Barbelled Retirement Investments

Way back at the turn of the century (this century, not the last one), investment guru Peter Bernstein noted:

... Over the long 75-year span from the end of 1925 to the end of 2000, a portfolio of $100 fully invested in stocks would have generated a compound return of 11 percent a year compared with 9.3 percent a year for a 60/40 portfolio—assuming no taxes and full reinvest- ment of dividends. This spread of less than 2 percentage points looks modest, but it is far from chicken feed when compounded over 75 years. ...

But consider the following. Equity performance was all over the place. The annual return on stocks ranged between a glorious 54 percent rise and a horrible 43 percent swoon; on eight occasions, losses were greater than 10 percent. Although the 60/40 portfolio was inevitably affected by the high stock volatility, the 40 percent in bonds helped the balanced port- folio come through with a more comfortable spread, ranging from a 40 percent gain to a 9 percent drop. ...

So it would seem that the prudent strategy would be to set up a 60% stock, 40% bond portfolio and let it ride. (I used to suggest the allocation to people who asked me about how to position their money in the Animation Guild's 401(k) Plan.)

However. There are times when doing a 60% stocks/40% bonds allocation might not be the swiftest of moves. Another investment guru (Rick Ferri) thinks he knows those times:

The 60/40 mix is a solid starting point for a discussion about asset allocation for investors who are accumulating assets for retirement. However, ... the center of gravity shifts when a person stops accumulating assets and starts taking income from their assets. The corrected ideal asset allocation for beginning a discussion on asset allocation with a pre-retiree or retiree is 30% stocks and 70% bonds. ...

This is a conservative mix that has enough equity to growth with inflation and enough fixed income to keep portfolio volatility at bay. Historically, a 30/70 allocation has earned the highest Sharpe ratio. This is the point on the efficient frontier that has earned the best risk-adjusted return. ...

Finally, there were five periods when higher volatility in 60/40 portfolios were accompanied by a losing annualized 5-year return. In contrast, 30/70 portfolios lost money only one time. ... This is the type of consistency in returns retirees can become comfortable with. ...

Investing is simple (rumors to the contrary). All you need to do is:

1) Stick with index funds. (They're low cost.)

2) Be diversified ("total market" indexes work well).

3) Don't jump in and out of your investments. (In other words, do a mix of stock and bonds that you can live with through market ups and downs.)

4) Make your investments more conservative* as you get older. (You can do this manually ... or with Target Date funds that do the heavy lifting for you.)

What makes investing hard? People do stupid things with their stocks and bonds and find it difficult to break the stupidity habit. They panic when there's a market down draft and sell equities at the bottom, or they get overly enthusiastic during a market high and start performance chasing. Studies show that the most successful investors are ones with iron discipline or amnesia**.

There is no "perfect plan" so don't waste time searching for one. Execute an investing strategy that's doable, and stick with it.

* One simple route to take: from 20-45 have a 60% stocks/40% bonds portfolio; from 45 on have a 40% stocks/60% bonds portfolio. Barbells

** Fidelity Mutual Funds did a study that showed the best investors at Fidelity were the ones who forgot they had investments at Fidelity.