Investing in a Low-Return World: Howard Marks' 6 options

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Lauretta
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Investing in a Low-Return World: Howard Marks' 6 options

Post by Lauretta » Fri Sep 15, 2017 3:43 pm

In his latest memo, Howard Marks lists 6 options open to investors, considering today's high valuations and low yields:

1. Invest as you always have and expect your historic returns.
2. invest as you always have and settle for today’s low returns.
3. Reduce risk to prepare for a correction and accept still-lower returns.
4. Go to cash at a near-zero return and wait for a better environment.
5. Increase risk in pursuit of higher returns.
6. Put more into special niches and special investment managers.

Which of these make more sense to you?
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by CULater » Fri Sep 15, 2017 3:51 pm

Is there an Option #7, since none of the six makes good sense to me.
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by MJW » Fri Sep 15, 2017 4:21 pm

I guess it's #2, but why isn't there an option to save more?

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Lauretta » Fri Sep 15, 2017 4:47 pm

MJW wrote:
Fri Sep 15, 2017 4:21 pm
I guess it's #2, but why isn't there an option to save more?
Good point, but I guess it's a corollary of 2. What do you think of 3. in the sense of decreasing your equity exposure to give you more dry powder if/when a correction comes?
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by McGilicutty » Fri Sep 15, 2017 5:15 pm

People have been talking about the future bringing low returns for a while, but it doesn't seem to be happening. Last year the S&P 500 returned about 15% and this year so far the total return is a little over 13%. I'm staying the course with most of my money in either S&P 500 ETFs or a total stock market ETF. Nobody knows nothing.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by MJW » Fri Sep 15, 2017 5:41 pm

Lauretta wrote:
Fri Sep 15, 2017 4:47 pm
MJW wrote:
Fri Sep 15, 2017 4:21 pm
I guess it's #2, but why isn't there an option to save more?
Good point, but I guess it's a corollary of 2. What do you think of 3. in the sense of decreasing your equity exposure to give you more dry powder if/when a correction comes?
I would only reduce equity exposure if I had achieved a financial milestone marker already laid out in my investment plan. This would indicate I had money that was important for me to protect. Right now it's early in the game for me, so I don't bother worrying about if/when something will happen. I just keep putting money in.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Johnnie » Fri Sep 15, 2017 7:48 pm

No. 7:

Set your A/A, set your domestic/international stock balance, pick your slice-and-dice funds and proportions if that's your preference - and then go away.

I'm guilty of "peeking" when the market is hitting new highs, but am coming around to the view that even that is not benign.

IOW, set it and forget it except for rebalancing according to a predetermined plan - and go live your life.

IOW, be a Boglehead.

Maybe that's harder after you stop working and "that's all there is there ain't no more" that doesn't come from Mr. Market. I'll find that out myself in 3 to 5 years, if it's up to me.
"I know nothing."

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by nisiprius » Fri Sep 15, 2017 7:50 pm

Option 2 for me.

1) If I were willing to take more risk to get more reward, I would already be taking more risk to get more reward. I'm taking as much risk as I care to. So, no option 5.

2) User "lobster" pointed us to 36 Obvious Investment Truths, a good article by Ben Carlson, and his truth #35 is:
35. The market doesn’t owe you high returns just because you need them.
Did Marks suggest an option?
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by alex_686 » Fri Sep 15, 2017 7:54 pm

Lauretta wrote:
Fri Sep 15, 2017 4:47 pm
3. in the sense of decreasing your equity exposure to give you more dry powder if/when a correction comes?
That would be a case of market timing, so I wold vote no. Personally, I am going for a little of option #2 (with increased savings) and option #6.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by tibbitts » Fri Sep 15, 2017 8:02 pm

MJW wrote:
Fri Sep 15, 2017 4:21 pm
I guess it's #2, but why isn't there an option to save more?
As a practical matter, because along with the low-return environment we also have low earnings. When real income decreases every year it's simply not possible for most people to save more.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by MJW » Sat Sep 16, 2017 1:26 am

tibbitts wrote:
Fri Sep 15, 2017 8:02 pm
MJW wrote:
Fri Sep 15, 2017 4:21 pm
I guess it's #2, but why isn't there an option to save more?
As a practical matter, because along with the low-return environment we also have low earnings. When real income decreases every year it's simply not possible for most people to save more.
Well...I guess we're screwed, then. :)

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by james22 » Sat Sep 16, 2017 1:35 am

nisiprius wrote:
Fri Sep 15, 2017 7:50 pm
Did Marks suggest an option?
It would be sheer folly to expect to earn traditional returns today from investing like you’ve done traditionally (#1). With the risk-free rate of interest near zero and the returns on all other investments scaled based on that, I dare say few if any asset classes will return in the next few years what they’ve delivered historically.

Thus one of the sensible courses of action is to invest as you did in the past but accept that returns will be lower. Sensible, but not highly satisfactory. No one wants to make less than they used to, and the return needs of institutions such as pension funds and endowments are little changed. Thus #2 is difficult.

If you believe what I said in the memo about the presence of risk today, you might want to opt for #3. In the future people may demand higher prospective returns or increased prospective risk compensation, and the way investments would provide them would be through a correction that lowers their prices. If you think a correction is coming, reducing your risk makes sense. But what if it takes years for it to arrive? Since Treasurys currently offer 1-2% and high yield bonds offer 5-6%, for example, fleeing to the safety of Treasurys would cost you about 4% per year. What if it takes years to be proved right?

Going to cash (#4) is the extreme example of risk reduction. Are you willing to accept a return of zero as the price for being assured of avoiding a possible correction? Most investors can’t or won’t voluntarily sign on for zero returns.

All the above leads to #5: increasing risk as the way to earn high returns in a low-return world. But if the presence of elevated risk in the environment truly means a correction lies ahead at some point, risk should be increased only with care. As I said in the memo, every investment decision can be implemented in high-risk or low-risk ways, and in risk-conscious or risk-oblivious ways. High risk does not assure higher returns. It means accepting greater uncertainty with the goal of higher returns and the possibility of substantially lower (or negative) returns. I’m convinced that at this juncture it should be done with great care, if at all.

And that leaves #6. “Special niches and special people,” if they can be identified, can deliver higher returns without proportionally more risk. That’s what “special” means to me, and it seems like the ideal solution. But it’s not easy. Pursuing this tack has to be based on the belief that (a) there are inefficient markets and (b) you or your managers have the exceptional skill needed to exploit them. Simply put, this can’t be done without risk, as one’s choice of market or manager can easily backfire.

As I mentioned above, none of these possibilities is attractive or a sure thing. But there are no others. What would I do? For me the answer lies in a combination of numbers 2, 3 and 6.

Expecting normal returns from normal activities (#1) is out in my book, as are settling for zero in cash (#4) and amping up risk in the hope of draws from the favorable part of the probability distribution (#5) (our current position in the elevated part of the cycle decreases the likelihood that outcomes will be favorable).

Thus I would mostly do the things I always have done and accept that returns will be lower than they traditionally have been (#2). While doing the usual, I would increase the caution with which I do it (#3), even at the cost of a reduction in expected return. And I would emphasize “alpha markets” where hard work and skill might add to returns (#6), since there are no “beta markets” that offer generous returns today.


https://www.oaktreecapital.com/insights ... arks-memos
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by FIREchief » Sat Sep 16, 2017 1:41 am

Lauretta wrote:
Fri Sep 15, 2017 3:43 pm
In his latest memo, Howard Marks lists 6 options open to investors, considering today's high valuations and low yields:

1. Invest as you always have and expect your historic returns.
2. invest as you always have and settle for today’s low returns.
3. Reduce risk to prepare for a correction and accept still-lower returns.
4. Go to cash at a near-zero return and wait for a better environment.
5. Increase risk in pursuit of higher returns.
6. Put more into special niches and special investment managers.

Which of these make more sense to you?
He conveniently fails to mention "today's high returns" in the stock market. Once again, the market has proven that high valuations don't mean a thing. Number 2 is irrelevant for an equity centric investor. "Today's low returns" is simply inaccurate. This whole thing is just silly. Stop it!! 8-)

BTW: who the h**l is "Howard Marks?"
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by james22 » Sat Sep 16, 2017 3:38 am

FIREchief wrote:
Sat Sep 16, 2017 1:41 am
Lauretta wrote:
Fri Sep 15, 2017 3:43 pm
In his latest memo, Howard Marks lists 6 options open to investors, considering today's high valuations and low yields:

1. Invest as you always have and expect your historic returns.
2. invest as you always have and settle for today’s low returns.
3. Reduce risk to prepare for a correction and accept still-lower returns.
4. Go to cash at a near-zero return and wait for a better environment.
5. Increase risk in pursuit of higher returns.
6. Put more into special niches and special investment managers.

Which of these make more sense to you?
He conveniently fails to mention "today's high returns" in the stock market. Once again, the market has proven that high valuations don't mean a thing. Number 2 is irrelevant for an equity centric investor. "Today's low returns" is simply inaccurate. This whole thing is just silly. Stop it!! 8-)
Current valuations are the best predictor we have of future returns, explaining ~40% of actual future returns.

http://www.etf.com/sections/index-inves ... nopaging=1
FIREchief wrote:
Sat Sep 16, 2017 1:41 am
who the h**l is "Howard Marks?"
Few books on investing match the high standards set by Howard Marks in The Most Important Thing. It is wise, witty, and laced with historical perspective. If you seek to avoid the pitfalls of investing, you must read this book! (John C. Bogle, Founder and former CEO, The Vanguard Group)

When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something, and that goes double for his book. (Warren Buffett, Chairman and CEO, Berkshire Hathaway)


https://www.amazon.com/Most-Important-T ... ward+marks
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by FIREchief » Sat Sep 16, 2017 3:43 am

james22 wrote:
Sat Sep 16, 2017 3:38 am
Current valuations are the best predictor we have of future returns, explaining ~40% of actual future returns.

http://www.etf.com/sections/index-inves ... nopaging=1
Well, that may all be true, but they haven't been much of a predictor lately!! :D
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Lauretta » Sat Sep 16, 2017 4:47 am

james22 wrote:
Sat Sep 16, 2017 3:38 am
FIREchief wrote:
Sat Sep 16, 2017 1:41 am
Lauretta wrote:
Fri Sep 15, 2017 3:43 pm
In his latest memo, Howard Marks lists 6 options open to investors, considering today's high valuations and low yields:

1. Invest as you always have and expect your historic returns.
2. invest as you always have and settle for today’s low returns.
3. Reduce risk to prepare for a correction and accept still-lower returns.
4. Go to cash at a near-zero return and wait for a better environment.
5. Increase risk in pursuit of higher returns.
6. Put more into special niches and special investment managers.

Which of these make more sense to you?
He conveniently fails to mention "today's high returns" in the stock market. Once again, the market has proven that high valuations don't mean a thing. Number 2 is irrelevant for an equity centric investor. "Today's low returns" is simply inaccurate. This whole thing is just silly. Stop it!! 8-)
Current valuations are the best predictor we have of future returns, explaining ~40% of actual future returns.

http://www.etf.com/sections/index-inves ... nopaging=1
FIREchief wrote:
Sat Sep 16, 2017 1:41 am
who the h**l is "Howard Marks?"
Few books on investing match the high standards set by Howard Marks in The Most Important Thing. It is wise, witty, and laced with historical perspective. If you seek to avoid the pitfalls of investing, you must read this book! (John C. Bogle, Founder and former CEO, The Vanguard Group)

When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something, and that goes double for his book. (Warren Buffett, Chairman and CEO, Berkshire Hathaway)


https://www.amazon.com/Most-Important-T ... ward+marks
hi James thanks for your comments. I've seen in another post of yours the Hussman quote (which is relevant to this thread too) on the Pappy Van Winkle's strategy (i.e. get out of the market when valuations are high and the trend turns negative) I'm curious, is that something you're planning to implement in practice?
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Tycoon » Sat Sep 16, 2017 6:05 am

This "low rate" market has been really generous to me the last 10 months. I'll stick with #2. I'm too dumb to understand more complicated schemes, too lazy to earn a PhD, and really don't believe in benevolent market sages.

Good luck to all.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by nisiprius » Sat Sep 16, 2017 6:24 am

james22 wrote:
Sat Sep 16, 2017 1:35 am
nisiprius wrote:
Fri Sep 15, 2017 7:50 pm
Did Marks suggest an option?
[Long quote...]https://www.oaktreecapital.com/insights ... arks-memos
Thanks!
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Lauretta » Sat Sep 16, 2017 6:27 am

Tycoon wrote:
Sat Sep 16, 2017 6:05 am
This "low rate" market has been really generous to me the last 10 months. I'll stick with #2. I'm too dumb to understand more complicated schemes, too lazy to earn a PhD, and really don't believe in benevolent market sages.

Good luck to all.

Tycoon
Well I have a PhD but I still haven't got a clue about the best way to invest!! :D (though admittedly my PhD is in physics, not in Economics...)
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by rmelvey » Sat Sep 16, 2017 7:24 am

Does anyone else find it ironic that people have been complaining about the low return environment for the last 8 years when we have seen huge returns in both stocks and bonds? I think it is far riskier to wait on the sidelines in hopes of a bargain that may never come. This is a form of risk that is masked as prudence.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by alex_686 » Sat Sep 16, 2017 7:50 am

rmelvey wrote:
Sat Sep 16, 2017 7:24 am
Does anyone else find it ironic that people have been complaining about the low return environment for the last 8 years when we have seen huge returns in both stocks and bonds? I think it is far riskier to wait on the sidelines in hopes of a bargain that may never come. This is a form of risk that is masked as prudence.
No. The value of a stock or bond is from future cash flow discounted by time. That is, by interest rates. As rates have fallen the price of stocks and bonds go up. In theory if real rates drop to zero than the value of stocks would be infinite. Obviously it can't go there. But it is a one way, one time gain. Rates could remain low in case price remains high - no more cheap gains from principle appreciation. Rates could go up in which case prices fall. However the general consensus is that going forward yield will be low.

In short, many ways for the market to remain flat or fall, few ways for the market to go up.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Lauretta » Sat Sep 16, 2017 8:05 am

alex_686 wrote:
Sat Sep 16, 2017 7:50 am
In short, many ways for the market to remain flat or fall, few ways for the market to go up.
This makes sense to me, though there's probably more potential in Europe and EM. You mentioned above that you also agree with:
6. Put more into special niches and special investment managers.
Are there any particular niches that you feel may be interesting? (I'm asking only in case you want to share that). I have read about alternative investments, even recently about things like whiskey (!) but they all strike me as things in which I would put only a very limited amount of money.
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by rmelvey » Sat Sep 16, 2017 8:15 am

alex_686 wrote:
Sat Sep 16, 2017 7:50 am
rmelvey wrote:
Sat Sep 16, 2017 7:24 am
Does anyone else find it ironic that people have been complaining about the low return environment for the last 8 years when we have seen huge returns in both stocks and bonds? I think it is far riskier to wait on the sidelines in hopes of a bargain that may never come. This is a form of risk that is masked as prudence.
No. The value of a stock or bond is from future cash flow discounted by time. That is, by interest rates. As rates have fallen the price of stocks and bonds go up. In theory if real rates drop to zero than the value of stocks would be infinite. Obviously it can't go there. But it is a one way, one time gain. Rates could remain low in case price remains high - no more cheap gains from principle appreciation. Rates could go up in which case prices fall. However the general consensus is that going forward yield will be low.

In short, many ways for the market to remain flat or fall, few ways for the market to go up.
The only place to hide from rising interest rates is short term debt, historically one of the lowest returning asset classes. You are taking a risk waiting for higher yields.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by b.lock » Sat Sep 16, 2017 8:26 am

I'm 107% stocks (a bit of UPRO :twisted: ), and I have at least a decade until retirement, so I guess it's #5 for me. That said, I was satisfied with the returns even before I "increased risk in pursuit of higher returns".

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by alex_686 » Sat Sep 16, 2017 8:37 am

Lauretta wrote:
Sat Sep 16, 2017 8:05 am
This makes sense to me, though there's probably more potential in Europe and EM. You mentioned above that you also agree with:
6. Put more into special niches and special investment managers.
Are there any particular niches that you feel may be interesting? (I'm asking only in case you want to share that). I have read about alternative investments, even recently about things like whiskey (!) but they all strike me as things in which I would put only a very limited amount of money.
I have made a few minor adjustments. More equity, less bonds. A little more towards the mortgage. I figure equity has a better risk / return profile at this point.

In bonds I have increased my "risky" bonds from 10% to 20%. I am reducing my government bonds to zero and moving strictly into corporate bonds. Junk bonds and preferred stock. I have added a tinny sliver Emerging Market debt, partly because it now has become easy to do so. I can defend the preferred stock and corporate bonds strategy strongly, the other 2 are a bit of a reach for yield.

I am looking at Pimco's Income Fund (PONDX). It is completely actively managed. They start with bonds with a 7 year maturity and then use derivatives and short sales to knock its duration down to 1. It should have a low correlation with bonds if interest rates rise.

Lastly, I have a slight value tilt. I am considering moving from a value tilt to a "Low Beta" factor tilt. I scoff at "dividend stocks instead of bonds" because I know of the dangers in that line of thinking. "Low Beta" might be the answer - lower but more consistent return than the average stock, still a good hedge against inflation.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Lauretta » Sat Sep 16, 2017 8:44 am

alex_686 wrote:
Sat Sep 16, 2017 8:37 am

Lastly, I have a slight value tilt. I am considering moving from a value tilt to a "Low Beta" factor tilt. I scoff at "dividend stocks instead of bonds" because I know of the dangers in that line of thinking. "Low Beta" might be the answer - lower but more consistent return than the average stock, still a good hedge against inflation.
Thanks for sharing! What are the dangers you refer to concerning dividend stocks? (I thought they were a good idea).
Concerning low volatility, I saw this post which seems to indicate that they are expensive at present, don't you think?
https://www.factorresearch.com/research ... lue-factor
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by james22 » Sat Sep 16, 2017 8:53 am

Lauretta wrote:
Sat Sep 16, 2017 4:47 am
... the Pappy Van Winkle's strategy (i.e. get out of the market when valuations are high and the trend turns negative) I'm curious, is that something you're planning to implement in practice?
It's something I practice, Laurette. In the Ted Seides thread I shared what I do.

I've been defensive too early, underestimating the central bank interventions, but that's OK. I've done well enough even so.

And I've been patient so far. But for one trade (preferreds early this year), I've only added to cash since the dip early 2016.

If the market never corrects, of course, I'll pay more and more opportunity cost. But I'm making my bet (and I keep looking for hedging opportunities [#6]).


As I mentioned before, if new, you probably want to invest pretty passively. But you should a least consider a conservative allocation to begin with, and never believe that buy-and-hold somehow magically protects you from permanent loss (as some do):

viewtopic.php?f=10&t=30085
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by chevca » Sat Sep 16, 2017 8:58 am

I'll take a #7, please.... invest as I always have and accept what the market gives me. :happy

If these other higher return options are being offered now, were they always offered even in regular, high, or not low-return worlds? If not, then I wouldn't take them to mean much now.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by CyclingDuo » Sat Sep 16, 2017 9:10 am

rmelvey wrote:
Sat Sep 16, 2017 7:24 am
Does anyone else find it ironic that people have been complaining about the low return environment for the last 8 years when we have seen huge returns in both stocks and bonds? I think it is far riskier to wait on the sidelines in hopes of a bargain that may never come. This is a form of risk that is masked as prudence.
You might enjoy following Laszlo Birinyl. His latest thoughts on the market can be found at the link below. He's always been an excellent sage, and a master at avoiding the "noise". We've enjoyed his interviews, and thoughts for over 20 years.

An investing legend who's nailed the bull market at every turn sees no end in sight for the 269% rally

http://www.businessinsider.com/laszlo-b ... age-2017-9
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Lauretta » Sat Sep 16, 2017 9:27 am

james22 wrote:
Sat Sep 16, 2017 8:53 am

As I mentioned before, if new, you probably want to invest pretty passively. But you should a least consider a conservative allocation to begin with, and never believe that buy-and-hold somehow magically protects you from permanent loss (as some do):

viewtopic.php?f=10&t=30085
Thanks james; yes I remember your advice. You also mentioned dollar cost averaging but in my case it's been a lump sum, that I'm spreading out over this year. I am following a simple B&H strategy, with roughly a third allocated to each of these: real estate, stocks and cash. I guess this will minimize regret! ;-) The way I include valuations is by overweighing EM and Europe, and underweighing the US.
But I am interested in learning/understanding these other methods, even though I definitely won't use them unless my understanding of the stock market improves, and I become familiar with all the details of implementation, the tax consequences etc. Anyway all this is fascinating, I wish I had bcome interested in all this earlier!. As Peter Lynch wrote, whereas in the US many people think about finance and the stock market, in Europe people are generally brought up studying subjects like Virgil and Nietzsche... ;-)
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Tycoon » Sat Sep 16, 2017 10:16 am

rmelvey wrote:
Sat Sep 16, 2017 7:24 am
Does anyone else find it ironic that people have been complaining about the low return environment for the last 8 years when we have seen huge returns in both stocks and bonds? I think it is far riskier to wait on the sidelines in hopes of a bargain that may never come. This is a form of risk that is masked as prudence.
I do find it troubling that what seems painfully obvious to me is unclear to many. But hey, it's not my money sitting on the sidelines.
Appeal to Pity:When pity is envoked to support a statement | Appeal to Popular Sentiment:Appealing to unrelated prejudices and attitudes | Hasty Generalization:Too little evidence to support the conclusion

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by alex_686 » Sat Sep 16, 2017 11:21 am

Lauretta wrote:
Sat Sep 16, 2017 8:44 am
Thanks for sharing! What are the dangers you refer to concerning dividend stocks? (I thought they were a good idea).
Concerning low volatility, I saw this post which seems to indicate that they are expensive at present, don't you think?
https://www.factorresearch.com/research ... lue-factor
When you are looking to date a person for a long term relationship do you look at their external beauty or their inner character? Dividends are external. Some companies pay robust dividends right up to the day they declare bankruptcy. Other solid companies never pay dividends but rather reinvest in the company or do stock buy backs. Berkshire Hathaway is a classic example.

On the link, low volatility is expensive by book value. I am not sure this is the best metric and he authors acknowledge this. One thing that gives me doubt is that Value and Momentum seem to be more efficient factor values. However they have a high correlation with each other. Still contemplating this.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by aj76er » Sat Sep 16, 2017 1:32 pm

The following points are always good advice, but perhaps even more prudent given the expected low returns moving forward:

1. Find ways to save more (budgeting, down sizing, etc)
2. Find ways to earn more (career growth, working longer, etc)
3. Pay off debt (mortgage, loans, etc)
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by tibbitts » Sat Sep 16, 2017 2:57 pm

alex_686 wrote:
Sat Sep 16, 2017 11:21 am
When you are looking to date a person for a long term relationship do you look at their external beauty or their inner character? Dividends are external.
Possibly a bad analogy: generally nobody gets to the inner character analysis unless the "investment" passes the external beauty screen.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by tibbitts » Sat Sep 16, 2017 2:58 pm

MJW wrote:
Sat Sep 16, 2017 1:26 am
tibbitts wrote:
Fri Sep 15, 2017 8:02 pm
MJW wrote:
Fri Sep 15, 2017 4:21 pm
I guess it's #2, but why isn't there an option to save more?
As a practical matter, because along with the low-return environment we also have low earnings. When real income decreases every year it's simply not possible for most people to save more.
Well...I guess we're screwed, then. :)
Excellent summary of the situation.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by longinvest » Sat Sep 16, 2017 3:25 pm

My choice is different:

7. Ignore prognostics about future returns. Plan (and regularly re-plan) based on current portfolio size, current income, current age, target retirement age, and a fixed portfolio growth trend based on asset allocation (unaffected by current market conditions).

In other words, stay the course and ignore the noise.

This strategy has a small contrarian element to it which leads to saving a bit less when the market is up (and expensive), and a bit more when the market is down (and cheap) without having to guess anything about it.
:happy

It's somewhat similar to VPW, but adapted to accumulation time.
Last edited by longinvest on Sat Sep 16, 2017 5:11 pm, edited 1 time in total.
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Lauretta
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Lauretta » Sat Sep 16, 2017 3:38 pm

longinvest wrote:
Sat Sep 16, 2017 3:25 pm

This strategy has a small contrarian element to it which leads to saving a bit less when the market is up (and expensive), and a bit more when the market is down (and cheap) without having to guess anything about it.
Thanks for sharing. It seems to me that your approach is still based on the expectation (or the assumption, whatever you want to call it) that if the market is down and cheap you'll get greater future returns, otherwise why invest more during that period?
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by longinvest » Sat Sep 16, 2017 3:45 pm

Lauretta wrote:
Sat Sep 16, 2017 3:38 pm
longinvest wrote:
Sat Sep 16, 2017 3:25 pm

This strategy has a small contrarian element to it which leads to saving a bit less when the market is up (and expensive), and a bit more when the market is down (and cheap) without having to guess anything about it.
Thanks for sharing. It seems to me that your approach is still based on the expectation (or the assumption, whatever you want to call it) that if the market is down and cheap you'll get greater future returns, otherwise why invest more during that period?
No. It's a simple side effect of having a smaller portfolio and, therefore, having to save more (given the fixed growth trend) to equalize* current and projected retirement spending at the target retirement age.

* The ratio of retirement spending to current spending doesn't need to be "equality". One can set it to something different.

I indirectly showed an example of the type of calculation I do in Q-4 and Q-5 of The Mathematics of Retirement Investing, except that I use a VPW percentage for projecting portfolio withdrawals at the age of retirement. (In later posts, #Cruncher improved the taxes estimate and added an option illustrating how to target different current and retirement spending).
Last edited by longinvest on Sat Sep 16, 2017 5:15 pm, edited 5 times in total.
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Lauretta
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Lauretta » Sat Sep 16, 2017 3:51 pm

longinvest wrote:
Sat Sep 16, 2017 3:45 pm
Lauretta wrote:
Sat Sep 16, 2017 3:38 pm
longinvest wrote:
Sat Sep 16, 2017 3:25 pm

This strategy has a small contrarian element to it which leads to saving a bit less when the market is up (and expensive), and a bit more when the market is down (and cheap) without having to guess anything about it.
Thanks for sharing. It seems to me that your approach is still based on the expectation (or the assumption, whatever you want to call it) that if the market is down and cheap you'll get greater future returns, otherwise why invest more during that period?
No. It's a simple side effect of having a smaller portfolio and, therefore, having to save more (given the fixed growth trend) to equalize* current and projected retirement spending at the target retirement age.

* The ratio of retirement spending to current spending doesn't need to be "equality". One can set it to something different.
ah ok, and by fixed growth trend you mean a rate? if so how do you estimate that rate? And for example if during the last 9 years the return for stocks has been very high, wouldn't this suggest that future rate will be lower?
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longinvest
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by longinvest » Sat Sep 16, 2017 4:05 pm

Lauretta wrote:
Sat Sep 16, 2017 3:51 pm
ah ok, and by fixed growth trend you mean a rate? if so how do you estimate that rate? And for example if during the last 9 years the return for stocks has been very high, wouldn't this suggest that future rate will be lower?
No, the growth trend is a rate which is unaffected by current market conditions (or metrics, or valuations, or predictions, or recent returns, or whatever). It only has to be an approximate* but fixed rate, as portfolio size (and calculations) will self-correct savings (and spending, during retirement) over time. If it is too high, the savings rate will trend up over time. If it is too low, the savings rate will trend down over time. The thing is that variations in portfolio size, from year to year, due to stock and bond market returns, dominate the impact on the savings rate, hiding this impact in the short term. So, as long as a reasonable fixed growth trend is selected (one could use 5.5% real for stocks, 1.5% real for bonds, which would translate into (.5 X 5.5% + .5 X 1.5%) = 3.5% for a 50/50 portfolio), it works well enough.

* Not forward from now, but generally over time (e.g. over one century or more). It simply cannot be precisely known.

This growth trend has been discussed in the context of the VPW method. Here's the last post I wrote about it: viewtopic.php?f=10&t=120430&start=700#p3526111
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naha66
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by naha66 » Sun Sep 17, 2017 8:30 am

Let me know when the low returns get here, then I'll make a pick. You know what it might start tomorrow or maybe 5 years from now, who knows.

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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Top99% » Sun Sep 17, 2017 11:09 am

I think all but 3 and 4 make sense and the one you pick depends on your ability, need and willingness to take risk. We are doing a combination of 2 (being conservative with our SWR) and 6. If we were still accumulating we would definitely lean more towards saving more than increasing risk.
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by GibsonL6s » Sun Sep 17, 2017 1:18 pm

I guess my snarky response would be isn't that what you are paid 2 and 20 to know?

1 and 2 are staying the course as no one know future returns. 3 and 4 are variants of market timing which you would need to believe in. 5 is in theory a reason people use hedge funds, i.e. leverage, long short, derivatives etc and 6 is effectively some sort of tilt.

In regards to future returns P/E ratios have been high for awhile no and so have returns. The issue is do you believe in a reversion to the mean and if so are you going to act on it, i.e. time the market?

I have been working toward a simpler portfolio and wanting to worry less about these things.

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Lauretta
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Lauretta » Sun Sep 17, 2017 2:20 pm

GibsonL6s wrote:
Sun Sep 17, 2017 1:18 pm
I guess my snarky response would be isn't that what you are paid 2 and 20 to know?
haha :D good answer.
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Re: Investing in a Low-Return World: Howard Marks' 6 options

Post by Portfolio7 » Sun Sep 17, 2017 5:43 pm

In all honesty, I'm still at #1. I mean, there are always segments of the global market that don't look promising, and in this case it may be the US... but who can say for sure. Even if the reduced 10 year outlook is true, you don't know the SOR, and that's kinda important. That's another good reason to maintain a globally diversified portfolio... it may have lagged the past 5 years vs a US centric portfolio, but it's doing nicely this year, and probably for several years to come. That's not to say I don't employ overweighting at times of apparent opportunity, but that's just buying stuff that's on sale, and it's minimal. I don't pretend to be able to predict the markets.
An investment in knowledge pays the best interest.

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