Author Topic: Warren Buffett on asset allocation for retirees  (Read 4637 times)

1WattLightbulb

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Warren Buffett on asset allocation for retirees
« on: November 04, 2015, 02:23:11 PM »
For what it's worth, WB recommends a 90/10 stock/bond asset allocation for retirees (if it jives with your goals). Sort of - he recommended it for the fortune his wife will receive (even though she'll be fine with ANY allocation of the billions). But a paper by professor and financial advisor Javier Estrada discusses the topic in relation to everyday people and adds a couple twists to build on the strategy. Article is attached - enjoy.

Abstract:     
One of the most important decisions retirees need to make is the asset allocation of their portfolios. They can have a static or a dynamic allocation, and simplicity usually favors the former. Warren Buffett recently added another vote for static allocations by revealing that he had advised a trustee to split the bequest his wife will receive 90% in stocks and 10% in short-term bonds. The evidence discussed here shows that, relative to other static allocations, a 90/10 split has a very low failure rate and provides investors with very good upside potential and downside protection. The evidence also shows that two minor twists to the 90/10 split result in two very simple dynamic strategies with even better upside potential and downside protection.


And on a related topic, I was wondering whether people commonly include the value of their home in their portfolio - and as part of their asset allocation calc. I ran into this article: http://www.wsj.com/articles/new-take-on-asset-allocation-include-your-house-and-social-security-1403470472  Thoughts?  For me, home equity counts. Since buying a home during the housing correction a few years ago, I consider my portfolio overweighted in real estate and a bit less diversified than before. I had never heard of including social security or pension in the bond category.

webcat86

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Re: Warren Buffett on asset allocation for retirees
« Reply #1 on: November 04, 2015, 02:33:31 PM »
I'm hesitant to include house. It's not a constant or consistent valuation and there's no way of accessing it unless the property is sold. A house price matters on the days you buy and sell/remortgage

MDM

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Re: Warren Buffett on asset allocation for retirees
« Reply #2 on: November 04, 2015, 06:54:06 PM »
You could include the house value if you are willing to sell it to rebalance your portfolio.

Full_Beard

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Re: Warren Buffett on asset allocation for retirees
« Reply #3 on: November 04, 2015, 07:24:07 PM »
Thanks for sharing that article.

Scandium

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Re: Warren Buffett on asset allocation for retirees
« Reply #4 on: November 04, 2015, 08:41:04 PM »
You could include the house value if you are willing to sell it to rebalance your portfolio.
What if I sell my bathroom if I'm overweight real estate? Or upgrade my kitchen if I'm underweight?

MDM

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Re: Warren Buffett on asset allocation for retirees
« Reply #5 on: November 04, 2015, 08:43:54 PM »
You could include the house value if you are willing to sell it to rebalance your portfolio.
What if I sell my bathroom if I'm overweight real estate? Or upgrade my kitchen if I'm underweight?
Sure, those would work.  You could also let the grass grow and play the hay futures market.

forummm

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Re: Warren Buffett on asset allocation for retirees
« Reply #6 on: November 05, 2015, 11:58:05 AM »
Buffett's allocation is for his wife. Who is currently 68 (and could be much older when Warren dies) and will presumably have at least tens of millions in assets if not billions (plus SS and MC). His allocation may not be the best for someone retiring at 30 with $500k.

innerscorecard

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Re: Warren Buffett on asset allocation for retirees
« Reply #7 on: November 05, 2015, 02:42:25 PM »
Buffett's allocation is for his wife. Who is currently 68 (and could be much older when Warren dies) and will presumably have at least tens of millions in assets if not billions (plus SS and MC). His allocation may not be the best for someone retiring at 30 with $500k.

This. It's ABSOLUTELY not the right allocation for "random person" either.

The thing with Buffett is that he is the master of saying things that are true, but must be read carefully. Beware of copying what others say that he says.

Full_Beard

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Re: Warren Buffett on asset allocation for retirees
« Reply #8 on: November 06, 2015, 01:20:31 PM »
Buffett's allocation is for his wife. Who is currently 68 (and could be much older when Warren dies) and will presumably have at least tens of millions in assets if not billions (plus SS and MC). His allocation may not be the best for someone retiring at 30 with $500k.

This. It's ABSOLUTELY not the right allocation for "random person" either.

Well, the point of the Estrada article is to address that particular question. He found that the failure rate of 90/10 vs. 60/40 (over a 30-year retirement time period and based on 86 different possible time periods between 1900 and 2014) was 2.3% vs. 0. So, I wouldn't say that Buffet's allocation is unquestionably wrong. You have to ask your risk tolerance and how important it is for you to pass something along to your heirs.

Retire-Canada

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Re: Warren Buffett on asset allocation for retirees
« Reply #9 on: November 06, 2015, 02:18:42 PM »
So, I wouldn't say that Buffet's allocation is unquestionably wrong.

Given this is his allocation for his wife and she is going to withdraw a vanishingly small % of her $XB fortune each year I'd say his allocation is unquestionably sensible.

Full_Beard

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Re: Warren Buffett on asset allocation for retirees
« Reply #10 on: November 06, 2015, 02:29:58 PM »
Fair point. I meant unquestionably wrong the average investor, which is the essence of Estrada's analysis -- 60/40 offers greatest protection, but 90/10 isn't far behind.

Jack

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Re: Warren Buffett on asset allocation for retirees
« Reply #11 on: November 06, 2015, 02:38:06 PM »
Buffett's allocation is for his wife. Who is currently 68 (and could be much older when Warren dies) and will presumably have at least tens of millions in assets if not billions (plus SS and MC). His allocation may not be the best for someone retiring at 30 with $500k.

This. It's ABSOLUTELY not the right allocation for "random person" either.

The thing with Buffett is that he is the master of saying things that are true, but must be read carefully. Beware of copying what others say that he says.

That's true, but I think that it (by coincidence) is pretty close to optimal for someone retiring at 30. With a time horizon significantly longer than 30 years, preservation of capital isn't enough -- you need gains. And that points to a high stock allocation.

Indexer

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Re: Warren Buffett on asset allocation for retirees
« Reply #12 on: November 06, 2015, 04:15:42 PM »
Buffett's allocation is for his wife. Who is currently 68 (and could be much older when Warren dies) and will presumably have at least tens of millions in assets if not billions (plus SS and MC). His allocation may not be the best for someone retiring at 30 with $500k.

This!

Concerning the house as an asset, no you shouldn't include the house you live in as part of your investment portfolio.  Net worth = yes, in your asset allocation = no. If you sold your house to have income your expenses would increase because you would start renting.  Your house is not an investment. Thinking that it is can give people a false sense that they have more investment assets than they really do, and I can't think of a single financial planning benefit to counting it as an investment. Your house is a use asset just like a car or furniture. Your house can appreciate in value, but that doesn't do you any good while you are living in it. If you sell it and then move into a cheaper property then you get the equity and you can put it to use. If someone planned on downsizing I could see treating the difference in prices as a cash inflow for that year. That is as far as I would go.

Now rental property is another beast. It is property that generates income and it should be treated as an investment. So if you own a ton of rental properties you likely don't need to a REIT to your portfolio.