Friday, November 5, 2010

Quote of the day

So an investor with 60% of his portfolio in stocks and 40% in bonds, a standard, if conservative, allocation, can expect a weighted average return from here of only about 4.1%.

This assumes a "long-term return of 5.2%" for stocks. BTW, that's a real return.

FLG notices that these articles always focus on the US stock and bond markets. If you are worried about the US stock market not providing sufficient returns, then it's not like the only answer is to shift to the US bond market. There's this thing called international investing that helps diversify. Sure, that whole decoupling thing is overstated, so a shitty American economy will still have spillover effects, but investing only in the US is a very bad idea.


Andrew Stevens said...

Don't get me wrong; I think Brett Arends is one of the worst writers in the world on investing, but he wasn't quite as bad as all that.

On the trivial point, you misread him. The 5.2% includes a 2% inflation projection so it's a projected nominal return, not real return. The expected real return for stocks is 3.2%.

He also did in fact talk about investing in emerging markets at the end and argued that at most you'd gain a couple of percentage points above the developed nations. Here I'm actually inclined to agree with him. Foreign stocks are much more highly correlated with U.S. stocks than they used to be and I wouldn't expect them to diverge too seriously, though I could easily be wrong about that.

I don't agree, by the by, that investing only in the U.S. is a "very bad" idea. I don't even think it's a bad idea. I certainly agree with you that it's not the optimal strategy (a substantial percentage of my portfolio is in foreign equities), but I'd definitely expect people who invest in nothing but U.S. stocks and bonds to do pretty well for themselves. But then I am not nearly as pessimistic as Mr. Arends. Could Mr. Arends be right? Certainly, but 9 times out of 10 people who say things like "neither pension funds nor private investors seem to have fully absorbed the grim lessons of the past decade" end up looking foolish thirty or forty years later.

FLG said...


After reading the article again, I'm not quite sure what I was thinking this morning.

FLG said...

Oh, but I still think not diversifying internationally is a bad idea.

Andrew Stevens said...

Well, it's definitely not optimal, so I suppose it's fair to say that it's a bad idea, since I agree that it's worse than other alternative allocations. I don't want to quibble over semantics too much since we're probably substantially in agreement on this point.

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