Finance Post: Groucho Marx Philospohy

[Jadow]

So, back in the 20's or 30's, no idea when, but Groucho walked into the NY Stock Exchange for a tour.

As he was walking around one of the traders on the floor asked him: "Groucho, how do you invest your money?"

Groucho Answered: "All in bonds."

To which the trader replied: "But Groucho, they don't pay much return."

And Groucho Answered: "They do when you have a lot of em!"

Other than being really funny and really true, as an investor, do you think, when you hit a certain level where you make good returns even on really safe invesments like CDs or Bonds, will you play it safe?

I figure, someday when I have enough basis, I'll cut back on this stock market a lot and just be happy with good, safe 5% or so interest.

Thoughts?

 

[Zugzwang152]

That depends on whether you want to keep growing your money as fast as possible, or are content with the amount you have.

 

[Jawo]

Depending on where you are in your financial life. If you are young (>30) be more aggressive since the stock market will increase over time. If you look at 1920 to 2000 the stock market went way up, even with the multiple depressions (1929, 1987, etc), World Wars, political crisis, and more. If you are nearing retirement it would be wise to keep money in bonds.

This all assuming that you will not need easy access to your money. There are pleanty of secondary bond markets to buy and sell them if you need easy cash.

In short...thats why financial advisors make the big bucks!

 

[LegendKiller]

Bonds are for people close to retirement or those who are very risk-averse. Equities are diversified through volume and time and will always deliver a superior return. Volatility is short-term.

His comment is funny, but not something I'd live by, it's the ratio of return, not absolute dollars that matters, as everybody knows.

There's a reason why most comedians are poor and most finance/investments people are not. They should stick to what they are good at.

 

[Yossarian]

Originally posted by: LegendKiller
Bonds are for people close to retirement or those who are very risk-averse. Equities are diversified through volume and time and will always deliver a superior return. Volatility is short-term.

His comment is funny, but not something I'd live by, it's the ratio of return, not absolute dollars that matters, as everybody knows.

There's a reason why most comedians are poor and most finance/investments people are not. They should stick to what they are good at.

investing only in bonds is for those who need to focus on preserving wealth. almost every investor should have SOME bonds though. they provide diversification, reducing portfolio volatility while having minimal impact on long term growth.

 

[LegendKiller]

Originally posted by: Yossarian
<div class="FTQUOTE"><begin quote>Originally posted by: LegendKiller
Bonds are for people close to retirement or those who are very risk-averse. Equities are diversified through volume and time and will always deliver a superior return. Volatility is short-term.

His comment is funny, but not something I'd live by, it's the ratio of return, not absolute dollars that matters, as everybody knows.

There's a reason why most comedians are poor and most finance/investments people are not. They should stick to what they are good at.</end quote></div>

investing only in bonds is for those who need to focus on preserving wealth. almost every investor should have SOME bonds though. they provide diversification, reducing portfolio volatility while having minimal impact on long term growth.

Actually, there are many investment professionals (Peter Lynch is one) say that bonds are nothing but drags on the portfolio. I tend to agree with this. There is no indication that bonds provide any worthwhile diversity to your portfolio that time doesn't provide.

Think of it this way, if you invested for 40 years and did nothing but buy and hold, you would have ridden out at least 3 economic cycles. During this time your long-run average return would be approx 8%.

If you had invested in bonds, your portfolio would have not suffered as greatly during downturns, but your return would still end up less, perhaps 6%.

So, which is better?

One thing people forget is that time is the greatest diversification tool you will ever have. Sure, you should always diversify with multiple companies, but riding out short-term volatility is going to win no matter what.

Any additional investment that doesn't correlate well with your current investment pool is a good diversification tool. Even adding a more risky asset is better diversification if not highly correlated.

That's why bonds are essentially worthless as diversification for anybody outside of 5-10 years of retirement, or those who are very risk-averse. This feeling is mirrored by many investment professionals that I interact with and is debated quite heavily in finance. CFA course materials provide a few studies that I had to read through, especially for Level 3.

I am not buy and hold and I do buy bonds during certain times in an economic cycle, but that's mainly because I have strong opinions about the direction of the market (and I am pretty good too). However, long-term I am 100% equities.