Devil's advocate: Why are recommendations so conservative?

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Devil's advocate: Why are recommendations so conservative?

Postby wuschelbeutel » Tue Dec 25, 2012 11:54 am

Very frequently, the recommended asset allocations, for an investment horizon of 30-40 years, contain US stocks and the total bond market (average maturity: five years) as the lion's share of the recommended portfolio. However, looking at the historic worst case "valley" (longest period until the real value is recovered) for international markets, it is much less than the intended investment duration. Not only that, but one can also hedge against the volatility with dollar cost averaging in and out. Generally, the volatility difference between US and international stock is not significant over multiple decades. So, why not invest more in international stocks than domestic stocks? And, then why bother with Total Bond Market Idx and similar bonds (avg maturity: intermediate)? Why not go long-term? The difference in volatility is a joke when you look at multiple decades.

Not only that, but people recommend to have the emergency fund invested in money markets. However, I venture to say that the majority of prudent investors will not extract their emergency fund (on average) for at least five years. So, why not dump the emergency money in in intermediate-term fund instead?
Last edited by wuschelbeutel on Tue Dec 25, 2012 12:09 pm, edited 1 time in total.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby Noobvestor » Tue Dec 25, 2012 12:04 pm

wuschelbeutel wrote:Very frequently, the recommended asset allocations (for an investment horizon of 20-40 years) contain US stocks and the total bond market (average maturity: five years) as the majority of the recommended portfolio. However, looking at the historic worst case "valley" (longest period until the real value is recovered) for international markets, it is much less than the intended investment duration. Not only that, but one can also hedge against the volatility with dollar cost averaging in and out. So why not invest a smaller proportion in US stocks and more in developing markets? And, then why bother with Total Bond Market Idx and similar bonds (avg maturity: intermediate)? Why not go long-term? The difference in volatility is a joke when you look at multiple decades.

Not only that, but people recommend to have the emergency fund invested in money markets. However, I venture to say that the majority of prudent investors will not extract their emergency fund (on average) for at least five years. Again, even the volatility of short term bond index is nothing compared to that time frame. So, why not dump the emergency money in in intermediate-term fund?


Those are some reasonable questions, but they are definitely multiple questions, and each could have its own book chapter (most of them probably do, somewhere or another!).

Volatility isn't a joke for those who capitulate, and a lot of good data shows you aren't rewarded proportionally for going out really far on the yield curve (there are exceptions - e.g. long bonds in a vast-majority-stock portfolio, or long bonds during a period of declining rates - but that holds as a general rule). I was really attracted to long bonds for a while, but less these days.

And as for tilting both heavily to stocks AND to international - at some point, you end up with a lot of ex-US currency fluctuation dominating your portfolio. For the most part, this is counter-balanced by domestic human capital and assets, but I wouldn't want to go 100% ex-US stocks and 0% USD-denominated bonds for the long haul.

But then there is a broader issue in play beyond history: the chance of history not repeating itself. There is the risk that equities will dive when you need them the most, or will simply stay down for long periods. 'Historic worst case' scenarios are only instructive to the point - we can't eat past results, only future returns.

So I guess the short answer is: there is no short answer. For me, personally, I've considered and discussed most of the things you're talking about, and concluded the risk/reward doesn't hold up to close scrutiny, at least for me personally. Having at least some bonds helps smooth returns enormously, particularly the first 15-25% of the portfolio. Being intermediate on duration has good characteristics (flight to safety without too much inflation/interest rate risk). Having some US holdings in general gives you balanced currency exposure. Lots of smaller answers.

FWIW, I think Boglehead answers are moderate, not conservative, and the financial media's are liberal (not in the political sense, but in the 'take risk, you'll be fine!' sense).
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Devil's advocate: Why are recommendations so conservativ

Postby livesoft » Tue Dec 25, 2012 12:09 pm

I have noticed that the forum responses go through fads depending on the background current of what the market has done and who responds the firstest and the mostest in a thread. The older responders who are closer to retirement or in retirement are generally more conservative, the younger responders are generally less conservative.

As an example, the 3-fund portfolio wasn't discussed much a few years ago. At that time it was all about a Bernstein, Swedroe, Bernstein, Merriman, Armstrong, Schultheis, Fama & French, TrevH small-cap and value tilted portfolio.

As you will note that in this thread from yesterday, I did not offer conservative advice, but did offer pretty much the same advice I have been offering for years.

I think another backdrop is that a number of older folks are arriving on the forum. They wanted to retire in 2008-2010 time frame, but had to delay because of the what happened to their portfolios and jobs. Now that things have fully recovered I think they are ready to retire, but are a bit gun shy at the same time. I think there is an inordinate amount of attention paid to the Wellesley and Wellington strategies for example. I think those strategies (long bonds) will not do as well going forward, but it is amazing to see folks piling into them because of past performance.
Last edited by livesoft on Tue Dec 25, 2012 12:13 pm, edited 1 time in total.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby grabiner » Tue Dec 25, 2012 12:10 pm

Mathematically, 100% stocks is optimal for many young investors with secure careers. However, mathematics isn't the only thing; many investors panicked in 2008-2009. If you have a bond fund, then you have part of your portfolio which is going up when everything else goes down, and you also can have the discipline to rebalance. Therefore, I never recommend more than 80% stock for anyone who hasn't already been through a bear market with a stock-heavy portfolio; if 100% stock is right for you, then you know enough to ignore my advice.

Many of the other recommendations are based on the risk of your whole portfolio. A portfolio with 80% stock and 20% intermediate-term bonds might have about the same risk as a portfolio with 75% stock and 25% long-term bonds, as long-term bonds are both more volatile and more strongly correlated with stocks. (Look at the performance of Long-Term Investment-Grade and Long-Term Bond Index in the fall of 2008, which is just when you needed your bonds for diversification.) If you need more long-term than intermediate-term bonds to get the same risk reduction, then the returns for the same level of risk may be worse

Similarly with US/international. If US and international stocks have the same expected return, but international stocks are riskier (because of currency risk) and slightly more expensive to hold, then 70% US and 30% international might be the best trade-off between risk and return. (I do hold 50% international myself, but that is because I overweight emerging markets for the diversification benefit, and I am deliberately taking additional risk with my stocks and holding 10% rather than 0% bonds to compensate.)
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Re: Devil's advocate: Why are recommendations so conservativ

Postby Noobvestor » Tue Dec 25, 2012 12:24 pm

grabiner wrote:A portfolio with 80% stock and 20% intermediate-term bonds might have about the same risk as a portfolio with 75% stock and 25% long-term bonds, as long-term bonds are both more volatile and more strongly correlated with stocks. (Look at the performance of Long-Term Investment-Grade and Long-Term Bond Index in the fall of 2008, which is just when you needed your bonds for diversification.) If you need more long-term than intermediate-term bonds to get the same risk reduction, then the returns for the same level of risk may be worse


Not to nitpick but ... after a small blip downward during the initial phase of the crash, long bonds quickly ended up providing as much or more protection during the downturn as shorter ones (even more clearly the case if you used the most safe and liquid of long-term bonds - i.e. Treasuries): http://quote.morningstar.com/fund/chart ... %2C0%22%7D

FWIW, viewtopic.php?p=27634

I'm not advocating long bonds, but I don't quite follow the logic of the risk equivalence of the ports you mentioned.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby midareff » Tue Dec 25, 2012 1:11 pm

livesoft wrote:
I think there is an inordinate amount of attention paid to the Wellesley and Wellington strategies for example. I think those strategies (long bonds) will not do as well going forward, but it is amazing to see folks piling into them because of past performance.


You will be able to cite this for many years to come I believe, somewhat unfortunately for many. Wellesley with 61% bonds of 6.4 years duration may not be a comfortable place to be a year or two from now.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby hpowders » Tue Dec 25, 2012 1:16 pm

Anyone who went through 2008, 100% invested in equities like I did, knows the answer and wised up in a hurry. I'm now 60% invested in equities, 30% in corporate and US government bonds and 10% in cash at 67 years old.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby Valuethinker » Tue Dec 25, 2012 2:05 pm

grabiner wrote:Mathematically, 100% stocks is optimal for many young investors with secure careers. However, mathematics isn't the only thing; many investors panicked in 2008-2009. If you have a bond fund, then you have part of your portfolio which is going up when everything else goes down, and you also can have the discipline to rebalance. Therefore, I never recommend more than 80% stock for anyone who hasn't already been through a bear market with a stock-heavy portfolio; if 100% stock is right for you, then you know enough to ignore my advice.


I don't know, but I suspect if you have TIPS in there as well (and frequent rebalancing) you might actually get to a 'more optimal' portfolio. Although at these real yields, TIPS would not have had that property.

At one halcyon moment (2000) I was 70% equities and 30% Real Return Bonds (ie TIPS). Had I held to that asset allocation, I think I would be better off now than where i am.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby Bungo » Tue Dec 25, 2012 2:30 pm

wuschelbeutel wrote:Not only that, but people recommend to have the emergency fund invested in money markets. However, I venture to say that the majority of prudent investors will not extract their emergency fund (on average) for at least five years. So, why not dump the emergency money in in intermediate-term fund instead?

For any given investor, emergencies don't occur "on average" - they occur when they occur. This money should be allocated under the assumption that it could be needed tomorrow, in my opinion.

Worse, there is an increased likelihood of an emergency such as unemployment occurring precisely when the markets are down.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby Professor Emeritus » Tue Dec 25, 2012 2:38 pm

wuschelbeutel wrote:. So, why not invest more in international stocks than domestic stocks?(Q1)

Not only that, but people recommend to have the emergency fund invested in money markets. However, I venture to say that the majority of prudent investors will not extract their emergency fund (on average) for at least five years. So, why not dump the emergency money in in intermediate-term fund instead? (Q@)


1) You have to distinguish between l markets with reliable accounting/legal control systems and limitations on insider trading and other environments. This issue , usually called transparency , affects the efficiency of various marketplaces . FWIW the real estate collapse in the USA was itself a transparency issue, as was the over enthusiastic investment in the market from other countries.

2) Emergency funds are emergency funds. You may not ever need to use it but if you do you want it right there. I don't even keep emergency funds in Vanguard money market funds.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby livesoft » Tue Dec 25, 2012 2:43 pm

Bungo wrote:Worse, there is an increased likelihood of an emergency such as unemployment occurring precisely when the markets are down.

But if I become unemployed, I do not rush out and sell all my emergency fund of stocks or short-term bonds that afternoon in order to pay for my expenses 6 to 10 months from now. Do you or have you?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby Watty » Tue Dec 25, 2012 4:36 pm

grabiner wrote:Mathematically, 100% stocks is optimal for many young investors with secure careers.


I would have to question if that is correct.

I don't have time to look it up right now but doesn't having maybe 20% in bonds give virtually identical long term performance over the long term but will much less volatility?
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Re: Devil's advocate: Why are recommendations so conservativ

Postby grabiner » Tue Dec 25, 2012 4:45 pm

Watty wrote:
grabiner wrote:Mathematically, 100% stocks is optimal for many young investors with secure careers.


I would have to question if that is correct.

I don't have time to look it up right now but doesn't having maybe 20% in bonds give virtually identical long term performance over the long term but will much less volatility?


The difference is that most of the money is not in your portfolio yet; the studies of long-term returns assume a fixed portfolio. The money that has not yet been added is immune to the market risk, and it may be bond-like depending on your career. For example, if you work for the government and contribute $10K a year to the TSP, that functions like an annuity which is being added to the TSP balance every year; losing half of your portfolio is only a 10% loss if 80% of the portfolio will come from later contributions.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby Bungo » Tue Dec 25, 2012 4:49 pm

livesoft wrote:
Bungo wrote:Worse, there is an increased likelihood of an emergency such as unemployment occurring precisely when the markets are down.

But if I become unemployed, I do not rush out and sell all my emergency fund of stocks or short-term bonds that afternoon in order to pay for my expenses 6 to 10 months from now. Do you or have you?

No, but the market slump could easily last for many months. Anyone laid off during the market turmoil of 2008-2009 would have been well served by having their emergency funds in cash. Of course many people were out of work long enough that they probably would have had to cash in some stocks and bonds anyway, but a cash cushion reduces the pain.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby livesoft » Tue Dec 25, 2012 5:01 pm

Bungo wrote:Anyone laid off during the market turmoil of 2008-2009 would have been well served by having their emergency funds in cash. Of course many people were out of work long enough that they probably would have had to cash in some stocks and bonds anyway, but a cash cushion reduces the pain.

I grant you they were well-served by having some of their emergency funds in cash. In case you didn't notice though, bonds did quite nicely in the market turmoil of 2008-2009. And as stated many times of the forum, if you have an emergency fund in short-term bonds that you believe might drop 10%, simply have a 10% larger emergency fund to start with.

To go back to the OP's question: Why are recommendations so conservative? I think it is because folks hate to lose money much more than they enjoy making money. This phenomenom of "loss aversion" is very well know and studied. Once one gets past that, I think they become better investors.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby wshang » Tue Dec 25, 2012 5:40 pm

We have been living through a "Fat tail" in history. No war on the European continent for 50 years. Pax Americana, no war on the North American continent for 100+ years, continued expansion of the world economy, avoidance of nuclear holocaust. Just like those who lived through the greatest bull market in American history, normal human history is not usually like this. Be conservative.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby staythecourse » Tue Dec 25, 2012 7:28 pm

Good questions from the OP. The reason you see so much conservative talk is either: 1. Recency bias after the miserable 2000's and 2. Many of the long term posters are older, i.e. less time horizon.

There is NOTHING wrong with being heavy on equities, BUT I think one needs to meet certain criteria, such as: 1. Long time horizon, 2. Safe, secure job, 3. No need for liquidity, i.e. you know you won't be touching this money for the full time horizon, and 4. Will stay the course and not sell in times of market thins.

Just keep in mind many thought they met these criteria, but to find out they were wrong. They either couldn't stay the course or their roof collapsed and they had to sell stocks to pay for repair or they got fired from their "secure" job when they economy tanked, or....

No. 3 is the answer why an EF should be cash ONLY. The advantage of liquidity is underestimated until you need it most and why returns on your cash is unimportant as by definition of an emergency cannot be planned.

Good luck.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby nisiprius » Tue Dec 25, 2012 8:43 pm

To ask "why are recommendations so conservative" implies a value judgement that they ought to be less conservative. To answer the question directly, one reason may be that many of us in this forum are influenced by John C. Bogle's opinions. In "A Common Sense Guide to Investing," he wrote:
My favorite rule of thumb is (roughly) to hold a bond position equal to your age--20 percent when you are 20, 70 percent when you're 70, and so on--or maybe even your age minus 10 percent. There are no hard-and-fast rules here. (Most experts think my guidelines are too conservative. But I am conservative).
The real question is how to decide how conservative to be, and whether there is one right answer.

My own opinions are: 1) there is no single right answer. There is no objective methodology for determining a right answer. The investor's risk tolerance must be factored in. 2) I feel that the average retirement saver's risk tolerance is lower than the risk tolerance of those who tend to give advice. 3) I feel that the advice-givers do not take account of the fact that others are not as risk tolerant as they are. They regard risk-aversion as a mistake rather than legitimate self-awareness; as an obstacle to be overcome, not a reality to be respected. 4) Based on the admittedly anecdotal evidence I have from the behavior of a few co-workers circa 2008, and posters in this forum, the mainstream "conventional wisdom" recommendations do in fact push people into portfolios that are too aggressive for them.

Those of us who are old may recommend more conservative portfolios, not because we are too old and too conservative, but because like Bogle we are aware of a significant shift in the conventional wisdom, a shift toward ever-more-aggressive allocations. As recently as 1989, recommendations for retirees looked like this:
Image
In 2006 Vanguard jacked up the stock allocations in all its target retirement funds, for no well-articulated reason (and display bad market timing).
There are of course rationalizations for this shift, but I have not seen convincing rationales.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby nisiprius » Tue Dec 25, 2012 8:51 pm

Also:
looking at the historic worst case "valley"
If 2008-2009 have taught us anything, it should be that, as in athletics, new records are being set all the time. Even if Mandelbrot is wrong and stock data can be analyzed by traditional statistical techniques, and even if there's enough data for a decent estimate of central tendency, there is nowhere near enough to estimate extremes. The "historical average return" might be some kind of rough planning number, but the "historic worst case" is not.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby livesoft » Tue Dec 25, 2012 9:05 pm

I think since 1989 there has been a change in yields of certificates of deposit and other cash accounts which has probably resulted in a corresponding lower allocation to cash over the years.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby rj49 » Tue Dec 25, 2012 9:33 pm

livesoft wrote:I have noticed that the forum responses go through fads depending on the background current of what the market has done and who responds the firstest and the mostest in a thread. The older responders who are closer to retirement or in retirement are generally more conservative, the younger responders are generally less conservative.

As an example, the 3-fund portfolio wasn't discussed much a few years ago. At that time it was all about a Bernstein, Swedroe, Bernstein, Merriman, Armstrong, Schultheis, Fama & French, TrevH small-cap and value tilted portfolio.

As you will note that in this thread from yesterday, I did not offer conservative advice, but did offer pretty much the same advice I have been offering for years.

I think another backdrop is that a number of older folks are arriving on the forum. They wanted to retire in 2008-2010 time frame, but had to delay because of the what happened to their portfolios and jobs. Now that things have fully recovered I think they are ready to retire, but are a bit gun shy at the same time. I think there is an inordinate amount of attention paid to the Wellesley and Wellington strategies for example. I think those strategies (long bonds) will not do as well going forward, but it is amazing to see folks piling into them because of past performance.


There are also a ton of 'how can I get more yield?' questions, just as there have always been high interest in REITs, TIPS, Harry Browne, international allocation, commodities, and Grantham's timber, usually when the portfolio or asset was hot. And the 'why not go 100% stocks?' questions usually come right after an up year for stocks, and bond/dividend/'safe' investing after market declines. Go figure. At least some things will always be with us: death, taxes, and Total Markets/slice & dice arguments.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby freebeer » Tue Dec 25, 2012 9:34 pm

hpowders wrote:Anyone who went through 2008, 100% invested in equities like I did, knows the answer and wised up in a hurry. I'm now 60% invested in equities, 30% in corporate and US government bonds and 10% in cash at 67 years old.


You say you "wised up" but had you just stayed the course you'd be better off, right? Depending on when you went from 100% to 60% equities you surely missed some of the post-2008 market recovery.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby MathWizard » Tue Dec 25, 2012 9:55 pm

I think that it is the fact that these are recommendations.

Recommendations that lead to losses cause a quick loss of faith in the recommender. Recommendations which
are sub-optimal are not subject to as much criticism. So you may be seeing a reluctance on the part of recommenders
to give too aggressive an AA. The small gain from a high equity alloaction can quickly be lost if the investor capitualtes
during a huge downturn.

AA is subject to one's own risk tolerance. The times that I have been asked, I have always suggested a more
conservative AA than I have (about 80/10/10 equities/bonds/cash counting emergency fund). Only one
person thought the AA I suggested was too aggressive (she has 0% equities.)
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Re: Devil's advocate: Why are recommendations so conservativ

Postby nisiprius » Tue Dec 25, 2012 10:35 pm

livesoft wrote:I think since 1989 there has been a change in yields of certificates of deposit and other cash accounts which has probably resulted in a corresponding lower allocation to cash over the years.
Ignore the distinction between bonds and cash--lump 'em together. Just look at stock and non-stocks. That chart says that at retirement, perhaps at age 65, a 20% allocation to stocks was considered "aggressive." Since cash is at least as conservative as bonds, that's age-plus-15 in bonds.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby livesoft » Tue Dec 25, 2012 10:42 pm

OK I read the article in the ABA Journal. The table/figure you posted seems completely unrelated to the text. Perhaps a summer intern was asked to "Make up a table to go with this article" and did?

It is also amazing how poor the advice was back then (in all the articles in that issue) even though Malkiel's book had been out quite a while already and certainly Vanguard was a player. This was published post-1987, too.

It would be interesting to see the ABA Journal issue devoted to purchasing life insurance. :twisted:
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby stlutz » Wed Dec 26, 2012 12:43 am

I see it more as being moderate. We have a lot of threads where people ask why they shouldn't be all stocks and threads where the poster will express their discomfort with anything but CDs. When everyone had traditional pensions, the money was basically invested 60/40. That seems like the most sensible starting point to me. Some would call that conservative. Others view this as being moderately aggressive.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby wuschelbeutel » Wed Dec 26, 2012 1:10 am

Regarding the emergency fund question (savings, money market, short bonds, or intermediate bonds):

1. The difference in liquidity should be a non-issue: Say, you become unemployed (in the unlikely case that you don't get unemployment money). You are likely to have access to money that saves you for a few days until you get the money from the investment company in your hands. Or, if you get sick, (if you don't have medical insurance [which isn't likely for an investor in the first place]), the hospital won't charge the money for a few days until you get the money from the investment company in your hands.
2. Looking at the return distribution had it been invested in intermediate bonds, at the time of withdrawal of the emergency money (say you look at the entire population of time until emergency money withdrawal): I claim that even very unlucky investors at the the bottom of this distribution will not lose much, and, in aggregate, people lose much more real value if they just put it into cash.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby mptfan » Wed Dec 26, 2012 3:43 pm

Watty wrote:I don't have time to look it up right now but doesn't having maybe 20% in bonds give virtually identical long term performance over the long term but will much less volatility?

It depends on your definition of "virtually identical." Over the long term, 100% stocks has returned 9.9% per year, on average, while 80% stocks and 20% bonds has returned 9.4% per year, on average.

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Re: Devil's advocate: Why are recommendations so conservativ

Postby Easy Rhino » Wed Dec 26, 2012 4:46 pm

wuschelbeutel wrote:Regarding the emergency fund question (savings, money market, short bonds, or intermediate bonds):

1. The difference in liquidity should be a non-issue: Say, you become unemployed (in the unlikely case that you don't get unemployment money). You are likely to have access to money that saves you for a few days until you get the money from the investment company in your hands. Or, if you get sick, (if you don't have medical insurance [which isn't likely for an investor in the first place]), the hospital won't charge the money for a few days until you get the money from the investment company in your hands.
2. Looking at the return distribution had it been invested in intermediate bonds, at the time of withdrawal of the emergency money (say you look at the entire population of time until emergency money withdrawal): I claim that even very unlucky investors at the the bottom of this distribution will not lose much, and, in aggregate, people lose much more real value if they just put it into cash.


liquidity need in an emergency fund may be more urgent in some emergencies than the 3 or 4 days it would take to sell, settle, and transfer, investment funds. I'm not sure what kind those are (besides "fleeing the country"), but there could be a need for same-day or next-day funds.

also, there's the psyhological impact. During the crisis, my emergency fund was in an ultrashort bond fund (the infamous schwab fund). When the principal value dipped by only 1 or 2%, I panicked and sold. I realized that I was completely unable to tolerate fluctuation in my emergency fund (Ironically, i was fine with the wild gyrations of my investment portfolio).
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Re: Devil's advocate: Why are recommendations so conservativ

Postby nisiprius » Wed Dec 26, 2012 4:47 pm

livesoft wrote:It is also amazing how poor the advice was back then (in all the articles in that issue) even though Malkiel's book had been out quite a while already and certainly Vanguard was a player. This was published post-1987, too.
Not sure what you're getting at there, because the article says, plain as can be:
Image
"For only $1,500, you can own a portion of 500 different stocks. You can invest in the Vanguard Index Trust 500[sic], a replica of the stocks in the Standard and Poor's 500, which is itself a replica of the stock market."

I need to remember this reference also as evidence that VFINX was the Total Stock Market of its day--that is, as recently as the late 1980s the S&P 500 was generally regarded as a decent proxy for "the stock market." That is, the rationale for investing in it was to invest in the total market as understood at the time, and according to that rationale VTSMX has superseded VFINX and one would not intentionally choose VFINX over VTSMX unless one had some fairly definite and not terribly popular investing theory.

He doesn't discuss specific stock allocations but what he says is reasonably in line with the table. For example, "too conservative" is equated with what he says "many" retirees do: "put their entire nest eggs into high-paying, supposedly safe long-term Treasuries and CDs." He points out that to protect against inflation, you need to either "save some of the interest you earn" or "continue to own some volatile investments--simply because volatile investments like stocks tend to perform better over the years...." The general tenor and principles are not out of whack with today's advice, it's just his translation of them into specific numbers. He says don't be too conservative, he says "diversify" by holding both stocks and bonds. It's just that to him, "conservative" and "aggressive" are 0% stocks and 20% stocks.

I am not saying the article is giving good advice, but I do think one needs to be on guard against the facile assumption that if today's advice is different from yesterday's, it is automatically because "we know more" or "today's conventional wisdom is right, yesterday's was wrong." Maximum-likelihood: both wrong!
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Re: Devil's advocate: Why are recommendations so conservativ

Postby livesoft » Wed Dec 26, 2012 7:18 pm

^I was reading the other articles in that issue as well. Did anything catch your eye in them?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby nisiprius » Wed Dec 26, 2012 8:42 pm

livesoft wrote:^I was reading the other articles in that issue as well. Did anything catch your eye in them?
I plead guilty to not having reviewed the whole issue ages ago when I was Googling for vintage asset-allocation advice--which isn't as easy to find as you might think. But you'd better hit me with a clue-by-four, I've glanced through it now and am not sure what you're getting at. No, it's not Boglehead advice.

Did you mean the "personal library" on p. 70 with titles like "How To Talk To A Broker" that omits "A Random Walk Down Wall Street?"

The guy on p. 74 recommending "investing" in a mix of term and whole-life insurance?

The gal on p. 75 who "favors the Templeton Growth Fund" in a magazine which coincidentally carries a Templeton ad on p. 79?

I don't see anything egregious. It's just the 1989 version of any financial magazine in the dentist's waiting room, today. Or the typical Morningstar.com website article about "Wide moats stocks are great but only if you know which ones to pick" or "Five great low-sprockellage columbium mining funds that beat their category average over one specific time period."

Yes, I'd like to see an actual high-quality overview of how investment advice has shifted over the years, and my little snippets don't amount to that.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby Valuethinker » Thu Dec 27, 2012 6:05 am

wshang wrote:We have been living through a "Fat tail" in history. No war on the European continent for 50 years. Pax Americana, no war on the North American continent for 100+ years, continued expansion of the world economy, avoidance of nuclear holocaust. Just like those who lived through the greatest bull market in American history, normal human history is not usually like this. Be conservative.



US invaded Mexico in 1916 ;-). Yugoslavia post 1990 was a proper 'European war'.

Or to quote Robert Heinlein 'You are just as dead in a police action as in a war'.

Sadly some of those 'fat tail' events we cannot hedge against.

However I generally agree with your point: the last 67 years has seen an extraordinary rise of free market capitalism, globally. The number of extant stock exchanges must have gone up 5 fold in that time. Free trade has broken out, all over.

Really it feels like a replay of the late 19th century. Dominant global power with its currency (pound then, dollar now) recognized as the currency of transaction and wealth. A *liberal* international power, committed to rule by law, growth of trade and finance etc.

An extraordinary confluence of events, from new technologies to falling birth rates, has allowed unprecedented numbers of people to crawl above basic subsistence. Resource scarcity has just not been a problem. The price of most major commodities and the price of a kwhr of electricity (and energy generally) has fallen sharply in real terms.

The wars we have had have been brutal and bloody, but in places largely like the Congo ie relatively remote. The other great humanitarian catastrophes (eg China's Great Leap Forward, Pol Pot's 'Year Zero' regime in Cambodia) have been horrendous but relatively localized. Famines are rarer than they were due to better food distribution and aid. Compared to the horrors of the period 1913-1945, we have been incredibly lucky.

Due to antibiotics, disease was driven back to an unprecedented extent. Antibiotics are now failing.

That stability, progress and prosperity is rare, or hitherto unknown, in world history. Previous periods of imperial stability have ended badly-- think Imperial Rome or any number of Chinese dynasties.

The future will no doubt have its wonders, but has huge challenges-- the move from a unilateral world power to a multilateral one of competing powers is likely to herald instability (the argument over those Japanese islands is just the beginning). Rogue states have nuclear weapons and ballistic missile technology. Terrorists will have access to vastly more destructive technologies (we are only beginning to think about the bioweapons risk, and there's certainly enough material to make nasty radiological bombs) - 911 was just an early warning. The environmental crisis looms ever larger, with little or no tangible signs of progress- the Amazon, and Borneo, are still burning. Resource scarcity may again become an issue.

More generally confidence in free market and global financial capitalism has been severely shaken. So far no repeat of the 1930s, but the risks are there.

The way Europe is turning inward, against immigration, against foreigners, against itself, is a real warning.

From the point of view of the individual investor you cannot count on 'Triumph of the Optimists' stock returns going forward. Stocks are likely to be a good investment, but they cannot repeat what they did in the 20th century.
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Re: Devil's advocate: Why are recommendations so conservativ

Postby Default User BR » Thu Dec 27, 2012 3:54 pm

mptfan wrote:
Watty wrote:I don't have time to look it up right now but doesn't having maybe 20% in bonds give virtually identical long term performance over the long term but will much less volatility?

It depends on your definition of "virtually identical." Over the long term, 100% stocks has returned 9.9% per year, on average, while 80% stocks and 20% bonds has returned 9.4% per year, on average.
https://personal.vanguard.com/us/insigh ... llocations

Here's a bit of quickie analysis on the data presented there, which includes the stock percentage, return, and the slope of a line segment from the previous data point to give a crude measure of curve shape.

Code: Select all
Stock% Return% Slope
0       5.6   
20      6.7    0.055
30      7.3    0.06
40      7.8    0.05
50      8.2    0.04
60      8.6    0.04
70      9.0    0.04
80      9.4    0.04
100     9.9    0.025

There are two "missing" data points, 10% stocks and 90% stocks. The latter is probably the more interesting one, as there a significant inflection in the graph from 80% to 100%. It's not clear where the 90% would actually fall. I reworked the chart with cubic spline interpolation [1] to estimate the data.

Code: Select all
Stock% Return% Slope
0       5.6   
10      6.1    0.05
20      6.7    0.06
30      7.3    0.06
40      7.8    0.05
50      8.2    0.04
60      8.6    0.04
70      9.0    0.04
80      9.4    0.04
90      9.7    0.03
100     9.9    0.02



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Re: Devil's advocate: Why are recommendations so conservativ

Postby leonard » Thu Dec 27, 2012 10:49 pm

1. People recommend Int'l equity all the time here, up to 50% or more.
2. Some quantity bonds provide a diversification benefits - so even with long term investing investors benefit from that diversification.
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