William Baldwin provides a simple portfolio strategy in the January 17 issue of Forbes. It is the prototypical long-term horizon recommendation that the asset allocation calculators all over the web give you. What's different is that his rationale is simple. Consider that equities are likely to earn 5% per year after inflation, bonds about 2%. Put the bonds in a tax deferred account and carefully manage the realized gains in the taxable equity account, and you can avoid paying taxes currently. A 50-50 portfolio will return 3.5% plus inflation over the long term. If you invest when P/E ratios are high (> 20) , it will be a little bit less; when P/Es are low, a little bit more. The S&P 500 is trading at a P/E of 16.3 based on 2010 earnings as of today's close.
Now, this is not a retiree's portfolio. The markets is too volatile to confidently predict this kind of return over the next ten years. And portfolio that is producing current income is so sensitive to market movements that one early year of underpeformance can cripple the income potential for the remainder of retirement. But for people still in their accumulation years, this can be a valuable framework for portfolio construction.
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