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No Right Answer

Philip Stein

DURING MY 30s, I worked for a defense contractor. The Berlin Wall fell in November 1989 and the Soviet Union imploded just over two years later. Many at work believed that the end of the Cold War would lead Congress to reduce defense spending. Sure enough, layoffs at my company commenced soon after.

I was fortunate to avoid being laid off. I do recall, though, overhearing one coworker in his 50s who, after receiving a pink slip, lamented, “At my age, who will hire me?”

I felt sorry for the poor fellow, and decided I had to get serious about investing for my future. I didn’t want my life to fall apart if I received a pink slip in my 50s or 60s. I was saving in the company’s 401(k) plan at the time, but that was about all.

Having no investment knowledge, I thought it prudent to engage the services of a financial advisor. Without any experience, I didn’t know how to evaluate and select one. I made a choice based on an ad. I found the experience underwhelming.

During my initial meeting, I recall the advisor asking me what I thought the inflation rate would be in a few years. I confessed that I had no idea, but pulled a number out of the air nonetheless. Sometime later, it dawned on me that the advisor was probably gathering inputs for a computer program that would spit out a report he could hand me—along with a bill for his services.

I was working fulltime, so I made appointments to see him at 5 p.m. At one such meeting, the advisor cut our visit short because he had to get home to watch the kids, so his wife wouldn’t miss her guitar lesson. That’s when I decided to become a do-it-yourself investor.

To educate myself, I read John Bogle, Burton Malkiel, William Bernstein, Jonathan Clements, Charles Ellis and others. I learned that the first step to building an investment portfolio is to choose an asset allocation—the distribution of your dollars across stocks, bonds, cash and alternative investments.

Throughout my 40s and 50s, I was about 70% in stocks and 30% in bonds. With the benefit of hindsight, I should probably have had more money in the stock market. But with my investment knowledge still limited and not yet confident in my abilities, I opted to be more conservative.

Much of what I read about choosing an asset allocation centered on answering these questions: How much risk was I able to bear? How much was I willing to bear? The answers would govern how much I should allocate to stocks.

The more I thought about it, however, the more I realized that my risk tolerance was a moving target. I was risk tolerant during bull markets and risk-averse during bear markets. This uncertainty helped explain my somewhat conservative allocation.

This focus on risk tolerance was meant to prevent me from committing the cardinal sin of investing—getting unnerved and selling at a loss during a bear market. If I could avoid tinkering with my portfolio during downturns, I probably had my asset allocation about right.

Now that I’m retired, and have more investment experience, I’ve demonstrated to myself that I can leave my portfolio untouched during bear markets. My current stock-bond split is about 60-40.

Another important lesson I learned: Always look for opportunities to increase the diversification of my portfolio. It’s the best way to both reduce the probability of a large loss and increase my long-term compound return.

I also learned it’s counterproductive to add an investment with a high correlation with another investment that I already owned. Their prices will tend to move up and down together. I wanted to add uncorrelated assets—those whose prices would tend to zig when my other holdings zag.

I know my allocation today, but is that where I should stay? As a retiree, I’m always wondering if I have too much money in stocks. I could have a significant loss in a bad market. Yet, if I invest too little in stocks, I may lose ground to inflation.

At the same time, I wonder whether I’m overweight in bonds. If I have too much invested in bonds and cash, I’ll lose ground to inflation. Yet if I don’t own enough of these assets, would I have to sell stocks to meet unexpected expenses, such as replacing the roof?

None of these questions has a clear, definitive answer. Any decision involves a tradeoff between risk and return. That brings me to a big risk: future health care costs.

Neither my wife nor I own a long-term-care insurance policy. We’re both in our mid-70s. We feel we need the growth typically offered by stocks to self-insure against the risk that one or both of us will eventually need nursing care. That’s why, even at this late stage, I’ve decided to put a bit more money into growth investments.

Even if my current portfolio gives us the growth we need, and it fits within my risk tolerance, still another question arises. Should I leave things alone as economic conditions change? International stocks, for instance, have underperformed the S&P 500 in eight out of the past 10 years. Could international shares be poised to outperform U.S. stocks over the next decade?

If I was still working and saving for retirement, I might increase my international stock exposure by a few percentage points. Is this a prudent move in retirement, however, when I have less time to recover from a setback?

There’s no perfect answer, and yet I need to make a decision, even if the decision is to sit tight. One influence on me is Bill Bernstein’s admonition, “When you’ve won the game, stop playing with the money you really need.”

Have I won the game? With ever-rising health care costs, with the never-ending battle against inflation, and with our dynamic domestic and global economies, I’m not sure I’ve won—or ever will.

Now retired, Philip Stein was a public health microbiologist and later a computer programmer in the aerospace industry. He maintains that he’s worked with bugs, in one form or another, his entire career. Phil and his wife Jeanne live in Las Vegas. His previous articles were Skill or Luck and Saved by Compounding.

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