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Re: A Backtest of the Dividend Growth Model, 1871-2010

Now we get out our backtesting cauldrons and conjure up all the dark arts of finance to come up with the Fancy Pants Prediction technique. It tells us that our simpleminded approach is off by a full 1%. Expected returns are in fact 2.8%, not 3.8%. That looks helpful! Well maybe. The oblivious inves...
by grayfox
Thu Oct 30, 2014 2:48 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 68
Views: 3693

Re: A Backtest of the Dividend Growth Model, 1871-2010

Putting aside the theoretical considerations behind this particular rendition of the Dividend Discount Model, what I think is missing is a general way to validate and evaluate forecasting models. We want to determine three things: 1. Is the forecasting model valid? 2. What level of confidence do we ...
by grayfox
Thu Oct 30, 2014 3:34 am
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 68
Views: 3693

Re: A Challenge for Bogleheads - the market has changed

Here's a chart showing the value, as of 2014-10-21, of a $1,000 investment made every month since April 1996 for two funds. Vanguard 500 Index (VFINX) and Vanguard Total International Stock Market (VGTSX). Black circles are are 500 Index VFINX and red circles are Total International VFTSX. Each circ...
by grayfox
Wed Oct 29, 2014 3:15 pm
 
Forum: Investing - Theory, News & General
Topic: A Challenge for Bogleheads - the market has changed
Replies: 44
Views: 3961

Re: Yield Curve Investigations

Indeed. Although I've heard this mentioned before, I've never really paid much attention to it, although I do own muni funds. I was actually surprised when I saw that the ratio was almost 160% for the 10-year securities. The ratio is similarly high for other terms (crazy high for shorter-terms; e.g...
by grayfox
Wed Oct 29, 2014 6:42 am
 
Forum: Investing - Theory, News & General
Topic: Yield Curve Investigations
Replies: 24
Views: 1866

Re: A Backtest of the Dividend Growth Model, 1871-2010

Is there a difference between correlation and regression R^2 ? They must be similar. They both go from -1 to +1 and show the strength and direction of a linear relationship. For sure. R2 is correlation to the power of two. Simple as that. In Excel, I use the CORREL function, then multiply it by its...
by grayfox
Tue Oct 28, 2014 1:25 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 68
Views: 3693

Re: A Backtest of the Dividend Growth Model, 1871-2010

With so few data points, you can run random numbers and easily get R^2 = .20 or .30 To see if I was talking through my hat, I generated two sets of 14 random numbers and looked at the correlation. Anyone can duplicate this exactly. > set.seed(1234) > for (i in 1:10) { + cat(cor(100 * rnorm(14, mean...
by grayfox
Tue Oct 28, 2014 7:32 am
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 68
Views: 3693

Re: A Backtest of the Dividend Growth Model, 1871-2010

This post is to report on a backtest of the simplified Dividend Growth Model for predicting forward 10-year stock returns for planning purposes (same as used by Mr. Bogle). The analysis was done by Research Affiliates in 2012, using Shiller data from 1871 to 2010 — and I reproduced their results in...
by grayfox
Tue Oct 28, 2014 3:28 am
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 68
Views: 3693

Re: Yield Curve Investigations

This is an important topic. The first basic principle of finance is that a dollar in the future is worth less than a dollar today. What discount rate is the market using to discount future payments that are guaranteed by the government? The yield curve tells us that discount rate. Second basic princ...
by grayfox
Mon Oct 27, 2014 3:38 pm
 
Forum: Investing - Theory, News & General
Topic: Yield Curve Investigations
Replies: 24
Views: 1866

Re: How to think about expected returns--continuing discussi

I have a very large number of posts here on the problems of using past data, including having only a few independent data points and that some of those data points may be irrelevant due to changing conditions. Nonetheless, what are the alternatives? Without some notion of returns, how do you decide...
by grayfox
Mon Oct 27, 2014 1:01 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8311

Re: How to think about expected returns--continuing discussi

By your definitions, of course predictions of returns are opinions. We can't today know equity future returns. That doesn't mean there aren't better and worse techniques or one opinion is as good as another. Consider weather forecasts. They are, by your definition, mere opinions. However, you get m...
by grayfox
Sun Oct 26, 2014 1:14 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8311

Re: How to think about expected returns--continuing discussi

<> :?: Which leads to my second question about expected return forecasts: Are these forecasts fact or simply someone's opinion? What do you mean? How would (or wouldn't) a prediction of the future be a fact? "Simply someone's opinion" is a rather dismissive characterization. Forecasting m...
by grayfox
Sat Oct 25, 2014 12:48 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8311

Re: So do we care more about change in bond price or bond yi

This idea of buying a 10-year STRIP and then selling it after one year sounds appealing. It turns out I actually bought the 2024-08-15 Stripped-Coupon-Interest STRIPS, with settlement date 12/31/2013 for a price of 70.774. My plan was to hold it to maturity as part of a LMP. By the way, the are thre...
by grayfox
Sat Oct 25, 2014 5:16 am
 
Forum: Investing - Theory, News & General
Topic: So do we care more about change in bond price or bond yield?
Replies: 178
Views: 13423

Re: How to think about expected returns--continuing discussi

Just to show an example of the difference in error ranges between the factors of stock returns, we can look at the recent return forecasts published by Research Affiliates. They use an earnings growth model to estimate expected real stock returns for U.S. large cap stocks over next 10 years (same m...
by grayfox
Sat Oct 25, 2014 5:02 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8311

Re: So do we care more about change in bond price or bond yi

Yield to Maturity (YTM): fictitious? ------------------------------------------ Regarding YTM, it depends how you define "fictitious". YTM is defined as the single discount rate that equates bond price to discounted cash flows. Is a calculated number fictitious? It depends how you interpr...
by grayfox
Fri Oct 24, 2014 5:14 pm
 
Forum: Investing - Theory, News & General
Topic: So do we care more about change in bond price or bond yield?
Replies: 178
Views: 13423

Re: How to think about expected returns--continuing discussi

My main complaint about most expected return forecasts is that the most important thing is buried in a footnote to Table Z.11 in the Appendix on page 167. Which is where you find that the range is +/- 8%. The debate centers on whether the mean return is 4.0% or 4.4% or 4.5%, but the interval is 20x ...
by grayfox
Fri Oct 24, 2014 5:24 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8311

Re: So do we care more about change in bond price or bond yi

Note that there are many more maturities for non-zeros (hence the gaps in the red curve), and note the little wiggles in the curve for non-zeros. I don't see any obvious reason for the wiggles, e.g., due to different coupons. It looks like they are older bonds with very high coupons. I looked at th...
by grayfox
Fri Oct 24, 2014 4:55 am
 
Forum: Investing - Theory, News & General
Topic: So do we care more about change in bond price or bond yield?
Replies: 178
Views: 13423

Re: Gains and Losses from Periodic Investments

Good points 3) 15, 16, 17 years sounds reasonable. 15 years ago was 1999 and the S&P 500 was near the top of the bubble. It's not surprising that stock investments made in 1999 are still trailing bond investments made in 1999. Yet I would bet that in another 15 years, those 1999 stock investment...
by grayfox
Fri Oct 24, 2014 4:35 am
 
Forum: Investing - Theory, News & General
Topic: Gains and Losses from Periodic Investments
Replies: 13
Views: 1411

Re: Gains and Losses from Periodic Investments

As I stated above, I think that the Equity Risk Premium can be shown to be very persistent over the past 35 years. Except for the bubble period around 1998-2000, and a little in 2007, there has been significance excess return of stocks over bonds. Then I thought, what about the other so-called risk ...
by grayfox
Thu Oct 23, 2014 7:16 am
 
Forum: Investing - Theory, News & General
Topic: Gains and Losses from Periodic Investments
Replies: 13
Views: 1411

Re: So do we care more about change in bond price or bond yi

Nothing to add, but I just want to say keep up the good work. I'm reading all the posts and following bond fund analysis discussion. Very enlightening.
by grayfox
Thu Oct 23, 2014 7:01 am
 
Forum: Investing - Theory, News & General
Topic: So do we care more about change in bond price or bond yield?
Replies: 178
Views: 13423

Re: How to think about expected returns--continuing discussi

$6,931 +++++++++++++++*+++stock+++++++++++++++++++++++++ $32,186 * $10,680 (TIPS) |__________________|___________________|__________________|__________________|__________________| 0 $10K $20K $30K $40K $50K For a young investor, it seems like there is a lot more risk with bonds in your example. Wit...
by grayfox
Wed Oct 22, 2014 3:02 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8311

Re: How to think about expected returns--continuing discussi

I don't really care about expected returns. At least not directly. What I want to know is: How much money I will have in 10 years? Suppose I want to put some money away to purchase a SPIA in 10 years. It could be a substantial amount of money, say $100K or $500K. To keep from having to many zeros, l...
by grayfox
Wed Oct 22, 2014 1:02 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8311

Re: Gains and Losses from Periodic Investments

How about a log scale on the vertical axis? L. Matthew 7:7 Ask, and it shall be given you; seek, and ye shall find; knock, and it shall be opened unto you: http://www.lagunabeachbikini.com/images/2014/investing/ValVFINX.VFIIX1980-2014log.png The main thing I notice is that most of the stock investm...
by grayfox
Tue Oct 21, 2014 10:12 am
 
Forum: Investing - Theory, News & General
Topic: Gains and Losses from Periodic Investments
Replies: 13
Views: 1411

Re: Gains and Losses from Periodic Investments

Here's a long-term view. $1,000 each month starting in June 1980. The funds are Vanguard 500 Index VFINX and Vanguard GNMA VFIIX http://www.lagunabeachbikini.com/images/2014/investing/ValVFINX.VFIIX1980-2014.png 412 Monthly investments Total Invested 412 * 1,000 = $412,000 GNMA gained $1,212,459 for...
by grayfox
Tue Oct 14, 2014 1:55 pm
 
Forum: Investing - Theory, News & General
Topic: Gains and Losses from Periodic Investments
Replies: 13
Views: 1411

Re: Gains and Losses from Periodic Investments

I started thinking of accumulation this way when I took that Stanford pensions and retirement online course with Professor Joshua D. Rauh . The first lecture was about savings and investing for retirement. A spreadsheet showed the basic process, which I would call the baseline scenario for retiremen...
by grayfox
Sun Oct 12, 2014 2:33 am
 
Forum: Investing - Theory, News & General
Topic: Gains and Losses from Periodic Investments
Replies: 13
Views: 1411

Gains and Losses from Periodic Investments

I thought someone might be interested in this chart I created. Suppose you invested $1,000 each month from Jan-2003 to the present. There are 142 months so that is a total of 142 $1,000 investments made so far. Now I know that most people look at their portfolio as one big pile of money. However, an...
by grayfox
Sat Oct 11, 2014 2:11 pm
 
Forum: Investing - Theory, News & General
Topic: Gains and Losses from Periodic Investments
Replies: 13
Views: 1411

Re: Is a fall in portfolio value "only on paper"?

After more thinking. 1. Obviously the realized gain or loss, sales price minus purchase price, matters. It;s how much you made and how much you will have to report as a gain for taxes, if in a taxable account. 2. The unrealized gain from the time of purchase, current market price minus purchase pric...
by grayfox
Fri Oct 10, 2014 1:01 pm
 
Forum: Investing - Theory, News & General
Topic: Is a fall in portfolio value "only on paper"?
Replies: 86
Views: 3716

Re: Is a fall in portfolio value "only on paper"?

There are two kinds of loss/gain: unrealized and realized. You must be specific about whether you are talking about realized or unrealized gains and loss. When someone says "paper loss", they usually mean unrealized loss. The realized gain/loss happens only when you sell, and there is only...
by grayfox
Fri Oct 10, 2014 11:06 am
 
Forum: Investing - Theory, News & General
Topic: Is a fall in portfolio value "only on paper"?
Replies: 86
Views: 3716

Re: Is a fall in portfolio value "only on paper"?

Here's what INVESTOPEDIA says INVESTOPEDIA EXPLAINS 'CAPITAL LOSS' A capital loss is essentially the difference between the purchase price and the price at which the asset is sold, where the sale price is lower than the purchase price. For example, if an investor bought a house for $250,000 and sold...
by grayfox
Fri Oct 10, 2014 10:35 am
 
Forum: Investing - Theory, News & General
Topic: Is a fall in portfolio value "only on paper"?
Replies: 86
Views: 3716

Re: Bogleheads, help me be less afraid of international stoc

I know that Large International stocks have lower P/E than Large U.S. stocks. So just to get a data point, I looked GMO's August 2014 7-year forecast. They are forecasting -1.7% annual return for US Large and +0.7% for Intl Large. I believe the error bars are +/- 6.5%. So here's is a how $10,000 inv...
by grayfox
Mon Oct 06, 2014 6:31 am
 
Forum: Investing - Theory, News & General
Topic: Bogleheads, help me be less afraid of international stocks
Replies: 53
Views: 3728

Re: Estimating Future Investment Returns — On a Napkin

As a comparison, I looked at another stock market forecast, GMO 7-year forecast from August 2014. They were predicting -1.7% for US Large over 7 years. I tried to find the error bars, but they weren't on the chart. That is very curious because older charts used to say "Estimated Range of 7-Year...
by grayfox
Mon Oct 06, 2014 4:41 am
 
Forum: Investing - Theory, News & General
Topic: Estimating Future Investment Returns — On a Napkin
Replies: 75
Views: 4806

Re: Estimating Future Investment Returns — On a Napkin

Looking at the historical record for the post-war period since 1950,... I was referring to the estimate of returns which in the end is what you are estimating. We don't even know the mean of the past return distribution. We can only estimate the mean of the past distribution to plus or minus a few ...
by grayfox
Mon Oct 06, 2014 2:52 am
 
Forum: Investing - Theory, News & General
Topic: Estimating Future Investment Returns — On a Napkin
Replies: 75
Views: 4806

Re: Estimating Future Investment Returns — On a Napkin

OK, reading some of the previous posts, I think some progress is being made on my question, at least the 30 year investment. As I reported previously, historically, $10,000 invested in S&P 500 for 30 years end up between about $30,000 (worst) and $550,000 (best), which is 18:1 range. And Compoun...
by grayfox
Sun Oct 05, 2014 1:49 pm
 
Forum: Investing - Theory, News & General
Topic: Estimating Future Investment Returns — On a Napkin
Replies: 75
Views: 4806

Re: Estimating Future Investment Returns — On a Napkin

grayfox is that final because this is me signing off this thread! I think that's basically it. 10,000 will grow to about $76,123 at a 7% compound growth rate over 30 years. Wait, when I looked at historical, the range of outcomes over 30 years was like $30,000 to $550,000. Shouldn't the answer have...
by grayfox
Sun Oct 05, 2014 7:02 am
 
Forum: Investing - Theory, News & General
Topic: Estimating Future Investment Returns — On a Napkin
Replies: 75
Views: 4806

Re: Estimating Future Investment Returns — On a Napkin

Edit: OK, I looked up the historical numbers. For the S&P 500, over 30 years, the worst was 2.92x and the best was 55.13x. So $10,000 investment ended up with between $29,200 to $551,300. What does the method in the OP say? Against my better judgement, grayfox , I'll make a serious attempt to a...
by grayfox
Sun Oct 05, 2014 6:15 am
 
Forum: Investing - Theory, News & General
Topic: Estimating Future Investment Returns — On a Napkin
Replies: 75
Views: 4806

Re: Estimating Future Investment Returns — On a Napkin

I am starting to conclude that using the historical returns is a better starting point than this napkin method promoted by Bogle, Bernstein, etc. I asked how much $10,000 would end up over 10-years. The answer was this method doesn't work for 10 years. But that's what I want to know about. Now I'm l...
by grayfox
Sun Oct 05, 2014 5:39 am
 
Forum: Investing - Theory, News & General
Topic: Estimating Future Investment Returns — On a Napkin
Replies: 75
Views: 4806

Re: Estimating Future Investment Returns — On a Napkin

The question is: how much money will I end up with? I am unable to calculate it. What amount would your or your 5th grade nephew calculate? Why don't you take a stab at making the estimates yourself, using the simple tools in the OP — and then we can see where you are having problems. If one knows ...
by grayfox
Sun Oct 05, 2014 3:37 am
 
Forum: Investing - Theory, News & General
Topic: Estimating Future Investment Returns — On a Napkin
Replies: 75
Views: 4806

Re: Estimating Future Investment Returns — On a Napkin

I am also making two $10,000 investments for 30 years. Grayfox , you're certainly capable yourself of using the two simple forecasting tools outlined in the OP to calculate the expected returns of your two investments over 30 years. In fact, the calculations are well within the grasp of my fifth-gr...
by grayfox
Sun Oct 05, 2014 3:07 am
 
Forum: Investing - Theory, News & General
Topic: Estimating Future Investment Returns — On a Napkin
Replies: 75
Views: 4806

Re: Estimating Future Investment Returns — On a Napkin

I will buy them on Monday and hold for 10-years. No rebalancing. Then I'll sell both to fund my spending in 2024. What will be the ending balance in dollars of each investment? Which one will have more money in dollars? Ten years is far too short of an investment period to make a reasonable estimat...
by grayfox
Sun Oct 05, 2014 2:14 am
 
Forum: Investing - Theory, News & General
Topic: Estimating Future Investment Returns — On a Napkin
Replies: 75
Views: 4806

Re: Estimating Future Investment Returns — On a Napkin

BONDS: CURRENT YIELDS PREDICT FUTURE RETURNS If held to maturity and interest payments are reinvested, current bond yields predict 90% of a bond's or bond fund's future total return (chart below). The other 10% depends on the prevailing rates when the interest payments are reinvested: if the rates ...
by grayfox
Sat Oct 04, 2014 7:24 am
 
Forum: Investing - Theory, News & General
Topic: Estimating Future Investment Returns — On a Napkin
Replies: 75
Views: 4806

Re: So do we care more about change in bond price or bond yi

To answer the original question: Do we want 1) price to rise, yield to fall or 2) price to fall and yield to rise? This is easy. What is investing? You forgo consumption today, so that you will have more consumption in the future. In other words, you sacrifice today to have more tomorrow. Any invest...
by grayfox
Sat Oct 04, 2014 7:10 am
 
Forum: Investing - Theory, News & General
Topic: So do we care more about change in bond price or bond yield?
Replies: 178
Views: 13423

Re: So do we care more about change in bond price or bond yi

Another thought. If the low-coupon bond does best, how about the zero-coupon? Here are my calculation using today's Treasury Yield Curve > #### Show bond price increasing as it falls down the yield curve > # 10/3/2014 Yield Curve = 1,2,3,5,7,10 = 0.10, 0.53, 1.01, 1.70, 2.14, 2.44 > #### Zero coupon...
by grayfox
Fri Oct 03, 2014 4:22 am
 
Forum: Investing - Theory, News & General
Topic: So do we care more about change in bond price or bond yield?
Replies: 178
Views: 13423

Re: So do we care more about change in bond price or bond yi

Here's an attempt to graphically illustrate some of the concepts we're discussing. The charts below are based on values calculated with the standard bond formulas based on the nominal treasury yield curve as of today. http://s26.postimg.org/iou3aake1/Bond_price_and_current_yield_at_coupon.png Nice ...
by grayfox
Fri Oct 03, 2014 3:33 am
 
Forum: Investing - Theory, News & General
Topic: So do we care more about change in bond price or bond yield?
Replies: 178
Views: 13423

Re: what is risk?

I think I understand the disagreement. Stated in simple terms: 1. Risk for some holding period is the variance of the total return over that holding period. (from Markowitz) 2. If the annual variance is known, then the variance for any holding period is known. (from statistics, σT = σ/sqrt(T)) There...
by grayfox
Wed Oct 01, 2014 5:36 am
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4405

Re: what is risk?

I guess we'll have to agree to disagree because I don't think you have answered the question at all, nor offered up any data to show anything, nor offered up any measure anyone else could even investigate. What other question is there to answer, what data is there to show, what else is there to inv...
by grayfox
Wed Oct 01, 2014 4:09 am
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4405

Re: Calculating Bond Fund What-Ifs

The previous simulation used a 5-year bond model. According to this calculator , duration of a 6-year 2% bond YTM=2% semiannual payments is 5.68 years. So I'll use a 6-year bond model since it lines up with the 5.7 year duration of VBMFX. The bond price after the 100 bps rise. So it didn't fall quit...
by grayfox
Wed Oct 01, 2014 3:32 am
 
Forum: Investing - Theory, News & General
Topic: Calculating Bond Fund What-Ifs
Replies: 56
Views: 4222

Re: what is risk?

My position is that the Markowitz model is fine exactly the way it is. The uncertainty lies in the dispersion (spread) of the outcome at the end of the holding period. You can measure the spread with variance, standard deviation, range or whatever. Standard deviation seems most convenient. If the ho...
by grayfox
Tue Sep 30, 2014 5:48 pm
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4405

Re: Calculating Bond Fund What-Ifs

BTW, here's what would happen if rates don't rise 100 bps, and you started with $10,000 > # 0 bps parallel rise, Year YTM.S YTM.L Bal.Start Interest Bond.Price Mkt.Val Bal.End Cap.Ret Inc.Ret Tot.Ret 1 2014 1.7 2 NA NA 100.000 10000.0 10000.0 NA NA NA 2 2015 1.7 2 10000.0 200.000 101.155 10115.5 103...
by grayfox
Tue Sep 30, 2014 5:06 pm
 
Forum: Investing - Theory, News & General
Topic: Calculating Bond Fund What-Ifs
Replies: 56
Views: 4222

Re: Calculating Bond Fund What-Ifs

rjb112 - taking your NAV drop when rates rise 1% at face value, let's say it happens at the end of 2014. Then assuming you start 2015 with $9,430 and yields are 3% and 2.7% , here is what my simulation of the single-bond model shows: > # rjb112 scenario, VBMFX, duration 5.7, ytm = 2.0 > # 100 bps pa...
by grayfox
Tue Sep 30, 2014 4:33 pm
 
Forum: Investing - Theory, News & General
Topic: Calculating Bond Fund What-Ifs
Replies: 56
Views: 4222

Re: what is risk?

My brother is my twin in every way but instead only has the historical 20-year returns and 20-year std and correlations. He does his best to build an asset allocation. Do we come up with pretty much the same allocation? I think we will. Do you have any evidence we will come to significantly differe...
by grayfox
Tue Sep 30, 2014 12:25 pm
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4405

Re: rebalancing conundrum/paradox/irony

The Finance Buff had an interesting take on this today. I tend to agree with his final conclusion: "Rebalancing is still a good way to control risk, but don’t think you are buying low and selling high when you rebalance between stocks and fixed income." http://thefinancebuff.com/rebalanci...
by grayfox
Tue Sep 30, 2014 3:12 am
 
Forum: Investing - Theory, News & General
Topic: rebalancing conundrum/paradox/irony
Replies: 83
Views: 5180
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