JUST PLAIN TALK: Two investing lessons from a genius, Bill Bernstein
Excluding his first book, everything Bill Bernstein writes, I read.
In a recent Humble Dollar post, he reminded us about Oct. 19, 1987, when the Dow lost 23%. One of my customers, a wealthy South Georgia businessman, told me it was an excellent time to buy. But unfortunately, I didn't, but I didn't sell
anything, so that was the second-best thing to do.
To paraphrase Paul Newman, sometimes doing nothing is a real cool hand. I'll never be Bill Bernstein's peer but following his wake is cool, also.
In a recent missive, Bernstein points out two investing axioms it took decades to learn. First, a sub-optimal portfolio you can execute is better than an optimal one you can't. For example, the best thing for me on Oct. 20 was to put some money in my IRA, but I froze. Buying was optimal, but I stuck with what was doable.
Too often, investors, especially in the light of double-digit markets, over-estimate their risk tolerance. Financial hubris is the result. For a portfolio to succeed, it has to survive, and sometimes its value will drop. So be prepared when it happens.
Fred Schwerd, a humorist and financial journalist, said it best: "There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description I might offer here even approximate what it feels like to lose a real chunk of money that you used to own."
Another analogy is to look at financial markets as a car that takes you from your present self to your future self. Picture driving down U.S. Highway 98 in tourist season during a hard rain. Driving fast might get you there sooner, but it's a bad idea.
Bill's second takeaway is to compartmentalize your portfolio mentally. Ensure you have sufficient funds in safe assets if there is an extended bear market. For example, from 1969 to 1982, the S&P 500 had a negative return when adjusted for inflation. The same thing happened from 2000 to 2012. Given my age, I may not live to see it again, but it could happen.
Don't ignore inflation's corrosive affect — the purchasing power of the S&P 500 can lose value for extended periods. If you depend on market returns to buoy your retirement lifestyle, remember: History may not repeat itself, but it often rhymes.
Include guaranteed income from Social Security, pension income (if you're lucky), rental income, and dividends in your safe assets.
Retirees who need 2% or less from their investments, essentially the dividend flow, can handle higher stock allocations IF they can stomach the volatility.
For young people, their safe assets are their ability to earn. Plus, market declines are background noise when retirement is decades away. So assuming you can handle the volatility, a high stock allocation may be appropriate. But everyone's risk tolerance is different.
Don't forget lesson one. A suboptimal portfolio you can execute is better than an optimal one you can't.
You can't always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.