Canadian treasury bond is very expensive right now. Corporate bond might depreciate further. No one knows. Best bet might be 2 or 3 year GICs. Sounds ridiculous.

I recommend 50%/50% to start off. Slowly work toward 80% equity allocation if that is your goal.

I’ve been wondering about the best bond allocation as I start to build an investment portfolio. I want a high stock allocation, but it makes sense that rebalancing with some more stable component can increase returns (especially in down years when bond prices may go up). Then again if the bond allocation is small the rebalancing won’t have much of an effect.

Stocks for the Long Run suggests that diversification by sector may be more effective than diversification by country in the future. Maybe utility companies could be a good substitute for bonds since they should be more stable.

I was not predicting prices, but just using numbers to illustrate what might potentially happen.

I agree with you that most people do not buy all their shares at one time. However, Jordan was tempted to increase his equity allocation to 85% in very short period time and I was pointing out that this might not be a good idea.

One event that I am concerned about is that long term equity yields will go higher than long term bond yields. This has happened in past bear markets. If this happens, it is a great time to buy equities. The process might be a lot more painful if you enter the bear markets with 100% in equities.

I am young and I will buy during the bear market and accumulate shares. Again, I do not expect it be to an easy ride. William Bernstein says a bear market is good for young people.

Boomers are the wealthiest segment of North American society. They are ready to sell their assets for retirement. Who will be the buyers? No one is sure at this point.

I agree with you that the panic of 2008 doesn’t look like Nikkei’s bubble or a bubble at all. Again I adhere to behavior finance to says the stock market is efficient yet irrational.

TEMPLE

However, rebalancing will have a positive effect, so the actual shortfall will be less than 1%, say 0.5% or so. The key question for long-term investors is: do you want to give up a little bit of return for lesser risk in the form of lower volatility. My guess is that for most people the answer would be yes. The reasons could vary from keeping some money for a rainy day to not comfortable with the huge fluctuations that come with being 100% in stocks.

At this point in time, stocks have much better expected returns than bonds but this is not always so. Someone with 20% in bonds in 2007 would have been thankful that they are able to rebalance into stocks (I personally was able to do this). If the typical difference in expected returns between stocks and bonds is 2%, a 20% allocation reduces expected returns by 0.4%, a lot of which can be made up by disciplined rebalancing.

Bottomline: A small allocation to bonds may hurt returns somewhat but the benefits in the form of reduction in volatility of the overall portfolio makes it worthwhile for most investors.

It seems like a throwaway remark but I disagree with your comment about gold. It is far too volatile to serve the function of parking money earmarked for a specific purpose.

Your parallels to the Nikkei aren’t really relevant to the US and Canadian markets. Valuations in the Nikkei and Japanese real estate markets were far higher at the peak than those seen recently in Canadian and US markets. Also, the demographics in Japan during the last 20 years have not been favourable to the economy. I don’t see many parallels between Japan and here, except on a very superficial level. An interesting point to note is that despite the long period of poor returns in the Japanese stock market, the longer term (albiet, very long term) gains in that market are still positive.

Also, like I mentioned above when responding to Aloha E, you can arbitrarily choose periods of poor stock market performance, but when you do that, you make two flawed assumptions. First, that a person invested at whatever peak you have arbitrarily chosen in whatever stock market you have arbitrarily chosen, and second, that the same person added no additional funds or derived any dividends during that period. Both assumptions are likely incorrect.

Finally, you say that we are in a “bear market of long duration”, and forecast some prices for the S&P. Forgive me, but I am skeptical that you have such powerful predictive powers. You may be right, but I doubt you are doing anything but guessing. I am going to stick with 100+ years of data that confirms stocks are the superior investment over the long term. Also, you are incorrect in that you think I am myopic in assessing stocks only from a bull market perspective. I’ve been investing in stocks for about 12 years, maybe a bit more, and bonds for about 20 years. I know where my returns are coming from, and it sure isn’t bonds. I understand risk managment, and my point is that choosing bonds is far more risky than choosing stocks. Bond returns over the long term are, at best, barely positive when adjusted for inflation. This is almost never the case for stocks, which are invariably the superior asset class in the long term.

My point is that the real risk is giving in to risk aversion, and playing not to fail, rather than playing to win.

Thanks!

TEMPLE

Regards,

TEMPLE