Rob Arnott [buy emerging market equities vs. US stocks]

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frankmorris
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Rob Arnott [buy emerging market equities vs. US stocks]

Post by frankmorris » Fri May 12, 2017 10:07 am

Seems like you all have discussed him before as I've searched. Curious on your thoughts with this article:

http://www.cnbc.com/2017/05/11/wall-str ... tocks.html

Makes me want to at least do a bit more research into factor-based investing. After all, I do see "market cap" as a factor. Anything other than owning all stocks in equal proportion, then is sort of factor-tilting.

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David Jay
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Re: Rob Arnott

Post by David Jay » Fri May 12, 2017 10:13 am

Do not watch/read CNBC for anything except pure entertainment. There is a reason why BH call the business media "financial porn", you will get sucked into it and pretty soon you will always be seeking the latest investment "fad".

(and no, I did not watch it)
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Elbowman
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Re: Rob Arnott

Post by Elbowman » Fri May 12, 2017 10:21 am

So I can't verify the numbers he is citing (I think it is PE10, 29 for US, 14-15 for developed international, 11-12 for emerging markets), but if they are accurate then I don't think it is unreasonable that by 2047 emerging markets will have outperformed the US. That doesn't mean it is a free lunch though; they may be reasonably priced given their risk.

CantPassAgain
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Re: Rob Arnott

Post by CantPassAgain » Fri May 12, 2017 10:21 am

My opinion, from reading this and your other posts, is that you are way overthinking this and making it harder than it needs to be for a "beginner".

The most important decision you need to make is your asset allocation, in a nutshell what percentage of stocks do you want and what percentage of "fixed income" (which can be cash, CDs, or various types of bonds) do you want. Then execute on that using broadly diversified, low cost index funds like the various "total market" funds which can be found at Vanguard, Fidelity, Schwaab, etc.

All of this factor based this and that slice this way and that way is maybe a little bit interesting but probably consumes more mental power than it is likely to generate in returns. Focusing on making more money via your career, and saving more are more likely to pay off substantially. Plain-old market returns should be plenty sufficient.

Again, all my opinion.

frankmorris
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Re: Rob Arnott

Post by frankmorris » Fri May 12, 2017 10:51 am

David Jay wrote:Do not watch/read CNBC for anything except pure entertainment. There is a reason why BH call the business media "financial porn", you will get sucked into it and pretty soon you will always be seeking the latest investment "fad".

(and no, I did not watch it)
I am primarily paying attention now to learn the landscape of investing - not necessarily searching for products or fads, but to hear what people are saying. I'm mainly leaning toward passive indexing, but I feel it would be irresponsible of me to simple to not research alternatives, question my assumptions about passive indexing, or take any individual's advice without digging a bit deeper.

I'm lucky because when I started the process I happened first upon information about passive indexing, which I've measured everything else against. Nothing seems to stand up to it at this point.

frankmorris
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Re: Rob Arnott

Post by frankmorris » Fri May 12, 2017 10:52 am

Elbowman wrote:So I can't verify the numbers he is citing (I think it is PE10, 29 for US, 14-15 for developed international, 11-12 for emerging markets), but if they are accurate then I don't think it is unreasonable that by 2047 emerging markets will have outperformed the US. That doesn't mean it is a free lunch though; they may be reasonably priced given their risk.
Particularly if the world economy is evolving & changing. I see a lot of support for passive indexing by citing market returns over decades. It's pretty hard to argue against the fact that global markets are changing. Doesn't mean we can predict winners & losers, but to not have some exposure globally would be unwise. Still, this seems one thing, whereas factor-based investing/smart beta seems to be something different.

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Re: Rob Arnott

Post by frankmorris » Fri May 12, 2017 10:55 am

CantPassAgain wrote:My opinion, from reading this and your other posts, is that you are way overthinking this and making it harder than it needs to be for a "beginner".

The most important decision you need to make is your asset allocation, in a nutshell what percentage of stocks do you want and what percentage of "fixed income" (which can be cash, CDs, or various types of bonds) do you want. Then execute on that using broadly diversified, low cost index funds like the various "total market" funds which can be found at Vanguard, Fidelity, Schwaab, etc.

All of this factor based this and that slice this way and that way is maybe a little bit interesting but probably consumes more mental power than it is likely to generate in returns. Focusing on making more money via your career, and saving more are more likely to pay off substantially. Plain-old market returns should be plenty sufficient.

Again, all my opinion.
Yes, I tend to over-think! Still, I've got a bit of time to research & think, and I don't believe I'd be able to "stay the course" if I didn't do my due diligence by considering all the options out there. I might likely second guess myself in 5 years because I would be wondering "what if?"

I think we live in a world rife with "confirmation bias" - finding information that simply supports your current thought pattern. If I'm going to give money to anyone/anything, I want to do my best to break it down and understand the mechanics of it. I'm leaning toward passive indexing, but I want to challenge my thinking and assumptions, allowing people that disagree with me a full opportunity to convince me that I'm wrong.

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Re: Rob Arnott

Post by asif408 » Fri May 12, 2017 11:03 am

Nothing surprising or really exciting in this article. Arnott is a big proponent of CAPE and valuation based investing. Just typical CNBC clickbait at its finest, putting quotes around "very worried". If you are well diversified and have the proper stock/bond allocation for your risk you shouldn't ever be worried about your overall portfolio. Proper diversification means you will always have something performing poorly. The last several years (until February 2016) that has been international & emerging markets stocks. Maybe in the future it will be something else.

CantPassAgain
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Re: Rob Arnott

Post by CantPassAgain » Fri May 12, 2017 11:17 am

frankmorris wrote:Yes, I tend to over-think! Still, I've got a bit of time to research & think, and I don't believe I'd be able to "stay the course" if I didn't do my due diligence by considering all the options out there. I might likely second guess myself in 5 years because I would be wondering "what if?"

I think we live in a world rife with "confirmation bias" - finding information that simply supports your current thought pattern. If I'm going to give money to anyone/anything, I want to do my best to break it down and understand the mechanics of it. I'm leaning toward passive indexing, but I want to challenge my thinking and assumptions, allowing people that disagree with me a full opportunity to convince me that I'm wrong.
You need to get over the what ifs and second guessing. You are in for a lifetime of investment misery with that mode of thinking. There is always something else that is going to beat the pants off of whatever you are doing.

"The enemy of a good plan is the search for a perfect plan."

That is why passive indexing works. Your investment is the benchmark. Everyone is out there trying to beat the benchmark, but not everyone can because collectively everyone is the benchmark. Not everyone can be better than average, see?

But what people miss is that, in investing, being average has been great historically. And after costs, you actually come out slightly better than average.

You need to let that sink in and burn itself into your brain. Then you are on your way to true enlightenment and inner peace :)

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David Jay
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Re: Rob Arnott

Post by David Jay » Fri May 12, 2017 11:19 am

frankmorris wrote:
David Jay wrote:Do not watch/read CNBC for anything except pure entertainment. There is a reason why BH call the business media "financial porn", you will get sucked into it and pretty soon you will always be seeking the latest investment "fad".

(and no, I did not watch it)
I am primarily paying attention now to learn the landscape of investing - not necessarily searching for products or fads, but to hear what people are saying. I'm mainly leaning toward passive indexing, but I feel it would be irresponsible of me to simple to not research alternatives, question my assumptions about passive indexing, or take any individual's advice without digging a bit deeper.

I'm lucky because when I started the process I happened first upon information about passive indexing, which I've measured everything else against. Nothing seems to stand up to it at this point.
I recommend you read some good books, such as those listed on the WIKI Startup Kit page here: https://www.bogleheads.org/wiki/Boglehe ... art-up_kit

For thoughtful understanding of the investing world I recommend "A Random Walk Down Wall Street". Bernstein's "4 Pillars" and Rick Ferri's "All About Asset Allocation" are also very good.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

CantPassAgain
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Re: Rob Arnott

Post by CantPassAgain » Fri May 12, 2017 11:26 am

frankmorris wrote:I am primarily paying attention now to learn the landscape of investing - not necessarily searching for products or fads, but to hear what people are saying. I'm mainly leaning toward passive indexing, but I feel it would be irresponsible of me to simple to not research alternatives, question my assumptions about passive indexing, or take any individual's advice without digging a bit deeper.

I'm lucky because when I started the process I happened first upon information about passive indexing, which I've measured everything else against. Nothing seems to stand up to it at this point.
Just saw this and would like to add: The largest retirement plan in the United States (as far as I know), the Federal Thrift Savings Plan, is based on passive indexing. Check it out:

https://www.tsp.gov/InvestmentFunds/Fun ... index.html

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Re: Rob Arnott

Post by QuietProsperity » Fri May 12, 2017 11:40 am

I think making adjustments on the margins is fine if you have really done your homework and know yourself, because chances are you will be "early" in these decisions.

Bogle, Bernstein, Ferri etc. are comfortable with the idea of adjusting strategic AAs as long as you stick with it. It is sometimes called "over re-balancing".

For example, for my own portfolio, I have equity allocation ranges for US Stocks (50-70), Developed ex US (20-40) and Emerging (5-15). My decisions are based on long-term values and relative returns. I make my decision at the beginning of every year and in most years, no changes are made (Last change was Jan 2016...no change at the start of this year).

I am comfortable with this strategy.

Do I think it is going to add some massive out-performance? No. I expect that in my lifetime this will add something like 0.25%-0.5% in annual returns.

More importantly, it helps me with my behaviors as I do believe that long-term values matter and this strategy allows me to follow that belief by tilting towards under-valued areas without letting it get out of hand (i.e. 100% EM right now :shock: ).

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Re: Rob Arnott

Post by garlandwhizzer » Fri May 12, 2017 11:41 am

I tend to agree with Arnott's thesis that US equities are vulnerable to underperformance relative to INTL going forward. There are significant valuation differences in these markets especially with EM but even with DM. On the other hand there is also increased perceived risk in INTL markets. The question each of us must answer is whether the extra potential gain is worth the extra potential risk. The US has handily outperformed INTL for a long long time which is part of what has created these valuation differences. There is a real possibility that the tide will reverse in the future but no one knows for sure.

I believe the best defense against that uncertainty of which will outperform/underperform going forward is simply to have significant exposure to all 3 (US,DM, EM) rather than to make a huge bet on the one that you believe will be the winner. Many US-only investors have been well rewarded for decades in avoiding INTL, but there is a real chance, given current valuations as well as macroeconomic factors, that the future may not be a replay of the past. Personally I believe we are in a low expected return environment for all assets going forward, especially "safe" assets. If your future financial goals require significant real portfolio appreciation, accepting some risk (like INTL exposure) may be necessary in this environment. It wasn't always that way but I believe that's what we're stuck with now.

Garland Whizzer

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Re: Rob Arnott

Post by frankmorris » Fri May 12, 2017 11:42 am

CantPassAgain wrote:
frankmorris wrote:Yes, I tend to over-think! Still, I've got a bit of time to research & think, and I don't believe I'd be able to "stay the course" if I didn't do my due diligence by considering all the options out there. I might likely second guess myself in 5 years because I would be wondering "what if?"

I think we live in a world rife with "confirmation bias" - finding information that simply supports your current thought pattern. If I'm going to give money to anyone/anything, I want to do my best to break it down and understand the mechanics of it. I'm leaning toward passive indexing, but I want to challenge my thinking and assumptions, allowing people that disagree with me a full opportunity to convince me that I'm wrong.
You need to get over the what ifs and second guessing. You are in for a lifetime of investment misery with that mode of thinking. There is always something else that is going to beat the pants off of whatever you are doing.

"The enemy of a good plan is the search for a perfect plan."

That is why passive indexing works. Your investment is the benchmark. Everyone is out there trying to beat the benchmark, but not everyone can because collectively everyone is the benchmark. Not everyone can be better than average, see?

But what people miss is that, in investing, being average has been great historically. And after costs, you actually come out slightly better than average.

You need to let that sink in and burn itself into your brain. Then you are on your way to true enlightenment and inner peace :)
I love that quote about the enemy of the good plan. Yes, I hear you, and support what you're saying. My plan for my process is to spend a few more months or so more heavily reading, researching, and evaluating different funds, companies, allocation formulas, etc. - not to spend 2 hours a day for the rest of my life watching CNBC.

Thanks again

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Re: Rob Arnott

Post by frankmorris » Fri May 12, 2017 11:43 am

garlandwhizzer wrote:I tend to agree with Arnott's thesis that US equities are vulnerable to underperformance relative to INTL going forward. There are significant valuation differences in these markets especially with EM but even with DM. On the other hand there is also increased perceived risk in INTL markets. The question each of us must answer is whether the extra potential gain is worth the extra potential risk. The US has handily outperformed INTL for a long long time which is part of what has created these valuation differences. There is a real possibility that the tide will reverse in the future but no one knows for sure.

I believe the best defense against that uncertainty of which will outperform/underperform going forward is simply to have significant exposure to all 3 (US,DM, EM) rather than to make a huge bet on the one that you believe will be the winner. Many US-only investors have been well rewarded for decades in avoiding INTL, but there is a real chance, given current valuations as well as macroeconomic factors, that the future may not be a replay of the past. Personally I believe we are in a low expected return environment for all assets going forward, especially "safe" assets. If your future financial goals require significant real portfolio appreciation, accepting some risk (like INTL exposure) may be necessary in this environment. It wasn't always that way but I believe that's what we're stuck with now.

Garland Whizzer
Thanks for your comments. I've seen comments about expecting lower returns in the near future, but haven't quite understood those predictions - especially in light of common wisdom on this forum that no one can predict the future. How have you come to the conclusion that the future won't be as successful as the past?

frankmorris
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Re: Rob Arnott

Post by frankmorris » Fri May 12, 2017 11:45 am

QuietProsperity wrote:I think making adjustments on the margins is fine if you have really done your homework and know yourself, because chances are you will be "early" in these decisions.

Bogle, Bernstein, Ferri etc. are comfortable with the idea of adjusting strategic AAs as long as you stick with it. It is sometimes called "over re-balancing".

For example, for my own portfolio, I have equity allocation ranges for US Stocks (50-70), Developed ex US (20-40) and Emerging (5-15). My decisions are based on long-term values and relative returns. I make my decision at the beginning of every year and in most years, no changes are made (Last change was Jan 2016...no change at the start of this year).

I am comfortable with this strategy.

Do I think it is going to add some massive out-performance? No. I expect that in my lifetime this will add something like 0.25%-0.5% in annual returns.

More importantly, it helps me with my behaviors as I do believe that long-term values matter and this strategy allows me to follow that belief by tilting towards under-valued areas without letting it get out of hand (i.e. 100% EM right now :shock: ).
That's an interesting strategy - using ranges, and making adjustments annually. Seems like a decent way of giving yourself a tiny bit of leeway without changing too often or too much.

frankmorris
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Re: Rob Arnott

Post by frankmorris » Fri May 12, 2017 12:00 pm

David Jay wrote:
frankmorris wrote:
David Jay wrote:Do not watch/read CNBC for anything except pure entertainment. There is a reason why BH call the business media "financial porn", you will get sucked into it and pretty soon you will always be seeking the latest investment "fad".

(and no, I did not watch it)
I am primarily paying attention now to learn the landscape of investing - not necessarily searching for products or fads, but to hear what people are saying. I'm mainly leaning toward passive indexing, but I feel it would be irresponsible of me to simple to not research alternatives, question my assumptions about passive indexing, or take any individual's advice without digging a bit deeper.

I'm lucky because when I started the process I happened first upon information about passive indexing, which I've measured everything else against. Nothing seems to stand up to it at this point.
I recommend you read some good books, such as those listed on the WIKI Startup Kit page here: https://www.bogleheads.org/wiki/Boglehe ... art-up_kit

For thoughtful understanding of the investing world I recommend "A Random Walk Down Wall Street". Bernstein's "4 Pillars" and Rick Ferri's "All About Asset Allocation" are also very good.
Thanks David Jay - I'm happy to report that I already checked out that wiki, and actually just finished the Bogleheads books a few days ago. I need to check out that

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Re: Rob Arnott

Post by Christine_NM » Fri May 12, 2017 12:47 pm

If I were "very worried" about US stocks, I'd put new money in Treasurys, not emerging markets. That's Asset Allocation 101.

Recognize that all financial media is aimed at selling you something, not in rational discussion of your alternatives.

Sometimes, starting something new, it is hard to know when you are finished. You have found Jack Bogle and that should be the end of your search.
10% cash 45% stock 45% bond. Retired, w/d rate 1.5%

lazyday
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Re: Rob Arnott

Post by lazyday » Fri May 12, 2017 1:26 pm

frankmorris wrote:I've seen comments about expecting lower returns in the near future, but haven't quite understood those predictions - especially in light of common wisdom on this forum that no one can predict the future. How have you come to the conclusion that the future won't be as successful as the past?
I think that you can predict the future, if you're willing to wait a decade or so, and take a loose probabilistic expected value view.

The Dividend Discount Model can be applied to an entire stock market. Also there's models that use CAPE to directly predict mid-long term expected returns.

Both AQR and Research Affiliates provide predictions and give detailed methodology showing how they made those predictions.

RA starts with the DDM and refines the answer such as by using CAPE to let valuations return halfway to the average. I think AQR mixes the DDM and a CAPE model? I don't recall for sure, but the methodology paper will tell.

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Re: Rob Arnott

Post by frankmorris » Fri May 12, 2017 2:00 pm

lazyday wrote:
frankmorris wrote:I've seen comments about expecting lower returns in the near future, but haven't quite understood those predictions - especially in light of common wisdom on this forum that no one can predict the future. How have you come to the conclusion that the future won't be as successful as the past?
I think that you can predict the future, if you're willing to wait a decade or so, and take a loose probabilistic expected value view.

The Dividend Discount Model can be applied to an entire stock market. Also there's models that use CAPE to directly predict mid-long term expected returns.

Both AQR and Research Affiliates provide predictions and give detailed methodology showing how they made those predictions.

RA starts with the DDM and refines the answer such as by using CAPE to let valuations return halfway to the average. I think AQR mixes the DDM and a CAPE model? I don't recall for sure, but the methodology paper will tell.
Just read through (somewhat) of the AQR article, and have to admit it's a bit (or a lot) above my head. Is there anywhere which describes the overall approach or thought process in less technical terms?

Interestingly, the article did suggest a large benefit of using factors in portfolio construction.

And this graphic predicts TIPS to outperform stocks over the next 10 years? https://www.researchaffiliates.com/en_u ... ation.html

If everyone is believing this, why is anyone still investing in US large cap stocks? Real growth rate of 0.6%? Why would anyone invest in stocks?

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Re: Rob Arnott

Post by frankmorris » Fri May 12, 2017 3:51 pm

To follow up, I just spent a bit reading to educate myself on the logic behind 7-10 year projected returns, and I think I have a slightly better sense.

That being said, I've not seen any predictions beyond that, so if it's true that "this time it's NOT different," then an investment horizon of 30-40 years should, again, lead to average returns from the past 100 years. Unless this time IS different, in which case even the near-term predictions may be rendered useless.

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Re: Rob Arnott

Post by lazyday » Fri May 12, 2017 5:37 pm

frankmorris wrote:Just read through (somewhat) of the AQR article, and have to admit it's a bit (or a lot) above my head. Is there anywhere which describes the overall approach or thought process in less technical terms?
If you still want to read more, you can also try the RA methodology papers.

William Bernstein covered the DDM a little in Four Pillars of Investing, I think. Also try "Gordon Equation" if you're searching electronically.

To be honest, I've never been comfortable with the DDM myself. I just accept it as a tool that's much better than nothing.
And this graphic predicts TIPS to outperform stocks over the next 10 years? https://www.researchaffiliates.com/en_u ... ation.html
RA assumes stock prices will become cheaper, so that makes the 10 year prediction lower. A 30 year prediction would be higher, since stocks are cheaper after the first 10 years.

AQR does not assume stocks get cheaper, and came up with about 4% real. I don't think extending to 30 years would change their prediction.
If everyone is believing this, why is anyone still investing in US large cap stocks? Real growth rate of 0.6%? Why would anyone invest in stocks?
I do think it's quite possible that US stocks can return .6% or worse in the next 10 years. And worse than, say 3% over 30 years. But I need better returns than bonds over the next few decades.

More than half of my equities are outside of US, which helps portfolio expected returns.

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Re: Rob Arnott

Post by sschullo » Fri May 12, 2017 6:03 pm

David Jay wrote:Do not watch/read CNBC for anything except pure entertainment. There is a reason why BH call the business media "financial porn", you will get sucked into it and pretty soon you will always be seeking the latest investment "fad".

(and no, I did not watch it)
+1,000,000!!! Never ever take anything seriously from the business or financial media to use in your plan. NEVER! There are a one or two absolutes in the investing process, and this is one of them.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: Rob Arnott

Post by frankmorris » Fri May 12, 2017 6:17 pm

lazyday wrote:
frankmorris wrote:Just read through (somewhat) of the AQR article, and have to admit it's a bit (or a lot) above my head. Is there anywhere which describes the overall approach or thought process in less technical terms?
If you still want to read more, you can also try the RA methodology papers.

William Bernstein covered the DDM a little in Four Pillars of Investing, I think. Also try "Gordon Equation" if you're searching electronically.

To be honest, I've never been comfortable with the DDM myself. I just accept it as a tool that's much better than nothing.
And this graphic predicts TIPS to outperform stocks over the next 10 years? https://www.researchaffiliates.com/en_u ... ation.html
RA assumes stock prices will become cheaper, so that makes the 10 year prediction lower. A 30 year prediction would be higher, since stocks are cheaper after the first 10 years.

AQR does not assume stocks get cheaper, and came up with about 4% real. I don't think extending to 30 years would change their prediction.
If everyone is believing this, why is anyone still investing in US large cap stocks? Real growth rate of 0.6%? Why would anyone invest in stocks?
I do think it's quite possible that US stocks can return .6% or worse in the next 10 years. And worse than, say 3% over 30 years. But I need better returns than bonds over the next few decades.

More than half of my equities are outside of US, which helps portfolio expected returns.
Thanks for the links/ideas - will look them up. Some of it definitely seems beyond my math capabilities.

So, with the LONG-long-term (i.e., 20-40 years), I'd find it hard to believe that any model would be that good at predicting. I think things just change too much. If they're basing their projections off of CAPE, dividend rates, interest rates, GDP expansion/growth, earnings growth, wage growth, etc. those could all very much change.

The more I think about the 10 year projections, the more I see them as just reversion to mean. Over the history of the market, things go up, then they go down, then up, then down, etc. If things are up right now, chances are they'll be down sometime in the next 10 years. Factor in a total loss at some point in that time frame, and that will just about get you there.

Another random thought on the CAPE - it's essentially a 10-year rolling P/E ratio, right? What would happen if we extended that to a 20-year rolling window? I wonder if the double setbacks in the 2000s would alter forward projections. Pro-growth arguments I've heard recently are that things have been "so good for so long" because they weren't for a while. Well, they were for a few years, but the net gain over the 2000s didn't amount to much. Maybe we're just playing catch up?

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Re: Rob Arnott

Post by Waba » Sat May 13, 2017 12:44 am

frankmorris wrote:That being said, I've not seen any predictions beyond that, so if it's true that "this time it's NOT different," then an investment horizon of 30-40 years should, again, lead to average returns from the past 100 years. Unless this time IS different, in which case even the near-term predictions may be rendered useless.
Yes, i think this is generally true.

You can refine that viewpoint a bit and say that the most likely "possible" outcomes for the next 30 years can be found by looking at the 70 periods of 30 years that we had in the last 100 years.

See for example this post on the different outcomes that investing for 30-years had during the last century: viewtopic.php?f=10&t=128447&start=50#p1892407

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Re: Rob Arnott

Post by lazyday » Sat May 13, 2017 1:45 am

frankmorris wrote:So, with the LONG-long-term (i.e., 20-40 years), I'd find it hard to believe that any model would be that good at predicting. I think things just change too much.
I agree, but in my opinion it's better than just using historical returns as a best guess. Think of a Japanese investor in 1990, or US in 2000.
Another random thought on the CAPE - it's essentially a 10-year rolling P/E ratio, right? What would happen if we extended that to a 20-year rolling window?
I think in backtesting, PE20 was seen as worse for predicting future returns. Shiller said something about including a full business cycle to avoid the problem with current PE that earnings might be temporarily high or low. 10 years was said to be a good length in general.
, but the net gain over the 2000s didn't amount to much. Maybe we're just playing catch up?
Or those poor returns were making up for manic excessive returns in the 1990s.

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Re: Rob Arnott [buy emerging market equities vs. US stocks]

Post by gtwhitegold » Sat May 13, 2017 7:48 am

I personally think that overweighting emerging markets vice international developed markets is a good idea if you believe that they will continue to have lower correlations with US equities than international developed markets. I personally believe this, so I am overweight emerging markets relative to international developed markets.

I also believe that emerging markets are riskier than developed markets and are expected to have a risk premium over time.

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Re: Rob Arnott

Post by frankmorris » Sat May 13, 2017 9:32 am

Waba wrote:
frankmorris wrote:That being said, I've not seen any predictions beyond that, so if it's true that "this time it's NOT different," then an investment horizon of 30-40 years should, again, lead to average returns from the past 100 years. Unless this time IS different, in which case even the near-term predictions may be rendered useless.
Yes, i think this is generally true.

You can refine that viewpoint a bit and say that the most likely "possible" outcomes for the next 30 years can be found by looking at the 70 periods of 30 years that we had in the last 100 years.

See for example this post on the different outcomes that investing for 30-years had during the last century: viewtopic.php?f=10&t=128447&start=50#p1892407
These graphs you've linked are interesting - my take home is that, because returns vary greatly based on entry/exit points, that's essentially market-timing, and for those of us that want to use our money - not just get the max return at date of death, we should move more gradually in and out of the market (e.g., gradually transition to safer returns over time). Thinking that we'll just do a massive readjustment when we turn a certain age may not work too well.

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Re: Rob Arnott

Post by frankmorris » Sat May 13, 2017 9:34 am

Another random thought on the CAPE - it's essentially a 10-year rolling P/E ratio, right? What would happen if we extended that to a 20-year rolling window?
I think in backtesting, PE20 was seen as worse for predicting future returns. Shiller said something about including a full business cycle to avoid the problem with current PE that earnings might be temporarily high or low. 10 years was said to be a good length in general.
That's interesting, and I think it makes sense. Your comment below about the 2000s being a reversion to mean, about our current economy being the reversion, is an interesting one as well.
, but the net gain over the 2000s didn't amount to much. Maybe we're just playing catch up?
Or those poor returns were making up for manic excessive returns in the 1990s.[/quote]

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Re: Rob Arnott [buy emerging market equities vs. US stocks]

Post by whodidntante » Sat May 13, 2017 9:42 am

Owning EM as part of your asset allocation is a sensible thing to do. But I'm guessing that is not what CNBC told you. It was probably confusing, confusing, confusing do something vague but only if the phase of the moon is right. Thanks to our guest for being smarter than us.

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Re: Rob Arnott [buy emerging market equities vs. US stocks]

Post by frankmorris » Sat May 13, 2017 10:11 am

whodidntante wrote:Owning EM as part of your asset allocation is a sensible thing to do. But I'm guessing that is not what CNBC told you. It was probably confusing, confusing, confusing do something vague but only if the phase of the moon is right. Thanks to our guest for being smarter than us.
I don't think they've been that cryptic ;). My sense, from watching CNBC, is that a major issue is noise - seeing the bigger picture, and ignoring the day-to-day.

I think the EM advice has probably been broadcasted widely, though this week the CNBC folks are all about Europe.

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Re: Rob Arnott [buy emerging market equities vs. US stocks]

Post by nedsaid » Sat May 13, 2017 11:18 am

frankmorris wrote:Seems like you all have discussed him before as I've searched. Curious on your thoughts with this article:

http://www.cnbc.com/2017/05/11/wall-str ... tocks.html

Makes me want to at least do a bit more research into factor-based investing. After all, I do see "market cap" as a factor. Anything other than owning all stocks in equal proportion, then is sort of factor-tilting.
I think Arnott is on to something here. It is pretty obvious that U.S. Stocks are more expensive than Developed Market Stocks which are relatively cheap. Emerging Market Stocks are cheaper still. The thing is, it is all a matter of degree. I believe that investors should be in there buying foreign equities and increasing their commitment to them but I don't believe that investors should be "avoiding" U.S. Stocks. What I would recommend is somewhat less U.S. Stocks and somewhat more International Stocks.

Valuations don't happen in a vacuum. U.S. Stocks are more expensive for several reasons, one big reason is that the U.S. is seen as the safe haven for the world, another reason are the well publicized problems in Europe. U.S. markets are also among the most liquid and the most transparent and the best regulated in the world. Another factor in high P/E ratios in the United States is the very strong U.S. Dollar. Emerging Markets are cheap because of the end of the commodity boom which occurred about 2008. EM countries tend to be very natural resource dependent.

This is about buying cheap assets and not trying to time the markets. Again, I do not recommend abandoning U.S. Stocks.
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Re: Rob Arnott

Post by NibbanaBanana » Sat May 13, 2017 11:39 am

frankmorris wrote:
CantPassAgain wrote:My opinion, from reading this and your other posts, is that you are way overthinking this and making it harder than it needs to be for a "beginner".

The most important decision you need to make is your asset allocation, in a nutshell what percentage of stocks do you want and what percentage of "fixed income" (which can be cash, CDs, or various types of bonds) do you want. Then execute on that using broadly diversified, low cost index funds like the various "total market" funds which can be found at Vanguard, Fidelity, Schwaab, etc.

All of this factor based this and that slice this way and that way is maybe a little bit interesting but probably consumes more mental power than it is likely to generate in returns. Focusing on making more money via your career, and saving more are more likely to pay off substantially. Plain-old market returns should be plenty sufficient.

Again, all my opinion.
Yes, I tend to over-think! Still, I've got a bit of time to research & think, and I don't believe I'd be able to "stay the course" if I didn't do my due diligence by considering all the options out there. I might likely second guess myself in 5 years because I would be wondering "what if?"

I think we live in a world rife with "confirmation bias" - finding information that simply supports your current thought pattern. If I'm going to give money to anyone/anything, I want to do my best to break it down and understand the mechanics of it. I'm leaning toward passive indexing, but I want to challenge my thinking and assumptions, allowing people that disagree with me a full opportunity to convince me that I'm wrong.
I agree. I think you should learn all that you can about all the pros and cons of the different investment techniques. When I first started investing it was pre internet. Not a lot of readily available information. I bought individual issue stocks because that's what my dad did and what he told me to do. I was aware of mutual funds but a lot of them were high load, and that wasn't the direction that I was being steered anyway. I can't give you any numbers, but I'm sure I would have done better if I had bought Vanguard funds from the get go. That said, you can avoid market bubbles with individual stocks. Which is a good thing.

Whatever you decide, make absolutely certain that you read Jon Bogle's book "Bogle on Mutual Funds" or "Little Common Sense Book of Investing".

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Re: Rob Arnott

Post by nedsaid » Sat May 13, 2017 11:49 am

NibbanaBanana wrote: That said, you can avoid market bubbles with individual stocks. Which is a good thing.
I would never make this claim. What I will say is that you can avoid the worst of the damage by keeping an eye on value. Refusing to chase what is hot and refusing to buy what is speculative will help limit the damage but when a bubble bursts, all stocks will fall, though some less than others.
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Re: Rob Arnott [buy emerging market equities vs. US stocks]

Post by frankmorris » Sat May 13, 2017 1:00 pm

Thanks everyone - the education shall continue....

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Re: Rob Arnott

Post by NibbanaBanana » Sun May 14, 2017 9:24 am

nedsaid wrote:
NibbanaBanana wrote: That said, you can avoid market bubbles with individual stocks. Which is a good thing.
I would never make this claim. What I will say is that you can avoid the worst of the damage by keeping an eye on value. Refusing to chase what is hot and refusing to buy what is speculative will help limit the damage but when a bubble bursts, all stocks will fall, though some less than others.
I would say that nobody can avoid stock market crashes or down turns. This is definitely true. But speculative market bubbles can be avoided simply by not participating in those sectors of the market.

The speculative mania of the "new era" economy and the TMT (technology, media, telecommunications) bubble of 2000 was, for the most part, confined to those areas. (The level of ridiculousity in valuations for those stocks could only be measured in tulips.) The NASDAQ index fell by 50% over the ensuing year but the DOW was pretty much flat. And many, more value oriented, funds and stocks were up nicely in 2000. I know people who were in TMT funds and lost 90%. And that was a permanent loss of capital. The crash of the following years did take the tide out for all boats though. But that was all boats. And that was a separate event.

As far as I can see, that TMT bubble was very easy to avoid. I completely avoided it myself by simply not speculating in those insane TMT stocks. (Kind of analogous to NINJA mortgages of the real estate bubble.) Many others avoided it too. That was a classic speculative bubble. Different from a broad market crash which is pretty much impossible to avoid. There are some excellent books on bubbles though out history. "Devil Take the Hindmost: A History of Speculation" is one.

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Re: Rob Arnott

Post by nedsaid » Sun May 14, 2017 10:28 am

NibbanaBanana wrote:
nedsaid wrote:
NibbanaBanana wrote: That said, you can avoid market bubbles with individual stocks. Which is a good thing.
I would never make this claim. What I will say is that you can avoid the worst of the damage by keeping an eye on value. Refusing to chase what is hot and refusing to buy what is speculative will help limit the damage but when a bubble bursts, all stocks will fall, though some less than others.
I would say that nobody can avoid stock market crashes or down turns. This is definitely true. But speculative market bubbles can be avoided simply by not participating in those sectors of the market.

The speculative mania of the "new era" economy and the TMT (technology, media, telecommunications) bubble of 2000 was, for the most part, confined to those areas. (The level of ridiculousity in valuations for those stocks could only be measured in tulips.) The NASDAQ index fell by 50% over the ensuing year but the DOW was pretty much flat. And many, more value oriented, funds and stocks were up nicely in 2000. I know people who were in TMT funds and lost 90%. And that was a permanent loss of capital. The crash of the following years did take the tide out for all boats though. But that was all boats. And that was a separate event.

As far as I can see, that TMT bubble was very easy to avoid. I completely avoided it myself by simply not speculating in those insane TMT stocks. (Kind of analogous to NINJA mortgages of the real estate bubble.) Many others avoided it too. That was a classic speculative bubble. Different from a broad market crash which is pretty much impossible to avoid. There are some excellent books on bubbles though out history. "Devil Take the Hindmost: A History of Speculation" is one.
I went into the 2000-2002 bear market with about 80% stocks and 20% bonds. My losses, peak to trough, were about 32%. The brokerage IRA with the individual stocks dropped the same as the broad market and rebounded when the market rebounded. The other retirement accounts that I had did better. My losses would have been even less except that I took a drubbing in Lucent, sold that and took losses in Nortel. While painful, my losses were bearable. I didn't chase the high tech and internet stuff, Hewlett-Packard and Lucent were about as wild as I got.

The 2008-2009 bear market was a different story. I had 72% stocks and 28% bonds going into that bear market and my peak to trough losses were about 35%. The things that helped in 2000-2002, like Value, Real Estate, Mid-Caps, and International; fell as hard as everything else so I didn't get the diversification effect. Pretty much, bonds really helped cushion the losses.

You are right about 2000-2002, you could have avoided most of the bubble if you had been invested properly and not chased the bubble stocks. I don't see how anyone could have avoided 2008-2009, that was a whole different situation. Wasn't much save for treasuries and certain government agency bonds that worked during the financial crisis.
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Re: Rob Arnott [buy emerging market equities vs. US stocks]

Post by garlandwhizzer » Sun May 14, 2017 11:20 am

frankmorris wrote:
Thanks for your comments. I've seen comments about expecting lower returns in the near future, but haven't quite understood those predictions - especially in light of common wisdom on this forum that no one can predict the future. How have you come to the conclusion that the future won't be as successful as the past?
My conclusion, like the opposite conclusion that others hold on this question of home equity bias, is merely a guess, an educated guess I hope. The market's future is both unknown and unknowable. That means that my assessment may be wrong. That also means that the alternate assessment based on long term historical averages, expecting them to continue in lockstep into the future may also be flawed.

There are some macroeconomic issues we currently have in the US which we have never had in our history. Among these are massive levels of debt, both governmental and personal, aging demographics with greatly increased lifespans meaning more years of asset depleting retirement relative to years of asset creating productive work, the woeful state of preparation for this retirement crisis with massive levels of future financial needs and many potential retirees living paycheck to paycheck and rather heavily indebted, the persistently declining rate of labor productivity in the US which has been going one for more than a decade and is currently approaching zero, and finally due to all the above tepid levels of economic growth in the US, quite different from any prior US recovery, which may in fact be a secular change that will persist for another decade or more. These factors were either not present or less pronounced in the rosy economic past where equity returns were high, debt levels were low, life expectancy was shorter, retirement was funded largely by defined benefit plans, productivity growth was robust, and a blue collar worker could buy a house and support a family on one income. Those days appear to be behind us to some degree. So I think it may not be accurate to assume that US equity returns are going to keep on at the same pace for the next century.

All the problems above are either absent or less severe in EM where economic growth is robust, populations are younger, productivity growth is strong, and personal debt levels are low while personal savings levels are high relative the US, and valuations relative the US are compelling. Against these EM pluses are the minuses of increased corruption, inefficient state owned enterprises, more lax enforcement of financial law and intellectual property rights, and more political uncertainty. Net net I don't know who will wind up outperforming which is why I own all of it: US, DM, and EM.

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Re: Rob Arnott

Post by bradshaw1965 » Sun May 14, 2017 11:27 am

QuietProsperity wrote:I think making adjustments on the margins is fine if you have really done your homework and know yourself, because chances are you will be "early" in these decisions.
That's been my experience as well, always early even when just shifting at the margins. I have a bit of small value but my experiences make me steer away from taking a deep dive into factor investing. I'm glad I passed on the fascination with commodities a few years ago, not sure how I'd be unraveling that piece of business now.

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Re: Rob Arnott

Post by NibbanaBanana » Sun May 14, 2017 1:49 pm

nedsaid wrote: I went into the 2000-2002 bear market with about 80% stocks and 20% bonds. My losses, peak to trough, were about 32%. The brokerage IRA with the individual stocks dropped the same as the broad market and rebounded when the market rebounded. The other retirement accounts that I had did better. My losses would have been even less except that I took a drubbing in Lucent, sold that and took losses in Nortel. While painful, my losses were bearable. I didn't chase the high tech and internet stuff, Hewlett-Packard and Lucent were about as wild as I got.

The 2008-2009 bear market was a different story. I had 72% stocks and 28% bonds going into that bear market and my peak to trough losses were about 35%. The things that helped in 2000-2002, like Value, Real Estate, Mid-Caps, and International; fell as hard as everything else so I didn't get the diversification effect. Pretty much, bonds really helped cushion the losses.

You are right about 2000-2002, you could have avoided most of the bubble if you had been invested properly and not chased the bubble stocks. I don't see how anyone could have avoided 2008-2009, that was a whole different situation. Wasn't much save for treasuries and certain government agency bonds that worked during the financial crisis.
Well, again, I consider the TMT bubble and the stock market crash that started in 2001 to be two separate but adjacent events. The former being a full blown speculative frenzy and the latter a market crash precipitated for the most part by 9/11 and the accounting scandals of Enron, Worldcom, and Tyco.

I don't think anyone would argue that the crash 2008-2009 wasn't directly caused by the speculative bubble in real estate. I was entirely aware of this real estate bubble as were just about everybody else I knew. It would have been hard not to be aware of it as it was continually written up in the media. I don't think all that many saw the connection to the global financial system. I did notice my bank stocks were flying high due to rapidly growing earnings from "fee" income. I had no idea of course that these "fees" were for packaging and selling CDO's and other derivatives that were based on toxic NINJA mortgages. Way over my head.

I almost feel lucky to have lived through (and survived) that TMT bubble of 2000 as it was one of a handful of classic, textbook cases of speculative manias in recorded history. And we witnessed it firsthand. Probably not going to be another one like that in my lifetime. If you study the history, they all have many features in common. Interesting.

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Re: Rob Arnott [buy emerging market equities vs. US stocks]

Post by MotoTrojan » Sun May 14, 2017 2:18 pm

The floating AA ranges mentioned above is interesting. Big risk with adjusting AA to market conditions is that it sets up habits of market timing. Best to just set something you're comfortable with and let it ride for life.

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