Taking Sides on Financial Issues

Taking Sides on Financial Issues

Adam M. Grossman  |  June 6, 2021

WHEN IT COMES to financial questions, there are two common reasons people disagree. Sometimes, they disagree about the facts—whether, say, interest rates are headed higher. But sometimes, people disagree for another reason: They see the world through different lenses.

Last week, I mentioned that Ray Dalio, a prominent hedge fund manager, had recently said that bonds “have become stupid.” I disagreed, but not because of the facts. There’s no disputing the impact of today’s low rates. But I think the wisdom of owning bonds depends on what you’re trying to accomplish. If you’re a hedge fund manager like Dalio, your objectives will be different from those of an individual investor. For a hedge fund, maybe bonds are stupid. But for an individual investor, they might make a ton of sense. It’s a matter of perspective.

Below are five other issues that I also see as matters of perspective.

1. Asset allocation. Investment advisor and author William Bernstein is often quoted as saying, “When you’ve won the game, stop playing.” In other words, if you’ve already accumulated enough savings to meet your needs—or if you’re on track to—then you should dial back your portfolio’s risk. There’s no sense continuing to take risk when you don’t need to. Warren Buffett has expressed the same sentiment: “It’s insane to risk what you have and need in order to obtain what you don’t need.”

Suppose you’ve saved $5 million for retirement and only need $100,000 on top of Social Security to meet your expenses. With these numbers, implying a modest 2% withdrawal rate, you’d be in great shape. If you took Bernstein’s approach, you would manage your portfolio conservatively to avoid jeopardizing that strong position. But some might reach precisely the opposite conclusion, reasoning that with $5 million in the bank and modest needs, you could afford to take more risk.

What’s the right answer? My view is that there isn’t one. It will depend on your goals and what’s most important to you. Are stability and security most important, or are you looking to grow your portfolio as much as possible? Where you come out on this question is an entirely personal decision.

2. Alternative investments. David Swensen was the longtime manager of Yale University’s endowment before he passed away recently. Swensen was a pioneer in developing complex investment strategies. But in a book he wrote for individual investors, Swensen advocated the exact opposite approach. His advice: Buy simple, low-cost index funds and steer clear of complexity.

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