That being said I still believe companies are better generators of cash than loans. The difficulty is choosing a very good business.

my 2c

1. Having bonds gives you the capacity to buy low and sell high through rebalancing.

2. Even over a long period, you can’t be sure stocks will return higher than bonds. It did so twice in the past, but twice is too few to bet all your money on.

There is no doubt you would be better off to throw a large sum of money into a 100% stock index of some sort and yield superior results 30 or 40 years down the road, but that is not reality for 99.9% of people. So if you can achieve results within a percentage point of a 100% stock portfolio and with significantly less volatility, then with an average investor who invests small amounts frequently as opposed to one lump sum and letting it ride will end up in pretty good shape.

Bottom line is, you can look at past performance and pick a 100% stock portfolio that returns 20% or more a year, or you could pick a stock portfolio that returns -20% a year over the last 30 years. You can pick any stocks you want as a benchmark and find different data to support any claim. The S&P is simply the best objective benchmark available without breaking it into the infinite number of portfolios you could create.

We can debate historical returns until we’re all blue in the face, but they are all based on assumptions, lump sum investments, and that future market conditions will reflect what has happened in the past. You show me a stock portfolio that did better than the S&P over the past 10 years, I’ll show you one that did worse and vice versa. That is exactly why the MPT and efficient frontier are so important so that people can create portfolios that maximize returns while also minimizing the risk.

Point 2 is that 12.75% from 100% stock compared to 11.70% 80/20 is not “roughly” the same. 1%+ is a really big deal over a long time frame. For someone at the 20/30/40 year timeframes, this would be +24%/+37%/51%. This difference could mean the difference between a comfortable retirement and one you have to scrimp to get by.

As far as the rest of your information, that just proves my point. You can achieve very similar or better results to a 100% stock portfolio while lowering volatility by simply diversifying across stock classes and adding a some fixed income as well.

And nobody said my 60/40 mix was just an S&P index with a bond index, there is far more to diversification than that which can yield better results, which you highlighted with some of your examples above.

I don’t think anybody is arguing that if you have a long-term investing horizon, 100% stocks would be a bad thing. The point here is that due to the efficient frontier you can effectively reduce your volatility a bit by proper diversification while still yielding roughly the same results as a 100% stock portfolio.

* 25% Large/Small/Intl/Reit = 12.75%
* 20% Bonds/Large/Small/Intl/REIT = 11.70%
* S&P500 = 11.33%
* 20% Bonds/80% S&P500 = 10.66%
* 40% Bonds+15% Large/Small/Intl/REIT = 10.58%
* 40% Bonds/60% S&P500 = 9.87%

Now let’s look at volatility (standard deviation):

* 40% Bonds+15% Large/Small/Intl/REIT = 7.92%
* 20% Bonds/Large/Small/Intl/REIT = 10.38%
* 40% Bonds/60% S&P500 = 10.90%
* 25% Large/Small/Intl/Reit = 13.00%
* 20% Bonds/80% S&P500 = 14.09%
* S&P500 = 17.41%

It looks like doing a balanced stock asset mix reduces volatility similar to a +20% influx of bonds while increasing returns at the same time. The 40/15/15/15/15 portfolio would have only encountered 1 year of loss the past 15! (2002 -4.72%) By comparison, the 40/60 portfolio had 4 years of losses the past 15.

So from my look at the data I have available, I’d say the S&P500 is NOT a good proxy for the entire equities market. Throw in a broad-based commodity index (trying to find data for this category) and I suspect the volatility of 100% stock+reit+commodities would be lower than that of 40% bonds/60% S&P500.

belly laughs at your expense for blindly following the calculations of a random person on the internet.

I went back and revised the example to be something that actually does produce higher return due to the combination of two securities. But I won’t belabor the point, as there’s not much practical application.

Back to the main issue, I’m really glad as well that you brought up this question, as it’s made me think about and look into this issue of asset allocation a lot more. I’m currently 100% invested in stocks, but the discussion has really given me food for thought.

@Anon post #13 – Your math is wrong there for the half and half portfolio. You can’t simply add the returns. It should be

17.5%,0%, 17.5%, 0% = $135 or roughly 7.78% geometric gain

At least thats what I came up with.