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Dr. Paul Price
Dr. Paul Price
Articles (513)  | Author's Website |

I'm Calling 'B.S.' on Mark Hulbert

June 08, 2014 | About:

Investors can handle the truth

When a headline is immediately contradicted by an article’s own author, something is wrong. Seeing it come from a respected source makes it even worse.

Mark Hulbert’s June 7, 2014, column perpetuates the myth of risk-adjusted returns. That absurd theory says that lower portfolio volatility somehow makes up for accepting smaller absolute returns on your long-term money.

His headline shouted that adding a 40% intermediate Treasury bond allocation to an otherwise all-stock portfolio can get “the same returns with half the risk”.

When you read further, though, Mr. Hulbert says that an all-equity SPY equivalent index fund would have earned a 10% average annual return since the start of 1926 versus the 8.7% per year achieved with a hybrid (60% stock/40% bond) mix.

How much more would you accumulate by avoiding bonds completely over a typical 40-year career spanning from age 25 through 65? A lot. Here is the answer directly from the SEC’s own web site.

Just days earlier, on May 31, 2014, Mr. Hulbert’s Wall Street Journal column indicated the total returns from small-cap shares had been 11.9% since 1929 while Intermediate-term treasury bonds earned less than half as much, at 5.4% annualized.

Granted, many people refuse to stay the course and tend to bail out of stocks when things get temporarily tough. That doesn’t mean advisors should give up on telling the truth about long-term returns.

Financial planners should be teaching people what works best, rather than serving up Pabulum that is easy to digest but produces less than optimal results.

History says that following the 60/40 split Hulbert is advocating will deprive people of millions of dollars they could have/should have had when retirement rolls around. Nobody will charge you less for goods or services later because you chose 'less volatility' during your accumulation phase.

You can't spend 'risk adjustment'.

Disclosure: Heavy in equities. I own no bonds or CDs.

About the author:

Dr. Paul Price


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Rating: 4.4/5 (9 votes)



Shaved_head_and_balls - 3 years ago    Report SPAM

"History says that following the 60/40 split Hulbert is advocating will deprive people of millions of dollars"

In 2005, History said that US home prices never decline in aggregate.

From 1803 to 1857, a US stock investor would have received a third of the ending wealth of the bond investor.

Now put a note on your desk, "Past results do not guarantee future performance"

Vladek - 3 years ago    Report SPAM

What makes this article ridiculous is 'time'. Famously, at Oxford, when they were deciding what to do with a $5million endowment, the Prof of Business wanted stocks, the Prof of Architecture to buy property; and the Prof of Economics confirmed that "for the past 500 years property returns had exceeded stocks by 2% p.a. "Yes" said the Prof of History, "but the past 500 years were exceptional". I'm 67 and the actuaries give me 16 years. My fund must keep me EVERY YEAR till then. If I go down 25% next year, I am not rescued by a 35% rise on what's left over the next 5 years. You have to wait 60 YEARS to be sure that stocks will outperform. It's true that they do, but irrlevant to the great majority of investors, to whom VOLTILITY MATTERS Likewise Buffett's 'lumpy' 15% c.f. 10%. Glib and self-serving and unworthy of the great man. OK for him - he has far more than he will ever need and the more excess you have the more risk you can (must, if you're greedy) take. The closer your needs are to your capital, the less risk you MUST take. Retirees who forget that and take a 2008-level hit will have a very bad time. The shorter the time frame the more conservaitve one must be. That's not a function of psychology or testosterone level, just arithmetic.

AlbertaSunwapta - 3 years ago    Report SPAM

There's so many variables at play that using the historical aggregate return statistics requires both an act of faith that history will repeat itself and highlights the need to sometimes temper one's fears with a longer term perspective. These aggregate return statistics though rarely reflect real world best case individual returns or conditions as the comments above highlight. Some considerations off the top of my head:

Tax impacts: exceedingly high MTRs (progressivity of taxes), capital gains deferal, nationalistic considerations (War bonds)

Inflationary costs: real returns vs nominal returns and the impact of low and high inflation

Transaction costs: exceedingly high commission rates (hundreds of dollars per trade)

Product availability: no MMFs, no index funds, large treasury purchase minimums, expense ratios on index funds, things like 5-9% front-end loads on funds, no ability to shelter savings in retirement plans so full taxation of all one's returns

Age, family, lifestyle, health and amount of funds saved/invested: weighting and timing of cash flows into savings are highly individualized

Investment return "cycles": impact final returns less and less over time however likely dramatically affected personal returns considing that most savings were accummulated over short periods.

As some people have said:

"In theory, theory and practice are the same. In practice, they are not." - Albert Einstein

"In theory there is no difference between theory and practice. In practice there is." - Yogi Bera

"Experience without theory is blind, but theory without experience is mere intellectual play."- Immanuel Kant

Jtdaniel premium member - 3 years ago

Hi Paul,

Thank you for a fine article. I share your enthusiasm for great stocks, but I have also come to appreciate the counter-balancing nature of bonds. There is something to be said for avoiding the full brunt of a bear market. Since I do not care to sell short or buy puts, cash and bonds are my most viable options.

I checked Vanguard records for the historical performances of three of its most famous and respected funds. These are core holdings for many IRA and 401(K) investors. The Windsor Fund is actively managed and effectively 100% invested in stocks at all times. The fund has traditionally had a preference for value/high-yield equities. Windsor has returned 7.55% per year for the last 10 years. It has delivered an 11.60% return since its 1958 inception, thanks largely to John Neff's famous 13.9% per annum run from 1964 - 1995.

Vanguard Wellington is a balanced fund that usually holds two-thirds stocks and one-third bonds. Wellington typically prefers value/dividend-paying stocks and intermediate term bonds. Consistency? This classic balanced fund has returned an average of 8.58% for the last 10 years and 8.32% since its 1929 inception. Although I hold no bonds in my cash accounts, Wellington is the sole holding in my IRA. I will admit to feeling nervous these days about my (probably) over-priced American Express, Walgreen and Hormel shares, but selling out of Wellington is never really a concern. There is just something right about 8.32% a year since 1929.

Vanguard Wellesley Income is a balanced fund that typically holds one-third stocks and two-thirds bonds. I have never seen reason to hold both Wellesley and Wellington, as there are many duplicate holdings. This ultra-conservative fund has marginally out-performed the fully-invested Windsor (by 7.72% to 7.55% per year) for the last 10 years. I found it even more remarkable that a fund that is usually no more than 35% invested in stocks has returned an average of 10.16% per year since its 1970 inception. I can't imagine that Wellesley investors live in fear of the next bear market. In fact, they may welcome it.

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