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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: 71
Views: 5158

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: 162
Views: 11235

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: 1159

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: 1159

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: 162
Views: 11235

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: 71
Views: 5158

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: 71
Views: 5158

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: 1159

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: 1159

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: 1159

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: 1159

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: 3616

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: 3616

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: 3616

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: 3703

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: 4778

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: 4778

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: 4778

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: 4778

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: 4778

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: 4778

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: 4778

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: 4778

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: 4778

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: 4778

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: 162
Views: 11235

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: 162
Views: 11235

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: 162
Views: 11235

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: 4373

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: 4373

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: 4181

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: 4373

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: 4181

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: 4181

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: 4373

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: 5137

Re: what is risk?

Do you have an example where A has higher annual variance than B, but the reverse is true at 20 years? Or the 20 year variance can't be reasonably estimated from the annual variance? You want one example? I will give you a link to hundreds of such securities. But first, this important important mes...
by grayfox
Tue Sep 30, 2014 2:34 am
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4373

Re: what is risk?

Most people in finance use the terms "volatility" and "correlation" very loosely, and never really know to what characteristic of a security volatility and correlation apply. In Modern Portfolio Theory, they apply to returns, not to prices. So saying that volatility is a measure...
by grayfox
Mon Sep 29, 2014 1:33 pm
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4373

Re: what is risk?

Here are some quotes from HARRY MARKOWITZ 1952 paper Portfolio Selection page 77 One type of rule concerning choice of portfolio is that the investor does (or should) maximize the discounted (or capitalized) value of future returns….The hypothesis (or maxim) that the investor does (or should) maximi...
by grayfox
Mon Sep 29, 2014 1:15 pm
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4373

Re: rebalancing conundrum/paradox/irony

It seems to me that the OP followed one of the BH rebalancing strategies in the wiki on Rebalancing Different rebalancing approaches There are a variety of ways in which investors determine it is time to rebalance: When contributing to or withdrawing from your portfolio. For example, if your target ...
by grayfox
Mon Sep 29, 2014 5:51 am
 
Forum: Investing - Theory, News & General
Topic: rebalancing conundrum/paradox/irony
Replies: 83
Views: 5137

Re: Future equities 2% real rhetoric is hogwash

I have been reading lately quite a few people discussing future 2% real returns on equities and I just don't understand how that is possible. Corporations are out there to make a profit. When a corporation makes money it has 2 choices with it. One is to invest back in the corporation thereby increa...
by grayfox
Mon Sep 29, 2014 5:01 am
 
Forum: Investing - Theory, News & General
Topic: Future equities 2% real rhetoric is hogwash
Replies: 45
Views: 3809

Re: what is risk?

I understand that bogleheads are not necessarily in complete agreement with the efficient market hypothesis, however, I believe it is safe to say that we for the most part, accept it. However, I am having a hard time understanding why volatility is considered the determining factor of risk. Almost ...
by grayfox
Mon Sep 29, 2014 4:27 am
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4373

Re: Obese airline passenger

I used to fly a lot for business back in the 1980s when flying was wonderful. There was lots of space, half the seats were empty so I often got a row to myself, and passengers were generally treated with respect and dignity. Flight attendants were happy and cheerful. Now there are 9 seats where ther...
by grayfox
Mon Sep 29, 2014 3:17 am
 
Forum: Personal Consumer Issues
Topic: Obese airline passenger
Replies: 62
Views: 4863

Re: rebalancing conundrum/paradox/irony

long story short: For years I've been 60/40, with 90%+ of all new contributions going to fixed income. This has worked because the stock market is going up 25% per year for the last five years, so my portfolio stays balanced. Really haven't had to rebalance at all during that period of time. But in...
by grayfox
Mon Sep 29, 2014 3:09 am
 
Forum: Investing - Theory, News & General
Topic: rebalancing conundrum/paradox/irony
Replies: 83
Views: 5137

Re: What's Your Takeaway from 2014 High Valuation

Whenever I read about high valuations, I go back and read this article: http://www.philosophicaleconomics.com/2013/12/the-single-greatest-predictor-of-future-stock-market-returns/ The best 10 year predictor of stock market returns is not PE10; it's the percentage of stocks in investor's portfolios....
by grayfox
Fri Sep 26, 2014 11:01 am
 
Forum: Investing - Theory, News & General
Topic: What's Your Takeaway from 2014 High Valuation
Replies: 52
Views: 4213

Re: History of U.S. Inflation — Appearances Can Be Deceiving

So what's the takeaway from this brief excursion into historical inflation rates and real stock returns? My sense is that: • As long as the level of future inflation stays moderate (2% is the current Fed target) and also stays relatively stable (standard deviation below, say, 3%), then stocks shoul...
by grayfox
Fri Sep 26, 2014 6:13 am
 
Forum: Investing - Theory, News & General
Topic: History of U.S. Inflation — Appearances Can Be Deceiving
Replies: 16
Views: 2409

Re: Calculating Rolling Returns

I like this way of viewing the returns and would like to calculate (in a spreadsheet) the same rolling returns (for a variety of different time periods as well) for various types of investments (i.e. specific stock mutual funds, index funds, REIT's, Bond funds, etc). My problem is that I do not kno...
by grayfox
Fri Sep 26, 2014 4:00 am
 
Forum: Investing - Theory, News & General
Topic: Calculating Rolling Returns
Replies: 14
Views: 876

Re: Calculating Bond Fund What-Ifs

* In a case like this it's simpler to use the Excel PV function than the PRICE function . Here is how it is used to compute the market value after the first and last years: 992.38 =-PV(2%, 4, 18, 1000, 0) 1039.42 =-PV(4%, 4, 37.60, 1056.29, 0) #Cruncher -- I was able to duplicate your results exact...
by grayfox
Fri Sep 26, 2014 3:24 am
 
Forum: Investing - Theory, News & General
Topic: Calculating Bond Fund What-Ifs
Replies: 56
Views: 4181

Re: Calculating Bond Fund What-Ifs

Wow! Thanks for those computations, #Cruncher. Summarizing the results of this mode for a 5-year holding period: Scenario Yield Curve 4-Yr 5-Yr End Ann Ret 0 Baseline don't care 1,093.30 1.80% 1 Constant 1.5 1.8 1,156.82 2.956% 2 Rising, Flattening 1.5->4.0 1.8->4.0 1,077.02 1.5% 3 Falling, Parallel...
by grayfox
Thu Sep 25, 2014 4:41 pm
 
Forum: Investing - Theory, News & General
Topic: Calculating Bond Fund What-Ifs
Replies: 56
Views: 4181

Re: Calculating Bond Fund What-Ifs

The best way IMHO to run this simulation is to model a bond fund as a single bond which is rolled over frequently. For example, take a 5 year bond, hold it for a year booking the coupons, then sell it as a 4 year bond and roll the proceeds into a 5 year bond again, booking capital gains or losses. ...
by grayfox
Thu Sep 25, 2014 2:59 am
 
Forum: Investing - Theory, News & General
Topic: Calculating Bond Fund What-Ifs
Replies: 56
Views: 4181
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