In a post on asset allocation, I wrote
“I’m still searching for a rational reason to invest in bonds for the long term.”Over the years I’ve softened my position on bonds to some degree. I still don’t own any bonds myself except for cases where I know I’ll need money available in less than 5 years. My long-term savings are still 100% in stocks. However, I’ve come to appreciate that so few investors are able to control cycles of fear and greed that it is practical for almost all investors to consider including bonds in a long-term portfolio.
I considered the stock market crash of 2008-2009 to be a good test of my ability to remain calm and rational. I didn’t sell stocks and even managed to find a little cash in various accounts to buy more. In addition, I slept just fine. However, many people who were invested in stocks sold low and many more had sleepless nights as they worried about their financial futures.
On some level, it is very rational to recognize your limitations and choose an asset allocation that allows you to sleep at night. Of course, you should stick to this allocation in good times as well; it is no good to allocate more to stocks in good times and less in bad times because this is just buying high and selling low.
We all have our weaknesses. My wife and I don’t keep potato chips and cookies in the house because I know I would eat far too many of them. Choosing to have a healthy allocation to bonds to avoid losing your cool and selling everything can be quite sensible, even if it isn’t for me.
On the Positive Side …
Here are a few of my older articles that I still quite like:
When investing in an RESP, see how a 20% Canada Education Savings Grant (CESG) can be consumed by a mere 2% MER.
Investing is definitely not like surgery, no matter what the financial planning industry says.
Here is an attempt to explain how volatility hurts investment returns with a minimum of math.
Leaving notes in the box when returning defective merchandise to help the next sucker.