50/50 AA recommended by Benjamin Graham

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investing1012
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50/50 AA recommended by Benjamin Graham

Post by investing1012 »

Isn't a 50/50 Stock/Bond AA relatively high bond allocation for most? In the book titled The Intelligent Investor why does Benjamin Graham recommend this for most folks?
Last edited by investing1012 on Mon Jan 15, 2018 9:27 am, edited 1 time in total.
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Re: 50/50 AA recommended by Benjamin Graham

Post by stemikger »

investing1012 wrote: Mon Jan 15, 2018 9:03 am Isn't a 50/50 Stock/Bond AA relatively high stock allocation for most? In the book titled The Intelligent Investor why does Benjamin Graham recommend this for most folks?
I think he looks at this as the optimal for most but does suggest a range. I believe his suggestion is no less than 25% in stocks and no more than 75% in stocks. So, if you think 50/50 is too aggressive for you, anywhere within that range has Graham's blessing.

I personally don't think 50/50 is too aggressive if you are a long term investor. It certainly is a lot more conservative than his most famous student suggests.

Warren Buffett's suggestion is 90/10 and no it's not just for his wife, he tells most of his friends and relatives who are not wealthy to invest this way.

For the record, I'm 53 and will hold 60/40 through the balanced index for life. I actually have the blessing of John Bogle himself on this allocation thanks to Mel at the last meeting.
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Re: 50/50 AA recommended by Benjamin Graham

Post by dbr »

investing1012 wrote: Mon Jan 15, 2018 9:03 am Isn't a 50/50 Stock/Bond AA relatively high stock allocation for most? In the book titled The Intelligent Investor why does Benjamin Graham recommend this for most folks?
On the face of it and with no other criteria simply dividing something in half between the available choices is an obvious exercise in what I call the "Method of Ignorant Choice." Why do you think this is a relatively high stock allocation for most? Most of whom? A lot of evidence would suggest 50/50 is a pretty good optimum for the objectives of most retirees. It could be argued that it is too conservative for young investors.
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Re: 50/50 AA recommended by Benjamin Graham

Post by investing1012 »

dbr wrote: Mon Jan 15, 2018 9:19 am
investing1012 wrote: Mon Jan 15, 2018 9:03 am Isn't a 50/50 Stock/Bond AA relatively high stock allocation for most? In the book titled The Intelligent Investor why does Benjamin Graham recommend this for most folks?
On the face of it and with no other criteria simply dividing something in half between the available choices is an obvious exercise in what I call the "Method of Ignorant Choice." Why do you think this is a relatively high stock allocation for most? Most of whom? A lot of evidence would suggest 50/50 is a pretty good optimum for the objectives of most retirees. It could be argued that it is too conservative for young investors.
I agree, i meant a high bond allocation. 50/50 makes sense for a retiree but not for someone in their 30s or 40s looking to retire in greater than 10 years.
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Re: 50/50 AA recommended by Benjamin Graham

Post by stemikger »

Sorry, I read your post wrong. When I started investing, I was 30 and was 50/50 for many years but bonds were paying a lot more.

My daughter just got her first real job after getting her Masters degree and is making good money, I will give her Warren's advice because she is only 23 and tell her to check back with me in 10 years.
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Re: 50/50 AA recommended by Benjamin Graham

Post by Toons »

stemikger wrote: Mon Jan 15, 2018 9:12 am
investing1012 wrote: Mon Jan 15, 2018 9:03 am Isn't a 50/50 Stock/Bond AA relatively high stock allocation for most? In the book titled The Intelligent Investor why does Benjamin Graham recommend this for most folks?
I think he looks at this as the optimal for most but does suggest a range. I believe his suggestion is no less than 25% in stocks and no more than 75% in stocks. So, if you think 50/50 is too aggressive for you, anywhere within that range has Graham's blessing.

I personally don't think 50/50 is too aggressive if you are a long term investor. It certainly is a lot more conservative than his most famous student suggests.

Warren Buffett's suggestion is 90/10 and no it's not just for his wife, he tells most of his friends and relatives who are not wealthy to invest this way.

For the record, I'm 53 and will hold 60/40 through the balanced index for life. I actually have the blessing of John Bogle himself on this allocation thanks to Mel at the last meeting.
You sound like An "Intelligent Investor" :sharebeer
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Re: 50/50 AA recommended by Benjamin Graham

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investing1012 wrote: Mon Jan 15, 2018 9:03 am Isn't a 50/50 Stock/Bond AA relatively high bond allocation for most? In the book titled The Intelligent Investor why does Benjamin Graham recommend this for most folks?
I don't think his recommendation is quite that simple. While he does say that "the guiding rule is to maintain as nearly as practicable an equal division between bond and stock holdings", he does go on to describe that this adjustment can (and should) be adjusted over time depending on market movements.

The actual language is in the section titled "The Basic Problem of Bond-Stock Allocation", and is not a bad read.
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Re: 50/50 AA recommended by Benjamin Graham

Post by nisiprius »

His actual words:
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums. According to tradition the sound reason for increasing the percentage in common stocks would be the appearance of the "bargain price" levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common-stock component below 50% when in the judgement of the investor the market level has become dangerously high....

[However] we can give the investor no reliable ulres by which to reduce his common-stock holdings toward the 25% minimum and then rebuild them later to the 75% maximum. We can urge that in general the investor should not have more than one-half in equities unless he is has strong confidence in the soundness of his stock position and is sure that he could view of market decline of the 1969-70 type with equanimity....

We are thus led to put forward for most of our readers what may appear to be an oversimplified 50-50 formula...
Notice that not only is the stock allocation relatively low by present standards, but also notice the imprecision and the round numbers. No fancy math, no false precision. Graham:
  • Fundamental guiding principle: everyone, always, stay within the range of 25%-75% stocks.
  • Baseline: 50% stocks.
  • Most investors: don't go above 50% stocks. In fact,
  • For "most of our readers," just stick with 50-50.
This was written in 1973. It does reference conditions in the market in 1972. Graham's advice elsewhere seems to allow for some tactical asset allocation. The 25%-75% range limit is very firm and unconditional, the "oversimplified 50-50" is not.

Since then, the conventional wisdom and consensus recommendations for stock allocation have gone up and up and up. Jeremy Siegel's 1994 Stocks for the Long Run supported the trend. (As did Edgar Lawrence Smith's influential 1924 book, Common Stocks as Long-Term Investments.)

The conventional wisdom is, well, we know more now, we are right, Benjamin Graham was wrong. And market conditions have changed and we know how they've changed. It's sometimes accompanied by bogus justifications based on exaggerations of increases in life expectancy.

It is hard to realize just how much allocation advice has shifted. One salient point is that "traditionally" retirement savings portfolio always included allocations to all three asset classes: stocks, bonds, and "short-term reserves." Short-term reserves, i.e. cashlike investments, not in an emergency fund, but within the investment portfolio itself. An illustration of this is the Vanguard LifeStrategy fund series, which from their start in 1994, up to perhaps 2010 or so? included a meaningful allocation to short-term reserves.

At some point--and, by the way, well before money market fund interest rates dropped to near-zero--recommendations for "cash" or "short-term reserves" allocation suggestion simply vanished. Gone.
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Re: 50/50 AA recommended by Benjamin Graham

Post by B. Wellington »

stemikger wrote: Mon Jan 15, 2018 9:12 am
investing1012 wrote: Mon Jan 15, 2018 9:03 am Isn't a 50/50 Stock/Bond AA relatively high stock allocation for most? In the book titled The Intelligent Investor why does Benjamin Graham recommend this for most folks?
I think he looks at this as the optimal for most but does suggest a range. I believe his suggestion is no less than 25% in stocks and no more than 75% in stocks. So, if you think 50/50 is too aggressive for you, anywhere within that range has Graham's blessing.

I personally don't think 50/50 is too aggressive if you are a long term investor. It certainly is a lot more conservative than his most famous student suggests.

Warren Buffett's suggestion is 90/10 and no it's not just for his wife, he tells most of his friends and relatives who are not wealthy to invest this way.

For the record, I'm 53 and will hold 60/40 through the balanced index for life. I actually have the blessing of John Bogle himself on this allocation thanks to Mel at the last meeting.
^^^This...Some would argue that the 50% bond holding is too high. However, Graham also suggested keeping "a margin for error" within the portfolio. Be it classic value stocks and/or X% in bonds...
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Re: 50/50 AA recommended by Benjamin Graham

Post by 3funder »

I haven't read the book, though I plan to soon. My asset allocation plan is as follows:

Age 35: ~85/15
Age 40: ~80/20
Age 45: ~75/25
Age 50: ~70/30
Age 55: ~65/35
Age 60: ~60/40
Age 65: ~55/45
Age 70: ~50/50
Last edited by 3funder on Mon Jan 15, 2018 3:02 pm, edited 20 times in total.
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Re: 50/50 AA recommended by Benjamin Graham

Post by Scott S »

It's easy to scoff at Graham's advice as being overly conservative so many years into a great bull market, but I think there's a lot of wisdom to it. When you're young and your nest egg is small, you really should have some component of your portfolio that is safe in case something bad happens and you have to eat it. And for older folks, we have lots of data showing that portfolio survival becomes less sure if you are 100% in bonds.
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Re: 50/50 AA recommended by Benjamin Graham

Post by indexonlyplease »

There is also the thought of having enough and not taking the risk.

Someone at 50 yrs may have enough so why would they take the risk with higher AA in stocks. Also, someone with pension/pension and SS would have enough so why would they take the risk enventhough they can.
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Re: 50/50 AA recommended by Benjamin Graham

Post by TheAncientOne »

The Intelligent Investor was written in 1949 when the Dow Jones was at 180. Twenty years earlier, the Dow peaked at 380 in September 1929. Graham wrote at a time when the idea of being in stocks at all was widely considered to be incredibly risky. His idea of a good stock was one that had $20 in cash, net of all liabilities that was trading for $10. Like that dying New England textile manufacturer, Berkshire Hathaway. By the standards of his day, a recommendation for your base allocation to be 50% in stocks was controversial and presumed risky.
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Re: 50/50 AA recommended by Benjamin Graham

Post by stemikger »

Toons wrote: Mon Jan 15, 2018 9:57 am
stemikger wrote: Mon Jan 15, 2018 9:12 am
investing1012 wrote: Mon Jan 15, 2018 9:03 am Isn't a 50/50 Stock/Bond AA relatively high stock allocation for most? In the book titled The Intelligent Investor why does Benjamin Graham recommend this for most folks?
I think he looks at this as the optimal for most but does suggest a range. I believe his suggestion is no less than 25% in stocks and no more than 75% in stocks. So, if you think 50/50 is too aggressive for you, anywhere within that range has Graham's blessing.

I personally don't think 50/50 is too aggressive if you are a long term investor. It certainly is a lot more conservative than his most famous student suggests.

Warren Buffett's suggestion is 90/10 and no it's not just for his wife, he tells most of his friends and relatives who are not wealthy to invest this way.

For the record, I'm 53 and will hold 60/40 through the balanced index for life. I actually have the blessing of John Bogle himself on this allocation thanks to Mel at the last meeting.
You sound like An "Intelligent Investor" :sharebeer
Thanks Toons! Coming from you that is a great compliment! :beer

To be honest I never read the book, but maybe one day!
Last edited by stemikger on Tue Jan 16, 2018 5:08 am, edited 1 time in total.
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Re: 50/50 AA recommended by Benjamin Graham

Post by Leesbro63 »

One thing to remember is that Graham has been dead for 40 years and his great work was done 80 years ago. People didn't live as long, in general, and the idea of spending old age living above the garage of an adult child wasn't considered bad. Anyway, there wasn't as along a period for stocks to recover because people died too soon. So it makes sense to consider a somewhat higher stock allocation today. Also, "two Social Secuity check families" were uncommon.
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Re: 50/50 AA recommended by Benjamin Graham

Post by nisiprius »

Leesbro63 wrote: Mon Jan 15, 2018 11:24 am One thing to remember is that Graham has been dead for 40 years and his great work was done 80 years ago. People didn't live as long, in general, and the idea of spending old age living above the garage of an adult child wasn't considered bad. Anyway, there wasn't as along a period for stocks to recover because people died too soon. So it makes sense to consider a somewhat higher stock allocation today. Also, "two Social Secuity check families" were uncommon.
I repeat: the degree to which life expectancy has increased is often exaggerated. People are much too apt to cite "life expectancy since birth." What actually matters is life expectancy at age 65. Over the last seventy or eighty years or so, this has been increasing at the rate of about one year per decade, so, only four or five years more than in 1973. Enough to justify an increase from 50/50 to 55/45, perhaps; no more. "People are living longer" is a facile explanation that doesn't come close to explaining, accounting for, or justifying the increases in recommended stock allocation.

(And of course life expectancy in the United States has decreased by a hair for two years now. Not enough to matter, might even be a statistical glitch, and I'm not sure if that includes life expectancy at age 65 or only at birth. I would bet money, though, that I will not be reading any advice to trim back stock allocation slightly due to shorter life expectancy.)
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Re: 50/50 AA recommended by Benjamin Graham

Post by nisiprius »

TheAncientOne wrote: Mon Jan 15, 2018 11:05 amThe Intelligent Investor was written in 1949 when the Dow Jones was at 180.
The passage I quoted is from the 1973 edition, and makes specific reference to not going over 50% unless an investor "is sure that he could view of market decline of the 1969-70 type with equanimity." It is very clear that his "stick with 50%" recommendation is 1970s advice.
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Re: 50/50 AA recommended by Benjamin Graham

Post by indexonlyplease »

stemikger wrote: Mon Jan 15, 2018 9:32 am Sorry, I read your post wrong. When I started investing, I was 30 and was 50/50 for many years but bonds were paying a lot more.

My daughter just got her first real job after getting her Masters degree and is making good money, I will give her Warren's advice because she is only 23 and tell her to check back with me in 10 years.
I did the same with my son who is 21. His Roth is in the Vangaurd Target Dated Fund 90/10. If they had a 100% stock target fund I would put him in that one. But the target fund make it easy to invest and no decisions for him on AA.
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Re: 50/50 AA recommended by Benjamin Graham

Post by indexonlyplease »

stemikger wrote: Mon Jan 15, 2018 9:32 am Sorry, I read your post wrong. When I started investing, I was 30 and was 50/50 for many years but bonds were paying a lot more.

My daughter just got her first real job after getting her Masters degree and is making good money, I will give her Warren's advice because she is only 23 and tell her to check back with me in 10 years.
I did the same with my son who is 21. His Roth is in the Vangaurd Target Dated Fund 90/10. If they had a 100% stock target fund I would put him in that one. But the target fund makes it easy to invest and no decisions for him on AA.
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Re: 50/50 AA recommended by Benjamin Graham

Post by nisiprius »

An interesting question, which I once made a shallow dig into without coming up with any satisfying answer, is how did 50/50 become 60/40?

Graham suggests the nice-round-number 50/50 allocation as the neutral center (in "The Intelligent Investor," 1973).

Bogle suggested 50/50 (in "Twelve Pillars," 2001):
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
Harry Markowitz shrugged, apologized, and said that it what he himself actually used:
I should have computed the historical covariance of the asset classes and drawn an efficient frontier. Instead I visualized my grief if the stock market went way up and I wasn’t in it--or if it went way down and I was completely in it. My intention was to minimize my future regret, so I split my [pension scheme] contributions 50/50 between bonds and equities.
So where did the now-classic 60/40 allocation? I'd always assumed that 60/40 came from Markowitz's published MPT papers and represented the historic MPT optimum at the time he was writing, but it doesn't. Since he was thinking about pension funds, the SBBI "large-company stocks" and "long-term government bonds" series would probably represent "stocks" and "bonds" as he knew them. For those, from 1926-2014, the optimum was 45/55. From 1926 to 1952 (when Markowitz published his paper, "Portfolio Selection"), the optimum is 12/88! In general, even looking for one and cherry-picking, it is difficult to find any respectably long periods of time over which the optimum allocation between large-company stocks and long-term or intermediate-term government bonds was higher than 50% stocks.
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Re: 50/50 AA recommended by Benjamin Graham

Post by halfnine »

stemikger wrote: Mon Jan 15, 2018 9:32 am Sorry, I read your post wrong. When I started investing, I was 30 and was 50/50 for many years but bonds were paying a lot more.

My daughter just got her first real job after getting her Masters degree and is making good money, I will give her Warren's advice because she is only 23 and tell her to check back with me in 10 years.
While I don't necessarily disagree with the advice what are you going to tell her if risk does show up in the next next 10 years.
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Re: 50/50 AA recommended by Benjamin Graham

Post by Toons »

50/50 is a great "sleep well" point for many investors.
As long as you reach your financial goals....
It doesn't matter what your asset allocation entails.

The link below,,,,2014 but valuable insight.
:happy

http://awealthofcommonsense.com/2014/04 ... portfolio/
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Re: 50/50 AA recommended by Benjamin Graham

Post by azanon »

The danger of the higher than 50/50 allocation, is not necessarily the mathematics. Even I can accept that the expected return continues to rise with higher equities. The danger is that the average human thinks they have a higher than average risk tolerance, right up until the point that they find themselves in a harsh bear market. And then at some point, they sell. There are studies all over the place that show the average returns of a individual are way below the average returns for a set allocation, and it's because more people than not can't really handle the stock heavy asset allocation they chose.

So, if it were only a "sleep at night" issue, maybe not sleeping so great is worth the extra return. But the stakes are higher. You might actually earn less than your humble friend who went with 50/50 or less, cause you're a human investor, and not a computer investor.
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Re: 50/50 AA recommended by Benjamin Graham

Post by ruralavalon »

investing1012 wrote: Mon Jan 15, 2018 9:03 am Isn't a 50/50 Stock/Bond AA relatively high bond allocation for most? In the book titled The Intelligent Investor why does Benjamin Graham recommend this for most folks?
I don't believe that is too high for most, when looked at as a long-term proposition, although I accept that young investors can take more risk.

We are 72 years of age, and have had an asset allocation of 50/50 since age 63 in late 2008.

I can not understand the current high stock allocations (such as 90/10 in target date funds, or 100% stock threads) often suggested except as a function of the long bull market we have and a lack of perspective.
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Re: 50/50 AA recommended by Benjamin Graham

Post by Mike Scott »

I'm reading the edition with Zweig's comments now. It is an interesting historical view of investing and also demonstrates that people are not that different now than before. It seems to me that Grahams advice has held up well with time and more importantly, it is so much easier to follow his investing advice now (via a 2 or 3 or 4 fund portfolio or balanced funds that do all the work for you). Graham also allows a fair amount of "squishy" movements from the 50/50 mark within his firm 25-75 range depending on assessment of current markets. Does that make him a "market timer". He was definitely a "stock picker" but did not have much choice except to put together his own group of individual stocks. If I am understanding him so far, I think he would say that the small changes you make within the 25-75 probably don't matter that much.
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Re: 50/50 AA recommended by Benjamin Graham

Post by azanon »

ruralavalon wrote: Mon Jan 22, 2018 8:16 amWe are 72 years of age, and have had an asset allocation of 50/50 since age 63 in late 2008.
If you don't mind sharing, I'm curious to know what allocation you had prior to late 2008, and why you changed, especially given the state of the market at that time.
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Re: 50/50 AA recommended by Benjamin Graham

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azanon wrote: Mon Jan 22, 2018 8:35 am
ruralavalon wrote: Mon Jan 22, 2018 8:16 amWe are 72 years of age, and have had an asset allocation of 50/50 since age 63 in late 2008.
If you don't mind sharing, I'm curious to know what allocation you had prior to late 2008, and why you changed, especially given the state of the market at that time.
We had an asset allocation of 65/35 in mid-2008, the market collapse of 2008 almost reversed that to about 35/65. I was scared enough that I didn't want to go back to 65/35 so in late 2008 sold enough Treasury STRIPS to buy stock index funds to change our asset allocation to 50/50.
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Re: 50/50 AA recommended by Benjamin Graham

Post by Garco »

There's nothing wrong with 50-50 for a young person, but I was 75-25 for my first 25 years of investing, and then got too aggressive (over 80% stocks, and heavy into hi-tech) during the dot-com affair, and I paid for it! I did recover in about 3.5 years, but since then never held that large a percentage in equities but typically held 60-65%. Once I retired a few years ago, I dropped my ratio to between 50-50 and 45-55. I intend to stay there.
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Re: 50/50 AA recommended by Benjamin Graham

Post by Sandtrap »

Toons wrote: Mon Jan 22, 2018 7:39 am 50/50 is a great "sleep well" point for many investors.
As long as you reach your financial goals....
It doesn't matter what your asset allocation entails. :D :D

The link below,,,,2014 but valuable insight.
:happy

http://awealthofcommonsense.com/2014/04 ... portfolio/
Yes!!!
Things change when one has more to lose than to gain.

Good link.
Thanks for the read.
j :D
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Re: 50/50 AA recommended by Benjamin Graham

Post by renner »

Scott S wrote: Mon Jan 15, 2018 11:02 am It's easy to scoff at Graham's advice as being overly conservative so many years into a great bull market, but I think there's a lot of wisdom to it.
Agreed. As much as I like thee Bogleheads, I do see the effects of being many years into a great bull market on many of us, myself included.
I like then essence of Graham's book about AA and stay the course. Very classic book. The only argument that I may buy favoring a higher allocation in stocks than 50/50 is life expectancy.
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Re: 50/50 AA recommended by Benjamin Graham

Post by zengolf2011 »

ruralavalon wrote: Mon Jan 22, 2018 8:53 am
azanon wrote: Mon Jan 22, 2018 8:35 am
ruralavalon wrote: Mon Jan 22, 2018 8:16 amWe are 72 years of age, and have had an asset allocation of 50/50 since age 63 in late 2008.
If you don't mind sharing, I'm curious to know what allocation you had prior to late 2008, and why you changed, especially given the state of the market at that time.
We had an asset allocation of 65/35 in mid-2008, the market collapse of 2008 almost reversed that to about 35/65. I was scared enough that I didn't want to go back to 65/35 so in late 2008 sold enough Treasury STRIPS to buy stock index funds to change our asset allocation to 50/50.
We're about the same age, and my experience was similar. I retired in November 2007, possibly the worst time since the awful '70s. I'd been betting against bonds throughout my pre-retirement decade. As a result, I missed out on a great bull market in bonds. My stock allocation experienced no capital appreciation during that decade, just the dividend return. Then the market debacle ensued.

I don't think I'm gun-shy, and I've never been risk-averse or panicky. I did use the 2007 stock rout as a buying opportunity. But I came to appreciate the wisdom of Graham's advice, and have stuck to about a 50-50 allocation since. I'm much, much more concerned about portfolio longevity than short-term performance.

I believe there have been multiple studies of the period from about 1970 through the present supporting a stock allocation of 40-60% for portfolio longevity (BlackRock published one). The wake does not steer the boat, but I'll stick with the time-tested strategies of Graham, Bogel, and Larimore -- the three investing students I admire the most.
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Re: 50/50 AA recommended by Benjamin Graham

Post by Toons »

Sandtrap wrote: Mon Jan 22, 2018 9:15 am
Toons wrote: Mon Jan 22, 2018 7:39 am 50/50 is a great "sleep well" point for many investors.
As long as you reach your financial goals....
It doesn't matter what your asset allocation entails. :D :D

The link below,,,,2014 but valuable insight.
:happy

http://awealthofcommonsense.com/2014/04 ... portfolio/
Yes!!!
Things change when one has more to lose than to gain.

Good link.

Thanks for the read.
j :D

:thumbsup
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
qwertyjazz
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Re: 50/50 AA recommended by Benjamin Graham

Post by qwertyjazz »

nisiprius wrote: Mon Jan 22, 2018 6:06 am An interesting question, which I once made a shallow dig into without coming up with any satisfying answer, is how did 50/50 become 60/40?

Graham suggests the nice-round-number 50/50 allocation as the neutral center (in "The Intelligent Investor," 1973).

Bogle suggested 50/50 (in "Twelve Pillars," 2001):
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
Harry Markowitz shrugged, apologized, and said that it what he himself actually used:
I should have computed the historical covariance of the asset classes and drawn an efficient frontier. Instead I visualized my grief if the stock market went way up and I wasn’t in it--or if it went way down and I was completely in it. My intention was to minimize my future regret, so I split my [pension scheme] contributions 50/50 between bonds and equities.
So where did the now-classic 60/40 allocation? I'd always assumed that 60/40 came from Markowitz's published MPT papers and represented the historic MPT optimum at the time he was writing, but it doesn't. Since he was thinking about pension funds, the SBBI "large-company stocks" and "long-term government bonds" series would probably represent "stocks" and "bonds" as he knew them. For those, from 1926-2014, the optimum was 45/55. From 1926 to 1952 (when Markowitz published his paper, "Portfolio Selection"), the optimum is 12/88! In general, even looking for one and cherry-picking, it is difficult to find any respectably long periods of time over which the optimum allocation between large-company stocks and long-term or intermediate-term government bonds was higher than 50% stocks.
Probably not the actual history. But given the presumed lower risk of indexing versus individual stocks, in your opinion, does that change the stock to bond ratio?

Thank you
QJ
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whodidntante
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Re: 50/50 AA recommended by Benjamin Graham

Post by whodidntante »

If you adjust for the gigantic pile of cash that a lot of people keep for down payments, cars, and "emergency funds" plus whatever they formerly call fixed income then a lot of people have conservative portfolios. Some young people don't even have 50% stock.
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patrick013
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Re: 50/50 AA recommended by Benjamin Graham

Post by patrick013 »

Image
Here's a low beta creation. Low enough to provide liquidity at a good
price and an equal tilt to SC to provide a bit more return. For an old
portfolio going into retirement doesn't look too bad. Prices today are
so high.
age in bonds, buy-and-hold, 10 year business cycle
metacritic
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Re: 50/50 AA recommended by Benjamin Graham

Post by metacritic »

One thing I haven't seen mentioned is that most people who could invest in the market surely had a pension in 1973. Their need to take risk was likely smaller than many people's need today over the course of their investing careers. Today we need to take on considerable risk (ie. greater amounts in equities) because we don't have pensions to enhance our portfolios. (Yes, you also could argue that people could safely take on more risk, but the point is that they didn't need to take on the risk to retire.

I can't back this up with numbers, however, but It feels like important context.
MichaelM
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Re: 50/50 AA recommended by Benjamin Graham

Post by MichaelM »

I am retired and portfolio is at 51/49 now. I was at at 70/30 when the bear market of 2000 arrived. I still have memories of this grinding bear. Every week was down from the previous week. This went on for awhile. Took courage to buy into that bear! I have not yet forgot that feeling of gloom that was all around.
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Re: 50/50 AA recommended by Benjamin Graham

Post by Dottie57 »

stemikger wrote: Mon Jan 15, 2018 9:12 am
investing1012 wrote: Mon Jan 15, 2018 9:03 am Isn't a 50/50 Stock/Bond AA relatively high stock allocation for most? In the book titled The Intelligent Investor why does Benjamin Graham recommend this for most folks?
I think he looks at this as the optimal for most but does suggest a range. I believe his suggestion is no less than 25% in stocks and no more than 75% in stocks. So, if you think 50/50 is too aggressive for you, anywhere within that range has Graham's blessing.

I personally don't think 50/50 is too aggressive if you are a long term investor. It certainly is a lot more conservative than his most famous student suggests.

Warren Buffett's suggestion is 90/10 and no it's not just for his wife, he tells most of his friends and relatives who are not wealthy to invest this way.

For the record, I'm 53 and will hold 60/40 through the balanced index for life. I actually have the blessing of John Bogle himself on this allocation thanks to Mel at the last meeting.
Right now, entering retirement at 61, I am at 50/50. Let's me sleep at night.
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Re: 50/50 AA recommended by Benjamin Graham

Post by cloppydogroll »

destroying the beauty of compound returns with 50% bonds for what can only be described as "sleep factor" is sacrilege. Every inch of return matters because compounded it becomes a mile
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Re: 50/50 AA recommended by Benjamin Graham

Post by tennisplyr »

Retired for 7 years, in mid sixties. Am at 45/55 which works for us since we've achieved our goals.
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀
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Re: 50/50 AA recommended by Benjamin Graham

Post by Peculiar_Investor »

nisiprius wrote: Mon Jan 15, 2018 10:08 am His actual words:
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums. According to tradition the sound reason for increasing the percentage in common stocks would be the appearance of the "bargain price" levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common-stock component below 50% when in the judgement of the investor the market level has become dangerously high....

[However] we can give the investor no reliable ulres by which to reduce his common-stock holdings toward the 25% minimum and then rebuild them later to the 75% maximum. We can urge that in general the investor should not have more than one-half in equities unless he is has strong confidence in the soundness of his stock position and is sure that he could view of market decline of the 1969-70 type with equanimity....

We are thus led to put forward for most of our readers what may appear to be an oversimplified 50-50 formula...
Notice that not only is the stock allocation relatively low by present standards, but also notice the imprecision and the round numbers. No fancy math, no false precision. Graham:
  • Fundamental guiding principle: everyone, always, stay within the range of 25%-75% stocks.
  • Baseline: 50% stocks.
  • Most investors: don't go above 50% stocks. In fact,
  • For "most of our readers," just stick with 50-50.
This was written in 1973. It does reference conditions in the market in 1972. Graham's advice elsewhere seems to allow for some tactical asset allocation. The 25%-75% range limit is very firm and unconditional, the "oversimplified 50-50" is not.

Since then, the conventional wisdom and consensus recommendations for stock allocation have gone up and up and up. Jeremy Siegel's 1994 Stocks for the Long Run supported the trend. (As did Edgar Lawrence Smith's influential 1924 book, Common Stocks as Long-Term Investments.)

The conventional wisdom is, well, we know more now, we are right, Benjamin Graham was wrong. And market conditions have changed and we know how they've changed. It's sometimes accompanied by bogus justifications based on exaggerations of increases in life expectancy.

It is hard to realize just how much allocation advice has shifted. One salient point is that "traditionally" retirement savings portfolio always included allocations to all three asset classes: stocks, bonds, and "short-term reserves." Short-term reserves, i.e. cashlike investments, not in an emergency fund, but within the investment portfolio itself. An illustration of this is the Vanguard LifeStrategy fund series, which from their start in 1994, up to perhaps 2010 or so? included a meaningful allocation to short-term reserves.

At some point--and, by the way, well before money market fund interest rates dropped to near-zero--recommendations for "cash" or "short-term reserves" allocation suggestion simply vanished. Gone.
Thank you very much for looking beyond the "headline" numbers and providing a fuller context to what Graham stated and why. I've read The Intelligent Investor and believe that like most classic investment books the advice is relatively timeless, particularly your point
nisiprius wrote: Mon Jan 15, 2018 10:08 am also notice the imprecision and the round numbers. No fancy math, no false precision.
As to Buffett's 90/10 advice, again I would suggest further reading and context is required. It comes from Buffett's 2013 Shareholder letter, pg 19-20,
Warren Buffett wrote:That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better longterm results than the knowledgeable professional who is blind to even a single weakness.

If “investors” frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.

Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
From my reading of Buffett's letter, the advice about as much about " ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm." rather than the specific asset allocation details of how Buffett recommends to the trustee.

In the world of 'sound bites' that we live in, few people take the time to read and ponder the underlying context of the sound bite quote to appreciate the thought(s) and theory behind it. That's a big mistake IMHO.
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Re: 50/50 AA recommended by Benjamin Graham

Post by ruralavalon »

cloppydogroll wrote: Mon Jan 22, 2018 7:24 pm destroying the beauty of compound returns with 50% bonds for what can only be described as "sleep factor" is sacrilege. Every inch of return matters because compounded it becomes a mile
On the wiki the 10 basic principles are called "Bogleheads Investment Philosophy", not the Commandments of the Boglehead's Religion. It's not a religion, so there is no sacrilege.

Both investing early and often (for the compounding), and not taking too much or too little risk (to sleep at night) are parts of the Bogleheads Philosophy. It's obviously necessary to balance these 10 principles, rather than focus on just one.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: 50/50 AA recommended by Benjamin Graham

Post by rec7 »

I understand Graham. Look at a chart of 100% stocks vs 50/50 the 50/50 person earned about 82% of the gains if you start in the 1920's to present. I think his point is you don't have to go to great risk to get most of the gains in the market.
Last edited by rec7 on Tue Jan 23, 2018 9:23 am, edited 1 time in total.
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Accrual
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Re: 50/50 AA recommended by Benjamin Graham

Post by Accrual »

whodidntante wrote: Mon Jan 22, 2018 12:55 pm If you adjust for the gigantic pile of cash that a lot of people keep for down payments, cars, and "emergency funds" plus whatever they formerly call fixed income then a lot of people have conservative portfolios. Some young people don't even have 50% stock.
This is very true. About to turn 27 and with my emergency fund + house down payment fund, I am just at around 50% equities.
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