Bill Bernstein: "Take risk off the table"

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Bill Bernstein: "Take risk off the table"

Post by Browser » Tue Nov 26, 2013 12:27 pm

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.
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Re: Bill Bernstein: "Take risk off the table"

Post by Rodc » Tue Nov 26, 2013 12:46 pm

I'm 60/40. Picked for a "normal" market whatever that might mean.

Why? I donnaknow, seems about right. Can I really rationalize why it is clearly better than 50/50 or 70/30, like if I were 50/50 or 70/30 I'd materially hurt my retirement vs 60/40? Of course not. And neither can anyone else.

So I am skeptical of minor adjustments of 5% or even 10%. Not to mention if the stock market tanks 50% that is a portfolio drop of 25% (50% stocks). Is that really going to make me feel all that much better than a drop of 30% (especially since with 60% I will likely have more $ when the drop starts)? Factor in the likelihood that in a crash a flight to bonds will increase bond NAV, thus mitigating the stock drop so that the difference will be less than the 5% I gave.

If you are going to market time and have it make a meaningful difference it seems to me you have to be a lot more aggressive in your moves. And of course that increases risk if you are wrong.

No thanks.

I'll just keep to my agreed to allocation, rebalance, and realize that yes, markets go up and down as expected. Been doing this long enough that it is not a major concern.
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Re: Bill Bernstein: "Take risk off the table"

Post by Call_Me_Op » Tue Nov 26, 2013 12:50 pm

I guess Bill is not a fan of rebalancing back to fixed percentages. Sounds like he is advocating a form of market timing.
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Re: Bill Bernstein: "Take risk off the table"

Post by Bill Bernstein » Tue Nov 26, 2013 1:00 pm

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

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Re: Bill Bernstein: "Take risk off the table"

Post by larryswedroe » Tue Nov 26, 2013 1:12 pm

Remember when markets have above average/expected returns, future expected returns are now lower---at same time depending on the stage of investing you're in your need to take risk either went up or went down. Thus IMO it's important that you reevaluate your IPS, altering/adapting it if your assumptions have changed. Big bull or bear markets can cause changes in need to take risks
And after 2008 our expected returns were higher of course than they are today.
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Re: Bill Bernstein: "Take risk off the table"

Post by jimkinny » Tue Nov 26, 2013 1:17 pm

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.
This is what it comes down to for me.

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Re: Bill Bernstein: "Take risk off the table"

Post by midareff » Tue Nov 26, 2013 1:22 pm

+1 Good time to cash in some of the chips and go home for another game another day.

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Re: Bill Bernstein: "Take risk off the table"

Post by Rodc » Tue Nov 26, 2013 1:24 pm

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.
This is a good point and one I agree with. Or even if you have not yet really won the game, but are well ahead of schedule. I think a through reassessment of goals and needs and the related asset allocation, say every 5 years once well along, or if something significant has changed, will naturally tend to have one deciding for reasons other than market conditions per se to reduce risk following a market run up.

And for what is worth I failed to mention a caveat I generally add to this topic when it comes up. While for the reasons stated I'm not convinced small moves are all that useful in general, those same reasons say small moves are not all that risky either. So, just as Bill does not have heart burn over my sticking to fixed allocation, I have no heart burn over modest changes to allocations.
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Re: Bill Bernstein: "Take risk off the table"

Post by jjustice » Tue Nov 26, 2013 1:25 pm

I've always (well, for about 25 years) found rebalancing to a tolerance band around a set allocation easy and rewarding. I do it mindlessly. But everytime the market gets unusually low or high the idea of overbalancing starts to appeal. So far, I've never done it. You would need a better metric than Bernstein's "when the market goes up 50%." 50% from where? Isn't there a poster here who shifts his allocation according to levels of PE10? Maybe reduce equities by 10% when PE10 reaches 25. Of course, you could use a sliding scale and make more frequent smaller adjustments.

I don't know. I probably won't do it this time either. I'm in a rebalancing rut.

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Re: Bill Bernstein: "Take risk off the table"

Post by livesoft » Tue Nov 26, 2013 1:33 pm

This is a warm and fuzzy thread for me. See my signature. :)
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Re: Bill Bernstein: "Take risk off the table"

Post by Raybo » Tue Nov 26, 2013 1:37 pm

I am 40% stocks. Of that 40%, half is foreign stocks (which certainly are not at an all-time high). Do I drop my entire stock allocation because the US market is high? Or, do I just drop my US allocation? My US allocation is (roughly) 20% of my assets. How much of a loss will I avoid by doing this?

Let's say I do this. Where do I put the money? It isn't like bonds are such a safe investment. What are the prospects for their returns going forward? I've already sold TSM and bought my allotment of IBonds this year. What do you suggest I do with the money I take out of stocks?
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Re: Bill Bernstein: "Take risk off the table"

Post by NoRoboGuy » Tue Nov 26, 2013 1:42 pm

jjustice wrote:I've always (well, for about 25 years) found rebalancing to a tolerance band around a set allocation easy and rewarding. I do it mindlessly. But everytime the market gets unusually low or high the idea of overbalancing starts to appeal. So far, I've never done it. You would need a better metric than Bernstein's "when the market goes up 50%." 50% from where? Isn't there a poster here who shifts his allocation according to levels of PE10? Maybe reduce equities by 10% when PE10 reaches 25. Of course, you could use a sliding scale and make more frequent smaller adjustments.
Yep: Here is the thread.

Mr. Bogle on Shiller PE10 (in 2011) from Morningstar:

"I like the Shiller P/E. I like the Shiller P/E for two reasons: One, it's focused on a longer period of time, not just on the moment, and that's very important thing to do because earnings can do all kinds of things in short periods."

"And the other thing I like about it is, he uses reported earnings from companies and not operating earnings. All the Wall Street pundits use operating earnings. Why? Because they are higher than reported earnings. The difference between operating earnings is what the company does in its normal course of business, and we take away from that, in order to get to reported earnings, all the mistakes they've made in investments, bad decisions, changing past decisions, things of that nature. And so it is actually reported earnings that give you the true, long-term picture of the company itself. So those two reasons, a long-term focus and the right earnings number and reliance on history, I go with Shiller. And by his numbers, I think he has about a 17 times P/E as the norm, and it’s around 21 times today. I wouldn’t regard this data, being data, as a major imbalance, but it would suggest the market is probably more or less properly valued, correctly valued, or maybe somewhat overvalued."

Note, today PE10 is over 25.
Raybo wrote:Where do I put the money? It isn't like bonds are such a safe investment. What are the prospects for their returns going forward? I've already sold TSM and bought my allotment of IBonds this year. What do you suggest I do with the money I take out of stocks?
Bonds are a far safer investment than stocks, assuming they are government or investment grade corporates. There are also CDs.
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Re: Bill Bernstein: "Take risk off the table"

Post by docneil88 » Tue Nov 26, 2013 1:53 pm

Browser 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.
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I'm surprised Dr. Bill would tie such moves to average price increases rather than increases in average valuations such as PE, PE10, average Price to Book, Price to Cash Flow, or Price to Sales. As valuations increase for equities, the expected return decreases and the risk increases. If you then decrease your exposure to equities with some moderate degree of inverse proportionality to valuations, I don't see that as imprudent or irrational, any more than I see the idea of decreasing equity risk as you get older to be imprudent or irrational.

Moderately adjusting equity allocation based on valuations usually does require more research, thought, and reassessment than the buy, hold, and occasionally rebalance route. Also, in the long run, such moves will rarely end up with a substantially higher return, but, in my opinion, they are likely to result in a higher risk-adjusted return and fewer sleepless nights if and when a bubble does burst.

EDIT to add: Best to think of these tactical moves primarily as risk reduction or moderation. If you make these tactical moves thinking you can outsmart the market and earn much more than the market return, you're likely to be disappointed, and, even worse, you're likely to second guess yourself, worry about your relative performance, and make frequent changes in the your trading trigger rules. That's usually counterproductive, not to mention, it takes much time to think through such changes and assess them.
Last edited by docneil88 on Tue Nov 26, 2013 2:22 pm, edited 1 time in total.

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Re: Bill Bernstein: "Take risk off the table"

Post by MnD » Tue Nov 26, 2013 2:00 pm

The market was ~250 when I started buying stocks every two weeks and now it's over 1800. PE was 18 then versus 19 now.
Seems like any formula that prescribes "intelligent investors" (what does that mean?) do some "trimming back" when the market goes up a lot isn't taking a very long-term view of things.
Absent volatility, the market would hit a new record high every day. Now if one cherry picks some past dates it would certainly have been fabulous to conduct various "tactical allocations" in 2001-2 and 2008-9/1996-2000 and 2005-7. But what are the future date ranges to conduct these tactical moves?

And when does one "grow out" after doing this "trimming back"? You have to be right twice to benefit from this approach. Remember the Mathers Fund?
Markets might have mediocre, ok or good future performance, but it's not a given that they will fall below current levels or below what would be earned by shifting ones AA heavier into low yielding bonds or money-losing cash within any prescribed time frame. PE's could compress handily over the next few years without equities trailing fixed income, especially if interest rates were to gradually increase. Nor can one count on any particular timing such as a significant decline coming through in "3 to 5 years hence". If anyone knew a decline was coming in 3 to 5 years hence, a much better strategy would be to trim back in 2017. :mrgreen:

Having two ~50% market declines occur in less than a decade has, in my opinion, conditioned investors to strongly associate market peaks with impending doom. I think that keeping fear in the forefront is a great environment for those can can weather the noise and stick to an appropriate AA without engaging in tactical maneuvers. Stay fearful my friends! :beer

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Re: Bill Bernstein: "Take risk off the table"

Post by Raybo » Tue Nov 26, 2013 2:06 pm

louis c wrote:
Raybo wrote:Where do I put the money? It isn't like bonds are such a safe investment. What are the prospects for their returns going forward? I've already sold TSM and bought my allotment of IBonds this year. What do you suggest I do with the money I take out of stocks?
Bonds are a far safer investment than stocks, assuming they are government or investment grade corporates. There are also CDs.
How, exactly, do you define "far safer" in today's investment environment?

We aren't talking about stocks versus bonds "in general." I am asking where I should put money I take out of stocks (60% of my assets are already in bonds, TIPS, and cash) today? At the current interest levels, a spike in interest rates could do more damage to my finances than a bear market in US stocks. Which bit of market timing should I concentrate on?

I am slowly moving my TIPS investments from a fund to actual TIPS and IBonds to build a liability matching portfolio. After that is done, why should I be concerned about stock price levels?
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Re: Bill Bernstein: "Take risk off the table"

Post by Browser » Tue Nov 26, 2013 2:08 pm

That is a good question for Dr. Bill. If I have trimmed back because of high returns and valuations, how do I decide when to "trim forward"?
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Re: Bill Bernstein: "Take risk off the table"

Post by Bill Bernstein » Tue Nov 26, 2013 2:22 pm

MnD raises a good question: the answer is simply that when he was buying stocks at S&P ~250, his ratio of human capital to investment capital was high--ie, he was presumably a young saver. (Either that, or he's very old now ;-))

There was a *lot* of turbulence along the way, and that redounded greatly to his benefit. The best advice for any young saver is "be aggressive and stay the course; volatility is your friend."

This is *not* the case for the retiree with a zero human capital:investment capital ratio, for whom volatility is definitely *not* his friend.

Bill

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Re: Bill Bernstein: "Take risk off the table"

Post by NoRoboGuy » Tue Nov 26, 2013 2:27 pm

Raybo wrote:
louis c wrote:
Raybo wrote:Where do I put the money? It isn't like bonds are such a safe investment. What are the prospects for their returns going forward? I've already sold TSM and bought my allotment of IBonds this year. What do you suggest I do with the money I take out of stocks?
Bonds are a far safer investment than stocks, assuming they are government or investment grade corporates. There are also CDs.
How, exactly, do you define "far safer" in today's investment environment?

We aren't talking about stocks versus bonds "in general." I am asking where I should put money I take out of stocks (60% of my assets are already in bonds, TIPS, and cash) today? At the current interest levels, a spike in interest rates could do more damage to my finances than a bear market in US stocks. Which bit of market timing should I concentrate on?

I am slowly moving my TIPS investments from a fund to actual TIPS and IBonds to build a liability matching portfolio. After that is done, why should I be concerned about stock price levels?
You answered your own question, and I agree: liability matching. Fundamentally we are saving for a reason. If the goal is to have X amount in Y years, we can either (a) save more (b) take more risk in hopes of a higher return, (c) decide to spend less, or some combination of the three. It appears your concern is duration and you are taking steps to mitigate that risk (individual TIPS and I Bonds). Some CD strategies may work as well, such as those that have a minimal early redemption penalty. There are some special deals if you look at credit unions and even some banks (like BBVA's build-my-savings).

* edited for grammar
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Re: Bill Bernstein: "Take risk off the table"

Post by baw703916 » Tue Nov 26, 2013 3:09 pm

FWIW, I've increased my bond allocation from 25% to about 38% this year, mostly to the TSP G Fund. Still quite a bit less than age in bonds. :wink:

The market has been extremely generous with gains this year--unsustainably so. It's not going to keep giving 25% annual returns ad infinitum. So it seems prudent to take some off the table.

I happened to see a story in a hotel copy of USA Today a few days ago that pointed out that with the markets at an all-time high, investors are enthused about putting money into equities. Really, you can't make this stuff up!

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Re: Bill Bernstein: "Take risk off the table"

Post by FFFollower » Tue Nov 26, 2013 3:13 pm

This year, I have been sending all of my contributions to bonds. I did a rebalance from US equities into Intl. equities earlier in the year. I also had a rebalance recently towards bonds. It's been tough to keep pace. I guess that is a good problem to have.

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Re: Bill Bernstein: "Take risk off the table"

Post by noyopacific » Tue Nov 26, 2013 3:21 pm

A few questions have come to mind:
1. Does Bill Bernstein have a written, up to date Investment Policy Statement for himself?
(If he does, I'd love to read it!)
2. Are these actions in line with his IPS?
3. Is “dynamic asset allocation” another name for market timing?
4. How might one safeguard themselves against trying to time the market when reevaluating, altering/adapting their IPS?
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Re: Bill Bernstein: "Take risk off the table"

Post by 2beachcombers » Tue Nov 26, 2013 3:27 pm

IPS changed from 80/20 to 70/30(80% of $$ for heirs). Working hard to get IDA down to 50/50(in 5-10yrs).

Was 100% equities until I joined this forum.

PS--WBERN--any changes to IDAs asset location and percentagees??--She has been great for me. 8-)

jerry

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Re: Bill Bernstein: "Take risk off the table"

Post by abuss368 » Tue Nov 26, 2013 3:35 pm

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.
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Re: Bill Bernstein: "Take risk off the table"

Post by dad2000 » Tue Nov 26, 2013 3:45 pm

I don't think this is market timing, but it shouldn't be done arbitrarily.

My IPS called for a reduction in equity allocation of 1% per year. I think the idea is that instead of using 1% (which is similar to "age in bonds"), we should consider having the IPS calculate the percentage based on how close we are to hitting our floor/LMP target.

I've hit the LMP target that I've set for age 65, but I'm much younger than that. Why risk more than I have to when I've basically won the game?

I haven't changed my IPS yet, but am strongly considering doing so.

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Re: Bill Bernstein: "Take risk off the table"

Post by abuss368 » Tue Nov 26, 2013 3:47 pm

Agreed. If you have already "won" the game, then I would consider taking some risks off the table.
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Re: Bill Bernstein: "Take risk off the table"

Post by baw703916 » Tue Nov 26, 2013 3:59 pm

wbern has been saying the same thing regarding "overrebalancing" for well over a decade, through three booms and two severe bear markets. So I don't think it's fair to accuse him of not staying the course. His chosen course is to shift allocation slightly in response to major market moves. It seems logical to me. It also is worth considering that the great returns of late have likely caused many investors' need to take risk to decrease.
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Re: Bill Bernstein: "Take risk off the table"

Post by Blues » Tue Nov 26, 2013 4:00 pm

Having used the opportunities presented by this bull market to establish a sound "floor" consisting of fixed income instruments which avoid direct interest rate risk and the vagaries of market fluctuation, I see no current need to alter an already conservative ratio of equities to bonds, cash and fixed income.

It seems to me that the time to consider and put in place the proper asset allocation to supplement "guaranteed" sources of income, (going forward), is before the lean times arrive.


Edited to add that I am very much in the debt of Messrs. Bernstein and Swedroe for shedding light on this very subject and helping to illuminate the path.
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Re: Bill Bernstein: "Take risk off the table"

Post by richard » Tue Nov 26, 2013 4:25 pm

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
To be precise, Sharpe wouldn't rebalance if a change in your portfolio mirrors a market move, but would rebalance otherwise. For example, your portfolio and the market start out at 60/40 and the market goes to 50/50. If your portfolio goes to 50/50, do nothing, otherwise move to 50/50.

Regarding stopping playing, have you written on how to construct an appropriate portfolio for the 2% and under withdrawal rate set? If not, how would you construct such a portfolio?

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Re: Bill Bernstein: "Take risk off the table"

Post by Svensk Anga » Tue Nov 26, 2013 4:29 pm

Dr. Bernstein has previously recommended Value Averaging. If one had been using VA this year, one has periodically sold equities. As a consequence, one's AA could have been growing more conservative all year. (Depends on the equity return assumption and AA one started with.) This seems to me a very good, systematic way to take money off the table when one is winning the game, especially as one approaches one's goal. It is not about ad-hoc adjustments to one's IPS because it feels right to do or because there are now lots of stories about bubbles in the financial media.

When the next downturn (or even a flat market) comes, VA will have one buying equities again. No guessing required. Stay on the VA path.

VA makes sense to me because over my 30-year investing experience I have seen my portfolio repeatedly make a slow climb above the long term trend line only to suffer sharp setbacks to below trend. VA would have provided a smoother ride. I toughed out a 90% equity allocation gambling to get to early retirement. With the goal in sight, a smoother ride definitely appeals.

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Re: Bill Bernstein: "Take risk off the table"

Post by bigred77 » Tue Nov 26, 2013 4:32 pm

I agree with some of the sentiment that these "marginal" changes of +/- 5% between bonds and equities are unlikely to have a material impact on ones "final destination" so to speak. If one feels better doing this then more power to them. I do feel that this could bring some unnecessary complexity, anxiety, or feelings of doubt (or even overconfidence) into the equation for the average investor. This can introduce thoughts of not "staying the course" or making more dramatic changes. It just seems like the trouble of having to make these decisions and live with them is not worth the small potential benefits. I would put this in the "keep it simple" pile and pass on this personally.


A second point of contention I have is the repeatedly brought up topic of Shiller PE or PE/10. This keeps getting brought up on this board as being "relatively historically high" and forcasting lower returns for equities going forward. I've seen it used to suggest that equities may have muted (like 7%-8%) returns over the next 30 years and also to suggest that a correction is likely to happen in the near future.

I don't disagree that the PE/10 is what it is. The number is "relatively historically high". What I don't seem to see people taking into consideration is the following:

- Equity Returns will come from FUTURE earnings, not past.
- The PE/10 is using Earnings from a severe recession. This is going to distort some of the inferences made on the data.
- It's just an "expected return" and theres a >= 50% chance that ACTUAL returns end up being higher than the predictive value.
- I think it was Larry Swedroe who said The R^2 on PE/10 to future returns is something like 40%. I don't want to over emphasize that 40% by making decisions based on that data in a vacuum and not taking a long hard look at determining what the other 60% may or may not be telling me.

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Re: Bill Bernstein: "Take risk off the table"

Post by manwithnoname » Tue Nov 26, 2013 4:35 pm

jimkinny wrote: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.
This is what it comes down to for me.

jim
There is no such thing as winning the retirement game unless you plan to die soon. Few know how long they will live. While its nice to have a theoretical amount of assets that you deem to be satisfactory for a secure retirement, events may result in assets being insufficient to match all liabilities which turn out to be large than expected.

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Re: Bill Bernstein: "Take risk off the table"

Post by ourbrooks » Tue Nov 26, 2013 4:41 pm

I have been searching for the William Bernstein article, written in 2009, in which he suggests tactically increasing one's stock allocation, because valuations were so favorable.
Can't seem to find it. wbern, care to give a pointer?

As is often pointed out about market timing in general, there are two decisions to be made. When to get out, is often the easier decisions; portfolios are up and everyone feels they can afford to relax a little and take less risk. It's the getting back in decision that's really hard. Stocks are way down and look like they'll never come back. Why not wait until the market's up a bit? Between losing 25% of the gain when stocks are rising by getting out a bit too soon and 25% of the gain when stocks are bottoming by getting in too late, the return advantage of stocks are pretty much cancelled out.

The end result of tactical asset allocations could well be that you'd have been better off with an all-bond portfolio in the first place.

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Re: Bill Bernstein: "Take risk off the table"

Post by Riprap » Tue Nov 26, 2013 4:55 pm

richard wrote:Regarding stopping playing, have you written on how to construct an appropriate portfolio for the 2% and under withdrawal rate set? If not, how would you construct such a portfolio?
I am interested in this too. From Deep Risk I concluded that I should not worry too much about rebalancing back to a fixed allocation if I can weather the shallow risk. I have been thinking more along the lines of directing excess cash to foreign equities.

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Re: Bill Bernstein: "Take risk off the table"

Post by Artsdoctor » Tue Nov 26, 2013 5:03 pm

I'm not reading Dr. B's thoughts as market timing, but as risk reassessment.

My parents are approaching 80. The last couple of years have seen their portfolio balance increase faster than they're spending. I've dialed back their equity allocation to 25% not because I think the market's overbought, but because the amount they have in the portfolio has exceeded what they can actually use. You could make an argument for reducing their equity allocation further but to some extent, they're working on a legacy provision and I do think stocks have merit for them.

I'm in my mid-50s and my entire asset allocation is built on the assumption that a real return going forward will be X in order to get Y ("my magic number"). These last two years have catapulted my portfolio to where I expected to be 5 years from now. I've scaled back my equities not because the market is "too frothy," but because I'm ahead of schedule and I don't need to take that risk.

The younger people that I'm working with (under 30), are keeping their equity allocation at 75% because they have a whole lifetime of working to recoup any losses that might result if the market tanks. Their equity allocation is based on need (they have it) and ability to take risk (they have it).

There will come a point when young people will need to scale back their equity allocation. Presumably that will happen when they start meeting their financials goals. I don't think that is market timing.

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Re: Bill Bernstein: "Take risk off the table"

Post by Jebediah » Tue Nov 26, 2013 5:33 pm

larryswedroe wrote:Remember when markets have above average/expected returns, future expected returns are now lower---at same time depending on the stage of investing you're in your need to take risk either went up or went down. Thus IMO it's important that you reevaluate your IPS, altering/adapting it if your assumptions have changed. Big bull or bear markets can cause changes in need to take risks
And after 2008 our expected returns were higher of course than they are today.
Best wishes
Larry
Thank you for this point Larry. It's interesting (and paradoxical) that re-balancing according to one's expected returns is inverse to rebalancing according to one's $ exposure. The former seems the more logical from a retirement planning perspective; the latter more logical from a market timing perspective.

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Re: Bill Bernstein: "Take risk off the table"

Post by sperry8 » Tue Nov 26, 2013 5:40 pm

MnD wrote:The market was ~250 when I started buying stocks every two weeks and now it's over 1800. PE was 18 then versus 19 now.
Seems like any formula that prescribes "intelligent investors" (what does that mean?) do some "trimming back" when the market goes up a lot isn't taking a very long-term view of things.
Absent volatility, the market would hit a new record high every day. Now if one cherry picks some past dates it would certainly have been fabulous to conduct various "tactical allocations" in 2001-2 and 2008-9/1996-2000 and 2005-7. But what are the future date ranges to conduct these tactical moves?

And when does one "grow out" after doing this "trimming back"? You have to be right twice to benefit from this approach. Remember the Mathers Fund?
Markets might have mediocre, ok or good future performance, but it's not a given that they will fall below current levels or below what would be earned by shifting ones AA heavier into low yielding bonds or money-losing cash within any prescribed time frame. PE's could compress handily over the next few years without equities trailing fixed income, especially if interest rates were to gradually increase. Nor can one count on any particular timing such as a significant decline coming through in "3 to 5 years hence". If anyone knew a decline was coming in 3 to 5 years hence, a much better strategy would be to trim back in 2017. :mrgreen:

Having two ~50% market declines occur in less than a decade has, in my opinion, conditioned investors to strongly associate market peaks with impending doom. I think that keeping fear in the forefront is a great environment for those can can weather the noise and stick to an appropriate AA without engaging in tactical maneuvers. Stay fearful my friends! :beer
Good post. Helps me with perspective. I'm on edge because my investing life only started in the late 90's. I keep buying "high". And then watch it all drop significantly (although I have weathered the storms and rode it out, and now I'm "up"). Still, so seeing the new highs makes me want to pull it out (or take risk off the table) and wait. Just wait til the next drop and finally buy low. But when? And if I did this in 2010 or 2011, I'd have missed so much upside it'd be hard to get back to even now.
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Re: Bill Bernstein: "Take risk off the table"

Post by baw703916 » Tue Nov 26, 2013 6:21 pm

It's worth remembering that Dr. B isn't recommending an all or nothing approach. Rather, a small change in AA in response to a large change in valuation. I still have plenty of market exposure at 38% bonds.
Most of my posts assume no behavioral errors.

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Re: Bill Bernstein: "Take risk off the table"

Post by CP4641 » Tue Nov 26, 2013 6:43 pm

I don’t view Dr Bernstein’s comments as market timing. I think his view is similar to David Swenson’s summary at the end of chapter 3 in Unconventional Success. In the chapter on Portfolio Construction David Swenson suggested that as the time horizon shortens one should substitute riskless cash positions for parts of the risky portfolio. The composition of the risky portfolio does not change (although the overall risk is lower).

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Re: Bill Bernstein: "Take risk off the table"

Post by pingo » Tue Nov 26, 2013 6:48 pm

[url=http://www.indexuniverse.com/sections/features/20562-bill-bernstein-take-risk-off-the-table.html?start=1]In this link[/url], wbern wrote: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.
I'm doing it as a matter of course because of my self-imposed glidepath. And I do feel like a dummy, but perhaps not as dumb as Mr. Bernstein feels: I'm buying more and more bonds to increase them by 1 percentage point per year. It's not a 12.5 ratio, but a lot of random internet people think that I have too many bonds as it is, so I guess they think I'm a dummy, too.

I suspect that when markets plunge and terror strikes the heart of every investor once again, I'll be glad to have a few more bonds and wish that I had a few less stocks. It sounds like I'll still be feeling less-smart, but absent the gift of clairvoyance, I must stick with the plan I developed with a calm and collected mind.

I hope that's good enough.
Last edited by pingo on Wed Nov 27, 2013 1:03 am, edited 2 times in total.

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Re: Bill Bernstein: "Take risk off the table"

Post by White Coat Investor » Tue Nov 26, 2013 7:01 pm

I think Bill is right mathematically. I don't think he is right behaviorally, which is often the more important factor in investing.

Keeping things simple, clear, and straightforward (i.e. a fixed asset allocation) has immense behavioral benefits. Not only do you not miss out on the benefits of the last year or two of the bull market (in exchange for getting pounded worse in the bear), but you don't have to decide questions like how much to decrease your stock/bond allocation and when. You just rebalance according to the plan.

If you're following a written plan, a system, then I think that approach is fine. For example, if your plan is to decrease your stock/bond percentage 4% after years when the market goes up more than 20% and increase it by 4% after years when the market goes down 20%, then that's fine. It's straightforward, systematic, and avoids emotional issues. Like rebalancing, it helps you buy low and sell high. But if you're just doing this by feel, well, I'm not sure that's a good habit to get into.
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Re: Bill Bernstein: "Take risk off the table"

Post by grok87 » Tue Nov 26, 2013 7:17 pm

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
Agree
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Re: Bill Bernstein: "Take risk off the table"

Post by leo383 » Tue Nov 26, 2013 7:43 pm

Call_Me_Op wrote:I guess Bill is not a fan of rebalancing back to fixed percentages. Sounds like he is advocating a form of market timing.
I think it's more subtle than that. Bernstein is also about getting to the point where you have enough saved to fully fund retirement, and socking that amount away in short term bonds, I-Bonds, TIPS, that sort of thing.

I think a lot of his clients and Bogleheads, given the last few years, are at that point, and he is saying make that money safe.

(edit--I see the man himself said it in the 4th post :oops: )

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Re: Bill Bernstein: "Take risk off the table"

Post by pkcrafter » Tue Nov 26, 2013 8:12 pm

EmergDoc wrote:I think Bill is right mathematically. I don't think he is right behaviorally, which is often the more important factor in investing.

Keeping things simple, clear, and straightforward (i.e. a fixed asset allocation) has immense behavioral benefits. Not only do you not miss out on the benefits of the last year or two of the bull market (in exchange for getting pounded worse in the bear), but you don't have to decide questions like how much to decrease your stock/bond allocation and when. You just rebalance according to the plan.

If you're following a written plan, a system, then I think that approach is fine. For example, if your plan is to decrease your stock/bond percentage 4% after years when the market goes up more than 20% and increase it by 4% after years when the market goes down 20%, then that's fine. It's straightforward, systematic, and avoids emotional issues. Like rebalancing, it helps you buy low and sell high. But if you're just doing this by feel, well, I'm not sure that's a good habit to get into.
Excellent point. +1.

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Re: Bill Bernstein: "Take risk off the table"

Post by sschullo » Tue Nov 26, 2013 8:54 pm

And this is precisely what intelligent money management should look like? It sure looks good in the rearview mirror, but it takes a certain amount of courage to be doing that before the bottom falls out.
Bernstein: 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.

Well, I have been feeling pretty dumb for nine out of the last ten years since I learned my lesson in the tech bubble and "trimmed back" from my 100% equity portfolio into a 70% bonds/30% equities portfolio in 2003. The one year I felt smart was 2008. Clearly my portfolio underperformed those folks that had higher equity allocations and it does take a lot of guts to lay low while others perform higher, but it does pay off in down markets or any other Armageddon. The key is to get your risk tolerance right the first time instead of changing it for any reason, whether mathematically or behaviorally.
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Re: Bill Bernstein: "Take risk off the table"

Post by tibbitts » Tue Nov 26, 2013 10:00 pm

leo383 wrote:
Call_Me_Op wrote:I guess Bill is not a fan of rebalancing back to fixed percentages. Sounds like he is advocating a form of market timing.
I think it's more subtle than that. Bernstein is also about getting to the point where you have enough saved to fully fund retirement, and socking that amount away in short term bonds, I-Bonds, TIPS, that sort of thing.

I think a lot of his clients and Bogleheads, given the last few years, are at that point, and he is saying make that money safe.

(edit--I see the man himself said it in the 4th post :oops: )
If you consider interest rates you might find that they've dropped (relative to inflation) more than equities have risen. In other words, many people may be in worse shape in terms of being able to fund their retirement on fixed income than they were before the recent run-up in equities. And in any case this equity run-up over the past few years hasn't really done anything other than get people back to close where they might have been more than a decade ago. But let's say that since 2000, your $1M went to $1.5M. Terrific, except back then you might have been earning 6% on the $1M, and now you're earning 2% on $1.5M, and you've had more than a decade of inflation in the meantime.

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Re: Bill Bernstein: "Take risk off the table"

Post by livesoft » Tue Nov 26, 2013 10:08 pm

tibbitts wrote:But let's say that since 2000, your $1M went to $1.5M. Terrific, except back then you might have been earning 6% on the $1M, and now you're earning 2% on $1.5M, and you've had more than a decade of inflation in the meantime.
Since 2000, you have had another 13 years of contributions, so your $1M went to $3M.
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Re: Bill Bernstein: "Take risk off the table"

Post by letsgobobby » Tue Nov 26, 2013 10:20 pm

Oh c'mon Bill and Larry. You are both closet PE10 adherents, why not just admit it? (No personal motive here, I promise) :twisted:

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Re: Bill Bernstein: "Take risk off the table"

Post by tibbitts » Tue Nov 26, 2013 10:23 pm

livesoft wrote:
tibbitts wrote:But let's say that since 2000, your $1M went to $1.5M. Terrific, except back then you might have been earning 6% on the $1M, and now you're earning 2% on $1.5M, and you've had more than a decade of inflation in the meantime.
Since 2000, you have had another 13 years of contributions, so your $1M went to $3M.
Or, you lost your tech-industry job in the 2000, and couldn't save any since on your burger-flipping salary. Obviously, experiences vary, but many people who'd counted on the '00s being their peak earnings years were severely disappointed.

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Re: Bill Bernstein: "Take risk off the table"

Post by Bill Bernstein » Tue Nov 26, 2013 10:46 pm

In general, you're in a far better place with an inflated portfolio from stocks and crummy interest rates than with the opposite case.

If, for example, you ask how much it would cost to fund a retirement with a TIPS ladder out to age 100, it comes out to about 15%-20% more now than it did in the good old days of 2002-7, when it was just possible, at the right time, to fund the whole ladder at an average real yield, throughout the curve, of 2.5%.

Bernanke et al., rest assured, have inflated our portfolios by more than 15%-20% larger than they would have been without QE1 . . . QEn.

Bill

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Re: Bill Bernstein: "Take risk off the table"

Post by DonCamillo » Tue Nov 26, 2013 10:51 pm

I am confused right now. I am not interested in buying anything. I don't want to invest in stocks when the PE is so high and I don't want to invest in bonds when the yields are so low. So I have just been accumulating cash, and may continue until stocks go down or interest rates go up. This does not affect my 401a, my 403b, or my Roth 457b, all of which are getting maximum funding into balanced funds from my salary. It does not affect my IRA which is in a bond fund or my taxable equity index funds, which are just being reinvested. But it does affect my taxable brokerage fund and my Roth, which are just accumulating dividends from both bonds and equities, and which together total 40% of my portfolio. So far, cash is minimal, about 3% of total portfolio. If I wait a couple of years, it may get over 10%. I think of this as holding cash and waiting to rebalance. Perhaps it is taking risk of the table, except for the risk of inflation.
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