Peter Bernstein's Cash and Stock Portfolio

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Benjamin Buffett
Posts: 129
Joined: Sun Nov 25, 2018 1:20 pm
Location: Indiana

Peter Bernstein's Cash and Stock Portfolio

Post by Benjamin Buffett »

I was researching the portfolio suggested to Cambridge University that recommended a spread of 80% stocks and 20% cash and ran across a 60/40 alternative discussed by Peter Bernstein that was a spread of 75% stocks and 25% cash. Has anyone read the article by Peter Bernstein, and does anyone have a link to it?

"Although cash tends to have a lower expected return than bonds, we have seen that cash can hold its own against bonds 30 percent of the time or more when bond returns are positive. Cash will always win out over bonds when bond returns are negative.

The logical step, therefore, is to try a portfolio mix that offsets the lower expected return on cash by increasing the share devoted to equities. As cash has no negative returns, the volatility might not be any higher than it would be in a portfolio that includes bonds."
--Attributed to Peter Bernstein

According to portfolio visualizer would be similar to a 60/40 on an inflation adjusted graph. The lines on the graphs for growth, crashes, corrections, and other market behavior are very similar. 75/25 and 80/20 portfolios have slightly higher risk, with a higher return. Any thoughts on such a bond-less portfolio.

Personally from what I have been reading from both Scott Burns(who proposed a 50/50 portfolio with TIPS used as a near cash asset) and Warren Buffett (who proposed a similar split using short term bonds as a near cash asset) a decent adaptation of the Cambridge and Peter Bernstein could be to have a 80% (or 75%) equity portfolio with 20% in short term TIPS(an inflation protected near cash asset). Granted the portfolio would be considerably aggressive for a retired investor, it does appear that it would behave similarly to a 60/40 with a similar failure rate(according to some online trinity portfolio simulators).
WildBill
Posts: 761
Joined: Wed Jun 29, 2016 10:47 pm
Location: San Antonio, Texas

Re: Peter Bernstein's Cash and Stock Portfolio

Post by WildBill »

Howdy

viewtopic.php?t=230368

This is a link to the article and a forum discussion of it.

BTW, Mr Bernstein died in 2009. He wrote a number of excellent books, the best being “Against the Gods”. He also wrote an excellent history of the Erie Canal.

Happy reading

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
Ferdinand2014
Posts: 2390
Joined: Mon Dec 17, 2018 5:49 pm

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Ferdinand2014 »

Benjamin Buffett wrote: Sat Jan 25, 2020 1:10 pm I was researching the portfolio suggested to Cambridge University that recommended a spread of 80% stocks and 20% cash and ran across a 60/40 alternative discussed by Peter Bernstein that was a spread of 75% stocks and 25% cash. Has anyone read the article by Peter Bernstein, and does anyone have a link to it?

"Although cash tends to have a lower expected return than bonds, we have seen that cash can hold its own against bonds 30 percent of the time or more when bond returns are positive. Cash will always win out over bonds when bond returns are negative.

The logical step, therefore, is to try a portfolio mix that offsets the lower expected return on cash by increasing the share devoted to equities. As cash has no negative returns, the volatility might not be any higher than it would be in a portfolio that includes bonds."
--Attributed to Peter Bernstein

According to portfolio visualizer would be similar to a 60/40 on an inflation adjusted graph. The lines on the graphs for growth, crashes, corrections, and other market behavior are very similar. 75/25 and 80/20 portfolios have slightly higher risk, with a higher return. Any thoughts on such a bond-less portfolio.

Personally from what I have been reading from both Scott Burns(who proposed a 50/50 portfolio with TIPS used as a near cash asset) and Warren Buffett (who proposed a similar split using short term bonds as a near cash asset) a decent adaptation of the Cambridge and Peter Bernstein could be to have a 80% (or 75%) equity portfolio with 20% in short term TIPS(an inflation protected near cash asset). Granted the portfolio would be considerably aggressive for a retired investor, it does appear that it would behave similarly to a 60/40 with a similar failure rate(according to some online trinity portfolio simulators).
I have been doing this for years. It’s essentially the ‘Warren Buffett’ portfolio. I don’t keep an allocation percent, but instead keep an X dollar amount of cash (T-bills) and everything else goes into equities(S&P 500 index). Those inclined to add international could simply hold VT and cash.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
Topic Author
Benjamin Buffett
Posts: 129
Joined: Sun Nov 25, 2018 1:20 pm
Location: Indiana

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Benjamin Buffett »

WildBill wrote: Sat Jan 25, 2020 1:26 pm Howdy

viewtopic.php?t=230368

This is a link to the article and a forum discussion of it.

BTW, Mr Bernstein died in 2009. He wrote a number of excellent books, the best being “Against the Gods”. He also wrote an excellent history of the Erie Canal.

Happy reading

W B
Thanks for the link :)
Topic Author
Benjamin Buffett
Posts: 129
Joined: Sun Nov 25, 2018 1:20 pm
Location: Indiana

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Benjamin Buffett »

I checked it seems to be a link to his 60/40 portfolio, but no discussion of his 75% 25% stock and cash portfolio. Unless I missed the link on the discussion.
Topic Author
Benjamin Buffett
Posts: 129
Joined: Sun Nov 25, 2018 1:20 pm
Location: Indiana

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Benjamin Buffett »

Ferdinand2014 wrote: Sat Jan 25, 2020 1:47 pm
Benjamin Buffett wrote: Sat Jan 25, 2020 1:10 pm I was researching the portfolio suggested to Cambridge University that recommended a spread of 80% stocks and 20% cash and ran across a 60/40 alternative discussed by Peter Bernstein that was a spread of 75% stocks and 25% cash. Has anyone read the article by Peter Bernstein, and does anyone have a link to it?

"Although cash tends to have a lower expected return than bonds, we have seen that cash can hold its own against bonds 30 percent of the time or more when bond returns are positive. Cash will always win out over bonds when bond returns are negative.

The logical step, therefore, is to try a portfolio mix that offsets the lower expected return on cash by increasing the share devoted to equities. As cash has no negative returns, the volatility might not be any higher than it would be in a portfolio that includes bonds."
--Attributed to Peter Bernstein

According to portfolio visualizer would be similar to a 60/40 on an inflation adjusted graph. The lines on the graphs for growth, crashes, corrections, and other market behavior are very similar. 75/25 and 80/20 portfolios have slightly higher risk, with a higher return. Any thoughts on such a bond-less portfolio.

Personally from what I have been reading from both Scott Burns(who proposed a 50/50 portfolio with TIPS used as a near cash asset) and Warren Buffett (who proposed a similar split using short term bonds as a near cash asset) a decent adaptation of the Cambridge and Peter Bernstein could be to have a 80% (or 75%) equity portfolio with 20% in short term TIPS(an inflation protected near cash asset). Granted the portfolio would be considerably aggressive for a retired investor, it does appear that it would behave similarly to a 60/40 with a similar failure rate(according to some online trinity portfolio simulators).
I have been doing this for years. It’s essentially the ‘Warren Buffett’ portfolio. I don’t keep an allocation percent, but instead keep an X dollar amount of cash (T-bills) and everything else goes into equities(S&P 500 index). Those inclined to add international could simply hold VT and cash.
Seems like that could be a really smart way to do it, especially if you have enough to cover most bear markets. I find the cash stock barbell portfolios to be a very interesting approach. :sharebeer
Ferdinand2014
Posts: 2390
Joined: Mon Dec 17, 2018 5:49 pm

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Ferdinand2014 »

Benjamin Buffett wrote: Sat Jan 25, 2020 5:52 pm I checked it seems to be a link to his 60/40 portfolio, but no discussion of his 75% 25% stock and cash portfolio. Unless I missed the link on the discussion.
https://awealthofcommonsense.com/2015/0 ... portfolio/

https://www.andersongriggs.com/read/-a- ... ve-returns
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
Topic Author
Benjamin Buffett
Posts: 129
Joined: Sun Nov 25, 2018 1:20 pm
Location: Indiana

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Benjamin Buffett »

Ferdinand2014 wrote: Sat Jan 25, 2020 5:57 pm
Benjamin Buffett wrote: Sat Jan 25, 2020 5:52 pm I checked it seems to be a link to his 60/40 portfolio, but no discussion of his 75% 25% stock and cash portfolio. Unless I missed the link on the discussion.
https://awealthofcommonsense.com/2015/0 ... portfolio/

https://www.andersongriggs.com/read/-a- ... ve-returns
Thank you very much, the second link was exactly what I was looking for :)
Fclevz
Posts: 651
Joined: Fri Mar 30, 2007 11:28 am

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Fclevz »

Benjamin Buffett wrote: Sat Jan 25, 2020 1:10 pm I was researching the portfolio suggested to Cambridge University that recommended a spread of 80% stocks and 20% cash...
I’ve read references to that Cambridge allocation too, but never any real details. Did you find anything interesting?
Topic Author
Benjamin Buffett
Posts: 129
Joined: Sun Nov 25, 2018 1:20 pm
Location: Indiana

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Benjamin Buffett »

I did manage to be shown a copy of the research conducted for Clare College by Smithers and Co. The data of the paper is out of date, and if more market data were added the optimums mentioned might change. Disclaimers aside the paper came to the following conclusions(Paraphrased):

Paper Summary

⦿ Cash has lower volatility and greater liquidity than bonds. Cash is superior to bonds for near-term needs, and as a portfolio stabilizer.
⦿ The most optimum portfolio on the efficient frontier was not a leveraged portfolio, but was instead, based on the numbers at the time of the paper's publication, a portfolio that was 80% invested in stocks and 20% in cash and or near-cash.
⦿ The paper mentions a variety of endowment management and spending strategies:
__⦿ Fixed 80/20 Stocks/Cash Re-balanced Annually (Decent Risk Adjusted Return for a Long Term Investor)
__⦿ Q Managed(Fair Value) 80/20 Tilted According to Market Valuations 60% equity minimum.(Highest Risk Adjusted Return)
__⦿ 100% Equities (Highest Fixed Portfolio Return, Also Highest Risk)
__⦿ Q(Fair Value) Managed 100% equities
__⦿ Fixed 90/10 Stock and Cash
⦿ Endowments need to spend their income in a stable way 4%-5% a year, 20% in cash smooths market volatility and reduces sequence of returns risk(sequence of returns risk not named in paper but described)

⚠⚠Q Managed Fair Value Tilts(in my opinion) Could be Subject To Hindsight/Market Timing Risk⚠⚠

Various tables, charts, equations, market valuation metrics, and endowment results were discussed and compared. The paper appeared to be very well written. The paper was confidentially prepared for, and only for, the Clare College's Endowment Management.

Analysis
The fixed 80/20 makes sense. The average bear market and market crunch takes about 5 years to recover lost value(According to Research on Yahoo Finance) and a reasonable withdrawal rate of 4%-5% could indeed be sustained for about 5 years without cutting into depressed stock values. Furthermore the 80/20 fixed allocation makes the most sense from a Boglehead perspective(compared to the other allocations in the paper) because it is reasonably diversified and avoids market timing. The portfolio performs well on simulations and back tests(beware hindsight is 20/20) and makes sense.

New articles by the paper's author view the Q fair valuation of the market to be so high as to recommend tilting more heavily towards cash in light of the market overvaluations. This seems reasonable, but I don't feel at all competent enough to even begin to time the market(and doubt very many can do so competently)....So I am inclined to lean towards the recommended lower risk fixed 80/20 allocation, and probably opt for global diversification in the equities.

His conclusion fits well with Peter Bernstein's recommendation, and it comes close in performance and risk(being only 5% different from 75% Stocks and 25% Cash)

A good summary of the document can be found by the document's author on FT behind a pay-wall: https://www.ft.com/content/66afd4b1-f4a ... 16537c8c49

Further disclaimer: I am not an economist or financial advisor. I also am not an expert on the author's works, and this summary is only in my words and my understanding of the author's works.
Topic Author
Benjamin Buffett
Posts: 129
Joined: Sun Nov 25, 2018 1:20 pm
Location: Indiana

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Benjamin Buffett »

Fclevz wrote: Fri Apr 03, 2020 10:13 pm
Benjamin Buffett wrote: Sat Jan 25, 2020 1:10 pm I was researching the portfolio suggested to Cambridge University that recommended a spread of 80% stocks and 20% cash...
I’ve read references to that Cambridge allocation too, but never any real details. Did you find anything interesting?
My findings were pretty interesting(see above post). I like the 80/20 allocation, it makes sense to me.

Some thoughts and caveats:

I would say that the 80/20(based on the research) is good for everyone............ Except the paper was written with two assumptions: A. withdraws will be less than 5% and B. the investor will stay the course. The research was for large universities.

A surprising number of individual retirees have investment accounts small enough that their withdrawal rates might be very high. While most of us here can stay the course well, even with a high equity allocation, others may not.

So if one wants to maintain a higher equity allocation(like myself), you have some research that suggests that it is not necessarily a terrible idea, it might even be optimal. But if someone is more comfortable with bonds, instead of a very high equity allocation tempered with some cash, then a more traditional asset allocation might be better for them as an individual.

The three asset allocations I like the most are:
* 80/20 Stocks and Cash.
* Simple three fund portfolio
* Very simple 60/40 balanced index fund.

Possible bias exists, to be honest, I like investment simplicity, and am not really a fan of bonds. While some research and math based on history seems to support higher equity allocations, the future might be very different from history.
perfectuncertainty
Posts: 386
Joined: Sun Feb 04, 2018 6:44 pm

Re: Peter Bernstein's Cash and Stock Portfolio

Post by perfectuncertainty »

Benjamin Buffett wrote: Mon Jan 27, 2020 4:47 pm
Ferdinand2014 wrote: Sat Jan 25, 2020 5:57 pm
Benjamin Buffett wrote: Sat Jan 25, 2020 5:52 pm I checked it seems to be a link to his 60/40 portfolio, but no discussion of his 75% 25% stock and cash portfolio. Unless I missed the link on the discussion.
https://awealthofcommonsense.com/2015/0 ... portfolio/

https://www.andersongriggs.com/read/-a- ... ve-returns
Thank you very much, the second link was exactly what I was looking for :)
+1. The bond bugs are more dangerous than the gold bugs!
Valuethinker
Posts: 49035
Joined: Fri May 11, 2007 11:07 am

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Valuethinker »

Benjamin Buffett wrote: Wed Jan 26, 2022 5:32 am I did manage to be shown a copy of the research conducted for Clare College by Smithers and Co. The data of the paper is out of date, and if more market data were added the optimums mentioned might change. Disclaimers aside the paper came to the following conclusions(Paraphrased):

Paper Summary

⦿ Cash has lower volatility and greater liquidity than bonds. Cash is superior to bonds for near-term needs, and as a portfolio stabilizer.
⦿ The most optimum portfolio on the efficient frontier was not a leveraged portfolio, but was instead, based on the numbers at the time of the paper's publication, a portfolio that was 80% invested in stocks and 20% in cash and or near-cash.
⦿ The paper mentions a variety of endowment management and spending strategies:
__⦿ Fixed 80/20 Stocks/Cash Re-balanced Annually (Decent Risk Adjusted Return for a Long Term Investor)
__⦿ Q Managed(Fair Value) 80/20 Tilted According to Market Valuations 60% equity minimum.(Highest Risk Adjusted Return)
__⦿ 100% Equities (Highest Fixed Portfolio Return, Also Highest Risk)
__⦿ Q(Fair Value) Managed 100% equities
__⦿ Fixed 90/10 Stock and Cash
⦿ Endowments need to spend their income in a stable way 4%-5% a year, 20% in cash smooths market volatility and reduces sequence of returns risk(sequence of returns risk not named in paper but described)

⚠⚠Q Managed Fair Value Tilts(in my opinion) Could be Subject To Hindsight/Market Timing Risk⚠⚠

Various tables, charts, equations, market valuation metrics, and endowment results were discussed and compared. The paper appeared to be very well written. The paper was confidentially prepared for, and only for, the Clare College's Endowment Management.

Analysis
The fixed 80/20 makes sense. The average bear market and market crunch takes about 5 years to recover lost value(According to Research on Yahoo Finance) and a reasonable withdrawal rate of 4%-5% could indeed be sustained for about 5 years without cutting into depressed stock values. Furthermore the 80/20 fixed allocation makes the most sense from a Boglehead perspective(compared to the other allocations in the paper) because it is reasonably diversified and avoids market timing. The portfolio performs well on simulations and back tests(beware hindsight is 20/20) and makes sense.

New articles by the paper's author view the Q fair valuation of the market to be so high as to recommend tilting more heavily towards cash in light of the market overvaluations. This seems reasonable, but I don't feel at all competent enough to even begin to time the market(and doubt very many can do so competently)....So I am inclined to lean towards the recommended lower risk fixed 80/20 allocation, and probably opt for global diversification in the equities.

His conclusion fits well with Peter Bernstein's recommendation, and it comes close in performance and risk(being only 5% different from 75% Stocks and 25% Cash)

A good summary of the document can be found by the document's author on FT behind a pay-wall: https://www.ft.com/content/66afd4b1-f4a ... 16537c8c49

Further disclaimer: I am not an economist or financial advisor. I also am not an expert on the author's works, and this summary is only in my words and my understanding of the author's works.
I just wanted to thank you for this

Knowing Andrew Smithers' published writings this all makes sense.

However one is reliant on the Q valuation methodology working. Poster alex686 had a post a couple of days ago about "regime change" in financial markets. Basically "systems" like Q will work well for years. Then something fundamental about markets will change.

The classic example is the rule, which worked for a whole generation of investors 1929-1958, that stocks should always yield more than high quality corporate bonds - because dividends are riskier than bond coupons. Then that relationship ended in 1958 and many professionals sold out and entirely missed the bull market of the early 1960s. Some of them never got back in and saw inflation destroy the value of their investments*.

* if I recall correctly, this is how professional fund management firms broke out. The Trust departments of large banks had their clients in portfolios of dull & safe corporate bonds primarily. Equities were far too risky for pension funds or trusteed funds. In the early 1960s a new breed of professional asset management firms took that business away from the banks.
Blue456
Posts: 2152
Joined: Tue Jun 04, 2019 5:46 am

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Blue456 »

Benjamin Buffett wrote: Sat Jan 25, 2020 1:10 pm I was researching the portfolio suggested to Cambridge University that recommended a spread of 80% stocks and 20% cash and ran across a 60/40 alternative discussed by Peter Bernstein that was a spread of 75% stocks and 25% cash. Has anyone read the article by Peter Bernstein, and does anyone have a link to it?

"Although cash tends to have a lower expected return than bonds, we have seen that cash can hold its own against bonds 30 percent of the time or more when bond returns are positive. Cash will always win out over bonds when bond returns are negative.

The logical step, therefore, is to try a portfolio mix that offsets the lower expected return on cash by increasing the share devoted to equities. As cash has no negative returns, the volatility might not be any higher than it would be in a portfolio that includes bonds."
--Attributed to Peter Bernstein

According to portfolio visualizer would be similar to a 60/40 on an inflation adjusted graph. The lines on the graphs for growth, crashes, corrections, and other market behavior are very similar. 75/25 and 80/20 portfolios have slightly higher risk, with a higher return. Any thoughts on such a bond-less portfolio.

Personally from what I have been reading from both Scott Burns(who proposed a 50/50 portfolio with TIPS used as a near cash asset) and Warren Buffett (who proposed a similar split using short term bonds as a near cash asset) a decent adaptation of the Cambridge and Peter Bernstein could be to have a 80% (or 75%) equity portfolio with 20% in short term TIPS(an inflation protected near cash asset). Granted the portfolio would be considerably aggressive for a retired investor, it does appear that it would behave similarly to a 60/40 with a similar failure rate(according to some online trinity portfolio simulators).
This is not only Peter Bernstein's but also Bill Berstain's (t-bill instead of cash) and Warren Buffets (also t-bills instead of cash) portfolio.
dcabler
Posts: 4543
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: Peter Bernstein's Cash and Stock Portfolio

Post by dcabler »

Benjamin Buffett wrote: Fri Oct 14, 2022 3:14 am
Fclevz wrote: Fri Apr 03, 2020 10:13 pm
Benjamin Buffett wrote: Sat Jan 25, 2020 1:10 pm I was researching the portfolio suggested to Cambridge University that recommended a spread of 80% stocks and 20% cash...
I’ve read references to that Cambridge allocation too, but never any real details. Did you find anything interesting?
My findings were pretty interesting(see above post). I like the 80/20 allocation, it makes sense to me.

Some thoughts and caveats:

I would say that the 80/20(based on the research) is good for everyone............ Except the paper was written with two assumptions: A. withdraws will be less than 5% and B. the investor will stay the course. The research was for large universities.

A surprising number of individual retirees have investment accounts small enough that their withdrawal rates might be very high. While most of us here can stay the course well, even with a high equity allocation, others may not.

So if one wants to maintain a higher equity allocation(like myself), you have some research that suggests that it is not necessarily a terrible idea, it might even be optimal. But if someone is more comfortable with bonds, instead of a very high equity allocation tempered with some cash, then a more traditional asset allocation might be better for them as an individual.

The three asset allocations I like the most are:
* 80/20 Stocks and Cash.
* Simple three fund portfolio
* Very simple 60/40 balanced index fund.

Possible bias exists, to be honest, I like investment simplicity, and am not really a fan of bonds. While some research and math based on history seems to support higher equity allocations, the future might be very different from history.
It's always a risk/reward tradeoff, isn't it? And risk isn't just that there might be volatility, it might actually mean a failure to meet one's goals in the timeframe desired or needed. And if that goal is retirement, then some sort of contingencies may come into play, including trying to extend the number of years working or living more frugally than desired.

Several issues seem to arise, at least in my mind, when discussing portfolios
- Simplicity is in the eye of the beholder. What I might find to be "simple" as an engineer with advanced spreadsheet skills might not at all match what my grandmother considers to be simple. Heck, anybody's idea of simplicity may change over the years.
- So many discussions revolve around some form of efficiency in the context of an SWR type of withdrawal method. And if you don't do that because you believe that SWR is inherently flawed?
- Most discussions of a stock/bond portfolio treat bonds, mainly bond funds, as just another asset to balance vs. stock in order to try and keep risk constant. And as a retiree, if you treat bonds as a source of very low risk income instead and don't rebalance?

Most of the people I know who have a high stock allocation fall into a few categories. I'm sure there are more.
- Early investors with a lot of human capital still ahead of them.
- Investors who have significantly more than they would ever need to live on and which, for them, risk tolerance is extremely high. They're often also trying to generate generational wealth or they have plans for a significant donation to the entity of their choice.
- A few people I know who fall into neither category and are hoping for a last minute win with their portfolio to make it to the finish line.

Then there is human behavioral aspects and the ability to stay a course. I suspect many people have a very tough time understanding the difference between staying a perfectly acceptable course vs. the realization that the course that they're currently on might actually be flawed.

Many roads to Dublin, yada yada, but as has been pointed out many times on the forum, the amount one saves over a working lifetime is at least as important, it not more so, than choosing an AA one can live with.

Cheers!
Topic Author
Benjamin Buffett
Posts: 129
Joined: Sun Nov 25, 2018 1:20 pm
Location: Indiana

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Benjamin Buffett »

Valuethinker wrote: Fri Oct 14, 2022 4:24 am
Benjamin Buffett wrote: Wed Jan 26, 2022 5:32 am I did manage to be shown a copy of the research conducted for Clare College by Smithers and Co. The data of the paper is out of date, and if more market data were added the optimums mentioned might change. Disclaimers aside the paper came to the following conclusions(Paraphrased):

Paper Summary

⦿ Cash has lower volatility and greater liquidity than bonds. Cash is superior to bonds for near-term needs, and as a portfolio stabilizer.
⦿ The most optimum portfolio on the efficient frontier was not a leveraged portfolio, but was instead, based on the numbers at the time of the paper's publication, a portfolio that was 80% invested in stocks and 20% in cash and or near-cash.
⦿ The paper mentions a variety of endowment management and spending strategies:
__⦿ Fixed 80/20 Stocks/Cash Re-balanced Annually (Decent Risk Adjusted Return for a Long Term Investor)
__⦿ Q Managed(Fair Value) 80/20 Tilted According to Market Valuations 60% equity minimum.(Highest Risk Adjusted Return)
__⦿ 100% Equities (Highest Fixed Portfolio Return, Also Highest Risk)
__⦿ Q(Fair Value) Managed 100% equities
__⦿ Fixed 90/10 Stock and Cash
⦿ Endowments need to spend their income in a stable way 4%-5% a year, 20% in cash smooths market volatility and reduces sequence of returns risk(sequence of returns risk not named in paper but described)

⚠⚠Q Managed Fair Value Tilts(in my opinion) Could be Subject To Hindsight/Market Timing Risk⚠⚠

Various tables, charts, equations, market valuation metrics, and endowment results were discussed and compared. The paper appeared to be very well written. The paper was confidentially prepared for, and only for, the Clare College's Endowment Management.

Analysis
The fixed 80/20 makes sense. The average bear market and market crunch takes about 5 years to recover lost value(According to Research on Yahoo Finance) and a reasonable withdrawal rate of 4%-5% could indeed be sustained for about 5 years without cutting into depressed stock values. Furthermore the 80/20 fixed allocation makes the most sense from a Boglehead perspective(compared to the other allocations in the paper) because it is reasonably diversified and avoids market timing. The portfolio performs well on simulations and back tests(beware hindsight is 20/20) and makes sense.

New articles by the paper's author view the Q fair valuation of the market to be so high as to recommend tilting more heavily towards cash in light of the market overvaluations. This seems reasonable, but I don't feel at all competent enough to even begin to time the market(and doubt very many can do so competently)....So I am inclined to lean towards the recommended lower risk fixed 80/20 allocation, and probably opt for global diversification in the equities.

His conclusion fits well with Peter Bernstein's recommendation, and it comes close in performance and risk(being only 5% different from 75% Stocks and 25% Cash)

A good summary of the document can be found by the document's author on FT behind a pay-wall: https://www.ft.com/content/66afd4b1-f4a ... 16537c8c49

Further disclaimer: I am not an economist or financial advisor. I also am not an expert on the author's works, and this summary is only in my words and my understanding of the author's works.
I just wanted to thank you for this

Knowing Andrew Smithers' published writings this all makes sense.

However one is reliant on the Q valuation methodology working. Poster alex686 had a post a couple of days ago about "regime change" in financial markets. Basically "systems" like Q will work well for years. Then something fundamental about markets will change.

The classic example is the rule, which worked for a whole generation of investors 1929-1958, that stocks should always yield more than high quality corporate bonds - because dividends are riskier than bond coupons. Then that relationship ended in 1958 and many professionals sold out and entirely missed the bull market of the early 1960s. Some of them never got back in and saw inflation destroy the value of their investments*.

* if I recall correctly, this is how professional fund management firms broke out. The Trust departments of large banks had their clients in portfolios of dull & safe corporate bonds primarily. Equities were far too risky for pension funds or trusteed funds. In the early 1960s a new breed of professional asset management firms took that business away from the banks.
Yeah the Q valuation method has worked well, and does work well.......until it doesn't. The markets change a lot, and historical returns may be very different from future returns.

Regarding the Q valuation methodology: I think his first proposed portfolio mix of 80/20 stocks and cash was based on the efficient frontier and risk evaluation during that time period, and was not itself created using the Q values. His proposed modification to this baseline portfolio was to over-re-balance and tilt according to the Q valuation.

To be completely honest, my interest was in the efficiency of a cash and stock portfolio, and my understanding of how Q valuations are hazy at best. I understand the general concept, but trust reversion to the mean, using low cost index funds, staying the course, and simple yearly re-balancing more than I trust myself to properly understand or apply Q valuation in tilting my portfolio.
Topic Author
Benjamin Buffett
Posts: 129
Joined: Sun Nov 25, 2018 1:20 pm
Location: Indiana

Re: Peter Bernstein's Cash and Stock Portfolio

Post by Benjamin Buffett »

dcabler wrote: Fri Oct 14, 2022 5:57 am
Benjamin Buffett wrote: Fri Oct 14, 2022 3:14 am
Fclevz wrote: Fri Apr 03, 2020 10:13 pm
Benjamin Buffett wrote: Sat Jan 25, 2020 1:10 pm I was researching the portfolio suggested to Cambridge University that recommended a spread of 80% stocks and 20% cash...
I’ve read references to that Cambridge allocation too, but never any real details. Did you find anything interesting?
My findings were pretty interesting(see above post). I like the 80/20 allocation, it makes sense to me.

Some thoughts and caveats:

I would say that the 80/20(based on the research) is good for everyone............ Except the paper was written with two assumptions: A. withdraws will be less than 5% and B. the investor will stay the course. The research was for large universities.

A surprising number of individual retirees have investment accounts small enough that their withdrawal rates might be very high. While most of us here can stay the course well, even with a high equity allocation, others may not.

So if one wants to maintain a higher equity allocation(like myself), you have some research that suggests that it is not necessarily a terrible idea, it might even be optimal. But if someone is more comfortable with bonds, instead of a very high equity allocation tempered with some cash, then a more traditional asset allocation might be better for them as an individual.

The three asset allocations I like the most are:
* 80/20 Stocks and Cash.
* Simple three fund portfolio
* Very simple 60/40 balanced index fund.

Possible bias exists, to be honest, I like investment simplicity, and am not really a fan of bonds. While some research and math based on history seems to support higher equity allocations, the future might be very different from history.
It's always a risk/reward tradeoff, isn't it? And risk isn't just that there might be volatility, it might actually mean a failure to meet one's goals in the timeframe desired or needed. And if that goal is retirement, then some sort of contingencies may come into play, including trying to extend the number of years working or living more frugally than desired.

Several issues seem to arise, at least in my mind, when discussing portfolios
- Simplicity is in the eye of the beholder. What I might find to be "simple" as an engineer with advanced spreadsheet skills might not at all match what my grandmother considers to be simple. Heck, anybody's idea of simplicity may change over the years.
- So many discussions revolve around some form of efficiency in the context of an SWR type of withdrawal method. And if you don't do that because you believe that SWR is inherently flawed?
- Most discussions of a stock/bond portfolio treat bonds, mainly bond funds, as just another asset to balance vs. stock in order to try and keep risk constant. And as a retiree, if you treat bonds as a source of very low risk income instead and don't rebalance?

Most of the people I know who have a high stock allocation fall into a few categories. I'm sure there are more.
- Early investors with a lot of human capital still ahead of them.
- Investors who have significantly more than they would ever need to live on and which, for them, risk tolerance is extremely high. They're often also trying to generate generational wealth or they have plans for a significant donation to the entity of their choice.
- A few people I know who fall into neither category and are hoping for a last minute win with their portfolio to make it to the finish line.

Then there is human behavioral aspects and the ability to stay a course. I suspect many people have a very tough time understanding the difference between staying a perfectly acceptable course vs. the realization that the course that they're currently on might actually be flawed.

Many roads to Dublin, yada yada, but as has been pointed out many times on the forum, the amount one saves over a working lifetime is at least as important, it not more so, than choosing an AA one can live with.

Cheers!
Very true. I would say that the most important aspect of retirement, at least from my reading on the subject, is your savings rate and expenses. I remember an article on a website talking about FIRE talking about the math of early retirement, and while most of us may not be planning to retire super early, the math is still eye opening.

Also continued part time employment(partial retirement), pensions, social security, and other benefits can be considered virtual bonds. This might be why some people may have higher equity allocations than others. On paper they may not have tons of bonds or cash, but when other benefits and sources of income are included the risk profile changes.

I also hope that a portfolio based on equities having high risk/returns, and near-cash having very low volatility and risk. Worst comes to worst I might have to spend a few more years working.

Also it is very interesting that you bring up SWR. I am not sure what a safe SWR is, or what could even replace a SWR, except withdrawing less than the portfolio's return each year, which would produce volatile returns. That itself is an interesting topic.
dcabler
Posts: 4543
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: Peter Bernstein's Cash and Stock Portfolio

Post by dcabler »

Benjamin Buffett wrote: Fri Oct 21, 2022 10:14 pm
dcabler wrote: Fri Oct 14, 2022 5:57 am
Benjamin Buffett wrote: Fri Oct 14, 2022 3:14 am
Fclevz wrote: Fri Apr 03, 2020 10:13 pm
Benjamin Buffett wrote: Sat Jan 25, 2020 1:10 pm I was researching the portfolio suggested to Cambridge University that recommended a spread of 80% stocks and 20% cash...
I’ve read references to that Cambridge allocation too, but never any real details. Did you find anything interesting?
My findings were pretty interesting(see above post). I like the 80/20 allocation, it makes sense to me.

Some thoughts and caveats:

I would say that the 80/20(based on the research) is good for everyone............ Except the paper was written with two assumptions: A. withdraws will be less than 5% and B. the investor will stay the course. The research was for large universities.

A surprising number of individual retirees have investment accounts small enough that their withdrawal rates might be very high. While most of us here can stay the course well, even with a high equity allocation, others may not.

So if one wants to maintain a higher equity allocation(like myself), you have some research that suggests that it is not necessarily a terrible idea, it might even be optimal. But if someone is more comfortable with bonds, instead of a very high equity allocation tempered with some cash, then a more traditional asset allocation might be better for them as an individual.

The three asset allocations I like the most are:
* 80/20 Stocks and Cash.
* Simple three fund portfolio
* Very simple 60/40 balanced index fund.

Possible bias exists, to be honest, I like investment simplicity, and am not really a fan of bonds. While some research and math based on history seems to support higher equity allocations, the future might be very different from history.
It's always a risk/reward tradeoff, isn't it? And risk isn't just that there might be volatility, it might actually mean a failure to meet one's goals in the timeframe desired or needed. And if that goal is retirement, then some sort of contingencies may come into play, including trying to extend the number of years working or living more frugally than desired.

Several issues seem to arise, at least in my mind, when discussing portfolios
- Simplicity is in the eye of the beholder. What I might find to be "simple" as an engineer with advanced spreadsheet skills might not at all match what my grandmother considers to be simple. Heck, anybody's idea of simplicity may change over the years.
- So many discussions revolve around some form of efficiency in the context of an SWR type of withdrawal method. And if you don't do that because you believe that SWR is inherently flawed?
- Most discussions of a stock/bond portfolio treat bonds, mainly bond funds, as just another asset to balance vs. stock in order to try and keep risk constant. And as a retiree, if you treat bonds as a source of very low risk income instead and don't rebalance?

Most of the people I know who have a high stock allocation fall into a few categories. I'm sure there are more.
- Early investors with a lot of human capital still ahead of them.
- Investors who have significantly more than they would ever need to live on and which, for them, risk tolerance is extremely high. They're often also trying to generate generational wealth or they have plans for a significant donation to the entity of their choice.
- A few people I know who fall into neither category and are hoping for a last minute win with their portfolio to make it to the finish line.

Then there is human behavioral aspects and the ability to stay a course. I suspect many people have a very tough time understanding the difference between staying a perfectly acceptable course vs. the realization that the course that they're currently on might actually be flawed.

Many roads to Dublin, yada yada, but as has been pointed out many times on the forum, the amount one saves over a working lifetime is at least as important, it not more so, than choosing an AA one can live with.

Cheers!
Very true. I would say that the most important aspect of retirement, at least from my reading on the subject, is your savings rate and expenses. I remember an article on a website talking about FIRE talking about the math of early retirement, and while most of us may not be planning to retire super early, the math is still eye opening.

Also continued part time employment(partial retirement), pensions, social security, and other benefits can be considered virtual bonds. This might be why some people may have higher equity allocations than others. On paper they may not have tons of bonds or cash, but when other benefits and sources of income are included the risk profile changes.

I also hope that a portfolio based on equities having high risk/returns, and near-cash having very low volatility and risk. Worst comes to worst I might have to spend a few more years working.

Also it is very interesting that you bring up SWR. I am not sure what a safe SWR is, or what could even replace a SWR, except withdrawing less than the portfolio's return each year, which would produce volatile returns. That itself is an interesting topic.
It is an interesting topic and also discussed frequently on the forum. As far as what could replace SWR, there's VPW, ABW, and TPAW all of which pretty mechanically give you more volatile withdrawals as the tradeoff for making sure your portfolio lasts as long as you intended. There are others as well. I will be using my own form of ABW. Choose your poison.

Cheers.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Peter Bernstein's Cash and Stock Portfolio

Post by dbr »

Benjamin Buffett wrote: Sat Jan 25, 2020 1:10 pm
"The logical step, therefore, is to try a portfolio mix that offsets the lower expected return on cash by increasing the share devoted to equities. " --Attributed to Peter Bernstein
Including an adjustment of the stock/bond asset allocation with the fixed income selection probably produces little ability to distinguish a benefit in working the selection of fixed income, and I agree that adjustment has to always be considered. This question is probably one that is more down in the weeds than it is important to financial planning. It might illustrate that when choices exist and the specific choice does not matter much, then there will be lots of discussion.

It might be that cash rather than all kinds of bonds and bond funds tends to free the investor from agonizing over all the nuances of bond performance. On the other hand it creates agonizing over interest rates and all that, and if you introduce real asset cash, meaning I bonds, all H breaks loose.

While one is mentioning all this one might also reference cash income streams, namely annuities, as well as cash assets.
Post Reply