Reacting to yesterday’s comments on asset allocation, my wise friend Less Antman writes:

“I, too, believe a bear is coming soon. Once again, my high/low divergence indicator is screaming SELL, and I’m turning a deaf ear.”

Less is turning a deaf ear because he believes it’s pointless to try to time the market. That if you are sensibly allocated, you should just stay the course through thick and thin.

“If people just split 50-50 US and International, they’re safe over a 5-year period as long as they don’t panic in the short interim. (Indeed, if they’re still adding new money, they’ll benefit from the lower purchase prices during that interim.) Asset allocation still works. Even with the extreme outperformance of big U.S. blue chips, a 27% return from large U.S. stocks last year would only have been reduced to 22% with a 50-50 mix of U.S.-International, yet the dangers of a big hurt from a big U.S. crash would have been massively reduced.”

Less did a little back-testing and reports:

“From the end of 1972 to the end of 1998, an all-large US portfolio would have returned 13.5% per annum, while the conservative Cash Equivalent-US Index-Intl Index equal split you recommended in The Only Investment Guide You’ll Ever Need yielded 12.1% over that time. The 1/3 cash equivalent holding softened the horrific 1973-4 worldwide crash so much that by the end of 1975 the investor was profitable again. Just 1 year to fully recover from the bottom, and 3 years from peak to new peak! (And the maximum cumulative loss was reduced from 37% to 20%). Frankly, when the difference between a nifty-fifty fanatic and a fuddy-duddy allocator is only 1.4% per year, you’re not giving up a whole lot being a fuddy-duddy. You give up more than that in management and trading expenses owning actively-managed funds instead of index funds. You also give up more than 1.4% in bid-ask spreads trading high flyers (just because commissions are trivial doesn’t mean trading is cost-free). Not to mention the extra taxes eaten away if it isn’t all sheltered.”

I’m not sure, but I think Less is calling me a fuddy-duddy.

He then quotes one of my lines from yesterday, where, after expressing my nervousness over today’s high stock prices, I said, “But I have been so wrong about this for so long, it may just be old age.”

No, Less says . . . “The problem is that you’re too young. Had you been born 25 years earlier, you would have started investing in 1942 and experienced 30 years of rising prices without significant breaks. Then you would have taken the bear ending in 1974 in stride and enjoyed the next long wave. I find it interesting that both my mother and her best friend, in their mid-70’s, are heavily invested in stocks and have been so continuously since they started invested. They’re not naive about bear markets, they just started early enough with so many winning years in a row that they understand the pointlessness of worrying about tulips every time the market gets ahead of itself. Or maybe their unrealized capital gains got so big by the time of the first bear that they couldn’t afford to panic out.

“And if you had been a little over 100 years older, you would have enjoyed the almost continuous 67-year rise in stocks from 1862 to 1929, watching a second-rate country ranked 14th in per capita wealth grow to number one and way beyond. Talk about the dangers of waiting a lifetime for the next bear market before investing!”

I love Less’s enthusiasm for all this. But I think it’s also worth noting that from 1862 to 1929, and from 1942 to 1973, the basic financial ratios — things like the ratio of stock prices to earnings, stock prices to cash flow, stock prices to sales — were a lot more conservative most of the time than they are today. So I’m heartened by his finding that the “a third, a third, a third” asset allocation referred to above, of which he approves, would not have held back performance too terribly from 1972 to 1998. It could be at least as appropriate (for the fuddy-duddies in the crowd) today.


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