100% Stocks, Huh? May I Suggest You Read This Thread

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tarheel
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100% Stocks, Huh? May I Suggest You Read This Thread

Post by tarheel » Sun Dec 18, 2016 8:28 am

I would recommend that anyone considering investing 100% in equities (0% bonds) perform this very quick thought experiment. I think it's well worth it.

The time period we will consider is 1982-2016 (longest period that portfoliovisualizer has data for Int'l Stock Market).

My first question is, do you consider this a LONG time frame? (I would guess most would say yes).

We are going to consider three representative portfolios, with no home country bias:

Portfolio A: 100% equities (50% Total US Stock Market/50% Int'l Stock Market).
Portfolio B: 80% equities/20% bonds (40% Total US Stock Market/40% Int'l Stock Market/20% Intermediate Term Treasury)
Portfolio C: 60% equities/40% bonds (30% Total US Stock Market/30% Int'l Stock Market/40% Intermediate Term Treasury)

Ok - here are the four simple questions:
1. Which Portfolio had the highest CAGR (compounded annual growth rate)?
2. Which Portfolio had the highest Sharpe ratio?
3. Which investor slept best at night during this period?
4. Which investor is sleeping best at night now, in 2016?

Check out this link at portfoliovisualizer.com for the answer. For extra fun, I'd suggest posting your answers before clicking the link.

https://www.portfoliovisualizer.com/bac ... easury3=40

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by tarheel » Sun Dec 18, 2016 8:32 am

Here were my answers before I looked:

1. The all stock portfolio would do a fair bit better than the 80/20 (although not a huge gap), and a good deal better than 60/40.
2. The 60/40 portfolio would be the most efficient, with the best Sharpe ratio.
3. The 60/40 investor would have the fewest sleepless nights - let's put it that way.
4. The 100% stock investor would be sleeping better today, because he/she has a significantly larger nest egg.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by jabbahop » Sun Dec 18, 2016 8:50 am

Thank you. Retired with 60/40 and this helps me from second guessing myself a bit.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by norciom » Sun Dec 18, 2016 8:57 am

If only the future would be so easy to predict.

What I take from backtests is "Don't worry, be happy". Have a set it and forget it allocation. +/- some asset percentages are not worth the mental anxiety.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by packer16 » Sun Dec 18, 2016 9:24 am

I think you need to be very careful about extrapolating performance from this period of time. The main reason is the large decline in interest rates from 10.5% YE 1982 to 2.4% today. If you assume the current yield is good proxy for future bond returns then expected returns for bonds have declined from 10.5% to 2.4%. One way to estimate expected returns for stocks is the forward looking ERP, Damodaran has estimates on his site here: http://pages.stern.nyu.edu/~adamodar/

Using this data we the ERP has declined from 4.9% to 4.5%. The historic average is 4.1%. The ERP appears to be mean reverting, see graph in Damodaran's ERP spreadsheet. In contrast, interest rates have long term trends. What this has caused based upon the period chosen is a LT interest rate trend down with a mean reverting ERP overlaid on this. Given this data, the expected returns on stocks in 6.5% versus 2.4% for bonds. If these are even remotely close to reality, then adding bond to your portfolio for anything other than liquidity will significantly reduce your expected return.

Another way to look at it the incremental return for taking stock risk, now the incremental return in 170% (4.1/2.4). In contrast, in 1999, the incremental return was only 33% and 1982 it was only 47%.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by badbreath » Sun Dec 18, 2016 9:32 am

You need to add one more 100% US total stock market. That one crushes the other three.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by packer16 » Sun Dec 18, 2016 9:43 am

You do bring up a good point on International. If you limit yourself to Anglo/Dutch countries (which have had above average governance & disclosure & higher returns over the past 100 years per Triumph of the Optimists), then you would do better.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by tarheel » Sun Dec 18, 2016 10:07 am

Packer, I'm well aware of the bond bull market over the past few decades. And I'm also aware that US has outperformed equity-wise. Of course, you would have a cloudy crystal ball predicting either in 1982.

The only point I'm trying to make is that the widely held view that equities are virtually certain to outperform in the long run is just not true. And that anyone holding bonds is a return-minimizing scaredy-cat (unless you are very near retirement).

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by corpgator » Sun Dec 18, 2016 10:16 am

badbreath wrote:You need to add one more 100% US total stock market. That one crushes the other three.
Was going to comment the same. International is the drag here. If you change to US stocks only for all 3, 100% stocks is still ahead, but not so clear cut anymore.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by MN Finance » Sun Dec 18, 2016 10:20 am

How many people use intermediate treasury as their bond exposure?

In many cases the bond component hugely impacts the results... just like the fallacy that 20% equities is safer than 0%, which is more a statement of the bonds not the stocks.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by Wakefield1 » Sun Dec 18, 2016 10:34 am

Active management in a Bond mutual fund or Bond component of a "balanced" fund might not be the same thing as active management of a Stock mutual fund
Freedom to move around as to bond duration and credit quality rating (as in corporate vs. United States Treasury vs. "high yield" (by Fund manager or even individual investor with own portfolio of bonds)

The argument for Stock Indexing is very powerful but is the same argument for Bond indexing as powerful?

With the current low interest rate environment and the expectation that rates will be rising are high credit quality long bonds at a disadvantage?

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by TomCat96 » Sun Dec 18, 2016 10:52 am

What's the lesson to be taken from this?

It seems like the moral of the story according to you is don't invest in 100% equities at 50% international, 50% US.

The lesson I took from this information, which is my usual stance is don't invest internationally.
If you had just the entire allocation sit passively in US stocks would be a whopping 68% more than your 80/20 allocation, 73% more than the 60/40 allocation

So the conclusion that I take from this is yet again is, like Bogle, like Buffet, stay the course at 100% US stocks.

I don't comprehend how a person can even argue this. The final balance of a 100% US allocation over the same time period is $366,519. And the moral of the story is to invest in the portfolio that returns $211,197 instead??

I don't care that the $211,197 had a higher Sharpe ratio or a lower standard deviation. I don't care if the meager returns I gained were somehow more efficient in theory. At some point the disparity between the 60/40 portfolio and the 100% US stocks will become so great that your drops in portfolio will be buffered by the whopping extra 68% or 73% $$ in your portfolio.

The 100% US equity portfolio is dead idiot simple. Simpler than even the 3-fund portfolio. Stay the course.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by lostdog » Sun Dec 18, 2016 10:57 am

TomCat96 wrote:What's the lesson to be taken from this?

It seems like the moral of the story according to you is don't invest in 100% equities at 50% international, 50% US.

The lesson I took from this information, which is my usual stance is don't invest internationally.
If you had just the entire allocation sit passively in US stocks would be a whopping 68% more than your 80/20 allocation, 73% more than the 60/40 allocation

So the conclusion that I take from this is yet again is, like Bogle, like Buffet, stay the course at 100% US stocks.

I don't comprehend how a person can even argue this. The final balance of a 100% US allocation over the same time period is $366,519. And the moral of the story is to invest in the portfolio that returns $211,197 instead??

I don't care that the $211,197 had a higher Sharpe ratio or a lower standard deviation. I don't care if the meager returns I gained were somehow more efficient in theory. At some point the disparity between the 60/40 portfolio and the 100% US stocks will become so great that your drops in portfolio will be buffered by the whopping extra 68% or 73% $$ in your portfolio.

The 100% US equity portfolio is dead idiot simple. Simpler than even the 3-fund portfolio. Stay the course.
+1

If you don't freak out and sell, a 100% stock will work out just fine.


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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by arcticpineapplecorp. » Sun Dec 18, 2016 11:02 am

TomCat96 wrote:What's the lesson to be taken from this?

It seems like the moral of the story according to you is don't invest in 100% equities at 50% international, 50% US.

The lesson I took from this information, which is my usual stance is don't invest internationally.
If you had just the entire allocation sit passively in US stocks would be a whopping 68% more than your 80/20 allocation, 73% more than the 60/40 allocation

So the conclusion that I take from this is yet again is, like Bogle, like Buffet, stay the course at 100% US stocks.

I don't comprehend how a person can even argue this. The final balance of a 100% US allocation over the same time period is $366,519. And the moral of the story is to invest in the portfolio that returns $211,197 instead??

I don't care that the $211,197 had a higher Sharpe ratio or a lower standard deviation. I don't care if the meager returns I gained were somehow more efficient in theory. At some point the disparity between the 60/40 portfolio and the 100% US stocks will become so great that your drops in portfolio will be buffered by the whopping extra 68% or 73% $$ in your portfolio.

The 100% US equity portfolio is dead idiot simple. Simpler than even the 3-fund portfolio. Stay the course.
Past performance is no guarantee of future results. People diversify because the future is unknown. Besides, if you're buying stocks you want to buy them when they're cheaper. That means buying international, not U.S. Do you know which country had the best performing stock market this year or last year, etc.? I can guarantee you it wasn't the U.S. No one knows which country will do the best over time (or any given year) so it's best to diversify and have money in all of them. That way you capture your fair share of the market's return no matter where they happen to come from.

By the way, thanks to the OP. I just looked at the chart and I was surprised to see the results. Lostdog, I don't think the lesson from that graph was be 100% stocks. (spoiler alert) The returns for 60/40 were the same as 100% stock, so why would you take the extra risk? But as Packer16 said, it was the bond component that juiced the returns back to 1982 because of rising, then falling rates over the next three decades. If that doesn't happen over the next 30 years, then these three graphs won't look the same as they do from 1982-2016. Past performance is no guarantee of future results. Be careful of your interpretation/conclusion drawing from past data.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by Random Walker » Sun Dec 18, 2016 11:04 am

I think these results show something that I've posted about several times before; volatility is a huge drag on the compounded return of a portfolio. Diversifying across asset classes with low (or negative) correlations improves portfolio efficiency dramatically. People look at standard deviations and think "I can handle that volatility". What they don't understand is that the volatility is also sucking from the portfolio terminal value. Best of all worlds is to find multiple asset classes or factors with expected equity like returns that are as weakly correlated as possible.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by packer16 » Sun Dec 18, 2016 12:58 pm

I agree that saying that equities will outperform outside the Anglo/Dutch is not a certainty as property rights can change in unpredictable ways. I heard once that if you removed from EM returns all countries that nationalized firms the EM returns would be very impressive indeed. That is why I think EM is so hard you just do not know if/when you will be nationalized especially with countries that have done it in the past. This effect is even evident in firms with large state ownership and run for other purposes like some firms in Continental Europe or Japan.

Valuation is also important and given the values today I would say the odds of US stocks outperforming bonds is higher than average given the ratio of the ERP to the bond rate. Note - this ratio was smaller in 1982. For me a key factor is the incremental expected return for more risk and today it is higher than it has historically been.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by raven15 » Sun Dec 18, 2016 1:27 pm

My take away from this experiment was that 1982 was the best year in the history of the US to buy into stocks, so it should come as no surprise that back testing shows US stocks to be the clear winners. For that matter 1982 was the best year in history to buy into US bonds as well. In summary the entire analysis is so heavily biased by the start and end dates that I would call it meaningless. Keeping an internationally diversified porfolio with an equity bias and some bonds for when you need to take money out remains the best advice.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by MIretired » Sun Dec 18, 2016 1:38 pm

I'll predict "C" , on all four ?'s. --the 60/40 --50/50 US/Intl'l.
Reasoning? I know the HUGE runup for Japan in the 80's. I've heard that bonds out-returned equities for last 30 years? (not sure here.)

Edit: OK, Looked on PV. Probably I mixed up "bonds out did Eq. in 2000's , maybe.
One thing, though. 80's, 90's, 00's have to be the best long-term (30 yr.) period for bond returns in modern history.
Checked 100% IT bond over same period: ended $140,789. Tot.Bnd class avail. not 'til late 1986
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by whodidntante » Sun Dec 18, 2016 1:50 pm

Cool. Now what should I hold for the next 34 years?

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by Rodc » Sun Dec 18, 2016 3:33 pm

Very interesting.

Perhaps more interesting I looked at how things would turn out if one started investing in 1982 and retired in 2016, assuming they put in a real $1000 each month (I presume that is what happens when you turn off inflation adjusting).

The results are the same: all three are within a hair of being the same.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by GreatOdinsRaven » Sun Dec 18, 2016 3:34 pm

badbreath wrote:You need to add one more 100% US total stock market. That one crushes the other three.

No joke. https://www.portfoliovisualizer.com/bac ... easury3=40
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by tarheel » Sun Dec 18, 2016 3:41 pm

raven15 wrote:My take away from this experiment was that 1982 was the best year in the history of the US to buy into stocks, so it should come as no surprise that back testing shows US stocks to be the clear winners. For that matter 1982 was the best year in history to buy into US bonds as well. In summary the entire analysis is so heavily biased by the start and end dates that I would call it meaningless. Keeping an internationally diversified porfolio with an equity bias and some bonds for when you need to take money out remains the best advice.
The reason I picked 1982 was that was the oldest date portfoliovisualizer would let me do Total Int'l. Not picked on purpose at all.

I complete agree with your last sentence - exactly the message I would want people to get.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by tarheel » Sun Dec 18, 2016 3:42 pm

raven15 wrote:My take away from this experiment was that 1982 was the best year in the history of the US to buy into stocks, so it should come as no surprise that back testing shows US stocks to be the clear winners. For that matter 1982 was the best year in history to buy into US bonds as well. In summary the entire analysis is so heavily biased by the start and end dates that I would call it meaningless. Keeping an internationally diversified porfolio with an equity bias and some bonds for when you need to take money out remains the best advice.
Although.....I would be holding some bonds for portfolio diversification and dry powder, rather than for "when I need to take money out."

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by tarheel » Sun Dec 18, 2016 3:44 pm

whodidntante wrote:Cool. Now what should I hold for the next 34 years?
The appropriate mix of stocks, bonds, and alternatives that matches your need, ability, and willingness to take risk.

For me, that looks like a heavily tilted 80/20 portfolio, but that portfolio is only right for me.....

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by g$$ » Sun Dec 18, 2016 3:45 pm

whodidntante wrote:Cool. Now what should I hold for the next 34 years?
100% equity.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by raven15 » Sun Dec 18, 2016 4:12 pm

tarheel wrote:
raven15 wrote:My take away from this experiment was that 1982 was the best year in the history of the US to buy into stocks, so it should come as no surprise that back testing shows US stocks to be the clear winners. For that matter 1982 was the best year in history to buy into US bonds as well. In summary the entire analysis is so heavily biased by the start and end dates that I would call it meaningless. Keeping an internationally diversified porfolio with an equity bias and some bonds for when you need to take money out remains the best advice.
Although.....I would be holding some bonds for portfolio diversification and dry powder, rather than for "when I need to take money out."
I completely agree with you and sympathize that PV reduced the period of international results to start in 1982 (starting in 1965 would be very different). Actually I was more advising against all the comments suggesting 100% US stock market is obviuosly the best. Well of course it looks best if your period is starting in 1982.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by kolea » Sun Dec 18, 2016 4:17 pm

TomCat96 wrote:What's the lesson to be taken from this?
Two lessons:
- If I could go back to 1982 I would invest 100% US equities. Oh, but I did invest 100% in US equities from 1985 to 2011. I retired in 2013 and am now at 65/35. I am pretty sure I would not have been able to retire when I did with portfolio A, B or C.

- I forgot what the other lesson is, but I am pretty sure it was about not seeing why 40% International is justified from that backtest.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by nisiprius » Sun Dec 18, 2016 8:16 pm

Wakefield1 wrote:...The argument for Stock Indexing is very powerful but is the same argument for Bond indexing as powerful?...
Yes, since it's the same argument. Look at Sharpe's The Arithmetic of Active Management. It applies to any market.

(OK, there is an issue in that the bond market isn't as unified, and--as with the stock market--it's not perfectly clear what "market" you want to invest in, although the Barclay's Aggregate index is pretty reasonable.)
With the current low interest rate environment and the expectation that rates will be rising are high credit quality long bonds at a disadvantage?
Who knows? In April 2014, Bloomberg polled 67 economists for a six-month forecast of the 10-year Treasury rate and 67 out of 67, every single one, predicted a rise. It fell. I think it would be foolish to take very consequential action based on prediction of future interest rates.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by grabiner » Sun Dec 18, 2016 9:01 pm

MN Finance wrote:How many people use intermediate treasury as their bond exposure?
I retried the experiment with Total Bond Market instead; it didn't make much difference in the relative performance. It did change the leader, but only by twelve basis points. The main difference is that Treasuries did very well in 2008, and thus a portfolio which held Treasuries and rebalanced into stocks at the end of 2008 reduced the impact of the market crash.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by nisiprius » Sun Dec 18, 2016 9:18 pm

I think there's a very important lesson to be taken from this. We are constantly reading totally confident-sounding generalizations about how various asset classes behave, or what they "tend to" do, or even what they "do," under various circumstances.

But if you actually go and check that statement for yourself... choosing what seem to you to be perfectly reasonable examples of those kinds of assets, using perfectly reasonable time spans... they very often just do not check out.

The important thing here is to go look for yourself, rather than looking at the particular time spans and mutual funds the writer has chosen to point out. Fact-check everything for yourself.

(I once ran across an article on "ETFs that let you sleep well at night" or some such title. Two of the three actually fell more than Total Stock during 2008-2009. Yes, seriously.)

It doesn't necessarily mean that the claims are completely false, but that they are much less reliable, robust, or certain than you might be led to believe.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by jwillis77373 » Mon Dec 19, 2016 1:30 am

The problem with basing an investment strategy on what we "know" is "what we don't know".

Anyone can construct a strategy based on the Past, [if all variables are held constant, if history repeats or at least rhymes] but even those assumptions make the mistake of "predicting" we know more than "we know".

Fact is History is being manipulated by the observers in everyway imagined, fashionable and unfashionable.

When we are confronted by the realities of the present.. we look to the Past.. and often repeat the same mistakes.. confidently [and] faithfully.

What we can predict are taxes and savings, we know what we spend vs what we save.. we know when we reset our quality of living thermostat.. or indulge.. no one needs reminding of that.

Saving and Investing is as much an exercise in self control and wishful thinking as it is in strategical brilliance.. you get something simply out of putting the money away and learning to live with less spending.

.. of course Compound Interest, Low inflation and Lower tax brackets are always welcome bedtime stories.


Okay how does this tie back into the original post?

In my view very simply.

Back testing matters very little and is dangerous, it assumes the past is prologue and should be heeded with an inordinate confidence in the specifics .. which you can study through back testing... its seductive.. its delusional.. and its intoxicating.

As for 60/40 or 80/20.. its again "assuming" you know more than you probably do.

Stocks and Bonds are investment vehicles, and hedging mechanisms.. trying to out smart the "looser".. but essentially betting with the same chips.

Its more important you save and invest, where saving can only occur after your out of debt.. anything else is "pretending".

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by White Coat Investor » Mon Dec 19, 2016 2:02 am

tarheel wrote:I would recommend that anyone considering investing 100% in equities (0% bonds) perform this very quick thought experiment. I think it's well worth it.

The time period we will consider is 1982-2016 (longest period that portfoliovisualizer has data for Int'l Stock Market).

My first question is, do you consider this a LONG time frame? (I would guess most would say yes).

We are going to consider three representative portfolios, with no home country bias:

Portfolio A: 100% equities (50% Total US Stock Market/50% Int'l Stock Market).
Portfolio B: 80% equities/20% bonds (40% Total US Stock Market/40% Int'l Stock Market/20% Intermediate Term Treasury)
Portfolio C: 60% equities/40% bonds (30% Total US Stock Market/30% Int'l Stock Market/40% Intermediate Term Treasury)

Ok - here are the four simple questions:
1. Which Portfolio had the highest CAGR (compounded annual growth rate)?
2. Which Portfolio had the highest Sharpe ratio?
3. Which investor slept best at night during this period?
4. Which investor is sleeping best at night now, in 2016?

Check out this link at portfoliovisualizer.com for the answer. For extra fun, I'd suggest posting your answers before clicking the link.

https://www.portfoliovisualizer.com/bac ... easury3=40
Okay, I'll play.
1) A
2) B
3) Not sure "portfoliovisualizer" can determine this. If you can define it objectively in some manner, then I guess 3.
4) Again, have no idea what this means. Maybe 1, since he's now the richest.

I assume I'm wrong or this wouldn't have been posted.

Edit: Yup, wrong wrong wrong wrong. Thanks for posting! Very interesting.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by tarheel » Mon Dec 19, 2016 6:06 am

I'm glad some of you are enjoying the post.

Some of you are overthinking it. I am not trying to tell anyone what to invest in. For example, my 1 year old's 529 is 100% equities for the next 2 years :P There are specific cases when that's the right thing to do. All I am saying is that in this particular snapshot in time, which is a snapshot relevant to many of you (I was three years old in 1982), a real healthy dose of bonds cost you nothing and you certainly slept better at night over a long period of time. I agree it is highly unlikely this is going to repeat itself exactly over the next 40 years. That's not the point.

For those saying this proves not to invest internationally, IMO going forward current valuations would suggest the complete opposite. Like domestic equities were on sale in 1982, international is today. So if you think the message is 100% domestic equities, I wish you luck. I'll be there with you with exactly one foot in. In the backtest I went 50/50 US/Int'l to have no home country bias, and many of us think intermediate-term treasury is an excellent bond fund (and as grabiner pointed out, total bond is very similar).

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by Ari » Mon Dec 19, 2016 6:11 am

Here's a longer-term graph:

Image
From this article: https://earlyretirementnow.com/2016/05/ ... tock-risk/

This doesn't exaclty inspire confidence in bonds going forwards.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by Quark » Mon Dec 19, 2016 6:47 am

Ari wrote:...This doesn't exaclty inspire confidence in bonds going forwards.
Considering that the S&P 500 was founded in 1957 as an expansion of a much smaller index from the 1920s, a chart with the S&P 500 back to 1870 doesn't exactly inspire confidence.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by packer16 » Mon Dec 19, 2016 7:42 am

My contention on international is the game in some other countries (non Anglo/Dutch based systems) is played by different rules & these need to be considered. I am also of the belief with these different rules there are unpredictable outcomes, like nationalization & sending profits to other non-shareholder stakeholders so it is impossible for the market accurately include these in pricing until it is too late. Thus for these countries, especially EM, it is very difficult to say what the real price should be. We can estimate the price relative to the Anglo/Dutch market but that leaves out a material factor which the most part is unpredictable. If the stocks in these markets are cheaper & the markets are becoming more like the Anglo/Dutch system then yes you will be rewarded. Countries like Chile, S. Korea etc. However there are others that are going backwards & most are staying the same. IMO when you are investing internationally you are making 2 bets, first on how cheap the stocks are & second how close the system is to the A/D system so you can reap the rewards of the ownership.

IMO some make the naive assumption that those who do not invest or invest very little outside the US have a psychologically based home country bias & thus are passing up higher returns in non A/D markets. I think this is false as there is real reason to not invest in countries where the rules of the game are different because a large number of the time you lose.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by Ari » Mon Dec 19, 2016 8:08 am

Quark wrote:Considering that the S&P 500 was founded in 1957 as an expansion of a much smaller index from the 1920s, a chart with the S&P 500 back to 1870 doesn't exactly inspire confidence.
That's a good catch! Didn't notice it myself. I'm guessing the data comes from Shiller, who uses "S&P composite stock price index". You can read about the data sources here: http://www.econ.yale.edu/~shiller/data.htm. The blog author likely added the "500" him/herself.
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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by Quark » Mon Dec 19, 2016 8:31 am

Ari wrote:
Quark wrote:Considering that the S&P 500 was founded in 1957 as an expansion of a much smaller index from the 1920s, a chart with the S&P 500 back to 1870 doesn't exactly inspire confidence.
That's a good catch! Didn't notice it myself. I'm guessing the data comes from Shiller, who uses "S&P composite stock price index". You can read about the data sources here: http://www.econ.yale.edu/~shiller/data.htm. The blog author likely added the "500" him/herself.
The chart appears to be from Shiller's data, but while his older data is probably the best available information, I wouldn't bet it's all that good. I once wrote to Shiller asking this and he didn't exactly claim it's as good as more current data.

Among the problems with relying on past data are lack of reliable data and comparability of conditions then to conditions now. I believe we have a nice example of these problems. :D

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by DDM4inv79 » Mon Dec 19, 2016 9:38 am

Quark wrote:
Ari wrote:...This doesn't exaclty inspire confidence in bonds going forwards.
Considering that the S&P 500 was founded in 1957 as an expansion of a much smaller index from the 1920s, a chart with the S&P 500 back to 1870 doesn't exactly inspire confidence.
Chill out everybody! Economic and Financial Historians have backfilled the S&P500 to before its official starting date and economic and financial researcher routinely use those data:
* The Ibbotson database goes back to 1926
* Mehra and Prescott (Nobel Laureate) wrote their classic paper on the equity premium with data back to 1889
* Shiller (Nobel Laureate) data on CAPE ratio: Data go back to 1871 (ostensibly the same as the this author data used in this and other studies, e.g. https://earlyretirementnow.com/2016/12/ ... depletion/

So it's not uncommon for Finance and Econ folks to use those data. Also, whether we start in 1871, 1889, 1926 or 1957 the gyst of the story still holds: Equities do really well with a lot of risk, bonds have limited long-term return potential.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by dbr » Mon Dec 19, 2016 9:42 am

DDM4inv79 wrote:
So it's not uncommon for Finance and Econ folks to use those data. Also, whether we start in 1871, 1889, 1926 or 1957 the gyst of the story still holds: Equities do really well with a lot of risk, bonds have limited long-term return potential.
This is exactly right. I think I might suggest better wording for bonds would be "do less well with less risk." As long as we agree to define risk as variability of return and "how things do" as expected return, this is pretty much all there is to be said, which is indeed your point.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by transitional » Mon Dec 19, 2016 11:23 am

Do the conclusions change if you let the initial $10,000 grow vs. add $10,000 every year to your portfolio? Obviously the principle has increased, but I am talking about final difference between 100-0 vs 80-20 vs 60-40 allocation.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by Quark » Mon Dec 19, 2016 11:26 am

DDM4inv79 wrote:
Quark wrote:
Ari wrote:...This doesn't exaclty inspire confidence in bonds going forwards.
Considering that the S&P 500 was founded in 1957 as an expansion of a much smaller index from the 1920s, a chart with the S&P 500 back to 1870 doesn't exactly inspire confidence.
Chill out everybody! Economic and Financial Historians have backfilled the S&P500 to before its official starting date and economic and financial researcher routinely use those data:
* The Ibbotson database goes back to 1926
* Mehra and Prescott (Nobel Laureate) wrote their classic paper on the equity premium with data back to 1889
* Shiller (Nobel Laureate) data on CAPE ratio: Data go back to 1871 (ostensibly the same as the this author data used in this and other studies, e.g. https://earlyretirementnow.com/2016/12/ ... depletion/

So it's not uncommon for Finance and Econ folks to use those data. Also, whether we start in 1871, 1889, 1926 or 1957 the gyst of the story still holds: Equities do really well with a lot of risk, bonds have limited long-term return potential.
That it's not uncommon to use data that isn't very good doesn't mean we should rely on it. For example, there's a fair chance of surviorship bias, which would skew the results.

That leaves more recent data. There isn't enough of that to rely one. How many independent 30 year periods have there been since 1957? Are that many data points a reliable guide?

Also, risk is risky. If we were sure equity would do better (over any time frame), it wouldn't be risky and therefore would not be expected to get a risk premium.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by B4Xt3r » Mon Dec 19, 2016 11:58 am

I'm not sure that I have the full story yet.

Simba's backtesting spreadsheet has comparable interest rates for international (12.17) as US total stock market (11.74) from 1972. If I limit to the data above, i.e. from 1982 those numbers become 12.09 and 12.53 respectively. (12.53/12.09)^(2016-1982) is only a 14% difference higher if one invested totally in US. So it seems that Simba's backtesting spreadsheet says US performed better during that time period, but perhaps not enough to justify a total allocation.

However, portfolio visualize says that US stocks averaged 10.89 from 1982 to 2016, but Ints only had 6.85 percent return. (1.1089/1.0685)^(2016-1982) is 3.53, which means that you'de have a full 253 percent more if you invested 100% US during that time, which could perhaps justify a total allocation.

Obviously this raises questions as to whose numbers are right...

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by Engineer250 » Mon Dec 19, 2016 12:04 pm

tarheel wrote:Some of you are overthinking it. I am not trying to tell anyone what to invest in.
Sure you are, no need to be coy about it.
tarheel wrote:For example, my 1 year old's 529 is 100% equities for the next 2 years :P There are specific cases when that's the right thing to do.
But how well does your 1 year old sleep at night? Have you considered going to a more conservative portfolio so they will sleep better?
Where the tides of fortune take us, no man can know.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by alfaspider » Mon Dec 19, 2016 1:58 pm

Engineer250 wrote:
tarheel wrote:Some of you are overthinking it. I am not trying to tell anyone what to invest in.
Sure you are, no need to be coy about it.
tarheel wrote:For example, my 1 year old's 529 is 100% equities for the next 2 years :P There are specific cases when that's the right thing to do.
But how well does your 1 year old sleep at night? Have you considered going to a more conservative portfolio so they will sleep better?
My 1 month old sleeps terribly and cries several times a day! He must be worried about his portfolio. Poor thing.

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by traveler90 » Mon Dec 19, 2016 3:40 pm

I took it back 6 years prior to make it an even 40 year period and did only US stocks as opposed to a 50/50 domestic/international split.

100/0 beat 80/20 by an entire million and beat the 60/40 by almost 2 million.

Back-testing gets pretty useless once you get too detailed IMO. Anyone can back-test and get to the number they want to support their argument. Not to mention, the global economic environment is always changing. It's a fun exercise but I think it's about as relevant as saying "Well, the Chicago Bears were really good in the 1980s, so therefore they should be good in 2017!"

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by TonyDAntonio » Mon Dec 19, 2016 9:53 pm

My oldest sister was over the other night for an early Xmas dinner. One of the dinner topics: her first mortgage obtained around 1980...18%!!!! But her bonds did really well. :happy

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by tarheel » Tue Dec 20, 2016 6:18 am

traveler90 wrote:I took it back 6 years prior to make it an even 40 year period and did only US stocks as opposed to a 50/50 domestic/international split.

100/0 beat 80/20 by an entire million and beat the 60/40 by almost 2 million.

Back-testing gets pretty useless once you get too detailed IMO. Anyone can back-test and get to the number they want to support their argument. Not to mention, the global economic environment is always changing. It's a fun exercise but I think it's about as relevant as saying "Well, the Chicago Bears were really good in the 1980s, so therefore they should be good in 2017!"
I would say, "Well, the Bears might be atrocious in 2017 so I better have other things to do on my Sunday if they turn out to be horrible, even though they were good in the 80s."

I group up in Boston and still remember the '85 Superbowl (I was six) when they killed the Pats!

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by tarheel » Tue Dec 20, 2016 6:19 am

Engineer250 wrote:
tarheel wrote:Some of you are overthinking it. I am not trying to tell anyone what to invest in.
Sure you are, no need to be coy about it.
tarheel wrote:For example, my 1 year old's 529 is 100% equities for the next 2 years :P There are specific cases when that's the right thing to do.
But how well does your 1 year old sleep at night? Have you considered going to a more conservative portfolio so they will sleep better?
She wakes up with me at 5am everyday and reads Bogleheads, so naw, she's good. :)

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Re: 100% Stocks, Huh? May I Suggest You Read This Thread

Post by CommonCent$ » Wed Dec 21, 2016 6:03 am

badbreath wrote:You need to add one more 100% US total stock market. That one crushes the other three.
Came in here to post the above.

Portfolio Returns

Portfolio performance statistics
# Initial Balance Final Balance CAGR Std.Dev. Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio US Mkt Correlation
1 $10,000 $366,519 10.89% 15.34% 35.79% -37.04% -50.89% 0.50 0.73 1.00
2 $10,000 $217,847 9.25% 12.18% 34.20% -29.79% -43.40% 0.47 0.69 0.91
3 $10,000 $211,197 9.15% 9.28% 29.43% -19.01% -30.89% 0.57 0.86 0.89


PS I think the time period is not "long:
NNN = "Nobody Knows Nothing"

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