On 2009-07-27, Hawke wrote:
I don't know who is giving you investment advice but by conventional
standards you should be a man in your twenties if you have 90% of your
money invested in stocks. If you are near 60 you are way over invested
in stocks. The older you get the more your portfolio should be weighted
in favor of bonds. 90% investment in stocks is very risky and therefore
you should be getting a very high return if you're not losing money.
People at retirement age or older should be 60% to 80% or even higher in
bonds. Your 90% strategy is a very high risk one. I'm wondering who told
you to invest so heavily in stocks. That is not what a responsible
broker would advise his clients to do. I'm just asking, is the 90% stock
investment strategy one you came up with or did a professional suggest
that? Your age is a major determinant of the percentage of stocks and
bonds you hold in your portfolio. So are you closer to 20 or 60?

I am 38. I heard many such asset allocation suggestions about how
asset allocation should depend on age only. This way of thinking is
very dangerous and can lead to ruinous consequences at worst, and
mediocre returns, at best. (though we learned in the last year that
there are things much worse than mediocre returns). I never believed
in any "asset allocation" advice that would disregard asset prices.

This age based allocation advice, essentially, leads one to overpay
for expensive assets (such as treasuries yielding zero, or stocks at
the P/E of 40 like in '2000), and to not buy enough of the more
attractively priced assets.

My allocation to stocks occurred not because of some formula involving
my age, or phase of the moon, but because I think that (stocks are
cheap enough to give me a decent returns over a long enough period of
time, even if some things go wrong. Essentially many enough people are
so scared, that stock prices now reflect their fears in the price, and
are thus much safer to own than if they only reflected very optimistic
projections in the price.

Prior to the collapse, our 401ks were all in cash, for example, and my
stock investments were 40% of our net worth, in a relatively
conservative stock, for similar reasons. (I thought that there was too
much optimism, and did not have any other, more specific insights
other than concern about the level of US debt, which played out
completely differently from my expectations). Now the 401ks are 100%
in stocks and so are the IRAs.

I also think that the theory of "volatility is risk", which is
implicit in age based asset allocation, is also complete bunk. Risk is
not in value of holding jumping up and down, it is in the possibility
of permanently losing money due to overpaying.

I have no clue as to where stock prices will be in the near future,
but I am comfortable that having bought 10 cents of earnings per
dollar invested, I will do OK after a decent enough period.

My own planning also involves a calculation that odds of significant
(but not necessarily hyper- ) inflation down the road are
underestimated by investors. In this case buying Treasuries may become
a very expensive strategy and owning them may be much risker than many
"asset allocators" are assuming. Put simply, what is the usefulness of
a "stable dollar value" of a portfolio, in case of "unstable value of
the dollar".

As far as who gives me investment advice, I never seek any investment
advice from any advisors, financial planners, and other such people,
for a variety of relatively simple reasons. I do not think that an
investment advisor would add much value for me personally. I also flat
out never take any stock tips.

i