Bernstein: A Decade of Super-Low Returns [1.4% for 60/40]

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BigJohn
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by BigJohn »

Rodc wrote:So at least keep your tactical moves modest. Of course if you work through the implications, if all you do is shift here and there by a modest amount any potential upside is also modest. But then so is the potential harm. History has not been kind to this sort of activity so buyer beware.
Rodc, I think that the chart you posted was fantastic and clearly demonstrates your point above. Too often people focus on the mean as a deterministic prediction without considering the variability. This leads them to the conclusion that Developed or Emerging WILL be better. When I look at your chart what I see it that those two options MIGHT be better but they also might be worse and possibly even a lot worse. Your chart demonstrates this probabilistic view very well.

I long ago came to the conclusion that tilting is a bet. Like all bets you need to decide both "can you afford to lose" and "is the size of the potential win worth it". Based on info in this thread, when I read this book it may convince me to modestly increase my international allocation (currently at 20% of my stock allocation). The variability of emerging is just too high for me to make a bet on tilting in that direction so I will stick with market weight within my international allocation.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
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berntson
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by berntson »

stlutz wrote: First, on US vs. Foreign stocks. One thing we know just looking at individual stocks in the US is that the market largely gets it right with the valuation that it puts on various securities. That is, value stocks with low price-to-X ratios generally prove to have lower growth rates, lower ROE etc. in the future than do growth stocks. So, if one is comparing a stock with a PE of 10 vs. a stock with a PE of 50, they should first seek to understand why the market has put the price on that stocks that it has before deciding that the market price is wrong.
What has in fact been found is that while the market is pretty good at ranking stocks when it comes to future growth (Tesla probably will have higher growth than Staples), it tends to overestimate the growth of growth companies and underestimate the growth of value companies (there is a good chance Tesla underperforms expectations, because they are so high, and that Staples beats them, since they are so low). Put another way, the market is pretty good at making predictions about future earnings but is also systematically overconfident about its predictions. I wouldn't be surprised if the same phenomena happens for whole markets.

Basically, if you think that analysts and pundits overestimate their ability to predict the future, you're a good candidate for being a value investor. And for tilting your portfolio towards foreign stocks. :beer
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JoMoney
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by JoMoney »

gtmn wrote:...Buffett, Bogle, GMO, and Dr. Bernstein generally fit these criteria, and if they all say that markets are extremely overvalued on a historical basis...
This is not true, only 2 of your 4 (one of them a perma-bear) have been claiming that markets are "extremely overvalued". Both Buffett and Bogle have acknowledged that the price is at all time highs but that it's within a reasonable sense of fairly valued, not at all "frothy", maybe a little on the high side, but a far cry from "extremely overvalued".

Buffett ( 23 Apr 2014 ) http://www.cnbc.com/id/101607268
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cjking
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by cjking »

On the basis of PE10, I also predict low returns for US stocks, however mine are a little more optimistic. With regard to whether a US investor should be in domestic or foreign stocks, my predictions (expected returns) are:-

1. USA 3.7%
2. World 4.7%
3. World-excluding-USA 5.6%.

If one were to hold only one of these, World-excluding-USA would probably be considered a radical choice by many here, but isn't it arguably more diversified and therefore safer than the USA-only option, which I suspect most here would find more comfortable?

(I'm not inclined to think foreign currency risk adds much to the risk of equities, on average over the long-term. However my hand-waving dismissal of that risk might be influenced by (I think) less than 10% of world equity capital being usually quoted in my home currency.)
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by cjking »

stlutz wrote:First, on US vs. Foreign stocks. One thing we know just looking at individual stocks in the US is that the market largely gets it right with the valuation that it puts on various securities. That is, value stocks with low price-to-X ratios generally prove to have lower growth rates, lower ROE etc. in the future than do growth stocks. So, if one is comparing a stock with a PE of 10 vs. a stock with a PE of 50, they should first seek to understand why the market has put the price on that stocks that it has before deciding that the market price is wrong.

The same should hold true for countries. When you compare the economic challenges the US faces as opposed to Europe or Japan, does anything think that US stocks should not trade at a higher multiple than foreign ones? I think we are being to hasty in jumping to the conclusion that the market has it wrong on this one.
One of Mebane Faber's blog posts shows there is significant home bias in equity allocation everywhere in the world. So I think your implicit assumption that money is freely flowing internationally to wherever the highest returns are expected could be wrong. He has launched the Global Value fund because the data indicates there is a historical inefficiency.
Second, on valuations. A lot of this discussion revolves around PE 10 and what the mean of that is historically. The problem is, we really don't know what the mean is.
The beauty of PE10 for valuations is that long-term history doesn't matter, the reciprocal is a reasonable central estimate of return for the next ten years, based only on the past ten years. For the same reason, changes in accounting standards that people like Siegel bring up in order to dismiss PE10-based pessimism about current valuations are not an argument I take seriously.
For the past 20 years this metric has pretty much been wrong in its forecasts.
Leaving aside that you may be using PE10 in slightly the wrong way, and that your are only looking at small part of history, I think you are also using the wrong measure of what constitutes accuracy. (See Bernstein's post earlier about predicting the result of a coin toss.) The question is does it successfully predict central tendency, and it might be doing so even if it's wildy wrong over every historical n-year period. The metric I like is the one Smithers used for q, which he called hindsight value: take the average annualised return for 40 investers with holding periods of 1 to 40 years respectively. For that metric, it will be another 20 years before we can fully assess what PE10 predicted in 1994.
Last edited by cjking on Wed Jun 11, 2014 6:16 am, edited 2 times in total.
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packer16
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by packer16 »

I think Bogle's approach is the best for equity returns. He is stating that the bond component of return is going to be about the inflation rate (say 2.0%) plus 5% earnings growth with no change to the speculative component. Both GMO and Dr. Bernstien's expectations imply a shrinkage of the equity risk premium which I don't see in the data. This may also include some aspect of reversion to the mean earnings multiple which would also imply a reversion to the mean interest rates of the past, which I think is incorrect. I think interest rates will continue to be low for some time to come as demand for FI remains high with an aging society. I agree the fixed income return may be negative (also confirmed by negative TIPs yields). However, I think the ERP of 5% is still there so the real return on large caps is likely to be closer to 4%. I also think the real estate returns are to low. When I can find a conservative real estate vehicle yielding 7% with 2 to 3% annual price escalators via NNN properties, I think the 1% real return is significantly understated. This is almost 7% real return.

As to PE10 use, the implicit assumption here is interest rates are going to return to pre-2008 levels which I see as highly unlikely.

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siamond
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by siamond »

Investing Teenager question for Dr Bernstein...

I cannot understand why the Gordon equation uses Dividend Growth, instead of Earnings Growth. I mean, in the past, this was probably not that different, but nowadays, with companies the size of Apple not distributing dividends until very recently, doing all sorts of financial wizardry like stock buy-backs and so on, a dividends-centric reasoning is a bit hard to take (at least, at the intuitive level).

And you said it yourself in the book (p34), the past-50-years earnings growth of 2.33% is significantly higher than the dividends growth (1.34%). That is ONE FULL POINT to be potentially added to the expected returns (or 0.8% to the 1.5% assumption you took for 'g'). Hardly negligible in this era of low returns.

Could you please clarify? Why do you keep using Dividends Growth? What would be wrong in using Earnings growth instead? Would this somehow overlap with the speculative return factor?
rj49
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by rj49 »

Yeah it's funny how when Mr. Bogle makes a reasonable stock/bond return estimate based on the Gordon equation we agree that it makes sense, but when Dr. Bernstein does it we pick it apart. I don't remember the same criticism of Rick Ferri's 30-year forecasts either. Dr. Bernstein also has written about how the chance of unexpected political/economic/natural disaster/ecological disaster is always there to decrease our level of returns/SWR certainty, as well as the possibility of unexpected death putting a serious crimp in our expected returns (or at least the ability to post in 10 years 'aha! your forecasts for large value was off by 3.239 percent!'. Nevertheless, whatever the estimates, I take them for the basic messages: large equities were overvalued in 1999, bond returns aren't promising going forward, all-time highs for stocks usually mean lower returns going forward so don't get over-exuberant and chase what's hot, if you want higher returns you can try riskier asset classes, and never, ever read perennial pessimists like Grantham, Hussman, and definitely not Marc Faber, who makes Dr. Doom Nourel Roubini sound like equities cheerleader Jeremy Seigel.
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JoMoney
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by JoMoney »

It may not be "fair" to use earnings growth for some of the stock styles mentioned. Indexes that attempt to track a "Value" style are almost systematically avoiding stocks growing earnings. ... and for good growing companies paying out dividends is a poor use of the capital... seems like it could skew the projections to favor certain types of stocks.
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VictoriaF
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by VictoriaF »

rj49 wrote:Yeah it's funny how when Mr. Bogle makes a reasonable stock/bond return estimate based on the Gordon equation we agree that it makes sense, but when Dr. Bernstein does it we pick it apart.
Jack provides his calculations in person at Bogleheads conferences. The context is very clear, and any questions are immediately resolved by Jack, Bill, Rick and other Boglehead experts and amateurs.

In Bill's case, someone pulls out a piece of his writing without providing or inadequately providing the context. The beauty of it is that "Bernstein" in the title attracts the best minds and a lively discussion ensues.

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mur44
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by mur44 »

In February 2013, Larry Swedroe posted an article on the same subject:

What low interest rates mean for stocks Larry Swedroe Feb 2013

The "Triumph of the Optimists" authors Elroy Dimson, Paul Marsh and Mike Staunton, looked at whether today's low level of real interest rates tells us anything about future returns. They surmised that since the expected return to stocks is composed of the rate of return on the risk-free asset (one-month Treasury bills) plus a risk premium, if the risk-free rate has fallen, it follows that "other things equal, a low real interest rate world is also a lower-return world for equities." This would be pretty significant, given that the risk-free rate is now effectively zero.
They found that "there is a clear relationship between the current real interest rate and subsequent real returns for both equities and bonds." Specifically, they concluded that investors should expect a stock premium (relative to one-month Treasury bills) of around 3 percent to 3.5 percent on a geometric (annualized) basis and, by implication, an arithmetic mean (annual average) premium for the world index of approximately 4.5 percent to 5 percent.
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Higher international returns should be expected --of course that likely reflects greater risk associated with it.
current valuations look about average.
The best outcomes are much lower and the worst outcomes much worse when valuations are high. So IMO it seems very prudent to plan on lower than expected returns and if you get lucky great.
Other experts such as wade Pfau agree with the above assessment.
bikenfool
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by bikenfool »

Rodc wrote: If you use this to instead motivate yourself to save more or hold of retirement for a couple of years you are on sounder ground.
stlutz wrote: The future is an uncertain place. While people can and usually do far worse than listening to Bernstein, making a bunch of market timing calls based on a chart that forms a minor part of a very good book is not warranted in my opinion.
+1
gtmn
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by gtmn »

JoMoney wrote:
gtmn wrote:...Buffett, Bogle, GMO, and Dr. Bernstein generally fit these criteria, and if they all say that markets are extremely overvalued on a historical basis...
This is not true, only 2 of your 4 (one of them a perma-bear) have been claiming that markets are "extremely overvalued". Both Buffett and Bogle have acknowledged that the price is at all time highs but that it's within a reasonable sense of fairly valued, not at all "frothy", maybe a little on the high side, but a far cry from "extremely overvalued".

Buffett ( 23 Apr 2014 ) http://www.cnbc.com/id/101607268
JoMoney:
I wasn't talking about 2014. I'm wondering whether valuation metrics like Bernstein's can be useful during periods of extreme market valuation to guide allocation shifts, such as during the bubbles of 2000 and 2007, and the lows of 2009. That's why I said "IF all of them say the markets are historically overvalued..." Thanks for the link to Buffett.
Richard wrote:
One of my favorite Vanguard papers shows that if you examine history, the metric that has done the best job of forecasting 10 year returns is p/e (regular p/e and p/e10 did equally well) and p/e only explains about 40% of the time variation in net-of-inflation returns. In other words, the best estimate has been e/p or e10/p, but they're best only in the sense that everything else has done worse.

These results are on the edge of statistical significance and predictions of periods longer and shorter than 10 years are below that threshold.

If you're talking about extreme overvaluation, you're talking about a very small sample set, only a few data points. Forget complex math and published papers - predictions based on one or two occurrences are not the most reliable.

Altering your allocation based on valuation metrics or other predictions is market timing. Mr Bogle famously said regarding market timing "I don’t know anyone who can do it successfully, nor anyone who has done so in the past. Heck, I don’t even know anyone who knows anyone who has timed the market with consistent, successful, replicable results."
Richard:
Good point about the average utility of valuation metrics. However, does the predictive value of these metrics increase as valuations become more extreme? If the market PE were 40 and the yield 1%, would a Bogle estimate be just as useless as when the PE is 14 and the yield is 3%? What if the starting yield was so fat that it provided 2/3 of the historical return? To ask it another way, is there any valuation at all that would move you to modify your allocation?

We have much more than a couple of data points on market extremes, and GMO, Robert Schiller, Gregory Mankiw, Edward Chancellor, Charles Kindleberger and Dr. Bernstein have written about them. GMO studied hundreds of market bubbles in various asset classes around the world. They identified one pattern that held for every bubble except the last one, and that is when bubbles burst, they decline well below fair value.

In the face of an historically extreme valuation, is there no other rational portfolio response than to stay the course?

Rodc:
Solid advice against making bold moves based on guesstimates or opinions from esteemed experts. I know better than to shift allocation year by year, and I fully appreciate the danger of making major allocation changes, so I don’t. I overweight or underweight within a policy range (60-80% equities for me) only when markets are at extremes. I can shift within my policy guidelines and do little harm if I’m wrong. Why not swing at a really fat pitch when you can’t strike out? I may not gain a huge advantage on a % basis, but in absolute terms its meaningful.

The bottom line is that I don’t see the point in holding assets that are so wildly disconnected from fundamental business value that only a miracle could justify their prices. In the bubbles of 2000 and 2007, I shifted away from such assets to avoid walking into a buzz saw that history strongly suggested was coming. At the end of 2008 and Q1 of 2009 I saw yields fat enough to provide over half of the return I needed to reach my goals, so I overweighted equities. I know these moves aren’t based on Boglehead rules, but I think exceptions to the rule arise under exceptional circumstances.

So, the next time the market goes hockey-stick and breaks new bubble records, should I just walk stoically into the buzz saw, or is it rational to make shifts within my policy sandbox to mitigate the damage?

gtmn
surfstar
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by surfstar »

I predict 3.14159265358979323846264338327950288419716939937510...

In 10 years from now, I will let you know the exact AA that produced that return :D
I mean, unless you get very specific, how do we know how accurate your predictions actually were?
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Bill Bernstein »

I think it's a bit too fatalistic to ignore valuations.

A lot of the posters on this thread have made one of two mistakes:

1) Assuming that because realized and expected returns often diverge, the latter must be useless.
2) Conflating the SD/SE of realized individual returns with the SD/SE of the *differences* among them; as Jeremy Grantham, for example, well demonstrated with his 2000 predictions, when valuations diverge greatly among asset classes, it's relatively easy to predict their future ranking. I really don't care if I get the absolute real returns predictions wrong; what matters to any intelligent investor is to get the *rankings* right more often than not.

As I wrote about extensively in the book, the two yearbook studies by Dimson et al. are seminal: the one in the 2013 book that showed that, since valuation metrics weren't stationary, using them to adjust your overall equity exposure wasn't worthwhile; and the 2011 yearbook study that showed that varying your allocation *among* risky assets according to valuation most definitely was.

That is to say, you are very likely to improve returns by tilting towards cheaper asset classes.

How much you do that is open to question. It's likely not wise, for example, to hold 100% of your stocks in emerging markets, if they're the cheapest at a given moment. But a bit more of them, and a bit less of the most expensive asset class? That seems wise to me.

Bill
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by richard »

gtmn wrote:<snip>Good point about the average utility of valuation metrics. However, does the predictive value of these metrics increase as valuations become more extreme? If the market PE were 40 and the yield 1%, would a Bogle estimate be just as useless as when the PE is 14 and the yield is 3%? What if the starting yield was so fat that it provided 2/3 of the historical return? To ask it another way, is there any valuation at all that would move you to modify your allocation?

We have much more than a couple of data points on market extremes, and GMO, Robert Schiller, Gregory Mankiw, Edward Chancellor, Charles Kindleberger and Dr. Bernstein have written about them. GMO studied hundreds of market bubbles in various asset classes around the world. They identified one pattern that held for every bubble except the last one, and that is when bubbles burst, they decline well below fair value.

In the face of an historically extreme valuation, is there no other rational portfolio response than to stay the course? <snip>
The US has had two instances of p/e10 above 30. I don't regard that as sufficient basis for action. BTW, "extreme" is not a specific number.

Would I move my allocation? If there was a bubble my portfolio value as a whole would go up, as likely would the equity portion, in which case I'd rebalance out of equities into safer assets.

There may be hundreds of articles, but I doubt there have been hundreds of separate bubbles in markets the size of the US.

"They identified one pattern that held for every bubble except the last one." That's a very common occurrence - you find a pattern and then it stop working.

In a post below, Dr Bernstein writes against using valuation as a basis for altering overall equity exposure, preferring using valuations to change allocations among risky assets. That seems inconsistent with what you're writing, which appears to be decreasing equity exposure if p/e (p/e10?) passes some value.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by protagonist »

Bill Bernstein wrote:I think it's a bit too fatalistic to ignore valuations.


Bill
But like somebody said that you said: " Dr. Bernstein also has written about how the chance of unexpected political/economic/natural disaster/ecological disaster is always there to decrease our level of returns/SWR certainty".

If the noise tends to be great enough to overwhelm the signal over ten years, what is the value of ten year forecasting based on the signal?

Unlike what seems to be a favorite of just about every finance celebrity I have encountered, Nate Silver (and I would guess most serious statisticians) avoids stock market forecasting, because he concludes it is nearly impossible to distinguish signal from noise in the stock market. It's not like elections or baseball. If it were possible to do with any meaningful level of accuracy/ margin of error, I would imagine statisticians would all be billionaires, like so many finance pundits. I doubt that even Nate Silver is a billionaire
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by richard »

Bill Bernstein wrote:I think it's a bit too fatalistic to ignore valuations.<snip>
The question on valuations is whether they useful enough to be actionable, for allocation purposes or for planning purposes (it's easier to set savings and withdrawal rates if you can reliably estimate returns).

Far and away the most popular suggestion for using valuation metrics is to adjust equity exposure, either on an ongoing basis or only in extreme cases. I find it interesting you oppose this strategy.

Titling a bit shouldn't hurt, unless you're incurring costs, such as taxes, or go so far as to lose adequate diversification. How far to go and how much benefit might one expect?

There are also operational questions. For example, if emerging markets use different accounting systems than developed markets, it would seem you can't just compare raw p/e numbers.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by protagonist »

richard wrote: Far and away the most popular suggestion for using valuation metrics is to adjust equity exposure, either on an ongoing basis or only in extreme cases. I find it interesting you oppose this strategy.
I don't oppose this strategy. I'm just being difficult. (laughing)
We all have to have a strategy to decide our asset allocation, despite (and hopefully recognizing) the relative paucity of science on which they are all based. I have one, and I even recommend strategies to my friends (usually prefaced by the Bob Dylan quote "Tell me, great hero, but please make it brief".)
I was referring to using this, or any existing metrics, to predict decade-forward returns.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by garlandwhizzer »

I've got to say this is a great discussion. So much food for thought on both sides of the issue that my brain currently feels overstuffed. Not certain now whether, facing this rather grim future, to do a pre-emptive tactical allocation shift or to stay with my widely diversified index portfolio with US equity being weighed at twice foreign equity, half of which is in EM. Hopefully in time clarity will dawn for me. I have no fear at all of tactical allocation shifts based on compelling fundamentals and have been doing it for 20+ years. Furthermore there is no question in my mind that Bill Bernstein is objective, experienced, rational, intelligent, and astute and that he makes solid points. On the other hand I have learned that the future is by definition unknown and unknowable even by the best investing experts. This discussion has forced me to think long and hard about the future and about my current asset allocation which in itself is good in my opinion.

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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by schuyler74 »

I still don't see how "tactical asset allocation" is any different than "market timing", except that in the former you're doing it with entire indexes and the latter is individual stocks. All Bogleheads agree that trying to time buy/sell of individual stocks based on evaluations would get you kicked out of the Boglehead club, but in this thread I see many of the same people saying that it's okay to do it with collections of stocks. What am I missing?
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by gtmn »

richard wrote:
The US has had two instances of p/e10 above 30. I don't regard that as sufficient basis for action. BTW, "extreme" is not a specific number.

Would I move my allocation? If there was a bubble my portfolio value as a whole would go up, as likely would the equity portion, in which case I'd rebalance out of equities into safer assets.

There may be hundreds of articles, but I doubt there have been hundreds of separate bubbles in markets the size of the US.

"They identified one pattern that held for every bubble except the last one." That's a very common occurrence - you find a pattern and then it stop working.

In a post below, Dr Bernstein writes against using valuation as a basis for altering overall equity exposure, preferring using valuations to change allocations among risky assets. That seems inconsistent with what you're writing, which appears to be decreasing equity exposure if p/e (p/e10?) passes some value.
Richard,

I guess you and I just disagree on what information is important and what to do with it. For example, you note there were only 2 instances where the p/e10 went above 30 and dismiss it as an insufficient sample. To me, those instances would get my attention and signal a serious deviation from the norm.

GMO's study of hundreds of bubbles spanned asset classes, borders, and centuries. They found that the patterns were the same, whether it was for tulip bulbs or tech stocks or Japanese stocks and real estate. It's a bit flip to dismiss their work just because 1 instance out of hundreds only fit the pattern very closely, but not completely. The last bubble did revert to fair value, but not below, because of the Herculean efforts of global monetary and fiscal policy.

I suppose you won't be interested in seeing GMO's record on relative asset valuation, which is quite impressive. I use it, among other valuations, to slightly tilt new purchases. The only times I've used valuation to reduce overall equity exposure was in 2006-7, when I stopped new purchases due to a global asset bubble. (I did get some TIPS to the extent of my tax deferred accounts.) Then I rotated back into stocks from October 2008 - October 2009. What was I to do, sell obscenely expensive stocks to buy even more expensive stocks elsewhere? Don't worry about me, I stick with my policy, which keeps me from stubbing my toes.

gtmn
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Ungoliant »

schuyler74 wrote:I still don't see how "tactical asset allocation" is any different than "market timing", except that in the former you're doing it with entire indexes and the latter is individual stocks. All Bogleheads agree that trying to time buy/sell of individual stocks based on evaluations would get you kicked out of the Boglehead club, but in this thread I see many of the same people saying that it's okay to do it with collections of stocks. What am I missing?
I don't think you're missing anything. Even self-proclaimed Bogleheads aren't immune to the human tendency to see patterns in randomness and underestimate the unpredictability of future events. Everyone wants to believe that if they listen to the right expert or just use their own superior intellect that they can outperform the market somehow. Of course there's no shortage of experts out there looking to take advantage of that nature in order to sell you their latest book.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by packer16 »

schuyler74 wrote:I still don't see how "tactical asset allocation" is any different than "market timing", except that in the former you're doing it with entire indexes and the latter is individual stocks. All Bogleheads agree that trying to time buy/sell of individual stocks based on evaluations would get you kicked out of the Boglehead club, but in this thread I see many of the same people saying that it's okay to do it with collections of stocks. What am I missing?
I sure hope not that is what I do. I value companies for a living and use the same skills to find cheap stocks to buy. When they are no longer cheap I sell and recycle.

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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Rodc »

I find it interesting that in 4 pages no one has produced a single example, or even a test, that purports to quantify the advantage of market predictions of this sort, or even show any benefit at all. If such predictions are only a little useful it might be hard to find evidence due to market noise. But if really useful it should not be hard to come up with some evidence.

In investing, history is chock full of ideas that "sounded good on paper", then did not pan out in real life. For example we went round and round on rebalancing on Really Bad Days. Lots of people thought it sounded like a great idea. Lots of people pointed out why it might not work.

Finally I got tired of listening and got some data and tried it out. What an idea. :)

RBD failed to do better than any of the standard rebalancing schemes, though it lagged by only a little. Once again, all that talk turned out to be about nothing important. And once again, we learned that the precise details of how one rebalances really don't matter.

I did the same with age in bonds and any number of other ideas, like asset switching based on Tobin's Q. Now it is someone else's turn. :)

Though Hoppy and I did provide some context by adding error bars (same formulation Bill provided for EM, I just repeated for the other assets) and in analyzing an earlier set of Bill's predictions (roughly got order correct which is good, errors were nearly three times as large as the class differences which is bad, estimates highly biased low, which is good if only the bias repeats.)

This thread: Lots of talk, not much actual information, it is what we love to do!

In fairness I have not read the book, just this thread. I'm wading through a 1000 page book on the rise and fall of the Third Reich, interesting history but a little slow going. If I can get through that I'll read Bill's book next. I am sure it will be valuable and I'll learn some new things.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by tetractys »

It's a conjectural projection. That said, it is a projection of a positive real return, which is not a bad thing at all. And without reading WB's book, I would assume the overall message is to invest wisely, and not to take too much risk. -- Tet
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Artsdoctor »

Tactical asset allocation is not unknown to Vanguard: http://www.bogleheads.org/wiki/Tactical ... allocation

I just completed Bill's book and it is meticulously footnoted and laden with a lot of information. It is something to be referred to back to on many occasions.

In reading the four pages of responses here, I'm struck by the fact that very, very few people have read the book. The problem is that most are missing the context in which many of these items are noted. Before anyone makes a decision to re-write his/her IPS or decides to criticize a concept a bit too thoroughly, I'd really recommend that a step be taken back and perhaps that the book be read from cover to cover. Bill has been more than fair with his time in answering questions here that really have been answered in detail in the book.

If you want to just put your Three Fund Portfolio on auto-pilot, I really don't think you're going to do badly. In fact, IN THE BOOK, this is acknowledged. However, if you want to potentially eke out some extra points, perhaps you might want to continue on with the "buy low and sell high" goal that we all appreciate--and that means lightening up on US equities and shunting some of those profits into internationals.

There is a warning in the book that has also been promulgated by Vanguard, Jack Bogle, and Larry Swedroe. Going forward, your returns over the next decade are probably going to be on the low side. This is actionable advice. If you're anticipating an average 8-9% nominal return (or 6-7% real return) going forward for the next decade because of historical returns, you may come up short. Read the book and find out why.

Try not to shoot the messenger who's actually trying to help you out.
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JoMoney
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by JoMoney »

schuyler74 wrote:I still don't see how "tactical asset allocation" is any different than "market timing", except that in the former you're doing it with entire indexes and the latter is individual stocks. All Bogleheads agree that trying to time buy/sell of individual stocks based on evaluations would get you kicked out of the Boglehead club, but in this thread I see many of the same people saying that it's okay to do it with collections of stocks. What am I missing?
TAA can apply to individual stocks as well, I think the difference is that TAA doesn't necessarily abandon a set strategic allocation altogether, it's a process of shifting allocations within a range based on your beliefs about the future or some temporary situation you're hoping to side-step or take advantage of. It's active management, and could easily be considered "market timing", but I haven't found a good definition of "Market Timing" that I like. It seems the term has negative connotations (deservedly so) and seems to be used mostly to describe a style someone disagrees with. People want to believe their style and allocation is well thought out and based on better than average decisions (and whoever is on the opposing side of their trades is just "market-timing" or "dumb beta").
The past 15 years have been a really good opportunity for those choosing active strategies and to be "tilted" away from the market allocations. The 15 years prior to that not so much. The future is unknowable.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by protagonist »

garlandwhizzer wrote:Furthermore there is no question in my mind that Bill Bernstein is objective, experienced, rational, intelligent, and astute and that he makes solid points. On the other hand I have learned that the future is by definition unknown and unknowable even by the best investing experts.
I agree with both of those statements, Garland. I might even stipulate "ESPECIALLY" by the best investing experts. The more one believes that he/she has a crystal ball, the more one becomes personally invested (no pun intended) in one's choices.
garlandwhizzer wrote: This discussion has forced me to think long and hard about the future and about my current asset allocation which in itself is good in my opinion.
That's one approach. Or you could trust your instinct and spend the rest of the time doing something fun. Maybe apply the same risk/reward formula that you are using on asset allocation on time allocation. Given x amount of hours spent thinking long and hard about the future , how much closer do you believe you will get to the truth?

By the way, here's an interesting tidbit regarding GDP growth and how it relates to equity returns: http://www.economist.com/news/finance-a ... th-paradox

My guess is the conclusion in that article is also based on lack of sufficient data to be statistically relevant, but I don't know if that is true so maybe I am being unfair. The appropriate conclusion might be "we don't know what we are talking about". That would actually carry useful, and actionable, information. It would keep people from sweating over which economies in which to invest, knowing they are just guessing and not outsmarting anybody.

But that's ok. Because,as per Nate Silver, (why am I not surprised?), economists are very poor at predicting GDP growth anyway. So who cares how it might correlate with market returns?

Until the predictors start including margin of error with their medium- to long-term predictions, and justify how they derived them via something more substantial than data derived from time periods that are often shorter than, and almost always no more than 2-10 times as long as, the periods for which they are making the predictions, I will ignore them.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by EnjoyIt »

Is this the financial porn I am told to avoid?
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
countmein
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by countmein »

Bill Bernstein wrote:
That is to say, you are very likely to improve returns by tilting towards cheaper asset classes.
Sounds good. But what readily-available metrics do I use to 'value' the following assets classes:

International Developed
EM
PME
REIT
?

And should that metric be compared to a historical norm for that particular asset class or is it just relative to other classes? For example, if the p/B of US is 3, and the p/B of EM is 2, does that make EM "cheap"?
Last edited by countmein on Wed Jun 11, 2014 6:23 pm, edited 2 times in total.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by DaufuskieNate »

siamond wrote:Investing Teenager question for Dr Bernstein...

I cannot understand why the Gordon equation uses Dividend Growth, instead of Earnings Growth. I mean, in the past, this was probably not that different, but nowadays, with companies the size of Apple not distributing dividends until very recently, doing all sorts of financial wizardry like stock buy-backs and so on, a dividends-centric reasoning is a bit hard to take (at least, at the intuitive level).

And you said it yourself in the book (p34), the past-50-years earnings growth of 2.33% is significantly higher than the dividends growth (1.34%). That is ONE FULL POINT to be potentially added to the expected returns (or 0.8% to the 1.5% assumption you took for 'g'). Hardly negligible in this era of low returns.

Could you please clarify? Why do you keep using Dividends Growth? What would be wrong in using Earnings growth instead? Would this somehow overlap with the speculative return factor?
Actually, the answers you seek are addressed in the book...

Page 159 - "The United States has a very long GDP series indeed, extending back over 200 years. It turns out that the American economy has averaged 3% growth per year adjusted for inflation...Does this translate into a similar growth of aggregate corporate profits? Indeed it does...corporate profits have been about 10% of GDP..."

Page 160 - ..."the growth of both per-share earnings and dividends is not much more than 1% per year...This difference between GDP growth and dividend/earnings growth is, of course, caused by the dilution of stock shares, which in the U.S. seems to run at about 2% per year. The same 2% gap has also been observed in the world's most stable developed economies."
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by garlandwhizzer »

Steve_14 wrote
Though their expectations are very, very different. For small cap value:

Bernstein: +4%/year
Grantham: -5%/year

So expect your small caps to either double or drop by half over the next few years.
This is true and the disparity speaks to uncertainty being the case with small caps and small cap value. Uncertainty haunts all predictions but I think the more important points are the ones on which both do generally agree:
1.Returns over 7 to 10 years are expected to be in a considerably lower range for US stocks than historical averages. This is not news. Bogle, Larry, and Rick tend to agree with this general concept although perhaps not to the extent that Bernstein and especially Grantham are suggesting.
2.Bonds over the next 7 - 10 years are likely to have low volatility but real returns of about zero over that time period. This also isn't new. Vanguard's analysis suggests about 2% nominal bond returns over a decade which would likely be wiped out by inflation. Note: because returns are low doesn't mean you don't need them.
3.International equities are likely to outperform US equities over the next 7 -10 years based on their different valuation fundamentals at present. This doesn't sit well with many Bogleheads. Most of us have been well rewarded by having US dominated equity portfolios over the last 10 years. Inertia is a strong force when you've been winning, but past performance does not predict the future any more accurately than do market experts.

The question of course is: what information is actionable? Those who are happy and comfortable with a 3 fund portfolio will likely not be influenced by these predictions and will stay the course. Those of us, like me, who tilt or make tactical asset allocation moves with a modest portion of our portfolios might consider the option of switching some of our equity exposure from US stocks to international equities and EM. Before I make this decision, I'm going to read Dr. Bernstein's new book which I just ordered. I suspect it will go into considerable detail on his analysis which will at least be food for thought. If his analysis is correct many who currently are investing for their retirement may have to make some adjustments in their plans. I'm doing nothing for now except rebalancing from equity which has increased dramatically into bonds which have been less so. After reading Dr. B's book, however, I may be convinced to make some modest equity changes.

Garland Whizzer
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by schuyler74 »

I'm glad I asked because you all have provided some excellent responses and it got me reading more about TAA in Artsdoctor's wiki link.
http://www.bogleheads.org/wiki/Tactical_asset_allocation wrote: Tactical asset allocation is an active investment strategy that adjusts a portfolio's asset class weightings according to short term forecasts of expected returns. ... Managers usually return to the portfolio's original strategic asset mix when desired short-term profits are achieved.
I believe Bogle's usual response to doing anything "tactical" is to caution that difficulty arises when trying to decide when to undo the change. If you're "temporarily" shifting from stocks to bonds, when do you go back? If moving from US to ex-US, when do you return to the proportions dictated by your IPS? And if you believe global markets are efficient, then it seems strange to think that the best guess at forecasts aren't already built in to the current prices, as described here:
http://www.referenceforbusiness.com/encyclopedia/Str-The/Tactical-Asset-Allocation.html wrote: As a short-term investment strategy, tactical asset allocation is often considered a market timing strategy. This implicitly assumes that markets are inefficient (at least in the short term) and that over- and undervalued asset classes can be identified and exploited.

Tactical asset allocation can also be described as a contrarian strategy. This approach assumes that out-of-favor asset classes, such as those that have performed poorly in a recent period, are likely to revert to their long-term average performance. While most investors tend to move away from out-of-favor asset classes, investors using tactical asset allocation tend to favor the unpopular markets. If the contrarian logic is correct, such a strategy should provide superior performance relative to a more passive investment approach.
The problem with the contrarian strategy is that it doesn't appear to work.

I asked about it in another thread on Quilt Charts (AKA "Callan periodic table of investment returns"), and the responders did the math to show that if, each year, you sold your holdings to buy last year's most out-of-favor investments, then your total return was less than if you'd just held a simple Vanguard LifeStrategy fund over the 15 years.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Artsdoctor »

Schuyler,

There's a matter of degree here. Some might say that this is close to "dancing on the head of a pin."

The most important predictor of returns is your stock:bond allocation. The way you decide on that allocation depends on your risk tolerance, your need to take that risk, and your ability to sustain any significant losses that might ensure. As a general concept, most would use their equity proportion as the workhorse and the area to take the risk that is necessary to meet their financial goals. Personally, I consider the fixed income side the "safety side" although some like to play with junk bonds and corporates to varying degrees. No one is talking about going from 70/30 to 30/70 based on valuations or anything Bill Bernstein says. Or worse, no one is advocating selling everything and then jumping back in (in fact, the book actually profiles a couple who did that and using them as an example of what NOT to do).

When you start getting down to making small adjustments to a subclass (domestic, international, REITs, slice, dice, etc.), it becomes a matter of style. For example, there's no right domestic:international ratio and no one can predict what the best allocation will be going forward. However, if you're generally in the 1/3 international and 2/3 domestic camp, you might want to take this opportunity to assess P/E, P/B ratios, and yield to see if this allocation still makes sense for your needs. The data for these numbers are readily available online. Do you want to push up the 33% international to 40%? Or even slightly more? I try very hard to not invest with an eye on the short-term, meaning the next year or so. But if you look at trends, you will find that higher valuations generally result in lower returns--and vice versa. Whether or not you use valuations in decision-making is up to you.

The beauty of this forum is that you have a tremendous number of resources available to you. There is no one style which is the only style. You get to pick and choose certain points that suit your needs. Your investing life will hopefully be very long and you will continue to learn and create your own style over the next several decades. No one should remain stagnant.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by dl7848 »

schuyler74 wrote:
The problem with the contrarian strategy is that it doesn't appear to work.

I asked about it in another thread on Quilt Charts (AKA "Callan periodic table of investment returns"), and the responders did the math to show that if, each year, you sold your holdings to buy last year's most out-of-favor investments, then your total return was less than if you'd just held a simple Vanguard LifeStrategy fund over the 15 years.
Contrarian strategies can and do work very well, but they aren't based on mechanistic approaches like the one quoted above. Why sell a good, trending investment when trends can last for years? Likewise, why buy last year's out-of-favor investment when out-of-favor investments can remain in downtrends for years. There has to be a lot more thought put into a contrarian strategy than arbitraily saying you will pick last year's worst investment and sell your current holding. For best results, you'd have to analyze on a case-by-case basis. Some will try to make it more formulaic by making the buy/sell decisions based on certain pre-defined fundamentals or technicals, or both, but that is not going to be as effective as a case-by-case approach.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by siamond »

DaufuskieNate wrote:
siamond wrote:Investing Teenager question for Dr Bernstein...

I cannot understand why the Gordon equation uses Dividend Growth, instead of Earnings Growth. I mean, in the past, this was probably not that different, but nowadays, with companies the size of Apple not distributing dividends until very recently, doing all sorts of financial wizardry like stock buy-backs and so on, a dividends-centric reasoning is a bit hard to take (at least, at the intuitive level).

And you said it yourself in the book (p34), the past-50-years earnings growth of 2.33% is significantly higher than the dividends growth (1.34%). That is ONE FULL POINT to be potentially added to the expected returns (or 0.8% to the 1.5% assumption you took for 'g'). Hardly negligible in this era of low returns.

Could you please clarify? Why do you keep using Dividends Growth? What would be wrong in using Earnings growth instead? Would this somehow overlap with the speculative return factor?
Actually, the answers you seek are addressed in the book...

Page 159 - "The United States has a very long GDP series indeed, extending back over 200 years. It turns out that the American economy has averaged 3% growth per year adjusted for inflation...Does this translate into a similar growth of aggregate corporate profits? Indeed it does...corporate profits have been about 10% of GDP..."

Page 160 - ..."the growth of both per-share earnings and dividends is not much more than 1% per year...This difference between GDP growth and dividend/earnings growth is, of course, caused by the dilution of stock shares, which in the U.S. seems to run at about 2% per year. The same 2% gap has also been observed in the world's most stable developed economies."
Not too sure to get your point? How are those quotes answering my question? If you interpret the statement on p160 as implying that earnings growth and dividends growth are equal, then this would contradict what is reported on p34 (which is likely to be the accurate number), but I don't believe the statement on p160 is intended to be very precise. Please explain?
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by berntson »

schuyler74 wrote: The problem with the contrarian strategy is that it doesn't appear to work.

I asked about it in another thread on Quilt Charts (AKA "Callan periodic table of investment returns"), and the responders did the math to show that if, each year, you sold your holdings to buy last year's most out-of-favor investments, then your total return was less than if you'd just held a simple Vanguard LifeStrategy fund over the 15 years.
Not sure if this is helpful, but markets seem to display short term momentum and long-term mean reversion. Over short periods (of around a year) winners tend to keep winning and losers tend to keep losing. Over longer periods. winners tend to revert down to the mean and losers up to the mean. So it's possible that the "buy last year's losers" strategy was on the wrong side of momentum rather than on the right side of mean reversion.

In any case, buying based on valuations is not the same thing as buying losers. Low priced stocks are often recent losers but not always. Recent losers can still be overpriced. If a market falls from absurdly high valuations, there is no reason in particular to think that it's going back up to those high valuations.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by protagonist »

berntson wrote:
Not sure if this is helpful, but markets seem to display short term momentum and long-term mean reversion. Over short periods (of around a year) winners tend to keep winning and losers tend to keep losing. Over longer periods. winners tend to revert down to the mean and losers up to the mean. So it's possible that the "buy last year's losers" strategy was on the wrong side of momentum rather than on the right side of mean reversion.
That's exactly the approach I took in the hypothetical hedge fund contest.
Last year, it worked like a charm.
This year it's not working...at least as of today I am down cf. the S+P 500.

My guess is that might be the fate of most "winning" investment strategies (recalling "January Effect" "Losers of the Dow", etc- I got sucked into "losers of the Dow" one year in the 1990s thanks to The Motley Fool and wow, did I take a beating. So sometimes you win, and sometimes you lose. With momentum, you never know where you sit in the cycle. "There are some systematic patterns in the stock market. For example, between 1965 and 1975, rises in stock prices one day were correlated with rises in stock prices the next day. But such patterns are rapidly exploited once people recognize them, and disappear". (a paraphrasing of Nate Silver from "The Signal and the Noise". Source: http://lesswrong.com/lw/hxx/some_highli ... ignal_and/)
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by protagonist »

Rodc wrote:I find it interesting that in 4 pages no one has produced a single example, or even a test, that purports to quantify the advantage of market predictions of this sort, or even show any benefit at all. If such predictions are only a little useful it might be hard to find evidence due to market noise. But if really useful it should not be hard to come up with some evidence.
"Fake Explanations

51 Eliezer_Yudkowsky 20 August 2007 09:13PM
Once upon a time, there was an instructor who taught physics students. One day she called them into her class, and showed them a wide, square plate of metal, next to a hot radiator. The students each put their hand on the plate, and found the side next to the radiator cool, and the distant side warm. And the instructor said, Why do you think this happens? Some students guessed convection of air currents, and others guessed strange metals in the plate. They devised many creative explanations, none stooping so low as to say "I don't know" or "This seems impossible."

And the answer was that before the students entered the room, the instructor turned the plate around.

Consider the student who frantically stammers, "Eh, maybe because of the heat conduction and so?" I ask: is this answer a proper belief? The words are easily enough professed—said in a loud, emphatic voice. But do the words actually control anticipation?

Ponder that innocent little phrase, "because of", which comes before "heat conduction". Ponder some of the other things we could put after it. We could say, for example, "Because of phlogiston", or "Because of magic."


"Magic!" you cry. "That's not a scientific explanation!" Indeed, the phrases "because of heat conduction" and "because of magic" are readily recognized as belonging to different literary genres. "Heat conduction" is something that Spock might say on Star Trek, whereas "magic" would be said by Giles in Buffy the Vampire Slayer.

However, as Bayesians, we take no notice of literary genres. For us, the substance of a model is the control it exerts on anticipation. If you say "heat conduction", what experience does that lead you to anticipate? Under normal circumstances, it leads you to anticipate that, if you put your hand on the side of the plate near the radiator, that side will feel warmer than the opposite side. If "because of heat conduction" can also explain the radiator-adjacent side feeling cooler, then it can explain pretty much anything.

And as we all know by this point (I do hope), if you are equally good at explaining any outcome, you have zero knowledge. "Because of heat conduction", used in such fashion, is a disguised hypothesis of maximum entropy. It is anticipation-isomorphic to saying "magic". It feels like an explanation, but it's not.

Supposed that instead of guessing, we measured the heat of the metal plate at various points and various times. Seeing a metal plate next to the radiator, we would ordinarily expect the point temperatures to satisfy an equilibrium of the diffusion equation with respect to the boundary conditions imposed by the environment. You might not know the exact temperature of the first point measured, but after measuring the first points—I'm not physicist enough to know how many would be required—you could take an excellent guess at the rest.

A true master of the art of using numbers to constrain the anticipation of material phenomena—a "physicist"—would take some measurements and say, "This plate was in equilibrium with the environment two and a half minutes ago, turned around, and is now approaching equilibrium again."

The deeper error of the students is not simply that they failed to constrain anticipation. Their deeper error is that they thought they were doing physics. They said the phrase "because of", followed by the sort of words Spock might say on Star Trek, and thought they thereby entered the magisterium of science.

Not so. They simply moved their magic from one literary genre to another.""

http://lesswrong.com/lw/ip/fake_explanations/
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by protagonist »

An open response to a frequent poster in these forums who questioned whether I consider Nate Silver more 'credible" than Bill Bernstein, and thought that it seemed like I was "picking on" Dr. Bernstein:

I'm not picking on Bill. As I stated, I agreed with Garland Whizzer's comment: " Furthermore there is no question in my mind that Bill Bernstein is objective, experienced, rational, intelligent, and astute and that he makes solid points."

I haven't read any of Bill's books, though I have recommended them. I find his posts interesting and informative, I have learned from him, and I greatly respect him. Perhaps even more so because we shared professions, I don't know.

I certainly think Nate Silver is better versed at statistics as applied to prediction than any finance experts I have read. You once spoke of "physics envy" in the social sciences....perhaps that is part of it. When Nate Silver argues against long-range market predictability, what he says makes a lot of sense to me. He knows what he can and cannot predict vis a vis elections, baseball, etc and he can provide margins of error of his predictions based on sound mathematics, so he knows how good his predictions are a priori. The finance experts are reading a lot more science into what they do than is justified by the data available. I pick that up when I read Swedroe's books, when I read about Bogle's predictions, when I read about Bernstein's predictions, Grantham's predictions, and the others I have read here....they all seem to be doing the same guesswork based on limited data and conjecture to back up their conclusions. (To be clear, I am referring specifically to future market predictions, not the rationale behind low-cost index investing).

Perhaps that is unfair of me, but as an outsider to the field, that is how I see it. I don't believe Bernstein is being disingenuous. I suspect it is endemic to the field....do it long enough and you come to believe in it.

I also cringe at the thought of gurus. I have come to believe that there are many who see these people not as respected, knowledgeable experts in their field (as I see them), but rather as gurus, and hang upon their every word. That is anathema to me and always elicits a reaction . Certainly it is not Bernstein's, Bogle's, Swedroe's et al fault, though some may relish that status and let it go to their head, starting to believe that they have the absolute truth, I don't know. I am not suggesting that they do believe that. Just that it's hard not to, when one is worshiped (consider the name of this forum: "Bogleheads").

To compare Bernstein with Silver in terms of credibility is unfair. Their expertise is different. I do tend to believe Silver over the finance guys when it comes to using statistics to make predictions. First, it is his area of expertise. Second, the way he does it and backs it up makes a lot more sense to me, given what knowledge I have of statistics.

I hope I didn't come off as sarcastic or insulting. My sentiment is anything but. I was just trying to inject a healthy dose of skepticism (as well as a bit of humor) from an outsider into a world of giddy exuberant hero-worship. And to make people think. I also hope Dr. Bernstein appreciates that, and does not take my comments as an affront.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Rodc »

^^^

Nicely put.

I down loaded the book last night and read the first chapter. It is easy going so I expect I'll finish over the next few bedtime reading sessions. My take has not really changed. It is an interesting, and no doubt eye opening read for those who do not frequent places like this, but so far at least not really new for those that do. Later chapters of course might add more.

Some data, but of course very limited as that is all there is. Some very simple limited theory (Gordon Equation), some P/E10, very much like in freshman physics class when the professor says "Let's assume balls that role without friction and and which collide with perfect transfer of momentum". A fair amount though of mere opinion and hand waving too. To be fair there is some discussion of issues like trading friction, but not much on the limits of the Gordon Equation. There are cautions about the limits of knowledge included, so that is helpful, but my take is it is written with more certainty in knowledge than exists.

That is enough to make one cautious of the near-mid term likelihood of low returns. Good for some basic planning. I am still pessimistic about the value of using these very rough estimates, and general information in the first chapter, to make much in the way of portfolio changes, based on the roughness of the estimates, the amount of just one persons (informed) opinion, and the human frailties that come into play all to often, even by those who consider themselves to be "sophisticated" when they try to do tactical allocation. Indeed just as nearly all drivers believe sincerely they are above average, but are delusional, most investors seem to think they are "sophisticated" and are delusional. The challenge is the delusional don't know they are delusional. :) Add that all together and you can hopefully see why I am pessimistic. Not that it can't work of course, I personally just would not count on it, or even make a substantial bet on it. A minor bet would be reasonable perhaps.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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nedsaid
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by nedsaid »

This is a very interesting thread. Looking at the chart from Dr. Bernstein's book, it suggests an investor should have a stock-heavy portfolio with lots of International Stocks in it. It also suggested that a portfolio should be value tilted, particularly small cap value. I was surprised that Developed Foreign Stocks had a higher projected future return than Emerging Markets.

This puts me in a bit of a dilemma. To me valuations matter a whole bunch and yet as I am getting older, I want more bonds in my portfolio. A minus one percent real return in bonds is not appealing to me and seems to be too high of a price to pay to dampen portfolio volatility. Right now, I have about 31% of my retirement assets in bonds and cash. Do I really want more in bonds than what I have right now? It might be that I will have to learn to live with volatility even as I approach retirement.

For those of us who are small value tilters and use the "slice and dice" portfolio, this is good news. The chart suggests that this strategy should work pretty darned well over the next 10 years. We will see.

Dr. Bernstein's book also seems to suggest that many of us need to increase our savings rate.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by richard »

protagonist wrote:<snip>they all seem to be doing the same guesswork based on limited data and conjecture to back up their conclusions. (To be clear, I am referring specifically to future market predictions, not the rationale behind low-cost index investing).<snip>
To me, the great divide is between those who believe we have enough historic data for these purposes and the data forms a reasonable basis for action and those who don't.

You can guess which side of the divide I'm on, given that I'm someone who frequently points out that we only have a handful of independent and fairly reliable 10 or 20 year market data points and that, at best, we have no way of knowing if underlying conditions are sufficiently stable. OTOH, the urge to find patterns and to believe we can control things is deeply ingrained in our species.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by packer16 »

With such a large amount of cash and bonds you may want to have 3 to 5 years living expenses in these types of assets and take your remaining fixed income allocation and put it into something between bonds and stocks in terms of riskiness (like NNNs or MLPs). Both of these asset classes (leased real estate and O&G infrastructure) did not (for the most part) reduce distributions through 2008-2009. With these you can probably get like 5 to 7% yield plus 3 to 5% growth in yield.

Packer
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NoVa Lurker
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by NoVa Lurker »

Rodc wrote:I find it interesting that in 4 pages no one has produced a single example, or even a test, that purports to quantify the advantage of market predictions of this sort, or even show any benefit at all.
Here's an example of the benefit of these sort of predictions:

My employer is a large financial institution. I have a 401(k), but I also have a "defined-benefit" pension and a "cash-benefit" (basically, defined contribution) pension with my employer. For the cash-benefit portion, I elect how it is invested. There are a bunch of good options - mostly typical low-ER index funds, but also an option to leave it in my employer's pension fund and receive a return of "Real + 3%." Each year, I receive a return equal to the inflation rate (calculated based on US CPI for the prior trailing 12 months) plus 3%. With this option, there are no fees at all.

In electing which option to choose, I have to decide between the "Real + 3%" option vs. various index funds. The key factors are, what is the likely real return on US or international stock funds over time? What about bond funds? And then, what is the downside risk / variance of each option (as illustrated in your helpful chart earlier)?

I am very interested in what experts like Mr. Bernstein think about this. Nobody has a crystal ball, but they know better than I do, and they're doing the work for me. I remember in my first-ever economics course, 20 years ago, we assumed a real rate of return of 10% for stock investments, and 5% real for bonds. Very optimistic! This was obviously to keep the math easy, but it still stuck in my brain. If I actually assumed 10% real returns for stocks going forward, then the "Real+3%" option would seem too conservative. Especially since I have multiple decades before retirement. But if the question is, Should I take substantial additional risk to get an "expected" real return of 4.5% instead of a virtually-guaranteed 3% real, then it is a tougher question.

Ultimately, I invest my 401(k) in a mix of international and US equity funds, with no bonds or cash. Then I invest almost all of the "cash-benefit" pension in Real+3%. I "re-balance" by moving small amounts into (and out of) index funds on the "cash-benefit" side, with the idea of keeping the total mix at roughly 70/30. Admittedly, this is a weird asset allocation approach, but I have concluded it's the most sensible under my circumstances. If the experts persuaded me that equities were likely to have much higher returns over the next, say, 30 years than currently expected, I might shift the allocations, but I really can't see that happening at this point. The OP by Berntson just confirms my current approach.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Bill Bernstein »

Hi:

Siamond asks about earnings vs dividend growth, and why I don't consider the 1% gap between the two over the past 50 years.

Well, it's true; companies are retaining dividends to grow earnings, but there are several reasons why I think that dividend growth is more realistic:

1) Earnings have grown because capital's share of GDP has increased by roughly 50% over the past few decades. This is not sustainable, for obvious reasons. (And if I said why, the thread would get locked.)

2) Companies are wasting, for the most part, those retained earnings. This is both theoretically and empirically true. (Say Snapple/TimeWarnerAOL/HPCompaq 3 times fast). This is nothing new: Ben Graham railed about this in Security Analysis.

3) I always go with the longer series, and if you use Shiller's data back to 1871, the gap almost disappears.

4) If you look at the international data from Dimson et al, 1% real dividend growth is an optimistic average. True, they don't look at earnings, but it's hard to believe that all 20 of so of their nations also have that 1% gap of the US over the past 50 years.

Best,

Bill
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Dandy »

Despite the reputation of Mr. Bernstein - predictions out a decade are usually not worth making current investment decisions based on them. There are usually good reasons to back up serious predictions -- just like those active managers have good reasons for their stock selections. If you listen to Cramer - he often makes a lot of sense (when not clowning around).

We are in strange times -- so we will see.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by DaufuskieNate »

siamond wrote:
DaufuskieNate wrote:
siamond wrote:Investing Teenager question for Dr Bernstein...

I cannot understand why the Gordon equation uses Dividend Growth, instead of Earnings Growth. I mean, in the past, this was probably not that different, but nowadays, with companies the size of Apple not distributing dividends until very recently, doing all sorts of financial wizardry like stock buy-backs and so on, a dividends-centric reasoning is a bit hard to take (at least, at the intuitive level).

And you said it yourself in the book (p34), the past-50-years earnings growth of 2.33% is significantly higher than the dividends growth (1.34%). That is ONE FULL POINT to be potentially added to the expected returns (or 0.8% to the 1.5% assumption you took for 'g'). Hardly negligible in this era of low returns.

Could you please clarify? Why do you keep using Dividends Growth? What would be wrong in using Earnings growth instead? Would this somehow overlap with the speculative return factor?
Actually, the answers you seek are addressed in the book...

Page 159 - "The United States has a very long GDP series indeed, extending back over 200 years. It turns out that the American economy has averaged 3% growth per year adjusted for inflation...Does this translate into a similar growth of aggregate corporate profits? Indeed it does...corporate profits have been about 10% of GDP..."

Page 160 - ..."the growth of both per-share earnings and dividends is not much more than 1% per year...This difference between GDP growth and dividend/earnings growth is, of course, caused by the dilution of stock shares, which in the U.S. seems to run at about 2% per year. The same 2% gap has also been observed in the world's most stable developed economies."
Not too sure to get your point? How are those quotes answering my question? If you interpret the statement on p160 as implying that earnings growth and dividends growth are equal, then this would contradict what is reported on p34 (which is likely to be the accurate number), but I don't believe the statement on p160 is intended to be very precise. Please explain?
p 160 does not say that earnings growth and dividend growth are equal. It says that "per share earnings" and dividend growth are similar. I believe the implication here is that both per share earnings and dividends are diluted over time by new share issuance.
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JoMoney
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by JoMoney »

DaufuskieNate wrote:
siamond wrote:
DaufuskieNate wrote:
siamond wrote:Investing Teenager question for Dr Bernstein...

I cannot understand why the Gordon equation uses Dividend Growth, instead of Earnings Growth. I mean, in the past, this was probably not that different, but nowadays, with companies the size of Apple not distributing dividends until very recently, doing all sorts of financial wizardry like stock buy-backs and so on, a dividends-centric reasoning is a bit hard to take (at least, at the intuitive level).

And you said it yourself in the book (p34), the past-50-years earnings growth of 2.33% is significantly higher than the dividends growth (1.34%). That is ONE FULL POINT to be potentially added to the expected returns (or 0.8% to the 1.5% assumption you took for 'g'). Hardly negligible in this era of low returns.

Could you please clarify? Why do you keep using Dividends Growth? What would be wrong in using Earnings growth instead? Would this somehow overlap with the speculative return factor?
Actually, the answers you seek are addressed in the book...

Page 159 - "The United States has a very long GDP series indeed, extending back over 200 years. It turns out that the American economy has averaged 3% growth per year adjusted for inflation...Does this translate into a similar growth of aggregate corporate profits? Indeed it does...corporate profits have been about 10% of GDP..."

Page 160 - ..."the growth of both per-share earnings and dividends is not much more than 1% per year...This difference between GDP growth and dividend/earnings growth is, of course, caused by the dilution of stock shares, which in the U.S. seems to run at about 2% per year. The same 2% gap has also been observed in the world's most stable developed economies."
Not too sure to get your point? How are those quotes answering my question? If you interpret the statement on p160 as implying that earnings growth and dividends growth are equal, then this would contradict what is reported on p34 (which is likely to be the accurate number), but I don't believe the statement on p160 is intended to be very precise. Please explain?
p 160 does not say that earnings growth and dividend growth are equal. It says that "per share earnings" and dividend growth are similar. I believe the implication here is that both per share earnings and dividends are diluted over time by new share issuance.
This is a bit conflicting , as Historical FED Z.1 data shows that negative "Net New Equity Issues" for the broad U.S. market has been the norm since the around the mid 1980's. (...not necessarily so for every sector of the market, but for the broad U.S. market)
http://www.federalreserve.gov/releases/ ... t/data.htm
http://research.stlouisfed.org/fred2/series/NCBCEBQ027S
Image
Some of the negative new equity issuance in the U.S. may be resultant of mergers and acquisitions, and some from share repurchases... But new share issuance (in aggregate) doesn't seem to be the case, and share repurchases definitely seem to be a rising trend for businesses to utilize extra cash. This has left a lot of dividend focused investors lamenting in recent years as mergers happen and the likes of Warren Buffett buy up their favorite dividend growth companies and get merged into Berkshire Hathaway, which has a share buyback program but pays no dividend.

For an owner/investor it shouldn't make a difference in the total return if there are share repurchases performed or an equal amount of dividends payed out. But if someone is looking at past "dividend growth" and expecting an old dividend growth pattern it may be awhile before their "mean" catches up to the new trend. The longer the series of data they're using, the longer it will take for their average to catch up to the new norm.

A Siegel quote I think might be relevant:
Jeremy Siegel, Stocks For the Long Run wrote:...One might wonder how the real growth of per-share earnings could exceed the long-run real growth of the entire economy, which is at most 3 percent per year. This is because per-share earnings are not the same as total earnings. With a 2 percent dividend yield, firms have sufficient cash flow to repurchase their shares. In fact, if all the increased cash flow caused by the reduction in the payout ratio were used for share repurchases, the number of shares would fall at 2 percent per year. In this case, aggregate real earnings can grow at 3 percent at the same time per-share earnings are growing at 5 percent. It is true that aggregate earnings cannot grow forever at a rate faster than the growth rate of the economy. If that were the case, it would mean corporate profits would grow so large as to squeeze out all other forms of compensation, such as wages, salaries, and rents. Yet it is perfectly possible for per-share earnings to grow forever at a rate faster than the overall economy.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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