Anybody Else in this Boat?

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Call_Me_Op
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Anybody Else in this Boat?

Post by Call_Me_Op »

I suspect I am not the only one in this boat. Prior to 2008, I thought I was well diversified - holding a lot of funds that were invested in asset classes having low historical correlation. Then came the financial crisis - and all risk assets suddenly became correlated as they went down the tube. After this, I set-out to develop a true all-weather portfolio, one that not only held assets that are generally weakly correlated, but that also would hold-up well under extreme conditions such as 2008 - and worse.

Once I designed such a portfolio - I have been sitting and waiting. Why? Because the flight-to-quality that took place in 2008 still has not unwound itself. The truly safe assets (principally treasuries) remain in very high demand (I will avoid using the word "bubble" here), and dreadfully expensive. Thus, I have only partially implemented the portfolio - hesitant to implement it in all its glory since a highly risk-averse portfolio is extremely expensive right now. I don't think I am the only one in this boat.

This may be seen as market timing - but I do believe in purchasing assets at what I consider a reasonable price. And safe assets are dreadfully expensive right now, as stated above. And to those who may point-out that assets that 'went down the tube" in 2008-2009 came right back, I would counter that this is not a guaranteed outcome going forward.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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InvestorNewb
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Re: Anybody Else in this Boat?

Post by InvestorNewb »

What is your portfolio so I can copy it ? :)
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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Re: Anybody Else in this Boat?

Post by RadAudit »

Call_Me_Op wrote: I have only partially implemented the portfolio - hesitant to implement it in all its glory since a highly risk-averse portfolio is extremely expensive right now. I
Well, it gives you something to look forward to doing in the new year - or two or three.

I'm still working on realigning a small portfolio I inherited. The realignment without undo cost is the part that keeps the process in slow motion.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

InvestorNewb wrote:What is your portfolio so I can copy it ? :)
Newb,

It may not be appropriate for you because it includes only a small allocation to equities - and a big allocation to treasuries.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

RadAudit wrote:
Call_Me_Op wrote: I have only partially implemented the portfolio - hesitant to implement it in all its glory since a highly risk-averse portfolio is extremely expensive right now. I
Well, it gives you something to look forward to doing in the new year - or two or three.

I'm still working on realigning a small portfolio I inherited. The realignment without undo cost is the part that keeps the process in slow motion.
Hi RadAudit,

Yes, 2 or 3 sounds about right.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
STC
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Re: Anybody Else in this Boat?

Post by STC »

If you added more fixed income because you misjudged your risk tolerance in 2008, then this makes sense. That being the case, understand that the primary role of fixed income is to act as a ballast for your portfolio - returns are secondary. In this light it doesn't matter if they are cheap or expensive, they are needed. The question then becomes how to invest your fixed income portion of your AA, NOT IF to invest your fixed income portion of your AA. On this topic opinions differ. Some stick with TBM. Others moved to intermediate term corporates, or shortened their duration. I hitched my boat to sacrilege, and went active with the Pimco Total Return Fund. Whatever you decide, keep in mind the primary reason for investing in fixed income, and things should turn out ok.
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Re: Anybody Else in this Boat?

Post by STC »

I would also add that it looks like the Fed will be holding these rates for the next 3-5 years.
FillorKill
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Re: Anybody Else in this Boat?

Post by FillorKill »

I’m no expert – that is certain – and yes I’m in your boat to the extent that I do not like any of the FI options right now.

I don’t know anything that the FI market does not.

I have nothing actionable [or even intelligent] to add.

I’m not going 100% equity but the lack of acceptable [as I see it] FI options is discouraging. :| :| :| :|

You are far from alone.
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

STC wrote: That being the case, understand that the primary role of fixed income is to act as a ballast for your portfolio - returns are secondary. In this light it doesn't matter if they are cheap or expensive, they are needed.
Hmmm...not sure I fully agree. The best "ballast" rises when the market crashes during a flight to quality. This ballast would be longer-dated treasuries. However, these are anything but "safe" right now. Short-duration treasuries will hold-up fine but will not compensate for market losses or provide as much rebalancing benefit.

That said - it's a matter of degree. I do in fact hold high-quality short-term fixed income. Buy the duration is much shorter than what I consider generally optimal.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by STC »

Call_Me_Op wrote:
STC wrote: That being the case, understand that the primary role of fixed income is to act as a ballast for your portfolio - returns are secondary. In this light it doesn't matter if they are cheap or expensive, they are needed.
Hmmm...not sure I fully agree. The best "ballast" rises when the market crashes during a flight to quality. This ballast would be longer-dated treasuries. However, these are anything but "safe" right now. Short-duration treasuries will hold-up find but will not compensate for market losses or provide as much rebalancing benefit.

That said - it's a matter of degree. I do in fact hold high-quality short-term fixed income. Buy the duration is much shorter than what I consider generally optimal.
The only thing that is -1 correlated to equities are things like put contracts. Long term bonds are a 0 correlation, or there-about, meaning they can and have moved in the same direction as equities. Short term bonds are likewise 0 correlated to equities, but have much less interest rate risk so the movements are muted. So pick your poision.

EDIT

If you go back to the intended purpose, of being a ballast... I think that the standard deviation of long term bonds, combined with the 0 correlation, presents a risk that violates the intent.
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Re: Anybody Else in this Boat?

Post by JW-Retired »

Not in your boat. I had a very traditional Boglehead type 60/40ish portfolio in Jan 08. It acted exactly like it was supposed to. It went down about 30% in late 2008/early 2009 but it has more than fully recovered. Currently, not counting new money, it's up 15% from the amount in Jan 08. I changed almost nothing, didn't even rebalance except a little with new contributions. Today AA is 58/42.

I don't really understand what your approach was in 2008/09. All I can offer is, for myself, I see no reason to change something that worked as advertised.

Sorry, that's likely no help to you.
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Re: Anybody Else in this Boat?

Post by ResNullius »

Just prior to the financial and market collapse, I was 80% in equities. I didn't sell anything on the way down, but I realized during that time that I simply could not continue with such a high equity allocation at my age (I had already semi-retired, doing a little part-time consulting at the time). I was particularly bothered by the numerous market collapses that had occurred during the previous ten years, plus the feeling that major institutions were dysfunctional...to put it nicely. I felt certain that the market would quickly snap back at least 20%, so I waited. After the intial snap-back, I started slowly moving equity money into fixed asset funds, a little at a time. Each time the market moved up about 5% or 10%, I moved more. I finally reached my goal of having 60% in fixed (I actually overshot to 65%, then slowly moved back to 60%, now about 61%). Whether I'm plus or minums 3-5% of my goal doesn't matter much to me. My fixed includes about 4 to 5 years of cash to cover what we need over and above SS, the rest is spit between short and intermediate investment grade funds at Vanguard. Yesterday, I decided to move a small chunk into long investment grade, given the Fed's determination to lower long-term rates over the next couple of years. If rates show evidence of making a sustained upward move, I'll switch the long to short. My equities are spit between Vanguard's SP500 and Total Market funds, and I don't plan to do anything there even if the market goes way down. In fact, if the market truly tanks again, I'll probably move some fixed money into equities, at least long enough to capture the 20% snap-back. During the reallocation phase, I booked a sizable 6-figure cap loss, which I've been using to off-set cap gain distributions plus getting the regular yearly deduction. When I do my taxes next year for 2012, I'll finally use up the cap loss carry-forward. I could have waited to make the re-allocation in hopes of not sustaining some losses in the staged movements from equity to fixed, but I was fearful of another even larger collapse, and at my age, I just could handle a huge hit that might persist for years (think Japan). I'm satisfied with what I did, since waiting for the perfect time strikes me as a losing proposition. I'm comfortable with our current asset allocation and fund selection, so I don't anticipate any changes. I wish you good luck and happy hunting.
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

JW Nearly Retired wrote:Not in your boat. I had a very traditional Boglehead type 60/40ish portfolio in Jan 08. It acted exactly like it was supposed to. It went down about 30% in late 2008/early 2009 but it has more than fully recovered. Currently, not counting new money, it's up 15% from the amount in Jan 08. I changed almost nothing, didn't even rebalance except a little with new contributions. Today AA is 58/42.

I don't really understand what your approach was in 2008/09. All I can offer is, for myself, I see no reason to change something that worked as advertised.

Sorry, that's likely no help to you.
JW
JW,

Glad you posted this. What I had prior to 2008 was essentially a conventional Boglehead portfolio. But 30% is too much for me to lose at this point in my investing career. To see 1/3 of my life savings swallowed with no end in sight is anxiety producing for me. That is precisely why I want high-quality fixed income not just to buffer market losses but (where possible) to compensate them.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

ResNullius wrote:Just prior to the financial and market collapse, I was 80% in equities. I didn't sell anything on the way down, but I realized during that time that I simply could not continue with such a high equity allocation at my age (I had already semi-retired, doing a little part-time consulting at the time). I was particularly bothered by the numerous market collapses that had occurred during the previous ten years, plus the feeling that major institutions were dysfunctional...to put it nicely. I felt certain that the market would quickly snap back at least 20%, so I waited. After the intial snap-back, I started slowly moving equity money into fixed asset funds, a little at a time. Each time the market moved up about 5% or 10%, I moved more. I finally reached my goal of having 60% in fixed (I actually overshot to 65%, then slowly moved back to 60%, now about 61%). Whether I'm plus or minums 3-5% of my goal doesn't matter much to me. My fixed includes about 4 to 5 years of cash to cover what we need over and above SS, the rest is spit between short and intermediate investment grade funds at Vanguard. Yesterday, I decided to move a small chunk into long investment grade, given the Fed's determination to lower long-term rates over the next couple of years. If rates show evidence of making a sustained upward move, I'll switch the long to short. My equities are spit between Vanguard's SP500 and Total Market funds, and I don't plan to do anything there even if the market goes way down. In fact, if the market truly tanks again, I'll probably move some fixed money into equities, at least long enough to capture the 20% snap-back. During the reallocation phase, I booked a sizable 6-figure cap loss, which I've been using to off-set cap gain distributions plus getting the regular yearly deduction. When I do my taxes next year for 2012, I'll finally use up the cap loss carry-forward. I could have waited to make the re-allocation in hopes of not sustaining some losses in the staged movements from equity to fixed, but I was fearful of another even larger collapse, and at my age, I just could handle a huge hit that might persist for years (think Japan). I'm satisfied with what I did, since waiting for the perfect time strikes me as a losing proposition. I'm comfortable with our current asset allocation and fund selection, so I don't anticipate any changes. I wish you good luck and happy hunting.
Thanks RS. Glad you were able to re-adjust your allocation to something more in line with your risk tolerance without major issues.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by pkcrafter »

I'm not in that boat, and no one should be in it. I find it too hard to give you a good answer without knowing if you are retired, what your AA was going into 2008, and what your target AA is now. The fact that you aren't actually moving to your target AA suggests you still haven't come to terms with risk and still don't have an acceptable portfolio. You can't create a portfolio that will provide some income and growth without any potential downside. It's all give and take, compromise, and trade-offs.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Anybody Else in this Boat?

Post by G-Money »

Either your newly designed portfolio is a "true all-weather portfolio" or it's not. If it's a "true all-weather portfolio," you should implement it immediately.

I take it that you currently have the same pre-2008 portfolio that did not do well in 2008-2009. If that's the case, who's to say another financical crisis isn't just around the corner? If that happens, your portfolio would likely lead to the same disappointing results you had in 2008-2009.

If you genuinely believe your "true all-weather portfolio" is more appropriate for you than your current portfolio, then just pull the trigger. I usually force myself to adhere to a 3-6 month waiting period before implementing any changes to ensure I'm not market timing, bandwagon jumping, or otherwise acting impulsively. I'm not sure how long you've been settled on your new and improved portfolio, but if you've already sat out for an appropriate waiting period, then I don't think there's much reason to continue to wait.

You've been around this forum long enough to know that Bogleheads don't believe in timing the market. So stop trying to time the market.
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Re: Anybody Else in this Boat?

Post by STC »

I think Larry recommends a 30/70 with small value and emerging markets making up the 30%, and a mix of nominal and inflation bonds for the 70%. It's intended to cut off the fat tail. May be worth looking into.
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

STC wrote:I think Larry recommends a 30/70 with small value and emerging markets making up the 30%, and a mix of nominal and inflation bonds for the 70%. It's intended to cut off the fat tail. May be worth looking into.
I have looked at this and most other concepts. Not sure the TIPS make sense if the FI is short and high-quality - at least the historical evidence doesn't support them. Also, I believe in broad equity diversification, so would hesitate to limit to SV and EM - but I do tilt toward them.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by Munir »

I cannot live my life by exclusively basing my holdings on the anxieties produced by the transient 2008 debacle. Is there really any asset that is immune to possible future declines, and is "cheap" in addition to being safe? I don't know of any. Even cash under the mattress is losing to inflation- as are treasuries with their current measly yields. Isn't the only choice still a diversified portfolio knowing that there will always be some risks? Personally, I prefer an addition of investment grade corporate bond holdings to the Total Bond index fund ownership. The risk of owning intermediate investment grade corporates is much less than owning a higher equity position, and also gives me some comfort knowing I'm slightly ahead of inflation. There is no "perfect" answer.
PS: I'm a retiree with a 70% FI portfolio -nearly all of it in my IRA.
Last edited by Munir on Thu Dec 13, 2012 10:45 am, edited 2 times in total.
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Re: Anybody Else in this Boat?

Post by telemark »

I'm not smart enough to know when something is overvalued, so I just keep on buying according to my allocation.
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Re: Anybody Else in this Boat?

Post by jtl46 »

I am definately not in the accumulation phase of my life so my AA is all about preservation of principal. Having said that, I am 90% CD's with an average maturity of 50 months and a yield of 3%. I have only 10% in Wellesley and I am thinking about moving that into a some combination of short term investment grade bonds (VFSTX) and a total stock market fund (VTSMX). Then I consider how well Wellesley held up in 2008/2009. Inflation is something I will need to consider, for the things I purchase on a regular basis it is at least double what the government publishes. I am betting that if it really takes off or if people come to the realization it is not 2% then interest rates will rise accordingly and I can roll over my CD's at a higher rate and take the penalty hit.

John
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

Munir wrote:I cannot live my life by exclusively basing my holdings on the anxieties produced by the transient 2008 debacle.
I don't think we are talking about portfolio design based "exclusively" on the 2008 experience. But there are portfolios that can ride through such debacles that do not sacrifice (much or any) return - at least based upon 40 years of data. The Permanent Portfolio is one example, although I am not necessarily advocating it - and there are reasons I wouldn't choose it.

For me personally (and I would bet I am not alone), having a portfolio that allows me to sleep comfortably is important. Drops of 30% with no end in sight are not acceptable to me.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by STC »

Call_Me_Op wrote:
Munir wrote:I cannot live my life by exclusively basing my holdings on the anxieties produced by the transient 2008 debacle.
I don't think we are talking about portfolio design based "exclusively" on the 2008 experience. But there are portfolios that can ride through such debacles that do not sacrifice (much or any) return - at least based upon 40 years of data. The Permanent Portfolio is one example, although I am not necessarily advocating it - and there are reasons I wouldn't choose it.

For me personally (and I would bet I am not alone), having a portfolio that allows me to sleep comfortably is important. Drops of 30% with no end in sight are not acceptable to me.
Acceptable drop * 2 = equity allocation
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

telemark wrote:I'm not smart enough to know when something is overvalued, so I just keep on buying according to my allocation.
I suppose this is a good approach if you have held the assets all along and benefited from the run-up, but that's not the situation I have described.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

STC wrote:
Call_Me_Op wrote:
Munir wrote:I cannot live my life by exclusively basing my holdings on the anxieties produced by the transient 2008 debacle.
I don't think we are talking about portfolio design based "exclusively" on the 2008 experience. But there are portfolios that can ride through such debacles that do not sacrifice (much or any) return - at least based upon 40 years of data. The Permanent Portfolio is one example, although I am not necessarily advocating it - and there are reasons I wouldn't choose it.

For me personally (and I would bet I am not alone), having a portfolio that allows me to sleep comfortably is important. Drops of 30% with no end in sight are not acceptable to me.
Acceptable drop * 2 = equity allocation
Well known - and a good first-order approximation. But if you hold treasuries, you generally will not see anything close to this drop.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by telemark »

Call_Me_Op wrote:I suppose this is a good approach if you have held the assets all along and benefited from the run-up, but that's not the situation I have described.
For what it's worth, the larger part of my portfolio was in the Black Hole of Ameriprise until the beginning of 2011. I think it was mostly in growth stocks, but that's only a guess. So much of my bond holdings date from that point. But my real point is simply not to overthink. There are people on Wall Street who work 80-100 hours a week with all the information that money can buy, and they can't time the market. What makes you think you can do it?
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

telemark wrote:
Call_Me_Op wrote:I suppose this is a good approach if you have held the assets all along and benefited from the run-up, but that's not the situation I have described.
For what it's worth, the larger part of my portfolio was in the Black Hole of Ameriprise until the beginning of 2011. I think it was mostly in growth stocks, but that's only a guess. So much of my bond holdings date from that point. But my real point is simply not to overthink. There are people on Wall Street who work 80-100 hours a week with all the information that money can buy, and they can't time the market. What makes you think you can do it?
I will answer this question with a question. Why are many people shortening their durations in this low interest rate environment? Is this market timing? What I am talking about here is essentially making a decision to stay very short on fixed-income because the risks of going longer seem to outweigh the benefits. A better name (rather than market timing) might be tactical duration adjustment.

There is a big difference between an efficient market and a "right" market. People have made more money going against the crowd - and right now, people are crowded into bonds.
Last edited by Call_Me_Op on Thu Dec 13, 2012 11:33 am, edited 1 time in total.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by sport »

I understand you to say that you want the safety of treasury bonds, but are concerned that they are presently overpriced. This overpriced condition means that the value of the bonds is subject to falling as interest rates rise. So the safety aspect of treasuries is from a default standpoint, but not from a market standpoint. Perhaps you should consider CDs as an alternative. They are almost equal to treasuries from a default standpoint, but will not decline when interest rates increase, if you buy them direct from the bank. Of course, with CDs you then get to be concerned about maturity dates, early withdrawal penalties, and opportunity costs. Nevertheless, they will not decline during a stock market drop, and with the FDIC backing, are a reasonable alternative to treasuries. It seems that an allocation to a CD ladder might solve part of your problem.

Jeff
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

jsl11 wrote:I understand you to say that you want the safety of treasury bonds, but are concerned that they are presently overpriced. This overpriced condition means that the value of the bonds is subject to falling as interest rates rise. So the safety aspect of treasuries is from a default standpoint, but not from a market standpoint. Perhaps you should consider CDs as an alternative. They are almost equal to treasuries from a default standpoint, but will not decline when interest rates increase, if you buy them direct from the bank. Of course, with CDs you then get to be concerned about maturity dates, early withdrawal penalties, and opportunity costs. Nevertheless, they will not decline during a stock market drop, and with the FDIC backing, are a reasonable alternative to treasuries. It seems that an allocation to a CD ladder might solve part of your problem.

Jeff
Thanks Jeff. I actually do have an allocation to long-term bank CD's as well as Savings Bonds. I also hold short-term brokerage CD's. Treasuries have the advantage of better liquidity.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by Tigermoose »

I'm kind of in the same boat. I am putting some principal down and choosing to refinance into a 15 yr fixed at 2.625% rather than increasing my % allocation of overpriced bonds in my portfolio. I'm maintaining my current level of bonds, but not increasing as I should do according to my "glide path."
Institutions matter
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Re: Anybody Else in this Boat?

Post by sport »

Call_Me_Op wrote:Thanks Jeff. I actually do have an allocation to long-term bank CD's as well as Savings Bonds. I also hold short-term brokerage CD's. Treasuries have the advantage of better liquidity.
To the extent you need liquidity, you may wish to consider a high-yield savings account. The yield will probably be less than a longer CD, but it is liquid. You can "mix and match" the amounts in various types of accounts to meet your needs, without incurring interest rate risk.
Jeff
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Re: Anybody Else in this Boat?

Post by G-Money »

Call_Me_Op wrote:
telemark wrote:
Call_Me_Op wrote:I suppose this is a good approach if you have held the assets all along and benefited from the run-up, but that's not the situation I have described.
For what it's worth, the larger part of my portfolio was in the Black Hole of Ameriprise until the beginning of 2011. I think it was mostly in growth stocks, but that's only a guess. So much of my bond holdings date from that point. But my real point is simply not to overthink. There are people on Wall Street who work 80-100 hours a week with all the information that money can buy, and they can't time the market. What makes you think you can do it?
I will answer this question with a question. Why are many people shortening their durations in this low interest rate environment?
For the same reason people use active funds, or pick stocks, or shift from stocks to bonds (or bonds to stocks) based on valuation models or moving averages. Because they think doing so will help them beat the market.
Call_Me_Op wrote:Is this market timing?
Yes.
Call_Me_Op wrote: What I am talking about here is essentially making a decision to stay very short on fixed-income because the risks of going longer seem to outweigh the benefits. A better name (rather than market timing) might be tactical duration adjustment.
Perhaps a more descriptive name. Certainly more euphemistic. Still, the conduct clearly falls within the general category of market timing.
Call_Me_Op wrote:There is a big difference between an efficient market and a "right" market.
Assuming this is true, how can you tell the difference?
Call_Me_Op wrote:People have made more money going against the crowd
Source? Also, you need to define terms. Which "crowd"?
Don't assume I know what I'm talking about.
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Re: Anybody Else in this Boat?

Post by gotherelate »

Call_Me_Op wrote:...
This may be seen as market timing - but I do believe in purchasing assets at what I consider a reasonable price. And safe assets are dreadfully expensive right now, as stated above. And to those who may point-out that assets that 'went down the tube" in 2008-2009 came right back, I would counter that this is not a guaranteed outcome going forward.
What's the guarantee going forward that safe assets won't get more expensive?
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Re: Anybody Else in this Boat?

Post by tadamsmar »

Call_Me_Op wrote:
Munir wrote:I cannot live my life by exclusively basing my holdings on the anxieties produced by the transient 2008 debacle.
I don't think we are talking about portfolio design based "exclusively" on the 2008 experience. But there are portfolios that can ride through such debacles that do not sacrifice (much or any) return - at least based upon 40 years of data. The Permanent Portfolio is one example, although I am not necessarily advocating it - and there are reasons I wouldn't choose it.

For me personally (and I would bet I am not alone), having a portfolio that allows me to sleep comfortably is important. Drops of 30% with no end in sight are not acceptable to me.
So, what percentage drop is acceptable?

if X = the percentage drop that is acceptable and S = the percentage of stocks you had in 2008 pre-crash then S*(X/30) seems a good stock allocation for you. No reason to wait, every minute you wait is subjecting you so something that you say is not acceptable. If you are holding more than S*(X/30) then your actions don't match your words.
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

G-Money wrote:
Call_Me_Op wrote:
telemark wrote:
Call_Me_Op wrote:I suppose this is a good approach if you have held the assets all along and benefited from the run-up, but that's not the situation I have described.
For what it's worth, the larger part of my portfolio was in the Black Hole of Ameriprise until the beginning of 2011. I think it was mostly in growth stocks, but that's only a guess. So much of my bond holdings date from that point. But my real point is simply not to overthink. There are people on Wall Street who work 80-100 hours a week with all the information that money can buy, and they can't time the market. What makes you think you can do it?
I will answer this question with a question. Why are many people shortening their durations in this low interest rate environment?
For the same reason people use active funds, or pick stocks, or shift from stocks to bonds (or bonds to stocks) based on valuation models or moving averages. Because they think doing so will help them beat the market.
Call_Me_Op wrote:Is this market timing?
Yes.
Call_Me_Op wrote: What I am talking about here is essentially making a decision to stay very short on fixed-income because the risks of going longer seem to outweigh the benefits. A better name (rather than market timing) might be tactical duration adjustment.
Perhaps a more descriptive name. Certainly more euphemistic. Still, the conduct clearly falls within the general category of market timing.
Call_Me_Op wrote:There is a big difference between an efficient market and a "right" market.
Assuming this is true, how can you tell the difference?
Call_Me_Op wrote:People have made more money going against the crowd
Source? Also, you need to define terms. Which "crowd"?
The "crowd" is the majority of investors. The source is the value premium.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

gotherelate wrote:
Call_Me_Op wrote:...
This may be seen as market timing - but I do believe in purchasing assets at what I consider a reasonable price. And safe assets are dreadfully expensive right now, as stated above. And to those who may point-out that assets that 'went down the tube" in 2008-2009 came right back, I would counter that this is not a guaranteed outcome going forward.
What's the guarantee going forward that safe assets won't get more expensive?
There is no guarantee of that. If they get more expensive, they are even less attractive.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

tadamsmar wrote:
Call_Me_Op wrote:
Munir wrote:I cannot live my life by exclusively basing my holdings on the anxieties produced by the transient 2008 debacle.
I don't think we are talking about portfolio design based "exclusively" on the 2008 experience. But there are portfolios that can ride through such debacles that do not sacrifice (much or any) return - at least based upon 40 years of data. The Permanent Portfolio is one example, although I am not necessarily advocating it - and there are reasons I wouldn't choose it.

For me personally (and I would bet I am not alone), having a portfolio that allows me to sleep comfortably is important. Drops of 30% with no end in sight are not acceptable to me.
So, what percentage drop is acceptable?

if X = the percentage drop that is acceptable and S = the percentage of stocks you had in 2008 pre-crash then S*(X/30) seems a good stock allocation for you. No reason to wait, every minute you wait is subjecting you so something that you say is not acceptable. If you are holding more than S*(X/30) then your actions don't match your words.
Not sure what you are asking, but I do have an allocation to stocks right now - and it is about 2X maximum acceptable loss.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

G-Money wrote:
Call_Me_Op wrote:Is this market timing?
Yes.
If this is market timing, then I am in good company with the likes of Bill Bernstein.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

Just to clarify, I did not have a bad portfolio pre-2008. It was essentially a Boglehead portfolio, about 60-40. But even that was too much downside for me in 2008. I have reduced equity exposure and improved quality on the bond side. But I am very short on the fixed-income duration. This is where I differ from where I'd like to be - I am not out as far on the yield curve. If this is market timing - I am guilty as charged. If you are OK buying 5 year treasuries at a fraction of 1%, you are free to do it - but I find it distasteful.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by hazlitt777 »

Call_Me_Op wrote:I suspect I am not the only one in this boat. Prior to 2008, I thought I was well diversified - holding a lot of funds that were invested in asset classes having low historical correlation. Then came the financial crisis - and all risk assets suddenly became correlated as they went down the tube. After this, I set-out to develop a true all-weather portfolio, one that not only held assets that are generally weakly correlated, but that also would hold-up well under extreme conditions such as 2008 - and worse.

Once I designed such a portfolio - I have been sitting and waiting. Why? Because the flight-to-quality that took place in 2008 still has not unwound itself. The truly safe assets (principally treasuries) remain in very high demand (I will avoid using the word "bubble" here), and dreadfully expensive. Thus, I have only partially implemented the portfolio - hesitant to implement it in all its glory since a highly risk-averse portfolio is extremely expensive right now. I don't think I am the only one in this boat.

This may be seen as market timing - but I do believe in purchasing assets at what I consider a reasonable price. And safe assets are dreadfully expensive right now, as stated above. And to those who may point-out that assets that 'went down the tube" in 2008-2009 came right back, I would counter that this is not a guaranteed outcome going forward.
Can you dollar cost average into these assets you perceive as overvalued? I personally believe bonds are overvalued, stocks less so, and gold is cheap. But I could be wrong. So I am diversified amongst all three. But if I wasn't...I think I would dollar cost average into them, whether I perceived them as cheap or expensive.

Just some thoughts.
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

hazlitt777 wrote:
Call_Me_Op wrote:I suspect I am not the only one in this boat. Prior to 2008, I thought I was well diversified - holding a lot of funds that were invested in asset classes having low historical correlation. Then came the financial crisis - and all risk assets suddenly became correlated as they went down the tube. After this, I set-out to develop a true all-weather portfolio, one that not only held assets that are generally weakly correlated, but that also would hold-up well under extreme conditions such as 2008 - and worse.

Once I designed such a portfolio - I have been sitting and waiting. Why? Because the flight-to-quality that took place in 2008 still has not unwound itself. The truly safe assets (principally treasuries) remain in very high demand (I will avoid using the word "bubble" here), and dreadfully expensive. Thus, I have only partially implemented the portfolio - hesitant to implement it in all its glory since a highly risk-averse portfolio is extremely expensive right now. I don't think I am the only one in this boat.

This may be seen as market timing - but I do believe in purchasing assets at what I consider a reasonable price. And safe assets are dreadfully expensive right now, as stated above. And to those who may point-out that assets that 'went down the tube" in 2008-2009 came right back, I would counter that this is not a guaranteed outcome going forward.
Can you dollar cost average into these assets you perceive as overvalued? I personally believe bonds are overvalued, stocks less so, and gold is cheap. But I could be wrong. So I am diversified amongst all three. But if I wasn't...I think I would dollar cost average into them, whether I perceived them as cheap or expensive.

Just some thoughts.
Hazlitt - yes, this may be a good approach. I am actually doing this in the sense that my fixed-income allocation includes a myriad of assets, and I am buying things like I-bonds and EE-bonds as part of it.

Not sure I know what to make of gold's current valuation, but my AA does call for some.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by G-Money »

Call_Me_Op wrote:
G-Money wrote:
Call_Me_Op wrote:People have made more money going against the crowd
Source? Also, you need to define terms. Which "crowd"?
The "crowd" is the majority of investors. The source is the value premium.
So you believe the value premium is a behavioral story, rather than a risk story? If it's a risk story, as is frequently argued, then the value premium is no more remarkable than the equity risk premium.

I'm also not clear on why the existance of a value premium lends itself as an argument in favor of changing the duration of one's bond holdings or delaying the deployment of funds into a more appropriate AA.
Last edited by G-Money on Thu Dec 13, 2012 2:03 pm, edited 1 time in total.
Don't assume I know what I'm talking about.
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Re: Anybody Else in this Boat?

Post by G-Money »

Call_Me_Op wrote:
G-Money wrote:
Call_Me_Op wrote:Is this market timing?
Yes.
If this is market timing, then I am in good company with the likes of Bill Bernstein.
Lots of people, including renowned authors on this forum, engage in suboptimal behavior. Perhaps this is another example. Perhaps not. No way to know ex ante.
Don't assume I know what I'm talking about.
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Re: Anybody Else in this Boat?

Post by Joe S. »

Call_Me_Op wrote:
InvestorNewb wrote:What is your portfolio so I can copy it ? :)
Newb,

It may not be appropriate for you because it includes only a small allocation to equities - and a big allocation to treasuries.

There is a basic problem here that we are trying to discuss your portfolio, but you haven't said what your portfolio is. This limits discussion.
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Re: Anybody Else in this Boat?

Post by telemark »

Call_Me_Op wrote:I will answer this question with a question. Why are many people shortening their durations in this low interest rate environment? Is this market timing? What I am talking about here is essentially making a decision to stay very short on fixed-income because the risks of going longer seem to outweigh the benefits. A better name (rather than market timing) might be tactical duration adjustment.

There is a big difference between an efficient market and a "right" market. People have made more money going against the crowd - and right now, people are crowded into bonds.
It's a strategy that only pays off if the market acts in a certain way within a certain period of time. I don't know how to call that anything but market timing. We all agree that interest rates will go up someday. The question is when, and no one knows that.

And yes, there are smart people who disagree with me, and they may be right.
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

G-Money wrote:
Call_Me_Op wrote:
G-Money wrote:
Call_Me_Op wrote:People have made more money going against the crowd
Source? Also, you need to define terms. Which "crowd"?
The "crowd" is the majority of investors. The source is the value premium.
So you believe the value premium is a behavioral story, rather than a risk story? If it's a risk story, as is frequently argued, then the value premium is no more remarkable than the equity risk premium.

I'm also not clear on why the existance of a value premium lends itself as an argument in favor of changing the duration of one's bond holdings or delaying the deployment of funds into a more appropriate AA.
The intent was to use the value premium to explain why going against the crowd is often beneficial. The crowd is usually wrong. I understand it's an imperfect connection.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

Joe S. wrote:
Call_Me_Op wrote:
InvestorNewb wrote:What is your portfolio so I can copy it ? :)
Newb,

It may not be appropriate for you because it includes only a small allocation to equities - and a big allocation to treasuries.

There is a basic problem here that we are trying to discuss your portfolio, but you haven't said what your portfolio is. This limits discussion.
For the sake of this discussion, we are talking about 25/5/75 Diversified equity/Gold/SAFE, where SAFE is ideally a rolling treasury ladder with 5 year duration. The account we have been discussing is taxable.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Anybody Else in this Boat?

Post by dbr »

I think that characterizing a "safe" asset as "overpriced" is an oxymoron.

I'm struggling to see what the problem is here. If the issue is that fixed income investments that have very little or no price volatility are also yielding very little right now, then we are all in that boat. This has nothing to do with when to buy such assets. More than that, the money has to be in one alternative or another, and we haven't heard about the options yet.
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Re: Anybody Else in this Boat?

Post by hazlitt777 »

dbr wrote:I think that characterizing a "safe" asset as "overpriced" is an oxymoron.

I'm struggling to see what the problem is here. If the issue is that fixed income investments that have very little or no price volatility are also yielding very little right now, then we are all in that boat. This has nothing to do with when to buy such assets. More than that, the money has to be in one alternative or another, and we haven't heard about the options yet.
Well, I've argued here that no asset by itself can provide safety. Rather, a well diversified portfolio can, or comes closest anyway. I think the oxymoron is the whole concept of a "safe asset."

As far as alternatives to the dollar for money...well there was gold and silver for thousands of years.
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Re: Anybody Else in this Boat?

Post by Call_Me_Op »

dbr wrote:I think that characterizing a "safe" asset as "overpriced" is an oxymoron.
That's only if you interpret SAFE as meaning no risk of any kind. I am not defining it that way. Here, "SAFE" means a vanishingly small probability of nominal loss and minimal probability of significant loss of real value. In addition, it should tend to play well with the equity portion of the portfolio.

Overpriced may not be the best word. I consider 5 year treasuries to be historically very valuable in a portfolio, but to currently have a relatively poor risk-reward relationship.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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