Rekenthaler: My Asset Allocation http://news.morningstar.com/articlenet/article.aspx?

id=797207

Register Subscribe Log In Company Site

Welcome!

Membership Home Portfolio Stocks Bonds Funds ETFs CEFs Markets Tools Real Life Finance Discuss

Rekenthaler Report

Rekenthaler: My Asset Allocation

Morningstar's John Rekenthaler explains why he is comfortable with
owning stocks, stocks, and more stocks. Most Active Stocks

Like 0 Morningstar Morningstar

Ticker Price($) Change(%) Rating Analyst Report
By John Rekenthaler | 03-08-17 | 06:00 AM | Email Article

Close to Home
Over the years, readers have requested that I discuss my portfolio. Ive resisted
those entreaties until now, because Ive had difficulty finding the right angle. About
me doesnt cut it.
With Morningstar Analyst reports you can get our expert Buy/Sell
opinions on over 3,900 Stock and Funds
But I think I have found
something useful. We all know
About the Author
the conventional investment Video Reports
John Rekenthaler is Vice President of Research for
Morningstar. wisdom: Invest heavily in stocks
while young, then gradually
move to mostly fixed-income
Contact Author | Meet other investing specialists
with age; diversify broadly;
dont own company stock;
minimize costs. How does that advice translate to this rather unusual case, of an
investor who makes his career writing about the topic? Which aspects of the
conventional wisdom has he incorporated and which has he bypassed? In the latter
case, were the decisions logical, or does the cobbler wear bad shoes?

This column covers asset allocation; Fridays will discuss security selection.
Rekenthaler: My Asset Allocation http://news.morningstar.com/articlenet/article.aspx?id=797207

Content Partners

Site Directory Site Map Our Products

Corrections Help Advertising Opportunities Licensing Opportunities Glossary RSS Mobile Portfolio Affiliate Careers Company News

International Sites: Australia Canada China France Germany Hong Kong Italy The Netherlands Norway Spain U.K. Switzerland India Finland

Stocks by: Name | Ticker | Star Rating | Market Cap | Stock Type | Sector | Industry
Mutual Funds by: Star Rating | Investment Style | Total Assets | Category | Top Holdings | Top Sectors | Symbol / Ticker | Name
ETFs by: Star Rating | Category | Total Assets | Symbol / Ticker | Name Articles by: Title | Date | Author | Collection | Interest | Popularity
Investment Categories by: Topic | Sector | Key Indicators | User Interest | Market Cap | Industry
Premium Stocks by: Name | Ticker | Star Rating | Market Cap | Stock Type | Sector | Industry
Premium Mutual Funds by: Star Rating | Investment Style | Total Assets | Category | Top Holdings | Top Sectors | Symbol / Ticker | Name
Premium ETFs by: Star Rating | Category | Total Assets | Symbol / Ticker | Name Popular Articles by: Title | Date | Author | Collection | Interest | Popularity
Popular Investment Categories by: Topic | Sector | Key Indicators | User Interest | Market Cap | Industry

Independent. Insightful. Trusted. Morningstar provides stock market analysis; equity, mutual fund, and ETF research, ratings, and picks; portfolio tools; and option, hedge fund, IRA, 401k, and 529
plan research. Our reliable data and analysis can help both experienced enthusiasts and newcomers.

Copyright 2017 Morningstar, Inc. All rights reserved. Please read our Terms of Use and Privacy Policy. Dow Jones Industrial Average, S&P 500, Nasdaq, and Morningstar Index (Market
Barometer) quotes are real-time.
Below is my current asset mix. It consists of 91% stocks, 4% cash, 3% bonds, and
More Videos...
2% preferred stocks (which despite their name, can be regarded as bond
substitutes).

Most Popular

10 Great Balanced Funds

High-Quality Dividends for a Slim Fee

Vanguard Dividend Growth's Closure Sparks Change in Bucket

Portfolios

Navigating a Low-Yield Environment in Retirement

Going Defensive? Look at These 3 Funds

Click here to view all

Related News

Also in Rekenthaler Report

Rekenthaler: My Asset Allocation http://news.morningstar.com/articlenet/article.aspx?id=797207

Sponsored Links

Sponsor Center

That is a large equities position by any standard. The rule of thumb that an investors
stock percentage should be 100 minus age indicates that my stock percentage should
be 44%. (No bonus points for guessing my age from the information.) The most
aggressive of professionally managed target-date funds hold considerably higher
weightings for their 50-something shareholders, with the largest equity weightings
exceeding 70%. Still, thats far short of my 91%.

By the Numbers
Why the difference? To start, while Wall Street oversells the danger of outliving ones
assets, because it benefits from instilling fear, theres truth to its claim that todays
retirees live longer than their predecessors. They do; and this particular future retiree
hopes to be among that number. Wall Streets default suggestion of planning until
age 95, with the assumption of living 30 years while in retirement, seems a tad
ambitious. But expecting to be around, and perhaps active, at age 85 does not. That
gives me almost three decades.

Which, I am delighted to report, is quite a long timeand greatly favors equities.

Test various asset allocations over the past centurys history (or longer, if you have
the data), in whatever developed country that you like. Reduce stocks returns so
that they will be lower in the future than they were in the past, and do the reverse
for bonds. Measure investment success as you wish. It matters not. For 30 years, the
numbers will always favor a high-equity portfolio over a balanced approach.

By always, I mean in every way. If the financial markets behave very well over
the next three decades, the ending balance for the stock portfolio will be much, much
larger than for the balanced portfolio. If the markets perform adequately, the stock
Rekenthaler: My Asset Allocation http://news.morningstar.com/articlenet/article.aspx?id=797207

portfolio will also prevail. If the markets disappoint, stocks will at worst match the
balanced portfolios results. And if the markets are catastrophically bad, because the
nation loses a major war and/or inflation skyrockets, stocks will win easilybecause
in such cases, bonds often go to zero, while stocks do not. The numbers over the
long term always favor equities.

Accumulating Versus Withdrawing

There are two possible objections to this argument.

One is that the final 20 years of my time horizon involve withdrawals. And
withdrawals are a different beast altogether. An asset pool that is accumulating,
without being touched, can withstand any bear market without damage, assuming
that those securities eventually recover to their previous levels. An asset pool that is
being used for withdrawals, however, can and will suffer permanent damage. In
funding its cash payments during the down times, that pool sells its securities low.
That those securities later recover their losses does the investor no good at all.

This objection is valid, but overstated. It is true that if a severe bear market arrives
early during the retirement period, and the investor does not adjust the withdrawal
amount, the equity-heavy portfolio gets whacked. The balanced approach shows its
benefits.

However, this analysis carries the twin assumptions of investor inflexibility and a
reasonably high withdrawal rate. If those assumptions do not hold, then the retiree
can ride out the storm. She or he can hold off withdrawing significant assets during
the worst parts of the downturn, so that the portfolio sustains minimal permanent
damage.

A friend, for example, informs me that when his retirement begins (whenever that
might be, he is 70 years old now and going strong), his annual portfolio withdrawal
rate will be less than 1%, and that amount includes luxuries that he can do without.
Clearly, he need not worry about damaging his nest egg by withdrawing at the wrong
time. My financial situation is not that strongbut it is very good, given my brilliant
absurdly lucky decision to join an 18-person startup that would eventually become a
$3.4 billion company.

Thus, under most conditions, my retirement portfolio will grow rather than shrink,
and therefore can be treated as (mostly) being in the accumulation stage. That happy
condition could change. The financial markets could crumble badly, for a long stretch
of time, and/or my spending needs could skyrocket. But unlike with most simulations,
people can adjust their planswhich for me, would mean swapping for bonds.

Staying Smart
The other objection to (almost) all equities is that the math might be fine, but the
behavior is unrealistic. Investors dont necessarily wait patiently through the
downpours, confident that the sun will soon reappear. They often sell. Or, in equally
damaging if less dramatic fashion, they stop putting new monies into risky assets,
which means that they dont receive all the benefits of the recovery. What makes me
Rekenthaler: My Asset Allocation http://news.morningstar.com/articlenet/article.aspx?id=797207

think I would be different?

That is a good question; the issue is my greatest concern. I have no doubt that under
certain investment conditions, I could make bad, emotional decisions. Those who
study psychological mistakes tend to make fewer such errors, but they are by no
means immune. Doing something stupid is an ongoing danger, for me as well as for
others. (Morningstars Don Phillips likes to say, quite accurately, that investment
excellence comes from avoiding avoidable errors.)

That said, I have been invested now for 30 years, and meaningfully so (with a
portfolio that was large enough to matter) for the past decade. That included the very
bad year of 2008, which was particularly difficult for me, since at that time my
portfolio consisted almost entirely of Morningstar stock, which fell 70% from peak to
trough. I was less than enthralled, but not tempted to sell.

Thus, I believe that my asset allocation has been well conceived. It varies from the
norm, but with good reasons. In my view (yours may certainly differ), the cobbler
wears the right shoes. As for Fridays subject of security selection not so much.

Note: Morningstars Alec Lucas objects to my comment that numbers always favor
stocks over a 30-year time horizon. As he should. My statement reads as a claim
that a stock portfolio inevitably beats a balanced portfolio, over all 30-year periods.
That is emphatically not true. There have been many instances in which a balanced
portfolio has outgained stocks over 30 years.

What I had intended to convey, but failed to do so because of poor wording, was that
when researchers run simulations, they generally conclude that an all-stock portfolio
is a better bet than a balanced portfolio. This holds true across various market
conditions: bull, neutral, bear (although that case can be argued), and catastrophic.
The argument is not that stocks always win with any particular draw, but rather that
the odds always favor the stock portfolio.

That section would have been clearer if I had written odds instead of numbers.
Sorry about that.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for
Morningstar.com and a member of Morningstar's investment research department. John is quick to
point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views
are his own.

Comments 1-10 of 59 Comments

Rekenthaler: My Asset Allocation http://news.morningstar.com/articlenet/article.aspx?id=797207

karlspackler Great article, but the main qualification is omitted. That is, that the
1 hour, 23 minutes ago future may not actually represent the same pattern as the last
Flag 200+ years. A scientist of geology or cosmology would laugh hardily
at the tiny sample of time we use to define the entire history of
Like 0 stock investing. It's creation in Europe a few centuries ago was a
blink of the eye ago.

You correctly point out that the deep risk of stocks, permanent loss
of capital due to major calamities, has always been less than other
investments. That should continue, but there is no guarantee. Bond
holders are legally in line to get paid first when a company goes
under. Granted, if a large number of companies in a diversified
world stock index portfolio goes under, you'd better have crops and
animals anyway.

However, the superiority of equities relies heavily on two fragile

institutions. One is honorable respect for the rule of law and a
paucity of corruption. We know this is partly priced into the
superiority of US shares vs. those of some other countries, but
there is no particular guarantee of it to not regress, even in the US.
Secondly, it requires a large presence of libertarian and capitalist-
minded members of the population; to ensure that the companies
retain some sense of duty to serve shareholders. One could easily
argue that there has never been such a widespread global rise in
anti-capitalist sentiment as there is now. Granted, this ventures into
the poisonous "this time it's different" mentality if taken too far. But
considering the degradation of any of these two foundational
principles as a remote, but not impossible, contingency might
behoove one to have some bonds in their portfolio.

Finally, if one is investing with the idea of never selling shares and
just living off of less than the dividend income, they may want to
rotate to whichever investment happens to be yielding more at the
time, more so if they are in their older years and not in the growth
phase of their portfolio. Lastly, they will want to gauge the
durability and safety of those dividend sources over the long term.
Even during the Great Depression stock dividends did fine
considering, but even a total world cap-weighted equity index is
unlikely to have as risk free a dividend payment as a US 10 Year
Treasury.

AdvisorMike Great artical, I have also gone near 100% high quality dividend
9 hours, 50 minutes ago paying stocks in my retirement. I decide to take this route after
Flag near 30 years of personal investing. If high quality companies like
J&J, Chevron, P&G, . . . go under you don't have to worry about
Like 0 your bonds, they won't be worth a thing.
Rekenthaler: My Asset Allocation http://news.morningstar.com/articlenet/article.aspx?id=797207

retired at 48 rsanka posted:..."A quick question to "retired at 48" - as you

9 hours, 55 minutes ago started RMDs, how did you manage to keep your returns optimal
Flag while minimizing your tax bite? Did you withdraw more than
minimum required and your budget needs and reinvest the excess?"
Like 0
Starting at age 48 (1993), I withdrew from a rollover IRA, an
annuity-like 7.8% of assets until age 60 pension time. IRS has
formulas that allow such withdrawals with zero tax penalty for early
IRA withdrawals. I lived on these annual withdrawals. My portfolio
still grew.

At age 60, realizing I didn't need pension per se, I took a lump sum
from GE, rolling it into an IRA. At age 62 I took social security. This
enabled me to reduce my IRA withdrawal percentages to age 70.5
RMD time. During my sixties, I also started conversions to Roth
IRAs, at most into 10% tax bracket. What I call creative financing, I
took out two larger Home Equity Loans, interest only, P - 3/4%, and
lived a lot on these monies during my sixties; this enabled me to do
greater conversions to Roths, as my only fixed income was social
security. Yes, I am now paying these HELOCs off, but the large Roth
has helped keep Trad RMD lower.

A couple years now with RMDs, I am just touching or within the

10% tax bracket. Conversions to Roth have helped. This RMD
amount is all spent (none saved), realizing paying off HELOCs is
also part of the deal.

What a country!

R48

DIYinvestor One of the things I love about the Morningstar community is how
10 hours, 56 minutes ago much can be learned from discussions such as these. I often learn
Flag as much--and sometimes more--from members' posts as from the
article itself. And ya know, you're never too old to learn. Keep
Like 0 going!

Guatebras1 John, thank you for sharing your portfolio profile. It is truly
11 hours, 14 minutes ago comforting to learn that a global money management professional
Flag gets away from conventional wisdom and chooses a path that
meets today's realities. These are times that will definitely favor risk
Like 0 tolerant investors that make sound decisions on quality equities or
low cost equity index funds and high quality bonds.
Rekenthaler: My Asset Allocation http://news.morningstar.com/articlenet/article.aspx?id=797207

I am now 73 and retired at 69 from a demanding but successful

general management career in international. Therefore, I am high
risk tolerant and understand that just because I left behind the
business world I should leave behind sound business behavior and
assets management principles and good practices while managing
my own assets.
I was so pleased to see your overall investment profile basically
matching mine. Since retirement I have been feeling like I was
living in outer space when reading financial guidance from the
majority of retirement financial sources. As you, I saw my equity
paper value in 08/09 shrink substantially, but it was a good time to
use cash to onboard quality shares. You are really courageous to
share this precious information and I for one really thank you for
doing it.

rsanka Thanks to "retired at 48" and "seekingreturns" to address RMD

12 hours, 47 minutes ago issue within this context. A quick question to "retired at 48" - as
Flag you started RMDs, how did you manage to keep your returns
optimal while minimizing your tax bite? Did you withdraw more than
Like 0 minimum required and your budget needs and reinvest the excess?
And congratulations to you and your wife for accomplishing your
ability to take down your bedroom sign!

bavan Well John is right on his AAP with entire Stocks being 100%, the
15 hours, 22 minutes ago reason being that his Networth is close to $189 Million (Assuming
Flag that he is one of 18 Equal Partners where the Market Capitalization
of his Startup company is $3.4 Billion as reported by him). With a
Like 0 Networth of $189 Million, it doesn't matter whether the Stock
Market is going to LOSE close to 50% even today as he will be still
rich at $89.5 Million which he can comfortably retire even if wants
today. Folks - SIZE Matters and for ULTRA-HIGH NETWORTH
Millionairres, AAP of 100% Stock is FINE.

However, for Mundane folks like us who slog our day-to-day life to
Work, AAP of 100% stock is NOT recommended and BONDS play a
bit of role to counter the bear market. For all other
Non-Millionairres, the standard recommendation of one's (100 -
AGE) should be allocated to Stocks and the rest should be in Fixed
Income such as Bonds!!

atomiccab At 56 I was 100% in stocks now that I am retired I am sticking with

17 hours, 24 minutes ago 70/30 stock to bond. I probably don't need to be in that
Flag conservative however, I don't need to be any more aggressive
either.
Like 0

faroutwest As one of the 18 star-struck apostles, John, I beg to bring to your

Rekenthaler: My Asset Allocation http://news.morningstar.com/articlenet/article.aspx?id=797207

17 hours, 34 minutes ago attention the ungodly state of Morningstar's IT pestilence. Pray
Flag appeal to your most high lords so that we undeserving, unwashed
heathens may be blessed by unwavering, unbroken, and true
Like 0 information direct from the mouth of the gods. Thus, may your 91%
temptation continue to shine upon thee.

myshkin01 JohnGalt: I haven't read Siegal's book yet but can't help wondering
20 hours, 54 minutes ago how one goes about allocating > 100% to equities. Is that some
Flag sort of leveraging trick?

Like 0 Not that I'm likely to be one of the investors he's talking about.

1-10 of 59 Comments

Add a Comment

Please login or register to post a comment.