Barron's Magazine ran a terrific advertisement many years ago. Resembling a lost tablet, the ad commanded, "Risk Not Thy Whole Wad". The ad was in fact referencing the CBOE Options Exchange. Investors could now use stock options to gain exposure to a stock weighting, with a predetermined risk level.
We were so impressed with the slogan that we framed the magazine ad and hung it on the office wall. Days later an entrepreneur came by the office to pitch his oil and gas investment opportunity. Sales were not going well and he was in over his head. He was down to his last marketing dollars. He looked up after completing his pitch, read the slogan and in a horrified voice blurted out, "I wish I had read this commandment before using up all my capital on this venture". We both sighed and moved on with our day (so as not to shock or offend the advertisement was then moved to a more discreet location).
It now resides on my home office wall to remind me that no opportunity should consume too much of my wad. The framed ad is a constant reminder that diversification is easily accomplished and allows for a more peaceful night's sleep.
I read this week on Bloomberg, that with respect to diversification, Blackrock is ditching the conventional 60% equity and 40% fixed income model ("moving away from broad allocations to public equities and bonds"). They are reported to be "in favour of public and private investments as well as tactical holdings of bonds" (typically in a 60/40 portfolio one would rebalance to this set weighting periodically and not try to tactically time entry points). In my view, they are zigging, when they should be zagging.
Based on Bloomberg's US 60/40 portfolio index this asset allocation has had only two down years in the last 16. Last year was particularly ugly at -17%, so I understand the damage to confidence based on recent events. But I question why you would move away from a strategy that has proved beneficial in 14 of the last 16 years.
Isn't this the very time you want to hold 40% of your portfolio in bonds with yields ranging from 4% to 9%? For example, if your goal is to earn a 7% overall annual return over the next 5 years, the interest payment from the bonds gets you well on your way.
Reviewing the 60% stock allocation in this model, I continue to be astonished at how negative the public is towards equities. In a recent CNBC survey, only "24% say now is a good time to invest in stocks, (close to )the lowest reading in the survey's 17-year history. The record low was last quarter at 26%". So far the naysayers have missed an 8.22% rally in the S&P 500 (to April 18th). The beauty of the 60/40 balance is that if stocks are overpriced you can rebalance back to 60% on corrections, reducing your bond holdings. Tacticians not required!
regards, Tim
Tim Morton, CFA is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com and a contributor to Barron's. My comments are not to be taken as investment recommendations. They are purely for discussion purposes. Please see your registered advisor for investment advice.
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