Richelson: 100% Bond Allocation Is Appropriate 28 comments
- Visit IndexUniverse.com
-
- DataAll US Listed ETFs, Sortable 42 Data Points
- ETF WatchAll ETFs under registration
- Breaking News
- Research
- Features
- Subscribe to RSS feed
- More articles
an article to
-
Font Size:
-
Print
- TweetThis
Stan Richelson and his wife, Hildy, run Scarsdale Investment Group Ltd. The Blue Bell, Penn.-based firm oversees about $130 million in U.S. bond portfolios for individual investors. The pair has written four books on the topic of investing in bonds. For the past 25 years, they've been advocating the case for bonds versus stocks as core holdings.
IndexUniverse.com's Murray Coleman recently caught up with Stan to discuss prospects for bonds going forward and their proper place in long-term portfolios.
IU: Did Rob Arnott's recent article in the Journal of Indexes validate work you've been doing for years?
Richelson: It was the best article I've ever read. It has not only validated our approach, but it has improved my life immensely.
IU: How so?
Richelson: When clients of ours used to speak to friends and family and explain that they were investing in our all-bond portfolios, they'd tell them they were crazy. So in the past, we had to tell our clients to keep it to themselves—they don't deserve that kind of abuse.
IU: What has been the response of your peers?
Richelson: Other fee-only advisers have been telling us for years that we were unprofessional because we didn't allocate assets the way they did. But after two stock market collapses in the last nine years, all of a sudden we've become very popular. Everyone wants to talk to us now—we're getting quoted in all sorts of publications. Our views have been the same for 25 years. It's finally starting to sink in with more people that their belief in stocks always outperforming bonds is all just a giant erroneous paradigm. And what's so huge about the Arnott article is that he goes back more than just 40 years. He looks back at various periods over the past 200 years to show that bonds have outperformed stocks during many longer periods.
IU: How has Arnott's work helped to advance previous studies on fixed income?
Richelson: The Arnott article said that bonds have outperformed stocks over the past 10, 20 and 40 years. We didn't have that article when we wrote our last book, "Bonds: The Unbeaten Path To Secure Investment Growth," when we working on it during late 2006 and early 2007. We used the Ibbotson data, which said that since 1926, stocks provided an average annualized return of about 10% and long-term Treasuries returned about 5%. So you'd think that stocks greatly outperformed bonds. But what the Ibbotson data didn't take into account was the impact of income taxes, fees and expenses on returns for individual investors. The Ibbotson data also doesn't properly account for the bad timing of individuals in timing stock markets.
If you compare stocks to tax-free muni bonds, for example, that 10% return for stocks just doesn't hold up over time. If you include those three factors—taxes, fees and bad timing—you see that the stock return comes down to about the return on a tax-free muni bond. That is the theme of the first chapter of our bond book.
IU: In your latest book, you also compare risk-adjusted returns between stocks and bonds, don't you?
Richelson: Yes, when you adjust for the risk of stocks as compared to high-grade bonds, there really isn't any comparison. Bonds are much safer. We're not discussing junk or anything of that sort.
IU: If you had all of this research already, what did Arnott's article add?
Richelson: Our comparison of stocks and bonds was very untraditional. Nobody ever challenged the Ibbotson data. I'm sure it's correct as far as it goes. What we did was to make some adjustments. What Arnott did was use Wall Street's methodology exactly as Wall Street compares stocks and bonds. He used long-term Treasuries and compared it to the S&P 500, including dividends, and marked to market in the traditional way every year. So he more than confirmed what we'd been telling people for years.
IU: Couldn't a case be made that this is all data mining?
Richelson: Keep in mind that the markets came to a crossroad in October 2008. In the last quarter of 2008, the stock market collapsed and, at the same time, interest rates on Treasuries declined substantially, resulting in Treasuries appreciating substantially.
IU: Are you saying that the long-term returns for stocks would've looked much better a year ago?
Richelson: Sure. If you go back to 2007, the S&P 500 was at an all-time high. The conventional wisdom is twofold: Stocks have always outperformed bonds; if you take any 10-year rolling period, you found that stocks never had a loss. At the point when Arnott collected his data, he found an extraordinary thing: When you go back 10 years, bonds outperformed stocks. He then counted back 20 years and then 40 years. In each time period, bonds outperformed stocks. He then took a huge stab at Jeremy Siegel by asking: So what's the long run?
IU: But if you looked at a different time period such as 2007, then things would look much different, wouldn't they?
Richelson: They probably would. But if you would've asked anyone at the beginning of February 2009 which asset class would've done better in the past 40 years, how many would've picked bonds? The Arnott article put bonds on a more level playing field with stocks. The key point as I see it is that if stocks haven't outperformed in the past, why would you think that they'd outperform in the future? What we suggest in our latest book is that individuals need to keep a more open mind. Stocks might outperform in the future, but so might bonds. And even if stocks outperform going forward, for the increased risks you take, bonds are a superior asset class for individual investors.
IU: So what do you see as a proper asset allocation for individual investors?
Richelson: We believe a 100% allocation to bonds is appropriate and proper. If there's no proof that stocks will outperform bonds going forward, why not protect your principal and know what you have, particularly in the current environment of recession and fear? I never thought you could do a proper financial plan with stocks—there's just too much uncertainty. The return on our muni-bond portfolios went up by about 50% on an after-tax basis over the past seven-and-a-half years. That sounds like a lot, doesn't it? But all that comes out to is around 4.5% on a compounded yearly basis. But it sure beat stocks.
And if interest rates stay around 4.5% over the next seven-to-eight years, we'll earn another 50% after tax. That's our definition of investing—you know when you're going to get your money back and you know what the rate of return is going to be at all times. Everything else is speculation. Any financial planners who are creating financial plans heavily weighted with stocks and significant expected rates of return are guessing. That's not the way to plan someone's future.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Joseph L. Sha...
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
-Stan Richelson
Owning fixed income securities in a hyper-inflationary environment is truly nuts. Add to that the fact that with King Obama in power, bondholders no longer have any lawfully secured interest during bankruptcy, and you have a recipe for disaster.
So good luck wit dat Stan and Hildy.
Yeah that's a real safe assumption there.
But...historically, bottom decile 10yr returns on the S&P 500 are usually followed by above-average 10yr returns.
Thank you, Hask, for not using "comprise"!
The book is a very good primer for those who haven't traded bonds or bond funds and includes a great list of web sites that cover bonds and the money markets.
The reason I stopped reading the book is that it ignores or downplays the impact of inflation on bond prices. We're seeing that now as treasuries plunge, pulling down corporates and mortgage-back securities with them.
At the moment, I'm 15% in equities and the rest in FGOVX, BND and money market.
And I'm not sure what to do now that my principal is being threatened. I don't like equities. They're long over due for a major correction. And I don't like money markets or treasuries for obvious reasons.
At this point, it may be smart to short the buck via ETFs, but that move may be over for the time being, too. Gold is touted by many, but it's close to being over bought and is meeting resistance, I think.
Writing covered calls makes sense in bull markets, but with all indicators continuing to point to a correction, this probably isn't the time to initiate new positions. At least, I'm not ready to.
Bottom line. There are no sure bets these days.
The question becomes, what's the best way to keep your powder not only dry, but safe?
1. The guy sells bonds. Of course he is going to say they are the greatest thing since the invention of the blow job.
2. The article builds a statistical case off a black swan event? Is there anything more absurd possible?
Richelson: When clients of ours used to speak to friends and family
and explain that they were investing in our all-bond portfolios,
they'd tell them they were crazy. So in the past, we had to tell
our clients to keep it to themselves—they don't deserve that kind
of abuse.
Hmmm. Sounds like what Ponzi scheme promoters typically tell THEIR investors.
On May 28 11:35 AM bearfund wrote:
> An all-bond portfolio could outperform if the bonds were denominated
> in hard money. Unfortunately over a period of 10 years or more -
> the timeframes under discussion in the interview - any nominal return
> on bonds has been wiped out and then some by the debasement of whatever
> paper currency the bonds are denominated in. Only the highest-yielding
> bonds can deliver a positive real return, but credit risk would have
> to be nil.
>
> Bonds are for short-to-intermediate term spread trades only. Anyone
> holding them for years is guaranteeing himself a loss of purchasing
> power.
People really should read the late Harry Browne's "Fail Safe Investing." Its a classic but it's as sound today as it was when it was first published. I am a big fan of the concept of the "permanent portfolio." For those who are fund investors you might want to check out the Permanent Portfolio Fund (PRPFX) which is based very closely on Harry's investment thesis and has a pretty good track record.
Bonds are taxed as ordinary income, whereas qualified dividends and long term capital gains are taxed at a much lower rate, currently 15%. The taxes are nearly triple that for bonds if you are in a higher income bracket.
On the inflation side of the argument, unless you're investing in more high yield, junk bond-type instruments, you're yields aren't producing a great deal of interest outside of normal inflation.
Once you subtract the taxes and inflation from a bond's income, you're barely coming out ahead.
As you near retirement, I definitely agree more of a person's wealth should be in bonds, but for long term investors (if they're are any left) I think investing in high-quality, dividend producing equities will make you a lot richer, despite the crashes like the one we're currently experiencing.
And obviously, for those who do not know what stocks they are buying and why they are buying, bonds are perceived to be safe.
Yet, I would not buy bonds when the value of money is dliuting faster than the rate of interest received.
Other than that putting 100% of your net worth in fixed income would have been horrible had you been an investor in almost any european country over the 20th century.
Makes me think of the expression "There are plenty of good 5 cent cigars around. The problem is they cost a QUARTER."
4.5% return? Don't count on it ! Remember the 5 cent (25cent) cigar.