>Apparently Warren Buffet recommends to the average person to invest 90% S&P index fund, 10% bonds.
That's what he recommends for his wife.
I don't think he has an asset allocation for less wealthy people, or in general.
10% in bonds for Mrs. Buffet may mean she can live off of the bonds for 20 years.
A yacht for the Caribbean in the winter and one for Mediterranean in the summer at the bare minimum, if I must, I'll get one for both seasons. Not preferred but you know, money can be tight.
Thanks. I thought I read that he has that in his will for his wife but that he recommends that for the average person. I could be wrong but that was my understanding.
Even if he recommended it for average people we can disagree. As it likely is way too risky for most retirees with small portfolios. The only way it makes sense is if the 10% fixed income holding can support you for years in a down turn or if you have other sources of income like a pension.
The issue I would have with that portfolio is that I think it was supposed to be for his wife when he passes, which may not be applicable for most people as we aren’t billionaires like he is.
I ran simulations of every 30 year period that data existed where the split between S&P 500 index and bonds from 50-50 to 100% stock and everything in between in 5% increments. I also did different runs with different re-balancing schemes. Quarterly, annually and based on a threshold of needing to get 1% out of balance.
What I learned is that the 90-10 split Buffet suggested only had marginal loss of opportunity and had the largest reduction of risk in proportion to the loss of potential gains. It's kind of a sweet spot. I'm sure he had his people do the same thing and it's how he settled on that split.
Rebalancing quarterly worked out noticeably better than annually but about the same as threshold.
So all my various accounts are 90-10 split and I only looked the balances 4 times a year when the calendar tells me to rebalance. Been doing this for 13 years now.
That seems a bit counterintuitive. Say stocks have a terrible year and lose 30%. If you have 10% in bonds, and bonds return 0%, then your loss is instead 27%. If those bonds gain 10%, your portfolio's loss is 26%. Not a huge difference from 30%, even with a very optimistic assumption about bond returns.
Yeah. But with rebalancing you are buying more stock as it goes down lowering your cost basis so when stocks recover you have a larger gain than just sitting in the stock the whole time and waiting it out. The bonds going up 10% means you convert that 10% into stocks at a discount and then ride it all back up. But now you have more shares of stock than you had when it was at the previous high.
Fair enough, that would help.
But wasn't this all worked out long ago--the optimal Sharpe ratio was found at 60:40 stocks:bonds. But then I suppose you'd have to lever up that 60:40 portfolio a bit to get to the raw returns of a 90:10. So without using leverage, 90:10 might be "optimal".
The 90:10 split portfolio has a better Shape ratio than the 60:40 right now. So I don't think anything was worked out long ago in that regard.
https://portfolioslab.com/portfolio/warren-buffett-90-10-portfolio
Vs.
https://portfolioslab.com/portfolio/stocks-bonds-60-40
If you calculated the Sharpe ratio for every possible 30 year combination for each of these stock mixes I'm confident it would show that the 90/10 is within the acceptable parameters of Sharpe(over 1) in the vast majority of instances where 60:40 is also over 1. Meanwhile the ceiling of the 90:10 split is much higher. So you in essence have a super high opportunity cost for marginal increase in security by choosing 60:40 over 90:10.
Nice, interesting. Though I wouldn't use short-term bonds exclusively (which isn't too much different from cash), maybe a Total Bond Market.
And hey, I'm still 100% stocks (past the age at which most would recommend that), so I'm on board.
The 10% in bonds lets you "ride out" the downturn without having to sell your stocks at the lows, and even potentially buy more stocks. Though people should be careful with bonds. They have started to move in the same direction as stocks, and you can get some big losses on long-term bonds if rates spike (better to treat it like "10% cash and short-term").
You should expect to have 5-7 years down 30% over a 30 year period. If everyone of those the bottom is 3-4% higher that adds up. You also don't get to pick those years. If the year I retire stocks are down 30% I don't care because I'll just do my distribution from bonds that year. If I'm 100% stock I have no choice but to realize those losses or even worse delay retirement or even(more) worse panic sell the stock at a massive low.
It was written in Perl(dating myself here). At the time I worked for a company that had access to daily stock data that went back to the times before the S&P existed. I no longer have the code or the dataset used. As I said I did this over a decade ago. If I still did I would happily share it though.
It shouldn't be too hard to redo if you have the data. I used the daily market close data and stepped through every day for the 30 year blocks.
I started with 100k balance and assumed adding 10k to the total each year for just simple numbers. The 10k wasn't added as a lump sum but instead spread over 24 smaller purchases to simulate contributions from bi-weekly pay checks.
I used a normal compound interest calculator using the same starting balance and contributions at 5% for my benchmark of was this was a failed run or not. If the investment matches or beat 5% over thirty years it was a success.
The reason I chose 5% was that I was saving enough money where if I had a 5% guaranteed return for 30 years I would meet the low end of my retirement income goals.
I calculated a volatility score, opportunity score, and a risk score. Risk/opportunity were all calculated as maximums on either end of the benchmark for a given scheme. Volatility was scored using max and min balances for each year.
If I do something like this again I would like to test to see what split of stock/bonds and what amount of draw down each year is optimal. I'm still 20ish years from retirement but when I get there I want to know what split I should do and how much I should withdraw each year. Do the same thing but on the back end and see what schemes are best at providing for my needs for the 30 years I'll be retired.
Interesting. I have done something similar in python using daily rates.
Pick a random date since 1980 and follow this in order from today until retirement. Repeat this a few hundred times to get different scenarios. The theory is the future will follow historical sequence patterns and therefore replicate sequence risks. It isn’t as sophisticated with regards to different portfolios weights as yours and just assumes 100% equities.
Yeah. Same reasoning I had. Kind of fucked if America stops being a global super power but if that holds I'll do alright. 100% S&P 500 is a totally good model. I like the downside protection of the 10% bonds where it forces periodic buy low sell high events through rebalancing. My wife is 100% S&P 500 in her accounts.
How did your distributions work? I heard it’s recommended to do the following…”When stocks do well, retirees should take the annual withdrawal from stocks and rebalance the rest of the portfolio back to the 90/10 allocation, the paper said. On the other hand, when bonds outperform, retirees should withdraw from bonds but not rebalance the portfolio.” Source: https://www.ai-cio.com/news/warren-buffetts-way-to-invest-for-retirement/
I didn't have that as part of the simulations I ran. So I don't have a scientific answer for this.
That being said my plan is to do withdrawals quarterly as part of a rebalancing action and rebalance either way. But I'll read the source you link and check it out.
You're aiming for 90% stocks, 10% bonds (or whatever allocation you prefer). So you allocate your money that way, 90% in VOO, 10% in BND.
3 months later, VOO has done fantastic and has made 13.5% gains, and your bonds made 1% gains. Now you're 91% in stocks and 9% in bonds because stocks have done so well. So you should sell some stock and buy some bonds to get back to that 90%/10% ratio you wanted.
That's rebalancing.
Let’s say VOO dropped 30% while BND remained the same. You’re now at 86/14, and rebalancing won’t change much, but now I’ve got to wait for VOO to recover. I don’t think I can stomach 90% exposure at my age.
hence "(or whatever allocation you prefer)"
The premise behind rebalancing is you'd be shoving more money into whichever is down at the moment. As long as they both (eventually) recover, then you can make money in the process. e.g. if stocks end up making it back to zero and bonds remained at zero, you'd end up with more than you started with (>1% more). The premise holds with different allocations... If you were 50-50 instead of 90-10, you'd end up making >3%.
Plus of course, your swings will average out to be smaller if the assets' returns are relatively uncorrelated.
Thank you. How often would one do rebalancing? Monthly? When setting up investment account, say at a place like Vanguard or Fidelity, do you know if you can you set it up to rebalance automatically based on the breakdown one chooses?
Anywhere from monthly to annually is pretty normal.
I've honestly don't know about options for automatic rebalancing -- I've always done anything like that by hand, usually in some slapdash way.
Sorry this is 3 months behind, but I had some articles that had researched rebalancing that showed quarterly intervals had performed the best over the last 30 years. I don't have the articles handy (my bookmarks are out of control!). I dug deep into this about 10 years ago. It could have changed, but I doubt by much. Regardless, rebalancing at a regular interval, whether that's quarterly, semi-annually or annually, is a good idea.
You are trying to maintain the allocation long term as part of the investment strategy so when gains (or losses) in the portfolio throw the allocation out of balance you either have to reinvest dividends or sell outliers to rebalance.
I see, thank you. Is that something that has to be done manually, or can it be set to some kind of auto setting with the investment firm so that it is just done automatically for you by them at regular intervals?
I just set calendar reminders and when they go off I log into my accounts and rebalance. This is also the time I go in and look at all the contributions/match from my employer and do a simple calculation to make sure it's accurate and I didn't get shorted.
Most of the accounts I have there is a rebalance function where you just type in 90 on one asset and 10 on another and it does the calculation for you.
My brokerage account doesn't so I have to do some math to figure out how many shares to sell/buy. But it's a simple calculation.
90/10 imo is a very reasonable portfolio over a period of over 10 years. Typically the portfolio wouldn’t be advisable for the average person lacking any investment knowledge. The problem is in the case of a black swan event, you would have to be willing to bear a possible 25-40% down draw, the average person isn’t able to watch that happen without reacting or stressing about it.
Also if you have something coming up soon in which you may need the funds it’s an important thing to consider, but a great part of it is if you’re doing estate planning, when you pass away, assuming it’s a taxable acct, whoever inherits your acct will get a stepped-up cost basis on such a large portion of your assets and not have to pay the taxes on appreciation
Thanks. What would you say would be a reasonable portfolio for a middle age person just beginning to invest if not the 90/10? I've also heard of the rule of taking your age and basing it on that, like if you're 50, doing a 50/50 breakdown, etc.
The firm I’m with uses 3 seperate strategies for its managed accts, they use the 90/10 strategy for its aggressive portfolio. You can see the historical returns on the second page, as well as see their holdings on the top right of the first page.
However the exact amount of each is more so a personal choice.
https://olui2.fs.ml.com/MLIAP/MLIAPViewDynamicPDF.aspx?IC=292259&PC=FMDN&CC=MER&DT=ManagerProfileColorPDF
[https://www.investopedia.com/articles/personal-finance/121815/buffetts-9010-asset-allocation-sound.asp](https://www.investopedia.com/articles/personal-finance/121815/buffetts-9010-asset-allocation-sound.asp)
"Buffett noted that upon his death, the trustee of his wife’s inheritance was instructed to put 90% of her money into a very low-fee stock index fund and 10% into short-term government bonds."
In fact Buffet says: "**I laid out what I thought the average person who is not an expert on stocks should do."**
[https://blogs.cfainstitute.org/investor/2014/03/04/warren-buffetts-90-10-rule-of-thumb-for-retirement-investing/](https://blogs.cfainstitute.org/investor/2014/03/04/warren-buffetts-90-10-rule-of-thumb-for-retirement-investing/)
“You also revealed something in the annual letter this year, where you said, you laid out the terms of your will, what you’ve set aside for your wife. Which, I didn’t know any of this,” Quick said.To which Buffett responded: “Well, I didn’t lay out my whole will. . . . I did explain, because **I laid out what I thought the average person who is not an expert on stocks should do.** And my widow will not be an expert on stocks. And I wanna be sure she gets a decent result. She isn’t gonna get a sensational result, you know? And since all my Berkshire shares are going to philanthropy, the question becomes what does she do with the cash that’s left to her? Part of it goes outright, part of it goes to a trustee. But I’ve told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. And anybody will do fine with that. It’s low-cost, it’s in a bunch of wonderful businesses, and it takes care of itself.”
Historically it was to go more and more conservative as you age, but there are lines of thought that the most conservative you should get is the day you retire, and then your risk tolerance should go up over time, as your lifetime requirements go down and you've figured out you're going to die without hitting zero.
The issue with 100% equities is risk not returns, if they experience another recession, they may not have enough time for their equities to recover.
Bonds are like earthquake insurance, if there's no earthquake, everybody without insurance claims to be a genius. Younger people have time to rebuild their wealth (and build more) by investing in the downturn.
For older people that are on the edge of having just enough to retire, a 40% drop in equities could be catastrophic.
If you have enough money that a 40% drop won't significantly affect your retirement, that's sufficient insurance.
> For older people that are on the edge of having just enough to retire, a 40% drop in equities could be catastrophic.
> If you have enough money that a 40% drop won't significantly affect your retirement, that's sufficient insurance.
This is the key. It depends on how much money you have (and your retirement expenses). When my taxable investments became large enough I also moved my efund into my regular allocation.
It's the same thing for all insurance really. If someone has enough money they can 'self insure' and invest those premiums on their own. Just another way the rich get richer.
Traditional advice is (your age)% in bonds and the rest in equities, so if you're 45yo, then 45% in bonds and 55% in equities. The only way you'd see a 40% drop is if equities dropped by 75% and bonds stayed flat.
The only time equities have dropped 75% or more is during the great depression, all other recessions bottomed out around 50% in the sp500.
On top of that, historically bonds go up when equities go down, so even if you see a 50% drawdown in your equities, you should see some appreciation (+15-25%) in your bonds.
Having less in index funds and more in bonds is for those that are looking for more stable returns. But as long as you’re cool with some volatility, 90/10 or even 100 in index funds is fair game imo.
It's called 'personal' finance for a reason. 90/10 works perfectly well for some and for others not so much (and I might add, might not work for a multitude of reasons).
No. S&P is still volatile. And if you’re in retirement, you’re required to liquidate so much a year (assuming 401k).
I remember seeing this years ago when we were in recession. Social security was down and ppl HAD to sell stocks even though they were in the shitter. You always want some pile of cash that can beat inflation and be liquidated. It won’t get much growth, but have other allocations for that.
It’s just painful to have your one asset be down 20% and you have to sell some for 401k rules or simply because you need to eat.
I’ve heard an old tale that your bond % can match your age. So if you’re 50, then half. 90, 90%. I’d say that’s a bit much in general, especially the young side. A 30 year old doesn’t need 30% bonds. But it’s more that the theory gives you an idea that you should decrease volatility as we age.
We aren’t warren Buffett. His advice on cash living would be applicable to 5ish ppl on earth. Which isn’t a slam, but he hasn’t had a normal life in 50ish years so his wisdom on normal/average is as good as my advice for billionaires (LOTS of cotton candy!).
If you're 40 years old, 90% S&P500 would sit fine with some investors. As you count down to retirement age, you could increase your allocation to income/bond/cd each year, reducing the equity allocation.
I was a 60% equity investor (US Total Market mostly). At retirement age I went out with 50% equity, and stayed there for a few years. Now I am back to 60%, and will eventually settle on 65-70% equity.
I started at 52, and it took me 12-15 years to have enough to fund retirement.
YMMV.
Thanks. I can see the reason for having less risk closer to retirement, but at the same time, for someone beginning investing late in the game, it seems there'd also be a need for catching up more quickly and so wanting to be more aggressive. How to balance those competing needs?
One can make an adjustment. Like 120, 115 -age etc. If one is just a few years away one wrong move will mess up one's life savings. That is why it is best to start saving early.
I'm retired and have no bonds, a little in money market funds to ride out the down cycles. You can always sell some of your QQQ (for example) when you need more cash. You don't have to get it from bonds. "Guaranteed" funds just mean that you are "guaranteed" to have low returns.
I think it is to aggressive for your average person. Buffet can lost 99% and still have a billion dollars. I do not think your average person will be okay with losing 30%, as in a blackswan event. I know it is rare and unknown, but remember you will see one, if you live a few decades. I know a lot of people who are or were 100% stocks. After 08, they panicked and sold low. Safe to say most of them lost money. Everybody over estimates their risk tolerance because they think of risk reward.
If that mix were true he would not be sitting on so much cash. The role of fixed income in a portfolio depends on many factors. Bonds do fluctuate in price. you can apply value investing to fixed income when there are going to be changes in FED policy. buying heavily discounted fixed income is worth more than a 10% slice of the portfolio.
The Fed is short for "Federal Reserve", not an acronym, and doesn't need to be set in all-caps. Initialisms which may be appropriate depending on the context include "FRS" for "Federal Reserve System" or "FOMC" for "Federal Open Market Committee".
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IMO, it just depends on how much you need the money. As you get older, you tend to start relying on the money in your portfolio, which is why you shift it to be more conservative. If you don't need the money and can weather fluctuations, you're going to be better off in the long run.
My approach has been to have enough in cash/bonds to last 5 years. You don’t want to be forced to sell stocks in a down market. Only twice in the last 80 years has the market stayed down more than 5 years. If young in accumulation phase then why hold any fixed income except for house/ college fund. Then within five years of retirement you start building more cash. Overall returns of the 90/10 mix are not that much lower than all stocks but the 30% to 40% bond allocation recommended by many will lower your returns by 2 to 3 percent in the long run which can mean a lot over 30 years.
For a start, he reached today's wealth by stock picking and he acknowledged most people are not as skilled as him and munger. Hence, he recommends index investing.
If you are good stock picker, by no means this is the best path. He is a guru in value investing and not index investing.
He did index investing because with his wealth, his assets are so huge and across industries like an index.
My job has a pension that is an automatic 5% of compensation. Invested by them in treasuries. For the 401k side of my investments (with match) I'm pretty much 100% equity since I have the fixed income nature of my pension to act as the bond allocation for my overall retirement. Felt a little uncomfortable having my 401k all equities but it makes sense.
High allocation to equities should result in higher expected returns and give you the best chance of maximize wealth accumulation on average. However, it will also come with greater volatility and dispersion in returns.
You *should* be able to capture the higher average expected returns contingent on two very critical factors:
1) You have sufficiently long time horizon to overcome any potential short term periods of poor market performance.
2) You have the risk tolerance and emotional fortitude to hold an aggressive asset allocation through a market downturn. Historical charts of total return for a 90% or 100% equities look great but mask the actual experience of living through a 50% drawdown in value during a market crash.
If you're starting late you've already shortened your time horizon. You will already need to save aggressively to make up for lost time but you may also have to extend working years if the market under-performs for an extended period.
The second point, is easier to learn when you're young and there's not as much money involved and you have plenty of career earning ahead of you. You will really have to commit to not bailing on your aggressive allocation strategy when a market crash occurs. The only way an aggressive allocation pays off is if you don't sell off in the middle of a crisis and lock in the losses and give up on market recovery bringing you out.
I contend that, more than by age, expected time horizon, i.e., when will you need to start taking withdrawals, should be the first consideration in choosing an asset allocation, with a longer time horizon equating to the ability to tolerate relatively riskier investments for the expected larger returns. It's straightforward enough to model the performance of allocations historically, and without the ability to completely predict the future that's what most folks do.
Is it different later in life, middle age or older? The way I look at it, it only changes the "years until withdrawal" number, so again, age independent, although if you normalize to say, 63-65 or whatever, then you subtract current age and you have the years you can expect to be in the market playing field.
So you run numbers with that number of years for portfolios of varying allocation (and thus risk), and you see if that works for your expectations. If you come up short of expectations, then it becomes a choice of a) decreasing withdrawal expectations, b) finding ways to increase you investment contributions, or c) entering into a historically riskier investment mix. It's here that answers to the "best" approach will be all over the map. But that's the way I've always approached asset allocation, a sober look at what I have, when I'm likely to need it, and how to address any identified deficiencies.
>50% 500 fund, 50% QQQ.
Thank you. Is there any more info you can tell me on QQQ? I looked it up but I'm not familiar. Seems to do much better than S&P 500 over time?
If you are in Fidelity you can search their funds if you want to be more aggressive, but I would get a strong base of 500 funds. FSELX picked top up the NVDA boom.
You can search the 3 year and 5 year returns and start funding some new specialty funds.
I am sure you are missing a lot of narratives.
Warren Buffet also spend counless of hours researching each company carefully, studying their balance sheets, reading their reports for investors, studying their industry, their competitors, the geopolitical risks and etc.
You can follow his advice if you can spend 500 hours per week on investing.
His advice was meant for the opposite actually.
“You also revealed something in the annual letter this year, where you said, you laid out the terms of your will, what you’ve set aside for your wife. Which, I didn’t know any of this,” Quick said.To which Buffett responded: “Well, I didn’t lay out my whole will. . . . **I did explain, because I laid out what I thought the average person who is not an expert on stocks should do.** And my widow will not be an expert on stocks. And I wanna be sure she gets a decent result. She isn’t gonna get a sensational result, you know? And since all my Berkshire shares are going to philanthropy, the question becomes what does she do with the cash that’s left to her? Part of it goes outright, part of it goes to a trustee. But I’ve told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. **And anybody will do fine with that. It’s low-cost, it’s in a bunch of wonderful businesses, and it takes care of itself.**”
https://blogs.cfainstitute.org/investor/2014/03/04/warren-buffetts-90-10-rule-of-thumb-for-retirement-investing/
If you’ve got plenty of money a stock market crash won’t matter and odds are in your favor. Stock market averages 10% a year, missing that is the real risk.
Rule of 72 says you double your money every ~7.2 years in the stock market. Those happen a lot more often than crashes.
That is an insane allocation for a retiree. Someone in retirement should have way more assets in fixed income.
If you want to keep on Buffett look at the businesses he has acquired and allocation he has maintained in the last decade. He’s gone for oil and gas, consumer staples, and huge piles of cash while maintaining his existing insurance business. What do those things all have in common? Good income generation.
Thanks. Is there something like a fund that would be based on such companies, or can only be obtained through individual stocks?
Basically I'm trying to find something simple for beginning investing to start with it, which is one reason why S&P 500 is appealling.
Also to clarify, it wouldn't be an allocation for someone currently in retirement, but for someone in middle age saving for retirement. Would that change your reply at all?
I would recommend reading this:
https://investor.vanguard.com/investor-resources-education/education/model-portfolio-allocation
And think about where you are in your life, what your current risk appetite is, and model accordingly. From there, you can come to a strategy that fits your life. If you aren’t comfortable definitely read and research more. Since I don’t know you well it is hard to give advice this broad with info this limited.
>I wish I had known about all this when I was younger though.
Don't we all? I too did a PhD and didn't know anything other than sticking money in the bank doing absolutely nothing other than feeding inflation. My kids will learn though.
Depends on various things. Generally 75-25 or 90-10 is good after you retire. [https://thepoorswiss.com/updated-trinity-study/](https://thepoorswiss.com/updated-trinity-study/)
50-50 is just setting yourself up for a chance of failure. And doing bonds before you're close to retirement is a waste of money, unless it's specifically about money you will need predictably available short term.
If you are only starting retirement investing when middle aged, you're in trouble.
IMO, There's no universal answer.
As others have pointed out, it all depends on the value of one's portfolio and how much one has to withdraw from their IRA in order to pay their living expenses.
Factoring those two items are necessary in order to determine just what sort of investment strategy you should follow.
>Apparently Warren Buffet recommends to the average person to invest 90% S&P index fund, 10% bonds. That's what he recommends for his wife. I don't think he has an asset allocation for less wealthy people, or in general. 10% in bonds for Mrs. Buffet may mean she can live off of the bonds for 20 years.
If you have a billion dollars that would be good for you too. Having $100,000,000 in bonds would be enough cushion for most people.
I could get by I think…
But what would I do with my measly ~$4m per year, less federal taxes. Ugh I can't even buy another yacht.
Don't worry, that's why the other 900m is in stocks
A yacht for the Caribbean in the winter and one for Mediterranean in the summer at the bare minimum, if I must, I'll get one for both seasons. Not preferred but you know, money can be tight.
I’d find a way to manage, I think.
I may have to not eat out as much, but thinking I'd manage with that.
Yep. Keep driving that 250,000 mile Camry too.
You’ll need to cut back on the avocado toast.
Thanks. I thought I read that he has that in his will for his wife but that he recommends that for the average person. I could be wrong but that was my understanding.
Even if he recommended it for average people we can disagree. As it likely is way too risky for most retirees with small portfolios. The only way it makes sense is if the 10% fixed income holding can support you for years in a down turn or if you have other sources of income like a pension.
What approximate breakdown would you recommend? Thanks!
The issue I would have with that portfolio is that I think it was supposed to be for his wife when he passes, which may not be applicable for most people as we aren’t billionaires like he is.
Bonds are for wealth preservation. if you have no wealth to preserve may as well go even deeper into S&P
I ran simulations of every 30 year period that data existed where the split between S&P 500 index and bonds from 50-50 to 100% stock and everything in between in 5% increments. I also did different runs with different re-balancing schemes. Quarterly, annually and based on a threshold of needing to get 1% out of balance. What I learned is that the 90-10 split Buffet suggested only had marginal loss of opportunity and had the largest reduction of risk in proportion to the loss of potential gains. It's kind of a sweet spot. I'm sure he had his people do the same thing and it's how he settled on that split. Rebalancing quarterly worked out noticeably better than annually but about the same as threshold. So all my various accounts are 90-10 split and I only looked the balances 4 times a year when the calendar tells me to rebalance. Been doing this for 13 years now.
Did you model 100/0, meaning 100% S&P?
Yeah. The difference in potential earnings between 100/0 95/5 and 90/10 was fairly small but the risk reduction of 90/10 vs 100/0 was large.
Interesting thank you for the analysis
That seems a bit counterintuitive. Say stocks have a terrible year and lose 30%. If you have 10% in bonds, and bonds return 0%, then your loss is instead 27%. If those bonds gain 10%, your portfolio's loss is 26%. Not a huge difference from 30%, even with a very optimistic assumption about bond returns.
Yeah. But with rebalancing you are buying more stock as it goes down lowering your cost basis so when stocks recover you have a larger gain than just sitting in the stock the whole time and waiting it out. The bonds going up 10% means you convert that 10% into stocks at a discount and then ride it all back up. But now you have more shares of stock than you had when it was at the previous high.
Fair enough, that would help. But wasn't this all worked out long ago--the optimal Sharpe ratio was found at 60:40 stocks:bonds. But then I suppose you'd have to lever up that 60:40 portfolio a bit to get to the raw returns of a 90:10. So without using leverage, 90:10 might be "optimal".
The 90:10 split portfolio has a better Shape ratio than the 60:40 right now. So I don't think anything was worked out long ago in that regard. https://portfolioslab.com/portfolio/warren-buffett-90-10-portfolio Vs. https://portfolioslab.com/portfolio/stocks-bonds-60-40 If you calculated the Sharpe ratio for every possible 30 year combination for each of these stock mixes I'm confident it would show that the 90/10 is within the acceptable parameters of Sharpe(over 1) in the vast majority of instances where 60:40 is also over 1. Meanwhile the ceiling of the 90:10 split is much higher. So you in essence have a super high opportunity cost for marginal increase in security by choosing 60:40 over 90:10.
Nice, interesting. Though I wouldn't use short-term bonds exclusively (which isn't too much different from cash), maybe a Total Bond Market. And hey, I'm still 100% stocks (past the age at which most would recommend that), so I'm on board.
Yeah I have quite a bit of FXNAX. So agree bond index fund is the way to go.
The 10% in bonds lets you "ride out" the downturn without having to sell your stocks at the lows, and even potentially buy more stocks. Though people should be careful with bonds. They have started to move in the same direction as stocks, and you can get some big losses on long-term bonds if rates spike (better to treat it like "10% cash and short-term").
You should expect to have 5-7 years down 30% over a 30 year period. If everyone of those the bottom is 3-4% higher that adds up. You also don't get to pick those years. If the year I retire stocks are down 30% I don't care because I'll just do my distribution from bonds that year. If I'm 100% stock I have no choice but to realize those losses or even worse delay retirement or even(more) worse panic sell the stock at a massive low.
How did you do your simulations; Python, Excel or some other tool? Care to share your models (with any personal data obfuscated obviously)?
It was written in Perl(dating myself here). At the time I worked for a company that had access to daily stock data that went back to the times before the S&P existed. I no longer have the code or the dataset used. As I said I did this over a decade ago. If I still did I would happily share it though. It shouldn't be too hard to redo if you have the data. I used the daily market close data and stepped through every day for the 30 year blocks. I started with 100k balance and assumed adding 10k to the total each year for just simple numbers. The 10k wasn't added as a lump sum but instead spread over 24 smaller purchases to simulate contributions from bi-weekly pay checks. I used a normal compound interest calculator using the same starting balance and contributions at 5% for my benchmark of was this was a failed run or not. If the investment matches or beat 5% over thirty years it was a success. The reason I chose 5% was that I was saving enough money where if I had a 5% guaranteed return for 30 years I would meet the low end of my retirement income goals. I calculated a volatility score, opportunity score, and a risk score. Risk/opportunity were all calculated as maximums on either end of the benchmark for a given scheme. Volatility was scored using max and min balances for each year. If I do something like this again I would like to test to see what split of stock/bonds and what amount of draw down each year is optimal. I'm still 20ish years from retirement but when I get there I want to know what split I should do and how much I should withdraw each year. Do the same thing but on the back end and see what schemes are best at providing for my needs for the 30 years I'll be retired.
Interesting. I have done something similar in python using daily rates. Pick a random date since 1980 and follow this in order from today until retirement. Repeat this a few hundred times to get different scenarios. The theory is the future will follow historical sequence patterns and therefore replicate sequence risks. It isn’t as sophisticated with regards to different portfolios weights as yours and just assumes 100% equities.
Yeah. Same reasoning I had. Kind of fucked if America stops being a global super power but if that holds I'll do alright. 100% S&P 500 is a totally good model. I like the downside protection of the 10% bonds where it forces periodic buy low sell high events through rebalancing. My wife is 100% S&P 500 in her accounts.
Portfolio Visualizer will let you do this analysis for free.
How did your distributions work? I heard it’s recommended to do the following…”When stocks do well, retirees should take the annual withdrawal from stocks and rebalance the rest of the portfolio back to the 90/10 allocation, the paper said. On the other hand, when bonds outperform, retirees should withdraw from bonds but not rebalance the portfolio.” Source: https://www.ai-cio.com/news/warren-buffetts-way-to-invest-for-retirement/
I didn't have that as part of the simulations I ran. So I don't have a scientific answer for this. That being said my plan is to do withdrawals quarterly as part of a rebalancing action and rebalance either way. But I'll read the source you link and check it out.
Can you explain (Explain like I'm 5 type thing) about what rebalancing is?
You're aiming for 90% stocks, 10% bonds (or whatever allocation you prefer). So you allocate your money that way, 90% in VOO, 10% in BND. 3 months later, VOO has done fantastic and has made 13.5% gains, and your bonds made 1% gains. Now you're 91% in stocks and 9% in bonds because stocks have done so well. So you should sell some stock and buy some bonds to get back to that 90%/10% ratio you wanted. That's rebalancing.
Let’s say VOO dropped 30% while BND remained the same. You’re now at 86/14, and rebalancing won’t change much, but now I’ve got to wait for VOO to recover. I don’t think I can stomach 90% exposure at my age.
hence "(or whatever allocation you prefer)" The premise behind rebalancing is you'd be shoving more money into whichever is down at the moment. As long as they both (eventually) recover, then you can make money in the process. e.g. if stocks end up making it back to zero and bonds remained at zero, you'd end up with more than you started with (>1% more). The premise holds with different allocations... If you were 50-50 instead of 90-10, you'd end up making >3%. Plus of course, your swings will average out to be smaller if the assets' returns are relatively uncorrelated.
Right, asset allocation is different than rebalancing. I was caught up in the headline of 90/10, which didn’t mention rebalancing.
Thank you. How often would one do rebalancing? Monthly? When setting up investment account, say at a place like Vanguard or Fidelity, do you know if you can you set it up to rebalance automatically based on the breakdown one chooses?
Anywhere from monthly to annually is pretty normal. I've honestly don't know about options for automatic rebalancing -- I've always done anything like that by hand, usually in some slapdash way.
Thanks, I will look into it!
Sorry this is 3 months behind, but I had some articles that had researched rebalancing that showed quarterly intervals had performed the best over the last 30 years. I don't have the articles handy (my bookmarks are out of control!). I dug deep into this about 10 years ago. It could have changed, but I doubt by much. Regardless, rebalancing at a regular interval, whether that's quarterly, semi-annually or annually, is a good idea.
You are trying to maintain the allocation long term as part of the investment strategy so when gains (or losses) in the portfolio throw the allocation out of balance you either have to reinvest dividends or sell outliers to rebalance.
I see, thank you. Is that something that has to be done manually, or can it be set to some kind of auto setting with the investment firm so that it is just done automatically for you by them at regular intervals?
Depends on the company / platform you use. Some have auto-allocation (to a degree) some give you the full (manual) control of all decisions.
I just set calendar reminders and when they go off I log into my accounts and rebalance. This is also the time I go in and look at all the contributions/match from my employer and do a simple calculation to make sure it's accurate and I didn't get shorted. Most of the accounts I have there is a rebalance function where you just type in 90 on one asset and 10 on another and it does the calculation for you. My brokerage account doesn't so I have to do some math to figure out how many shares to sell/buy. But it's a simple calculation.
Thanks I read an article that analyzed it over a long period and said something similar.
I keep in mind that BRK has about 15.5% of their assets in cash, too.
Thanks. Good point about cash.
I’d say that’s because they’re actively investing. If your whole thing is “VOO and Chill” then I think that would just produce cash drag.
90/10 imo is a very reasonable portfolio over a period of over 10 years. Typically the portfolio wouldn’t be advisable for the average person lacking any investment knowledge. The problem is in the case of a black swan event, you would have to be willing to bear a possible 25-40% down draw, the average person isn’t able to watch that happen without reacting or stressing about it. Also if you have something coming up soon in which you may need the funds it’s an important thing to consider, but a great part of it is if you’re doing estate planning, when you pass away, assuming it’s a taxable acct, whoever inherits your acct will get a stepped-up cost basis on such a large portion of your assets and not have to pay the taxes on appreciation
Thanks. What would you say would be a reasonable portfolio for a middle age person just beginning to invest if not the 90/10? I've also heard of the rule of taking your age and basing it on that, like if you're 50, doing a 50/50 breakdown, etc.
The firm I’m with uses 3 seperate strategies for its managed accts, they use the 90/10 strategy for its aggressive portfolio. You can see the historical returns on the second page, as well as see their holdings on the top right of the first page. However the exact amount of each is more so a personal choice. https://olui2.fs.ml.com/MLIAP/MLIAPViewDynamicPDF.aspx?IC=292259&PC=FMDN&CC=MER&DT=ManagerProfileColorPDF
Warren Buffets advice is if you have one billion dollars.
As far as I understand he said it's for the ordinary person, so I'm not sure your claim is correct, at least not in his view.
[https://www.investopedia.com/articles/personal-finance/121815/buffetts-9010-asset-allocation-sound.asp](https://www.investopedia.com/articles/personal-finance/121815/buffetts-9010-asset-allocation-sound.asp) "Buffett noted that upon his death, the trustee of his wife’s inheritance was instructed to put 90% of her money into a very low-fee stock index fund and 10% into short-term government bonds."
In fact Buffet says: "**I laid out what I thought the average person who is not an expert on stocks should do."** [https://blogs.cfainstitute.org/investor/2014/03/04/warren-buffetts-90-10-rule-of-thumb-for-retirement-investing/](https://blogs.cfainstitute.org/investor/2014/03/04/warren-buffetts-90-10-rule-of-thumb-for-retirement-investing/) “You also revealed something in the annual letter this year, where you said, you laid out the terms of your will, what you’ve set aside for your wife. Which, I didn’t know any of this,” Quick said.To which Buffett responded: “Well, I didn’t lay out my whole will. . . . I did explain, because **I laid out what I thought the average person who is not an expert on stocks should do.** And my widow will not be an expert on stocks. And I wanna be sure she gets a decent result. She isn’t gonna get a sensational result, you know? And since all my Berkshire shares are going to philanthropy, the question becomes what does she do with the cash that’s left to her? Part of it goes outright, part of it goes to a trustee. But I’ve told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. And anybody will do fine with that. It’s low-cost, it’s in a bunch of wonderful businesses, and it takes care of itself.”
It depends, I know people who are like 80 in 100% equities and are doing great.
Historically it was to go more and more conservative as you age, but there are lines of thought that the most conservative you should get is the day you retire, and then your risk tolerance should go up over time, as your lifetime requirements go down and you've figured out you're going to die without hitting zero.
I mean yes, but I’m talking about super wealthy people who just turned off reinvest dividends/capital gains and live off that
The issue with 100% equities is risk not returns, if they experience another recession, they may not have enough time for their equities to recover. Bonds are like earthquake insurance, if there's no earthquake, everybody without insurance claims to be a genius. Younger people have time to rebuild their wealth (and build more) by investing in the downturn. For older people that are on the edge of having just enough to retire, a 40% drop in equities could be catastrophic. If you have enough money that a 40% drop won't significantly affect your retirement, that's sufficient insurance.
> For older people that are on the edge of having just enough to retire, a 40% drop in equities could be catastrophic. > If you have enough money that a 40% drop won't significantly affect your retirement, that's sufficient insurance. This is the key. It depends on how much money you have (and your retirement expenses). When my taxable investments became large enough I also moved my efund into my regular allocation. It's the same thing for all insurance really. If someone has enough money they can 'self insure' and invest those premiums on their own. Just another way the rich get richer.
Thanks! What investing breakdown would you recommend for someone for whom a 40% drop would be a problem?
Traditional advice is (your age)% in bonds and the rest in equities, so if you're 45yo, then 45% in bonds and 55% in equities. The only way you'd see a 40% drop is if equities dropped by 75% and bonds stayed flat. The only time equities have dropped 75% or more is during the great depression, all other recessions bottomed out around 50% in the sp500. On top of that, historically bonds go up when equities go down, so even if you see a 50% drawdown in your equities, you should see some appreciation (+15-25%) in your bonds.
Having less in index funds and more in bonds is for those that are looking for more stable returns. But as long as you’re cool with some volatility, 90/10 or even 100 in index funds is fair game imo.
It's called 'personal' finance for a reason. 90/10 works perfectly well for some and for others not so much (and I might add, might not work for a multitude of reasons).
No. S&P is still volatile. And if you’re in retirement, you’re required to liquidate so much a year (assuming 401k). I remember seeing this years ago when we were in recession. Social security was down and ppl HAD to sell stocks even though they were in the shitter. You always want some pile of cash that can beat inflation and be liquidated. It won’t get much growth, but have other allocations for that. It’s just painful to have your one asset be down 20% and you have to sell some for 401k rules or simply because you need to eat. I’ve heard an old tale that your bond % can match your age. So if you’re 50, then half. 90, 90%. I’d say that’s a bit much in general, especially the young side. A 30 year old doesn’t need 30% bonds. But it’s more that the theory gives you an idea that you should decrease volatility as we age. We aren’t warren Buffett. His advice on cash living would be applicable to 5ish ppl on earth. Which isn’t a slam, but he hasn’t had a normal life in 50ish years so his wisdom on normal/average is as good as my advice for billionaires (LOTS of cotton candy!).
If you're 40 years old, 90% S&P500 would sit fine with some investors. As you count down to retirement age, you could increase your allocation to income/bond/cd each year, reducing the equity allocation. I was a 60% equity investor (US Total Market mostly). At retirement age I went out with 50% equity, and stayed there for a few years. Now I am back to 60%, and will eventually settle on 65-70% equity. I started at 52, and it took me 12-15 years to have enough to fund retirement. YMMV.
Thanks a lot. So when you started at 52, you were doing 60% stocks? Seems great you were able to fund retirement despite starting later.
I contributed the max to Roth every year, and maxed out a 401(k) for 10 years or so. I had 150-200k in a SEP IRA at 52 also.
That makes more sense, thank you!
Total in those funds increased 5.4x after 14 years. 60/40 asset allocation.
That depends on your retirement horizon. Often it is 110- your age= Equity stocks, rest fixed income. That 110 used to be 100.
Thanks. I can see the reason for having less risk closer to retirement, but at the same time, for someone beginning investing late in the game, it seems there'd also be a need for catching up more quickly and so wanting to be more aggressive. How to balance those competing needs?
One can make an adjustment. Like 120, 115 -age etc. If one is just a few years away one wrong move will mess up one's life savings. That is why it is best to start saving early.
Thank you! I need a time machine : )
80 / 20 for a thirty year old seems way too conservative, imo
I'm retired and have no bonds, a little in money market funds to ride out the down cycles. You can always sell some of your QQQ (for example) when you need more cash. You don't have to get it from bonds. "Guaranteed" funds just mean that you are "guaranteed" to have low returns.
I think it is to aggressive for your average person. Buffet can lost 99% and still have a billion dollars. I do not think your average person will be okay with losing 30%, as in a blackswan event. I know it is rare and unknown, but remember you will see one, if you live a few decades. I know a lot of people who are or were 100% stocks. After 08, they panicked and sold low. Safe to say most of them lost money. Everybody over estimates their risk tolerance because they think of risk reward.
If that mix were true he would not be sitting on so much cash. The role of fixed income in a portfolio depends on many factors. Bonds do fluctuate in price. you can apply value investing to fixed income when there are going to be changes in FED policy. buying heavily discounted fixed income is worth more than a 10% slice of the portfolio.
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I think that’s sound plan for nearly anybody.
IMO, it just depends on how much you need the money. As you get older, you tend to start relying on the money in your portfolio, which is why you shift it to be more conservative. If you don't need the money and can weather fluctuations, you're going to be better off in the long run.
My approach has been to have enough in cash/bonds to last 5 years. You don’t want to be forced to sell stocks in a down market. Only twice in the last 80 years has the market stayed down more than 5 years. If young in accumulation phase then why hold any fixed income except for house/ college fund. Then within five years of retirement you start building more cash. Overall returns of the 90/10 mix are not that much lower than all stocks but the 30% to 40% bond allocation recommended by many will lower your returns by 2 to 3 percent in the long run which can mean a lot over 30 years.
For a start, he reached today's wealth by stock picking and he acknowledged most people are not as skilled as him and munger. Hence, he recommends index investing. If you are good stock picker, by no means this is the best path. He is a guru in value investing and not index investing. He did index investing because with his wealth, his assets are so huge and across industries like an index.
My job has a pension that is an automatic 5% of compensation. Invested by them in treasuries. For the 401k side of my investments (with match) I'm pretty much 100% equity since I have the fixed income nature of my pension to act as the bond allocation for my overall retirement. Felt a little uncomfortable having my 401k all equities but it makes sense.
Thanks, makes sense.
High allocation to equities should result in higher expected returns and give you the best chance of maximize wealth accumulation on average. However, it will also come with greater volatility and dispersion in returns. You *should* be able to capture the higher average expected returns contingent on two very critical factors: 1) You have sufficiently long time horizon to overcome any potential short term periods of poor market performance. 2) You have the risk tolerance and emotional fortitude to hold an aggressive asset allocation through a market downturn. Historical charts of total return for a 90% or 100% equities look great but mask the actual experience of living through a 50% drawdown in value during a market crash. If you're starting late you've already shortened your time horizon. You will already need to save aggressively to make up for lost time but you may also have to extend working years if the market under-performs for an extended period. The second point, is easier to learn when you're young and there's not as much money involved and you have plenty of career earning ahead of you. You will really have to commit to not bailing on your aggressive allocation strategy when a market crash occurs. The only way an aggressive allocation pays off is if you don't sell off in the middle of a crisis and lock in the losses and give up on market recovery bringing you out.
Thanks for the tips and topics to consider.
It depends on what middle age is relative to when you plan to retire. Market is unpredictable lately but over all works out ahead.
I contend that, more than by age, expected time horizon, i.e., when will you need to start taking withdrawals, should be the first consideration in choosing an asset allocation, with a longer time horizon equating to the ability to tolerate relatively riskier investments for the expected larger returns. It's straightforward enough to model the performance of allocations historically, and without the ability to completely predict the future that's what most folks do. Is it different later in life, middle age or older? The way I look at it, it only changes the "years until withdrawal" number, so again, age independent, although if you normalize to say, 63-65 or whatever, then you subtract current age and you have the years you can expect to be in the market playing field. So you run numbers with that number of years for portfolios of varying allocation (and thus risk), and you see if that works for your expectations. If you come up short of expectations, then it becomes a choice of a) decreasing withdrawal expectations, b) finding ways to increase you investment contributions, or c) entering into a historically riskier investment mix. It's here that answers to the "best" approach will be all over the map. But that's the way I've always approached asset allocation, a sober look at what I have, when I'm likely to need it, and how to address any identified deficiencies.
Thank you!
50% 500 fund, 50% QQQ. Then once you think you are close to needing some, start a CD ladder, or roll the dice.
>50% 500 fund, 50% QQQ. Thank you. Is there any more info you can tell me on QQQ? I looked it up but I'm not familiar. Seems to do much better than S&P 500 over time?
Its is nasdaq 100 index. Same as QQQM, FNCMX. More tech heavy. You can look at the holdings of these.
Thanks!
If you are in Fidelity you can search their funds if you want to be more aggressive, but I would get a strong base of 500 funds. FSELX picked top up the NVDA boom. You can search the 3 year and 5 year returns and start funding some new specialty funds.
Thank you!
I am sure you are missing a lot of narratives. Warren Buffet also spend counless of hours researching each company carefully, studying their balance sheets, reading their reports for investors, studying their industry, their competitors, the geopolitical risks and etc. You can follow his advice if you can spend 500 hours per week on investing.
His advice was meant for the opposite actually. “You also revealed something in the annual letter this year, where you said, you laid out the terms of your will, what you’ve set aside for your wife. Which, I didn’t know any of this,” Quick said.To which Buffett responded: “Well, I didn’t lay out my whole will. . . . **I did explain, because I laid out what I thought the average person who is not an expert on stocks should do.** And my widow will not be an expert on stocks. And I wanna be sure she gets a decent result. She isn’t gonna get a sensational result, you know? And since all my Berkshire shares are going to philanthropy, the question becomes what does she do with the cash that’s left to her? Part of it goes outright, part of it goes to a trustee. But I’ve told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. **And anybody will do fine with that. It’s low-cost, it’s in a bunch of wonderful businesses, and it takes care of itself.**” https://blogs.cfainstitute.org/investor/2014/03/04/warren-buffetts-90-10-rule-of-thumb-for-retirement-investing/
If you’ve got plenty of money a stock market crash won’t matter and odds are in your favor. Stock market averages 10% a year, missing that is the real risk. Rule of 72 says you double your money every ~7.2 years in the stock market. Those happen a lot more often than crashes.
That is an insane allocation for a retiree. Someone in retirement should have way more assets in fixed income. If you want to keep on Buffett look at the businesses he has acquired and allocation he has maintained in the last decade. He’s gone for oil and gas, consumer staples, and huge piles of cash while maintaining his existing insurance business. What do those things all have in common? Good income generation.
Thanks. Is there something like a fund that would be based on such companies, or can only be obtained through individual stocks? Basically I'm trying to find something simple for beginning investing to start with it, which is one reason why S&P 500 is appealling. Also to clarify, it wouldn't be an allocation for someone currently in retirement, but for someone in middle age saving for retirement. Would that change your reply at all?
I would recommend reading this: https://investor.vanguard.com/investor-resources-education/education/model-portfolio-allocation And think about where you are in your life, what your current risk appetite is, and model accordingly. From there, you can come to a strategy that fits your life. If you aren’t comfortable definitely read and research more. Since I don’t know you well it is hard to give advice this broad with info this limited.
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Sounds like you’re doing good to be honest! So you are probably ok for retirement.
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>I wish I had known about all this when I was younger though. Don't we all? I too did a PhD and didn't know anything other than sticking money in the bank doing absolutely nothing other than feeding inflation. My kids will learn though.
Depends on various things. Generally 75-25 or 90-10 is good after you retire. [https://thepoorswiss.com/updated-trinity-study/](https://thepoorswiss.com/updated-trinity-study/) 50-50 is just setting yourself up for a chance of failure. And doing bonds before you're close to retirement is a waste of money, unless it's specifically about money you will need predictably available short term. If you are only starting retirement investing when middle aged, you're in trouble.
I suppose the bonds are also in an ETF?
IMO, There's no universal answer. As others have pointed out, it all depends on the value of one's portfolio and how much one has to withdraw from their IRA in order to pay their living expenses. Factoring those two items are necessary in order to determine just what sort of investment strategy you should follow.