Content area
Full Text
I n his 2013 letter to Berkshire Hathaway shareholders, Warren Buffett discussed the very simple advice he gave to the trustee that will manage the bequest his wife will receive: Invest 90% of the cash in a very low-cost index fund tracking the S&P 500 and the remaining 10% in short-term government bonds. Although Buffett did not suggest that investors follow this strategy (he merely stated the recommendation he gave for his wife's bequest), his suggestion begs the question of why this specific asset allocation.
For the U.S. market, Estrada [2016a] explores the merits of a 90/10 stock/bond allocation relative to other static allocations. For 30-year retirement periods between 1900 and 2014, he finds that a 90/10 allocation had a very low failure rate (2.3%); he also finds that this strategy provided a middle ground between the higher upside potential of more aggressive strategies and the better downside protection of more conservative ones. One of the two goals of this article is to expand the scope of the inquiry to another 20 countries, thus evaluating the global performance of a 90/10 strategy relative to other static strategies.
The second goal is to evaluate the merits of a minor twist to the 90/10 allocation by exploring a simple dynamic strategy based on mean reversion. Essentially, this strategy, based on stock market performance, determines whether the annual withdrawal is made out of stocks or out of bonds, and whether or not the portfolio is rebalanced back to the 90/10 allocation.
The global evidence from 21 countries over a 115-year period discussed here ultimately suggests the following: In the average country, first, a 90/10 allocation has a much higher failure rate than it does in the United States; second, despite that, a 90/10 allocation does have a lower failure rate than most other static allocations; third, a 90/10 allocation provides better downside protection and higher upside potential than other strategies with a lower allocation to stocks; and fourth, the simple dynamic strategy explored here has a similar failure rate and provides slightly better downside protection and a somewhat higher upside potential than the 90/10 allocation.
The rest of the article is organized as follows: The first section discusses in more detail the issue at stake; the next...