The Little Book of Common Sense Investing, Updated and Revised

Chapter EighteenAsset Allocation I: Stocks and Bonds

When You Begin to Invest. As You Accumulate Assets. When You Retire.

IN THIS CHAPTER AND the next, we tackle two complex issues: the general principles of asset allocation, and allocation funds specifically designed for your retirement years. These are issues that have no easy answers.

Why? First, because we investors have a wide range of investment goals, risk tolerances, and behavioral characteristics.

Second, because we’ve had 35 years of extraordinary returns in the stock market and the bond market alike, returns that are highly unlikely to recur in the coming decade. (See Chapter 9, “When the Good Times No Longer Roll.”)

Third, authors of books on investing, are, in a real sense, captives of the eras that we have experienced. For example, when Benjamin Graham wrote The Intelligent Investor in 1949, he had never experienced a year in which the interest rate on bonds exceeded the dividend yield on stocks. By way of contrast, as I write this chapter in 2017, I have witnessed 60 consecutive years in which the dividend yield on stocks has never exceeded the interest rate on bonds. Turnabout, it seems, is fair play.

So instead of looking back and mining the voluminous data on past returns and risks on stocks and bonds, I’ll discuss clear principles that you can apply in your current situation. Whether you are accumulating investment assets during your working years or are making withdrawals from your assets in your retirement ...