Asset Allocation Is a Temporal Conundrum

WARREN BUFFETT said:

The biggest thing about making money is time. You don’t have to be particularly smart – you just have to be patient.

I like to say that asset allocation is a “temporal conundrum.” In other words, we are all trying to have as much money as possible at specific times in the future to optimize our certainty of outcomes.

The problem is that asset markets generate uncertain returns, and our lives are a sequence of evolving and uncertain needs. The best we can do is try to quantify our future expenses and liabilities and then find certain assets that might help us maximize the certainty of meeting those expenses in the future.

The financial services industry does a terrible job of explaining time horizons to investors. We talk about vague concepts like “stocks for the long run,” but rarely quantify these ideas. Worse, Wall Street is structured around quarterly earnings calls and monthly or year-end financial targets. If you turn on financial TV, you might think that the time horizon of the stock market is a single day, week or month. Even professional analysts structure forecasts around months, quarters, and years.

Ironically, the stock market is a very long-term instrument. The average corporation in the S&P 500 has a lifetime of 18 years.⁶ It takes decades for corporations to grow and become the entities that we see in our everyday lives. I’ve quantified the current time horizon of the global stock market at 18 years using a methodology I call “Defined Duration.” But even when you look at safer instruments like bonds, the time horizon is longer than you might think. In the case of the total US bond market, the average maturity of bonds is 8.4 years as of 2025.

WONKY SIDE NOTE

Let’s reinforce this point with a basic example.

Consider a five-year Treasury note that pays 4%. This instrument is designed to pay you 4% per year over a five-year term. This instrument cannot mathematically earn more than 4% per year over the course of its existence, but as interest rates change it will generate more or less than this in some of those years. If you want to capture the entirety of that 4% average annual return over a five-year period you must be patient enough to allow that instrument to pay out the income it’s designed to pay out over five years. You cannot squeeze 5% of blood, on average, from this stone.

The stock market is not really that different. Warren Buffet once wrote:

I believe. . . that stocks, in economic substance, are really very similar to bonds. I know that this belief will seem eccentric to many investors. They will immediately observe that the return on a bond (the coupon) is fixed, while the return on an equity investment (the company’s earnings) can vary substantially from one year to another. True enough. But anyone who examines the aggregate returns that have been earned by companies during the post-war years will discover something extraordinary: the returns on equity have in fact not varied much at all.⁷

This is important because the stock market is an instrument that, if you hold it for many decades, will generate about 5–6% real returns per year. But there will be years where it’s down 50% and in many stock markets even decades of negative or flat returns. This instrument accrues its returns over inherently long periods because the time horizon over which corporations reliably pay out profits is extended. It takes time to generate revenue and profit and grow a firm into a large entity. This process cannot be accelerated no matter how impatiently we flip our assets around on stock exchanges.

To emphasize this point, consider the average time horizon over which you might make money by holding a portfolio of US stocks, shown in Table 0.2.

Table 0.2: Probability of positive returns over rolling periods

This data is interesting because it highlights the randomness of the stock market over shorter time periods. At a very minimum you wouldn’t want to view the stock market as anything less than a five-year instrument, but to have very high certainty of positive returns you really need to view it more like a 10–20-year instrument.

All of this creates a high behavioral hurdle for investors. We want short-term certainty, but we’re allocating our savings into inherently longer-term instruments. Keep that in mind as we discuss these portfolios. Understanding your personal intertemporal conundrum is a key aspect of choosing the portfolio (or portfolios) that can best match your personal needs.

I hope that many of these portfolios will help you better understand how time relates to your portfolio.