Asset Allocation; bonds, stocks, commodities, gold and more

1. The results are seen from a U.S. point of view. For us Canadians, since we are only 2% let’s look at our investments from a U.S. perspective.
2. All our investments are starting in January 1977
3. All our investments are starting with a $10,000 initial capital
4. Taxes are not included in this calculation. We assume that we are talking about tax-protected accounts such as the 401 (k) in the U.S. or the RRSP in Canada.

The benchmark, the total U.S. Market.

We are going to compare all our investments with the total U.S. market. One way in which a regular individual can get the total stock market return is through the Vanguard Total U.S. Stock Market ETF (VTI) with a management expense ratio of only 0.04%. This expense ratio is the closest thing I have seen to charity work. Thank you Vanguard. I have almost all my investment at your house. Investing in the US stock market should be the starting point of any asset allocation.

Ok, let’s look at the results.

Our investment of 10,000 for 46 years, would have given us $944,407. This is almost one million dollars.

We will compare all other investments with this return.

U.S. Long-term Corporate bonds

Most of the time, we are presented with the question? What percentage of bonds would you like to have in your portfolio? The correct answer should be “ZERO” If stocks have never lost money (in the long run), and if bonds underperform stocks if you have an investment horizon of 30 years plus. Why would anyone want bonds instead of stocks?

It is said that bonds are less risky.

This is totally untrue. Sure, bonds are less volatile, but in the long run, they are not riskier.

Most people think that having bonds in your portfolio is a fundamental part of asset allocation. I would say, “skip the bonds.”

Let’s check it out.

Our investment would have given us $345,195. Only about one-third of our stock portfolio.

As you can see, the line is smoother than the stock line, but to invest in bonds, in order to have reduced volatility is not a great business deal.

The 50%-50% portfolio. Bonds vs. Stocks

Many advisors recommend increasing the percentage of bonds as you get older. I think this is a dumb idea. There are many other factors that should consider other than age for your asset allocation.

For example;

• If a person has a pension (regular income), that in itself is a bond. They already have reduced volatility in their lives, they can afford to take more risk.
• If a person had too little money. If you reach retirement with only $100,000. You need to give as much opportunity to your money to grow.
• If a person has too much money. If you have $5,000,000 you can easily have everything in bonds. 2% return on $5 million is $100,000 per year, enough for most people to live comfortably.

None of those scenarios have anything to do with age.

Adviser recommends several scenarios. the 80-20, the 70-30, the 50-50, the 70-30 and the 80-20. Let’s just consider one of them. Let’s consider the 50-50, rebalancing every year at the end of the year.

The result is better than just bonds, the result is $678,080. Not bad, but if our end goal is to make money, why should we bother???

Commodities

Gold

In more than one article, I have written how bad is gold as an investment decision. Let’s find out.

It’s not as terrible as I expected. Our $10,00o investment could have become worth $289,174, which is not terrible, but only one-third of the return on stocks. I addition, look at all the volatility. It’s crazy volatile for such a low return.

The thing that bothers me the most about gold is that it doesn’t do anything. It has very little utility. It doesn’t produce anything. It’s nothing more than a pretty metal.

Small Stock

This one will blow your socks off. Look at this growth! The theory is that small stock has more room to grow.

This is difficult to digest. Take a look by yourself.

Our $10,000 investment would have become $1,766,242. This is nuts! Even if the time frame is too small to be statistically significant, how can you not drool when you see this return?

The U.S. Small-cap Value

This is the last snapshot of financial pornography. This is the small-cap value. The name says it all.

Our $10,000 would have become $4,742,754. I am speechless. A good way to own Small-Cap Value is with the SPDR® S&P 600 Small Cap Value ETF (SLYV).

Conclusion

There are many asset allocations. We should use the one which suits us best. But let’s be aware of all the opportunities. There are many more choices other than stocks vs. Bonds.

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