Pride and Prejudice

andrew hallam

andrew hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (Wiley 2011) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use.

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13 Responses

  1. Hey Kevin,

    In time, I think Vanguard's non ETF indexes will be available in Canada. They're already in the UK and Australia.

    As for a 100% stock portfolio outperforming a portfolio of bonds and stocks over time, it might not always been the case. For fun, I'm going to play devil's advocate and suggest that I'm more aggressive than you are.

    If you check out the couch potato portfolio's historical track record since 1976 (it has 33% bonds) it has beaten the Canadian and U.S. stock market indexes thanks to mechanically "being greedy when others are fearful and fearful when others are greedy" —through annual rebalancing.

    I've also found that, despite the success of my investment club (annual compounding returns of roughly 7.5% per year from 1999 to 2010 with 100% equities) I've done much better with my personal account. By taking a more "active" approach with my own money, even with my indexes, I've rebalanced with bonds when asset allocations have gone askew–rather than just mechanically doing it at a given date.

    Selling bonds from January to April 2009 allowed me to put money into the stock market (a 6 figure deposit) that a fully invested equity investor couldn't have done. And then, during the recovery, I was able to make great gains with the equities I bought "on the cheap".

    Likewise, the recent bond sales I made last month ensured a lot of equity money into the markets that I couldn't have made (if I had a 100% stock portfolio).

    So, one could argue that my strategy has been more aggressive than having 100% equities. Of course, you wouldn't expect that—because conventional wisdom suggests otherwise. But conventional wisdom is worth challenging from time to time.

    I enjoy reading David Swensen's book, "Unconventional Succcess". With roughly a 40% bond allocation, he has easily beaten the S&P 500 index over decades, with Yale's endowment fund money, thanks to very regular rebalancing in a tax free account.

    Most of the time, I just purchase my laggards with my monthly purchases: bonds lagged in 2007, so that was all I bought. Stocks lagged in 2008/2009, so that was all I bought. Of course, 2008/2009 involved some more aggressive rebalancing that paid off nicely. It didn't involve "timing" or forecasting. I just rebalanced.

    If the markets go on a tear, Kevin, perhaps you might want to think about loading up on some XSB. It's contrarian, but contrarian thinking, I think, is the key to investing well.

    I'm curious to hear your thoughts on this.



  2. [email protected] says:

    Hi Andrew,

    You are quite right in that holding bonds in the portfolio over stocks alone would have boosted your returns over the dog years that we've had recently. I completely agree with you on asset rebancing as a better way of buying lows and selling highs than attempting to time the market.

    On the other hand, had you been holding 100% stocks during the bull years, it's possible that you would have gained enough so that you would have a higher total portfolio value than you would have by going with stocks and bonds. This is something I'm interested in actually comparing to see if this is really the case.

    If you look at the "total portfolio value" charts at… you can see the values going higher and higher as the stock % increases. These are retirement portfolios with a 4% withdrawal per year, and analyzed from different periods (well, you should recognize it as you were kind enough to send me this PDF yourself ;)) At 75% stocks and 25% bonds, it's higher than the other portfolio values. Unfortunately, there's no graph for 100% stocks.

    There's three ways we can approach this:

    1) Stick to a bond allocation as per your age or just leave it fixed. i.e. a 40-year old person will stick to 40% bonds/60% stocks, and someone like me would stick to around 25% bonds/75% stocks. Rebalance whenever you feel things go out of whack.

    2) Use a variable bond/stock allocation, depending on which is doing better. If the stock markets are doing really well, then start increasing your bond portfolio from 0% to a max. of 30% or so by diverting your cash flow into bonds and perhaps selling off some stocks. Once the stock market crashes, dump the bonds back into stocks.

    3) Try to forecast what the decade will be like. If you think it's going to be a dog decade because of sovereign risks etc… then hold less stocks and hold more bonds. 😉

    What do you think, Andrew? Where does your strategy fit in? If I were to take a guess, I would say it's somewhat like #1, with a dash of #2 thrown in.

  3. I just remembered that I mentioned this on… under "Beating the market with bonds". You are the original inspiration, of course.

    Here was a key paragraph that I wrote:

    "However, let’s say that you have a deep portfolio in stocks, but keep 25% in bonds. After the crash, you don’t stick with your 75/25 allocation ratio, but you go all-in stocks. This way, you sell your now relatively-high bonds to buy cheap stocks, which can potentially increase your long-term returns beyond what a simple split would have returned. Andrew Hallam calls this “beating the market with bonds“, and it can help you increase your returns over time. I think a comparison needs to be done to see if it beats a 100% stock allocation over the long run, but this strategy certainly does beat sticking with a fixed stock/bond ratio even through a crash."

    So the follow-up to this here is to analyze the 100% stock allocation over the long run and compare that to different bond strategies.

  4. @[email protected]

    Hey Kevin,

    Normally the 100% stock portfolio would kick butt. You're right there.

    But for the guy like David Swensen (luck? cool and impartial?) the market might be beatable with crafty rebalancing.

    Have you read "Value Averaging"? You likely could have done it with his strategy.

    Did you check out the performance data on that MoneySense couch potato link I put in:

    It's pretty amazing:

    But after everything I've said, the full equity index probably does have the greater chance of whupping the blended one. But I guess the fun thing is looking at possible exceptions.

  5. Hey Andrew,

    Value averaging is a pretty cool technique when you're holding different sectors and classes of investments in your portfolio. I have to read your post about it again to refresh my understanding of the difference between it and simple asset reallocation!

    Gotta put some numbers together and run a historical simulation at some point… do you know of any good tools to automate some aspects of this?

  6. @[email protected]

    Hey Kevin,

    I don't know of any tools that would automate a historical look back. I guess, too, we can also take history with a grain of salt. Who knows if it all will work out as well going forward. THe Motley Fool guys sure found that out with the old Foolish 4 Portfolio (a strategy that will likely work again, now that it has been abandoned and labelled as "ineffective")

  7. "Past Performance is No Guarantee of Future Results"

    Indeed, this is true. We can still get an idea by looking at the past, but it is no guarantee of things that are to come. We could have 10 more dog years like we just had, or we could have 10 years of stellar boom once the economy recovers and as technology progresses.

    You know I believe in the great potential of technology; only the profligacy of governments (and by extension, the voters) has the potential to mess things up for a while with bailout after stimulus after debt rollover…

  8. I've been fortunate enough to have bought and held for a long period of time some conservative funds that have beaten the market over the long-haul such as Mutual Global Discovery, Oakmark Balanced, T. Rowe Price Capital Appreciation, and FPA Crescent. Whether this was luck or skill, who knows, but I sought out value oriented funds with a consistent investment philosophy that played defense first and didn't try to hit home runs. They underperformed in bull markets and overperformed in bear markets. These days I split my investments between indexes and these conservative value funds. The drawbacks on the funds are that you are always substitutable to management turnover and asset bloat….. nothing breeds failure like success in the mutual fund world.

  9. Hey Biz,

    You bought some great funds–but your last statement rings very true about success perpetuating a greater and greater size, thus potentially reducing returns through "elephantitis"

    That said, as big as those funds may be getting, they're reasonably "low fee" funds, so they might not be favorites with advisors. That's a good thing!

    The American Fund class of funds (with their 5.75% front end load) will likely be sold by advisors to new investors before your funds are. That's a good thing, don't you think.

    Check out a little known fund called The Sequoia Fund.

    I think it's up your alley.

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