Ben Stein is one of my favorite financial writers. I don’t always agree with his political views, but I usually find him to be grounded in reality in money matters. Also, he’s a pretty funny guy when he wants to be.
Here is what he suggests for a typical working American’s portfolio distribution, from a recent article in Forbes magazine:
- 20% of your total portfolio in cash or CDs to take care of emergencies, like the loss of a job.
- 80% in a mix of index funds and exchange-traded funds.
That 80% should be invested as follows:
- 25% in an S&P 500 index fund like Vanguard’s VFINX.
- 25% in a total stock market index fund like Vanguard’s VTSMX.
- 25% in the iShares ETF EFA, an international large cap fund.
- 15% in the iShares ETF EEM, which tracks an emerging markets index.
- 5% in the iShares ETF ICF, a fund that tracks real estate investment trusts.
- 5% in the the ETF XLE, which follows the energy sector.
Ben Stein doesn’t take any time horizon into account when recommending this allocation, but he does voice his opinion against bonds. What do you think of his portfolio suggestion? Does the allocation of the 80% equity portion provide better risk-adjusted return than just investing straight into VTSMX? Ben Stein is a proponent of timing the market through the use of sector ETFs, which I know from reading his book, Yes, You Can Time the Market. Some say you shouldn’t try to time the market it all, it just introduces unnecessary risk.
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I am very surprised at his comments on bonds. Shocked actually. I have read quite a few of his books and bonds have always had a key place in his portfolio recommendations. I would be interested in his rationale on the sudden about face on bonds. Maybe we will find out in his next book.
Fascinating. I’m reading The Intelligent Investor by Graham and there’s a section about long-term bonds (actually it’s about all kinds of bonds). Mr. Graham is a huge proponent of bond holding, 25% minimum, which I personally think is nuts. I hold no bonds at all, just a high yield savings account.
My take is similar to Mr. Stein’s. I don’t understand long-term bonds very well, so I don’t buy them.(My #1 maxim is don’t buy something you don’t understand.) Short-term bonds, i.e. T-bills, aren’t paying out much better than CD’s or a high yield savings account at the moment, so I’m not interested in dealing with a new process to get them. (sorry Jonathan!)
So, where does that leave me? I have some money allocated to each type of fund he recommends, except the energy fund and emerging markets. I am actually looking at energy stocks right now, but I don’t know much about the sector (which is why I don’t already have it, per maxim #1). The reason why I don’t have an emerging markets fund is that neither of my last two 401k plans has offered one. I could branch out and buy into one through an IRA, but I don’t have enough cash to do that yet. Instead, I just reallocated to buy an international growth fund that is available in my current 401k. (Not exactly an emerging markets fund, but better than naught exposure in Latin/South America and Asia (excluding Japan)).
I think you have to spread out risk and by going with international and real estate, you’re doing that. A lot of people get psychologically discouraged from investing when they see the market fall. They don’t view it as a buying opportunity. By diversifying holdings and spreading out risk to other markets/funds, watching your fund performance dip in one place doesn’t depress you because you might have other funds that mitigate the fall.
The other thing is if you do any international economics, you know that it’s good to have a toehold in other markets around the world. It’s phenomenally optimistic or stupid to put all your eggs into the US basket.
Interesting review on his commentary. I would have never thought about that way.
But maybe if the time horizon is 3 or 4 decades, you don’t need bonds to stablize a portfolio, because you have so much time to make up for mark corrections or mistakes.
Weird portfolio. 25% SP500 + 25% Total Stock market? Total stock market is 85% SP500. What this really is telling you is 47% SP500 + 3% Extended Market. What’s the point of bothering with a puny 3%?
Total stock market is closer to around 5,000 different equities.
You have to keep in mind that The Intelligent Investor was written long ago, the market has changed a lot since Graham recommended a heavy allocation of bonds. Bonds used to return a higher percentage, and the stock market was mostly dividend paying companies rather than growth.
Ben Stein’s book cohort Phil DeMuth is the one who apparently recommends investments in bonds. Ben recommends cash equivalents and no bonds. Although they collaborate on their financial books apparently they must diverge on some financial issues and this is one. I did not feel this was made clear in their books, but maybe it was at some point. I determined this by re-reading a previous Yahoo article by Ben.
As a recent retiree, I appreciate the income-producing value of bonds. Stein may be right about the risks of longer-term bonds vs. cash investments, but I think intermediate term is where the sweet spot usually lies.
For a reality check, go the the Vanguard site, where you can make a chart comparing the total returns over 10 years of a $10,000 initial investment in two funds. Plot their Prime Money Market Fund (almost always one of the top 5 highest yielding retail money funds) against the Total Bond Market Index Fund, which is, by definition, intermediate term.
You will see that at no time in the past 10 years did the cumulative return of the money fund exceed the return of the bond fund. And after 10 years, that $10,000 would have grown to $17,743 in the bond fund but only $14,466 in the money fund.