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Another "Why Bonds?" / Buffett 90/10 thread..

Bogleheads • View forum - Investing - Theory, News & General - www.bogleheads.org
Someone recently PM'ed me the question ...I want to do the Warren Buffett 90/10 portfolio. I'm only 23 so I'm still in the accumulation phase. What's purpose of the 10% of government bonds? If I'm not taking withdrawals from my portfolio is the government bonds even necessary? Is there something that I'm missing fundamentally about the government bonds?... Rather than just reply I'm posting it in a thread so others can provide feedback as well. I'm all for the idea of holding an aggressive portfolio, especially if the person doing it is still in a accumulation phase and not expecting to withdraw any time soon. I do think it's important to have some cash on hand though, and government bonds are 'special' in that they are as good as cash as longs as the maturity/duration is matched with your need of the cash. Government bonds don't have any default risk, and by keeping them short-term there will always be some of them maturing, turning into cash on hand that doesn't need to find a buyer in the market. I don't know that 10% is the right amount for anybody in particular, you'll have to work that out for yourself. But Buffett has given the advice Warren Buffett on CNBC wrote:

"...have them having enough cash on hand so they feel comfortable, and then the rest in equities.." At a BRK Annual Shareholder meeting in 2008, blogger Tim Ferris asked the question

“If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage.”

Buffett let out a small laugh and began. “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”

[ Note, the phrasing is slightly different, but a reporter taking notes confirms the gist of it]

Q32: Timothy Ferris, Princeton guest lecturer. Imagine you are investing with small sums of money at 30yrs old, with your first $1mil. Your savings can cover expenses for 18 months. You are not a full time investor, no dependents. What advice do you have, please be as specific as possible.

WB: Put it all in a low cost index fund. Vanguard. Reliable, low cost. Not professional, thus an amateur. Unless bought during strong bull market, that investment would outperform bonds over long period of time and I would forget it and go back to work.

In the letter to shareholders where the 90/10 allocation is pointed out, Buffett also said

Warren Buffett in 2013 Letter to Shareholders wrote:

... So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm... Regarding the "farm", Buffett has elsewhere said

After buying a farm, would a rational owner … start selling off pieces of it whenever a neighboring property was sold at a lower price? Or would you sell your house to whatever bidder was available at 9:31 on some morning merely because at 9:30 a similar house sold for less than it would have brought on the previous day? In a different CNBC interview Buffett gave the reasoning for the 10% allocation to bonds Warren Buffett on CNBC wrote:

And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. And anybody will do fine with that. It’s low-cost, it’s in a bunch of wonderful businesses, and it takes care of itself. It makes sense to me, if you consider that 10% is potentially 3 years worth of spending for someone taking 3-4% withdrawals, and if whatever downturn in stocks occurred was less than 50% from the peak it could easily makeup the difference for twice that long or more. 80% of the rolling 5 year periods in the market historically were positive and the larger drawdowns over those periods were all right around the 10% mark [MStar Graph of Rolling 5 year periods] If you can stomach the possible dowturns of such a portfolio, others have 'researched' it as well

...Recent research suggests that retirees might be able to lean heavily on stocks without putting their nest egg in grave danger. But if a 90% stock allocation gives you the jitters, pulling back a little might not be such a bad idea.

It seems to me, that the point of bonds here, is to feel secure that you can weather a storm in the stock market and not have to sell a large chunk of your portfolio to keep your spending needs met. If your income is secure, and you have an emergency fund to get through any inevitable surprise expenses, maybe you can get by with less than 10% in bonds... but you're the one who's going to have to make that call.
Date: Apr 30, 2017   


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