Balance beyond the ups and downs
A balanced investment portfolio can save investors from falling for the erroneous notion that “this time is different,” Bob Landaas explains in a Money Talk Video. Maintaining a balance between stocks and bonds lets investors practice humility and acknowledging that they can’t predict stock prices, Bob says. Here is the transcript.
One of the most important issues when you invest your money is to get the mix right between stocks and bonds. Many investors struggle with that issue.
Typically during a bull market for stocks, people obviously want more stocks in their portfolio, and just the opposite when the stocks are getting clobbered people want more bonds.
Way back in 1990, Harry Markowitz got a Nobel Prize in economics by convincing the academic community and then ultimately the Nobel committee about asset allocation. And what he showed was that if you get much past 55- to 60 percent in stocks, your risk line keeps going up, but your return line tends to flatten out. And of course, it’s a function of how you back-test it.
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We’ve been looking at this for almost 30 years now, and the results don’t change much from year to year. And frankly, the last five years the results have shown that you’ll actually lose money by increasing your stock exposure past 65 percent.
So as a firm, we try to struggle with balanced portfolios. In theory, it’s easy to explain. In reality, it’s hard to implement because most people will want to avoid stocks on the way down, and they want to increase their stock exposure on the way up.
Of the eight major downturns since I started in 1975, nobody called four of them:
- the Persian Gulf crisis
- the crash in ’87 and
- the Arab embargo, when I first got started in the mid-‘70s.
Nobody called them. Now, plenty of us called the other four.
So the other part about building a balanced portfolio is the concept of humility – that it’s very difficult, almost impossible some days, to forecast the future correctly. So the pros know that it’s tricky. If the world doesn’t change, I’ve got a reasonable chance of having my forecast come out right. But in most years, it’s that proverbial meteor from outer space that blindsides the pros.
And so that really is what balance is all about. Stick to your knitting. Don’t let your stock portfolio go much above 55 percent. Don’t ever succumb to the concept of “This time it’s different.” It usually isn’t different, in the classic business cycle.
Bob Landaas is president of Landaas & Company.
Money Talk Video by Peter May
(initially posted May 30, 2013)
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