If I was 100% invested in stock and I switch a $200K portfolio to 100% CDs for retirement -- it's the same end result as if I was 100% invested in CDs and left $200K in the CDs for retirement. The fact that I probably had to save a lot more money to get that same amount with 100% CDs is immaterial. Past investment decisions, whether good or bad, is just emotional baggage. What may better plans for the future (including the tax consequences for switching to a new plan) is the only important factor to consider no matter where on the timeline you are.
Are we talking generalities here, or addressing this particular poster's situation. He has a 3-legged stool: Social Security, savings, pension. He hasn't, until now, had control over the pension. Now he does. He is considering more aggressive investment of these funds. What is it that bothers you about this?
Huh? First people are jumping on me for suggesting a bit of stock risk to overcome inflation (and possibly even reduce volatility due to non- correlation + rebalancing factors) and now you're asking if I have a problem with suggesting a more aggressive portfolio. Do I need to start posting in Chinese?
It's more stable only if one holds for a certain, long period, one where one does not expect, say, a senior citizen's disease/ailment to strike and suck away at one's nest egg. Like the need for a doggone nursing home.
The rule, "If one's timeframe is under about ten years, do not invest in stocks, period," still holds.
Aside: Try Shiller's data on the S&P, accessible for free at
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Second aside: I do not like any argument that Depression era data by itself can support very well general arguments about investing.
Lastly, I increasingly hesitate to apply inflation data to senior citizens or anyone with a much shorter timeframe. I think the often cited CPI is likely a poor measure of one's personal inflation. It's true it's all we have for general guidance, so we use it as a rough guideline, especially for long-term investing. But my point is that investing entirely in CDs for the short run most certainly can make sense. I think your posts in this thread tend to (or do) read like generalizations ('all CDs--always bad'). So I am tossing in my 1.5 cents. Older folks who are all CDs-treasuries-money markets may be making a perfectly sound decision. (Note: Hector says he is near retirement; Louise, same.) Hector, a male, may very well be figuring on a life expectancy of no more than about 15 years. (Sorry Hector; just hypothesizing here, since men do have a lower life expectancy than women. For all I know, though, you are in excellent health with relatives who live to be 105!) I think all-CDs are a reasonable choice then, one that allows Hector and his wife to sleep at night.
As for mixing CDs etc. and stocks in a portfolio to produce lower risk than CDs by themselves: I have no problem with this argument, but only for those investing for the long term.
The worse year in the last 136 was -42% in 1931. If your portfolio is
5% stock, that's a -2% overall decrease. Which means instead of getting 5% interest from 100% CDs, you got 3% interest instead. During the 70s and 80s, 2% rate fluctuations happened almost every year. It would be a very extreme border case where 2% made the difference between living nicely and living on the edge.
I wasn't planning on going here but I think I'll take up the challenge afterall. Let's see if the common wisdom is actually correct. Here's data from 1871 to 2006 for a portfolio of 5% stocks, 5% T-Bonds, 90% T- Bills.
Total Years: 136 Years with a nominal loss: 3 (1931 -0.06%, 1937 -0.71%, 1941 -0.08%) Annualized Nominal Return:5.04% (versus 4.76% for 100% T-Bills) Annualized Real Return: 2.61% (versus 2.33% for 100% T-Bills) Standard Deviation: 2.70% (versus 2.78% for 100% T-Bills) Years underperforming 100% T-Bills: 55 Years underperforming 100% T-Bills by more than 1%: 12 Years underperforming 100% T-Bills by more than 2%: 1 Years outperforming 100% T-Bills: 81 Years outperforming 100% T-Bills by more than 1%: 30 Years outperforming 100% T-Bills by more than 1%: 5
We all know the phrase past performance does not guarantee future results. But if 3 years of noise-level nominal losses (during those years, T-Bills were paying next to nothing also) out of 136 is not strong enough data, I don't know what part of investing or economics can be trusted. At some point, past data has to play a role in planning. Otherwise, why invest in stocks at all? After all, it's just a bit more than a century of historic data we're going by.
So I would have to disagree with your statement. There is always some threshold where holding a bit of riskier stocks & bonds can help no matter what your investment timeframe is.
snip discussion of an allocation of 5% stock and 95% CDs yada
You are using this very specific allocation, assigning a tiny fraction for stocks, to generalize that mixing stocks, CDs and treasuries is always good? Reasoning from the specific to general is always dangerous, wyu. Why did you not present the data on, say, a 30% stocks and 70% CDs/treasuries split? I bet every regular in this group knows these numbers will not be nearly as compelling. They in fact point to a fair amount of risk for someone investing "for the short run."
I think all one can reasonably conclude, based on history (including your 3 of 136 years example), is that a "small fraction" of stocks is not going to break anyone's back for the short run. But that's by definition of "small fraction," since it means, worst case, one only loses a "small fraction" of one's portfolio. A "large fraction" of course denotes increasingly more risk for short time frames. Surely you can agree with this much. Otherwise, we are not going to agree on much here.
FROM THE START, I talked about how a TINY TINY TINY amount of stock improving CD portfolios and keep CD-like stability. READ MY FIRST REPLY! 5% stock, 5% bonds, 5% commodities was my premise for a portfolio since 1972. My second scenario was 5% stock, 5% bonds for the Great Depress because I lacked data for commodities before 1972. And it's only NOW you finally notice I was talking 5% stock? I can't help it if you are reading more into messages than what is posted.
I did not and do not see that emphasis at all. I am not agreeing or disagreeing with your general claim above, because it's too vague and IMO not particularly useful. I think at this point the thread speaks for itself.
Thanks to all for an excellent discussion on what to me are difficult and complicated decisions. One quick note about the SS payments, though. My parents died in their mid-seventies, so I have to infer (even though I don't smoke and do have a more active lifestyle) that I won't live more than a few years beyond what they got. Examining the money to be gained by postponing the Social Security, it looks as if I would have to live into my mid-eighties to profit thereby. Add to that the possibility that Congress will change the rules before I tap into the pot, it would seem wiser to 'take the money when you can get it'.
(And the worst-case scenario? I get hit by a drunk driver at age 68, and don't get a penny of my money back!)
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