I’ve posted Podcast #132 to the “RobCasts” section of the site. It’s called Cash Is A Strategic Asset Class.
Investing in safe asset classes lets you hold onto your assets at times of insane stock prices. That leaves you with more to invest in stocks when they are being sold at reasonable prices. So it’s not right to count only the return you earn directly on the safe investment class as the return for that asset class. You also need to count thee indirect return you earn from that asset class because investing in it permits you to earn more from stocks.
Arty says
Rob,
Absolutely. The problem is that investors, even “experts” look at asset classes in isolation, and not the **portfolio as a whole**—over time. Thus, they look at “cash” as worthless, or less than that if they get overwhelmed by inflation lingo that might then forces untimely moves into equities.
Equities drive returns. This is true even if you have a low, but permanent, tilted equity allocation as I described in other posts. And it is true if you have a shifting (non-tilted) allocation as you recommend.
I think one must view fixed income—of the highest quality only—as the portfolio anchor. This can be CDs, MM, ST Treasuries of the highest quality, TIPS, et al.
Unless an investor locked-into TIPS at insanely favorable, once-in-a generation yields, the fixed portion allows one to buffer a portfolio (if using buy and hold) or as a waiting-in-reserve, for VII. TIPS are great, BTW, especially if one understands how relative yields, maturities, and time, work together.
Arty
Rob says
Thanks for taking time out of your day to share your thoughts with us, Arty. Your comments have been a big help on numerous occasions.
Rob
Rob says
John Walter Russell has supplied us with additional research on the question of the extent to which following Valuation-Informed Indexing strategies help an index investor obtain higher returns at lower risk in comments put this morning to yesterday’s blog thread:
http://arichlife.passionsaving.com/2009/07/23/cash-is-a-strategic-asset-class/#comments
Good stuff.
Rob