GMO forecast

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Always passive
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GMO forecast

Post by Always passive » Sat Feb 17, 2018 12:37 am

I received a monthly email from GMO with their 7 year forecast. For the last one, end of January 18, see the site below.
https://www.gmo.com/docs/default-source ... f?sfvrsn=2

I typically do not pay much attention to the data, but this time out of curiosity I decided to look at it. For those that are not aware, for sometime GMO has been highly negative at the prospects of the markets, and not much different than Research Associate and other serious investment companies. But I think that this time they have gone overboard, all assets, equities and fixed income, are forecasted by them to be so expensive that have either a negative “real” performance or close to zero for the next seven years.
Given this outlook which they base on current valuations, and by people that manage billions of dollars and are far from stupid, if they are close to being right, what is left for the rest of us that invest in indexes. Shall we all go to cash and wait it out? (Just kidding!)
I know that many will say that no one knows nothing, and that is fine. If that is your view I kind of agree, but I also feel that valuations as a way to understand the future is something that most of us take seriously. Thus, I would very like to hear from those that can provide serious comments on this data. What is one to do?

PFInterest
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Re: GMO forecast

Post by PFInterest » Sat Feb 17, 2018 12:55 am

what is gmo?

dont do anything.

Always passive
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Re: GMO forecast

Post by Always passive » Sat Feb 17, 2018 1:21 am

PFInterest wrote:
Sat Feb 17, 2018 12:55 am
what is gmo?

dont do anything.
If you do not, find out. This is the type of answerss that no one benefits from. Get serious, it is your money!

Nate79
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Re: GMO forecast

Post by Nate79 » Sat Feb 17, 2018 1:22 am

Don't know but the Kirkland brand infant formula we feed our baby is labelled as non-GMO.

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Re: GMO forecast

Post by Nate79 » Sat Feb 17, 2018 1:22 am

Always passive wrote:
Sat Feb 17, 2018 1:21 am
PFInterest wrote:
Sat Feb 17, 2018 12:55 am
what is gmo?

dont do anything.
If you do not, find out. This is the type of answerss that no one benefits from. Get serious, it is your money!
Doubtful.

HongKonger
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Re: GMO forecast

Post by HongKonger » Sat Feb 17, 2018 3:05 am

GMO are permabears. I don't think predicting the tech meltdown a decade in advance or the 08/09 crash a decade in advance makes you a legend in calling the market personally.
But do I think US equities are overvalued, yes. Do I personally think there will be a good run up before the next crash, yes. When will the next crash be? I don't know (although my gut says not this year), .

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JoMoney
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Re: GMO forecast

Post by JoMoney » Sat Feb 17, 2018 3:18 am

GMO is a firm ran by Jeremy Grantham, a smart, skeptical, well spoken guy... but a perma-bear... and his forecast record/ranking reflects that
https://www.cxoadvisory.com/gurus/
https://www.cxoadvisory.com/3200/indivi ... -grantham/
It hasn't done well for investors to be so bearish... but it does sound smarter, so maybe it pays good to be a bearish financial advisor.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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alpine_boglehead
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Re: GMO forecast

Post by alpine_boglehead » Sat Feb 17, 2018 10:14 am

It's at least interesting to browse through GMO's successive forecasts (from Google image search "GMO 7 year asset class forecast).

Even in 2010, when this bull market was still a calf, they gave US large cap a 4,7% expected real return. For the S&P 500 (US large cap), in the 7 years that followed the price return alone was nearly 12% yearl. And you wouldn't have done well investing in the asset class they predicted to have the highest expected return: emerging markets. VWO (Vanguard Emerging Markets) features a price return of about 0% over that period. Perhaps they had some recency bias from the 2004 to 2007 emerging markets performance. Another case for "nobody knows nothing" and "stay the course".

07/2010
Image

10/2015
Image

01/2017
Image

Scooter57
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Re: GMO forecast

Post by Scooter57 » Sat Feb 17, 2018 11:56 am

Alternatively, you can conclude that if very intelligent value based investors are able to make a strong case for a permabear position that does not match actual stock progress, it shows what a completely illogical gamble investing really is. The Bogleheads philosophy rests on the idea that the market is unpredictable using reason, but it also is based on the potentially false belief that markets over the long term go up.

This may be true over recent history and the very long term--longer than we and our kids will live. But there are nasty patches when it is not true for long enough to screw us up.

Not understanding that investing IS gambling, though gambling with better odds than Vegas, is a big mistake.

I still see a lot of posts here that seem to think academic research can figure out useful things, but suspect their backtesting-heavy findings probably are no more helpful than the strategies Grantham et al. employ.

Grantham doesn't make his living from newsletters. Go read his bio.

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alpine_boglehead
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Re: GMO forecast

Post by alpine_boglehead » Sat Feb 17, 2018 12:52 pm

Scooter57 wrote:
Sat Feb 17, 2018 11:56 am
Alternatively, you can conclude that if very intelligent value based investors are able to make a strong case for a permabear position that does not match actual stock progress, it shows what a completely illogical gamble investing really is. The Bogleheads philosophy rests on the idea that the market is unpredictable using reason, but it also is based on the potentially false belief that markets over the long term go up.

This may be true over recent history and the very long term--longer than we and our kids will live. But there are nasty patches when it is not true for long enough to screw us up.

Not understanding that investing IS gambling, though gambling with better odds than Vegas, is a big mistake.

I still see a lot of posts here that seem to think academic research can figure out useful things, but suspect their backtesting-heavy findings probably are no more helpful than the strategies Grantham et al. employ.

Grantham doesn't make his living from newsletters. Go read his bio.
Because the stock market doesn't behave the way Jeremy Grantham believes it should, investing is an illogical gamble. :confused

I'd argue the other way round - investing is driven by humans, which are "illogical", so it's safe to assume that lots of the behavior seen in markets mirrors the rationality/irrationality of the participants (see the crypto "currency" space).

For me it underlines the boglehead conclusion - there's so many experts out there saying different things (Grantham being just one of them, you'll find other very bright minds arguing in the opposing direction) - one of them will be right, but it's impossible to know which one, ergo employ a very simple strategy of diversifying and keeping costs low (by not giving the active management "experts" a big chunk of their return for their may-be-true predictions).

I don't think its illogical to take a risk when there's an expected return higher than that risk. Life is just that, from our ancestors venturing out to hunt down a mammoth to us investing in stocks.

The difference between investing and gambling seems to be that gambling is a zero-sum game (with fees). Investing takes calculated risks with an expected return higher than the (perceived) risk, a non-zero-sum game.

There's lots of scenarios in which the "stocks always go up over the long term" fails, the history books are full of them, and it doesn't (yet) contain the unknowable unknowns that the future may hold. That's why bogleheads also recommend diversification. I'm always a bit wary when I read the "100% stocks" posts of the more risk-tolerant members.

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grayfox
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Re: GMO forecast

Post by grayfox » Sat Feb 17, 2018 1:03 pm

alpine_boglehead wrote:
Sat Feb 17, 2018 10:14 am
It's at least interesting to browse through GMO's successive forecasts (from Google image search "GMO 7 year asset class forecast).

Even in 2010, when this bull market was still a calf, they gave US large cap a 4,7% expected real return. For the S&P 500 (US large cap), in the 7 years that followed the price return alone was nearly 12% yearl. And you wouldn't have done well investing in the asset class they predicted to have the highest expected return: emerging markets. VWO (Vanguard Emerging Markets) features a price return of about 0% over that period. Perhaps they had some recency bias from the 2004 to 2007 emerging markets performance. Another case for "nobody knows nothing" and "stay the course".

07/2010
Image
As I recall, GMO forecasts are for 7 years out and assume that valuations mean revert to the historical average over that 7 years. Since 2010, valuations did NOT mean revert to the historical average. In fact, valuations expanded from about 20 in 2010 to the present 33. See http://www.multpl.com/shiller-pe/

Predictions come from whatever your assumptions are. Their assumption of mean reversion did not pan out and their prediction was way off.

talzara
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Re: GMO forecast

Post by talzara » Sat Feb 17, 2018 3:24 pm

JoMoney wrote:
Sat Feb 17, 2018 3:18 am
GMO is a firm ran by Jeremy Grantham, a smart, skeptical, well spoken guy... but a perma-bear... and his forecast record/ranking reflects that
https://www.cxoadvisory.com/gurus/
https://www.cxoadvisory.com/3200/indivi ... -grantham/
It hasn't done well for investors to be so bearish... but it does sound smarter, so maybe it pays good to be a bearish financial advisor.
This is what Jack Bogle said of Jeremy Grantham in 2011, when they were making those predictions.
Jack Bogle, the founder of Vanguard, who noted that Grantham “ran money for Vanguard for a while, and it didn’t work out that well,” says of him: “He’s been very, very good in his forecasts. In times of great bullishness, he’s the skunk at the garden party, and in times of bearishness, he’s saying, ‘Don’t give up.’ ”

http://www.nytimes.com/2011/08/14/magaz ... ayhem.html

Always passive
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Re: GMO forecast

Post by Always passive » Sat Feb 17, 2018 3:44 pm

One interesting point is that his forecast is so pessimistic on about everything and yet his funds invest in those very same asset classes. How is a potential investor in a GMO fund supposed to feel confident that by investing in one of the funds, he is not wasting his money?

HongKonger
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Re: GMO forecast

Post by HongKonger » Sat Feb 17, 2018 3:55 pm

Maybe that's why they saw outflows of 34% last year.

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Robert T
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Re: GMO forecast

Post by Robert T » Sat Feb 17, 2018 5:38 pm

.
I earlier set-up a portfolio (for tracking purposes) a long time ago now, that weights allocations based on GMO expected returns using all the 6 equity asset classes and 4 of the bond asset classes (cash, US government bonds, TIPS, and EM bonds) included in the GMO forecasts. An allocation is only made to asset classes with positive real expected returns in the GMO forecasts, and each allocation for a specific 'asset class' = expected return of that 'asset class' divided by the sum of the expected returns of all asset classes with positive returns. The funds used for each 'asset class' are 'index funds' where available. The portfolio is rebalanced once a year (at start of each year) to new weights implied by the GMO forecasts.

Here are the resulting annual returns over the last 15 years.

Returns (%)

2003...41.3
2004...18.4
2005...18.4
2006...14.9
2007...12.6
2008..-10.3
2009...37.8
2010...15.6
2011..-3.9
2012...17.5
2013...11.7
2014...2.9
2015...-5.8
2016...10.4
2017...25.4

Annualized return = 12.9%
Standard deviation = 14.5%
2008 downside = -10.3%

This is in comparison to my own portfolio: 75:25 stock:bond with global value and small cap tilt in equities

Annualized return = 9.9%
Standard deviation = 15.4%
2008 downside = -28.7

So the GMO portfolio did much better - $1 grew to almost 50 percent more over this period, with only about 1/3 of the 2008 downside. Would just note that the GMO portfolio is much less tax-efficient with often large changes in allocations across 'asset classes' over this 15 year period.

Personally I am sticking with own 'long-term' portfolio allocation. While interesting, for me the GMO portfolio is too tax inefficient; brings too much 'instability' to the investment process (large and frequent changes) and has large 'tracking error' both of which reduce the likelihood of staying the course; and it relies exclusively on expected real returns from one firm (GMO). Forecasts are at best difficult to do (even more so, to do them consistently well). GMO seems to do better at forecasts around extreme valuations - and even Grantham himself has said that 'revision to the mean' is taking/may take a lot longer that the 7 years used to derive their forecasts which may result in a larger range (less confidence) in the point estimates presented in the charts***. Some of the earlier charts included ranges/confidence intervals, and they were not small. Over the past 7 years my portfolio annualized returns have been similar the GMO portfolio returns above (8.0% vs. 7.8% annualized).

Obviously no guarantees.

Robert

*** From GMOs Q3 quarterly letter - Grantham writes (my underlines) - "Inside GMO there are three different views on whether and how rapidly the market will revert to its pre-1998 normal: James Montier feels it will be business as usual and revert within 7 years. Ben Inker also holds out for a 7 year period, but includes a 33% chance it will revert to a higher average valuation (the “Hell” scenario). I believe that the reversion on valuations will take 20 years, and that profit margins will probably only revert two-thirds of the way back to the old normal. All three outcomes are quite possible. This creates a difficult investment challenge." ... so much larger ranges around the point estimates ... He goes one to say - "My proposition, though, is that there is an optimal investment for all three outcomes: a heavy emphasis on Emerging Market (EM) equities, especially relative to the US." Time will tell.
.

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Noobvestor
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Re: GMO forecast

Post by Noobvestor » Sat Feb 17, 2018 10:05 pm

Thanks for tracking that, Robert - fascinating stuff! For anyone who couldn't get the link to work ... here's the most recent I could find:

Image

Glad to see my small cash, moderate emerging markets (and 50% overall international) stock allocations might pay off :beer
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: GMO forecast

Post by IlliniDave » Sun Feb 18, 2018 10:30 am

The thing I like about GMO is that they make me look like a roaring optimist.
Don't do something. Just stand there!

Scooter57
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Re: GMO forecast

Post by Scooter57 » Sun Feb 18, 2018 12:14 pm

alpine_boglehead wrote:
Sat Feb 17, 2018 12:52 pm

I don't think its illogical to take a risk when there's an expected return higher than that risk. Life is just that, from our ancestors venturing out to hunt down a mammoth to us investing in stocks.

The difference between investing and gambling seems to be that gambling is a zero-sum game (with fees). Investing takes calculated risks with an expected return higher than the (perceived) risk, a non-zero-sum game.

There's lots of scenarios in which the "stocks always go up over the long term" fails, the history books are full of them, and it doesn't (yet) contain the unknowable unknowns that the future may hold. That's why bogleheads also recommend diversification. I'm always a bit wary when I read the "100% stocks" posts of the more risk-tolerant members.

Much of what we do in life is a gamble, including choosing a spouse or having a child. We make the gambles where we feel that the odds are good. I don't think investing is any less of a gamble because those odds are better than buying lottery tickets or playing poker for a living. Trusting that following any approach, Boglehead or other, will ensure that you achieve your desired outcome is not wise. There is a non-zero chance that it won't, as the underlying belief is that markets will trend up over a period of time that corresponds to your retirement needs.

Diversification is just another way of trying to improve your odds. It's no different than studying poker and mastering the strategies. Doing that does improve the odds, which is why some people will win much more than others even when chance is a factor.

The problems arise when people start thinking that the strategies they are following result from some kind of settled fact and lose sight of the fact that they ARE gambling and that their calculation of the odds may be wrong.

There does seem to be a subset of people posting who take the attitude that they don't really have to know anything about the stuff they are investing in as long as they follow some Boglehead-approved guru's recommendations. They buy "Value" funds without any understanding of how "value" is defined and how the stocks in a particular index are selected. They buy bonds with no understanding of how interest rates affect bonds.

Obviously, there are a lot of very bright, experienced investors here, too, who have worked things out themselves over time. But I think it is a sign of ignorance to feel superior to someone like Grantham without understanding what it is that he bases his decisions on.

The fact that his stuff does seem to have performed well just suggests to me that he understands that we still have to invest in environments that probably are less than ideal and may not live up to our long-term hopes. That was a very reasonable approach to take over the past decade. It is also possible that permabears may end up with the last laugh. I bet there were some Japanese permabears who took a lot of guff but ended up with a lot more money to invest through the past 25 years.

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alpine_boglehead
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Re: GMO forecast

Post by alpine_boglehead » Sat Feb 24, 2018 12:35 am

Scooter57 wrote:
Sun Feb 18, 2018 12:14 pm
alpine_boglehead wrote:
Sat Feb 17, 2018 12:52 pm

I don't think its illogical to take a risk when there's an expected return higher than that risk. Life is just that, from our ancestors venturing out to hunt down a mammoth to us investing in stocks.

The difference between investing and gambling seems to be that gambling is a zero-sum game (with fees). Investing takes calculated risks with an expected return higher than the (perceived) risk, a non-zero-sum game.

There's lots of scenarios in which the "stocks always go up over the long term" fails, the history books are full of them, and it doesn't (yet) contain the unknowable unknowns that the future may hold. That's why bogleheads also recommend diversification. I'm always a bit wary when I read the "100% stocks" posts of the more risk-tolerant members.

Much of what we do in life is a gamble, including choosing a spouse or having a child. We make the gambles where we feel that the odds are good. I don't think investing is any less of a gamble because those odds are better than buying lottery tickets or playing poker for a living. Trusting that following any approach, Boglehead or other, will ensure that you achieve your desired outcome is not wise. There is a non-zero chance that it won't, as the underlying belief is that markets will trend up over a period of time that corresponds to your retirement needs.

Diversification is just another way of trying to improve your odds. It's no different than studying poker and mastering the strategies. Doing that does improve the odds, which is why some people will win much more than others even when chance is a factor.

The problems arise when people start thinking that the strategies they are following result from some kind of settled fact and lose sight of the fact that they ARE gambling and that their calculation of the odds may be wrong.

There does seem to be a subset of people posting who take the attitude that they don't really have to know anything about the stuff they are investing in as long as they follow some Boglehead-approved guru's recommendations. They buy "Value" funds without any understanding of how "value" is defined and how the stocks in a particular index are selected. They buy bonds with no understanding of how interest rates affect bonds.

Obviously, there are a lot of very bright, experienced investors here, too, who have worked things out themselves over time. But I think it is a sign of ignorance to feel superior to someone like Grantham without understanding what it is that he bases his decisions on.

The fact that his stuff does seem to have performed well just suggests to me that he understands that we still have to invest in environments that probably are less than ideal and may not live up to our long-term hopes. That was a very reasonable approach to take over the past decade. It is also possible that permabears may end up with the last laugh. I bet there were some Japanese permabears who took a lot of guff but ended up with a lot more money to invest through the past 25 years.
Thanks for you explanation - this seems much more thought through than the provocative "investing is gambling" proposition :happy - it's very true that life is just a long series of taking one's chances.

I took the time to look again at the bogleheads approach in the Wiki, and that seems much more sensible than the "dump all into a three-fund portfolio and forgetaboutit" "guru" recommendation to which it sometimes seems to be reduced. There's one thing which might be added - and Grantham obviously also works by it - "we cannot let others do our thinking for us".

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Re: GMO forecast

Post by InvestInPasta » Sun Feb 25, 2018 2:17 pm

Robert T wrote:
Sat Feb 17, 2018 5:38 pm
.
I earlier set-up a portfolio (for tracking purposes) a long time ago now, that weights allocations based on GMO expected returns using all the 6 equity asset classes and 4 of the bond asset classes (cash, US government bonds, TIPS, and EM bonds) included in the GMO forecasts. An allocation is only made to asset classes with positive real expected returns in the GMO forecasts, and each allocation for a specific 'asset class' = expected return of that 'asset class' divided by the sum of the expected returns of all asset classes with positive returns. The funds used for each 'asset class' are 'index funds' where available. The portfolio is rebalanced once a year (at start of each year) to new weights implied by the GMO forecasts.

Here are the resulting annual returns over the last 15 years.

Returns (%)

2003...41.3
2004...18.4
2005...18.4
2006...14.9
2007...12.6
2008..-10.3
2009...37.8
2010...15.6
2011..-3.9
2012...17.5
2013...11.7
2014...2.9
2015...-5.8
2016...10.4
2017...25.4

Annualized return = 12.9%
Standard deviation = 14.5%
2008 downside = -10.3%
Hence by following the GMO forecast of December 2017 (see image below), your tracking portfolio allocation now is:

62% Emerging Equity
20% Emerging Bond
18% Cash

Is it correct?

Image
When studying English I am lazier than my portfolio. Feel free to correct my English and Investng mistakes.

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patrick013
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Re: GMO forecast

Post by patrick013 » Sun Feb 25, 2018 2:42 pm

Always passive wrote:
Sat Feb 17, 2018 12:37 am
But I think that this time they have gone overboard, all assets, equities and fixed income, are forecasted by them to be so expensive that have either a negative “real” performance or close to zero for the next seven years.
Not zero. Portray a 4-5% earnings growth rate, a 3% FFR in the early 2020's,
it's going to be hard for the S&P 500 to reach 3000 and hold it, unless big
earnings surprises occur or the market is overly optimistic. I think it will
stay under 3000 based on the info at hand.
age in bonds, buy-and-hold, 10 year business cycle

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Re: GMO forecast

Post by JBTX » Mon Feb 26, 2018 1:13 am

Robert T wrote:
Sat Feb 17, 2018 5:38 pm
.
I earlier set-up a portfolio (for tracking purposes) a long time ago now, that weights allocations based on GMO expected returns using all the 6 equity asset classes and 4 of the bond asset classes (cash, US government bonds, TIPS, and EM bonds) included in the GMO forecasts. An allocation is only made to asset classes with positive real expected returns in the GMO forecasts, and each allocation for a specific 'asset class' = expected return of that 'asset class' divided by the sum of the expected returns of all asset classes with positive returns. The funds used for each 'asset class' are 'index funds' where available. The portfolio is rebalanced once a year (at start of each year) to new weights implied by the GMO forecasts.

Here are the resulting annual returns over the last 15 years.

Returns (%)

2003...41.3
2004...18.4
2005...18.4
2006...14.9
2007...12.6
2008..-10.3
2009...37.8
2010...15.6
2011..-3.9
2012...17.5
2013...11.7
2014...2.9
2015...-5.8
2016...10.4
2017...25.4

Annualized return = 12.9%
Standard deviation = 14.5%
2008 downside = -10.3%

This is in comparison to my own portfolio: 75:25 stock:bond with global value and small cap tilt in equities

Annualized return = 9.9%
Standard deviation = 15.4%
2008 downside = -28.7

So the GMO portfolio did much better - $1 grew to almost 50 percent more over this period, with only about 1/3 of the 2008 downside. Would just note that the GMO portfolio is much less tax-efficient with often large changes in allocations across 'asset classes' over this 15 year period.

Personally I am sticking with own 'long-term' portfolio allocation. While interesting, for me the GMO portfolio is too tax inefficient; brings too much 'instability' to the investment process (large and frequent changes) and has large 'tracking error' both of which reduce the likelihood of staying the course; and it relies exclusively on expected real returns from one firm (GMO). Forecasts are at best difficult to do (even more so, to do them consistently well). GMO seems to do better at forecasts around extreme valuations - and even Grantham himself has said that 'revision to the mean' is taking/may take a lot longer that the 7 years used to derive their forecasts which may result in a larger range (less confidence) in the point estimates presented in the charts***. Some of the earlier charts included ranges/confidence intervals, and they were not small. Over the past 7 years my portfolio annualized returns have been similar the GMO portfolio returns above (8.0% vs. 7.8% annualized).

Obviously no guarantees.

Robert

*** From GMOs Q3 quarterly letter - Grantham writes (my underlines) - "Inside GMO there are three different views on whether and how rapidly the market will revert to its pre-1998 normal: James Montier feels it will be business as usual and revert within 7 years. Ben Inker also holds out for a 7 year period, but includes a 33% chance it will revert to a higher average valuation (the “Hell” scenario). I believe that the reversion on valuations will take 20 years, and that profit margins will probably only revert two-thirds of the way back to the old normal. All three outcomes are quite possible. This creates a difficult investment challenge." ... so much larger ranges around the point estimates ... He goes one to say - "My proposition, though, is that there is an optimal investment for all three outcomes: a heavy emphasis on Emerging Market (EM) equities, especially relative to the US." Time will tell.
.
This is a really good post. It shows that the “permabear” label is simplistic and not totally accurate. They historically have used a 7 year investment forecast time period but as you mention there is some disagreement in his own firm as to how mean reversion might play out. I tend to think his POV is the right one, that things aren’t just going to whip back to historical norms overnight.

I always enjoy reading his letters. I learn a lot but take certain recommendations with a grain of salt. I’m somewhere between Grantham and those who advocate being all in the S&P all the time.

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Re: GMO forecast

Post by JBTX » Mon Feb 26, 2018 1:37 am

talzara wrote:
Sat Feb 17, 2018 3:24 pm
JoMoney wrote:
Sat Feb 17, 2018 3:18 am
GMO is a firm ran by Jeremy Grantham, a smart, skeptical, well spoken guy... but a perma-bear... and his forecast record/ranking reflects that
https://www.cxoadvisory.com/gurus/
https://www.cxoadvisory.com/3200/indivi ... -grantham/
It hasn't done well for investors to be so bearish... but it does sound smarter, so maybe it pays good to be a bearish financial advisor.
This is what Jack Bogle said of Jeremy Grantham in 2011, when they were making those predictions.
Jack Bogle, the founder of Vanguard, who noted that Grantham “ran money for Vanguard for a while, and it didn’t work out that well,” says of him: “He’s been very, very good in his forecasts. In times of great bullishness, he’s the skunk at the garden party, and in times of bearishness, he’s saying, ‘Don’t give up.’ ”

http://www.nytimes.com/2011/08/14/magaz ... ayhem.html
Interesting NYT article. I didn’t realize it till I read it that Grantham was one of the first to actually develop an index fund.

https://www.vanguard.com/bogle_site/lib/sp19970401.html

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Re: GMO forecast

Post by JBTX » Mon Feb 26, 2018 1:43 am

Scooter57 wrote:
Sun Feb 18, 2018 12:14 pm
alpine_boglehead wrote:
Sat Feb 17, 2018 12:52 pm

I don't think its illogical to take a risk when there's an expected return higher than that risk. Life is just that, from our ancestors venturing out to hunt down a mammoth to us investing in stocks.

The difference between investing and gambling seems to be that gambling is a zero-sum game (with fees). Investing takes calculated risks with an expected return higher than the (perceived) risk, a non-zero-sum game.

There's lots of scenarios in which the "stocks always go up over the long term" fails, the history books are full of them, and it doesn't (yet) contain the unknowable unknowns that the future may hold. That's why bogleheads also recommend diversification. I'm always a bit wary when I read the "100% stocks" posts of the more risk-tolerant members.

Much of what we do in life is a gamble, including choosing a spouse or having a child. We make the gambles where we feel that the odds are good. I don't think investing is any less of a gamble because those odds are better than buying lottery tickets or playing poker for a living. Trusting that following any approach, Boglehead or other, will ensure that you achieve your desired outcome is not wise. There is a non-zero chance that it won't, as the underlying belief is that markets will trend up over a period of time that corresponds to your retirement needs.

Diversification is just another way of trying to improve your odds. It's no different than studying poker and mastering the strategies. Doing that does improve the odds, which is why some people will win much more than others even when chance is a factor.

The problems arise when people start thinking that the strategies they are following result from some kind of settled fact and lose sight of the fact that they ARE gambling and that their calculation of the odds may be wrong.

There does seem to be a subset of people posting who take the attitude that they don't really have to know anything about the stuff they are investing in as long as they follow some Boglehead-approved guru's recommendations. They buy "Value" funds without any understanding of how "value" is defined and how the stocks in a particular index are selected. They buy bonds with no understanding of how interest rates affect bonds.

Obviously, there are a lot of very bright, experienced investors here, too, who have worked things out themselves over time. But I think it is a sign of ignorance to feel superior to someone like Grantham without understanding what it is that he bases his decisions on.

The fact that his stuff does seem to have performed well just suggests to me that he understands that we still have to invest in environments that probably are less than ideal and may not live up to our long-term hopes. That was a very reasonable approach to take over the past decade. It is also possible that permabears may end up with the last laugh. I bet there were some Japanese permabears who took a lot of guff but ended up with a lot more money to invest through the past 25 years.
Well said. I always say laugh at Grantham at your own risk. Some will say the fact that he has been wrong (which in many ways isn’t exactly true) means that he will continue to be wrong and things will continue to play out the same way they have the last 30 years. My take/worry is that Grantham may ultimately be proven right,30+ years later.

lazyday
Posts: 3297
Joined: Wed Mar 14, 2007 10:27 pm

Re: GMO forecast

Post by lazyday » Mon Feb 26, 2018 4:49 am

JBTX wrote:
Mon Feb 26, 2018 1:13 am
It shows that the “permabear” label is simplistic and not totally accurate.
There might be a difference between the accuracy of each individual return prediction, and the order in which the predictions lie.

For example if GMO predicts US equity to return -5% annualized for 7 years, and EM equity to return 0%, and 7 years later we see that US has returned 8% while EM has returned 12%, then we might complain that GMO has been too bearish yet again. But they did get the order right.

Another complication: if on the second year, the two year annualized return of US equity really is -5% before it comes roaring back, then maybe the prediction was a good one, in a sense. It's a 7 year prediction, but as I recall, when they changed from 10 to 7 year predictions they gave the reason that markets typically cross fair value within 7 years. If the prediction is momentarily true at year two, then at that moment you have a chance to change your AA if you like. So for a tactical asset allocator, the prediction was good. For someone who wants to know how much return to expect in 7 years, it wasn't.

JBTX
Posts: 3860
Joined: Wed Jul 26, 2017 12:46 pm

Re: GMO forecast

Post by JBTX » Mon Feb 26, 2018 8:32 am

In terms of Grantham personally expecting a 20 year mean reversion and Bogle predicting about 3-4% nominal over the next decade they really aren’t that far off. Shhhh! Don’t tell anybody!

Elysium
Posts: 1148
Joined: Mon Apr 02, 2007 6:22 pm

Re: GMO forecast

Post by Elysium » Mon Feb 26, 2018 8:39 am

Robert T wrote:
Sat Feb 17, 2018 5:38 pm
.
I earlier set-up a portfolio (for tracking purposes) a long time ago now, that weights allocations based on GMO expected returns using all the 6 equity asset classes and 4 of the bond asset classes (cash, US government bonds, TIPS, and EM bonds) included in the GMO forecasts. An allocation is only made to asset classes with positive real expected returns in the GMO forecasts, and each allocation for a specific 'asset class' = expected return of that 'asset class' divided by the sum of the expected returns of all asset classes with positive returns. The funds used for each 'asset class' are 'index funds' where available. The portfolio is rebalanced once a year (at start of each year) to new weights implied by the GMO forecasts.

Here are the resulting annual returns over the last 15 years.

Returns (%)

2003...41.3
2004...18.4
2005...18.4
2006...14.9
2007...12.6
2008..-10.3
2009...37.8
2010...15.6
2011..-3.9
2012...17.5
2013...11.7
2014...2.9
2015...-5.8
2016...10.4
2017...25.4

Annualized return = 12.9%
Standard deviation = 14.5%
2008 downside = -10.3%

This is in comparison to my own portfolio: 75:25 stock:bond with global value and small cap tilt in equities

Annualized return = 9.9%
Standard deviation = 15.4%
2008 downside = -28.7

So the GMO portfolio did much better - $1 grew to almost 50 percent more over this period, with only about 1/3 of the 2008 downside. Would just note that the GMO portfolio is much less tax-efficient with often large changes in allocations across 'asset classes' over this 15 year period.

Personally I am sticking with own 'long-term' portfolio allocation. While interesting, for me the GMO portfolio is too tax inefficient; brings too much 'instability' to the investment process (large and frequent changes) and has large 'tracking error' both of which reduce the likelihood of staying the course; and it relies exclusively on expected real returns from one firm (GMO). Forecasts are at best difficult to do (even more so, to do them consistently well). GMO seems to do better at forecasts around extreme valuations - and even Grantham himself has said that 'revision to the mean' is taking/may take a lot longer that the 7 years used to derive their forecasts which may result in a larger range (less confidence) in the point estimates presented in the charts***. Some of the earlier charts included ranges/confidence intervals, and they were not small. Over the past 7 years my portfolio annualized returns have been similar the GMO portfolio returns above (8.0% vs. 7.8% annualized).

Obviously no guarantees.

Robert

*** From GMOs Q3 quarterly letter - Grantham writes (my underlines) - "Inside GMO there are three different views on whether and how rapidly the market will revert to its pre-1998 normal: James Montier feels it will be business as usual and revert within 7 years. Ben Inker also holds out for a 7 year period, but includes a 33% chance it will revert to a higher average valuation (the “Hell” scenario). I believe that the reversion on valuations will take 20 years, and that profit margins will probably only revert two-thirds of the way back to the old normal. All three outcomes are quite possible. This creates a difficult investment challenge." ... so much larger ranges around the point estimates ... He goes one to say - "My proposition, though, is that there is an optimal investment for all three outcomes: a heavy emphasis on Emerging Market (EM) equities, especially relative to the US." Time will tell.
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One thing that stands out in the returns posted above for the GMO forecast based portfolio is that most of the excess returns appears to have come from avoiding the large drawdown in one single year 2008. I calculated annual returns for my live portfolio returns since Jan 1 2009 compared to GMO portfolio, and here are the results:

9 year annualized returns since Jan 1, 2009 (CORRECTED)

GMO portfolio: 11.59%
My portfolio: 12.08%

I had 80/20 equity/bonds until 2016 when I started accumulating more fixed income and lowering after strong market gains to get to 70/30 for last 2+ years.

My returns were substantially lower in 2008, however, no large variations since then. So, it appears they won the jackpot in 2008 by avoiding large draw downs, call it lucky or skill, but the a payoff coming from a single year prediction coming true isn't worth taking on such huge tracking error risk and wide asset allocations shifts.

EDIT: Individual annual returns for comparison

Code: Select all

Year  GMO       Personal
2009   37.08%    39.17%
2010   15.60%    17.35%
2011    -3.9%    -6.46%
2012    17.5%    13.72%
2013    11.7%    21.32%
2014     2.9%     6.86%
2015    -5.8%    -1.53%
2016    10.4%     8.67% *
2017    25.4%    15.77% 
*- year equity allocation went down from 80/20 to 70/30, and remains at 68/32 currently.

NOTE: I have corrected the CAGR since the initial post

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