Speaking of today’s new technologies and today’s interconnected global marketplace, each is yet another reason why 10% in short-term Treasuries and 90% in an S&P 500 index fund will not make sense for most people. Whereas fundamental value may have been the primary driver of stock movement in the 20th century, technology has increased the participation by those who merely invest via price movement. Half of all participation is high-frequency trading; another large percentage of institutional investors, myself included, regard trendlines and relative strength indices. Modern-day technologies have the ability to push ETFs like iShares S&P 500 (IVV) and Vanguard S&P 500 (VOO) down much further than theoretical buy-n-holders can even imagine.
On another point, since when did diversification become a dirty word? U.S. stocks represents roughly 1/2 the world’s market capitalization, and large-cap U.S. stocks even less. Holding large-cap U.S. stocks alone is likely to severely underperform a basket of global equities over long stretches. How patient might you be with the S&P 500 in a decade like 2000-2009? Let’s say you put $500,000 in the S&P 500 SPDR Trust (SPY) with reinvested dividends, expecting to retire with $1,000,000 on 7% per year. If you did not touch it, you only had $452,000. In contrast, a diversfied basket of global stocks and bonds via Blackrock Global Allocation might have taken that same $500,000 to $1,000,000 with a total return north of 125% in the decade. Diversifying with REITs, MLPs, preferreds as well as emerging market equities was another way to outhustle the S&P 500.
Finally, I have not come across any investors who genuinely wish to plow 90% or more of net worth into SPY, IVV, VOO or Vanguard S&P 500 (VFINX). Simply stated, most high net worth (as well as modest net worth) clients whom I have met have different objectives. Some have expressed a desire to preserve capital; others explain that they wish to take very little risk; still others are very specific about never losing more than 8% on a single investment or the portfolio at large in a 12-month span.
It follows that a strong steward of other people’s money or his/her own account will execute an unemotional discipline to deal with the reality of the emotional, in-the-moment world that we live in. Buy-n-hold 10% short-term treasuries and 90% in a low-cost S&P 500 index fund? Only if you’re Mrs. Buffett. The rest of us need to get intimate with portfolio protection strategies — stop limit-orders, trend-following, RSI, put options, hedging, non-correlated assets (i.e., diversification) — to secure a desired standard of living.