In what ways could BogleHeads be badly wrong ?

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Dudley
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In what ways could BogleHeads be badly wrong ?

Post by Dudley » Wed Jan 24, 2018 10:48 am

The broad BogleHead investment philosophy has (or would have) served investors well for the last few decades.
i.e. establish a stock/bond mix in line with age/risk; invest in a broad, low cost index funds; hold and rebalance over cycles. Is that going to be true going forward ?

Whats the possibility such an approach is simply the product of the market behavior over the last few decades and also influenced by experience in USA. In what ways, and in what (realistic) economic circumstances, do you think it could turn out to be badly wrong in the decade(s) to come ? e.g. :

- the risk in stocks being underestimated given US history
- rising rates and/or inflation hammering bonds
- prolonged stagflation crushing both stocks and bonds
- absence of asset class diversification outside stocks and bonds
- buy and hold may not give adequate recovery in unusually long down turn

Just interested to try get some open minded, non-dogmatic, opinions on how bogleheads may possibly be deluding themselves (ourselves) or be blind-sighted by certain economic conditions ?

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White Coat Investor
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Re: In what ways could BogleHeads be badly wrong ?

Post by White Coat Investor » Wed Jan 24, 2018 10:52 am

# 1 Trend following may work better than buy and hold
# 2 Choosing stocks may become easier than it has been in the past
# 3 Picking mutual fund managers may become easier than it has been in the past
# 4 Factor investing may work out a lot better than many of us think
# 5 Future stock returns may be 3% while real estate (buying local properties) provides 10%+ returns
# 6 The entire economic world melts down and you would have been better off spending your money rather than saving/investing at all

That's about all I could think of. I worry most about # 1 and # 5 as those seem most likely to me.
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Re: In what ways could BogleHeads be badly wrong ?

Post by Sandtrap » Wed Jan 24, 2018 10:53 am

White Coat Investor wrote:
Wed Jan 24, 2018 10:52 am
# 1 Trend following may work better than buy and hold
# 2 Choosing stocks may become easier than it has been in the past
# 3 Picking mutual fund managers may become easier than it has been in the past
# 4 Factor investing may work out a lot better than many of us think
# 5 Future stock returns may be 3% while real estate (buying local properties) provides 10%+ returns
# 6 The entire economic world melts down and you would have been better off spending your money rather than saving/investing at all

That's about all I could think of. I worry most about # 1 and # 5 as those seem most likely to me.
Agreed.
#1
Definitely #5.

j :D

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JoMoney
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Re: In what ways could BogleHeads be badly wrong ?

Post by JoMoney » Wed Jan 24, 2018 10:59 am

Are you questioning whether or not someone might be deluded into believing there's some guarantee that stocks will be a profitable investment?
Or are you questioning the philosophy that if people are going to buy stocks, most will be better off buying a diversified cross-section of the market (or the whole market) and not trading?
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Re: In what ways could BogleHeads be badly wrong ?

Post by alex_686 » Wed Jan 24, 2018 11:04 am

Dudley wrote:
Wed Jan 24, 2018 10:48 am
Just interested to try get some open minded, non-dogmatic, opinions on how bogleheads may possibly be deluding themselves (ourselves) or be blind-sighted by certain economic conditions ?
I think you are missing a critical point of the bogleheads philosophy. We can separate the investment market in 2 parts. You are confusing 2 different questions into a single question.

First there is "Beta", a.k.a. market exposure, a.k.a. asset allocation. We can break this down into stocks and bonds. Stocks can be broken down into domestic, international, small cap, REITs, etc. You can get exposure to Beta cheaply by buying index funds. The factors that you pick will be the primary determination of your portfolio's performance.

Now some of these exposures may be overvalued or exposure you to risks that you don't want to be exposed to. See your list above. We can find a set of Beta factors that can minimize the risks outlined in your investment thesis. Now, some of the risks you mentioned are contradictory. Plus, risk and return are linked. If you don't want to be exposed to those risk you are not going to get much of a return.

Second there is "Alpha" or active management. Picking that hot stock, timing the market, seeing the economic trend before anybody else, etc. This is skill based. One would think that one could use skill to avoid the risks listed above. Most people think they are above average but in fact most people are average. So no, you can't.

The average story is that people make big overconfident bets, let emotions to trade and the wrong time, and rack up big trading expenses. Even if they are successful, taxes take a huge bit out of them, meaning their performance is lower in the long run.

Being discipline and passive is a very simple effective strategy that will work better than most in the above list of risks.

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Re: In what ways could BogleHeads be badly wrong ?

Post by asif408 » Wed Jan 24, 2018 11:06 am

I think all the possibilities you mentioned are legitimate. One of the benefits of the Bogleheads philosophy is that a couple of them, such as the "invest early and often" and "diversify" should help mitigate most of these issues. If you have a long enough time horizon and you are periodically buying a variety of diverisfied funds during down markets the issues you mentioned should be shorter term. And not limiting yourself to one country would be beneficial as well. So your first, fourth, and fifth items should be limited if you follow these 2 suggestions.

Most Bogleheads don't own exclusively long-term bond funds. Short-term and intermediate, high quality bond funds, which tend to be the choice of most here, will decline somewhat with rising rates but not dramatically, and nothing like stocks. So I think in this case you have exaggerated the downside of item 2. A bond investor who really fears inflation also has other options today that weren't available 25 years ago, such as TIPS and I-bonds, which will at least keep up with inflation, though probably not make you rich. TIPS yields are currently positive, though barely above 0.

Stagflation is the most difficult one. Again, there are ways to protect against this, such as owning TIPS/I-bonds. On the stock side, stocks of commodities producers would likely fare better than most other stocks during this time, though no guarantees. And a fixed rate mortgage I guess could provide a limited amount of benefit in this type of situation.

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Re: In what ways could BogleHeads be badly wrong ?

Post by azanon » Wed Jan 24, 2018 11:11 am

I have a great fondness for Boglehead philosophy, but I admit 2 come to mind (and both are related):

1. That a portfolio dominated by stocks (let's say anything 50% or higher) could ever constitutes a "balanced" portfolio. In practice, stocks are very volatile by comparison to most other asset classes, is only one of several asset classes, and only tend to do well in certain economic climates. And because of their volatility, a 50% position in stocks will likely explain 80%+ of the volatility of a portfolio.

Stocks also, I believe, have approximately the actual expected return that they should have for their expected risk, so from that standpoint they're not necessarily better than any other asset class. In any event, if we enter an unfavorable investing climate for stocks, a typical boglehead portfolio will likely feel like anything other than balanced.

2. In that it currently tends to favor home country bias in a portfolio, and logically so at least given Jack Bogle's view towards international investing. Given today's current valuations, I see at least the potential for a portfolio dominated by US stocks to be badly wrong for the next few years.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Nate79 » Wed Jan 24, 2018 12:12 pm

1. That passive beats active. While I'm not sure active can beat passive but this is so ingrained into he BH thinking that I don't think it is given much thought any more (yet an exception is given for Vanguard active funds...).
2. Costs matter always. Definitely true for index funds but if you have a reasonably priced active fund can it beat an index fund?
3. I think the BH way is a little bit too math heavy and focuses on the investments. The reality is that how much you save and your income is much more important than whether you choose X or Y fund. It's personal finance, and is driven by personal actions and much less about your investment philosophy. Running a tight budget, saving more, working more, etc are more important than which fund you invest in or the expense ratio of the funds.
4. That having a professional advisor, even one paid by AUM is evil and will cause disaster. Some people just don't have a clue, don't have time, and need some help.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Yenah » Wed Jan 24, 2018 12:16 pm

While I believe that the Bogleheads investing philosophy is solid, and that those who followed it in the past are most likely much better off on average than those who didn't, there are a few things that cause me some worry (admittedly slight) for the future if following a typical 2- or 3-fund portfolio model:

#1 Overweighting of US equities. A Japan-like multi-decade meltdown would be very harmful to anyone holding a 2-fund portfolio or a 3-fund portfolio with only a smaller percentage of equities in international. In addition, if the US loses its status as the economic leader of the world and safe haven the values of US financial assets could suffer a long-term decline.

#2 Concentration on financial assets, i.e. stocks and bonds. There is something slightly unsettling about having the bulk of one's wealth tied up in ownership of financial assets that is recorded in computer databases somewhere. Are these ownership records vulnerable to a cyber warfare or cyber terrorism attack that destroys magnetic-based computer records? Are they vulnerable to appropriation by sophisticated organized crime?

#3 Widening gap between haves and have-nots. If things get too bad sooner or later the have-nots will take steps to appropriate wealth from the haves, either through the political process or other means.

So, while I think the Boglehead investment approach is excellent, I would tilt toward a significantly higher percentage of international equities, and some ownership of physical real estate.

Yenah

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Re: In what ways could BogleHeads be badly wrong ?

Post by MJW » Wed Jan 24, 2018 12:20 pm

I think to suggest that the Bogleheads' philosophy is "wrong" is to misunderstand the premise driving the philosophy. What can be wrong about it? The notion that other strategies may net a better return within a given time frame? The argument misses the point. So do the arguments that point out whenever the 3 Fund Portfolio outperforms other approaches (which, by the way, seems to be applied rather selectively in an act of perpetuating contradictory logic for the purpose of making one's own case).

Anything beyond the idea that "I will take what the market gives me, because who knows what's going happen?" and doing so as inexpensively as practicable, is adding layers of complexity to the philosophy when they really do not belong. Let's avoid making this something it isn't.

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Re: In what ways could BogleHeads be badly wrong ?

Post by btenny » Wed Jan 24, 2018 12:29 pm

I think Boglehead philosophy is great and works great for most situations. BUT if we get high inflation and or even moderate inflation for an extended period stock and bond investors will most likely suffer. This happened in the 1970s. The market rose but inflation rose faster so net net stocks lost money. The same thing happened to bonds. So following Boglehead rules in the 1970s was not very good.

Just thinking back to how things progressed in those days gives me chills. I am too old to fight back and invest in other areas like I did back then.

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Re: In what ways could BogleHeads be badly wrong ?

Post by moghopper » Wed Jan 24, 2018 12:31 pm

MJW wrote:
Wed Jan 24, 2018 12:20 pm
I think to suggest that the Bogleheads' philosophy is "wrong" is to misunderstand the premise driving the philosophy.
A failure to question one's own stance on occasion leads to the worst sort of echo chamber. I don't believe the OP was questioning the very existence of the "Bogleheads" - but suggesting that an un-examined life (or in this case, philosophy) is not one worth living (or using).

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Re: In what ways could BogleHeads be badly wrong ?

Post by nisiprius » Wed Jan 24, 2018 12:32 pm

In order to ask how Bogleheads could be badly wrong, you have to state clearly what you think Boglehead-style investing is expected to achieve. Please go ahead and state it.

If I believed that investing in a three-fund portfolio is more likely to double my money in three months than investing in cryptocurrency, I would be badly wrong.
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Re: In what ways could BogleHeads be badly wrong ?

Post by chicagoan23 » Wed Jan 24, 2018 12:38 pm

Dudley wrote:
Wed Jan 24, 2018 10:48 am
The broad BogleHead investment philosophy has (or would have) served investors well for the last few decades.
i.e. establish a stock/bond mix in line with age/risk; invest in a broad, low cost index funds; hold and rebalance over cycles. Is that going to be true going forward ?

Whats the possibility such an approach is simply the product of the market behavior over the last few decades and also influenced by experience in USA. In what ways, and in what (realistic) economic circumstances, do you think it could turn out to be badly wrong in the decade(s) to come ? e.g. :

- the risk in stocks being underestimated given US history
- rising rates and/or inflation hammering bonds
- prolonged stagflation crushing both stocks and bonds
- absence of asset class diversification outside stocks and bonds
- buy and hold may not give adequate recovery in unusually long down turn

Just interested to try get some open minded, non-dogmatic, opinions on how bogleheads may possibly be deluding themselves (ourselves) or be blind-sighted by certain economic conditions ?
Like democracy, BH principles are probably the worst investment philosophy we have, except for all the other ones....

All of the risks you cited are legitimate but what would the alternatives be?

1. Short the market? That protects against big declines in stocks, prolonged stagflation, etc. but if you're wrong and we don't have those negative events, you could get crushed. I'm reminded of the poster who went 100% short about two years ago.

2. Move to cash? Inflation risk is higher than deflation risk, it seems to me, and you get no growth holding non-return generating cash.

3. Commodities? Currency risk, and economic downturns hammer them too, just like stocks.

4. Active management? Could work but chances are it won't serve you any better than broad indexing.

5. Real estate? Possibly, but use of leverage and lack of diversification also increases risk, and high ongoing costs make it tough to be as passive as you would be with a stock/bond split. Also, while real estate will always hold some value, so will the assets of all publicly traded companies in the US.

A 60/40 split could definitely turn out to be badly wrong in the decades to come, but it seems that almost any other alternative is more likely to turn out to be badly wrong.

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Re: In what ways could BogleHeads be badly wrong ?

Post by HomerJ » Wed Jan 24, 2018 12:39 pm

MJW wrote:
Wed Jan 24, 2018 12:20 pm
Anything beyond the idea that "I will take what the market gives me, because who knows what's going happen?" and doing so as inexpensively as practicable, is adding layers of complexity to the philosophy when they really do not belong. Let's avoid making this something it isn't.
This.

Investing in index funds isn't trying to be the best. It's the base-line.

Index funds give us an easy (and CHEAP!) way to track the market exactly. By definition, you have zero chance to beat the market.

If the market crashes for a long time, you'll be down for a long time too. Nothing in Boglehead philosophy says that can't happen. The Great Depression happened. It could happen again.

If the market remains stagnant for a long time, your index returns will be stagnant too. Nothing in Boglehead philiosphy says that can't happen. The DOW was around 1000 in 1966, and still around 1000 in 1982. That's 16 years of no movement (but at least you got dividends). That can certainly happen again.

Now Asset Allocation is important for handling these various risks, and we debate the various AAs on these boards. But I don't think there's a definitive Boglehead philosophy around Asset Allocation. But Bogleheads are aware of the above risks, and that's why there's a debate at all (otherwise we'd all be 100% stocks all the time).

Maybe default Boglehead philosophy on AA is "Age in bonds", you know, keeping it simple. But, in general, we all handle the various risks in our ways. Lots of debate on that.

I agree with the other posters that "Living below your means" is probably the best message to take from these boards. It's not technically part of the "Boglehead investment philosophy", but your saving rate, and keeping expenses low, are far more important for financial success than any other factors.
Last edited by HomerJ on Wed Jan 24, 2018 12:51 pm, edited 1 time in total.

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Re: In what ways could BogleHeads be badly wrong ?

Post by MJW » Wed Jan 24, 2018 12:44 pm

moghopper wrote:
Wed Jan 24, 2018 12:31 pm
MJW wrote:
Wed Jan 24, 2018 12:20 pm
I think to suggest that the Bogleheads' philosophy is "wrong" is to misunderstand the premise driving the philosophy.
A failure to question one's own stance on occasion leads to the worst sort of echo chamber. I don't believe the OP was questioning the very existence of the "Bogleheads" - but suggesting that an un-examined life (or in this case, philosophy) is not one worth living (or using).
I don't believe the OP was "questioning the very existence" of the Bogleheads either, nor was I implying that one can't make an argument for a different approach. Also, I'm not a Bogleheads card holder/flag waver/insert other expression of extreme fandom, so I'd like to think I am fairly objective in my stance here...

My point, which Nisiprius has since articulated more succinctly, is that in order to question the philosophy one should frame it in its proper context. I am not sure that many on this forum, even the more dedicated, gung-ho members, do that, necessarily.

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HomerJ
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Re: In what ways could BogleHeads be badly wrong ?

Post by HomerJ » Wed Jan 24, 2018 12:47 pm

I guess we all have an assumption that the stock market will continue to grow, over the long-term.

I believe this is a valid assumption because it's not a closed system. Human work is constantly inputted into the system raising the value of companies.

I'm not sure that's a "Boglehead" assumption however.

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Re: In what ways could BogleHeads be badly wrong ?

Post by zeugmite » Wed Jan 24, 2018 12:53 pm

The biggest risk to the Boglehead way is if markets become persistently inefficient so that investors are not rewarded appropriately for risk. Central bank intervention is the current biggest cause of market inefficiency over the last ten years. It's fine if you have most of your investments in before the intervention, but terrible if you've had to accumulate during the last ten years at questionable prices.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Tyler Aspect » Wed Jan 24, 2018 1:00 pm

Bogleheads usually caution investors not to do market timing. I think that is generally a good recommendation. However, for a retired person without a source of income the potential of a recession is a significant event. It is my belief that there are usually visible economic signs of impending economic troubles.

Looking at the 10 year period starting from 2004, suppose such an investor were to reduce their holding from 60% stock / 40% bond to a more conservative position of 40% stock / 60% bond, then they would reduce average annual return (CAGR) from 6.34% to 5.55%. More importantly, their maximum draw-down would be reduced from a loss of 38% to 28%. In my mind this is a good trade-off even if the investor's call were two years too early. You would be giving up 2% of your net asset to protect against a 10% loss of your net asset.

Food for thought.
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Re: In what ways could BogleHeads be badly wrong ?

Post by getthatmarshmallow » Wed Jan 24, 2018 1:08 pm

As a newbie, I see a couple of places, and I think it's always wise to question the fundamentals:

1) "Past performance does not guarantee future results" is also true of the entire stock market, yet is typically quoted as a reason to avoid an actively-managed fund, but not as a reason to rethink indexing. This strikes me as a blind spot, and maybe a reason to increase international allocations.

2) Due in part to the popularity of index funds, the fees for actively-managed funds (I presume) are lower than they were back before index funds existed. Thus, an actively-managed fund doesn't have to do as well as it might have in the past in order to beat the index sufficiently to be a worthwhile choice. So if we add in two further assumptions:
  • the asset allocation is the most important decision you make because it prevents you from being stupid during a bear market
  • you can hold the actively-managed fund in a tax-advantaged account
Then it seems there's a case for holding part of your portfolio in actively-managed funds, appropriately given your risk tolerance, in (e.g.) your tax-advantaged accounts.

But that said, I think it's also important to manage the scope of the question. Stagflation, an unusually long downturn, etc., is going to be a problem for everyone involved in stocks and bonds, not just indexers. So you need to distinguish the question of "what's bad for anyone investing?" vs. "what's a risk that's unique to indexing?" if you want to make a good judgment of the risk. And I think the question is whether giving up on any "skill"-based picking of stocks completely by passively investing is itself a kind of risk.

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Re: In what ways could BogleHeads be badly wrong ?

Post by snackdog » Wed Jan 24, 2018 1:12 pm

A black swan event such as a pandemic, nuclear war, cyber attack or asteroid collision could crater the world economy for a generation or more. Then the bogleheads might look pretty silly with all their investments up in smoke.

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Re: In what ways could BogleHeads be badly wrong ?

Post by All Seasons » Wed Jan 24, 2018 1:24 pm

Sounds like someone needs a dose of Risk Parity. :D

https://www.bridgewater.com/resources/a ... -story.pdf
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Re: In what ways could BogleHeads be badly wrong ?

Post by visualguy » Wed Jan 24, 2018 2:11 pm

The strategy can fail because of the reasons mentioned by the OP and others. In other words, it's possible that a Boglehead stock/bond portfolio that passes past tests will fail in the future. The bad period of 65-82 could have been even worse and/or longer, and the same applies to the bad period of 2000-2012. If the wrong people had been in charge of setting policy, and they had taken the wrong steps, things could have easily been even worse.

The question is what is the probability of that, and what can be done about it. The probably can't really be computed, so we have to assess it for ourselves. I see it as small, but not tiny. Something to be concerned about, but not "freaked out" about.

As to what to do about it... One option is a "Plan B". For example, some people in areas where housing is very expensive have a lot of home equity. It's possible to liquidate that and move in the unlikely case that the portfolio fails. Another approach is to work longer or do something more lucrative and save more. Yet another approach is to diversify into direct real estate which may hold up better in economically strong parts of the country (not everyone is in a position to do it, but some are.)

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Re: In what ways could BogleHeads be badly wrong ?

Post by stlrick » Wed Jan 24, 2018 2:20 pm

I've never been able to reconcile:

1. Stay the course, nobody knows nothing, you can't time the market

and

2. Valuations matter

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Re: In what ways could BogleHeads be badly wrong ?

Post by RNJ » Wed Jan 24, 2018 2:22 pm

White Coat Investor wrote:
Wed Jan 24, 2018 10:52 am
# 1 Trend following may work better than buy and hold
# 2 Choosing stocks may become easier than it has been in the past
# 3 Picking mutual fund managers may become easier than it has been in the past
# 4 Factor investing may work out a lot better than many of us think
# 5 Future stock returns may be 3% while real estate (buying local properties) provides 10%+ returns
# 6 The entire economic world melts down and you would have been better off spending your money rather than saving/investing at all

That's about all I could think of. I worry most about # 1 and # 5 as those seem most likely to me.
For me, the key word in the OP's post is "badly". And that I take to mean doing something incredibly stupid / careless that is avoidable given current available information. This, I believe, is the BH philosophy strength (basically: diversify, keep costs low, know your risk tolerance, index [mostly]).

Being a BH is like exercising, eating your fruits and veggies, staying at a reasonable weight: it encourages good (if not "best") practices, and mostly moves people in a good-enough direction.

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Re: In what ways could BogleHeads be badly wrong ?

Post by CppCoder » Wed Jan 24, 2018 2:26 pm

The Boglehead's philosophy will never be the "best" investment strategy in the sense that one will always be able to construct a back tested portfolio that will have done better over a given past time period. Unfortunately, without a crystal ball, the statistical likelihood is that without some form of (legal) asymmetric market knowledge, you will create a portfolio that will do worse. Hence, I look at the strategy as less a way to win and instead as a way not to lose (or, at least, get my fair shake). In that way, I don't think it can be "badly wrong."

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Re: In what ways could BogleHeads be badly wrong ?

Post by AtlasShrugged? » Wed Jan 24, 2018 2:27 pm

Just interested to try get some open minded, non-dogmatic, opinions on how bogleheads may possibly be deluding themselves (ourselves) or be blind-sighted by certain economic conditions ?
Dudley....here is some food for thought.

Dogma: The Efficient Markets Hypothesis....it could be wrong.
Dogma: The Cost Matters Hypothesis....could be wrong.
Dogma: Simple is better.....could be wrong.
Dogma: Passive investing trumps active investing....could be wrong
Blind-sided: Japan won't happen here.....until it does
Blind-sided: A military/terror event greater than 9/11....until it happens

I think visualguy kind of hit it. Could these things happen (dogma wrong, extraordinary event)? Yes. But the probability is exceptionally low. To be honest, I would not worry about it much.
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Re: In what ways could BogleHeads be badly wrong ?

Post by aristotelian » Wed Jan 24, 2018 2:29 pm

I don't see how any of the concerns listed by OP couldn't be shared by someone espousing a Bogleheads philosophy. There is no perfect solution, but you diversify and hope for the best.

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Re: In what ways could BogleHeads be badly wrong ?

Post by onourway » Wed Jan 24, 2018 2:31 pm

The one I see is inflation risk to the bond portion of a portfolio. There is *some* talk of TIPS, etc. but the returns have been so poor for so long on them that they are rarely more than a small portion of most people's holdings, if at all. (I think this is a classic case of recency bias - but I'm guilty as well, so?) There is an assumption that 'bonds are safe' but for someone nearing retirement at something like 50/50 or 60/40, a sudden and unexpected inflation event could be much more harmful that I think we give credit to.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Captain kangaroo » Wed Jan 24, 2018 2:39 pm

Boglehead philosophy provides comfort to me, that's my favorite aspect.

I own the entire stock market, balanced with short term bonds for a degree of safety. My portfolio is over a million.. Will it ever be 10 million using this philosophy like it COULD be with timing the market, shorting, stock selecting? No, but I don't need that. I want a comfortable, happy and stress free life. I'm happy knowing it'll grow 3-6% and in the years it plummets, I know it'll bounce back eventually (unless the world comes to an end and Google, Amazon, ExxonMobil, etc) all suddenly collapse.

Complexity can be stressful too. I can look at my three funds and see that it's up, or down.

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Re: In what ways could BogleHeads be badly wrong ?

Post by lazydavid » Wed Jan 24, 2018 2:43 pm

JCE66 wrote:
Wed Jan 24, 2018 2:27 pm
Just interested to try get some open minded, non-dogmatic, opinions on how bogleheads may possibly be deluding themselves (ourselves) or be blind-sighted by certain economic conditions ?
Dudley....here is some food for thought.

Dogma: The Efficient Markets Hypothesis....it could be wrong.
Dogma: The Cost Matters Hypothesis....could be wrong.
Dogma: Simple is better.....could be wrong.
Dogma: Passive investing trumps active investing....could be wrong
Blind-sided: Japan won't happen here.....until it does
Blind-sided: A military/terror event greater than 9/11....until it happens
I'll go along with all of those except one. "Cost Matters" is based on simple math, and cannot be wrong. "Cost is the only thing that matters" could be (and likely is) wrong, but the shorter version must be true.

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Re: In what ways could BogleHeads be badly wrong ?

Post by jalbert » Wed Jan 24, 2018 2:56 pm

Having invested in index funds for over 30 years, I can say that the biggest benefit is that you don't have to be right. You will get the index return. That may be good. That may be not so good, but it often aligns with what is going on in the economy. In 2009, it was not very good, but there also were decent brand new cars selling for $6500. Home prices and rents were lower. Today, the market has recovered tremendously, and we have higher car and housing prices to show for it.
Risk is not a guarantor of return.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Rowan Oak » Wed Jan 24, 2018 3:07 pm

JCE66 wrote:
Wed Jan 24, 2018 2:27 pm
Just interested to try get some open minded, non-dogmatic, opinions on how bogleheads may possibly be deluding themselves (ourselves) or be blind-sighted by certain economic conditions ?
Dudley....here is some food for thought.

Dogma: The Efficient Markets Hypothesis....it could be wrong.
Dogma: The Cost Matters Hypothesis....could be wrong.
Dogma: Simple is better.....could be wrong.
Dogma: Passive investing trumps active investing....could be wrong
Blind-sided: Japan won't happen here.....until it does
Blind-sided: A military/terror event greater than 9/11....until it happens

I think visualguy kind of hit it. Could these things happen (dogma wrong, extraordinary event)? Yes. But the probability is exceptionally low. To be honest, I would not worry about it much.
I think cost will always matter.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: In what ways could BogleHeads be badly wrong ?

Post by mak1277 » Wed Jan 24, 2018 3:16 pm

I think OP, you have to ask two more general questions before you can start to postulate where this approach could "be badly wrong":

1) What are you comparing it to? It's not intellectually honest to compare a boglehead approach to "all other" approaches and say there are some circumstances in which one or some of the other approaches would be better or more "right".

2) Why does someone choose a boglehead approach? Personally, I am lazy. I like being able to contribute to three funds and just ignore it. I accept that I'm not going to "beat the market", and I don't care. Three fund portfolio is good enough for me and it enables me to focus my energy on other things. I choose simplicity over optimization every time.

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Re: In what ways could BogleHeads be badly wrong ?

Post by bhsince87 » Wed Jan 24, 2018 3:31 pm

There are some folks i know (including my parents) who beleive both stocks AND coporate bonds are too risky. My parents have only "invested" in CDs and ferederal government bonds. And they've done just fine.

Stocks and other bonds rely heavily on our fairly well regulated and behaved financial markets. If those markets fail, through say curruption, government intervention, social unrest, etc., both stocks and bonds could fail epically.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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Re: In what ways could BogleHeads be badly wrong ?

Post by InvisibleAerobar » Wed Jan 24, 2018 3:41 pm

btenny wrote:
Wed Jan 24, 2018 12:29 pm
I think Boglehead philosophy is great and works great for most situations. BUT if we get high inflation and or even moderate inflation for an extended period stock and bond investors will most likely suffer. This happened in the 1970s. The market rose but inflation rose faster so net net stocks lost money. The same thing happened to bonds. So following Boglehead rules in the 1970s was not very good.

Just thinking back to how things progressed in those days gives me chills. I am too old to fight back and invest in other areas like I did back then.
So the question becomes, what would have been better (with perfect hindsight) and what could one do if something similar (to the events in the 70s) happens in the future? I wonder how people in Japan has made it out of the last two decades, given the anemic growth (and at times lack of even that).

On a side note, I often wondered what would have happened had the recovery from 2008/2009 taken much longer. I recall talking to someone who cashed out a significant chunk of equities in 08/09 because the value of those holdings went down by about 50%. She said she was concerned and worried; I countered that we could either assume that things would eventually recover for her investment horizon or that things won't, and that had the latter happened, we (as in much of the nation, if not the world) would be so very f***ed that drop in equity prices would be the least of anyone's worries.

The pressing concerns are related to the fundamental assumptions of growth. Specifically, what happens when things could no longer grow and expand. Exhaustion of resources such as petrol (from which most of plastics is derived) and rare earth minerals could bring significant changes to consumption. If the earth can't sustain population growth and the concomitant increase in demand of goods, then growth itself (in any time scale) may not be a valid assumption. But then again, such a scenario likely wouldn't spare any other approaches, which goes back to the point that if/when such a scenario happens, there would be issues larger than stagnation one would need to consider.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Agggm » Wed Jan 24, 2018 3:44 pm

Sandtrap wrote:
Wed Jan 24, 2018 10:53 am
White Coat Investor wrote:
Wed Jan 24, 2018 10:52 am
# 1 Trend following may work better than buy and hold
# 2 Choosing stocks may become easier than it has been in the past
# 3 Picking mutual fund managers may become easier than it has been in the past
# 4 Factor investing may work out a lot better than many of us think
# 5 Future stock returns may be 3% while real estate (buying local properties) provides 10%+ returns
# 6 The entire economic world melts down and you would have been better off spending your money rather than saving/investing at all

That's about all I could think of. I worry most about # 1 and # 5 as those seem most likely to me.
Agreed.
#1
Definitely #5.

j :D
Then it won't be 1 or 5. 😁

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Post by acanthurus » Wed Jan 24, 2018 4:02 pm

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Re: In what ways could BogleHeads be badly wrong ?

Post by sailaway » Wed Jan 24, 2018 4:12 pm

If the entire world economy melts down, what difference will it make whether I saved or spent?

In many cases, the savers may be better prepared because they have been more creative all along, less prone to doing things just because everyone else did.

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Re: In what ways could BogleHeads be badly wrong ?

Post by H-Town » Wed Jan 24, 2018 4:35 pm

stlrick wrote:
Wed Jan 24, 2018 2:20 pm
I've never been able to reconcile:

1. Stay the course, nobody knows nothing, you can't time the market

and

2. Valuations matter
They are not the same. #2. Valuations: meaning that you, as an investor, should be able to calculate PE and growth rate of the assets you own. Understand that high valuation means that low return in the future. Adjust your expectation and planning so see whether you must save more to achieve your target number. Many people fail to keep their eyes on this long-term goal as some days they will come to a reality that they don't have enough money to retire.

#1 is a pretty much a fact.

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Re: In what ways could BogleHeads be badly wrong ?

Post by rbaldini » Wed Jan 24, 2018 4:48 pm

If it were found that, in the future, actively managed mutual funds on average DID beat common index funds, then that would be surprising and I'd conclude that I was misled by the Bogleheads. (Note that the above is not impossible, because actively managed mutual funds are not the entirety of active investors, and market index funds are not perfect indices.)

I don't really count the real estate thing because it's not a passive investment. At the very least you have to buy, maintain, and sell houses. At worst, you have to be a landlord. That's a lot more work than putting my money in an index fund. I don't take Boglehead philosophy to say that "stock is inherently better investment than real estate", so if real estate did turn out to be better for those who did it, I wouldn't say Bogleheads were wrong.

It could be that we're pretty far off about international vs. domestic... But then again, Bogleheads disagree wildly about that, so there's no consensus to disprove.

Crypto currencies could end up being the future... most Boglers are skeptical of that, I think.

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Re: In what ways could BogleHeads be badly wrong ?

Post by BigMoneyNoWhammies » Wed Jan 24, 2018 4:55 pm

azanon wrote:
Wed Jan 24, 2018 11:11 am
I have a great fondness for Boglehead philosophy, but I admit 2 come to mind (and both are related):

1. That a portfolio dominated by stocks (let's say anything 50% or higher) could ever constitutes a "balanced" portfolio. In practice, stocks are very volatile by comparison to most other asset classes, is only one of several asset classes, and only tend to do well in certain economic climates. And because of their volatility, a 50% position in stocks will likely explain 80%+ of the volatility of a portfolio.

Stocks also, I believe, have approximately the actual expected return that they should have for their expected risk, so from that standpoint they're not necessarily better than any other asset class. In any event, if we enter an unfavorable investing climate for stocks, a typical boglehead portfolio will likely feel like anything other than balanced.

2. In that it currently tends to favor home country bias in a portfolio, and logically so at least given Jack Bogle's view towards international investing. Given today's current valuations, I see at least the potential for a portfolio dominated by US stocks to be badly wrong for the next few years.
I don't have the link to it unfortunately, but JB gave an interview a few weeks ago where he addressed the "Jack Bogle prefers US stocks only" issue. Evidently, the way he framed it was thus: his view is that enough earnings from many US companies now come from business overseas (I believe approx 40% was the figure he threw out) that expressly investing in any sort of international fund wasn't necessarily needed for exposure to international markets, with the caveat that emerging markets might be an exception. I would tend to agree with his assessment, and have some EM exposure, but otherwise don't have any equities allocated specifically towards intl stocks for this reason. So many of the companies invested in via index funds are multinational entities at this point that international exposure is a given.

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Re: In what ways could BogleHeads be badly wrong ?

Post by bloom2708 » Wed Jan 24, 2018 5:03 pm

rbaldini wrote:
Wed Jan 24, 2018 4:48 pm
If it were found that, in the future, actively managed mutual funds on average DID beat common index funds, then that would be surprising and I'd conclude that I was misled by the Bogleheads. (Note that the above is not impossible, because actively managed mutual funds are not the entirety of active investors, and market index funds are not perfect indices.)
You won't be mislead. Every year certain funds beat the indexes. All you have to do is pick the right ones. Then get out of them when they under-perform the next year. You only know that in hindsight. What if 50% of the funds beat the index. Which 50%?

You can't say you will feel mislead. You can pick the winners now. Just pick the ones that will beat the index. Then sell before they under perform. Easy. :wink:

Nobody knows nothing.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

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Re: In what ways could BogleHeads be badly wrong ?

Post by linenfort » Wed Jan 24, 2018 5:06 pm

Dudley wrote:
Wed Jan 24, 2018 10:48 am
- prolonged stagflation crushing both stocks and bonds
- absence of asset class diversification outside stocks and bonds
- buy and hold may not give adequate recovery in unusually long down turn
I think about the above sometimes. Clearly, a classic 60/40 stock/bond portfolio should see more severe and longer drawdowns than, say, Harry Browne's permanent portfolio. If a long drawdown due to a stock crash coincides with my retirement, I will probably wish I had put more into the permanent portfolio and less into stocks. And I will feel I was wrong.
bogleheads, don't knock state lotteries. They helped defund the mafia.

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Re: In what ways could BogleHeads be badly wrong ?

Post by rbaldini » Wed Jan 24, 2018 5:10 pm

bloom2708 wrote:
Wed Jan 24, 2018 5:03 pm
rbaldini wrote:
Wed Jan 24, 2018 4:48 pm
If it were found that, in the future, actively managed mutual funds on average DID beat common index funds, then that would be surprising and I'd conclude that I was misled by the Bogleheads. (Note that the above is not impossible, because actively managed mutual funds are not the entirety of active investors, and market index funds are not perfect indices.)
You won't be mislead. Every year certain funds beat the indexes. All you have to do is pick the right ones. Then get out of them when they under-perform the next year. You only know that in hindsight. What if 50% of the funds beat the index. Which 50%?

You can't say you will feel mislead. You can pick the winners now. Just pick the ones that will beat the index. Then sell before they under perform. Easy. :wink:

Nobody knows nothing.
No, that's not what I'm saying. I'm saying, suppose that in the future, a solid majority of actively managed mutual funds beat the Vanguard Total Stock Market Index (adjusted for risk, say). *On average*, professionally managed mutual funds beat the index by a non-trivial margin. Then one wouldn't need to get lucky or rely on hindsight - just picking an active mutual fund would, on average, have been a better strategy.

In the past, this has not been true. And I don't think it will be true in the future. But it's not impossible, and if it came true, then I think it's fair to say we'd all be pretty surprised, and wrong.

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Re: In what ways could BogleHeads be badly wrong ?

Post by BigMoneyNoWhammies » Wed Jan 24, 2018 5:13 pm

White Coat Investor wrote:
Wed Jan 24, 2018 10:52 am
# 1 Trend following may work better than buy and hold
# 2 Choosing stocks may become easier than it has been in the past
# 3 Picking mutual fund managers may become easier than it has been in the past
# 4 Factor investing may work out a lot better than many of us think
# 5 Future stock returns may be 3% while real estate (buying local properties) provides 10%+ returns
# 6 The entire economic world melts down and you would have been better off spending your money rather than saving/investing at all

That's about all I could think of. I worry most about # 1 and # 5 as those seem most likely to me.
#5. Low stock returns relative to historical norms worries me more than anything else listed here.

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Re: In what ways could BogleHeads be badly wrong ?

Post by visualguy » Wed Jan 24, 2018 5:15 pm

rbaldini wrote:
Wed Jan 24, 2018 4:48 pm
If it were found that, in the future, actively managed mutual funds on average DID beat common index funds, then that would be surprising and I'd conclude that I was misled by the Bogleheads. (Note that the above is not impossible, because actively managed mutual funds are not the entirety of active investors, and market index funds are not perfect indices.)

I don't really count the real estate thing because it's not a passive investment. At the very least you have to buy, maintain, and sell houses. At worst, you have to be a landlord. That's a lot more work than putting my money in an index fund. I don't take Boglehead philosophy to say that "stock is inherently better investment than real estate", so if real estate did turn out to be better for those who did it, I wouldn't say Bogleheads were wrong.

It could be that we're pretty far off about international vs. domestic... But then again, Bogleheads disagree wildly about that, so there's no consensus to disprove.

Crypto currencies could end up being the future... most Boglers are skeptical of that, I think.
The criterion for being badly wrong isn't something else being better than the BH approach. The criterion is that the BH approach fails. You relied on it to work (because the BH portfolio always worked in the past based on firecalc, etc.), but it actually fails in the future when you are using it to pay for your retirement. I think that's what the OP is talking about. It looks like most here (including myself) believe that this scenario isn't likely, but not impossible.

Regarding direct real estate... It helps me reduce my worry about the BH approach failing. Like I said, it's not a big worry, but why not diversify in a way that would address it if practical. It's not passive, but it isn't all that onerous either at the small scale that we're talking about. It's much less onerous than trying to extend my working years when my career runs out of steam, or trying to change direction to make more money in my career.

In general, though, I have to say that I'm more worried about underestimating future expenses than the BH strategy failing.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Dottie57 » Wed Jan 24, 2018 5:15 pm

snackdog wrote:
Wed Jan 24, 2018 1:12 pm
A black swan event such as a pandemic, nuclear war, cyber attack or asteroid collision could crater the world economy for a generation or more. Then the bogleheads might look pretty silly with all their investments up in smoke.

If those happen, I won't worry about looking silly.

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Re: In what ways could BogleHeads be badly wrong ?

Post by rbaldini » Wed Jan 24, 2018 5:20 pm

visualguy wrote:
Wed Jan 24, 2018 5:15 pm
The criterion for being badly wrong isn't something else being better than the BH approach. The criterion is that the BH approach fails. You relied on it to work (because the BH portfolio always worked in the past based on firecalc, etc.), but it actually fails in the future when you are using it to pay for your retirement. I think that's what the OP is talking about. It looks like most here (including myself) believe that this scenario isn't likely, but not impossible.
Sure. But... wouldn't you agree that the vast majority of Bogleheads would predict that the average mutual fund in the future will not beat an index, after costs? And therefore, if they did (very unlikely, but not strictly impossible), then we would be "wrong"? Even "badly wrong"?
visualguy wrote:
Wed Jan 24, 2018 5:15 pm
Regarding direct real estate... It helps me reduce my worry about the BH approach failing. Like I said, it's not a big worry, but why not diversify in a way that would address it if practical. It's not passive, but it isn't all that onerous either at the small scale that we're talking about. It's much less onerous than trying to extend my working years when my career runs out of steam, or trying to change direction to make more money in my career.
Sure, I have no gripe with real estate for others. I'm just saying I don't think "Don't Invest in Real Estate" is part of the Boglehead philosophy - so if real estate outperforms stocks, that doesn't reflect badly on Bogelheads, IMO. Am I wrong about that? EDIT: I guess the standard suggestion is the 3-Fund portfolio, which doesn't include real estate. So, while not explicitly forbidding real estate, it certainly doesn't encourage it as much as stocks or bonds. So, perhaps yes, we'd be wrong-ish if real estate ended up being the best bet.

Personally, I have a lot of money in real estate: I own a house. It's the biggest asset I own, for now. I don't need any more than that. Certainly no interest in being a landlord.
Last edited by rbaldini on Wed Jan 24, 2018 5:29 pm, edited 1 time in total.

Trev H
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Re: In what ways could BogleHeads be badly wrong ?

Post by Trev H » Wed Jan 24, 2018 5:28 pm

That low cost index fund investing is the "only" way to go.

One word... oh well three words.

Wellesley Income Fund.

Trev H

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