Changing Asset Allocation Based On Market Forecasts - Market Timing?

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Park
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Changing Asset Allocation Based On Market Forecasts - Market Timing?

Post by Park » Tue Oct 30, 2018 7:41 am

https://www.morningstar.com/videos/8883 ... world.html

The following is from an interview with Fran Kinniry of Vanguard;

"I think sometimes market forecasting gets a negative connotation, but there's really only a couple of ways you can do this. You can use history, and that would be agnostic to initial conditions. You would ignore what yields are, ignore what valuations are, and do a Monte Carlo off of that. That I would say is very problematic...

What we do in the Vanguard Capital Markets Model is we take in the key initial conditions--on equities, they tend to be valuations, such as price to earnings valuations; on bonds, they tend to be yields--and then, we form a distribution to give people expectations of what that distribution may look like relative to history. So, to your point, it allows them to do financial planning. You can't really determine how much to save, what you may end up with, how you will allocate your assets without having some information of market outlook."

Is Fran Kinniry saying you should adjust your asset allocation based on market forecasts? Is this market timing? My guess would be that if he advocates making such changes, his recommendation would be that they should be modest.

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nedsaid
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Re: Changing Asset Allocation Based On Market Forecasts - Market Timing?

Post by nedsaid » Tue Oct 30, 2018 9:12 am

Yes, this is market timing. I would not recommend doing this except during extremes of market valuations and sentiment. These are rare events, perhaps occurring three maybe four times in an investor's lifetime. The great buying opportunities in my lifetime were after the 1973-1974 and the 2008-2009 bear markets. The aftermath of the 2000-2002 bear market was a lesser buying opportunity. The two great selling opportunities would have been the Go-Go and Nifty Fifty era of the 1960's and the High Tech and Internet bubble of the late 1990's. Problem is markets can both stay down and stay up much longer than you think.
A fool and his money are good for business.

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Re: Changing Asset Allocation Based On Market Forecasts - Market Timing?

Post by Ron Scott » Tue Oct 30, 2018 10:14 am

Park wrote:
Tue Oct 30, 2018 7:41 am
https://www.morningstar.com/videos/8883 ... world.html

The following is from an interview with Fran Kinniry of Vanguard;

"I think sometimes market forecasting gets a negative connotation, but there's really only a couple of ways you can do this. You can use history, and that would be agnostic to initial conditions. You would ignore what yields are, ignore what valuations are, and do a Monte Carlo off of that. That I would say is very problematic...

What we do in the Vanguard Capital Markets Model is we take in the key initial conditions--on equities, they tend to be valuations, such as price to earnings valuations; on bonds, they tend to be yields--and then, we form a distribution to give people expectations of what that distribution may look like relative to history. So, to your point, it allows them to do financial planning. You can't really determine how much to save, what you may end up with, how you will allocate your assets without having some information of market outlook."

Is Fran Kinniry saying you should adjust your asset allocation based on market forecasts? Is this market timing? My guess would be that if he advocates making such changes, his recommendation would be that they should be modest.
OMG, so many issues here.

1. All the Monte Carlo simulations in the world are not going to predict long term market results, and you buy stocks for the long term so...

2. Then VCM ignores market returns independent of valuations and focuses on historical valuations to give you an expected future distribution? (They're saying they can develop a usable distribution of returns using returns so long as the include valuations. Gotta wonder how wide the distributions are.) Uh boy.

3. Then you adjust your asset allocation based on the "market outlook"? Yeah?

Bottom line here is that you set your AA based on market conditions not risk tolerance. This is for long-term investors?

Not feeling it.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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vineviz
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Re: Changing Asset Allocation Based On Market Forecasts - Market Timing?

Post by vineviz » Tue Oct 30, 2018 10:35 am

Park wrote:
Tue Oct 30, 2018 7:41 am
Is Fran Kinniry saying you should adjust your asset allocation based on market forecasts? Is this market timing? My guess would be that if he advocates making such changes, his recommendation would be that they should be modest.

I think this is an accurate reflection of Kinniry's position in the interview.

There is no way to choose an asset allocation without having some expectations about future asset returns, future asset volatility, and future correlations between assets: clearly WHAT those expectations are should influence our portfolio construction, savings rates, etc.

Several times, though, Kinniry mentions the distribution (or uncertainty) inherent in those expectations, which is what leads to relatively moderate changes to financial plans based on market outlook.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Changing Asset Allocation Based On Market Forecasts - Market Timing?

Post by Fallible » Tue Oct 30, 2018 11:43 am

Park wrote:
Tue Oct 30, 2018 7:41 am
https://www.morningstar.com/videos/8883 ... world.html

The following is from an interview with Fran Kinniry of Vanguard;

"I think sometimes market forecasting gets a negative connotation, but there's really only a couple of ways you can do this. You can use history, and that would be agnostic to initial conditions. You would ignore what yields are, ignore what valuations are, and do a Monte Carlo off of that. That I would say is very problematic...

What we do in the Vanguard Capital Markets Model is we take in the key initial conditions--on equities, they tend to be valuations, such as price to earnings valuations; on bonds, they tend to be yields--and then, we form a distribution to give people expectations of what that distribution may look like relative to history. So, to your point, it allows them to do financial planning. You can't really determine how much to save, what you may end up with, how you will allocate your assets without having some information of market outlook."

Is Fran Kinniry saying you should adjust your asset allocation based on market forecasts? Is this market timing? ...
As I read the entire interview, it seems he is saying only that awareness of "some" market outlook can be helpful to investors in setting an allocation and deciding how much to save. He is not saying to adjust AA based entirely on market forecasts (which I would not expect anyone at VG to say).

Also, Benz brings up the importance of time horizon and Kinniry agrees, and then she brings up what I saw as the gist of the interview in this exchange (boldface mine):
Benz: Let's talk about portfolio construction in what might be a fairly low-returning next decade. Are there any things that people should think about when they are attempting to assemble a portfolio that will perform well, areas that they would underweight or overweight? How would you approach that?

Kinniry: I would say there's probably a lot more of what they shouldn't do than should do, and we are seeing a lot more of what they shouldn't do. What I mean by that is, reach for yield, reach for risk, believe in maybe high-alpha strategies such as a hedge fund or something like that. There's nothing wrong with alternatives, but I think sometimes the allure or the promise of them and the costs of them are quite high. We see a lot of investors not willing to accept low returns. They go toward, I call it, high-cost hope, higher-cost mandates and hope that they get the return. 
Some things that they can do is really make sure that they have their asset allocation right in advance, make sure that they have really low-cost funds, broadly diversified; if you are in a taxable portfolio, highly tax-efficient. Those would be the things you can do.
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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Re: Changing Asset Allocation Based On Market Forecasts - Market Timing?

Post by alex_686 » Tue Oct 30, 2018 11:56 am

vineviz wrote:
Tue Oct 30, 2018 10:35 am
There is no way to choose an asset allocation without having some expectations about future asset returns, future asset volatility, and future correlations between assets: clearly WHAT those expectations are should influence our portfolio construction, savings rates, etc.

Several times, though, Kinniry mentions the distribution (or uncertainty) inherent in those expectations, which is what leads to relatively moderate changes to financial plans based on market outlook.
Let me extend on this and ask a very basic question - what should your AA be between bonds and stocks? Consider that forward long term forecasting of expected returns and risk are decent. Sure, large enough to drive a truck though - but still accurate enough to generate actionable results. Better than say the static 60/40 allocation or a rule-of-thumb "age in bonds".

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Re: Changing Asset Allocation Based On Market Forecasts - Market Timing?

Post by asset_chaos » Tue Oct 30, 2018 6:01 pm

Park wrote:
Tue Oct 30, 2018 7:41 am
The following is from an interview with Fran Kinniry of Vanguard;
You can't really determine how much to save, what you may end up with, how you will allocate your assets without having some information of market outlook."
I read the interview. The emphasis is yours not Kinniry's. If I were going to emphasize a clause of that sentence, it would be
You can't really determine how much to save, what you may end up with,how you will allocate your assets without having some information of market outlook."
If current valuations are high and the higher probability (though not a guarantee) is for lower future returns, then it's prudent to choose to save more than you might have otherwise. It's savings plus returns on those savings that generates the money to let you accomplish your financial goals. If the returns part of the equation is likely to be lower than you expect, then you obviously have to either lower your goals or raise your savings.

(Not entirely true; you could also take more risk in hopes of squeezing out extra return to avoid lowering goals or raising savings. But that choice has a high risk of failure.)
Regards, | | Guy

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Park
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Re: Changing Asset Allocation Based On Market Forecasts - Market Timing?

Post by Park » Tue Oct 30, 2018 6:53 pm

asset_chaos wrote:
Tue Oct 30, 2018 6:01 pm
Park wrote:
Tue Oct 30, 2018 7:41 am
The following is from an interview with Fran Kinniry of Vanguard;
You can't really determine how much to save, what you may end up with, how you will allocate your assets without having some information of market outlook."
I read the interview. The emphasis is yours not Kinniry's. If I were going to emphasize a clause of that sentence, it would be
You can't really determine how much to save, what you may end up with,how you will allocate your assets without having some information of market outlook."
If current valuations are high and the higher probability (though not a guarantee) is for lower future returns, then it's prudent to choose to save more than you might have otherwise. It's savings plus returns on those savings that generates the money to let you accomplish your financial goals. If the returns part of the equation is likely to be lower than you expect, then you obviously have to either lower your goals or raise your savings.

(Not entirely true; you could also take more risk in hopes of squeezing out extra return to avoid lowering goals or raising savings. But that choice has a high risk of failure.)
Your point about emphasis is well taken. After I wrote the post, I realized that I should have added at the end of the original post, that the emphasis was mine.

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