This morning, you read Your Survival Guy’s personal view of a 60-40 stock-bond portfolio approach, while Robert C. Pozen explains in The Wall Street Journal that he views the optimal balance as 90/10. While we disagree on that balance, I think we would both agree that it’s important to be invested and to stay invested. Pozen writes:
There are two main arguments against the 90-10 portfolio. First, that the stock market has frequent crashes. The total annual return of the S&P 500 was negative for 13 of the past 60 years. The years with the worst total returns were 2008, 2002 and 1974. But each time, the S&P 500 posted strongly positive returns in the next two years.
In the past six decades, the S&P 500 has been negative for three consecutive years only once—in 2000-02, as the dot-com bubble burst. The S&P 500 was down a total of 37.43%, but those losses were more than recouped by the end of 2006. The S&P 500 was also down in both 1973 and 1974, by a total of 37.25%, due to the oil embargo. Those losses were more than recouped by the end of 1976.
What 60-40 and 90-10 investors have in common in both these scenarios is that their portfolios recouped much faster than those investors who sold and sat on their cash during the recoveries. Imagine selling everything at the bottom of the Financial Crisis and waiting years to get back in.
For more than a decade after the 2008 financial crisis, there was a bull run in bonds because interest rates fell and remained low. But that scenario is unlikely to recur soon as interest rates normalize, inflationary pressures build, and neither political party seems to have the will to reform Medicare or Social Security, which the government will have to bail out by issuing more debt at higher rates.
Action Line: Trying to time the market isn’t a plan, it’s a gamble. When you want to build a plan for your investments, email me at ejsmith@yoursurvivalguy.com.
P.S. Read more about the dangers of market timing here:
