Do You Want to Sleep Well or Eat Well?
|
|
Do you want
to eat well or sleep well? This is an old Wall Street adage that investment
advisers would ask clients to get a sense of their tolerance for risk. The wisdom of the question was clients who
answered "eat well" should allocate more money into stocks compared to
bonds. Over the long-term, stocks are
supposed to produce superior performance to bonds and provide a hedge against
rising living expenses. On the other
hand, investors who answered "sleep well" were assumed to be risk averse and
better candidates to own more bonds than stocks preferring "sleeping well" over
the risk of not being able to afford a steak dinner later in life. The basic investment concept at work is the
higher the risk (stocks) the higher the return but at the price of losing a few
nights of sleep.
The first
and most fundamental investment decision that all investors must make is the
percentage allocation of stocks and bonds in their portfolio. If we equate "eating well" with the
expectation that our money lasts at least as long as we do, and "sleeping well"
with awaking one day to find that we are still here but our money is gone, the
decision becomes very personal. How do I
make my money last as long as I do? The
answer is to either spend less or get your money to make more money, which
means taking on more risk.
The
Leuthold Group just completed a generational analysis of Stock vs, Bond
returns. Their conclusions were:
1. In every rolling time frame
ranging from one to 25 years through the end of Q1 2009, the total return
of stocks has lagged the total return of 10-Year Treasuries. (Where's the
good news?)
2.. Using history as guide, this
lag in stock market performance versus bonds is rare and sets the stage
for decade long superior performance of stocks over bonds. (History to the
rescue.)
3. The second quarter of 2009 may
have been an important turning point for the performance difference
between stocks and bonds. (Let's hope so.)
What are
the implications of Leuthold's conclusions for you and your money?
1. Investors are chasing the good
performance of bonds and fleeing the bad performance of stocks at the
precise moment when stocks are again ready to compensate investors for the additional risk. (Classic
counterproductive investor behavior.)
2. Determine the suitable
stock/bond allocation so that you can both "eat well and sleep well" in
retirement. (We know how to do this.)
3. Rebalance your portfolio. (Probably lighten up on bonds and add to
stocks.)
4. Chasing the past superior
performance of bonds will likely detract from future long-term performance
when you need it the most. (Better
sleep but no steak dinners.)
5. Twenty-first century capitalization
is a global reality. Make sure your
money has global exposure. (Learn Chinese and for better sleep drink more
Russian vodka.)
And
finally, a good night's sleep is overrated.
If you want your money to outlive you, take more risks and learn how to
nap. Zzzzzzzzzz. (See picture above.)
|
