Equal Stock/Bond allocation

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rbwb
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Equal Stock/Bond allocation

Post by rbwb »

When looking at asset allocations why do the models give 60/40 and 40/60 but not 50/50?

Depending on the amount in cash I realize it might not be actually 50/50 but still equal stocks/bonds plus cash.
It sure seems like a simple allocation and easy to rebalance.
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leonidas
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Re: Equal Stock/Bond allocation

Post by leonidas »

I have been close to 50/50 for about 7 years now. I like simplicity.
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nisiprius
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Re: Equal Stock/Bond allocation

Post by nisiprius »

Apart from my belief that the difference between 60/40 and 50/50 isn't significant, I have seriously wondered myself what the origins of the "60/40" allocation are. I've done some casual searching and nothing has popped up. I thought it might be the efficient frontier for the S&P 500 and long-term government bonds at the time when Harry Markowitz published his 1952 paper, but I don't think it is. Here's what I'm finding. Now in fact the CRSP wasn't founded until 1960, and the original "􏰈􏰂􏰉􏰊􏰅􏰆􏰇􏰈􏰋􏰌􏰌􏰅􏰆􏰇􏰍􏰉􏰊􏰇􏰎􏰉􏰏􏰌􏰍􏰁􏰋􏰂􏰉􏰐􏰇􏰑􏰒􏰍􏰓􏰔􏰕􏰖􏰔􏰑􏰒􏰍􏰓􏰇􏰗􏰋􏰅􏰁􏰂􏰓􏰋􏰃􏰍􏰌􏰇􏰘􏰒􏰁􏰙􏰓􏰉􏰅􏰇􏰚􏰛􏰜􏰝􏰞􏰔􏰛􏰜􏰟􏰠􏰡􏰈􏰂􏰉􏰊􏰅􏰆􏰇􏰈􏰋􏰌􏰌􏰅􏰆􏰇􏰍􏰉􏰊􏰇􏰎􏰉􏰏􏰌􏰍􏰁􏰋􏰂􏰉􏰐􏰇􏰑􏰒􏰍􏰓􏰔􏰕􏰖􏰔􏰑􏰒􏰍􏰓􏰇􏰗􏰋􏰅􏰁􏰂􏰓􏰋􏰃􏰍􏰌􏰇􏰘􏰒􏰁􏰙􏰓􏰉􏰅􏰇􏰚􏰛􏰜􏰝􏰞􏰔􏰛􏰜􏰟􏰠􏰡􏰈􏰂􏰉􏰊􏰅􏰆􏰇􏰈􏰋􏰌􏰌􏰅􏰆􏰇􏰍􏰉􏰊􏰇􏰎􏰉􏰏􏰌􏰍􏰁􏰋􏰂􏰉􏰐􏰇􏰑􏰒􏰍􏰓􏰔􏰕􏰖􏰔􏰑􏰒􏰍􏰓􏰇􏰗􏰋􏰅􏰁􏰂􏰓􏰋􏰃􏰍􏰌􏰇􏰘􏰒􏰁􏰙􏰓􏰉􏰅􏰇􏰚􏰛􏰜􏰝􏰞􏰔􏰛􏰜􏰟􏰠􏰡Stocks, Bonds, Bills and Inflation: Year-By-Year Historical Returns (1926-1974)" by Ibbotson and Sinquefield was not published until 1976, so I don't know exactly what data he would have have, but using the SBBI data this is what I'm seeing:

Image

Inflation-adjusted:

Image

In short from 1926 to 1952 the optimum mix was far more than 50% bonds.

As a check on my math, if I use the same data Portfolio Visualizer uses I get this from Portfolio Visualizer

Image

and I get this myself:

Image

In this case, the tangent portfolio is 47% stocks, 53% bonds.

I've been playing around with this and I cannot find a place where the tangent portfolio is 60/40 unless I do some serious cherry-picking of the year range.

So I just don't know where 60/40 comes from and I'm actually quite curious to know.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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nisiprius
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Re: Equal Stock/Bond allocation

Post by nisiprius »

P.S. "Portfolio Selection," Harry Markowitz, The Journal of Finance Volume 7, Issue 1, pages 77–91, March 1952, doesn't seem to contain any actual financial data at all. And the charts in it do not show "Markowitz bullets," or rather they might be transverse slices rather than the usual sagittal sections. It certainly doesn't say anything about 60/40.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
RetiredinKaty
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Re: Equal Stock/Bond allocation

Post by RetiredinKaty »

The article referenced below by Peter Bernstein may give some insight into the origin of the 60/40 portfolio. It seems to be based on 1) a diversified mix of stocks and bonds is good, 2) stocks in the long run make more than bonds but are much more risky, and 3) so a prudent long term portfolio should favor stocks but not by too much???

viewtopic.php?t=11879
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nisiprius
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Re: Equal Stock/Bond allocation

Post by nisiprius »

RetiredinKaty wrote:The article referenced below by Peter Bernstein may give some insight into the origin of the 60/40 portfolio. It seems to be based on 1) a diversified mix of stocks and bonds is good, 2) stocks in the long run make more than bonds but are much more risky, and 3) so a prudent long term portfolio should favor stocks but not by too much???

viewtopic.php?t=11879
Very frustrating. I have skimmed the article, which looks good and interesting, but I am darned if it gives any explanation as to where the numbers "60" and "40" come from. He says at the beginning
Once upon a time—that is, for many years before the great bull market of the ’90s—the most popular benchmark for portfolio asset allocation aimed at this goal was about 60 per- cent in stocks and 40 percent in fixed-income investments.
and he says at the end
I propose restoring 60/40 to its rightful place as the center of gravity of asset allocation for long-term investors.
But not a hint as to why it was "the most popular benchmark."

He address the question and IMHO completely evades it when he says
Then why not 50/50, or even 40/60? The answer is in how markets work. Rational investors buy stocks only when they can expect to make enough extra in the stock market to compensate for the greater risks involved in owning stocks. This dynamic process of pricing stocks relative to less risky assets explains why, over the long run, stocks have returned more than bonds and why, therefore, more stocks than bonds makes good sense.
Then why not 65/35 or 70/30 or 75/25?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
jbrinker
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Re: Equal Stock/Bond allocation

Post by jbrinker »

I have nothing to add, but this is the start of what I hope to be an interesting conversation. I wonder if you might want to take this over to the other board (theory)?
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