written word.
  • "Up to fifty years old" essentially groups all sorts of savers/investors with potentially very distinct sets of personal circumstances.
  • Investors "with high risk tolerance" does not translate to the same Ability and Need to take risk.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Grt2bOutdoors » Thu Feb 07, 2013 9:48 am

grabiner wrote:
SC Hoosier wrote:In their book "The Elements of Investing", one of them, not sure which, say that investors with high risk tolerance can be 100% equities up to 50 years old. I subscribe to this view as well. What are your thoughts?


Ability to take risk depends on more than age.

How secure is your job?
How far are you from planned retirement?
Will you have a pension in retirement?
How large is your current portfolio, compared to what you expect it to be at retirement? (If you didn't start saving much until your children graduated from college, and are now saving a lot, then you may have only a small part of your retirement portfolio already saved and can take more risk. If you can't afford to save much for retirement at all but have inherited a large portfolio, you need to be more conservative.)
How much of your portfolio is intended for your heirs? (Some retirees have much larger portfolios than they need to spend in retirement, and can put 100% of the remainder in stocks.)

With the right answers, it's reasonable for a 50-year-old to be 100% stocks: a teacher, intending to retire at 65 with a pension, would be a natural example.

I am 44, with 90% stock with the risk of 100% stock due to slice-and-dice, and expect to keep this portfolio for several more years.


David - Great advice. Unfortunately, many times someone will read an article or even some of the posts on the forum and think it's okay to go all-in including holding a significant portion of emerging markets, small value, etc. all because some poster said that is what they were doing and posted wonderful results. What many fail to account for is all of the above you posted. A 50 year old with unsecure employment, no emergency fund, no significant assets should not be rolling the dice with someone who is tenured, has a significant pension, owns a home free and clear, has other income streams available to them. There is no comparison. That 50 year old has much less time available to recoup, it's not like they are 24 and starting out.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Grt2bOutdoors » Thu Feb 07, 2013 9:53 am

Call_Me_Op wrote:I think people tend to forget that there really is a chance that things can get really bad like 1929 again at some point in the future. I would be an emotional wreck if I lost 90% of my life savings and didn't know whether I was going to lose even more - or if it would ever come back. I'll keep by bonds and cash, thank you.


+1000. Read a book on the Great Depression and you will never ever think again that "cash is trash". The same goes for those leveraging up with mortgages, they don't know that those who lost homes in the Depression did so because they failed to pay their taxes - some may assume it was job loss and that's part of the problem, but no, the real reason was many many banks failed, there was no FDIC insurance back then. Even for those who think I've got nothing to worry about, I've got a pension - if there is ever a significant worldwide crash in asset prices, guess what happens to pension values? A black swan event, sure. Probable, maybe not. Possible - anything is possible while you're still above ground.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby staythecourse » Thu Feb 07, 2013 10:02 am

Nothing wrong at all with being heavy on equities. Period. The data supports it. Anyone saying anything else is suffering from recency bias.

I crunched the numbers of a heavy equity investor (80/20) vs. a defensive investor (50/50) over every 10, 15, 20 year period from 1926 to current. The data CLEARLY supports the equity heavy investor and only increases over the longer time horizons. In 10 year periods the 80/20 investor outperformed 80%+, in 15 years periods they outfperformed 85%+, and in 20 year periods they outperformed 95%+. Of course, folks out there will clamor about "what about risk??" The answer of WORST underperformance when it didn't outperform was 20% less returns in 10 year periods, 15% less returns in 15 year periods, and <5% in 20 year periods.

The data is the data. The job of every investor is to determine extrapolate that information for their personal situation. In my view of investing in general is: it is a matter of weighing PROBABILITIES vs. POSSIBILITIES. The probablities of success and REDUCING underperformances is with the equity heavy portfolios and only increases with increasing time horizons. THe possiblities of failure and crashing and burning is there, but that is not evenly remotely the likely possiblity. So, the question remains is do you invest based on high probabilities or the low possibilities. The former is using a rational approach and the latter is more emotional. Either is fine, but every investor has to answer that question themselves.

This does come with the caveat that any investor considering high equities: Have a recession resistant job (trust me not many folks fit into this), long time horizon, and no need for the liquidity of those $$ before the date of retirement.

Good luck.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby stemikger » Thu Feb 07, 2013 10:25 am

Grt2bOutdoors wrote:
Call_Me_Op wrote:I think people tend to forget that there really is a chance that things can get really bad like 1929 again at some point in the future. I would be an emotional wreck if I lost 90% of my life savings and didn't know whether I was going to lose even more - or if it would ever come back. I'll keep by bonds and cash, thank you.


+1000. Read a book on the Great Depression and you will never ever think again that "cash is trash". The same goes for those leveraging up with mortgages, they don't know that those who lost homes in the Depression did so because they failed to pay their taxes - some may assume it was job loss and that's part of the problem, but no, the real reason was many many banks failed, there was no FDIC insurance back then. Even for those who think I've got nothing to worry about, I've got a pension - if there is ever a significant worldwide crash in asset prices, guess what happens to pension values? A black swan event, sure. Probable, maybe not. Possible - anything is possible while you're still above ground.


+1000 to this as well. Well said!!!
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Dandy » Thu Feb 07, 2013 10:51 am

Obviously it depends on a number of factors e.g. risk tolerance, job/earning security, number of people depending on you/your earning power/assets, you level of debt, other assets, etc

I sounds great until it isn't. Lots of people losing jobs, having difficulty getting re employed especially at the same compensation. Pension, health insurance and government safety nets are gone, going or on the list for change. While equities over the long run outperform a balanced portfolio. We don't live in the long run we live in the current. I think a middle age man with a non working wife and 2 kids, a house with a mortgage for example would be wise to ignore this "ok" to go to 100% equities - unless there are major extenuating curcumstances.

I thought that previous studies indicated 100% equities wasn't the best allocation for the best long term results. I think I remember 80% equities. (Still too high for all but the young and brave as far as I am concerned). Studies come and go but we are stuck with our decisions and their outcome.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby MrMatt2532 » Thu Feb 07, 2013 10:52 am

I'm surprised the idea of human capital hasn't been brought up in this thread. The idea has been popularized over the last 20 years and has been a major reason for some of the changes to conventional reasoning and rules of thumbs.

Most the models I've seen all suggest sometime between age 35 to age 50 as for when one should start ramping down from 100% equities. Note that this means those same models suggest the investor should be leveraged prior to this point.

Most of the Target Retirement funds utilize human capital in their research to come up with the asset allocation vs age/(time until retirement). For example, even the research that went into the vanguard target retirement funds cite human capital and in their analysis they find around age 40 as to when an investor should start ramping down from 100% equities. However, they chose 90% equities instead I believe for behavioral reasons.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Harold » Thu Feb 07, 2013 10:54 am

staythecourse wrote:Nothing wrong at all with being heavy on equities. Period. The data supports it. Anyone saying anything else is suffering from recency bias.

I crunched the numbers of a heavy equity investor (80/20) vs. a defensive investor (50/50) over every 10, 15, 20 year period from 1926 to current. The data CLEARLY supports the equity heavy investor and only increases over the longer time horizons. In 10 year periods the 80/20 investor outperformed 80%+, in 15 years periods they outfperformed 85%+, and in 20 year periods they outperformed 95%+. Of course, folks out there will clamor about "what about risk??" The answer of WORST underperformance when it didn't outperform was 20% less returns in 10 year periods, 15% less returns in 15 year periods, and <5% in 20 year periods.

The data is the data. The job of every investor is to determine extrapolate that information for their personal situation. In my view of investing in general is: it is a matter of weighing PROBABILITIES vs. POSSIBILITIES. The probablities of success and REDUCING underperformances is with the equity heavy portfolios and only increases with increasing time horizons. THe possiblities of failure and crashing and burning is there, but that is not evenly remotely the likely possiblity. So, the question remains is do you invest based on high probabilities or the low possibilities. The former is using a rational approach and the latter is more emotional. Either is fine, but every investor has to answer that question themselves.

This does come with the caveat that any investor considering high equities: Have a recession resistant job (trust me not many folks fit into this), long time horizon, and no need for the liquidity of those $$ before the date of retirement.

Good luck.

You're making a categorical statement, apparently without considering that models based on 1926-XXXX data might not be suitable for the time period 2013-YYYY.

The reality is that market pricing at any given point in time doesn't presume any degree of certainty for an equity risk premium going forward any period of time, yet the common wisdom (as exemplified in statements like yours) is that of course equities will outperform in the vast majorities of time (e.g. the 80%/85%/95% you cited above). If there were a consensus on that, market pricing would reflect it, yet market pricing doesn't. There's no current arbitrage in exchanging X years of Treasury returns for X years of S&P 500 returns -- they both sell at the same price.

Not saying stock investors won't be rewarded (as one myself, I hope we will be) -- but merely pointing out that it's not categorically obvious, and that past data isn't the only thing to go on.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby scone » Thu Feb 07, 2013 11:05 am

The 100% stock portfolio ought to work fine. As long as you don't encounter a Depression scenario or a Nikkei scenario toward the end of the accumulation period. In that case, it might take you many, many years to crawl up out of the deep hole you're in. You might never get back to even, especially in real terms, especially if a deep crash is followed by stagflation. At best, you might be able to get by on dividends and SS, but in a lower interest rate environment that could be pretty tight if your total assets have been cut in half.

Now imagine a particular scenario: you're 55 years old, the market is cut in half, you lose your job, your medical care, and finally your house. Because you have no job, you can't contribute to your 401k, and because you're in 100% stock, you can't rebalance. The stress ends your marriage, and then you get a heart attack. Seriously. Don't imagine bad stuff like this can't happen to you, as it has for so many others. Exceptionally good luck is not the average case.

I think most people assume the stock markets will bounce back relatively quickly after a huge drop, but sometimes that does not happen. Jim Otar has a good bead on this when he talks about the luck factor-- your success is partly a matter of random chance. It's not entirely under your control, no matter how well you think you have controlled the risks. I would urge people to study Otar's work before putting all their chips on the stock side of the table. Even the house does not bet the house.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Rick Ferri » Thu Feb 07, 2013 12:05 pm

There are two sides to investing - there is math and there is emotion. This solution may be mathematically correct, but it's way off emotionally. Very few people can stand 100% in equity 100% of the time. And when those who do brave the odds do capitulate and sell, it's typically near the bottom.

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Re: Mr. Bogle's rough rule of thumb.

Postby B. Wellington » Thu Feb 07, 2013 12:27 pm

Taylor Larimore wrote:
SC Hoosier wrote:In their book "The Elements of Investing", one of them, not sure which, say that investors with high risk tolerance can be 100% equities up to 50 years old. I subscribe to this view as well. What are your thoughts?


My thought is that very few young (or old) investors can tolerate the large losses in their life savings of a 100% stock portfolio during a long and bad bear market. Even if they hang on (not knowing how much worse it will be), it is not worth sleepless nights.

Jack Bogle did not arrive at his rule of thumb (percentage of bonds should roughly equal our age) by accident.

Best wishes.
Taylor


+1 In 2008 my neighbor (70) sold EVERYTHING. Also my brother (49) sold EVERYTHING including his 401(K) :shock: How many others would have held on if we were still in a bear market years later?
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Grt2bOutdoors » Thu Feb 07, 2013 12:47 pm

Everyone, and I mean everyone should thank their lucky stars that a few brave souls stepped up to the plate to rescue the financial system or today both young and old would be singing quite a different tune. That's how close we came from falling into the abyss instead of just looking at it from the cliff's edge where we sit today (not much has changed in 4 years). You can quote all the backtesting and theory you want - it all would have gone right out the window if the banking system had collapsed. That includes fiat money and metals.
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100% Stocks

Postby EDN » Thu Feb 07, 2013 12:56 pm

Well,

I have clients young and old who were and still are 100% in stocks -- got through 2008 just fine. I'm personally 100% in stocks. So either I am completely off the reservation or this "no one should be 100% in stocks" stuff just is wrong no matter how much you believe in it personally.

I have no idea, and am not really interested in what the average person under 50 or 40 can or should be doing. I just know that with the right amount of education, perspective, portfolio, and in the right circumstances, 100% in stocks makes the most sense. Of course if you need ongoing income, you need bonds. If you are not comfortable with the risk or don't see the need to try and generate the additional returns, no need for all-stocks.

But losses come with the territory, and I don't know a single investor who would have bailed on a 100% stock portfolio that wouldn't have bailed on 90/10, 80/20, or probably even 70/30. I don't believe in one-size-fits all allocations or formulas, and outside of 100% bonds, I think most balanced allocations make sense for some investors. We just learned in a previous thread from a few days ago that many here don't believe its a good idea to rebalance back to stocks during serious declines despite very-low equity allocations. It strikes me that bad behavior is just that, regardless of allocation.

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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Ketawa » Thu Feb 07, 2013 12:58 pm

Sometimes I wonder if I should go up to 100% stocks. On one hand, I fit the profile of someone who has the ability to take a lot of risk: 25 years old, mostly recession-proof job (officer in military), will probably retire with a pension. In 2008-2009 I was 100% stocks. I never sold, but my portfolio was only around $10-15k. I was young and more foolish back than - I was 100% in the American Funds Capital World Growth and Income Fund (CWGIX) simply due to inertia from my father putting me in it. My XIRR calculation for 2008 was -39%. If stocks drop 50%, is there really that much of a difference between being down 50% (100% stocks) or down 39% (80% stocks/20% fixed income)? With 100% stocks, the upside is much greater over the next couple decades.

On the other hand, I tilt a lot to small/value and my portfolio is around $80k. I have 20% fixed income in the G Fund and a variety of CDs/savings accounts earning 3-4%. Especially with access to the G Fund, at the margin I should hold slightly more fixed income than the average person in my situation. That kind of risk-free return seems too good to pass up.
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The Solution or the Problem?

Postby EDN » Thu Feb 07, 2013 1:00 pm

Grt2bOutdoors wrote:Everyone, and I mean everyone should thank their lucky stars that a few brave souls stepped up to the plate to rescue the financial system or today both young and old would be singing quite a different tune. That's how close we came from falling into the abyss instead of just looking at it from the cliff's edge where we sit today (not much has changed in 4 years). You can quote all the backtesting and theory you want - it all would have gone right out the window if the banking system had collapsed. That includes fiat money and metals.


I know political discussions are not acceptable here, so I will simply say that I completely disagree with this comment. And ironically, this poster has actually identified the reason the market fell as far as it did in the first place, and not the solution to all that ails us. Same goes, more or less, for the Great Depression.

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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby garlandwhizzer » Thu Feb 07, 2013 2:39 pm

I totally agree with a 100% equity position for those less than 50 who have a stock market stomach. Considering long term returns it is the way to go in my opinion. If you have a stock dominated portfolio, however, it is critical to be able to tolerate large losses of portfolio value without letting emotions force you to sell at the bottom of a bear market. If your emotions take over during the crisis, you can seriously damage your asset base and should not be so heavily into equities. Wise investors, there are some, not many, Warren Buffet and Ben Graham come to mind, actually profit greatly from bear markets by buying precisely when the emotionally overwrought herd is panicking and rushing to sell, believing that the sky is falling. That is one reason, perhaps the main reason, that they hold bonds in their portfolios, to rebalance into stocks at propitious moments and take advantage of emotion driven market inefficiencies. As the saying goes, you make your money in bear markets. You just don't realize it at the time.

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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby SC Hoosier » Thu Feb 07, 2013 4:07 pm

Rick Ferri wrote:There are two sides to investing - there is math and there is emotion. This solution may be mathematically correct, but it's way off emotionally. Very few people can stand 100% in equity 100% of the time. And when those who do brave the odds do capitulate and sell, it's typically near the bottom.

Rick Ferri


I agree that 100% stocks is not a message for the masses. When I started this post, I didn't consider that. I was thinking mainly of myself, which was selfish. I see bear markets and recessions as buying opportunities and I look for money to buy with in my couch cushions. :D

I saw Ellis and Malkiel's book as permission to do what I felt was right for me all along.

I want to caution those that read this thread that a very small percentage of the population should use 100% equities. I agree with almost all the posts above.

I am honored that I've had so much participation by such respected posters in my first thread.

Thank you,

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Re: 100% Stocks

Postby dbr » Thu Feb 07, 2013 4:19 pm

EDN wrote: Of course if you need ongoing income, you need bonds.

Eric


That's not true. Why would it be true? Most disaccumulation models do not have much worse outcomes at 100% stocks than at some blend of stocks and bonds. The opposite statement that if one needs ongoing income you need stocks is somewhat true as those same models usually show that too much in bonds is dangerous.
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Bonds For Liquidity

Postby EDN » Thu Feb 07, 2013 5:35 pm

dbr wrote:
EDN wrote: Of course if you need ongoing income, you need bonds.

Eric


That's not true. Why would it be true? Most disaccumulation models do not have much worse outcomes at 100% stocks than at some blend of stocks and bonds. The opposite statement that if one needs ongoing income you need stocks is somewhat true as those same models usually show that too much in bonds is dangerous.


dbr,

That is probably true, I haven't run a lot of simulations on drawing income from 100% stocks, but I'd say it is true that you will usually come out with more money in the end at 100% stock than, say, 60/40. I say to include some bonds because I believe you sell bonds for income when stocks are down (2000-2002, 2008, 2011, etc.) to prevent you from locking in stock losses. But that is as much a behavioral ploy as anything, for the lower-returning bonds will have an impact. I am a bit partial to it however as it got my retirees through 2008.

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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby grayfox » Thu Feb 07, 2013 5:55 pm

SC Hoosier wrote:In their book "The Elements of Investing", one of them, not sure which, say that investors with high risk tolerance can be 100% equities up to 50 years old. I subscribe to this view as well. What are your thoughts?


The real time factor to consider is not age, but investment horizon. If the investing horizon is very long, than 100% stocks makes sense. So for instance, if you need the money 40 years hence, invest in asset class with highest expected return, which also has the highest risk, i.e. stocks. 30-year horizon, probably the same-100% stocks. 20-year horizon may still be 100% stocks.

But as you get closer to T0, maybe somewhere around 15- or 10-year horizon, it's necessary to start considering a transition to bonds. By about 5 years to go, you should probably have the money in a 5-year CD or Treasury note that will guarantee that you will meet the obligation. When the horizon is zero, you should have cash to pay for whatever it is you have to pay for.

The trickiest part is between 15 and 5 years when you transition for 100% stocks to CDs. I don't know if it's better to make the transition incrementally, like 10% per year, or opportunistically in one fell swoop. It probably depends on the circumstances.

Here's a table

Investment Horizon................AA
40 to 15 years................100% stocks
15 to 5 years............transition stocks to fixed
5 years......................100% no-risk fixed
0 years........................Cash to pay obligation
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby steve r » Thu Feb 07, 2013 6:15 pm

staythecourse wrote:Nothing wrong at all with being heavy on equities. Period. The data supports it. Anyone saying anything else is suffering from recency bias.


These claims of recency bias followed by a look back at data amuse me. The truth is we tend to only look back at 85 year periods in the U.S. (a great economic success) and exclude other less than successful countries (Argentina, Germany, Japan, Russia, Egypt, etc.) and exclude world history prior to 1926. Why 1926? (apart from available data).

That said staythecourse spoke of an aggressive 80/20 split model. For me (in my 40s) would be about mypersonal limit - absolute max. Backtest for 41 years (72 to 12) using Simba the 80/20 split (S&P500 / ITT) reduces returns ten basis points, greatly reduces risk.

OTOH
EDN wrote:I don't know a single investor who would have bailed on a 100% stock portfolio that wouldn't have bailed on 90/10, 80/20, or probably even 70/30. I don't believe in one-size-fits all allocations or formulas, and outside of 100% bonds,


Is a statement I could not agree with more.

I guess the moral of the story is to know your limits. Which is hard to know and also swayed by recency.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby RenoJay » Thu Feb 07, 2013 6:21 pm

Know thyself. I was very risk tolerant with 90% equities up through and including the crash of 2008. I stayed the course, told my friends to buy stocks, etc. Then, in late 2009, when the adrenaline wore off, I told myself I never wanted to go through that again and moved to a 60/40 blend between equity and fixed income (not necessarily bonds, but other non-equity fixed income.) I think the challenge with this kind of advice is that most people don't really know their personal level of risk-aversion and are likely to do something dumb at the wrong time if they're overweighted in equities to this degree.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby grabiner » Thu Feb 07, 2013 10:44 pm

Grt2bOutdoors wrote:David - Great advice. Unfortunately, many times someone will read an article or even some of the posts on the forum and think it's okay to go all-in including holding a significant portion of emerging markets, small value, etc. all because some poster said that is what they were doing and posted wonderful results. What many fail to account for is all of the above you posted.


And that is why, when I give advice, I never recommend anyone match my portfolio. If my portfolio is right for you, then you know enough to ignore that advice. (The main reason for that recommendation is that most posters seeking advice don't know how they will react to a bear market because they haven't been through one with a stock-heavy portfolio.)
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby Candor » Thu Feb 07, 2013 11:13 pm

Since my 20's it was my goal to be 100% equities for retirement until 50 and this was a theory of mine with virtually no investment knowledge at a relatively early age. My plan at that point was to pull 10% out each year until I was comfortable with my AA but these days at the age of 45 now 50 doesn't seem nearly as old as it did in my 20's so I will likely amend that and slowly start to pull out from the market as I age. I'm currently about 93% equities and after the dot.com bubble I may have dipped a little below 90% but for the most part I've been able to stay my course. As I get older and the stakes get higher I hope to continue to have the fortitude of my younger years.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby zaboomafoozarg » Thu Feb 07, 2013 11:23 pm

Rick Ferri wrote:Toto, we're not in 2008 anymore! The market will never go down again and we will never have to worry about emotional selling because, we'll we're sooooo educated now after the financial crisis. Everything is wonderful, isn't it, Toto?


Exactly what I was thinking.
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Re: Charlie Ellis & Burton Malkiel say 0% bonds OK under 50

Postby letsgobobby » Fri Feb 08, 2013 2:39 am

staythecourse wrote:Nothing wrong at all with being heavy on equities. Period. The data supports it. Anyone saying anything else is suffering from recency bias.

I crunched the numbers of a heavy equity investor (80/20) vs. a defensive investor (50/50) over every 10, 15, 20 year period from 1926 to current. The data CLEARLY supports the equity heavy investor and only increases over the longer time horizons. In 10 year periods the 80/20 investor outperformed 80%+, in 15 years periods they outfperformed 85%+, and in 20 year periods they outperformed 95%+. Of course, folks out there will clamor about "what about risk??" The answer of WORST underperformance when it didn't outperform was 20% less returns in 10 year periods, 15% less returns in 15 year periods, and <5% in 20 year periods.

The data is the data. The job of every investor is to determine extrapolate that information for their personal situation. In my view of investing in general is: it is a matter of weighing PROBABILITIES vs. POSSIBILITIES. The probablities of success and REDUCING underperformances is with the equity heavy portfolios and only increases with increasing time horizons. THe possiblities of failure and crashing and burning is there, but that is not evenly remotely the likely possiblity. So, the question remains is do you invest based on high probabilities or the low possibilities. The former is using a rational approach and the latter is more emotional. Either is fine, but every investor has to answer that question themselves.

This does come with the caveat that any investor considering high equities: Have a recession resistant job (trust me not many folks fit into this), long time horizon, and no need for the liquidity of those $$ before the date of retirement.

Good luck.

and why would you exclude the oh so interesting data from 1901 to 1926?You know, where the market went basically nowhere?
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