Lots of people like to read Warren Buffett's annual letter from Berkshire-Hathaway. However, I really enjoy reading what John Montgomery has to say in his annual reports from Bridgeway. I recently read the semi-annual report and he had a nice bit to say about how he invests. The real meat in his writing, however, comes long before he talks about his actual asset allocation (100% stock, mostly very risky, all in Bridgeway funds if you care.) At any rate, there were enough pearls that I thought were worth sharing with you all that I'm going to quote him extensively, and make a few comments.
Looking at individual stocks is mildly entertaining but ultimately irrelevant to long-term investment success.
I agree. There is little sense in taking uncompensated risk.
If you've followed my writing in the past, you won't be surprised to hear that my target allocation hasn't changed much over time. Compared to others, I have a very long-term, very static view of asset allocation.
Music to my ears. Long-term. Static asset allocation. Rare changes.
Bear in mind, everybody's situation is different in terms of goals, risk tolerance, emergency fund cushion, and especially time horizons. I am not recommending your follow my target allocation, because your situation is undoubtedly different than mine. I share it with you simply to show my thought process and also by way of disclosure.
Asset allocation is as personal as personal finance gets. The key is to find something likely to meet your goals that you can stick with through the long-term. Consider your goals, risk tolerance, and time horizon. Basically, as Swedroe says- your need, willingness, and ability to take risk.
Personally, I have a high threshold for pain in a market downturn. I don't usually look at my account statements beyond updating them in Quicken often enough to ensure accuracy and tax lots and disclosure reporting. My rule of thumb–both professionally and personally–is, “If it doesn't make a difference in a decision you make, don't look.”
Incredible wisdom there. Knowing yourself and how you react in a bear market is key in choosing your asset allocation. If you haven't yet been through a big bear market or two, err on the side of a conservative portfolio. Don't look at your account balances frequently. Like choosing individual stocks, it simply isn't relevant. Obviously, you do need to keep track of some things, but it is far less than most beginning investors think.
I realize this is hardly classical wisdom, but I see two big problems with watching one's investments too closely. First, investors tend to become more nervous, especially in a downturn, which causes unnecessary stress — and studies show that stress causes investors to make costly changes to their investment mix. Second, investors tend to chase “hot” returns, buying more of an investment after a big run-up and selling after a downturn. That's a formula for financial disaster.
If anything matters more to investment returns than asset allocation, it's investor behavior.
So what's the antidote to obsessing about returns? Here's my philosophy:
a) Structure an asset allocation plan that matches your goals, investing time horizon, and risk tolerance. Generally, this means diversified, short-term investments for near-term needs and more stocks for long-term needs.
b) Write it down
c) Implement it
d) Rebalance it about once a year, or as lifestyle changes occur.
I hope that sounds familiar to long-term readers.
Increasingly, I support hiring an investment advisor to help you implement this strategy — but only one who charges reasonable fees, does tax-lot level reporting, practices regular rebalancing, and takes advantage of donating appreciated tax lots. Above all, you need an advisor who understands the dynamics of the behavior gap and has a strong record of helping clients avoid chasing hot returns and panicking in downturns.
Nothing wrong with that, except the actual task of hiring an investment advisor that meets that description requires you to be sufficiently savvy that you no longer have the need of him. I'm all for competent advisors offering their services at a fair price for most doctors. Unfortunately, most “advisors” aren't competent, and many of the competent ones don't charge a fair price because investors are more than willing to pay their inflated price. More so than almost anything else in life, hiring an advisor is a caveat emptor situation.
What do you think? Do you agree or disagree with Montgomery's advice? Why? Comment below!
Some very nice quotes in this posting. After all my years in the industry, I have come to believe that the less time an investor actually spends “watching” and “monitoring” their portfolios and investments (whether they do it on their own or pay someone to do it for them), the better off they are.
Great points. I also have 100% stocks. Having just recently started investing it didnt make any sense to me allocation wise, and this is before you consider if we’re lucky enough to have a nominal increase in rates any “value” would be destroyed. If we get near whatever the new normal is going to be in a few years I would grab some bond funds, but right now the downside risk is too high.
Via email:
Yes, I agree wholeheartedly. In the past I have interviewed several advisors. My comments after having done so are as follows:
1. I never found an advisor who I felt cared as much about managing my assets as I did.
2. When asked ‘how can I make sure that I am getting my moneys worth should you manage my money’ I usually got a deer in the headlights look. I felt no one had ever asked them this before. But in any other purchase would you not seek to know that you received value for you purchase. Yet most advisors seemed either stunned or offended by this question.
3. Honestly, I could not find an advisor who shared my investing philosophy – set the proper asset allocation, diversify with low cost index funds, re-balance etc. Maybe because it is really not that complicated I just never felt the need to hire an advisor. Most advisors I spoke with were active investment managers, and I understand their advice has to generate income for themselves so I just felt there wasn’t always a fiduciary relationship between the two of us.
Just a few of the reasons I have not felt the need to hire an investment advisor. However, for specific needs like tax planning, long term care insurance etc. I will learn as much as I can then seek to find someone who is knowledgeable, trustworthy and reasonable.
Garrett Planning Network’s hourly advisors. Check them out.
Shameless plug. But since I also plug Garrett’s advisors frequently, I won’t object.
WCI wrote
“Nothing wrong with that, except the actual task of hiring an investment advisor that meets that description requires you to be sufficiently savvy that you no longer have the need of him.”
I think WCI nailed it in the quote above. There are so few fiduciary financial adviser out there that you really need to know what you are looking for. But if you know what you are looking for, you probably can easily do it yourself.
When someone asks me about investing and getting an advisor, I explain the high fees and that it is better to learn and do it on their your own. If they are not interested in learning, I explain and recommend low cost target date funds.
Today, it is so easy to just by one fund and never have to think about it again.
Right, but that doesn’t help you with budgeting, staying the course, figuring out what to invest in in your 401(k), evaluating your insurance options, figuring out the appropriate student loan management, knowing there are backdoor Roth IRAs etc. Investment selection is the easiest part of the whole deal, but that’s the part everyone pays the most for!
“When a person with experience meets a person with money, the person with experience will get the money. And the person with the money will get some experience.”
For this reason I have not used investment advisors for many years.
Best advise I can give anyone is to keep it simple, keep it inexpensive and most importantly know your risk tolerance. After living through crash of black monday I learned my lesson and went to 50% stocks/precious metal and 50% bond/cash and for past 9 yrs peer to peer lending portfolio. I rebalance once every 12 – 16 months.
I can state without hesitation that my simple portfolio has beaten the S&P 500 with less volatility. Now my portfolio lagged 100% stocks at turn of the century, but thanks to tech crash with rebalancing I got some cheap stocks, and 2008 crash was really good, b/ not only did stocks crash but bonds rallied and with rebalancing I bought whole bunch more stocks. I even took a large loan from my whole life insurance to bank roll 529 plans for family members as well as buy properties.
In mu opinion it isn’t necessary to be invested 100% in stocks to capture the upside. With investment time horizon of 50 – 60 yrs you will get at least one opportunity every decade to load up on stocks, and make sure to protect your gains by rebalancing at least every year or so.
Are you a physician or an advisor?
What’s your rationale for carrying whole life insurance?
Sam’s use of whole life was discussed extensively in the comments of a recent post. I’ll see if I can try to remember which one it was. Whoever remembers first, just post a link so it doesn’t get rehashed here. It annoys me when we get thirty comments about whole life on a post that has nothing to do with it.
Lun, I am a physician. lets not talk about whole life insurance, WCI is very touchy about it. Don’t be obsessed and focus too much time on investing. Keep it simple, enjoy you life, and over decade or so you will have your financial freedom. You will be better off then 99.999% folks on the planet, and better then 95% of americans. All in all, not a bad deal.
You can talk about it all you like. But not on every single comments thread on the entire site. Take the discussion to a post about whole life. There are dozens of them.
As Anrew Tobias says “TRUST NO ONE”. If Americans realized how SIMPLE stock/bond investing was????? That’s the puzzle that has not been solved knowing most $$$ are actively invested
Jim,
There is absolutely no correlation between your computer skills (googling to find an RIA who uses asset allocation and preaches diversification and charges 1% o less) and your own ability to stay the course with an appropriate long-term investment portfolio (which I the greatest role provided by an advisor).
Intelligence or experience does not erase your behavioral shortcomings, a fact most DIY investors grudgingly accept by building portfolios with too much in bonds, insufficiently spread across the sources of expected return (small cap and value) and yet still buy/sell at the wrong time costing (per Jack Bogle) over 1% per year in under performance.
Even Jack Bogle suffers here: he was 60% in stocks in 2000, 25% in 2009 and 60% in 2014. There’s a significant cost to that bad behavior, one that an advisor could have helped Jack avoid. Add in the additional value of global small/value diversification that Jack shuns and you see that YES, almost everyone needs a good financial advisor. And, of course, they are extremely easy to find. DFA’s “Find An Advisor” is perhaps the best tool available for this.
You’re right that bad investment behavior can kill any investment plan. I’m not convinced, however, that every advisor is actually helpful in that regard. I’ve seen a lot of bad behavior from advisors! But it is easier to be more objective with someone else’s money. Plus, I’ve seen investors that still sold everything in a bear market despite having an advisor telling them not to. So the advisor isn’t a guarantee of good behavior.
I’m interested in a citation for Bogle’s AA changes. While I’ve seen him preach tactical asset allocation in the past, it seems he usually means a stock/bond ratio swing of 15% or less, not the 35% you’re citing.
The problems with DFA’s find an advisor service are several fold. First, you only get a “DFA advisor.” Second, you don’t get it instantaneously and you have to provide personal information.
And, despite what a DFA approved advisor likes to preach, there are additional risks in a small/value tilted portfolio.
Here is an interesting article about the small cap premium. Like all these “pearls”, it appears that once you do some digging its never as straightforward as its sold. Always best to check on it. Anyways, if you’d like to read a quick but very informative post on such things related to small caps:
https://theirrelevantinvestor.wordpress.com/2015/10/27/this-is-the-small-cap-secret-no-one-ever-told-you/
I think the data for small value is pretty good, but I’m not willing to wholesale bet the farm on it. I have a tilt, but not a terribly extreme one.
The article actually confirms that in the end, and its a decent premium, but no where near the wild reported out performance do to the several one time structural market changes and classification issues of a long long time ago.
On the flip side of that is there now seems to be a trend of winner takes all in profit margin and growth the last 10-15 years where the biggest companies are the ones making all the gains and everyone else is behind.
I’d also like to see the link to the timing of his changes. More importantly why do you think they are so badly timed? If the inverse of his allocations were bonds it looks excellently timed and would have had a strongly positive return. People who follow a tactical/momentum approach faithfully made a killing in the recent down turn and his allocation looks suspiciously similar to those.
Jim:
For your information:
https://www.bogleheads.org/forum/viewtopic.php?p=2668795#p2668795
If you are ever in Miami, I hope you will PM or call me (305-854-6681) so we can dine and perhaps go sailing.
Taylor
Thank you for the kind invite (again.) My wife keeps wanting to take our daughters to Harry Potter World. Maybe I’ll have to come along and we can visit Miami too for a sailing trip.
Jim: Please make this an injectable device (advice). There are good solutions and second opinions out there. Just continue to remind your readers that one of the necessary skills is preventing panic yourself, or using someone else to avoid those painful mistakes.
Yes, staying the course is a key part of any plan, but particularly in public equities. And it is key to know yourself and what you can handle. Nothing like your first bear market to help with that.
I struggle with “risk”. How do you determine the risk u should take for your family? We are young and make good money (500k plus). I am pretty sure I can tolerate high risk but does it make sense to go 100% stocks. About 25 – 30 years from retirement. Making over 500k – should one be in 100% stock? Or 90? Or 80? Assuming a boglehead lifestyle of course
Lun
Do not invest more then 50% of your assetts in stocks (regardless of your age). Increase your exposure a bit perhaps 55% stocks after large corrections which occur every few years. Do not fall into trap of diversifying with small cap / large cap and emerging markeet nonsense. In the end, these are still stocks that will fall and crash multiple times over your investment horizon. True diversification includes stocks, bonds (various types) and cash for a simple portfolio. For complicated portfolio through in preciouis metals, real estate / land etc (although over long run you can capture the essence of later mentioned assett class with stock/bond/cash.
Now, if you want to be filth rich, then you need to look at business, including real estate. But most people, including doctors dont have the skill set for this. In fact, the investmetn advisiors refer to us as the DUMB money. The only business where you may have an leg up is starting private practice, but this too is not easy.
Also take a look at the post by Sam, he makes some good points and good luck, soon you too can be the 1% if you dont make stupid financial decisions.
Well this really depends. Risk should have a point of course and should be rewarded with larger return (of course you usually get increased volatility as well). However, making good money as you do, you dont NEED too much risk as even a short time period of good saving and non debaucherous spending will get you there easily.
Now, I would never for a younger person suggest 50% bonds, just look at the trinity study. Bonds almost sole purpose is to smooth volatility, and the larger the percentage in bonds the more likely you are to deplete your funds over time. Id let a large principal balance be my insurance against volatility and balance anxiety. You should certainly have bonds at some point, and since theres no need for any risk on behavior maybe even try a portion of your investments in low volatility etfs, though thats mostly in name and even theyve had their issues of volatility, but long term seems to do ok with their plan.
Of course you have to do what you’re comfortable with and can sleep well at night, but I usually defer to my long term plan and goals and thats how i sleep at night without any concern. Youre going to do great just on the amount you contribute and time so I’d focus on contributing and structure of your plan, and not the day to day fluctuations. Whatever mixture you select I would look up the historical max draw downs, return, etc…so you have parameters that can also keep you cool. If you chose 100% stocks you want to know a correction of x magnitude happens every y months with a max historical draw down of z%. So if any market nonsense happens you can assess whether its worth your concern (its not) or expected. Kind of like complications, theyre a whole lot worse if you dont discuss them first.
Makes sense.
At the present, I don’t have much disposable income as we are machine gunning away loans after we max retirement accounts, and backdoor Roth.
I’m guessing your recs remain the same in tax deferred? And why ETFs as opposed to plain old index mutual funds?
From what I have been reading, most recs for “conservative” allocations within our age groups, advocate 80% stocks.
If you use a good ETF or a good index fund, it doesn’t matter so much which you choose. Choose based on cost and hassle. I use both, depending on which is cheaper and less hassle in a given account.
What did you do with your stocks in 2008-2009? Sell? Stay the course? Buy more? Weren’t investing yet? I think you can use that as a gauge. If you sold, you should have less stock than you had in 2008. If you stayed the course, then you’re probably about right. If you bought more, maybe you can bump up your AA a bit. But if you weren’t investing in 2008, I would encourage you to err on the conservative side. You can always ramp up the risk later.
Wasn’t investing yet. What is caution? 80/20?
Btw, did you think about having a simple forum where you can post the title of your newest article and all comments are tallied in that thread?
A more complex forum is in the works. I haven’t requested that particular feature. Might be doable though.
I’d 100% rather have comments in a forum section, this way you can read all the latest comments in a row, rather then having them inter-mixed like we do now. Hopefully Dr. D changes this. 😉
It was a tough decision whether or not to intermix the comments. they weren’t mixed for the first few years, then a couple of years ago I made the change. It seemed a good idea since the software didn’t let you quote like forums do. It’s not a big deal unless you’re getting dozens of comments on every article, which I now do. Good problem to have.
The forum will have the ability to quote and will have the latest posts at the bottom.
Lun
Do not invest more then 50% of your assetts in stocks (regardless of your age). Increase your exposure a bit perhaps 55% stocks after large corrections which occur every few years. Do not fall into trap of diversifying with small cap / large cap and emerging markeet nonsense. In the end, these are still stocks that will fall and crash multiple times over your investment horizon. True diversification includes stocks, bonds (various types) and cash for a simple portfolio. For complicated portfolio through in preciouis metals, real estate / land etc (although over long run you can capture the essence of later mentioned assett class with stock/bond/cash.
Now, if you want to be filth rich, then you need to look at business, including real estate. But most people, including doctors dont have the skill set for this. In fact, the investmetn advisiors refer to us as the DUMB money. The only business where you may have an leg up is starting private practice, but this too is not easy.
Also take a look at the post by Sam, he makes some good points and good luck, soon you too can be the 1% if you dont make stupid financial decisions.
Sorry guys, I am new to the site, and do not feel comfortable sharing my name yet.
I am impressed with depth of coverage and for most part good sound advise.
Who is the WCI? Is he / she a doctor or financial advisor?
https://www.whitecoatinvestor.com/about/