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Tuesday, February 14, 2012

Bonds versus Stocks: Buffett versus Gross

The media is playing up the differing views of Buffett and Gross on stocks and bonds.  Buffett recently previewed his much-anticipated shareholder letter and called bonds "dangerous investments."  At the other end of the spectrum, Bill Gross, manager of the world's largest bond fund, at PIMCO, has recently increased exposure to Treasury issues.

Five years from now, we will look back and see that one of these icons of the investment world will be right and the other probably very wrong.  With the yield on the 10-year Treasury below 2%, the Fed and other world central banks on an inflation mission, and the yield on the S&P 500, for the first time in decades, yielding more than the 10-year Treasury, I have to side with Buffett - up to a point.

Some, in fact, like Laurence Fink, CEO of BlackRock Inc. (the world's largest investor), are pounding the table and arguing that investors should be 100% in equities.

I have to say that I believe Buffett is right but wouldn't go 100% into stocks.  I could sketch out a scenario where 10 years from now the S&P 500 is 10% lower than today (think Medicare, U.S. dysfunctional  government, Southern Europe, nutcase in Iran, etc., etc.) and the 10-year Treasury note is at 1.50%, say, where, in fact, Buffett followers would not have done well.  It is why my clients are diversified.

One comment that Fink made got a chuckle out of me.  He said he was sitting with Buffett one time and the market was falling off a cliff.  He said Buffett got up 3 times and bought stock.  This impressed him. It doesn't me.  Buffett is a multi-billionaire.  He has, for all practical purposes, unlimited capacity to take risk.  If the market fell 50% tomorrow, it would not make one bit of difference to Buffett's economic well-being.

I would suggest that  Fink sit with a couple who are 3 years into retirement, have a "nest egg" of $600,000, and are trying to generate an income from the nest egg and social security that will last.  See how often they are jumping up and down to buy stocks in a market that's falling sharply!

To me, the disagreement on the most important investment decision of all--asset allocation--by these extremely bright, successful long-term investors is the strongest argument for diversification.  Although I agree that long-term Treasuries should be avoided today, bonds in general should not.

Disclosure:  This post is for educational purposes only.  Individuals should do their own research or consult an investment professional before making investment decisions.


  1. I don't see how anyone can argue holding a ten year gov't bond for the duration yielding 2% is a "good" investment. Inflation will likely average higher 2% or higher per year during that period of time. I think Buffett's point is that properly selected equities have inflation protection built-in plus hopefully a little bit of growth above inflation.

    1. re Grouch I believe that if China collapses and Europe implodes, the 10 year Treasury could have the highest total return among non gold assets. I don't expect this but believe there is a positive probability of it happening.
      I do agree that Buffett is probably right but still see a slight argument for this other side.

    2. Of course, if the US implodes, we're all screwed, with the possible exception of the gold bugs.

  2. I agree, but both Buffett and Fink don't take into account the temperament of the average investor.

    Sure when stocks rise, bonds will fall and Fink is correct in saying you should be 100% in stocks. But volatility is different in stocks and bonds.

    Wise to stay diversified. Always.

  3. Gold bug here.

    I see positive probability of US imploding. I do expect this b/c the economic sector is a house of cards. Anyone saying anything different is fooling themselves..........

  4. Stocks are clearly better tha bonds high yield bonds may compare to stocks but in the end stocks outperform bonds.