No Single Best Allocation

9) The ninth tenet of Valuation-Informed Indexing is that there is no one optimal stock allocation.

Even if we were to look at numbers alone, ignoring the human element, we would reject the notion that there is a single best allocation.

This article shows that owning 80% stocks (as opposed to 50% stocks) was a bad choice throughout most of the last decade. The HSWR80 and HSWR50 portfolios consist of stocks and commercial paper.

Calculated Rates of the Last Decade

This article shows that owning 80% stocks is a better choice when valuations are favorable.

Withdrawal Rates at Favorable Valuations

The case against a single best allocation is even stronger when you introduce the human element. Different people have different needs. Quite often, a TIPS-only portfolio is adequate and it has a 100% guarantee of success. Portfolios with stocks always have a chance of loss. We draw the line and declare safety with a (roughly) 95% probability of success. When valuations are high, as they are today, the numbers show that stocks often REDUCE Safe Withdrawal Rates. They did in the 1960s.

Have fun.

John Walter Russell
November 7, 2005