My thoughts on asset allocation

Asset allocation

Yawnworthy topic is of major importance

The subject is asset allocation. My default 100% allocation to common stocks is unconventional. But, it has worked very well for me for almost fifty years.

A study by Gary Brinson, Randolph Hood and Gilbert Beebower looked at the impact of asset allocation on the returns of 91 large U.S. pension funds over ten years. They looked at the allocation between stocks, bonds and cash. They found that over 95 percent of the funds’ returns came from their asset allocation. The identity of the individual stocks and bonds bought — and trying to buy and sell stocks at the right time – varied the returns less than five percent. I have not read the study itself but it makes sense.

Virtually all investment advisors, professional money managers and other knowledgeable investment types will recommend to individual investors a program with a balance of something like 60% allocated to stocks, 30% allocated to bonds and 10% held in cash for ready access and to take advantage of opportunities. It is said the bond component smooths out the volatility of the portfolio and reduces risk.

Automatic rebalancing

In a stock bull market, when the stock portion of the portfolio enjoys capital gains, the percent of stocks in the portfolio by market price will increase. When that happens, the wise investor in such a program should sell some stocks and buy some bonds to rebalance to the recommended weightings of 60/30/10. This is automatic rebalancing. It is automatic because it doesn’t require any thought. One rebalances simply because the portfolio has gone out of balance against target balances.

I reject this 60/30/10 approach for reasons I will explain when I tell you of my own experience.

Discretionary lightening up

In Irrational Exuberance Shiller wrote, with reference to the stock market’s CAPE ratio: “Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low.” (Shiller, 2005 Second Edition)p.187.

Robert Shiller was interviewed for a Wall Street Journal article published November 22, 2013. The CAPE reading at the time of the Wall Street Journal article was 25.2. The practical question is what action one should take in one’s portfolio at this level. “At current levels, it’s “a concern,” said the Yale University professor who last month won the Nobel Prize. It suggests “you should reduce holdings a bit, that might be reasonable.” In the meantime, it is possible “the market could keep going up even more.”

 I reject ‘discretionary lightening up’ for one simple reason: to attempt to do so is both extremely difficult to get right and is to practice market timing, a no no.

CAPE was never intended as a market timing aid. Plus, I have my own criticisms of CAPE. See here, here and here.

My own experience

Let me describe my own experience and readers can decide for themselves what is best for them.

In 1975, after reading that stocks outperformed bonds over the long term, I took our retirement savings out of a life insurance run pension plan and put them in an all common stock mutual fund. I also opened a small investment account and practiced doing it myself on the side.

In 1985, feeling the stock market was overpriced I cashed in the mutual fund and switched it all into 90 day treasury bills paying 11%. That’s right, 11%.

In late 1990 I sold the treasury bills and put all our retirement savings into a common stock portfolio at a discount broker which I managed myself without an advisor. The portfolio contained no bonds and next to no cash.

In 1998 I read Jeremy J. Siegel’s Stocks for the Long Run (Siegel, 1998) which bolstered what I had learned, that over a long period of years, a well-diversified carefully chosen portfolio of stocks will outperform other asset classes. The book is by any measure an authoritative work.

But, I also read a lot of other material on investing. Our portfolio of 100% common stocks had done really well in the 1990s and I came to the conclusion in late 1998 that the stock market was in a real bubble. In spite of what I had read in Jeremy Siegel’s book, I sold all our stocks (with some small exceptions) and put our retirement savings in 2 year bonds.

In late 2002 I sold all the bonds and went back into stocks. Since late 2002 we have had a 100% allocation to common stocks that I manage myself.


My view of bubbles is that there have only been three in the last one hundred years – 1929, late 1960s and late 1990s. The stock market rout of 2008 was not the result of a stock market bubble but of the sub-prime fiasco and other financial shenanigans. Commentators often pontificate on whether the stock market is overpriced and whether there is a stock market bubble. Most of this talk is nonsense. Generally what they are talking about is ordinary bull markets. A bull market and its denouement are like a summer storm. A bubble is a category 4 hurricane. It requires special thought and handling.

Stock market volatility is perfectly natural and not a sign of bad things. Volatility has nothing to do with risk. It does not measure risk.

It has worked for our family.

I mention our family’s investment returns not to boast but simply to support the credibility of what I have written above. Since 1972 the total compound return on our family retirement savings has been 13.42% (to Dec 2020). This includes time in bonds and treasury bills. From January 1, 2009 to present, our discount broker shows a compound total return on our financial assets, i.e. retirement savings, of 15.90%

How I look at it

If we put true stock bubbles on one side for a moment, stocks will outperform bonds over the long haul. This is because of the Equity Risk Premium. See here. Based on my current thinking, being in treasury bills from 1985 to late 1990 was not the best decision. It turned out alright because treasury bills paid so much interest. I would have been better off staying in stocks. Staying 100% in common stocks during the 2008 financial crisis was the right decision. Because stocks had not been in a true bubble they bounced back very quickly. Similarly, in 2020 we stayed 100% in common stocks through the Covid crisis. I rejigged the portfolio to reflect the impact of Covid on various kinds of businesses.

True bubbles need special treatment. When you are convinced the stock market is in a true bubble, it’s time to go to cash or short term bonds. Hence, I am happy to use a 100% allocation to common stocks and apply the special treatment to bubbles. I do not believe a 60/30/10 asset allocation is suitable for me. It would tend to be a drag on performance. I don’t need the smoothing effect of bonds. I consider bonds more risky than most investors believe. That is because of inflation.

I will stay alert for the next bubble. True bubbles are not hard to spot. The really hard part is taking action when you fear missing out on all the easy money being made. I may be wrong about all of this. My investment plan for 2021 anticipates we might show a paper loss of 50% at some point, although I think this unlikely. See here.


Asset allocation is important. Every investor needs a strategy and once in place, you need to stick to it.


For readers wishing to dig further into asset allocation check out The Motherlode Part 5: Asset Management

This Part contains three chapter:

28. Asset Allocation
29. Bubbles, crises, panics and crashes
30. Cash Reserves

Also you can take a look at these posts:

Expected future returns

What to make of declining bond yields

What you need to know about bubbles


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