but the idea of an all-or-nothing approach well i sold all my stocks yesterday you're going to have a long hard investment lifetime we seem to come down to a for most investors and i did something like 65 stocks 35 percent bonds is an intelligent allocation now we and we know stocks are almost certain to do better in the long run just because of the nature of the capital markets and so we've already said we want to do something to give us a little you know anchor to windward dry powder call it what you will uh to protect you against behavioral mistakes and to give you some stability in your account and usually more income although not much more today and so if it's 65 35 and for whatever sound reason non-emotional reason you can come up with and and the market looks substantially overvalued don't don't worry about it if you think it's 20 percent overvalued or 25 percent or undervalued but by the same amount but if it seems to get out of line by a substantial amount take the 65 to 50. take the 35 to 50 and be 50 50. but the idea of an all or nothing approach well i sold all my stocks yesterday you're going to have a long hard investment lifetime who can do that and we still know people left uh a lot of mutual funds we did not have much of a problem here because of our index base but who left the market after it went down 55 50 and 19 in 2007 2009 february or march of 2009 and they got out and they haven't gotten back yet well i mean the mutual fund uh flow data is is enormously powerful yeah right everybody's flooded into bonds and uh and out of equities and we've had a fabulous equity market yeah i mean it's unbelievable the strength of the equity market but i don't i don't see it quite yet being substantially overvalued enough enough to make a change but again what you're doing in a time frame in the late 90s so you have stocks at 30 times plus you've got bonds investment grade bonds kind of 7 and so you know there's a case to be made where no just kind of pick your asset allocation pick your index fund and write it out but those do seem to be extremes where logic kind of dictates that you really probably ought to do uh some adjustment i hate to say this because it makes me into a market timer but of course you're absolutely right and to make matters worse if i deny it i would have to expunge uh my recorded comments at a morningstar conference in the spring of 2000 when the market was at its all-time high and i said to don phillips he did a one-on-one interview we did two sessions and the combined attendance in the two sessions was more than the attendance of the meeting i can't understand why anybody would have wanted to hear that twice but i said at one point when he asked me about that i said you know don with bonds yielding around seven percent today the stock market yielding one percent the stock market being at that point closer to 40 times earnings in the 30. i think it's impossible in the next decade and i look at things in decades lengths that bonds will that stocks will outperform bonds returns on stocks ought to be you know pretty close to nominal and the returns on bonds gonna be seven percent a year that's doubling your money in the decade and then i looked at them and said you know don sometimes i sit here and worry why i have any money in stocks whatsoever and i was in the process then and i can't remember the exact timing but obviously around that time of reducing my own uh equity position from about it's normal of about 70 75 percent i don't even remember maybe 80 down to about 25 or 30 percent and i did that so um but but mainly well importantly because of that everybody says you know you knew what was going to happen and i suppose you could argue that i did but that i was also you know my heart was failing and my life was endangered i wanted to make sure my what what part of it what a kind of estate i had mostly my retirement plan here was protected for my family so it was a it was a personal financial decision greatly abetted by the fact that it made totally financial and economic sense and how many times in a lifetime does that come along well i went through the crash in 70 274 that was before the after the merger and that was not as easy to see coming but i went from a moderately overvalued position to a greatly undervalued position stock yields got to seven percent in 74. and nobody said why don't we buy stocks and uh with bond yields and bonds to make them interesting right and then when paul voger comes in and some of the yields on say long-term treasuries intermediate term treasuries range around 15 nobody thought i ought to get out of stocks and into bonds it was not so much that stocks were overpriced it was the bonds with the steel of the century and this last 50 percent decline one of i think four i've experienced um was they're all different that's one really important thing don't say i've seen all this before you never very few times says the same thing happened twice and in in the financial markets the same problems happened twice yeah each one each one is its own there's some some statement like uh all happy families are alike and all unhappy families uh are different but all unhappy families are are alike in their own way or something like that and uh the the problem here is that all these bear markets are very very different inspired by different things sometimes mathematics sometimes investors emotions and sometimes by external factors and what really happened is we should have seen any of us and i didn't see it because i wasn't involved in that the mortgage market that was developing catastrophic if i'd spent eight hours for the salesman for washington mutual or countrywide even better on the west coast just going on a salesman to house to house and here you can borrow 300 000 put 200 000 into a house of which i'll get you a 200 000 mortgage and keep 100 for yourself and you're making 17 000 a year go ahead and do it and uh you would have been if you've known that and i think it's arguable that i should have known it uh but not many people did so the result of this was not all only those insane mortgages but the insanity of being able to sell them to a bank you didn't have to worry about whether that customer was any good that was up to the next guy and he didn't pay much attention and the next guy along with his collateralized debt obligations played the law of averages that just wasn't going to work given those circumstances nobody thought enough about the risk so what that gave rise to was first huge amounts of spending from equitizing the value of houses whereas the economy was pumped up by something like two trillion dollars in that period for people taking money out of their houses to spend we can only do that once maybe they thought they could do it more but those things don't happen like that and then in in the following act shows that you're trying to restore all that so you're spending two trillion dollars less to restore your equity or you know you can't keep saving like that and the other thing that happened was it basically put the financial system under enormous pressure and one entire industry banking basically eliminated all its dividends this does not happen very often this was the worst decline in dividends in a relative basis yeah oh yeah but but it took the s p dividend down about 22 percent and if you look at the long chain of s p dividends have your students just short the s p dividend from 1926 and it goes that's the depression and then it kind of grows and grows and grows there are little bumps but this is this is the biggest bump in dividends since the depression and so this was this was a market collapse it was born by essentially an economic or financial collapse i mean collapse might be a little bit strong but if an industry eliminates his dividend that is not something that will happen in the marketplace and without recognition so it was this was a more logical collapse if we'd only seen it coming first let me differentiate between the active managers let's call them a stock picker and for each good stock picker of course it's a bad stock picker but no way around these things and then there's asset allocation how much do you want the stocks and how much do you want in bonds to me that is by and large a buy and hold proposition don't do something just stand there no matter almost no matter what happens and maybe no matter what happens for example even this 50 percent decline you know you ended up with more money uh seven years later from 2007 to 2014 if you just stayed in and just taken your lumps and it came back if you were in an all market index fund so asset allocation is a little different but there's one thing that is the same please don't let anybody forget this if you're smart enough to reduce your allocation to stocks and increase your allocation to bonds somebody else is reducing their allocation to bonds and increasing their allocation to stocks and under the city the logic is identical so if the system is roughly which it is and depending on how you count the treasury's debt uh which is another interesting story but roughly a 60 40 uh situation so you have the you have the total market allocation for the typical investor and the variations are not huge you know somebody's going to be 100 in equities which by definition is the best long-term strategy uh and yet you may not be able to handle the bumps well let me correct myself no 100 equities is not the best long strategy 100 equity is leveraged two to one there you go three to one just so long as you get someone to bail you out at the bottom right and you can you can pay them back later this is not an easy thing to do but we all know those fundamentals and we all know that allocation for the system is is fixed for all of us so we're trading back and forth with one another trying to prove we're smarter and i'd say this about warren you know when he he's as everybody knows decided to in the in the money he's leaving to his widow in a trust he is directed to be invested 90 in the s p 500 index fund not a vanguard s p 500 index fund i should say because he said it too and uh so and his this big bet he has with a hedge fund which he's winning by a huge amount happily and there are kind of random events uh his bet his side of the bet is not that berkshire will do better than the hedge fund but the s p 500 will do better so he's he's a a huge supporter and has been for as long as i've known him of the index fund and indeed when i talked to him about a little book of common sense investing i said you know i'm going to write in the conclusion i was just working on the book when i had dinner with him i guess that would be back in around 2006 and i said i'd concluded that benjamin graham would be an indexer do you think that's fair and uh because everything change benjamin graham recanted a lot of it's hard to find value anymore they're too many people looking for it uh and he said of course he was an indexer fund i know because he told me so and that was good enough for me so i put it in the book but uh so these are the varieties of investing that you're gonna depart from this universe of stocks and bonds uh if you depart somebody else does the exact opposite thing it's a closed universe and so in that sense and i love this point it's a little bit difficult to do without a chart but the chart is entitled we're all indexers look at the total stock market that's what we all own now slice about a third of that out and those are indexers who know the value of indexing so they own an index fund and with no trading arguably no trading then look at the other two thirds those people own the market index by definition those stockholders but they don't they're not satisfied with that they want to bet against each other and therefore they lose the index by the amount of transaction costs they have none of this is complicated