Malkiel's recommendations, 1990 to 2015

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nisiprius
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Malkiel's recommendations, 1990 to 2015

Post by nisiprius » Sat Jan 17, 2015 10:45 am

In my opinion there is no rational way to explain this as an objective response to anything; the world and the fundamental principles of investing could not have changed this much. I think the change in Malkiel's views are mostly a reflection of changes in mainstream conventional wisdom, but that in itself raises questions.

Burton Malkiel, A Random Walk Down Wall Street, 1990 edition (the first one to include lifecycle portfolio suggestions)

1990:
Image
The omission of international stocks is not an oversight; in 1990 he recommended that international stocks be 15% of total portfolio in "mid-twenties," 10% of total portfolio in "mid-fifties," and none at all in "late sixties and beyond."

2015: Current edition (eleventh) W. W. Norton, ISBN-13: 978-0393246117 ISBN-10: 0393246116.
Image
Notice that the stock allocation has increased much more than a glance at the pie chart shows, because "real estate" means, specifically, REITS, and because he allows "dividend growth stocks" to be included in "bonds!" Thus the stock allocation for a retiree in 2015 is close to 60%, double what he recommended in 1990.

I think it is instructive to compare his 2015 recommendation for "late sixties to his 1990 recommendation for "late thirties to early forties:"

1990:
Image

Someone in their late thirties to early forties who invested according to Malkiel's recommendations in 1990 and continued to followed them in subsequent editions of the book would not, in fact, have reduced her risk at all! In every edition of his book, he has recommended risk reduction with age--yet his overall recommendations have gotten progressively more aggressive, so that the risk reduction never occurs! The risk reduction with age is entirely offset by general increases in aggressiveness across the board.

(This happen to parallel what has actually happened in Vanguard's target retirement funds).
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Re: Malkiel's recommendations, 1990 to 2015

Post by lazyday » Sat Jan 17, 2015 11:11 am

If I were to try hard to defend Malkiel, I'd say that in 1990, stocks and probably bonds had higher expected return than today. So we need to take more risk to get the same expected return.

Looks like he's still into growth, with that suggestion about "smaller growth companies".

Personally I'm a bigger fan of Swensen and W Bernstein. I don't follow any single guru, but try to learn a bit from each.

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Re: Malkiel's recommendations, 1990 to 2015

Post by dh » Sat Jan 17, 2015 11:22 am

It may be that an increase in life expectancy and decrease in defined benefit/pensions account for some of the change. Regardless, it is very interesting. I appreciate the OP's post!

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Re: Malkiel's recommendations, 1990 to 2015

Post by staythecourse » Sat Jan 17, 2015 11:30 am

My guesses would be low inflation leading to low interest rates leading to low bond yields for many retirees.

Now to be fair one should compare him to someone else to see if what his changes are the "norm" or the outlier. Don't think there was lifecycle funds back then, but if there was how did their's change?

My guess, is MANY folks have changed. Look at the simple age in bonds. When Mr. Bogle started advocating for that it was just accepted as age in bonds. Now folks routinely push the 110 or 120- age equations. Are we living that much longer from the first piece of advice to the second?

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Re: Malkiel's recommendations, 1990 to 2015

Post by dbr » Sat Jan 17, 2015 11:32 am

Something like this requires an explanation of the analysis and rationale for the recommendations. It has been ages since I might have read Malkiel's original book and I don't remember the details. You can't just blast out a nice pie chart without some reason for it, and you can't change the recommendation over time without an explanation.

I'm not volunteering to go back and try to figure it out, but if I did it would be to find what line of thinking leads to the possibility that a specific indicated allocation across bonds, stocks, etc. even exists for the retiree drawing down a portfolio. I am inclined to look at the data that says asset allocation during retirement drawdown is not very important over a pretty broad range.

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Re: Malkiel's recommendations, 1990 to 2015

Post by vencat » Sat Jan 17, 2015 12:06 pm

While I respect all the experts I also pay heed to the the notion, ALL idols have clay feet.
This recent article is very good advice from him.
http://www.wsj.com/articles/burton-g-ma ... 1419986157
But he actually advocates replacing part of the bond portfolio with dividend growth stocks!!! Boglehead heresy!
A few years ago he was advocating this:
http://www.wsj.com/articles/SB100014240 ... 4281603104.

Other questionable, confusing recommendations from different Boglehead experts:
1) Reluctant/absent support for international stocks.
2) Inclusion of Commodities.
3) Including Junk bonds (even the decent Vanguard High Yield Corporate fund lost 20% in 2008)
4) Shifting strategy for TIPS

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Re: Malkiel's recommendations, 1990 to 2015

Post by tibbitts » Sat Jan 17, 2015 1:50 pm

staythecourse wrote:My guesses would be low inflation leading to low interest rates leading to low bond yields for many retirees.

Now to be fair one should compare him to someone else to see if what his changes are the "norm" or the outlier. Don't think there was lifecycle funds back then, but if there was how did their's change?

My guess, is MANY folks have changed. Look at the simple age in bonds. When Mr. Bogle started advocating for that it was just accepted as age in bonds. Now folks routinely push the 110 or 120- age equations. Are we living that much longer from the first piece of advice to the second?

Good luck.

There hasn't been nearly enough change in life expectancy to justify the degree of changes in recommendations that we're seeing. So either the original recommendations were more correct, or the new recommendations are more correct. If we choose to believe that the old recommendations were correct for their time, and new ones are correct for their time, then we're acknowledging that timing is the correct path - and just have to decide on the algorithm. My guess is that most forum members are already on board with this; they just don't like to acknowledge that they've abandoned "stay the course."

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Re: Malkiel's recommendations, 1990 to 2015

Post by RyeWhiskey » Sat Jan 17, 2015 3:11 pm

The discrepancies aside, all of those portfolios seem too complicated for everyday folks (like my retired parents, both 65+). 7+ fund portfolios? It seems as though the complexity is the only thing which remained constant through the years... :beer
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Re: Malkiel's recommendations, 1990 to 2015

Post by Toons » Sat Jan 17, 2015 3:17 pm

Nice pie charts.
2015 -Lifestrategy Conservative Growth :happy
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Re: Malkiel's recommendations, 1990 to 2015

Post by baw703916 » Sat Jan 17, 2015 3:24 pm

The conclusion is obvious: 65 is the new 35! :beer
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Re: Malkiel's recommendations, 1990 to 2015

Post by ourbrooks » Sat Jan 17, 2015 3:31 pm

Things do change. In 1970, you couldn't hold Vanguard funds in your IRA because (a) there were no Vanguard funds and (b) there were no IRAs!

Although the 1990 portfolio would have produced low volatility, it is actually a quite risky portfolio from the point of view of running out of money. It's at the minimum for stock allocations for the 4% withdrawal rate and stocks tend to provide some degree of inflation compensation. If five more years of 1975-1980 inflation levels had occurred, people using this asset allocation might have found their budgets squeezed really hard. Bengen's withdrawal rate work was published in 1994 so Malkiel didn't have the benefit of all of the safe withdrawal rate studies to look at. I wonder whether after all of those studies came out, Malkiel didn't decide that he'd erred in the direction of low volatility at the cost of higher risk.

One of the possible reasons Malkiel didn't include REITs in his recommendations was that they would have to have been purchased as individual equities; the Vanguard fund wasn't started until 1996 and there weren't many other funds available. If I were Malkiel, I'd want to make space for them. Things have to add up to 100% so something else has to be reduced if REITs are held at a meaningful level.

It would be wonderful if Prof. Malkiel posted the reasons for his choices, but a lot of the differences between 1990 and 2015 can be explained by more recent work on investment outcomes and by the availability of new, better investment vehicles.

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Re: Malkiel's recommendations, 1990 to 2015

Post by dkturner » Sat Jan 17, 2015 3:37 pm

Isn't it possible that Malkiel took a look around, made some assumptions about future needs and returns, and changed his mind about what, in his opinion, would be now be the best AA for a new retiree? Last time I checked the world is a lot different now than it was in 1990. We now think we know a lot more about the behavior of asset classes and there are a lot more low cost investment options than there were 25 years ago.

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Re: Malkiel's recommendations, 1990 to 2015

Post by columbia » Sat Jan 17, 2015 3:38 pm

The 15% international is also interesting and I believe nisiprius has commented on this in the past.

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Re: Malkiel's recommendations, 1990 to 2015

Post by tibbitts » Sat Jan 17, 2015 3:51 pm

dkturner wrote:Isn't it possible that Malkiel took a look around, made some assumptions about future needs and returns, and changed his mind about what, in his opinion, would be now be the best AA for a new retiree? Last time I checked the world is a lot different now than it was in 1990. We now think we know a lot more about the behavior of asset classes and there are a lot more low cost investment options than there were 25 years ago.

Undeniably there are better products today, but that doesn't change the extraordinary shift to more aggressive allocations.

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Re: Malkiel's recommendations, 1990 to 2015

Post by Leeraar » Sat Jan 17, 2015 4:20 pm

Aha!

You have discovered that successive editions of "A Random Walk Down Wall Street" are, essentially, investment newsletters.

What does Hulbert say?

L.
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Re: Malkiel's recommendations, 1990 to 2015

Post by nisiprius » Sat Jan 17, 2015 9:58 pm

Interestingly, now that I think about it, Malkiel's recommendation for 10% cash has remained rock-steady (despite large changes in the return from cash!)
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Re: Malkiel's recommendations, 1990 to 2015

Post by Wildebeest » Sat Jan 17, 2015 10:35 pm

Burton Malkiel is now 79 or there about and I hope he is as mentally sharp as John C Bogle at 85. You do wonder though and baw7039716 hits the nail on the head as in in Burton Malkiel's head 65 is the new 35 and may be Malkiel thinks he found the fountain of youth.


His book " A random walk on Wall street" was and is a classic and I wish that with advancing age comes wisdom, unfortunately his latest publicatons do not support that.
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Re: Malkiel's recommendations, 1990 to 2015

Post by msi » Sun Jan 18, 2015 5:30 am

Book royalties are more like a bond substitute than dividend growth stocks.

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Re: Malkiel's recommendations, 1990 to 2015

Post by dkturner » Sun Jan 18, 2015 7:09 am

nisiprius wrote:Interestingly, now that I think about it, Malkiel's recommendation for 10% cash has remained rock-steady (despite large changes in the return from cash!)


Yes, but in 2015 he includes short-term bonds as "cash". In 1990 he defined cash as money market funds. Looking at the Vanguard Total Bond Market Index Fund we see that 5.9% of assets have an effective maturity of under 1 year and 26.8% have an effective maturity of 1-3 years. Looks like a retiree holding the bulk of fixed income allocation in the TBM fund doesn't need much of an allocation to a money market fund. Don't you think that Malkiel deliberately changed the definition of "cash" in 2015 because the world has changed and he is adopting his thinking to the new realities?

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Re: Malkiel's recommendations, 1990 to 2015

Post by nedsaid » Sun Jan 18, 2015 10:56 am

This is why I have a rather relaxed attitude about asset allocation and rebalancing. Both are important but I have to admit that I have allowed some portfolio drift. For example, my International portion of my stocks has drifted between 23% and 27% or so. Though I have posted that International Stocks are relatively cheap versus US Stocks, my International portion has drifted lower because of the very strong relative performance of the US market. 23% is still "enough" so I don't obsess over it. We don't know for sure what the best asset allocation going forward will be, so we are essentially making our best educated guesses.

It looks like what Malkiel and Vanguard are doing is "reaching for return." As interest rates drop, portfolios tend to get more and more aggressive. I personally have "reached for return" rather than "reach for yield", keeping a relatively high allocation to stocks rather than venture into the riskier areas on the bond market. It comes with a reluctance to accept lower returns.

It also shows that we are all human with weaknesses and foibles. I am sure that if I posted my portfolio in detail, I would get reactions of "what the heck is Ned thinking?" Or "why is that in there?" Or folks might wonder why I don't have more International Stocks if I like them so much. I am sure people could find inconsistencies in my thinking and approach. People could look over my transaction history and point out errors that I have made.

Pretty much we do what we think is best armed with whatever knowledge we have at the time. As much as we like to think of ourselves as rock solid in our investment approaches and immune to emotion, we are still fickle beings. So if I read something compelling, I might decide to experiment with a small part of my portfolio to see if it works out. So in some respects, you might say that my own portfolio is a bunch of little lab experiments. I've tried individual stocks, earnings and price momentum, value, small/value tilting, indexing and dividends. Then I read Larry Swedroe and tell myself that I discovered factor investing before the academics did (not really but perhaps I was on to something without fully realizing it at the time).

So my investing sins are probably as bad or worse than Malkiel's. I went from a very cautious investor who would barely venture beyond bank certificates of deposit to a swashbuckling risk taker. Now I am somewhere in between.

So it is sort of like the managers in private business. They engage in what is known by "management by trade magazine." You tend to want to do as a manager what the trade magazine tells you to do and what your peers in the industry are doing. You want to be modern, progressive, and on the cutting edge. "Stay the course" seems to be for old fogies who don't get it. Investors are not any different.
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Re: Malkiel's recommendations, 1990 to 2015

Post by dbr » Sun Jan 18, 2015 11:16 am

nedsaid wrote:It looks like what Malkiel and Vanguard are doing is "reaching for return." As interest rates drop, portfolios tend to get more and more aggressive. I personally have "reached for return" rather than "reach for yield", keeping a relatively high allocation to stocks rather than venture into the riskier areas on the bond market. It comes with a reluctance to accept lower returns.




Good point, and I think you are right. Definitions of the index aside, I think Bogle's tilt to corporates is clear advice to take more risk for more return when interest rates are low. One may hardly even mention advice to move to dividend stocks. If there is a good argument that investors should take more risk when returns appear to be lower than normal, then that is the argument that should be made and it should be made in eyes wide open mode.

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Re: Malkiel's recommendations, 1990 to 2015

Post by nisiprius » Sun Jan 18, 2015 11:30 am

nedsaid wrote:[much good stuff snipped]...It looks like what Malkiel and Vanguard are doing is "reaching for return." As interest rates drop, portfolios tend to get more and more aggressive. I personally have "reached for return" rather than "reach for yield", keeping a relatively high allocation to stocks rather than venture into the riskier areas on the bond market. It comes with a reluctance to accept lower returns... They engage in what is known by "management by trade magazine." You tend to want to do as a manager what the trade magazine tells you to do and what your peers in the industry are doing. You want to be modern, progressive, and on the cutting edge. "Stay the course" seems to be for old fogies who don't get it. Investors are not any different.
Well said. Also, in the "only human" department, one can imagine an investor disappointed by lower returns calling up their advisor or broker and grousing, and it is hard to imagine them saying "Suck it up. Times are tough. Tighten your belt." How much easier to say "Well, my clients who want more return have been buying [corporate bonds/emerging markets bonds/bank loan bonds/3X leveraged frontier markets stocks], why not kick the tires on this nice fund over here..."
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Re: Malkiel's recommendations, 1990 to 2015

Post by Leeraar » Sun Jan 18, 2015 11:35 am

I've said this before. An early edition of "Random Walk" was very influential when I started investing soon after 1980. I wish Malkiel had left well enough alone and not tampered with the original classic.

L.
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Re: Malkiel's recommendations, 1990 to 2015

Post by lack_ey » Sun Jan 18, 2015 12:06 pm

Some explanations from an interview from a month ago, here:
http://www.etf.com/sections/features/24055-legends-of-indexing-burton-malkiel.html

I have become increasingly worried about bond investing in the developed markets. We are living through an era that has been called a financial repression, where the United States, Europe and Japan—all of these nations—have big budget deficits and large ratios of debt to GDP. Financial repression is the government saying, "We've got to finance the deficits and the debt. We'll keep interest rates at extraordinarily low levels, and at levels that are generally below the rate of inflation, so that bonds are likely to give you a negative real (after inflation) rate of return, even if interest rates don't rise."
[...]
In the new edition, there is a lot of discussion about what do you do in this environment, and there is a fair amount of discussion concerning two strategies. One is to be far more international [emerging markets bonds] than you were.
[...]
The second thing—which has become increasingly popular, so this isn't quite as good as when I first started talking about it—is a stock-substitution strategy.
[...]
Admittedly, stocks are riskier than bonds, but I think bonds at these interest rates are particularly risky, because you could take some really bad capital losses in bonds when interest rates start to go up. A so-called dividend substitution strategy of substituting some relatively safe dividend growth stocks for bonds, particularly for government bonds, seems to me to be a reasonable strategy.


Also take a look at what Wealthfront is doing. He's chief investment officer there.

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Re: Malkiel's recommendations, 1990 to 2015

Post by nedsaid » Sun Jan 18, 2015 12:22 pm

What is the difference between making a sound change in course or strategy versus just following an investment fad or mania? The trouble for investors is that it can be hard to tell the difference. There are some very articulate and convincing people out there who can make almost anything seem like a compelling and viable strategy. Sometimes we only know the difference in retrospect and from experience.

As someone pointed out, not too many years ago neither Vanguard or IRA's existed. No one worried about what index funds to buy for their IRA because neither existed. Work place tax deferred retirement savings plans also came into being. So these caused big changes in the way that people invested their money. One could also see that the defined benefit pension plans were going the way of the dodo bird. These were huge changes that demanded investor action.

People who invested in low turnover portfolios of blue chip individual stocks for decades would find it hard to be convinced that index funds were a superior approach. Particularly for someone who had done their homework and achieved very acceptable returns. It would be hard for them to accept that a passive approach with very little research or effort would outperform stock picking with many hours of research and hard work. It seems almost un-American. It probably took years of market experience with index funds and much data to convince the pre-Boglehead stock pickers to change their approach to passive investing in index funds. Index funds were not a fad, they passed the tests of time and experience.

We all want to be "ahead of the curve" and try to position ourselves in the best way possible. What trends will continue and what trends will prove only to be fads? Hard to tell.

I also remember Jim Rogers, someone I respect but don't agree with much. He made big predictions about long term bull markets in commodities and in the Chinese stock market. His arguments were persuasive and his predictions seemed inevitable as it appeared that history was on his side. But somehow his predictions didn't pan out. Wouldn't a guy who became rich as a hedge fund manager know such things? Wasn't he an expert?

So if you see Vanguard or Burton Malkiel trying to adjust to a changing world and get ahead of the curve and failing in some respects, they can be forgiven. It is hard to tell what adaptations will work and what will not. Our crystal balls are fuzzy.
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Re: Malkiel's recommendations, 1990 to 2015

Post by stlutz » Sun Jan 18, 2015 12:40 pm

Two obvious notes and then an overall comment:

--Most people don't buy every new edition of a book that comes out.
--Somebody who was 65 in 1990 is 90 today.

Has Malkiel said that the recommendations he made in 1990, 1995, 2000 etc. were bad ones and that people who adopted those allocations should drop them and switch to something else? I haven't

As others have noted, the world now is different than in 1990. One of the biggest differences is that you could expect to get significant real returns from investing in bonds back then. Not today. So, in the need/willingness/ability to take risk equation, the "need" part is higher for someone who is retiring today than 25 years ago. Expecting bonds to provide you a lot of real return is "skating where the puck was."

I don't think I've ever seen a poster say that nisiprius needs to personally increase his international allocation. In fact, I think most people would say he should stick with what he has ("stay the course"). Conversely, for someone who has been investing in international funds for their entire adult lives (like me), it doesn't make sense to suddenly drop that allocation when they reach 65 because it wasn't in some pie chart in Malkiel's book 25 years ago.

I've used international as 1/3 of equities for over 15 years. After some recent consideration, I plan to stick with that. For the 25 year old investor just getting started today, I think 50 percent is the default starting point, however. Yes, that's different from my thinking back in the late 90s, but why is that a problem?

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Re: Malkiel's recommendations, 1990 to 2015

Post by Leeraar » Sun Jan 18, 2015 12:43 pm

nedsaid,

You are being too kind. Statements like:
relatively safe dividend growth stocks for bonds

cannot stand up to any scrutiny at all.

Malkiel's advice is tactical and potentially dangerous.

L.
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Re: Malkiel's recommendations, 1990 to 2015

Post by tyler_cracker » Sun Jan 18, 2015 1:04 pm

in addition to what Leeraar quoted, this stands out to me as being pretty dumb:

Malkiel wrote:bonds at these interest rates are particularly risky, because you could take some really bad capital losses in bonds when interest rates start to go up.


nisi and others have debunked this piece of FUD repeatedly, as is known to anyone who has glanced through the dozens of Bondpocalypse threads since 2012.

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Re: Malkiel's recommendations, 1990 to 2015

Post by nedsaid » Sun Jan 18, 2015 1:08 pm

Leeraar wrote:nedsaid,

You are being too kind. Statements like:
relatively safe dividend growth stocks for bonds

cannot stand up to any scrutiny at all.

Malkiel's advice is tactical and potentially dangerous.

L.


Leeraar, I have a couple responses to this. First, one has to be able to separate the wheat from the chaff. Even people that I really admire have said things that in retrospect I thought were dumb. Dr. Malkiel made huge contributions to the field of finance but that doesn't make him immune from making incorrect statements. So keep what is good and toss what is bad or doesn't work for you.

Second, there are disagreements in investment philosophy. I like dividends and having been around the various threads, I am well aware of the pros and the cons of this approach. I actually have done a whole lot of different things, even a few things that others might consider "dangerous." I would agree with you that dividend stocks are still stocks and will have more volatility than bonds. But John Bogle has advocated something similar but he replaces a slice of stocks with dividend stocks to get a bit more yield, Bogle is not using dividend stocks as a bond substitute. Malkiel's suggestion is not irrational but one has to understand that there are additional risks involved. I am not sure Malkiel is telling his readers about the extra risks.

I was a bit aghast with a friend's 100% individual stock portfolio. Years ago, he went into the brokerage business and I took my bank CD IRA account to him. He got me started with individual stocks. He lasted there for about a year but I kept my account which I still have today. A big difference between my friend and myself is that I am doing what he is doing but with only 15% of my retirement portfolio and not 100%. I believe in diversification across asset classes and hold bonds and cash type of investments. I am doing a lot of indexing.

But I have to admit, I was rather envious of the income he was getting off his portfolio. He was actually venturing into higher dividend paying stocks and I winced a bit. He and his wife could retire off the dividends from their retirement portfolio plus Social Security. He has an income stream that will probably grow over time. Personally, I am not willing to accept the volatility of a 100% stock portfolio. I feel like I am hanging way out there at approximately 70% stocks at 55 years of age.

My friend has picked stocks for almost 30 years and maintained a 100% stock portfolio through the 2000-2002 and 2008-2009 bear markets. He is a big boy and is aware of the risks of his approach. Not what I would do but it is working for him. He is very comfortable with 100% stocks.

So I completely get what you are saying. I understand the arguments of total return investing and yet I understand why people like the regular dividend payments. But I am at peace knowing that my portfolio looks different from yours and different from my friend's. We all do what we think is best for ourselves. I don't have any argument with your portfolio.
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Re: Malkiel's recommendations, 1990 to 2015

Post by nedsaid » Sun Jan 18, 2015 1:16 pm

tyler_cracker wrote:in addition to what Leeraar quoted, this stands out to me as being pretty dumb:

Malkiel wrote:bonds at these interest rates are particularly risky, because you could take some really bad capital losses in bonds when interest rates start to go up.


nisi and others have debunked this piece of FUD repeatedly, as is known to anyone who has glanced through the dozens of Bondpocalypse threads since 2012.


The comment seems dumb in retrospect as the Boglehead Bond Panic of 2013 turned out to be a big fizzle. But bond bear markets DO happen and just because 2013 was a very mild downturn in bonds doesn't mean that a bad downturn can't happen. I recall Dr. Bernstein's posts on this forum about the really awful real losses that bonds suffered during certain time periods. No Malkiel's statement is not dumb, you just have to look back further in market history than 2013. We have seen essentially a huge bond bull market since 1982 and it is hard for us to believe that things could be different.
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Re: Malkiel's recommendations, 1990 to 2015

Post by ourbrooks » Sun Jan 18, 2015 1:44 pm

After thinking about it a bit, I've concluded that Malkiel's 2015 recommendations are LESS risky then his 1990 ones.

As I a retiree, I'm primarily worried about one thing, running out of money before I die. It would be truly nice if holding a smaller proportion of stocks always reduced that risk but it doesn't; as the studies in the Wiki show, being 100% in bonds leads to a greater chance of running out of money than holding, say, 30% stocks.

Malkiel's 1990 recommendations had retirees holding 30% stocks. That's the very bottom of the stock proportion which can support a 4% safe withdrawal rate. For most retirees, it's too close to the edge. All it would take is a modest increase in long term average inflation above historical values (or a return of bonds to their long term historical returns) and they'd be faced with an unexpected shortfall.

As I pointed out above, Malkiel didn't have the safe withdrawal rate studies available in 1990. With what's known now, it wasn't very good advice.

Malkiel's 2015 recommendations step back from that edge. He's increased his percentages of equities to be a little bit more towards the middle and he's added a third asset class, which is usually uncorrelated with stocks, to reduce the volatility. Regardless of his reasoning or motivations in making the change, from the point of view of portfolio survivability, his current recommendations are less likely to lead to retirees running out of money.

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Re: Malkiel's recommendations, 1990 to 2015

Post by dbr » Sun Jan 18, 2015 2:04 pm

ourbrooks wrote:Malkiel's 1990 recommendations had retirees holding 30% stocks. That's the very bottom of the stock proportion which can support a 4% safe withdrawal rate. For most retirees, it's too close to the edge. All it would take is a modest increase in long term average inflation above historical values (or a return of bonds to their long term historical returns) and they'd be faced with an unexpected shortfall.

As I pointed out above, Malkiel didn't have the safe withdrawal rate studies available in 1990. With what's known now, it wasn't very good advice.

Malkiel's 2015 recommendations step back from that edge. He's increased his percentages of equities to be a little bit more towards the middle and he's added a third asset class, which is usually uncorrelated with stocks, to reduce the volatility. Regardless of his reasoning or motivations in making the change, from the point of view of portfolio survivability, his current recommendations are less likely to lead to retirees running out of money.


I am at risk that I haven't read the book, and while your observations make sense, is there any evidence that is the rationale behind the change in his sample portfolio? I bet it isn't.

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Re: Malkiel's recommendations, 1990 to 2015

Post by Five Scoop » Sun Jan 18, 2015 2:10 pm

Found this in an interview with Malkiel in 2013 where he comments on changing allocation recommendations in his updated editions, granted for a different age group.

"CNBC: In the recent editions of "Random Walk," you suggested the following portfolio for an investor in his or her 50s—with each asset class represented by a low-cost fund—and for the percentage allocated to equities to be larger, depending on the age and risk tolerance of the investor:
Cash: 5 percent
Bonds: 27.5 percent
REITs: 12.5 percent
Stocks: 55 percent

How would you update that portfolio?
Malkiel: The recent editions were written when bonds had a generous yield. Today BND yields are about 2.4 percent. That is why we suggest the bond (safer) part of the portfolio be fine-tuned. We ... use high-quality dividend growth stocks for a part of what otherwise would be a straight bond portfolio. Also, we use some foreign bonds where debt/GDP is low and yields are relatively high.

The updated portfolio for an investor in his or her 50s would look like:

Cash: 5 percent
Dividend growth stocks, emerging market bonds and tax-exempt bonds: 27.5 percent
REITs: 12.5 percent
Stocks: 55 percent

You use that as a starting point and move allocations up or down, depending on your age."

The link to the article follows:

http://www.cnbc.com/id/101226110#.

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Re: Malkiel's recommendations, 1990 to 2015

Post by dbr » Sun Jan 18, 2015 2:12 pm

So, in short, he says the risk from bargaining for too little return in bonds is worth taking the risk of putting all the money in dividend paying stocks.

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Re: Malkiel's recommendations, 1990 to 2015

Post by Leeraar » Sun Jan 18, 2015 2:46 pm

nedsaid,

My complaint is that dividend paying stocks are no different from stocks, and that stocks represent a completely different risk proposition than bonds, especially government bonds.

It's like the question, should I pay off my mortgage or invest in stocks? Do what you want, but understand that the risk propositions are completely different.

Malkiel has become a gun for hire, degrading (in my opinion) his past accomplishments.

L.

[edited for clarity]
Last edited by Leeraar on Sun Jan 18, 2015 3:25 pm, edited 2 times in total.
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Re: Malkiel's recommendations, 1990 to 2015

Post by baw703916 » Sun Jan 18, 2015 3:09 pm

lack_ey wrote:Some explanations from an interview from a month ago, here:
http://www.etf.com/sections/features/24055-legends-of-indexing-burton-malkiel.html

I have become increasingly worried about bond investing in the developed markets. We are living through an era that has been called a financial repression, where the United States, Europe and Japan—all of these nations—have big budget deficits and large ratios of debt to GDP. Financial repression is the government saying, "We've got to finance the deficits and the debt. We'll keep interest rates at extraordinarily low levels, and at levels that are generally below the rate of inflation, so that bonds are likely to give you a negative real (after inflation) rate of return, even if interest rates don't rise."
[...]
In the new edition, there is a lot of discussion about what do you do in this environment, and there is a fair amount of discussion concerning two strategies. One is to be far more international [emerging markets bonds] than you were.
[...]
The second thing—which has become increasingly popular, so this isn't quite as good as when I first started talking about it—is a stock-substitution strategy.
[...]
Admittedly, stocks are riskier than bonds, but I think bonds at these interest rates are particularly risky, because you could take some really bad capital losses in bonds when interest rates start to go up. A so-called dividend substitution strategy of substituting some relatively safe dividend growth stocks for bonds, particularly for government bonds, seems to me to be a reasonable strategy.




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Re: Malkiel's recommendations, 1990 to 2015

Post by tyler_cracker » Sun Jan 18, 2015 3:28 pm

nedsaid wrote:The comment seems dumb in retrospect as the Boglehead Bond Panic of 2013 turned out to be a big fizzle. But bond bear markets DO happen and just because 2013 was a very mild downturn in bonds doesn't mean that a bad downturn can't happen. I recall Dr. Bernstein's posts on this forum about the really awful real losses that bonds suffered during certain time periods. No Malkiel's statement is not dumb, you just have to look back further in market history than 2013. We have seen essentially a huge bond bull market since 1982 and it is hard for us to believe that things could be different.


hi ned,

the comment from malkiel which i quoted alludes only to interest rate risk. it would take an impressive parlay of rising interest rates over a protracted period, inflation (related to but distinct from interest rate risk), and/or defaults (orthogonal to interest rate risk) to produce "really bad capital losses". this is doubly true when the context is a comparison to equities, where large negative swings are much more common.

i appreciate your concern that my argument may be compromised by recency bias or by confusing strategy with outcome. using the data at http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html, i'm looking for "really bad capital losses" in 3 month t-bills and 10 year t-bonds. since 1928, i see zero years where the t-bill had a negative return. i see four years where t-bonds dropped more than 5% (2009 was the worst at -11.12%). i guess these are nominal numbers so the real story is a little different.

my point is not that bonds are invincible, only that comparing bonds to equities by trumping up the danger of bonds is somewhere between disingenuous and dumb.

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Re: Malkiel's recommendations, 1990 to 2015

Post by nedsaid » Sun Jan 18, 2015 4:36 pm

I am certainly not down on bonds, I do hold them in my portfolio and have really grown to appreciate their role in a portfolio. Nor do I see a bond apocalypse in the near future. Right now the winds are blowing towards lower inflation if not mild deflation and that would be good for bonds.

I also do not equate dividend paying stocks with bonds. Stocks are stocks whether they pay dividends or not. So we can agree on that.

My concern is with inflation. It doesn't take a very high rate to really eat away at your buying power. 2% a year would be an over 20% loss in purchasing power over a decade, 3% a year will erode purchasing power by about a third. Even at what we consider low rates, the corrosive power of inflation on purchasing power is relentless. We could soon be in a world where bond yields don't even cover inflation. Not a problem now but it could be.

And yes, we have seen sustained periods of both rising inflation and rising interest rates. It has happened before and could happen again. Dr. Bernstein posted about very large losses in purchasing power over certain time periods in percentages that rival a bear stock market. Granted, this doesn't happen overnight but over time. Nominal losses would be a lot less.

I certainly don't want to be piling into bonds after a 30 year plus bull market. How much lower can interest rates really go? Because of much lower income and much less potential for price appreciation from falling rates, there is genuine concern that the buffering effect of bonds in a stock bear market will be much less than before. Indeed, I can see a scenario where you have falling stock prices and falling bond prices at the same time. Asset classes always look less risky after a long bull market.

For somebody to suggest that there are more risks in bonds than what might now be perceived is not an irrational statement. A lot of things we thought couldn't happen in 2008-2009 actually did happen. Bonds looked safer than they really were during that time period because of flight to quality in treasury instruments and massive government intervention through the Federal Reserve and TARP. AAA rated commercial paper issued by General Electric for a time had no market. Warren Buffett bailed out General Electric. The US Government slapped guarantees on money market funds to stop what was in effect a run on the bank. For a time, the credit markets completely seized up except for Treasuries. How soon we forget.
A fool and his money are good for business.

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Re: Malkiel's recommendations, 1990 to 2015

Post by Leeraar » Sun Jan 18, 2015 4:59 pm

nedsaid,

Malkiel does not subscribe fully to the efficient market theory, but one has to believe that bonds are fairly priced, given expectations of future interest rates. Also, that the return premium of stocks over bonds represents a current consensus. Including expectations for inflation.

We don't know what we don't know. Don't fret about it, diversify.

L.
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Re: Malkiel's recommendations, 1990 to 2015

Post by nedsaid » Sun Jan 18, 2015 6:37 pm

Leeraar wrote:nedsaid,

Malkiel does not subscribe fully to the efficient market theory, but one has to believe that bonds are fairly priced, given expectations of future interest rates. Also, that the return premium of stocks over bonds represents a current consensus. Including expectations for inflation.

We don't know what we don't know. Don't fret about it, diversify.

L.


I have diversified. :happy
A fool and his money are good for business.

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Re: Malkiel's recommendations, 1990 to 2015

Post by Garco » Sun Jan 18, 2015 6:52 pm

Gosh, I'm 60+ and my portfolio is remarkably similar (and coincidentally so) to Malkiel's 2015 portfolio. It may be iffy but it's what I am comfortable with in 2015. I wasn't 60+ in 1990....

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There is more than one road to Dublin

Post by Taylor Larimore » Wed Dec 23, 2015 4:55 pm

Bogleheads:

Professor Malkiel's Random Walk Down Wall Street and Mr. Bogle's Bogle on Mutual Funds put me on the road to a comfortable retirement and investing success.

Portfolios are not cookie-cutter for everyone. Portfolios should be designed based on each owner's goals, time-horizon, risk-tolerance and personal financial situation. It is usually a mistake to copy someone else's portfolio.

There is more than one road to Dublin.

Happy Holiday!
Taylor
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Re: Malkiel's recommendations, 1990 to 2015

Post by shum » Thu Dec 24, 2015 10:44 am

Nice comments Taylor. As a retired professor I decided to read and research "investing" as my new area. I have read and studied most of Taylor's list of readings and gone many other places for reading as well as each source suggests others. What I looked for were fundamental ideas and not specific portfolios. Examples: when something is "on sale" (e.g.,bond index when rates go up) buy some more, it's part of your plan isn't it? Build a steady floor and then a portfolio for extras you may need or want. Adjust your spending to the market. Make and write down a plan. Spend less than you make, always. Cost matters. Taxes matter. Speculation is for gamblers, not me. . . . . KISS. Some low correlated investments are nice. Etc. You know the drill.

Use basic principles to design a plan for you. Adapt to your situations as they change, as your plan has tried to anticipate. "Enough" is a good word and so is "frugal."
-shum

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Sound advice from the retired professor

Post by Taylor Larimore » Thu Dec 24, 2015 11:22 am

Shum:

Thank you for the sound advice and your kind words.

Happy Holiday!
Taylor

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Re: Malkiel's recommendations, 1990 to 2015

Post by BigJohn » Thu Dec 24, 2015 11:49 am

lazyday wrote:If I were to try hard to defend Malkiel, I'd say that in 1990, stocks and probably bonds had higher expected return than today. So we need to take more risk to get the same expected return.

I learned a lot from Random Walk when I read it years ago but don't think I'd try this hard to defend Malkiel. IMO, chasing yield by increasing risk is not prudent, especially as one approaches or is in retirement. If Malkiel is suggesting increasing risk to maintain a constant real return, he owes it to his readers to be explicit about the fact that risk is going up substantially with the changes.

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Re: Malkiel's recommendations, 1990 to 2015

Post by mickeyd » Thu Dec 24, 2015 12:56 pm

There is more than one road to Dublin.


All that I did was select my AA years ago. Tweaked it a few times along the way. Continue to stay the course.

It's too simple to write a book about. That's my way to Dublin.
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