Cogent Rebuttal to All Equity Portfolio

The text below is a comment that Trevor Bacon made to a MarketPlace article:

Warren Buffett’s favorite market metric suggests investors are ‘playing with fire’

Years of thinly traded markets (due to millions of individuals rebuilding from the recession and nervous to go back in), as well as billions in stock buybacks, pushed prices excessively high on low volume.  Now that earnings are finally the result of all this QE and normal recovery, retail investors are coming off the sidelines and pouring cash in on top for fear of missing out (as usually occurs at the end of a bull market).  Additionally, with nowhere still to go to earn a reasonable rate of return in fixed investments, most have very lopsided portfolios of ever-increasing-risk equities and little to no bonds – a dangerous situation all over again.

Finally, arguing that stocks still look comparatively cheap in the current environment can only last so long. First, rates must rise at some point, which is a headwind to stocks.  Second, in 2008, homes selling multiple times their value were also called “bargains” because the lending environment was unrealistic and made people think prices were going up forever.  The same is happening today in our unrealistic rate environment.  If we had a more realistic interest rate environment these past years, the market might be 30-50% less than where it is now, portfolios would have a proper balance of equities and bonds, and today’s rising earnings and improving economy would now begin to dictate a prudent move into a greater holding of properly-valued risk equities.  But instead, I fear a growing house of cards is once again in the making.


The above is one of the best arguments for a diversified portfolio I have seen. But, it is still taking a short term perspective. Unless the market NEVER comes back, the person who is Investing For Retirement should/must continue to invest during radical market decline in order to take advantage of dollar-cost-averaging, the ONLY proven, assured way to Buy Low, Sell High.

To pull out of the market because a recession is imminent means you are going to try to time the market; e.g. when to sell all, when to buy back in, danger of whipsaw, etc. This market timing strategy has been thoroughly debunked.