Trick or Treat

Last night was Halloween. We rarely get more than a handful of trick-or-treaters, sometimes none. Last night we had just one group, but it was a group of twelve, so now I only have to eat half a large bag of mini-size M&M packets before Christmas candy shows up on the shelves.

In the “spirit” of the holiday, I was feeling a bit mischievous this morning when a friend called with a finance question.

“You recommended a 60/40 stock allocation for our retirement portfolio, right?” she asked.

“Well, my husband is rolling over his 401(k) and he says he will feel better with a 50/50 allocation of his part of our savings. Will that work?”

I told her a true story about myself from around 2000. (If you’ve read LocallyGroan.com, you know how I like to tell stories about myself. Inherited the weakness from my grandfather.)

I went to see a well-known and quite capable money manager on the West Coast during the Tech Boom about managing a large sum of money I had made on stock options. I told his managers that I wanted 40% of the portfolio invested in bonds and cash.

“We don’t do that,” they told me. “Holding bonds significantly reduces your expected return. We buy them on occasion and use other hedges when we anticipate a bear market, but in general, you can trust us to get you out of the market before a crash.”

We're market timers. We don’t need no stinking bonds.

I said “fine” and subsequently turned over 60% of my portfolio for them to invest in stocks and I invested all of the remainder in bonds. They were happy with their 100% stock allocation and I was happy with my 60/40 portfolio. While I was with them, the combined stock and bond portfolios outperformed the stock portfolio.

“So, if I increase the stock allocation of my part of the savings so it averages out to 60/40, should I tell my husband?” my friend asked.

“Whoa!” I told her. “I’m not going there. You know the NSA is listening to this, right?”

I can imagine times when you might treat a husband and wife’s retirement portfolios separately, but if the pool of funds belongs to both of you, one of you can’t invest in Russian ruble futures without affecting the other.

I stayed with that money manager for a few years and did OK. Ultimately, I was unhappy with the “exceptional manager” theory and decided to manage my own money with index funds and ETF’s.

And bonds, of course.

I read a letter a few years ago from the exceptional manager apologizing for not foreseeing the 2007 market crash and getting his investors out in time.

Sorry, kids. We ran out of candy.