Bill Bernstein: "Take risk off the table"
Re: Bill Bernstein: "Take risk off the table"
I am 50%stock/50%TIPS.I am in early retirement 54.Not changing anything now.But will continue to buy TIPS even though some say that"s crazy.
Re: Bill Bernstein: "Take risk off the table"
A helpful article in that it causes me personally to think, "For my current level of assets/personal situation, is my risk level set at a level that will allow me to sleep at night if 2008-09 repeats?"
Cue Adrian Nenu's rule - "tolerable loss = half of equity allocation"
For me personally, at least at this time, the answer is stay the course given the current situation and personal asset values.
Cue Adrian Nenu's rule - "tolerable loss = half of equity allocation"
For me personally, at least at this time, the answer is stay the course given the current situation and personal asset values.
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Re: Bill Bernstein: "Take risk off the table"
Well, what about this ...say I'm retiring in 5 years plus my savings are ahead of plan due to a sharp 5-year bull market. I now think it's time to decrease my stock exposure and increase my bond holdings and start to add some inflation-protected assets to that side of my portfolio (i.e., lower my short-term overall risk). That's a very generic move for a transitional retiree. The situations are age, savings level, risk/reward dynamics of the stock market moving forward. The "time" consideration is proximity to retirement given the aforementioned situations. Market timing?tibbitts wrote:It's the "or even moderate" part that people are having trouble with. As in your example, one glass of wine turns into two. And a few beers, and a shot or two or three of whiskey. I think you can make a case, although not an obvious one, that rebalancing isn't market timing. I don't think you can make a case that a "small or even moderate adjustment in one's asset allocation due to situational changes" isn't market timing. It seems to me that that's the definition of market timing; a 100% change in one direction or another has never been required to qualify.IlliniDave wrote:It really depends on how you define "market timing". In the derogatory sense I would define it as someone who would sell all their equities at a given time to wait on the sidelines intending at some point in the relatively near future to pile all the way back in for the sake of short-term profits.an_asker wrote:As long as Dr Bernstein or Jack Bogle tells us to alter our asset allocations, it is OK. If we were to do so on our own, that is market timing.abuss368 wrote:I am not sure. With all due respect, it feels like a little bit of market timing?
Jack Bogle always tells us to "stay the course". If we start trying to market time we could be right or we could be wrong.
The idea that any small or even moderate adjustment in one's asset allocation due to situational changes (internal or external) is, (cover the children's ears) market timing, is akin to a guy that has one glass of wine everyday at dinner being accused of debauchery when he has two one evening because he finds an especially nice bottle or because it's New Year's Eve.
If you want to have the broadest definition of market timing possible then rebalancing, being on a glide path, setting up an LMP, choosing which assets to take distributions from during a given retirement year, increasing/decreasing your savings rate, tax loss harvesting--nearly every conceivable investment action one could take could be called market timing. Even an initial asset allocation decision is rooted in age and expectation of future performance.That broad of a definition discredits the argument of market timing as "bad" behavior, and you're left with both prudent "market timing" and imprudent "market timing". There's just no getting around the fact that investing occurs over substantial lengths of time and requires an ongoing series of decisions based on situations at different points in the timeline. These situations are both the investor's personal financial situation, her/his goals (subject to change over time), as well as overall economic/market conditions.
Many here disagree with me, and that's fine by me. But, in my view where market timing gets clearly imprudent is when investors alternate between being "in" the market (when they think it's going to be hot) and "out of" the market when they expect it to do badly. Usually that results in the opposite of what Bernstein is talking about (increasing risk during market surges rather than "taking risk off the table" during a sustained market surge near the end of the accumulation phase). There's ample evidence that the in/out behavior causes investors to "buy high and sell low" and substantially underperform a buy-and-hold strategy. I don't think there's similar evidence that time/situation-based actions such as rebalancing, decreasing stock exposure with age, tax loss harvesting, the various tactics one can employ during the distribution phase, even tweaking an AA due solely to valuations, carry the same adverse repercussions.
"Staying the course" doesn't require locking the rudder and forbid adjusting the sail. Currents and winds change.
Don't do something. Just stand there!
Re: Bill Bernstein: "Take risk off the table"
"Staying the course" or "sticking to your plan" assumes that one has decided in advance how much risk they are willing to tolerate regardless of what unfolds in the future. Once that tolerance level is set, all expectations must be set aside. That means eating whatever the market serves. If those conditions are not acceptable then the only realistic option is a zero loss tolerance policy.
In my case, being retired means eliminating the danger that I won't have enough rather than taking a risk and hoping for a positive result.
In my case, being retired means eliminating the danger that I won't have enough rather than taking a risk and hoping for a positive result.
- Don Christy
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Re: Bill Bernstein: "Take risk off the table"
EDITED to add, Happy Thanksgiving to those in the US. Happy Thursday to everyone else.
I am very thankful for the advice and education I've received from the incredible BogleHead posters.
Maybe I'm thinking abut this too naively, but here's how I view whether changes to allocation based on market valuation are "market timing."
If you adjust your AA in response to market changes principally to increase your expected returns, you are practicing market timing.
If you adjust your AA in response to market changes because you now have less need to take risk and want to reduce volatility, you are practicing risk management.
I think a good boglehead IPS should contemplate and try to define risks to your plan, and include policies around risk management, particularly as you get closer to retirement.
For some, risk management is simply something like "age in bonds" with rebalancing. For others, risk management may include de-risking portfolio completely and creating a liability matching portfolio once some target has been attained.
I would suggest that Bernstein and Swedroe lie closer to the latter position.
The only problem I have with any of it is that it's very difficult to really know the nature of, and therefore manage (or liability match), the future risks to a 40-50 year portfolio.
I am very thankful for the advice and education I've received from the incredible BogleHead posters.
Maybe I'm thinking abut this too naively, but here's how I view whether changes to allocation based on market valuation are "market timing."
If you adjust your AA in response to market changes principally to increase your expected returns, you are practicing market timing.
If you adjust your AA in response to market changes because you now have less need to take risk and want to reduce volatility, you are practicing risk management.
I think a good boglehead IPS should contemplate and try to define risks to your plan, and include policies around risk management, particularly as you get closer to retirement.
For some, risk management is simply something like "age in bonds" with rebalancing. For others, risk management may include de-risking portfolio completely and creating a liability matching portfolio once some target has been attained.
I would suggest that Bernstein and Swedroe lie closer to the latter position.
The only problem I have with any of it is that it's very difficult to really know the nature of, and therefore manage (or liability match), the future risks to a 40-50 year portfolio.
“Speak only if it improves upon the silence." Mahatma Gandhi
Re: Bill Bernstein: "Take risk off the table"
I am in same line if thought as doncamillo. Cash has accumulated and neither want to buy stocks or bonds. Where do I put the money. So far it just accumulates.
Re: Bill Bernstein: "Take risk off the table"
Dr. Bernstein has been a proponent of value averaging in the past and this is really along those same lines. To the poster above, nothing wrong with sitting on the cash and deploying it when the market drops as long as you can be patient.
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Re: Bill Bernstein: "Take risk off the table"
If you adjust your AA in response to market changes principally to increase your expected returns, you are practicing market timing.
If you adjust your AA in response to market changes because you now have less need to take risk and want to reduce volatility, you are practicing risk management.
I think a good boglehead IPS should contemplate and try to define risks to your plan, and include policies around risk management, particularly as you get closer to retirement.
Nicely stated. Back in 08-09, when the market tanked, I did not sell any stock funds and continued to buy either through automatic contributions or otherwise. Now five years later, my net worth has increased substantially due to market gains and continued contributions to my 401k. Consequently, my mind is on a liability matching portfolio (LMP). So, I sell to contribute to that. Consistent with my IPS, I intend to maintain 30-40 percent in stocks and rebalance in 5 percent bands. I may miss some more gains, but my mind is more at ease -- the latter of which has been the point of saving and trying to make money in the market. It makes sense given my needs and comfort with different levels of risk.
For me, this thread, with its many notable contributors weighing in on a key topic, is one of the best this year. Thanks.
Re: Bill Bernstein: "Take risk off the table"
Happy Thanksgiving to all.umfundi wrote:As Dr. Bernstein and others on the panel of experts at BH2013 said, staying with your plan is more important than getting the plan exactly right.
Yes, "staying the course" is not some stupid slogan. It means, stick with your plan. Which is why I am so frustrated with some of the experts now suggesting you should be tinkering and tampering with your plan.
Keith
I don't consider it tinkering but prudent to take appropriate measures when, as Bernstein and Swedroe point out, one is no longer required to take as much risk to fund their retirement (or other goal).
Just as you wouldn't invest in equities for a short term goal, once one has amassed a certain amount of wealth sufficient to augment their "safe" sources of income throughout their retirement, (pension, Social Security, inheritance etc.), it only makes good financial sense to invest and safeguard much of it in less aggressive vehicles such as TIPS, I-Bonds, government bonds, SPIA's, CDs etc. The remaining balance, one's "risk portfolio", can still be invested more aggressively in any number of equity funds or similar investments. The percentages you feel comfortable allotting to your "liability matching portfolio" vs. your "risk portfolio" is still up to you and there is no reason that such action would conflict with a well reasoned IPS.
Tinkering? I don't think so. In my view, "winning the game" is not building a huge balance in one's portfolio only to watch it shrink and wither away when its most needed. "Winning the game" is taking the prudent steps to ensure that you are in a position to enjoy the fruits of the investments and risks you have taken over many years to reach the point of funding a reasonably comfortable retirement.
Why anyone would think that long term blind allegiance to a methodology, (which is meant to be a tool), is more important than achieving and ensuring the ultimate goal is beyond me. There comes a time...
Last edited by Blues on Thu Nov 28, 2013 7:54 am, edited 1 time in total.
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Re: Bill Bernstein: "Take risk off the table"
Given a 200% run up in stocks, how could one's need to take risk NOT have changed, unless they were a very novice investor? All Dr. B is saying is don't ignore what these historic gains have offered you.
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Re: Bill Bernstein: "Take risk off the table"
Presumably, you have been rebalancing all along, and by doing so you have reaped these gains. Whether your over-all AA needs to change is questionable. If it was right in 2007 it probably should be about the same.letsgobobby wrote:Given a 200% run up in stocks, how could one's need to take risk NOT have changed, unless they were a very novice investor? All Dr. B is saying is don't ignore what these historic gains have offered you.
Best regards, -Op |
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Re: Bill Bernstein: "Take risk off the table"
Even if one were rebalancing throughout their investing lifetime, isn't it reasonable that at some point one could make the determination that they no longer needed to have such high exposure to equities? There was a time when I owned no bonds, rightly or wrongly. When I eventually added fixed income, it may or may not have been at the appropriate percentages given the circumstances.Call_Me_Op wrote:Presumably, you have been rebalancing all along, and by doing so you have reaped these gains. Whether your over-all AA needs to change is questionable. If it was right in 2007 it probably should be about the same.letsgobobby wrote:Given a 200% run up in stocks, how could one's need to take risk NOT have changed, unless they were a very novice investor? All Dr. B is saying is don't ignore what these historic gains have offered you.
However, now that I am older and hopefully wiser, after having remained committed throughout many years of the markets ups and downs, is it unreasonable that I have arrived at the conclusion over the past year or two that a 30% investment in equities will be sufficient for our portfolio and comfort going forward?
Asset allocation is a tool. A means to an end. It should be amended as befits the circumstances, (in my humble opinion).
(This is not the same thing as advocating changes to be made willy-nilly absent sound reasoning.)
Re: Bill Bernstein: "Take risk off the table"
Sadly, I didn't experience the 200% run up in US stocks over the last 4.5 years because I was also invested in bonds and foreign stocks.letsgobobby wrote:Given a 200% run up in stocks, how could one's need to take risk NOT have changed, unless they were a very novice investor? All Dr. B is saying is don't ignore what these historic gains have offered you.
Total Int'l Stock is up a mere 38% in that time frame.
Total US Bond is up a mere 22% in that time frame.
And I kept rebalancing out of the US stocks that I did have into the poorer performers.
I suppose these past few years will go into the annals (and data bases used by data miners) as another reason not to rebalance.
You can't win for losing.
Re: Bill Bernstein: "Take risk off the table"
Excellent post, livesoft.livesoft wrote:Sadly, I didn't experience the 200% run up in US stocks over the last 4.5 years because I was also invested in bonds and foreign stocks.letsgobobby wrote:Given a 200% run up in stocks, how could one's need to take risk NOT have changed, unless they were a very novice investor? All Dr. B is saying is don't ignore what these historic gains have offered you.
Total Int'l Stock is up a mere 38% in that time frame.
Total US Bond is up a mere 22% in that time frame.
And I kept rebalancing out of the US stocks that I did have into the poorer performers.
I suppose these past few years will go into the annals (and data bases used by data miners) as another reason not to rebalance.
You can't win for losing.
Re: Bill Bernstein: "Take risk off the table"
.
Happy Thanksgiving!
Above is a very simple illustration of a 50/50 VTSMX/VBMFX allocation rebalanced annually for the past 15 calendar years. Meaning [say] someone turning 50yo in 1998 would be turning 65yo in 2013.
2 cents (well, maybe 3).
Happy Thanksgiving!
Code: Select all
TOTAL RETURN
Year VTSMX VBMFX 50/50
2012 16.25% 4.05% 235.40
2011 0.96% 7.56% 213.71
2010 17.09% 6.42% 204.97
2009 28.70% 5.93% 183.41
2008 -37.04% 5.05% 156.34
2007 5.49% 6.92% 186.11
2006 15.51% 4.27% 175.24
2005 5.98% 2.40% 159.47
2004 12.52% 4.24% 153.05
2003 31.35% 3.97% 141.22
2002 -20.96% 8.26% 120.02
2001 -10.97% 8.43% 128.16
2000 -10.57% 11.39% 129.81
1999 23.81% -0.76% 129.28
1998 23.26% 8.58% 115.92
- Notice how 156.34 to end 2008 turns to 235.40 by end-2012 (+50.6%).
- According to Vanguard, VTSMX returned another 30.02% through YTD 11/27/2013.
- There should be lower need for risk.
- IF there isn't, then it implies *staying a course* that is likely built on insufficient savings rate to meet goals; perhaps built on something else. I'm trying to be nice here.
2 cents (well, maybe 3).
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: Bill Bernstein: "Take risk off the table"
+1YDNAL wrote:.
Happy Thanksgiving!Above is a very simple illustration of a 50/50 VTSMX/VBMFX allocation rebalanced annually for the past 15 calendar years. Meaning [say] someone turning 50yo in 1998 would be turning 65yo in 2013.Code: Select all
TOTAL RETURN Year VTSMX VBMFX 50/50 2012 16.25% 4.05% 235.40 2011 0.96% 7.56% 213.71 2010 17.09% 6.42% 204.97 2009 28.70% 5.93% 183.41 2008 -37.04% 5.05% 156.34 2007 5.49% 6.92% 186.11 2006 15.51% 4.27% 175.24 2005 5.98% 2.40% 159.47 2004 12.52% 4.24% 153.05 2003 31.35% 3.97% 141.22 2002 -20.96% 8.26% 120.02 2001 -10.97% 8.43% 128.16 2000 -10.57% 11.39% 129.81 1999 23.81% -0.76% 129.28 1998 23.26% 8.58% 115.92
All that said, I see nothing wrong in Bernstein suggesting something like a 4% (or whatever) reduction in Equity risk. An IPS that doesn't build-in this sort of contingency, may not be worth the paper (disk space) it is written on.
- Notice how 156.34 to end 2008 turns to 235.40 by end-2012 (+50.6%).
- According to Vanguard, VTSMX returned another 30.02% through YTD 11/27/2013.
- There should be lower need for risk.
- IF there isn't, then it implies *staying a course* that is likely built on insufficient savings rate to meet goals; perhaps built on something else. I'm trying to be nice here.
2 cents (well, maybe 3).
- Svensk Anga
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Re: Bill Bernstein: "Take risk off the table"
For 15 years (1995-2010), through the heart of my accumulation phase, I held 90% equities. The idea was to take a lot of risk seeking the highest expected return in order to accumulate the funds for early retirement. I had it in mind to get more conservative when the goal was in sight, but had no specific plan to manage the transition. I had not yet heard of an IPS.
Dr. Bernstein's "Ages of the Investor" came at the right time for me. Since reading that, I have accelerated my exit from the game. I went from 76% equity in October 2012 to 67% a year later. Part of the exit was accomplished by directing almost all new money to fixed income. The other part came from selling equities as market gains pushed my equity balance above the value averaging path I set a year and a half ago. I think my LMP is now fully funded. (I think I have to fund only 15 years, to age 70. After that, pensions, SS with delayed retirement credits, and half my dividends could cover the routine expenses.)
I wonder if my path isn't close to the optimum, at least for the risk tolerant and early retirement seekers. Equities cycle above and below their long term trend. If one can sell out from a high equity allocation well into an up cycle, one stands a good chance of securing one's "number" earlier than otherwise. The steady 60/40 investor might reach his number on schedule at normal retirement age. The 90/10 investor has a shot of reaching his number early. If so, fund the LMP at whatever age and withdraw substantially from the game. But you better grab it when it is there as it may go away again, for a while. This gives one the option to retire, semi-retire, shift career, volunteer, or whatever, while the other guy is still plodding toward his number.
Dr. Bernstein's "Ages of the Investor" came at the right time for me. Since reading that, I have accelerated my exit from the game. I went from 76% equity in October 2012 to 67% a year later. Part of the exit was accomplished by directing almost all new money to fixed income. The other part came from selling equities as market gains pushed my equity balance above the value averaging path I set a year and a half ago. I think my LMP is now fully funded. (I think I have to fund only 15 years, to age 70. After that, pensions, SS with delayed retirement credits, and half my dividends could cover the routine expenses.)
I wonder if my path isn't close to the optimum, at least for the risk tolerant and early retirement seekers. Equities cycle above and below their long term trend. If one can sell out from a high equity allocation well into an up cycle, one stands a good chance of securing one's "number" earlier than otherwise. The steady 60/40 investor might reach his number on schedule at normal retirement age. The 90/10 investor has a shot of reaching his number early. If so, fund the LMP at whatever age and withdraw substantially from the game. But you better grab it when it is there as it may go away again, for a while. This gives one the option to retire, semi-retire, shift career, volunteer, or whatever, while the other guy is still plodding toward his number.
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Re: Bill Bernstein: "Take risk off the table"
between new savings, gains in all three markets, and being five years older, many will still find they need to or want to take less risk.livesoft wrote:Sadly, I didn't experience the 200% run up in US stocks over the last 4.5 years because I was also invested in bonds and foreign stocks.letsgobobby wrote:Given a 200% run up in stocks, how could one's need to take risk NOT have changed, unless they were a very novice investor? All Dr. B is saying is don't ignore what these historic gains have offered you.
Total Int'l Stock is up a mere 38% in that time frame.
Total US Bond is up a mere 22% in that time frame.
And I kept rebalancing out of the US stocks that I did have into the poorer performers.
I suppose these past few years will go into the annals (and data bases used by data miners) as another reason not to rebalance.
You can't win for losing.
Re: Bill Bernstein: "Take risk off the table"
Here is the original post. It says nothing about winning the game. It is all about tinkering because of recent market events.Blues wrote:Happy Thanksgiving to all.umfundi wrote:As Dr. Bernstein and others on the panel of experts at BH2013 said, staying with your plan is more important than getting the plan exactly right.
Yes, "staying the course" is not some stupid slogan. It means, stick with your plan. Which is why I am so frustrated with some of the experts now suggesting you should be tinkering and tampering with your plan.
Keith
I don't consider it tinkering but prudent to take appropriate measures when, as Bernstein and Swedroe point out, one is no longer required to take as much risk to fund their retirement (or other goal).
Just as you wouldn't invest in equities for a short term goal, once one has amassed a certain amount of wealth sufficient to augment their "safe" sources of income throughout their retirement, (pension, Social Security, inheritance etc.), it only makes good financial sense to invest and safeguard much of it in less aggressive vehicles such as TIPS, I-Bonds, government bonds, SPIA's, CDs etc. The remaining balance, one's "risk portfolio", can still be invested more aggressively in any number of equity funds or similar investments. The percentages you feel comfortable allotting to your "liability matching portfolio" vs. your "risk portfolio" is still up to you and there is no reason that such action would conflict with a well reasoned IPS.
Tinkering? I don't think so. In my view, "winning the game" is not building a huge balance in one's portfolio only to watch it shrink and wither away when its most needed. "Winning the game" is taking the prudent steps to ensure that you are in a position to enjoy the fruits of the investments and risks you have taken over many years to reach the point of funding a reasonably comfortable retirement.
Why anyone would think that long term blind allegiance to a methodology, (which is meant to be a tool), is more important than achieving and ensuring the ultimate goal is beyond me. There comes a time...
KeithBrowser wrote:Even Dr. Bill is noticing the market craziness these days:And if you’re like me, you like leaning even more against the wind, so that when you see valuations like this, you want your equity allocation to be less than it was two years ago. So if you were 55 percent/45 percent two years ago, maybe today you want to be 45 percent/55 percent or at least 50/50. Believe me, this is not rocket science.It’s really a problem in engineering. If the stock market goes up X percent, you want to decrease your asset allocation by Y percent. What’s the ratio between X and Y? If the market goes up 50 percent, maybe I want to reduce my stock allocation by 4 percent. So there’s a 12.5 ratio between those two numbers. Well, that’s what it really all boils down to: What’s your ratio between those two numbers?Yes, when the intelligent investor does some trimming back, he usually feels like a dummy for the next year or two. And when he trims back again, he feels like a little bit more of a dummy. And he feels dumb for awhile each time after he does it. But then there comes a point, three to five years hence, when he feels awfully smart.
Déjà Vu is not a prediction
Re: Bill Bernstein: "Take risk off the table"
Well, Keith, I don't feel it's fair to ignore Dr. Bill's post early on in this thread:
Regardless of your choice of method, I wish you well.
To each his own. I choose to err on the side of caution and risk management with my hard earned portfolio.wbern wrote:I don't necessarily disagree with RodC; I certainly have no objection to fixed asset allocation.
But I've always believed that slight changes in allocation opposite big moves in valuation are generally salutary, and I've certainly not changed my mind on that one; the theme was present in the first electronic edition of Intelligent Asset Allocator in 1996, and is discussed on pp 137-9 in the 2000 hard copy, as well as in my subsequent books.
If you are a true believer in market efficiency, then you *never* rebalance, since that's a bet on better/worse future returns for assets with past worse/better returns. (And, in fact, this is Bill Sharpe's opinion.) Dynamic asset allocation of the type I'm describing is simply a more aggressive form of rebalancing: "overbalancing," if you will.
And, to the extent you could stick with it, it's had a pretty good track record over the past 15 years; the person who maximized/minimized stock allocations in 2001-2 and 2008-9/1996-2000 and 2005-7 was not at all unhappy, in the end, tho he may have felt like a dummy at times along the way.
There's another dimension to this, which is that high recent returns mean that many savers have, at this point, won the retirement game--that is, they now have, for the first time, an adequate liability matching portfolio. Once you've won the game, you should stop playing it, or at least stop playing it so aggressively.
Bill
Regardless of your choice of method, I wish you well.
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Re: Bill Bernstein: "Take risk off the table"
+1 ...very well stated, and I totally agree. Making a plan is difficult, populating the plan is relatively easy, adhering to the plan can be very difficult.umfundi wrote:As Dr. Bernstein and others on the panel of experts at BH2013 said, staying with your plan is more important than getting the plan exactly right.
Yes, "staying the course" is not some stupid slogan. It means, stick with your plan. Which is why I am so frustrated with some of the experts now suggesting you should be tinkering and tampering with your plan.
Keith
SB...
"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein
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Re: Bill Bernstein: "Take risk off the table"
Bernstein says, "buy low, sell high."
Sounds a little less like timing if you mention "expected returns"
Ha!
Sounds a little less like timing if you mention "expected returns"
Ha!
Re: Bill Bernstein: "Take risk off the table"
I thought the whole idea was to have a written plan that you didn't deviate from. And I don't recall any example of including anything other than possibly rebalancing in an IPS. And you can say "4% or whatever" in an IPS, there has to be some algorithm, as with rebalancing. So, what's the algorithm to describe the current situation?All that said, I see nothing wrong in Bernstein suggesting something like a 4% (or whatever) reduction in Equity risk. An IPS that doesn't build-in this sort of contingency, may not be worth the paper (disk space) it is written on.
Re: Bill Bernstein: "Take risk off the table"
I fully agree with what Dr. Bernstein says here, excerpted in bold above. I was simply trying to point out, that's not what I am ranting about.Blues wrote:Well, Keith, I don't feel it's fair to ignore Dr. Bill's post early on in this thread:
To each his own. I choose to err on the side of caution and risk management with my hard earned portfolio.wbern wrote:There's another dimension to this, which is that high recent returns mean that many savers have, at this point, won the retirement game--that is, they now have, for the first time, an adequate liability matching portfolio. Once you've won the game, you should stop playing it, or at least stop playing it so aggressively.
Bill
Regardless of your choice of method, I wish you well.
Keith
Déjà Vu is not a prediction
Re: Bill Bernstein: "Take risk off the table"
I don't know who is right, who is wrong or even if there *is* a right or wrong, but I do know that if I was new (or maybe even not so new) to the forum and the wiki I'd be more than a little confused to read this thread and others like it after reading about the Bogleheads Philosophy in wiki (http://www.bogleheads.org/wiki/Boglehea ... philosophy).
Individual approaches are going to vary; we all know that. But if we are serious as a community about trying to help folks with their investment lives, this "rift" is at least conceptually pretty major.
The 10th element of our philosophy is "stay the course," which reads in pertinent part,
"Even during normal markets there are always distractions, such as attractive new asset classes that have recently outperformed, or fancy alternative investment vehicles, such as hedge funds. Bogleheads strive not to be distracted, and strive not to waver. Create an asset allocation that includes bonds to reduce the volatility caused by the stock part of your portfolio, then rebalance when needed. This balanced approach will help you to stay the course. Once you set up a Boglehead portfolio, the only real course correction needed is to rebalance once per year to bring the stock/bond allocations back to pre-set levels. (Investors generally want to increase bond holdings slightly every year, such as by setting the percentage of bonds "to your age in bonds".) Although making only that one change every year takes discipline, it is also an enormous relief to be able to tune out the endless chatter of when and what to buy and sell." (emphasis added).
Sounds pretty clear cut to me. If you started 70/30 and your equities jumped or took a dive then you rebalance back to 70/30 (or 69/31, if you're strictly adhering to one of the age in bonds variations). How, if at all, should the wiki reflect the obvious difference of opinion in all these "take some risk off the table" threads?
Individual approaches are going to vary; we all know that. But if we are serious as a community about trying to help folks with their investment lives, this "rift" is at least conceptually pretty major.
The 10th element of our philosophy is "stay the course," which reads in pertinent part,
"Even during normal markets there are always distractions, such as attractive new asset classes that have recently outperformed, or fancy alternative investment vehicles, such as hedge funds. Bogleheads strive not to be distracted, and strive not to waver. Create an asset allocation that includes bonds to reduce the volatility caused by the stock part of your portfolio, then rebalance when needed. This balanced approach will help you to stay the course. Once you set up a Boglehead portfolio, the only real course correction needed is to rebalance once per year to bring the stock/bond allocations back to pre-set levels. (Investors generally want to increase bond holdings slightly every year, such as by setting the percentage of bonds "to your age in bonds".) Although making only that one change every year takes discipline, it is also an enormous relief to be able to tune out the endless chatter of when and what to buy and sell." (emphasis added).
Sounds pretty clear cut to me. If you started 70/30 and your equities jumped or took a dive then you rebalance back to 70/30 (or 69/31, if you're strictly adhering to one of the age in bonds variations). How, if at all, should the wiki reflect the obvious difference of opinion in all these "take some risk off the table" threads?
Don't reach for yield.
Re: Bill Bernstein: "Take risk off the table"
Sriracha,
Great post. The Wiki rocks!
As someone else noted, the BH Forums contribute their own noise.
Keith
PS: I assume you are not the guy with a court order: http://www.cnbc.com/id/101231927
(Edited for typo.)
Great post. The Wiki rocks!
As someone else noted, the BH Forums contribute their own noise.
Keith
PS: I assume you are not the guy with a court order: http://www.cnbc.com/id/101231927
(Edited for typo.)
Last edited by umfundi on Thu Nov 28, 2013 1:13 pm, edited 1 time in total.
Déjà Vu is not a prediction
Re: Bill Bernstein: "Take risk off the table"
Taking advantage of extremes of market sentiment is not hard. If your friends are bragging about the big gains they are making from day trading stocks, that is a sign of a bubble. If folks who no nothing about investing start giving you stock tips, that is a sign of a bubble. When you see books about DOW 36,000, that is a sign of a bubble. When magazine covers extol the bull market in stocks that will go on for as far as the eye can see, that is a sign of a bubble. When market experts tell us that old methods of valuation are obsolete, that is a sign of a bubble.
Conversely, when everyone has given up on stocks that is a sign of a buying opportunity. When Business Week has "The Death of Equities" on its cover, that is a good sign. When your fellow employees are putting in sell orders on their stock funds on their 401k's, that is a bullish sign. When you watch the financial news, and the relentlessly bad news gets worse and worse, that is a good sign.
This is not hard. These extremes in investor sentiment and valuations don't happen very often. But you can take advantage when these events happen.
Everyone I suppose COULD do this, but they don't. They reason they don't is human nature. The Greed and Fear cycles in the markets. Most folks get carried away by their emotions at both extremes.
Conversely, when everyone has given up on stocks that is a sign of a buying opportunity. When Business Week has "The Death of Equities" on its cover, that is a good sign. When your fellow employees are putting in sell orders on their stock funds on their 401k's, that is a bullish sign. When you watch the financial news, and the relentlessly bad news gets worse and worse, that is a good sign.
This is not hard. These extremes in investor sentiment and valuations don't happen very often. But you can take advantage when these events happen.
Everyone I suppose COULD do this, but they don't. They reason they don't is human nature. The Greed and Fear cycles in the markets. Most folks get carried away by their emotions at both extremes.
A fool and his money are good for business.
Re: Bill Bernstein: "Take risk off the table"
OK, I look forward to the strong signals from the NedSaid indicator. If I pay extra, can I get an advance look?nedsaid wrote:Taking advantage of extremes of market sentiment is not hard. If your friends are bragging about the big gains they are making from day trading stocks, that is a sign of a bubble. If folks who no nothing about investing start giving you stock tips, that is a sign of a bubble. When you see books about DOW 36,000, that is a sign of a bubble. When magazine covers extol the bull market in stocks that will go on for as far as the eye can see, that is a sign of a bubble. When market experts tell us that old methods of valuation are obsolete, that is a sign of a bubble.
Conversely, when everyone has given up on stocks that is a sign of a buying opportunity. When Business Week has "The Death of Equities" on its cover, that is a good sign. When your fellow employees are putting in sell orders on their stock funds on their 401k's, that is a bullish sign. When you watch the financial news, and the relentlessly bad news gets worse and worse, that is a good sign.
This is not hard. These extremes in investor sentiment and valuations don't happen very often. But you can take advantage when these events happen.
Everyone I suppose COULD do this, but they don't. They reason they don't is human nature. The Greed and Fear cycles in the markets. Most folks get carried away by their emotions at both extremes.
Keith
Déjà Vu is not a prediction
Re: Bill Bernstein: "Take risk off the table"
Geez, you don't need an indicator from me. Gosh, you have friends and co-workers I suppose. You have folks you socialize with. Just keep your eyes and ears open. There is nothing precise or scientific about this. It is merely observing human behavior. I don't think this is off the reservation.
A fool and his money are good for business.
Re: Bill Bernstein: "Take risk off the table"
Thanks Keith.
I'm a big fan of the wiki, too. Maybe these forum threads should come with a warning, "Do as we say in the wiki, not as we do according to this thread."
As for Sriracha, no, I'm not affiliated. Just happened to be eating a Sriracha-laced meal when I finally decided to register here - back in 2010 or whenever it was - after much lurking.
I'm a big fan of the wiki, too. Maybe these forum threads should come with a warning, "Do as we say in the wiki, not as we do according to this thread."
As for Sriracha, no, I'm not affiliated. Just happened to be eating a Sriracha-laced meal when I finally decided to register here - back in 2010 or whenever it was - after much lurking.
Don't reach for yield.
Re: Bill Bernstein: "Take risk off the table"
Ok, but none of those things are happening now, so what's the point?nedsaid wrote:Taking advantage of extremes of market sentiment is not hard. If your friends are bragging about the big gains they are making from day trading stocks, that is a sign of a bubble. If folks who no nothing about investing start giving you stock tips, that is a sign of a bubble. When you see books about DOW 36,000, that is a sign of a bubble. When magazine covers extol the bull market in stocks that will go on for as far as the eye can see, that is a sign of a bubble. When market experts tell us that old methods of valuation are obsolete, that is a sign of a bubble.
Conversely, when everyone has given up on stocks that is a sign of a buying opportunity. When Business Week has "The Death of Equities" on its cover, that is a good sign. When your fellow employees are putting in sell orders on their stock funds on their 401k's, that is a bullish sign. When you watch the financial news, and the relentlessly bad news gets worse and worse, that is a good sign.
This is not hard. These extremes in investor sentiment and valuations don't happen very often. But you can take advantage when these events happen.
Everyone I suppose COULD do this, but they don't. They reason they don't is human nature. The Greed and Fear cycles in the markets. Most folks get carried away by their emotions at both extremes.
By far the most noise I heard about daytrading was in the mid-90s. People at work were constantly talking about tech stocks, and even trading multiple times per day, although there were nothing like the web trading platforms back then that we have today. I think the dow was in the 4k range. I haven't heard much since. So in retrospect, should I have acted on that, and then dumped my money in when I stopped hearing all this talk by the late 1990s?
If I go back and look for evidence of a bubble in 1999, I can find it - now. But I was seeing those signs in real time in 1994 and 1995; I wasn't seeing them in 1999, maybe because of the different environment I was in, or because I was so busy with work (thanks to a relatively booming economy) that I was too busy to pay attention. So the point is that personal experience is pretty useless. You need to have some quantifiable measure.
Re: Bill Bernstein: "Take risk off the table"
The point is we are not experiencing these extremes right now. We are not in a bubble now.
We saw the stock bubble in 1999 and early 2000. We saw the extreme pessimism in the US Stock Market in 2009.
So my point is we are not in a bubble or in a period of extreme pessimissm. Just follow your normal plan.
What am I saying that is so controversial? I am amazed at the responses I am getting.
In 2000, I sold about 30% of my stocks. I did this for a few reasons. I was worried about market exhuberance. I was learning about portfolio theory and realized I was taking too much risk. I was listening to Bob Brinker then and he put a "sell" on the US Market about that time. But I did not "dump" stocks. I was still probably 65% in the stock market when it all crashed.
In 2009, I did not "dump bonds" and I did not even rebalance. I just directed all my new monies for investment into stocks for about a year. Then I went back to 60% stocks/40% bonds contribution strategy.
We saw the stock bubble in 1999 and early 2000. We saw the extreme pessimism in the US Stock Market in 2009.
So my point is we are not in a bubble or in a period of extreme pessimissm. Just follow your normal plan.
What am I saying that is so controversial? I am amazed at the responses I am getting.
In 2000, I sold about 30% of my stocks. I did this for a few reasons. I was worried about market exhuberance. I was learning about portfolio theory and realized I was taking too much risk. I was listening to Bob Brinker then and he put a "sell" on the US Market about that time. But I did not "dump" stocks. I was still probably 65% in the stock market when it all crashed.
In 2009, I did not "dump bonds" and I did not even rebalance. I just directed all my new monies for investment into stocks for about a year. Then I went back to 60% stocks/40% bonds contribution strategy.
Last edited by nedsaid on Thu Nov 28, 2013 1:38 pm, edited 1 time in total.
A fool and his money are good for business.
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Re: Bill Bernstein: "Take risk off the table"
Wonderful thread; I appreciate all of the comments.
Two things:
1) Re. the "NedSaid indicator." It's also the Bob Shiller Indicator. In a recent interview, he hit the nail on the head, which is that he's pretty sure it works, but unfortunately he won't live long enough to acquire enough data points to achieve statistical significance. Nonetheless, I pay attention to it, whatever name you want to give it.
2) The key point about the riskiness of stocks is where you are in your lifecycle. As I said in Ages of the Investor, for the relatively young saver (from whom we've seen a lot of posts, at least in their former lives, in this thread), stocks aren't risky at all. I was once there myself. But for the retiree, with no remaining human capital, they're Chernobyl toxic.
Bill
Two things:
1) Re. the "NedSaid indicator." It's also the Bob Shiller Indicator. In a recent interview, he hit the nail on the head, which is that he's pretty sure it works, but unfortunately he won't live long enough to acquire enough data points to achieve statistical significance. Nonetheless, I pay attention to it, whatever name you want to give it.
2) The key point about the riskiness of stocks is where you are in your lifecycle. As I said in Ages of the Investor, for the relatively young saver (from whom we've seen a lot of posts, at least in their former lives, in this thread), stocks aren't risky at all. I was once there myself. But for the retiree, with no remaining human capital, they're Chernobyl toxic.
Bill
Re: Bill Bernstein: "Take risk off the table"
Thanks Dr. Bernstein for your comments. There is no "Nedsaid" indicator, it is a variation of the Peter Lynch Cocktail Party Theory laid out in one of Lynch's books. So I certainly don't claim credit for anything new. I don't even claim that this works with scientific precision. The claim I am making is pretty limited.
If one sees Market Euphoria, it seems to me that caution is warranted. Extreme pessimism in the markets is an opportunity to buy in at depressed prices. John Templeton once said to Invest at the point of maximum pessimism. Other respected investors have made similar quotes. Warren Buffett has said to be greedy when others are fearful and fearful when others are greedy.
The only claim that I have made performance wise is that what I am advocating is a form of reverse performance chasing. I don't think this is so radical.
Thank you for your comments. I am reading the 4 Pillars of Investing. A very good book.
If one sees Market Euphoria, it seems to me that caution is warranted. Extreme pessimism in the markets is an opportunity to buy in at depressed prices. John Templeton once said to Invest at the point of maximum pessimism. Other respected investors have made similar quotes. Warren Buffett has said to be greedy when others are fearful and fearful when others are greedy.
The only claim that I have made performance wise is that what I am advocating is a form of reverse performance chasing. I don't think this is so radical.
Thank you for your comments. I am reading the 4 Pillars of Investing. A very good book.
A fool and his money are good for business.
Re: Bill Bernstein: "Take risk off the table"
The problem is, we have a new strong signal:
The Lions actually WON a Thanksgiving Day game. I mean, they handily beat Green Bay, not just edged by.
Who knows what this means for the markets tomorrow?
Keith
The Lions actually WON a Thanksgiving Day game. I mean, they handily beat Green Bay, not just edged by.
Who knows what this means for the markets tomorrow?
Keith
Déjà Vu is not a prediction
- Svensk Anga
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Re: Bill Bernstein: "Take risk off the table"
Well, the last time this happened was 2003. Everyone buy houses. Little or nothing down. Own it for a month and flip it for a profit. House values never go down.umfundi wrote:The Lions actually WON a Thanksgiving Day game. I mean, they handily beat Green Bay, not just edged by.
Who knows what this means for the markets tomorrow?
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Re: Bill Bernstein: "Take risk off the table"
I'm not in the habit of disagreeing with Dr. Bernstein, but "Chernobyl toxic" is a bit extreme.wbern wrote: 2) The key point about the riskiness of stocks is where you are in your lifecycle. As I said in Ages of the Investor, for the relatively young saver (from whom we've seen a lot of posts, at least in their former lives, in this thread), stocks aren't risky at all. I was once there myself. But for the retiree, with no remaining human capital, they're Chernobyl toxic.
Bill
Over a 30-year retirement timeframe, a properly managed allocation to stocks should help a retiree cope with inflation better than having all bonds and CDs.
It's also good if your portfolio at retirement-start is bigger than needed, to cope with market fluctuations better.
As a new age 63 retiree, I rather firmly believe my stock percentage will never go below 30% of my portfolio value...
Attempted new signature...
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Re: Bill Bernstein: "Take risk off the table"
Or, it's Thanksgivvukah for the only time in, what, 73,000 years? This could really bode... something.umfundi wrote:The problem is, we have a new strong signal:
The Lions actually WON a Thanksgiving Day game. I mean, they handily beat Green Bay, not just edged by.
Who knows what this means for the markets tomorrow?
Keith
Re: Bill Bernstein: "Take risk off the table"
I agree with The Wizard. Please change it from Chernobyl-toxic to Kiev-toxic. Kiev got badly hit by the 1986 Chernobyl disaster, but now almost 30 years later it's more or less recovered.The Wizard wrote:I'm not in the habit of disagreeing with Dr. Bernstein, but "Chernobyl toxic" is a bit extreme.wbern wrote: 2) The key point about the riskiness of stocks is where you are in your lifecycle. As I said in Ages of the Investor, for the relatively young saver (from whom we've seen a lot of posts, at least in their former lives, in this thread), stocks aren't risky at all. I was once there myself. But for the retiree, with no remaining human capital, they're Chernobyl toxic.
Bill
Over a 30-year retirement timeframe, a properly managed allocation to stocks should help a retiree cope with inflation better than having all bonds and CDs.
It's also good if your portfolio at retirement-start is bigger than needed, to cope with market fluctuations better.
As a new age 63 retiree, I rather firmly believe my stock percentage will never go below 30% of my portfolio value...
Victoria
Inventor of the Bogleheads Secret Handshake |
Winner of the 2015 Boglehead Contest. |
Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
Re: Bill Bernstein: "Take risk off the table"
I'm guessing the issue that people are having is with the notion that either market euphoria or "maximum pessimism" is somehow recognizable when it's happening, not necessarily to a degree of scientific precision, but just to a degree of useful precision. If you can't recognize it to the point that you can act profitably on it - like me hypothetically "taking some off the table" in 1994 or 1995, and then buying back in in 1999 , based on my view of sentiment - then it's not much use. For it to be in an IPS, it has to be quantifiable, so if we're going to say that tactical allocation changes, or whatever we want to call this, is a beneficial thing, there has to be an algorithm for it. Otherwise, implementation will be based entirely on individual luck, skill, or some indeterminable combination thereof.nedsaid wrote:Thanks Dr. Bernstein for your comments. There is no "Nedsaid" indicator, it is a variation of the Peter Lynch Cocktail Party Theory laid out in one of Lynch's books. So I certainly don't claim credit for anything new. I don't even claim that this works with scientific precision. The claim I am making is pretty limited.
If one sees Market Euphoria, it seems to me that caution is warranted. Extreme pessimism in the markets is an opportunity to buy in at depressed prices. John Templeton once said to Invest at the point of maximum pessimism. Other respected investors have made similar quotes. Warren Buffett has said to be greedy when others are fearful and fearful when others are greedy.
The only claim that I have made performance wise is that what I am advocating is a form of reverse performance chasing. I don't think this is so radical.
Thank you for your comments. I am reading the 4 Pillars of Investing. A very good book.
I'd never heard of the Cocktail Party theory - possibly it's related to the 7% SWR theory?
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Re: Bill Bernstein: "Take risk off the table"
In 1998 my pediatric surgeon fellows were daytrading internet stocks between cases. In 2006 two of my staff and several of my patients quit their jobs to become real estate agents. I felt at both times that the actions of a few really said something important about market psychology. Coincidence that we proceeded to have a tech stock crash of 80% and the worst real estate declines since the Depression? I think not.
Last edited by letsgobobby on Fri Nov 29, 2013 7:06 am, edited 1 time in total.
Re: Bill Bernstein: "Take risk off the table"
How do you reconcile that with my experience of hearing co-workers stories of daytrading tech stocks in the mid-90s, and then seeing interest in it seemingly blow over by 1999? Or with the observation that the real estate I was familiar with never varied in value by more than a few percentage points a year through the supposed crisis in the late 2000s? Or with the fact that the only person I know of to leave another career for real estate did so in 2009/2010, at what should seemingly have been the worst possible time? You reconcile it by saying that personal anecdotal evidence isn't useful enough to act upon. If I went with the "actions of a few" theory, my conclusions would have been completely wrong: maybe due to luck, maybe due to (lack of) skill, but completely wrong.letsgobobby wrote:In 1998 my pediatric surgeon fellows were daytrading internet stocks between card. In 2006 two of my staff and several of my patients quit their jobs to become real estate agents. I felt at both times that the actions of a few really said something important about market psychology. Coincidence that we proceeded to have a tech stock crash of 80% and the worst real estate declines since the Depression? I think not.
Re: Bill Bernstein: "Take risk off the table"
.
IMO I think valuation based rebalancing has merit. To be fair, this is not new to Bill Bernstein, as indicated in his Intelligent Asset Allocator book.
Jeremy Grantham has, as good as any, 7-yr expected asset class returns which is available publicly. Expected returns are based on asset class valuation in that ‘overvalued’ asset classes have lower expected returns, and ‘undervalued’ asset classes have higher expected return.
Would a “valuation-based rebalancing” approach add value over a ‘fixed allocation rebalancing approach”?
I put this to the test using Grantham’s (GMO’s) expected asset class returns. I set up a test portfolio, and at the beginning of every year the portfolio was rebalanced by valuation. Asset classes with highest 7-year expected return received a greater allocation than asset classes with lowest 7-year expected return (each asset class weight = asset class real expected return/sum of real expected returns across all asset classes, with asset classes with negative real expected returns being excluded). Ten asset classes were used: US large, US small, US quality, Intl large, Intl small, EM, T-bills (ST treasury), US bonds (Intermediate treasury), TIPS, and EM bonds.
Here are the back-tested results compared to my actual globally diversified, small cap and value tilted, 75:25 stock:bond fixed allocation (5x25 rebalancing band) portfolio, the ACWI Index (global equities), the US Aggregate Bond market (TBM).
Since start of 2003, a portfolio using a pure valuation-based rebalancing approach at the start of each year using Grantham’s (GMO) 7-year expected returns had an annualized return of 15%, compared to my ‘fixed allocation’ approach of 11% (i.e. a portfolio end value 2/3 the size of the 'valuation based rebalancing' portfolio, the latter also had a much smaller downside in 2008). The ACWI and TBM returns over this period were 9.3% and 4.6% respectively. So at least over this period there was some value added in a valuation-based rebalancing approach.
FWIW-after about 10 years of “mastering” fixed-allocations, I have added a valuation based rebalancing approach “at the margin”. i.e. over or under weight broad asset classes (US, non-US, EM, bonds) based on Grantham’s (GMO’s) 7-year expected returns, but limited to within a 5x25 band. Earlier backtests showed about a 1% annualized return increment – obviously no guarantees. The downside is tax (in)efficiency. I have some space in tax-advantaged accounts to do this, if I didn’t I probably wouldn’t.
Current GMO 7-year real expected returns suggest an overweight to Non-US developed, and EM, relative to US (apart from US quality). And across all 10 asset classes it still suggests about a 75:25 stock:bond allocation (a higher bond allocation than the 8% for 2013, but is close to the average bond allocation since 2003 of about 30% -although there has been wide variation in bond allocations over time from about 60% in 2007-2008, to 10% in 2009, to 5% in 2012).
Just my take – each to their own. Obviously no guarantees.
Robert
.
IMO I think valuation based rebalancing has merit. To be fair, this is not new to Bill Bernstein, as indicated in his Intelligent Asset Allocator book.
And even Bogle covers this approach in Common Sense on Mutual Fund.Bill Bernstein – The Intelligent Asset Allocator (2001) wrote:
“Dynamic asset allocation refers to the possibility of varying your policy allocation because of changing market conditions. After spending much of this book convincing you of the virtue of fixed allocations, why am I relaxing this valuable discipline so late in the game? Isn’t changing the policy allocation tantamount to market timing, a demonstrably profitless activity? Before proceeding further, let me be clear: Adherence to a fixed policy allocation with its required periodic rebalancing is hard enough. It takes years to become comfortable with this strategy; many lose their nerve and never see the thing through. You cannot pilot a modern jet fighter before mastering the trainer; likewise, you should not attempt dynamic asset allocation before mastering fixed asset allocation”..... “......it is still not a bad idea to occasionally change your allocation slightly in the opposite direction of valuation.”......"Rebalancing requires nerve and discipline; overbalancing requires even more of both these commodities. Very few investors, small or institutional can carry it off.”
So where do we find “rational forecasts [that] indicate that one asset class offers a considerable better investment opportunity than another”.John Bogle – Common Sense on Mutual Funds – John Bogle (1999). wrote:
“There is a third option, but only for bold and self-confident investors. It does not abandon the ‘stay the course’ principle, but it allows for a mid-course correction if stormy weather threatens on the horizon. If rational forecasts indicate that one asset class offers a considerably better investment opportunity than another, you might shift a modest percentage of your assets from the class judged less attractive to the class judged more attractive. The policy is referred to as tactical asset allocation. It is an opportunistic, transitory, aggressive policy that – if skill, insight, and luck are with you – may result in marginally better long-term returns that either a fixed-ratio approach or benign neglect.”…”Tactical asset allocation, if the strategy is used at all, should therefore be used only at the margin.”
Jeremy Grantham has, as good as any, 7-yr expected asset class returns which is available publicly. Expected returns are based on asset class valuation in that ‘overvalued’ asset classes have lower expected returns, and ‘undervalued’ asset classes have higher expected return.
Would a “valuation-based rebalancing” approach add value over a ‘fixed allocation rebalancing approach”?
I put this to the test using Grantham’s (GMO’s) expected asset class returns. I set up a test portfolio, and at the beginning of every year the portfolio was rebalanced by valuation. Asset classes with highest 7-year expected return received a greater allocation than asset classes with lowest 7-year expected return (each asset class weight = asset class real expected return/sum of real expected returns across all asset classes, with asset classes with negative real expected returns being excluded). Ten asset classes were used: US large, US small, US quality, Intl large, Intl small, EM, T-bills (ST treasury), US bonds (Intermediate treasury), TIPS, and EM bonds.
Here are the back-tested results compared to my actual globally diversified, small cap and value tilted, 75:25 stock:bond fixed allocation (5x25 rebalancing band) portfolio, the ACWI Index (global equities), the US Aggregate Bond market (TBM).
Since start of 2003, a portfolio using a pure valuation-based rebalancing approach at the start of each year using Grantham’s (GMO) 7-year expected returns had an annualized return of 15%, compared to my ‘fixed allocation’ approach of 11% (i.e. a portfolio end value 2/3 the size of the 'valuation based rebalancing' portfolio, the latter also had a much smaller downside in 2008). The ACWI and TBM returns over this period were 9.3% and 4.6% respectively. So at least over this period there was some value added in a valuation-based rebalancing approach.
FWIW-after about 10 years of “mastering” fixed-allocations, I have added a valuation based rebalancing approach “at the margin”. i.e. over or under weight broad asset classes (US, non-US, EM, bonds) based on Grantham’s (GMO’s) 7-year expected returns, but limited to within a 5x25 band. Earlier backtests showed about a 1% annualized return increment – obviously no guarantees. The downside is tax (in)efficiency. I have some space in tax-advantaged accounts to do this, if I didn’t I probably wouldn’t.
Current GMO 7-year real expected returns suggest an overweight to Non-US developed, and EM, relative to US (apart from US quality). And across all 10 asset classes it still suggests about a 75:25 stock:bond allocation (a higher bond allocation than the 8% for 2013, but is close to the average bond allocation since 2003 of about 30% -although there has been wide variation in bond allocations over time from about 60% in 2007-2008, to 10% in 2009, to 5% in 2012).
Just my take – each to their own. Obviously no guarantees.
Robert
.
Re: Bill Bernstein: "Take risk off the table"
Hi Robert,Robert T wrote:FWIW-after about 10 years of “mastering” fixed-allocations, I have added a valuation based rebalancing approach “at the margin”. i.e. over or under weight broad asset classes (US, non-US, EM, bonds) based on Grantham’s (GMO’s) 7-year expected returns, but limited to within a 5x25 band. Earlier backtests showed about a 1% annualized return increment – obviously no guarantees. The downside is tax (in)efficiency. I have some space in tax-advantaged accounts to do this, if I didn’t I probably wouldn’t.
Current GMO 7-year real expected returns suggest an overweight to Non-US developed, and EM, relative to US (apart from US quality). And across all 10 asset classes it still suggests about a 75:25 stock:bond allocation (a higher bond allocation than the 8% for 2013, but is close to the average bond allocation since 2003 of about 30% -although there has been wide variation in bond allocations over time from about 60% in 2007-2008, to 10% in 2009, to 5% in 2012).
Just my take – each to their own. Obviously no guarantees.
Robert
.
Very interesting indeed. Can you give a basic example of what your allocation looks like using this approach as against your 'policy portfolio' of 37/28/10/25ish? Not quite getting my head around how the 5x25 band restriction kicks in.
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Re: Bill Bernstein: "Take risk off the table"
Apparently my sampling is better than yours.tibbitts wrote:How do you reconcile that with my experience of hearing co-workers stories of daytrading tech stocks in the mid-90s, and then seeing interest in it seemingly blow over by 1999? Or with the observation that the real estate I was familiar with never varied in value by more than a few percentage points a year through the supposed crisis in the late 2000s? Or with the fact that the only person I know of to leave another career for real estate did so in 2009/2010, at what should seemingly have been the worst possible time? You reconcile it by saying that personal anecdotal evidence isn't useful enough to act upon. If I went with the "actions of a few" theory, my conclusions would have been completely wrong: maybe due to luck, maybe due to (lack of) skill, but completely wrong.letsgobobby wrote:In 1998 my pediatric surgeon fellows were daytrading internet stocks between card. In 2006 two of my staff and several of my patients quit their jobs to become real estate agents. I felt at both times that the actions of a few really said something important about market psychology. Coincidence that we proceeded to have a tech stock crash of 80% and the worst real estate declines since the Depression? I think not.
Re: Bill Bernstein: "Take risk off the table"
tibbitts wrote:I thought the whole idea was to have a written plan that you didn't deviate from. And I don't recall any example of including anything other than possibly rebalancing in an IPS. And you can say "4% or whatever" in an IPS, there has to be some algorithm, as with rebalancing. So, what's the algorithm to describe the current situation?All that said, I see nothing wrong in Bernstein suggesting something like a 4% (or whatever) reduction in Equity risk. An IPS that doesn't build-in this sort of contingency, may not be worth the paper (disk space) it is written on.
You continue to conflate evaluating need for risk, market timing, and acting profitably. I don't know (don't care to know) what your investing plan says, or what "IPS examples" you have reviewed, but my IPS, AA, and adjustments thereof are based largely on our ability and need for risk. Isn't this what this thread is about?tibbitts wrote:I'm guessing the issue that people are having is with the notion that either market euphoria or "maximum pessimism" is somehow recognizable when it's happening, not necessarily to a degree of scientific precision, but just to a degree of useful precision. If you can't recognize it to the point that you can act profitably on it - like me hypothetically "taking some off the table" in 1994 or 1995, and then buying back in in 1999 , based on my view of sentiment - then it's not much use. For it to be in an IPS, it has to be quantifiable, so if we're going to say that tactical allocation changes, or whatever we want to call this, is a beneficial thing, there has to be an algorithm for it. Otherwise, implementation will be based entirely on individual luck, skill, or some indeterminable combination thereof.
I'd never heard of the Cocktail Party theory - possibly it's related to the 7% SWR theory?
Browser (original poster) wrote:Even Dr. Bill is noticing the market craziness these days:<< snip >>IU: So you’re just watching it; it’s going in slow motion. What should investors do given the rise in “risky assets,” as you put it?
Bernstein: You want to at least keep your asset allocations stable. That means that you’ve sold a bit for the past two years—just slowly raising cash.
And if you’re like me, you like leaning even more against the wind, so that when you see valuations like this, you want your equity allocation to be less than it was two years ago. So if you were 55 percent/45 percent two years ago, maybe today you want to be 45 percent/55 percent or at least 50/50. Believe me, this is not rocket science.
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Re: Bill Bernstein: "Take risk off the table"
I think RobertT's post has pretty well NAILED the concept that some of us have been discussing.
I like the idea that "overbalancing" is actually harder to do compared to standard rebalancing.
I'm still not quite sure what I'll be doing personally; I'm staying with standard rebalancing for right now...
I like the idea that "overbalancing" is actually harder to do compared to standard rebalancing.
I'm still not quite sure what I'll be doing personally; I'm staying with standard rebalancing for right now...
Attempted new signature...
Re: Bill Bernstein: "Take risk off the table"
Robert, it is not quite clear to me how you handled the mechanics of this. Could you perhaps illustrate with one set of yearly numbers? Your results for 2008 looked particularly interesting, -10.3% versus your portfolio's -28.7%. Did the bonds get much higher rebalancing at the start of 2008?Robert T wrote:....(snip)...
I put this to the test using Grantham’s (GMO’s) expected asset class returns. I set up a test portfolio, and at the beginning of every year the portfolio was rebalanced by valuation. Asset classes with highest 7-year expected return received a greater allocation than asset classes with lowest 7-year expected return (each asset class weight = asset class real expected return/sum of real expected returns across all asset classes, with asset classes with negative real expected returns being excluded). Ten asset classes were used: US large, US small, US quality, Intl large, Intl small, EM, T-bills (ST treasury), US bonds (Intermediate treasury), TIPS, and EM bonds. ....
Re: Bill Bernstein: "Take risk off the table"
Agreed, I hold a large allocation to foreign - but don't worry - foreign will have its day. Just sit tight... no sector or country stays the leader forever. The pendulum always swings.livesoft wrote:Sadly, I didn't experience the 200% run up in US stocks over the last 4.5 years because I was also invested in bonds and foreign stocks.letsgobobby wrote:Given a 200% run up in stocks, how could one's need to take risk NOT have changed, unless they were a very novice investor? All Dr. B is saying is don't ignore what these historic gains have offered you.
Total Int'l Stock is up a mere 38% in that time frame.
Total US Bond is up a mere 22% in that time frame.
And I kept rebalancing out of the US stocks that I did have into the poorer performers.
I suppose these past few years will go into the annals (and data bases used by data miners) as another reason not to rebalance.
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Re: Bill Bernstein: "Take risk off the table"
The Bogleheads Wiki is the IPS for the Bogleheads Forum.umfundi wrote:Great post. The Wiki rocks!
As someone else noted, the BH Forums contribute their own noise.
Last edited by BigFoot48 on Fri Nov 29, 2013 11:20 pm, edited 1 time in total.
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