INSUBCONTINENT EXCLUSIVE:
By Jared DillianMy mother is 73
She has a nice sum of money saved up from a long career as a public servant that is invested in two mutual funds
One is a high dividend fund that mostly consists of international stocks, and the other is a short/medium duration corporate bond fund
Her investment objective is to earn income, and the blended portfolios yield about 4 per cent
the primary source of that stress is debt and risk
My mother sustained a miniscule drawdown during the market swoon at the end of last year
If she had been 100 per cent in aggressive growth stocks, it would have been much worse.
From my travels, I have come to suspect that a
equities is because volatility makes people make stupid decisions
After suffering such losses, most people will conclude that the stocks they hold might go down the last 40 per cent, and so they take action
to conserve whatever capital they have left
But what typically happens is that people sell at the worst possible time and then watch helplessly as the market rebounds.
Financial
advisers will generally recommend what has become the standard asset allocation, which is 80 per cent in stocks and 20 per cent in bonds,
with investors allocating more to bonds as they age
But even that is too risky
of how each asset class contributes to the overall risk of the portfolio.
I propose an allocation to stocks of 35 per cent for all investors
in all circumstances, and an allocation to bonds of 65 per cent
The reason being is that most advisers focus on returns to the exclusion of all else
They start by asking how much money you want in retirement, then they have you figure out how much you are willing to contribute and back
out the rate of return you need
Most people assume an 8 per cent return from an equity portfolio
realize those returns because of suboptimal behavior along the way
In other words, buying on the highs and selling on the lows
Or, they only faithfully dollar cost average on the way up
Ratio, or better risk/return characteristics
Such a portfolio is suitable for all people at all ages because the goal here is not to target returns but to target volatility and minimize
If you minimize risk, then you minimize stress
If you minimize stress, you minimize suboptimal behavior
That is a legitimate concern
My answer is that investors simply need to save more
the 1950s to the mid-1980s
People will tend to save less if they believe the 8 per cent actuarial return of the stock market given to them by their advisers.
If people
had more realistic expectations of what they could earn in the market, it might cause them to be more conservative with their personal
The thesis here is that investors, over time, will achieve higher returns with a set-it-and-forget-it 35/65 portfolio than in a more
volatile portfolio of mostly stocks that induces suboptimal investor behavior
In that sense, do-it-yourself investing really becomes possible and cheaper.
Advisers should stop targeting return and start targeting
Figure out what volatility a client can handle and use that to design a portfolio
