Portfolio Allocation Deep Thoughts... or Not

I’m working my way through the deeply contemplative time of year where I try to avoid thinking too hard and (worse yet) causing harm.

I’m sitting on a fairly healthy “allocation” toward indexes – roughly ~45% of a portfolio split between S&P and QQEW/VGT. The balance is mostly Berkshire and some dry powder.

As it is a relatively tax-neutral moment, I’m contemplating a slight shift out of the indexes (say 5-10%) toward a combination of cash/Berkshire. I appreciate that the tide has lifted all boats to rather lofty levels – but I also appreciate the counterargument that cash has a true holding cost (perhaps the highest seen in my decades of investing).

While strangers on the internet are just that, I’m curious if any of you are contemplating similar shifts or how you feel regarding the broader markets versus Berkshire/cash over the next 3 to 5+ years.

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I think the factor you’re considering the holding cost of cash is inflation. But I think the holding cost of cash was much higher at points where stocks were at their lowest valuations. What was the holding cost of cash when Berkshire approached a Price to Book ratio of 1?

I’m holding about 10% cash (actually moved most of that into VTAPX because of inflation worries). But I’m also about 30% in Berkshire Calls. The cash is strategic as I’m about to start living off the portfolio. I think the S&P’s valuation is high, so I’ve reduced what I have invested there.

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I think a lot of the equation involves your age and financial position. During the economic meltdown of 2008 I was firmly in the camp of the Munger quote “if you can’t handle a 50% decline, you deserve low returns”. I agreed, stayed put, added to my positions and it worked out well.

Now I look at the big picture, and I feel if we have a big downturn with a long slow recovery (like the 17 year cycles WEB wrote about in 1999)) it will negatively impact whatever remains in my long term lifestyle. A slow erosion of my assets from this level is not a bad option.

I’m got out of bonds (except I-bonds) a few years ago. I’m down to very little in indexes. I have two nice houses paid off in popular towns which I love, and can enjoy no matter what they are worth. If I were younger I’d be looking hard at some tech funds, Asian investments, I’d worry about things like rebalancing. I expect the S&P to be worth more when I croak than it is now, I just don’t need the ride. Now my allocation to BRK is about the only risk level I need in the financial scene.

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but I also appreciate the counterargument that cash has a true holding cost (perhaps the highest seen in my decades of investing).

Or perhaps the lowest.

Having cash forever costs you money for sure.
But having it for a judicious periods can be wonderful.

The return on cash isn’t the interest you earn, it’s what you do with it after waiting a bit.
Sometimes it’s very very handy, and there is no substitute.

You can’t know what will happen in future, but educated guesses can be made.
In any given (say) 2 year stretch there’s usually a really good deal on something you know, and better than at the start of the stretch.
But a good price on a stock is a necessary but not sufficient condition for a great entry…you also need to have the cash to buy.

I bought a bunch of Berkshire (beyond my normal range of allocation) late last September and late November.
Not dirt cheap, but a good entry.
I’ve done very well on those additions, but I couldn’t have made them if I hadn’t had a bit of cash handy.
I’ll likely unwind some of that into the current rally, so I can repeat the trick the next time I spot a deal.

Of course, a cash pile for deployment on the next price plunge is no good if you can’t bring yourself to buy when everything looks dark.

Jim

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having cash… In any given (say) 2 year stretch there’s usually a really good deal on something you know, and better than at the start of the stretch.

That might be too much projecting, seeing it from your point and that of some other sophisticated and successful investors here. I am sure many here have like myself such a high portfolio percentage of Berkshire exactly because they don’t think of themselves as good investors and of being able to halfway reliably spot opportunities.

Owning Berkshire longterm, for many years, does relieve one from that. When people say “Know-nothing investors should buy indices I would add: plus Berkshire”.

For contrary to you average or even lesser skilled investors the holding cost of cash is much higher than it is for you, is it more ballast than opportunity.

Berkshire… I’ll likely unwind some of that into the current rally, so I can repeat the trick the next time I spot a deal.

Not too hasty! Don’t forget about the 3% Mungo rule :slight_smile:

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Hi righteous5,

You asked: I’m curious if any of you are contemplating similar shifts or how you feel regarding the broader markets versus Berkshire/cash over the next 3 to 5+ years.

It all depends on what your goals are. I’m not a fan of market timing but I strongly believe in having dry powder. Now is as good a time as any to make sure you have some dry powder handy. The market has been up nicely over the past three years, despite some pretty awful events. The current earnings yield for the S & P 500 is just over 3%, which is fairly expensive from an historical context.

One observation is that Berkshire declined about the same amount as the S & P 500 during the great recession. I’m not talking about business performance here, just stock price movement. So, with Berkshire included in the index now, it’s proven to move right along with it. I think folks used to look at Berkshire as more of a safe haven in a down market. At least in 2008 that wasn’t the case.

Based on your thoughts above you’ve allocated roughly 50% of your portfolio to Berkshire and dry powder. On first glance that seems like a very high allocation to a single stock. While others on this board are comfortable with high allocations to individual stocks, 40% to 50% is extraordinary.

A good rule of thumb is a maximum allocation of 10% to 10 positions. That’s a maximum and those investments can’t be concentrated in the same industry etc. While there is some math backing up that rule of thumb it’s not particularly important for this discussion. My point would be, if you’re concentrated higher than 10%, to some extent you are giving up a free lunch. We’ll call it a diversification lunch. Of course that presumes you bring the same rigor to other investments as you did with that large allocation. And as most folks know, or eventually learn, the only thing that goes up in a bear market is correlations. :wink:

I managed my father’s investments as he got older. His portfolio was entirely in individual stocks and cash. I always kept 3 year’s worth of living expenses in cash and he had no debts. When the market plunged in 2008 we didn’t sell anything and we even bought some stocks. His retirement income plus dividends provided a nice buffer. In down markets, dividend payments tend to hold up much better than stock prices. It turns out that management teams don’t like cutting dividends until they really have to. Perhaps a basket of dividend stocks would be a good counter to Berkshire Hathaway and the S & P 500? Their income might provide more dry powder in a time that’s convenient to you. While you can always sell some Berkshire stock, choosing the right time to do so, isn’t always as easy. Those dividends are scheduled to come in every quarter.

Cheers!

Buck
TMFBuck

PS- If you’re interested in more information on dividend stocks, I spoke about them on the Rule Breaker’s podcast back in April 2020 https://www.fool.com/podcasts/rule-breaker-investing/2020-04….

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