Personal Investments • Opinions on 90/10 Portfolio by Warren Buffett

That would be fine advice if we knew the odds of future performance. Alas we don't, however comforting it may be to believe backtesting lets us know the odds.

If we are going to call stocks risky we imply we know the odds. When that choice of the word risky disagrees with every historical outcome it goes much further, to blatant disregard for what is risky or what has happened and to behaviorally making investment decisions.

So do we know what is risky or can we actually access risk? You need to make a decision. It sounds like you would have no idea if 90/10 is appropriate or not appropriate if you can not assess risk. I assume everyone here is willing to accept 90/10 that does not know the odds. Those that believe otherwise must be behaviorally determining the odds without a knowledge basis. A behavioral choice for 90/10 should be as good as 30/70 or 0/100.

Spell out the likely scenario that makes action A (90/10) riskier than action B (say 50/50) during early to mid accumulation. Something that is likely should have already happened and would show up frequently in our backtesting.

We actually do know the odds to a degree to make an appropriate decision. I see this comment as a way not to address the odds, but you can convince me if you all stop calling stocks risky and accept 90/10 as an appropriate accumulation AA based on not knowing the risks. Nobody knows anything and any action is justified without factual basis because the risks are simply unknown.

What are you relying on while having no knowledge of risks?

Show us that something in your brain that is
1) better than history
2) demonstrates that 90/10 in accumulation is more likely to fail

Stocks are riskier because there is no contractual guarantee of payment and because they don't have the self-correcting feature of bonds. If a bond's price declines it's yield increases and that increase counteracts the price decline. None of this requires knowing odds or history.

If risk means anything it means the chance of doing badly, short term or long term.

So now we have established that we can put some sort of measure on risk. What you are missing is that the investor demands an expected return in exchange for that volatility. Stocks are volatile because they have that expected return. The accumulator simply does not care about volatility risk and the only risk they are getting is long term depreciation of the stocks they invest in. These risks are real but shared by the 60/40 portfolio in a way where 60% will fail when 90% fails.

Where did we establish a quantification of risk?

You can't eat expected returns, only realized returns.

If you believe markets are efficient the global market portfolio is appropriate for the average (weighted by portfolio size) investor. Global equities and bonds appears to be a reasonable approximation of the market portfolio and at the moment it's approximately a 60/40 split. The higher the equity portion the higher the risk. See, for example, the Bill Sharpe portfolio thread, John Cochrane's papers and various works by Ken French, all of which I've posted repeatedly.

That's a market of Warren buffet billionaires, hedge funds, and endowment funds - with very little from individual investors. There is simply no basis that that this average helps to meet our individual goals.[/quote]
Warren Buffett is an individual. Hedge funds and endowments invest on behalf of individuals.

Read https://www.dimensional.com/us-en/insig ... -investing, https://www.johnhcochrane.com/research- ... portfolios, viewtopic.php?t=207804, and view https://www.youtube.com/watch?v=rgHA_a5_TSU

We only have about three or four independent thirty year historical periods which might be reliable and relevant. That's hardly enough data points to be confident about using past data to predict the future. Ken French, who likely has more knowledge of historical data and statistics than anyone posting here, says "Chance dominates realized returns" - actual returns are almost all noise, almost all unexpected.

He (and others) have emphasized the importance of considering who is on the other side of a trade. If you're far from the market portfolio, someone else has to be far the other way. If you believe you've made a generally wiser choice, do you believe people who underweight are dumb or less informed? He (and others) point out the hazards of such lines of thinking.

That's correct. What you do is read the 4 pillars of investing and start with understanding history. There is certainly stock risk beyond what history has shown but you have to have the capacity to reason out what would need to happen for something like 60/40 to beat 90/10 over a career. We can't simply ignore history because we don't like the result.[/quote]
I've read both versions of 4 pillars. Investing history gives a nice perspective, but is not great for predicting the future.

Is 90/10 more likely to fail over the next thirty years? There's no way of knowing in advance. Just because we have a tremendous desire to know the odds and are pattern finding creatures does not mean the world has to comply.

We can study history and say it has always worked out better with little risk of doing much worse - assuming adequate diversification (managing single country risk, risk in portfolio in-line with future accumulatio, etc). You need to know a lot more than nothing to go against history. If you don't know the odds of which is better you should probably consider taking the higher expected returns from stocks. That would be perfectly rational and appropriate for the accumulator.

The accumulator should like the better expected return from stocks given no idea which is riskier. Your base case when you say we don't know which is riskier is that the expected future average outcome is worse than any post outcome. That is highly pessimistic and can only be made with a good understanding of the actual risks.
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You're just blindly claiming investing history is a good predictor. Realize the limits of a handful of data points. Reread the Ken French statement about chance and realized returns. Take a look at https://fairwaywealth.com/wp-content/up ... 0-2014.pdf which, based on history, finds that history is not a very good predictor.

Statistics: Posted by exodusing — Mon Apr 29, 2024 6:19 am — Replies 102 — Views 9700

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