“Wide diversification is only required when investors do not understand what they are doing.” – Warren Buffett

Probably the single most common incorrect quote in investing is: “Asset allocation determines 94% of your investment returns.” The quote refers to a study1 that is misquoted by both the investment industry to market simple investment strategies and by the index industry to downplay fund manager skill.

“Asset allocation” attempts to balance risk and return by adjusting the mix between equities (stocks), bonds and cash. While the benefits are far less than touted, it is an objective and simple way to help investors understand both the risk level and return potential of their portfolio.

There is a common belief that it is just a matter of deciding whether you are more comfortable with the classic mix of 60% stocks/40% bonds or a more growth-oriented 80%/20% mix. However, there are actually a variety of asset allocation strategies.

Here are 5 possible strategies. All are reasonable and based on studies. The best strategy for you depends on multiple factors, including your risk tolerance, time horizon and your long term goals, especially your retirement goal.

1. Fixed Allocation

This is the traditional method. It is based on your risk tolerance. After filling out a “risk tolerance questionnaire” and based on the degree of ups and downs you can tolerate in your investments, you choose an allocation, say 70% stocks/30% bonds. You generally maintain the same allocation through your life, unless your risk tolerance changes.


  • Investments should be suitable to your risk tolerance. Most investors are not very knowledgeable about investing and this allows them to have a constant level of ups and downs that they can get comfortable with.
  • Easy for you to understand the risk and return level of your investments.


  • Risk tolerance for most people changes based on the situation. In great bull markets, most investors become more aggressive, while in scary bear markets most investors become more cautious.
  • You may end up with a portfolio that is too conservative when you are young and too aggressive when you are old.
  • Many investors end up with a portfolio too conservative to have any chance at all of having the retirement they want because they base their investments only on their risk tolerance, without knowing what return they need to achieve their life goals.

2. Target Date

This method is based on the “birthday theory” that you should become more cautious as you get older. The formula used is usually something like: 110 – your age = % in stocks. At age 30, you should have 80% in stocks and at age 60 that should have 50%. There are target date mutual funds that do the adjustment for you automatically each year.


  • Automatically adjusts for the shorter time horizons and more conservative nature that is common as you get older.
  • Reduces risk as your portfolio gets larger with time. A 20% decline on a $1 million portfolio at age 60 may be harder to tolerate than a 20% decline on a $50,000 portfolio at age 30.


  • Many people become comfortable with the ups and downs of their investments, so they may not want more conservative investments every year.
  • With more experience, not all investors become more conservative with age.
  • You may end up with a portfolio too conservative to have any chance of having the retirement you want.

3. Lifecycle Investing

Based on an in-depth study by two Yale professors2, they proved that retirement risk over your lifetime is lower if you “diversify across time”. Traditional asset allocation does not give you much growth when you are young and have a long time horizon with a relatively small portfolio.

Traditional investing also creates a big “last decade risk” because 80% of your investments over your working life are usually after age 50. If your last decade is a bad decade (like the 2000-09 decade), it probably means your rate of return for your entire working life is low. One bad decade can put you far below your retirement goal.

Lifecycle investing reduces “last decade risk” by diversifying across time. Essentially, you borrow to at least double the size of your investments in your first decade of investing and invest 100% in stocks. If you have $50,000, you borrow another $50,000, so you can invest $100,000 all in stocks. That means you essentially have 200% in stocks.3 Then you slowly pay off the leverage by your early 50s, when you start adding bonds, moving to your desired mix by retirement.

The study (and book) by two Yale professors proved lifecycle investing for your entire working life provided a better retirement 99-100% of the time.  For more details, check out the full article on Lifecyle Investing.


  • Provides a better retirement income than traditional asset allocation 99-100% of the time (based on the study).
  • Offers more growth potential when you are young and have a long time horizon.
  • Reduces “last decade risk” that one bad decade can mess up your retirement.


  • Borrowing to invest in your 20s and 30s is a riskier strategy at a time when you may not be experienced.
  • Borrowing to invest may magnify the bad investing behavior of most investors, who tend to “buy high” when there is a lot of good news and “sell low” by converting to more conservative investments when news stories are mostly negative.

4. Stocks for the Long Run

Investing seems to arbitrarily focus on 1-year returns, even though most investors will be invested for at least 30 years. In the investing bible “Stocks for the Long Run”, Prof. Jeremy Siegel proved that over long periods of time, stocks always produce higher returns and are more consistent than bonds. If your time horizon is more than 30 years, then stocks have historically beaten bonds 100% of the time.

His study shows that for investors with a 30-year time horizon, ultraconservative investors (least risk) should have 71% stocks, moderate investors 116% stocks (by borrowing), and aggressive investors 139% stocks.

One of my mentors, Nick Murray, worded it well – the long term return of stocks has been 10%/year, bonds 6%/year and cash 2%/year. How many 10%s vs. 6%s vs. 2%s do you want in your portfolio?

When you look at 30-year periods (instead of 1-year periods), the returns of stocks has been more reliable and consistent than bonds. This is because the return on bonds is highly susceptible to inflation. The worst 30-year period ever for the S&P500 since 1871 was a gain of 5.09%/year4, which would more than quadruple your money. After inflation, the worst 30-year period for stocks was +2.6%/year, while for bonds it was a loss of -2.0%/year.5

Many major countries have had their government bonds go to zero (or near zero) in the last century, including Germany, Italy, Japan, Russia and Brazil, but the stock market has always recovered in every country.4

The underlying theory is that stock markets are based on large companies that are able to adjust their businesses to keep raising their profits over time. They have many tools, including raising prices, getting new clients, introducing new products, expanding into new markets, cutting costs or buying competitors. As long as companies continue to increase profits over time, the stock market eventually goes up.


  • Provides a much better retirement for investors with long time horizons that are able to tolerate the ups and downs.
  • Easy to understand and based on research.
  • Avoids the most common investing error of switching to more bonds at the bottom of the market.


  • Most investors think short term, even if their time horizon is long.
  • Many investors are not able to tolerate the ups and downs of the stock markets.
  • Investing only in stocks may magnify the bad investing behavior of most investors, who tend to “buy high” when there is a lot of good news and “sell low” by converting to more conservative investments when news stories are mostly negative. The average investor makes 6-7%/year less than the investments they own because of bad market timing.7

5. Rempel Maximum

This is the strategy for people that want to build serious wealth – borrowing to invest for the long term.8 Borrowing to invest magnifies gains and losses, but the stock market has never had a loss for a 15-year period or longer.4 Borrowing to invest is a risky strategy, but the risks are far lower if you invest long term. The interest on an investment loan is normally tax deductible as well.  Details about the Rempel Maximum here.

It is the logical extension of “Stocks for the long run”. Long term, stocks have consistently outperformed both bonds and the cost of borrowing to invest.4 Leverage is the strategy used by nearly all wealthy people, who use “other people’s money” to invest in their business or in the stock market (many businesses), including 87% of the Forbes 400 richest people.9

The amount borrowed to invest can range widely and depends on many factors. Often the intent is to borrow the maximum amount that you can support long term.


  • Can build significant wealth and the security that comes from having a huge nest egg.
  • Provides a much better retirement for investors with long time horizons that are able to tolerate the ups and downs – significantly higher than “stocks for the long run”.
  • Avoids the most common investing error of switching to more bonds at the bottom of the market.
  • Interest payments are fully tax-deductible every year, while tax on the growth of the investments can be deferred until you sell them far in the future if you have tax-efficient investments.


  • Too risky of a strategy for most people who may not be able to stomach significant down periods, especially if the investments drop below the value of the amount borrowed.
  • Most investors think short term, even if their time horizon is long.
  • Borrowing to invest may magnify the bad investing behavior of most investors, who tend to “buy high” when there is a lot of good news and “sell low” by converting to more conservative investments when news stories are mostly negative.

The best strategy for you depends on multiple factors, including your risk tolerance, time horizon and your long term goals, especially your retirement goal.

Story of Jim and Jennifer

Jim and Jennifer are 35 and make a good income. They want to retire comfortably a bit early at age 60. They are deciding on their asset allocation. Consider the following:

  1. Goal: They sat down with us and created a detailed, line-by-line retirement lifestyle that they want. In order to make it given how much they can afford to invest, their investments will need to average 8%/year long term. That means they would have to invest 100% in equities to make their goal.
  2. Gut feel: They are thinking of investing with a balanced 50%/50% allocation because they are a bit nervous with the difficult markets recently.
  3. Risk tolerance: A discussion of their risk tolerance and a questionnaire show they can tolerate the level of ups and downs of the stock market.
  4. Market crash: They said that in a big market crash, they would invest more to buy low.
  5. Time horizon: Even though they plan to retire in 25 years, their time horizon is closer to 50 years, including after they retire.

Here are possible allocations based on these 5 strategies:

  1. Fixed allocation: 70% stocks/30% bonds. (They are young and have a relatively high risk tolerance, but are a bit nervous.)
  2. Target date: 75% stocks/25% bonds. (Formula is 110- age 35 = 75% stocks.)
  3. Lifecycle investing: 200% stocks/-100% bonds. (Borrow to double their investments at their age. Count the loan as a negative bond holding.)
  4. Stocks for the Long Run: 100% stocks/0% bonds.
  5. Rempel Maximum: 400% stocks/-300% bonds. (Just an example using a 3:1 investment loan.)

What strategy should Jim and Jennifer use?  Which asset allocation strategy is best for you?

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.

1 Brinson, Hood, and Beebower (1986, 1991) The study actual shows that 40% of the difference in return between different balanced funds was explained by the asset allocation.
2 “Lifecycle Investing”, Ian Ayres and Barry Nalebuff
3 If you count the investment loan as a negative bond position, then you are investing 200% stocks/-100% bonds in your first decade.
4 Standard & Poor’s
5 “Stocks for the Long Run”, 4th edition, Jeremy Siegel
6 The only exception I am aware of is Russia when it converted to communism and the government seized many companies. This is a political reason, not an investment reason for a stock market collapse.
7 “Quantitative Analysis of Investor Behavior 2011”, Dalbar
8 Borrowing to invest for the long term is essentially a negative bond allocation.
9 “The Forbes 400 – The richest people in America”

“Disclaimer: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Opinions expressed are the personal opinion of Ed Rempel.”



  1. SST on March 28, 2012 at 8:51 pm

    Inflation, at the minimum, is an increase in money supply.
    This free and easy credit is the reason behind the “Great” bull market of the 80’s and 90’s.
    Equities were the asset class in which prices were inflated.

    First a whole bunch of banks collapsed, then equities collapsed.
    All that money had to find a new home.

    Say hello to real estate and commodities.
    Now that real estate has collapsed (and more banks), it’s just commodities left.
    Where to next decade???
    (As a side note, inflation has all but left real wages untouched for a very long time.)

    I see some industry “professionals” on here are still touting the ridiculous “70-year periods” and “since 1802” stock market return marketing scheme. Siegel regurgitation.

    Here’s what Hero Seigel states:
    “One dollar invested in stocks in 1802 would have grown to $1,250,000 in 1991, in bonds to $6,920, in Treasury bills to $2,830, and in gold to $14.20. ”

    Please, Captain America and Ed, can you tell us all EXACTLY WHICH STOCKS were invested in 1802? Since there was NO index fund until the mid-1970’s, that wipes clean over 90% of the data and makes the above statement completely FALSE.

    Funnily enough though, a person actually could have bought actual gold in 1802 for around $19 per ounce. It’s price is now ~$1,700 — a paltry 2% return per year. Or you could have cashed it in in 1976 for $105 — all the while the “other” dollar spent 170+ years playing buy-and-sell…and most likely going broke — and bought the first S&P index fund — all the while the “other” dollar would have had to come up with a whole new dollar…actually 86 new dollars, to match the gold-funded index investment. And that $105 would now be worth $3,730 (or $35.50 for every $1).

    And why, oh why, do stock market “gurus” and industry “professionals” even bother to back-date returns 200 years?!?! LOL!
    What is the average investment span of the average person?
    Certainly not 200 years, and my guess, these days, it’s closer to 20 than to 200.
    Why not do average 20-year index return calculations?

    Let’s see…average age of a Canadian is 39 years old…first foray into the markets…we’ll say age 20 (in 1993):

    S&P 500 returns 6% per year. After inflation, 4%.
    Gold returns 8.5% per year (6.5% adjusted).
    Silver 11.75% (9.75% adjusted).
    (I use gold and silver as a foil because they are the most non-correlated stock market asset)

    Hmmm. Stocks have sucked for at least 20 years.

    How about the Canadian Baby Boomers?
    Age range from 48 to 67; first investment at age 20:

    Elder Boomer (1966 – current)
    S&P 500 returns 6% per year. After inflation, 1.75%.*
    Gold returns 8.5% per year (4.25% adjusted).
    Silver 7% (2.75% adjusted).
    Real Estate 6.5% (2.25% adjusted).
    *(purely theoretical since there was no possible way to invest in the S&P 500 index in 1966; but still interesting to show the low rate of return.)

    Younger Boomer (1985 – current)
    S&P 500 returns 8% per year. After inflation, 5.5%.
    Gold returns 5.5% per year (3% adjusted).
    Silver 5.5% (3% adjusted).
    Real Estate 6% (3.5% adjusted).

    So much for that.

    Looks as though the Younger Boomers got a great boost over their Elders via all the loose credit regulations brought to life in the ’80’s.

    It also looks as though over a REAL historical investment period (45+ years), the stock market gives the WORST returns (but don’t let the industry “professionals” tell you that!).

    Great to see those precious metals that produce nothing at all and pay zero dividend beating out the top 500 companies in America for 50 years running. Weird. No wonder so many retirees can’t, they all bought into the hype.

    Oh, almost forgot, according to Canadian black-letter LAW, each and every ounce of silver (and gold, depending on size) can be sold TAX FREE. Try doing that with a stock. Remember, it’s not how much you make, it’s how much you keep. How much will you be giving away to the stock market and tax man?

    I know, I know, reality and facts are irrelevant when talking about the stock market. Can’t blame them for spouting what they were taught.
    Oh well, done with all that silly “opposing view point” and “facts” and “think for yourself” stuff. Can’t fight the machine forever.

    Have FUN in the stock market!
    Let me know if anyone makes a million bux! :)

    p.s. — if you still believe the stock market and bonds (and the ever losing cash) are the ONLY assets in which to allocate your money…you most surely will never become a millionaire.

  2. SST on April 19, 2012 at 2:48 am

    The recently dusted-off seminal ‘old money’ asset allocation:

    1/3 land;
    1/3 gold;
    1/3 fine art.

    See any stocks or bonds on that list?


    I’m thinking I’d rather emulate REAL wealth which has persevered across generations than take the advice of “professionals” who only get paid when they sell you paper products.

  3. Value Indexer on April 19, 2012 at 9:43 am

    Ah yes, old money… where anyone can pretend to have anything because no one needs to know that you’re overspending while earning a pitifully low return on your assets and pretending you still own them, and you don’t have to mark to market when the market only opens once every 50 years. That’s a better study of how to impress people on reality tv (appearance is everything) than how to invest successfully :)

    Warren Buffet went from ordinary to the top in one lifetime, why didn’t all the “old money” do even better since they started with a lot more a lot earlier?

  4. SST on April 19, 2012 at 11:26 pm

    You obviously have a very shrewd insight in how wealthy families operate!

    Warren BuffetT’s money has thus far lasted ONE SINGLE proprietor.

    I guess only time will tell if his fortune is still alive and well within his family tree in another 200 or 300 years. Oops! That’s right, since he will be giving away 99% of his wealth to charity, guess that leaves his heirs among the bottom-rungers in the ‘old money’ department.

    Besides that, at the time, all of the ‘old money’ founders — Rockefeller, Du Pont, Vanderbilt, Astor, Carnegie et al were all considered the wealthiest men on the planet — and adjusted for inflation, were all much, MUCH wealthier than Buffett.

    Then, of course, there is the all-time power-house in old money: Rothschild. At their peak they held the single largest ever fortune in modern history. Due to a voluptuous lineage, the core family fortune has shrunk, but the Rothschild conglomerate wealth has grown massive ($400 billion???) over the past 250 years.

    Let’s say the Buffett children get $500 million…think they and all their heirs can turn that into $400 billion in the next 200 years?

    Maybe…if they follow one of the Top 5 Asset Allocation Strategies!

  5. SST on April 20, 2012 at 12:11 am

    Just ran across this incredibly timely item:

    Oops! Guess twelve more ‘new money’ families won’t be making it onto the ‘old money’ list any time soon!

  6. Value Indexer on April 20, 2012 at 9:45 am

    But all those fortunes came from somewhere, surely not gold speculation. We’re talking about two different things.

    If you want your children to manage your money well the best thing is to make sure they don’t manage it at all and it’s under the control of someone who can do the least possible harm, more or less keep up with inflation and maybe grow the assets a bit, and limit the fights when you have a growing number of people with access to the same money.

    But if you want to manage your own money well in your lifetime, the best thing to do (if you want to have more than you do now) is to get the highest return you can get safely while keeping full control.

    These days there’s no point in merely “preserving” $100,000 to be passed down through the generations. If you invest like old money or “spend like a millionaire” before you are, you never will be.

  7. SST on April 20, 2012 at 11:48 am

    @VI: “But all those fortunes came from somewhere, surely not gold speculation. We’re talking about two different things.”

    I notice you didn’t read the article.
    For one thing, putting money into the stock market is — by DEFINITION — speculation. Putting money into physical gold is — by DEFINITION — investing. Sorry to all that the financial industry has warped and twisted these words to suit their own marketing ventures.

    “If you want your children to manage your money well the best thing is to make sure they don’t manage it at all and it’s under the control of someone who can do the least possible harm…”

    Ah, thus it is NOT your FAMILY keeping the fortune afloat. Family-controlled wealth is kind of THE hallmark of “old money”. Lack of financial knowledge is why most family money never makes it past puberty

    Oh well. Enjoy what ever money you do have. :)

  8. Andrew F on April 20, 2012 at 11:52 am

    SST, you have it backwards. Long-term holdings in the stock market are investments that can be justified on a discounted cash-flow basis. Gold has no cash flows, just speculation that someone will pay you more (in real terms) for it than you paid originally.

  9. Value Indexer on April 20, 2012 at 12:59 pm

    If your main concern is that you’re sitting on a few billion and your descendants won’t be qualified for anything other than managing investments with no one to report to (but strangely they will all be exceptionally good at that and they will agree on the best way to manage it), you could start a blog called “trillion dollar journey” to talk about those issues :)

    Us peasants over here will be too busy with other things to think about that :)

  10. SST on April 20, 2012 at 9:46 pm

    Actually, Andrew F, by ECONOMIC DEFINITION which has been established for a very, very long time, buying stocks is SPECULATION, buying gold is INVESTING.

    As I mentioned above, you have fully bought into the financial industry’s malformation of transactions. The power of decades of marketing!

    To V.I., perhaps a more realistic blog for 99% of us would be “Hundreds of Thousands Dollar Journey”, because that is most certainly our destination.

  11. Andrew F on April 21, 2012 at 2:17 pm

    SST, that is a hand-waving argument. There are real cash-in-hand returns to investing in the stock market (or equity in general). Gold is purely speculative. If everyone decided they didn’t like how gold looked tomorrow, gold would drop in value to approximately that of copper. The price of gold does not reflect its practical usefulness.

  12. SST on April 21, 2012 at 8:52 pm

    Ah yes! I remember when Enron and Nortel had “practical usefulness” too! No speculation at all! Pure INVESTING! RIMM, too! Oh, GM was pretty practical, right? Cars and trucks and all…oops! Guess their usefulness ran out! And on it goes.

    Sorry you don’t understand speculation vs. investing.
    Maybe if more people did, more people would be millionaires.

    I’m certainly not saying don’t buy stocks, a lot of common people do. The rich, however, allocate their assets in stuff which basically cannot disappear — land, gold, art — stuff which will endure over centuries.

    The island of Manhattan was bought for $24 (some say $1,000) worth of animal pelts and supplies. Today the land of Manhattan is valued over $200 billion. That’s a steady 6% annual average return for almost 400 years running.

    How many stocks are still around from 1600? 1800? 1900?

    Vincent van Gogh never sold a painting yet one of his most expensive paintings (based on auction) might now be valued at $150 million. From $0 to $150 million in 120 years — an outstanding 18% average return per year!

    What has the S&P 500 returned (theoretically) since 1890?

    As far as gold goes, humans have valued gold for close to 10,000 years — good luck trying to change human nature!

    Point being, if you want your financial legacy to last past your own funeral, best to have a look around at other venues in which to park your money.

    Have fun in the market! :)

  13. Andrew F on April 22, 2012 at 3:01 am

    SST, that is more hand-waving.

    What has been the real return on gold over the last 500 years? Just about nothing.

    You cherry-pick a few stocks that failed. No one said investing was without risk.

    You cherry pick Manhattan and Vincent Van Gogh. Yes, they provided good returns in retrospect. Through the benefit of hindsight. Take the asset classes of all land, or the asset class of all paintings, and tell me how much those returned over time.

    And please give me some samples from your list of rich people who got rich through investments in land (not development of land–just holding land over a long period), gold or art. That is not how most very rich people got rich. Most of the very rich are entrepreneurs or the children of entrepreneurs. I don’t understand how you square this fact with your assertion that the rich don’t invest in equities, and instead make all their money in speculative asset classes like gold or art. Land is a reasonable investment, as it at least flows cash through rents.

  14. SST on April 22, 2012 at 11:15 am

    I guess poor people will continually focus on cash-flow (and incorrect financial verbiage). The rich adopt a different mind-set, and it shows.

    As for the claim of cherry picking…isn’t that what YOU do with YOUR equities??? Or do you just buy them ALL and hope for a good return on your speculation?

    The stocks I picked were not microcap nothings, they were giant companies which had, as you put it “practical usefulness” — and they failed spectacularly. When has gold ever been reduced to $0 in the last 8,000 years?

    I’ll repeat, since you seem to have missed it: point being, if you want your financial legacy to last past your own funeral, best to have a look around at other venues in which to park your money — gold, land, fine art.

    Regardless of your opinion, it is a reality that the rich hold these assets allocations, and it has obviously worked for centuries. It’s a bit foolish to argue money management with generational wealth.


  15. Andrew F on April 22, 2012 at 11:30 am

    No, I don’t cherry-pick equities. I buy broad index funds. You can’t do that with land or art. You have to cherry pick. And most of the time you are not picking a Van Gogh or Manhattan pre-rapid price appreciation.

    I ask again: please give me an example of a rich person who became rich through holding (not trading) gold, land, or art.

    That’s what I thought.

  16. SST on April 22, 2012 at 12:54 pm

    Ah, another fallacy: “I don’t cherry-pick equities. I buy broad index funds.”

    Are you buying ALL global index funds? Or SPECIFIC funds?

    Please give me an example of a person who became rich through holding (NOT TRADING) ONLY equities. Remember, only 1-2% of North Americans have a minimum net worth of a million dollars. And if you could also provide an example of a rich person holding ONLY equities. Or an example of an equity (ie. stock) which has endured more than one century.

    That’s what I thought.

    I explain again — because you simply can’t understand the concept of wealth — if you want your financial legacy to last past your own funeral, best to have a look around at other venues in which to park your money: gold, land, fine art.

    Good luck to you. :)

  17. Value Indexer on April 22, 2012 at 8:47 pm

    If you truly aren’t concerned about anything that you will personally see, giving your descendants a better world to live in and not just a bigger castle to hide in seems like a pretty good investment.

  18. SST on April 23, 2012 at 3:24 am

    @VI: Agreed.
    Guess that’s why Buffett is giving away 99% of his wealth to charity.

    But for the rest of us mere money mortals who don’t possess the dollar clout to influence government policy or corporate strategy…the best we can do to create a better world to live in is to create better descendants. What better asset allocation than that.

  19. SST on May 1, 2012 at 11:04 am


    As I was saying….

    Art: a $64 Billion market.

    All of it not worth a penny! LOL!
    AAPL on the other hand…

  20. Ed Rempel on July 21, 2012 at 1:23 am

    Hi All,

    Let me see if I can bring this back to what is applicable to the average person.

    The reason that stocks are the most appropriate investment for most people to build their wealth is that stocks have consistently returned a good return and protected purchasing power over the long run.

    This chart by Prof. Jeremy Siegel is fascinating. It shows returns from 1802-2010 comparing asset classes after inflation:


    Note that with everything that has happened in the last 200 years, stocks were always able to adjust and continue to grow. The reason for this is that the stock market is made of a bunch of large companies that are able to change their operations to continue making money.

    Companies have many ways to do this, such as getting new customers, changing products, cost cutting, buying other companies, becoming more efficient, etc. Individual companies go under, but the stock market as a whole has always continued to grow long term.

    The surprising fact from this chart is that the 200-year trend line for stocks is drawn with a ruler, which cannot be done with other types of investments. Bonds are considered to be lower risk, which is true over shorter time periods, but not true over 30-year periods or more. Bonds get killed in high inflation environments and stocks have beaten bonds 100% of 30-year periods.

    That is part of what this article is about. There are different asset allocation strategies. The longer your time horizon and the more you are able to stay invested through down periods, the more equities are appropriate for you – up to and including leverage which is an allocation over 100%.

    For more conservative investors with shorter time periods, the first 2 or 3 strategies are more appropriate.

    In the vast majority of cases, at least some allocation to the stock market makes sense. The chart from Prof. Siegel shows the logic for this clearly.


  21. Rich on August 2, 2013 at 1:16 pm

    I recently read about a sixth strategy that is somewhat different than the five mentioned in Ed’s article. In this strategy you place all of your investments in a diversified set of stocks that you will not require for the next 7 years (or 10 years if that suits you better) and the rest goes into fixed income liquid investments. The idea of 7-10 years being that the market normally recovers by the time you need the money from the stocks.

    With this strategy you would invest 100% stocks when you are 20 because you will not need any of that money in the next 7 years. When you are 30 and buy a house and have children you may want to back off to 75% stocks so that in case of unemployment or other setbacks you still have a cash-cushion to prevent you from losing your house or having to sell stocks at a bad time. If you are 45 and have a big mortgage and children starting to enter college you may go to 70% stocks to cover the large obligations you have going. By 55 your mortgage is paid off and children graduated so you go back to 90% because you plan on retiring at 60 and you only need a little cushion for the first few years of retirement. As you approach 60 you reduce your stock allocation according to your years-to-retirement number. Even when you retire you may still end up with 75% stocks because 25% would cover you for the next 7 years. The numbers are just examples because everyone will have different values depending on the size of their portfolio and obligations.

    There are several things I like about this strategy. You can have a fairly high percentage of stocks while still being sure that you have enough in liquidity to cover your costs in case of financial setbacks so you can relax about market fluctuations and not do anything stupid like sell low and buy high. You really only have to adjust things about once per year and this is a good time to plan your next 7 financial years. You can make it simple by investing in low management expense ratio exchange traded funds; I pay around 0.25% MER for my ETFs and it only takes me a few hours to readjust the portfolio. You can tailor the plan to suit your financial needs and not rely on some questionable financial risk test that is dependent on your mood that day to determine your stock allocation. You are unlikely to be stuck in a situation where you go bankrupt, lose your house or are stuck with a big loan that causes great personal pain to you and your family.

    It is a very steady and simple approach that makes you wealthy in the 20-25 year time frame but experience has proven to me that this is the best way because you grow with your money and are less likely to lose it that way.

  22. Ed Rempel on August 5, 2013 at 1:07 am

    Hi Rich,

    Interesting to associate it with life events. I’m not sure this would work as well in practice as it sounds, though.

    There are a lot of ideas that sound good in your head but don’t really when you do the math, and I think this is like that. I have a few issues with this method.

    Your figures are just an example, but you end up only 70-75% equities for your main growth years from age 30-55. A higher equity allocation for these 25 years should give you quite a bit more in retirement.

    Then going to 90% equities for only 5 years from 55-60 and then back to 75% equities would be a risky, shorter-term bet.

    It seems to me that you are using the cash/bond allocation for your emergency fund. Perhaps it would be better to establish a proper emergency fund of, say, 3-6 months’ expenses either in cash or an available credit line, and then maintain a higher equity allocation for the long run.

    The amount you are holding in cash for possible life events would grow exponentially as your portfolio grows. For example, at age 30, your portfolio may be $50,000, but at age 50, it could be $500,000. Having 30% in cash of your $500,000 is a lot.

    You would also run the risk of having your emotional market view affect your allocation. There is not a formula. The allocation depends on your opinion of your possible cash needs in the next few years, which is very subjective.

    Don’t you think you would be better off creating a proper emergency fund and then investing long term with a high equity allocation based on your risk tolerance?


  23. SST on August 19, 2013 at 10:35 pm

    The ultra-wealthy Tiger21 members allocate their assets as such:

    Hedge 9%
    Cash 10%
    Fixed 15%
    RE 21%
    Public Equity 23%
    Private Equity 20%

    Since 2008, this diversified group of rich people has doubled their Private Equity holdings and decreased their Public Equity holdings by 10% (all other sectors remained fairly stable).

    Still think you need to be “fully invested” 100% in public equities?

    This diverse group of rich people didn’t amass their $95 million (average) buying mutual funds.

    Don’t believe the hype and get closer to the profit!

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