It does not disagree with the statement:
It certainly might.
Your simulation looks at a 51-year span of time. That is longer than most investors‘ (let alone early retirees‘!) accumulation phase.
The valleys of drawdown you mentioned may well be a very relevant periods of time for these investors (though a mere 5% allocation to bonds may not make a sizeable difference).
My point was that there are combination of assets that have higher returns than any on their own. Stocks and bonds at 1x leverage (aka. no leverage) is no such combination.
Indeed they might have higher returns, but so does going to the casino. Both have lower expected returns, but stock + bonds portfolios are a lot less volatile / have less drawdown for only a partial reduction in returns.
But one should mind that the backtesting period since the Volcker era has been particularly favorable to Treasuries and the 60/40 portfolio.
Fixed it for you. Over very long time periods, assets with higher expected returns would still be expected to return more than a mix of them “watered down” with assets that have lower expected returns.
The risk is higher too, though, so the actual returns may be higher, or lower, or deeply lower in the down-the-drain level territory. Risk adjusted returns take into account the risk you have to miss your target when using volatile assets. Mixing uncorrelated asset classes with positive expected returns helps to reach higher expected risk adjusted returns.
Correct, in the long run, the expected return of shares far outweights the expected return of a 60/40. The important metric to have a look at is if the lows are higher with Stocks vs 60/40 and there, the interesting observation is that it takes a long time until the lows (e.g. 2009) of stocks only portfolios were materially higher than 60/40. Hence, my Personal conclusion is that the „safe“ remaining investment duration after which one could consider a stocks only Portfolio is more in the range of 15-20 years and not 7-10 years as often stated.
But even if we invest for 15-20+ years, I would not go for Shares only. For such durations, they have the higher expected return than 60/40 and even if the 15-20 years end directly in a crash, Shares only should be better than 60/40… but still the argument against Stock only is that you should never put all your eggs in one basket. A stocks portfolio only takes loads of tail risk that only materializes once in a blue moon - lets say maybe once every 200-300 years or so. But if this tail risk materialzes and your shares are wiped out; then its sad to see your lifetime savings go. Hence, i still advocate for something like 30-40% of assets not in stocks. This may ideally be physical real estate, bonds, money market, gold, … whatever. It just serves as insurance against a write-off scenario on global stocks. Highly likely a scenario we won‘t face in our lifetimes but still something worth insuring against… lets say after your first 10-15 years of savings as you then have limitted working time to recover from such loss.
So until 35, you can go 100% stocks (unless you plan for fire), after this you should shift to 60/40, maybe 70/30. if your target fire/retirement date is closer than 15 years, you should already immediately and regardless of your age down-shift.
Also at least in theory, once you have higher risk adjusted returns, if you want more risk the solution might not be go all in equity (you might leave the efficient frontier).
If you believe in the principles behind risk parity and have somewhat uncorrelated assets, you’d actually leverage the lower risk assets to achieve equal risk distribution on the asset classes.
Indeed, I wish there was a CHF hedged, Futures based x2 Bond Fund with monthly re-balancing. Such product was awesome.
I always claim that in such a scenario you need a bunker and ammunition. What must have happened that it came to this?
Stocks don’t go to zero for real, and it can be averted by solution diversification:
Stocks don’t go to zero for real, and it can potentially be solved by fleeing:
Stocks actually go to zero, but so does about every other asset, except for guns and barter you can carry:
Can someone come up with a scenario that has stocks at or near zero, but not other investment assets?
Right. On a risk-adjusted basis you have superior returns and you might then also have the possibility to leverage the portfolio to have higher returns at the same risk.
I might also try to make a similar argument to the 100% stock folk and say that everybody should go 100% in on bitcoin as if you look at the history it has much superior returns than stocks…
You don’t even need to consider the doomsday scenario of 100% share wipeout. A run of the mill crash of 40%-60% can already be devastating and there are plenty of historical examples which show that it can be many decades before stocks recover from such crashes.
“But stocks always go up in the long term!” Oh, really? Do they? Do we really have enough history to conclude that? What are the underlying fundamental factors that lead to this phenomenon? If the factors are increasing population and a multi-decade secular decline in interest rates, then maybe stocks don’t always go up in the long term and certainly not necessarily in the short timespan between accumulation and retirement…
But certainly not risk-adjusted.
(And volatility alone is not risk)
Being 100% exposed to Bitcoin is currently like playing at a casino. Until tokens and their use are regulated, I’m not sure 100% exposure is very smart (except for a teenager or young adult, but for a responsible person, not recommended).
Have 5-10% exposure, but no more.
And it’s hard to compare the historical value of an asset with so little hindsight… (IMO)
Which is precisely the point I am trying to make with that analogous example. Too many people look only at the raw return without considering any other relevant factors, such as risk.
I think there are a few such black swan events (and of course there are always the unknown unknowns, who has expected a global pandemic before COVID?):
Not all of them would wipe out stocks completely, but they could lead to huge drops and other assets (like gold or bonds) may not be affected.
Once you have certain savings, lets say more than what you forecast to be able to save in the next 10 years; you should ensure that you don’t keep all eggs in one basked. I consciously called them once every 200-300 year events because trully (and as 0xLambda stated), these are in reality unknown unknowns.
Just a selection of some known unknowns (sorted from what I consider unlikely to extremely unlikely):
No matter what, it is in my view always a good idea to have at least some assets that survive a meltdown of the stock markets and/or the banking system. Remember that 80% of the people have nothing; so as long as the government keeps these people in an ok situation, they will in case of any drastic change have less reservations to let the remaining ones that hold assets lose part or all of it.
That isn’t that unlikely: Lex in depth: how investors are underpricing climate risks
The big danger is of a “climate Minsky moment”, the term for a sudden correction in asset values as investors simultaneously realise those values are unsustainable.
(can probably find non-paywall through archive.is)
Anyone who invested in Russia has seen their stocks effectively go to zero.
Country risk: you’ve seen confiscation, bail-ins, financial repression in various countries.
Another one might be the increase of the currency and the stock prices fall to partly account for this, but holders of cash/bonds would benefit.
For most people who are invested in Russian stocks (i.e. Russians themselves), things aren’t looking so bad actually.
Well, in nominal terms maybe not. Although having your currency dropping in value and not being able to convert it to buy useful things (and being conscripted and sent to die) might be considered to be looking a little bit bad.
For ‘non-friendly’ investors, liquidity is gone and your assets are frozen now with a high chance of being expropriated.
I’ve always been almost exclusively investend in the stock market with ETF and some selected “fun” stocks.
However, recently some bonds (notably several EU ones) are selling at such a discout that I’ve looked closer and bought some of those.
We’re talking about government bonds with moderate to high level of security (well, it remains quite implausible that Italian or Spanish governments are going bankrupt in the next 5 years), selling at around 55- 65% of nominal value, with rates around 2% /yr.
I mean, it’s clear that holding them until around 2050 might be worse than buying shares, but my idea is to enjoy the interests (which are quite nice, especially since I’ve bought them at a discount), and then, once interests rates and inflation lower, bonds value will rise and I’ll resell them for the added value.
What do you think about that? Might be a clearly better alternative to cash.
Cheers
Are you considering currency risk there?
Those “2%” might mean 0 or negative if you spend in CHF.
