The Belgian Dentist: Who Laughs Last, Laughs Best?

by: The Belgian Dentist


The archetypal Belgian dentist for decades was laughed at for being too conservative.

But contrary to expectations, his predilection for bonds delivered nice returns with limited downside risk.

At the current low interest rates an all-bond portfolio is not the way forward for conservative investors.

The term "Belgian dentist" was coined by Christian Hemain, the founder of IFR (International Financing Review). Nowadays it has become a cliché and is almost always accompanied by the words "proverbial" or "archetypal".1

In his book "Getting Started in Currency Trading: Winning in Today's Market" Michael D. Archer mentions how his mentor Charles B. Goodman frequently praised the Belgian dentist:

Mr. Goodman was constantly talking about his "Belgian dentist". In Europe, Belgians are considered to be very conservative investors. In the United States, that accolade often has gone to dentists. The perfect risk-avoidance trader is then a Belgian dentist!.2

The main attributes of this archetypal investor are:

  • Reasonably well-off
  • Unsophisticated
  • Conservative (a predilection for bonds)
  • Risk-averse
  • Tax-efficient

As a consequence the Belgian dentist for decades was laughed at for being too conservative.

Cullen Roche's Savings portfolio scale is the perfect framework to explain why the Belgian Dentist is considered too conservative.

Figure 1: The Savings Portfolio Scale

According to Roche, asset allocation is;

[A] balancing act between purchasing power protection and permanent loss protection. The investor who wanted to be protected against permanent loss risk would be 100% cash. However, they would risk falling behind in purchasing power by the rate of inflation each year. Likewise, the investor who wanted to be protected against purchasing power risk would be 100% stocks.

Figure 2: Too much downside protection

While the Belgian Dentist certainly limited his downside risk by investing mainly in bonds, he also missed out on the juicy returns earned by equity-investors. But then popped the dotcom-bubble and a few years later the same happened to the housing bubble. In the meantime bonds enjoyed on a seemingly never-ending bull market.

The result for our ever too conservative investor: equity-like returns with bond-like volatility. There are hedge funds who charge you 2/20 for that…

And so our Belgian friend is no longer the object of ridicule. Who laughs last, laughs best!

Gary Shilling is one market analyst who didn't laugh with the Belgian Dentist. He has been bullish on bonds since 1981 when he stated: "We're entering the bond rally of a lifetime."

Figure 3: Comparative Stock and Bond Performances

The Belgian dentist favored coupon-paying bonds from well-known multinational companies. Gary Shilling went for 30-year zero-coupon Treasuries. The latter have a longer duration and hence benefited more from the decline in bond yields.

Mr. Shilling believes the bull market in bonds is still alive and kicking. We tend to disagree. We no longer believe an all-bond portfolio is the way forward for conservative investors.

The solution?

The solution in our humble opinion is a dynamic asset allocation between cash, bonds and stocks. In terms of the savings portfolio scale this means moving up to the upper left when it is safe to do so from risk-return point of view. When prospective returns are low and/or risks are high, the opposite happens and we move to the lower right in the graph.

How do we determine the asset allocation between cash, bonds and stocks? We use the idea proposed by John Hussman to equal the total portfolio (modified) duration and the investment horizon. The calculation of duration for cash and bonds is straightforward and for equities this can be approximated by using the inverse of the dividend yield.

So when we build our portfolios we maximize our expected return with the constraint that the total duration cannot exceed our investment horizon.

For cash and (government) bonds the prospective return is simply the current yield and for equities we use the model from the website Philosophical Economics based on the average investor portfolio allocation to equities.

Our current expected return estimates can be found in Table 1:

Table 1: Expected returns

Source: own calculations.

In Table 2 you can compare the back-tested results of this strategy (for the defensive, neutral and dynamic versions of the Belgian dentist algorithm) with those of the investment giants Meb Faber discusses in his highly recommended book "Global Asset Allocation".3

Table 2: Nominal returns 1973-2013

Source: Meb Faber (Global Asset Allocation), own calculations.

The returns YTD are certainly not bad:

Table 3: Returns YTD

Source: Morningstar, own calculations.

Table 4 details the average allocation to equities, bonds and cash for the different strategies.

Table 4: Average asset allocation 1973-2013

Source: Meb Faber (Global Asset Allocation), own calculations.

Not only the average allocations of the Belgian Dentist are more conservative than the other allocations of Table 4, the current ones are that even more:

Table 5: Current asset allocation

Source: own calculations.

We risk we will be laughed at for being too conservative. But the Belgian dentist knows one thing: who laughs last, laughs best.

Stay tuned!


  1. Michael D. Archer, 2010. Getting Started in Currency Trading: Winning in Today's Market.
  2. Barry Eichengreen and Ricardo Hausmann, "How to eliminate original financial sin," Financial Times, November 21, 2002.
    MacLeod Alison, 1984. "In search of the Belgian Dentist," Euromoney, June, p. 56-62.
    Herwig Langohr and Patricia Langohr, 2009. The Rating Agencies and Their Credit Ratings: What They Are, How They Work and why they are relevant.
    Moorad Choudhry, 2001. Bond and Money Markets: Strategy, Trading, Analysis.
  3. Meb Faber, 2015. Global Asset Allocation: A Survey of the World's Top Asset Allocation Strategies.

This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.