Asset Allocation – an old word that was in heavy use until the boom

Back when I was a young investor in the late 80s and early 90s, one of the big topics of discussion was “asset allocation.” As most of you know, this was how you broke down your investments in a variety of buckets (stocks, bonds, precious metals, real estate, etc.) in order to gain the benefits of each and to offset some of the drawbacks.

When you were investing back then, this was a primary part of the discussion, and even folks starting out in their 20s were encouraged to invest in a significant percentage of bonds. Of course, that was when bonds were paying close to double-digits in dividends/interest!

Something odd happened in the late 90s with the boom – everyone stopped talking about asset allocation, and just started pursuing a 100% growth stock strategy. Due to that, and many other causes, a bubble was formed as everyone bid it up, and then it finally popped in 2000. Many of the growth/IT companies lost 80%-90% of their value, or when out of business completely.

Then 2006-2008, the real estate market was the place to be, and folks ended up going “all in” for houses, condominiums, apartments, and REITS. The prices were bid up again, and then – pfft! Another great crash, this one close to 50% of the stock value being killed – and many folks underwater on their mortgages for a decade.

Now we have hit another “crash” where people using Index funds and Vanguards “buy the whole market” index have priced the market up (over 24 P/E ratio on the S&P 500 before the crash vs. a historical average around 15). While the market is showing signs of recovery (just look at yesterday’s jump), it still is down significantly and will take some time to work its way back, especially if the economy sputters coming out of the Chinese Flu.

I was looking through my investments and allocations, and realized that, if I had been 100% in the S&P500, I would have dropped over $350K during 2020, but since I am at a 70/30 split with our investments, I only ended up down $250K as of the March 23. My allocation helped “ease out the rough parts.”

I wonder if everyone’s pursuit of the “fast buck” or the quick gain ( stocks, real estate, etc.) is one of the major causes of these bubbles. Instead of following the “get rich slowly” kind of attitude, everyone seems to want to chase the brass ring. Yet as we have learned in the FIRE community, just reaching FI does not make you happy – and you need to plan what you are going to do once you reach FI, or you will end up nuts (or going back to work).

It would be nice if that word got out to more people in our society – do not rush it, but enjoy the ride as you go. Plan, but do not try to short-circuit the process. Maybe then, we would have growth without as many mad crashes.

Mr. 39 Months

4 thoughts on “Asset Allocation – an old word that was in heavy use until the boom”

  1. We’re doing tactical asset allocation with our paper portfolio now b/c of the increased volatility which doesn’t seem to be letting up any time soon. We’re majority real estate overall, but with our paper we had been almost 100% stocks (albeit spread across small to large caps, domestic and international, and established and start-up). Still the stock part of our portfolio went down with the market so clearly we need to diversify even more.

    1. I can see that. If you are 100% stock, I’m sure it hurt (though you probably had a “gang buster” year last year! I hope the real estate portion is still looking strong – not sure that is going to suffer much, provided we can restart the economy in a couple of weeks.

      Not sure I’d sell stocks now to diversify – I’d just “stand pat” and if you had new money, put that in. I don’t plan to sell my stocks now and lock in my losses. I figure in a year they’ll be back.

      How is Costa Rica handling the virus outbreak?

      1. While there aren’t a ton of cases, and the spread so far has been pretty slow, Costa Rica has really tried to lock things down, and trying to get people to stay home. Schools closed, most businesses closed, restrictions on driving at nighttime, etc. The entire local economy at the beaches have stopped since it is all based on tourism. Not even locals visiting from the city, because they have shut the beaches and stopped selling alcohol. And for now, the borders are closed to foreigners. They have definitely taken it seriously and hopefully that keeps it from spreading too badly!

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