Pick Your Own Asset Allocation

A reader writes in (regarding last month’s article about “total market” investing):

“Your article made me feel much more comfortable with my market-cap weighted portfolio!

However, after reading your email, a news story came out about Wealthfront. Burton Malkiel has written extensively about the merits of market-cap weightings. He and Charlie Ellis helped me build my simple portfolio!

However, it just came out that Malkiel is ignoring his own advice, and has decided to add smart beta ETFs to Wealthfront portfolios. This is a crushing blow. It seems more and more of my favorite investing authors are abandoning the plain vanilla portfolios they have written about for decades, and instead are embracing momentum, value, and small stock overweights in hopes of beating the market.

I am trying very hard to keep it simple and stay the course. But it seems we are losing members of the plain vanilla club every day! Losing Malkiel and Ellis was not fun for me to read about this morning.”

Firstly, advisory firms (including robo-advisors) have an incentive to make their portfolios look smart/complicated. If it’s a simple total market portfolio, people might wonder: why not just handle it on their own? Or why not just use a less expensive target-date fund?

The more important point, however, is that there are no clubs or teams here. It doesn’t work to weigh the names on one side of an asset allocation debate against the names on the other side.

Ultimately you have to weigh the evidence and arguments on each side of the debate and then decide for yourself.

If you decide based on the names on each side, it will always be a struggle to stick with the plan, because on any asset allocation debate there will be experts — credible ones — who disagree with you, regardless of which side of the debate you’re on. And they’ll have convincing-sounding arguments and data backing them up.

For instance on the topic of bonds, several parties I respect greatly have made different arguments.

• Taylor Larimore (and many Bogleheads) suggest using just a “total bond” fund.
• Jack Bogle likes a “total bond” fund with some additional corporate bonds.
• Vanguard’s all-in-one funds include a “total bond” fund plus a “total international bond” fund.
• Rick Ferri has argued in favor of adding a modest allocation to a high-yield bond fund as well.
• Bill Bernstein likes sticking with just Treasuries or CDs.
• Allan Roth has argued in favor of shopping for CD rates rather than using bonds at all.

Personally I would find it impossible to weigh the credibility of one of those parties against the credibility of the others.

In addition, if you decide based on names, you always have to revisit your portfolio decisions whenever a) an expert changes opinion or b) you encounter a new expert with an opinion on the matter.

Conversely, once you’ve made the decision for yourself, you can put it out of your mind and move on with your life.

Reading a new expert opinion or reading about an expert changing their opinion should be roughly as impactful as reading a list of “Top 10 Cities for [People of Your Generation]” in a magazine. Even if your town isn’t on the list, you don’t consider moving. You’ve already made an informed decision, so the writer’s opinion has no impact on where you choose to live.

In short, with any asset allocation decision, regardless of what you end up choosing, the goal is to take your time with the decision, so that ultimately it’s your decision, and you can be confident/content regardless of who agrees or disagrees with you.