In the last decade, pension fund sponsors have been awash with all or nothing theories of investing.
As the stock market was rising to its peak in the 1990s, we were presented with theories that provided a rationale for investing largely in stocks. Jeremy Siegel's 1994 book, "Stocks for the Long Run," encouraged pension funds to make substantial allocations to equities because they have long-term liabilities and stocks have always beat bonds in the long run.
In his March 2000 commentary in Pensions & Investments under the headline "Diversification is bunk," Charles Munger, Warren Buffett's associate, went so far as to say that putting all your money in one stock, like the Woodruff Foundation did with Coca-Cola Co., could be a wise strategy.
More recently, we have been presented with theories to support investing solely in bonds. Remember the risk premium argument that was popular in recent years? This analysis claimed stocks should be shunned by pension funds because the risk premium of equities over bonds was considered non-existent. Well, guess what? The broad stock market is up more than 30% from the low in 2003 and the Nasdaq is up more than 70% from its low. Hello!
In 2001, John Ralfe, then CFO at Boots PLC in London, sold all the stocks in its pension fund and invested solely in long-term bonds. He now has a consulting firm that promotes this strategy. Peter Bernstein supports his idea, saying pension sponsors should "figure out a mix with the highest probability of being able to pay for the groceries."
In my opinion, putting all your money in one asset category constitutes a breach of fiduciary responsibility. If you are not diversified across asset categories, you are not investing — you are speculating. You are behaving as if you know bonds (or stocks) will produce better results than stocks (or bonds). You are bound to be caught.