10/05 11:41 ET
This is a wonderful question.
Like any great question, it’ll require considerable thinking over a long period of time, and we won’t know the answer until we get to the end and look backwards. And then we’ll all know exactly the right answer.
So that leaves us with the only choice, which is to make sensible estimates. Jeremy Grantham and Rob Arnott are two brilliant and independent thinkers, so we should all listen to them very carefully when making our own judgments.
Charles D. Ellis, Greenwich Associates Founder
10/05 11:42 ET
My own view, and this is not an expert opinion, is that wide-range indexing global markets makes good sense for everyone.
The secret to real success in indexing is always going to be taking a long-, long-, long-term view, and I’m comfortable taking market capitalization as the basis for the long-term view knowing that this will put me into stocks that I would otherwise have not gotten into and leave me in stocks that would make me uncomfortable.
But it’s my experience that being uncomfortable and accepting that indexing works better than trying to outsmart indexing.
Charles D. Ellis, Greenwich Associates Founder
10/05 11:43 ET
A number of readers say that they get the argument for indexing, but that it only raises the issue of which index to choose. And as the book makes clear, it makes the issue of asset allocation all the more important.
This question is typical:
“Whilst most will agree equities will outperform bonds in the long term, is it right to take as given previous market performance, albeit over 100 years. Shouldn’t we hedge against future poor equity performance if the world/ U.S. changes?
Is there some sensible rule that people can adopt for asset allocation without falling into the traps of over-trading, or believing that they can beat the market?
John Authers, Bloomberg Opinion, New York
10/05 11:45 ET
Asset allocation is terribly important and almost always conventional advice is dead wrong. My favorite target is “invest your age in bonds” (so presumably if you’re 30 years old, you should invest 30% in bonds). So this rule is nuts.
Charles D. Ellis, Greenwich Associates Founder
10/05 11:46 ET
Imagine the typical 30-year-old who is a serious investor. Let’s assume for a minute that she did an MBA and is working in a fairly high-income career? What is her most valuable asset?
It’s not her securities portfolio; it is her ability to earn substantial income in the many years ahead. Likely she would not retire until well after 70 -- that’s a long, long time. And the present value of her earning and saving power is huge.
In addition, she may already own a home. She will be receiving Social Security benefits, and those are are more like bonds than other investments you can think of. They are stable assets. So this woman is actually heavily invested in stable assets, and the last thing she needs is to do more by buying bonds.
Charles D. Ellis, Greenwich Associates Founder
10/05 11:47 ET
Jump to the other end of life: I’m 84, and I own zero bonds. I am receiving required minimum distribution, I am receiving Social Security, I do own my home, and being an art history major in college, I own some paintings. The conventional advice would be that I should have 84% of my securities in bonds. I have zero.
Why? Because I’m still able to earn enough to cover our expenses, so my objective is to provide financial confidence to my grandchildren. Their average age is 15. They won’t be spending the money that I’ll give them for years and years. So the sensible investment is all equities, and that’s what I’m doing.
Charles D. Ellis, Greenwich Associates Founder
10/05 11:49 ET
Having rejected the conventional wisdom of investor age in bonds, a clear-cut challenge for me and any other person is to figure out what’s right for me in my particular situation.
As investors, each of us is unique just as much as my fingerprint is unique or the iris of my eye is unique or my DNA is unique. In similar way, we differ in wealth, we differ in income, we differ in saving capacity, we differ in risk tolerance, we differ in interest in investing, and we differ in skills in investing.
Charles D. Ellis, Greenwich Associates Founder
10/05 11:50 ET
If each of us were to take all those factors and think seriously about ourselves, we would realize that we are unique as investors. The best thing any investor can do is to figure out what’s really right for her or for him for the long, long term in portfolio structure.
Put that plan in writing, and stay with that plan until either we change a lot, or the world changes a lot. Chances are high most of us should be investing even more than we do in equity investments.
Charles D. Ellis, Greenwich Associates Founder