G L from IL posted over 5 years ago:

A 50-year test of allocation theory – AAII’s Changes to Asset Allocation Models There have been uncountable articles directing investors to allocate savings between equities and something safe. It has been going on for a long time. Few, if any of the articles, actually analyze what would happen if alternate strategies were to be used. Hindsight is 20/20. Using scientific methods we can test the past using a hypothesis and variations upon it. The following does just that. Disclaimer: one can’t predict the future but we have 50 years of modern times from which to learn. Is it true that with more the stocks, the results are better? Stocks don’t always go up and sometimes bonds do better. Yes. So maybe in those years the popular 60/40 split between equities and bonds would do better. Furthermore, when interest rates rise and can more likely thereafter fall to the benefit of bond holdings, perhaps one should own more of them. That’s readily analyzed if we look at what happens as rates fluctuate. Which rates? The Fed rate leads enough that it could be a good parameter. On the other hand changes in CPI could be even better as rates react to it. As rates rise, indicated by either the Fed rate or CPI, bond holdings could follow suit. These kinds of parameters and relationships should be tested, the more rigorously the better. Several scenarios need to be evaluated. Let’s use the Fed rate and CPI such that we are at the 60/40 split when rates are high. To do that let’s be in 40% bonds when the Fed or CPI “rate” hits a lofty 10%. That means the Fed rate multiplied by 4 would determine the percentage invested in bonds. The same goes for another evaluation using CPI. This way, most of the time the split is more heavily in equities but the bond percentage is opportunistically higher when bonds are paying more and likelihood for gains is greatest since rates will eventually drop from high levels and bond values will rise. Also, note that several times after inflationary rise, equities fall, so it should be good time to have a more balanced allocation. I gathered data from 1970 to today. That’s 50 years of data. For stocks, the S&P500 total return was used, including dividend reinvestment like I do in my retirement accounts. For bonds, I like the ‘High Yields’. After all, I’m investing to try to get ahead and the risk is not great. Average annual Fed rates and CPI indexes were used for two cases where the investment split was tied to current rates. Let’s compare the results. After the 50 years with 100% in HY bonds, a one-time investment of $1000 grew to $33,010. Thirty three times your money seems pretty good. Substituting stocks to the tune of a constant 60/40 split yielded a cool $127,210, so don’t even consider all bonds. What about the hypothesis that bond percentage tracking the Fed at 4 times the interest rate could be better? It was, delivering a whopping $165,130! This is starting to sound like I’m on to something. The same test using the CPI index was better yet, albeit not by much at $167,540. Over 167 times your investment was the best result but one must regularly change allocation with the changes in rates. If you feel you must have bonds to appease the pundits, your nerves, or your financial planner, this is the way to go! Wait again – what if all the age appropriate ‘financial correctness’ was ignored and one just left the $1000 in all equities? The total would be $257,660. Yes, that’s over 257 times your money. It’s time to draw your own conclusion. However, in retirement, there could be an untimely bad year on Wall Street when you need to take money (a RMD of $10,306 at 4% of that $257,660 for example) out of your account. Since the market has dropped two years in a row a couple times in 50 years, I would siphon off two years or 8% out of equities. That means you could carry a 92/8 split early in retirement. Logically, sell the portion of the 8% needed or required at a time when the stock market has dropped a lot. Replenish when equities rebound but keep in mind those rebounds after such travesties have been in the 30% range the following year so don’t be too hasty! Now I will not be ‘a la mode’ as I beg to differ with investment pundits. I see there could be better advice. Lemming thought is that as we age we should pare back investments in equities and replace them with bonds or worse, money funds. I’m old; old enough to be bucketed into “needing safe retirement practices”, at least to feel better. But I feel best when investments are actually doing better. If old age has to be the criterion for moving from stocks to bonds, I will declare I’m old if and when I hit 100. Maybe. In the meantime the advantage of holding nearly all stocks versus popular allocations is so great that it cannot be brushed aside – just keep a couple years of necessary funds out of equities. Bryan G Lammers

Narayana S from VA posted over 5 years ago:

Dear Sir, I subscribed to AAII Platinum. I thought it included A+. Obviously not. What does AAII Platinum provide? I am unable to access Platinum. --Narayana Srinivasan Membership No: Pending AAII Platinum $499.00 Pending AAII New Membership $61.54 Pending SWISSKLIP * ORDER 6506

CHARLES L from FL posted over 2 years ago:

Or something in between - we've been using 75/25 (+/-) for years. The wife's IRAs are at 76/24; my Roth is 60/30/10 (10 being precious metals; don't laugh - this year I'm beating her by 2%); the other accounts are whatever they need to be to keep the overall investment portfolio at about 74/26. We're both retired. We're comfortable being this aggressive, with a military pension and social security funding 100% of our budget.