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Buffett’s asset allocation advice: take it … with a twist
Asset Management
<p>Abstract: </p> <p>One of the most important decisions retirees need to make is the asset allocation of their portfolios. They can have a static or a dynamic allocation, and simplicity usually favors the former. Warren Buffett recently added another vote for static allocations by revealing that he had advised a trustee to split the bequest his wife will receive 90% in stocks and 10% in short-term bonds. The evidence discussed here shows that, relative to other static allocations, a 90/10 split has a very low failure rate and provides investors with very good upside potential and downside protection. The evidence also shows that two minor twists to the 90/10 split result in two very simple dynamic strategies with even better upside potential and downside protection.<br /> Buffett's Asset Allocation Advice: Take It ... With A Twist - Introduction<br /> Retirees need to carefully balance the risk of spending too much and outliving their savings with the risk of spending too little and lowering their lifestyle unnecessarily. The two main tools they can use to avoid falling on either side of the cliff are the portfolio’s withdrawal rate and asset allocation. Regarding the latter, in his 2013 letter to Berkshire Hathaway shareholders, Warren Buffett discussed the simple advice he gave to the trustee that will manage the bequest his wife will receive:<br /> “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short?term government bonds and 90% in a very low?cost S&amp;P 500 index fund. (I  suggest Vanguard’s.) I believe the trust’s long?term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high?fee managers.”<br /> Buffett does suggest in his letter that investors should follow a simple approach, passively investing in a broadly?diversified, low?cost portfolio; he does not suggest or imply, however, that investors should have a 90/10 stock/bond allocation. And yet his comment begs the question: Is the asset allocation Buffett advised for his wife appropriate for other investors? If yes, why? If not, why not?</p> <p>An obvious distinction between Buffett’s wife and the average investor quickly comes to mind. The average investor needs to implement an asset allocation that carefully balances the two risks already mentioned, overspending and underspending. Buffett’s wife, however, is likely to receive a nest egg large enough so that she will not have to worry about either risk. Put differently, just about any asset allocation will enable Buffett’s wife to live comfortably and still outlive her portfolio, which is not the case for most investors.</p> <p>That said, this article evaluates the merits of the 90/10 allocation that Buffett advised for his wife, relative to other static allocations with different stock/bond proportions, for investors at large. Furthermore, it explores two minor twists to the 90/10 allocation, one that accounts for the behavior of the stock market, and the other that accounts for the relative behavior of the stock and bond markets.</p> <p>In a nutshell, the evidence discussed here suggests that, besides having a very low failure rate, the 90/10 allocation results in an interesting middle ground between the upside potential of more aggressive static allocations and the downside protection of more </p>
Daily Scan: Asia sinks; China sees defense sector surge
Capital Markets
<p>Updated throughout the day</p> <p>October 27</p> <p>As investors fret over the outcome of China's five-year economic planning meeting, China markets wavered today, with the Shanghai and Hong Kong indices eking out modest gains of 0.14% and 0.11%, respectively, before the final bell. The rest of Asia meanwhile sunk, ending a four-week rally. Japan was hardest hit, seeing 0.91% drop on the Nikkei 225. </p> <p>China nerves were offset by big gains in the country's defense sector , which ended up 7.2%, according to Citic Securities. The jump coincides with the news that a US Navy destroyer sailed within 12 nautical miles of the artificial islands built by China in the South China seas. A move that ups the stakes in an increasingly fragile multinational territorial dispute. </p> <p>Here’s what else you need to know:</p> <p>China, Japan, South Korea to hold first summit in three years. The three countries will hold the summit in South Korea when Chinese Premier Li Keqiang visits. It’s the  first such meeting since they were discontinued in 2012 amid tension dating back to World War Two. Reuters </p> <p>Earthquake devastates southern Asia. At least 180 people have died in Afghanistan and Pakistan after a 7.5 magnitude quake struck the region. The epicenter was in Jarm, Afghanistan, near the Pakistan border. Tremors were felt as far as Tajikistan. CNN</p> <p>U.K. House of Lords block family tax credits. The U.K. parliament’s upper chamber has issued a rare rebuke to the conservative government over plans to cut tax rebates for working families, a widely unpopular part of a budget-cutting strategy that would affect thousands of British households. Wall Street Journal </p> <p>Five Britons dead after Canadian whale-watching boat sinks. Five Britons were killed when a whale-watching boat sank off the coast of western Canada. The boat carrying 27 people sank near Tofino, a popular tourist area on Vancouver Island, on Sunday afternoon, killing a woman and four men. BBC </p> <p>US to defy Beijing over South China Sea. The US navy is poised to start freedom of navigation operations in the South China Sea in a high-stakes effort to push back against Chinese territorial claims over artificial islands in the disputed resource-rich waters. Financial Times (paywall)</p> <p>Don't run, don't walk, fly for asylum. The E.U. wants refugees to take paid flights from Greece to other asylum offering countries, rather than face dangerous winter walks. There have already been cases of hypothermia as people wait in the cold, and the E.U. fears the problem will only worsen as winter sets in. Reuters</p> <p>IMF to include China's yuan in benchmark currency basket. International Monetary Fund staff are set to give the all-clear for China’s yuan to be included in the lende</p>
Criminal charges being prepared against former Fed regulator and junior Goldman Sachs executive
Capital Markets
<p>Federal prosecutors are preparing criminal charges in a case of leaked information passing from the New York Fed to a former employee of the regulator then working at a major bank. Under a tentative deal first reported in The New York Times, Goldman Sachs would pay a $50 million fine, be banned from a certain type of bank consulting for three years and face additional restrictions regarding how it handles sensitive regulatory information.<br /> Former Fed employee assigned task to work with bank he once regulated, while supervisor claims no knowledge regarding leaked information<br /> Rohit Bansal first worked at the New York Federal Reserve Bank for seven years before he took a job at Goldman in 2014, where he was assigned to consult with the same banks he regulated while at the Fed.  He is accused of accessing confidential information about a bank client he supervised as a regulator.</p> <p>Despite the fact that Bansal had emailed his supervisor the documents he had placed some of the leaked documents in question to his supervisor, Joseph Jiampietro, lawyers briefed on the matter said he will not face criminal punishment. Goldman fired Jiampietro, a former senior adviser to former Federal Deposit Insurance Corporation Chair Sheila C. Bair, for failure “to properly escalate” the issue internally. Jiampierto claimed to have never looked at the documents and was unaware they were improperly obtained.<br /> After recusing himself from working with the bank, supervisors said to pressure junior Goldman banker to work with client<br /> Goldman’s internal compliance process, which Bansal participated in, instructed employees not to use any material from a previous employer, but such clear instructions were not part of the New York Federal Reserve’s compliance procedures. Despite the confusion, Bansal’s recused himself from working with the one bank he was now assigned to consult with at Goldman, but claims he felt pressured to remain on the account when his supervisors encouraged him to work behind the scenes for that New York bank in question, the lawyers told the New York Times.<br /> Goldman Spokesman Michael DuVally told the New York Times the bank had “reviewed our policies regarding hiring from governmental institutions and have implemented changes to make them appropriately robust.” As soon as the incident was discovered it was reported.<br /> Goldman’s offer fails to match the regulator’s bid on a fine, as Bansal being shunned from banking industry<br /> Goldman initially offered to pay the New York State Department of Financial Services a $3 million fine, but found the bid-ask spread on the deal to be much higher in accepting a $50 million penalty, admission that it failed to supervise Bansal alongside a proposed three-year suspension from involvement in certain consulting deals with banks in New York State, the report said..</p> <p>The Federal Reserve is further expected to permanently bar Bansal from the banking industry, a tactic that was recently advocated on the opinion pages of the New York Times. The Fed has barred six people so far this year for infractions, a significant increase from the three preceding years, the report noted.</p> <p>Bansal’s lawyers are appealing for leniency from criminal charges, as much of what Bansal did was categorized as “fair game.”</p> <p>The Bansal case i</p>
Daily Scan: Stocks slip slightly; Massachusetts regulators go after Fidelity
Capital Markets
<p>Updated throughout the day</p> <p>October 26</p> <p>Stocks slipped slightly Monday, with the Dow slipping 0.1% with the fall of oil prices. The Nasdaq gained 0.1%, and the S&amp;P 500 lost 0.2%. Oil prices fell to $43.85/barrel. Earnings for the third quarter are looking shaky -- especially for manufacturing firms where demand is slowing. Companies continue to indulge in share buybacks to boost earnings per share comparisons. Howard Silverblatt, senior index analyst at S&amp;P Dow Jones Indices, reports that nearly one-quarter of the companies that have published earnings so far (172) have bought 4% of their outstanding stock. Leading the buyback policy: Microsoft, which absorbed $4.8 billion in stock.  Apple, which reports Tuesday, bought back $10 billion last year. Also reporting this week: UPS, another economic bellwether, Exxon, Twitter, Alibaba, and more. ... The Federal Open Market Committee convenes. Goldman Sachs says no rate hike until December, but only with 60% confidence. Before the Fed policymakers convene on Tuesday and Wednesday, they will get word on new home sales in September. Look for a slight drop to 549,000 from 552,000 in August, seasonally adjusted. The other big numbers: third quarter GDP on Thursday and personal income and spending on Friday.</p> <p>Here’s what else you need to know:</p> <p>Fidelity in trouble for "unethical" behavior. Massachusetts regulators filed a complaint Monday against Fidelity Investments for allowing unregistered investment advisors to trade. Fidelity says that it does not believe it violated any laws or regulations. One unregistered advisor allegedly received about $732,000 in advisory fees over 10 years to conduct 28,958 trades for 20 Fidelity customers. Wall Street Journal</p> <p>Valeant defends itself. The big pharmaceutical company said on a conference call Monday that it had found "no evidence whatsoever" of any illegal activity in the company. It also created a new board committee to review the specialty pharmacy relationships it disclosed last week, as well as the report of wrongdoing from the Wall Street Journal. Wall Street Journal</p> <p>White House, Republicans near deal on budget. The deal would be one of John Boehner's last important pieces of law to go through the House before he resigns in two weeks as leader. The agreement would boost the federal debt limit so the government doesn't have to shut down. It still needs to get support from Democrats and a few Republicans. Wall Street Journal (paywall)</p> <p>Seventh high school football player dies. Andre Smith died of "blunt force head injuries to due a football accident" in Illinois Friday. The 17-year-old senior is the seventh high school player to die this year. Last year five students died of causes directly linked to football, and six others died of indirect causes, such as heat stroke or water intoxication. CNN</p> <p>University of Mississippi to remove Confederate flag. Ole' Miss has stopped flying the state's flag on campus because it includes the stars and bars. Students at the universit</p>
Relax like Hillz
Lifestyle, 4:01
<p>Hillary Clinton was the Queen of Calm during her 11-hour hearing with the Benghazi commission. Her secret? Meditation.</p> <p>Clinton told NPR that she tried to meditate between breaks, and she practices yoga to help remain calm, reports Quartz.</p> <p>So breathe deep. If Hillz can mediate to keep her cool while getting pummeled by Republicans for hours on end, you have nothing to worry about in your next client meeting.<br /> Photo: VictoryNH: Protect Our Primary </p>
Q3 wipes $700B from top fund managers
Asset Management
<p>Seven of the largest asset managers in the world lost a whopping $700 billion total during the third quarter. BlackRock alone lost $215 billion during those three months, reports the Financial Times.</p> <p>With end of year bonuses coming soon, everyone must be hoping for a much, much better fourth quarter.<br /> Photo: Purple Slog</p>
Why are so many key hedge funds closing down?
Hedge Funds
<p>&nbsp;</p> <p> This year has been the worst year for hedge fund shutdowns since 2008.</p> <p> More than 400 funds shut down in the first half of the year.<br /> Of the remaining funds, average 2015 returns are nearly flat.</p> <p>&nbsp;</p> <p>There’s no doubt about it: 2015 has been a rough year for hedge funds. New data from Bloomberg indicates that more funds have shut down this year than in any other year since the Financial Crisis. Here’s a look at just how bad it’s gotten.<br /> The Numbers<br /> According to Bloomberg, the total combined assets of the hedge funds that have shut down so far this year is about $16 billion. A whopping 417 hedge funds closed ...</p> <p>Full story available on<br /> Photo: Jason<br /> &nbsp;</p>
World markets weekend update: A boost from central banks
Capital Markets
<p>All eight indexes on our world watch list posted gains over the past week, with central bank policy as a key driver. On Thursday the ECB's president hinted at another stimulus package, and on Friday the Chinese central bank cut interest rates for the sixth time in 12 months. The two Eurozone indexes were the week's biggest winners, the DAX up 6.83% and the CAC 40 up 4.70%. The Nikkei finished in third place with a 2.92% advance and the S&amp;P 500 finished fourth with a 2.07% gain.</p> <p>Here is an overlay of the eight for a sense of their comparative performance so far in 2015.</p> <p>As for the Shanghai Composite, below is a log-scale weekly chart illustrating the bubble that peaked in 2007 and the bubble that started last year. The index is now down -33.9% from its June 12 peak but well off its -43.3% interim low set on July 8th. Optimists might identify the interim low as the beginning of a new bull market. But a comparison with the failed rallies during the crash that began in 2007 suggests a less encouraging forecast.</p> <p>&nbsp;</p> <p>A Closer Look at the Last Four Weeks</p> <p>Read more at Advisor Perspectives.<br /> Photo: Indigo Skies Photography</p>
Video: James Bonds by the numbers -- and they are big
Lifestyle, 4:01
<p>Via CNBC</p> <p>&nbsp;<br /> Photo: Audrey Larrive</p>
FT: Aberdeen Asset Management is searching for a buyer
Asset Management
<p>Aberdeen Asset Management – after years of countless hurts from its love affair with the emerging markets – is reportedly shopping around for a buyer:<br /> “Aberdeen Asset Management has begun to sound out potential buyers for the group as Europe’s second-largest fund house struggles to put an end to a slump in its profitability, share price and assets under management.</p> <p>People familiar with the process said Martin Gilbert, Aberdeen’s 60-year-old founder and chief executive, had made informal approaches to a number of rivals in recent months.”<br /> According to the Financial Times, word on the strasse is that Credit Suisse – which at one time owned 25% of the firm – may actually be interested in purchasing the asset manager, though analysts do cite Deutsche Bank, K.K.R., and Blackstone as potential suitors as well.</p> <p>As The Press and Journal wisely point out however, Japan’s largest bank – Mitsubishi UFJ (MUFJ) – would probably be Aberdeen’s best bet if it was really looking for a buyer.</p> <p>Not only does MUFJ already own a large chunk of Aberdeen, but as we’ve previously reported, the Japanese behemoth had previously planned to “have closer ties” with the fund manager as it tries to expand its global asset management business.</p> <p>Aberdeen absolutely denies that Gilbert’s been shopping around though, so it should be interesting to see how it plays out over the next few days. We’ll keep you in the loop.<br /> Photo: David Jones</p>