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Stock-Bond Portfolio

Cullen-
At what price level does the stock bond portfolio no longer make sense?  In that extreme scenario where bond yields plummet further and stock multiples explode because of TINA.

For Example:
If the 10 year rate is .40%, PE Ratios for the major indexes hit 75-100X earnings.

What would be the exit plan for investors, where would you suggest people pivot to in that scenario?  Gold?  Land? Collectibles?

Just curious if there is a level you would exit the stock/bond trade and if so, what that approximate (“this is really stupid and really poor risk reward”) level would be.

 

 

Hi @clarencebeeks

Depends on a lot of outside factors. Mainly your personal risk profile. In my opinion the average investor should NEVER completely abandon a stock/bond allocation of some type. You might alter your weighting, and I do that all the time for people, but I don't think the "all in" or "all out" move is ever the right way to approach asset allocation.

I guess there's a chance that, if stocks went absolutely bonkers crazy then I might reduce the stock allocation to something very low. Maybe even zero. But that just means I would own mostly bonds and cash (or other assets). With the bonds - they're shorter-term instruments that, even if rates were 0.4% you'd still be earning 0.4% per year vs 0% for cash. So you'd want to remain diversified even in that scenario. You'd just alter your allocation away from stocks if you expected future returns to be substantially negative.

Long story short - don't play the all in or all out game. This ain't a poker table.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche
Quote from Cullen Roche on 12/24/2020, 9:43 AM

Hi @clarencebeeks

Depends on a lot of outside factors. Mainly your personal risk profile. In my opinion the average investor should NEVER completely abandon a stock/bond allocation of some type. You might alter your weighting, and I do that all the time for people, but I don't think the "all in" or "all out" move is ever the right way to approach asset allocation.

I guess there's a chance that, if stocks went absolutely bonkers crazy then I might reduce the stock allocation to something very low. Maybe even zero. But that just means I would own mostly bonds and cash (or other assets). With the bonds - they're shorter-term instruments that, even if rates were 0.4% you'd still be earning 0.4% per year vs 0% for cash. So you'd want to remain diversified even in that scenario. You'd just alter your allocation away from stocks if you expected future returns to be substantially negative.

Long story short - don't play the all in or all out game. This ain't a poker table.

This is exactly what I do in my accounts.  I keep a core portfolio that ensures that I always have some allocation to stocks, but then my satellite portfolio scales in and out based on how overbought or oversold SPY is.  Currently, SPY is so overbought (by my indicators) that my satellite portfolio is out of stocks completely.

I would think a reasonable longer term target for the S&P500 is probably $1500 -$2500.

So your choices are to own federal reserve notes yielding nothing, muni or corporate debt yielding slightly less than nothing, or equities that are valued at (literally) insane valuations as a product of 10 years of reckless monetary and fiscal policy.
Pick your poison.