Worst investing year ever....

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JBTX
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Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 2:05 pm

In terms of number asset classes that lost money.

If you get past the exaggerated headline, it actually is interesting. Would lend credence to the notion asset classes are more highly correlated.

https://www.marketwatch.com/story/how-b ... 2018-11-26


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JoeRetire
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Re: Worst investing year ever....

Post by JoeRetire » Mon Nov 26, 2018 2:08 pm

JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?

aristotelian
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Re: Worst investing year ever....

Post by aristotelian » Mon Nov 26, 2018 2:09 pm

I think anyone who went through the Great Depression or 2008 would beg to differ.

JBTX
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Re: Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 2:11 pm

JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.

JBTX
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Re: Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 2:15 pm

What I found most interesting is most of the "Worst" years there was a large decline in the major markets. In this instance, none of the classes have been a disaster, but pretty much all have had modest losses.

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willthrill81
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Re: Worst investing year ever....

Post by willthrill81 » Mon Nov 26, 2018 2:15 pm

JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
Keep in mind that with the 'big' asset classes of stocks and bonds, they are historically uncorrelated (more or less). They could go both go up at the same time or down at the same time, or one could go up and the other down; there is virtually no observed relationship between them.

While I'm not a huge advocate for modern portfolio theory, this is a common misconception about the theory. People believe that uncorrelated or even negatively correlated assets mixed together will always provide a 'diversification benefit'. But that's just not true. There's nothing to prevent two or more asset classes from going down at the same time. Statistically, one would expect such a thing to happen at some point due to random chance.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

KlangFool
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Re: Worst investing year ever....

Post by KlangFool » Mon Nov 26, 2018 2:18 pm

JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
JBTX,

Cash or Cash equivalent is making money before inflation.

KlangFool

JBTX
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Re: Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 2:40 pm

KlangFool wrote:
Mon Nov 26, 2018 2:18 pm
JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
JBTX,

Cash or Cash equivalent is making money before inflation.

KlangFool
It shows 90% of classes lost money, so obviously not everything. And I'm not sure what all the classes are, supposedly there are 70. I suspect they are overweighted with commodities. Plus we don't know if it is nominal or real.

JBTX
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Re: Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 2:43 pm

willthrill81 wrote:
Mon Nov 26, 2018 2:15 pm
JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
Keep in mind that with the 'big' asset classes of stocks and bonds, they are historically uncorrelated (more or less). They could go both go up at the same time or down at the same time, or one could go up and the other down; there is virtually no observed relationship between them.

While I'm not a huge advocate for modern portfolio theory, this is a common misconception about the theory. People believe that uncorrelated or even negatively correlated assets mixed together will always provide a 'diversification benefit'. But that's just not true. There's nothing to prevent two or more asset classes from going down at the same time. Statistically, one would expect such a thing to happen at some point due to random chance.
I don't really know how they define the 70 asset classes, of which 90% are down. But putting that aside, if 90% of asset classes are down, it implies that most are indeed NOT uncorrelated.

WanderingDoc
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Re: Worst investing year ever....

Post by WanderingDoc » Mon Nov 26, 2018 2:51 pm

JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
70 asset classes? Sounds like nonsense to me.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

asif408
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Re: Worst investing year ever....

Post by asif408 » Mon Nov 26, 2018 2:51 pm

Admittedly I am cherry picking but look at 2002-2011: https://www.portfoliovisualizer.com/ass ... ingDays=60 and then 2011-Present: https://www.portfoliovisualizer.com/ass ... ingDays=60

Correlations were high between US, Developed Ex-US, and Emerging Markets, yet returns also varied greatly. In the cherry picked 2002-2011 period, developed ex-US had twice the return of US stocks, and EM had 4x the return of US stocks and nearly twice the returns of developed ex-US stocks. That was during a time correlations ranged from 0.78-0.85.

In the later period (2011-Present), US stocks beat developed ex-US by almost 8%, and developed ex-US bettered EM by almost 4%. And correlations were between 0.80-0.86.

So returns varied greatly even though correlations were high in both periods. Yes, everything went down a lot in 2008-2009, but that doesn't negate the benefit of diversification. Over longer time periods (5,10, 20 years), it hasn't mattered that the correlations between US and ex-US have increased, the returns are still significantly different during these longer 8-10 year time periods. It's just that most people can't view things on that long of a time horizon.

And who is to say correlations don't fall again at some point? At least since 2011-2012 correlations have actually fallen slightly between US and foreign stocks. It's even true for sectors, such as between the US Total Stock Market and US REITs. I don't know if that continues or not, but at least I can say that the correlations are not static or are only going in one direction. I think there is a lot of recency bias from the 2008 fiasco when correlations went close to 1. Historically, not every downturn has seen correlations of markets, sectors, etc. go to 1.

I imagine you could do a similar comparison with sectors, small-cap value, etc. and find similar results. Correlations may be permanently higher than they once were, but even so, performance still diverges from time to time. It just doesn't happen every time, and most of the time you won't see it over a few months or a year.

columbia
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Re: Worst investing year ever....

Post by columbia » Mon Nov 26, 2018 3:00 pm

Is the Iraqi dinar on that chart? :wink:

heyyou
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Re: Worst investing year ever....

Post by heyyou » Mon Nov 26, 2018 3:19 pm

by willthrill81
Keep in mind that with the 'big' asset classes of stocks and bonds, they are historically uncorrelated (more or less). They could go both go up at the same time or down at the same time, or one could go up and the other down; there is virtually no observed relationship between them.

While I'm not a huge advocate for modern portfolio theory, this is a common misconception about the theory. People believe that uncorrelated or even negatively correlated assets mixed together will always provide a 'diversification benefit'. But that's just not true. There's nothing to prevent two or more asset classes from going down at the same time. Statistically, one would expect such a thing to happen at some point due to random chance.
The above has many important observations, perhaps as a verbal version of the Callan Periodic Table graphic. As a media skeptic, I often see unsurprising info presented with sensationalist headlines.

from Google, edited for brevity:
adjective: sensationalist
presenting stories in a way that is intended to provoke public interest or excitement, at the expense of accuracy.
"sensationalist reporting of the latest alleged cancer cures"
My opinion is that the article is interesting, but not actionable for buy & hold, stay-the-course investors. It is not much different from a crash forecast, but does serve to attract readers to a for-profit website.

KyleAAA
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Re: Worst investing year ever....

Post by KyleAAA » Mon Nov 26, 2018 3:28 pm

Uncorrelated doesn't mean that one will go up if the other goes down, just that there is no relationship. It isn't unusual that both stocks and bonds would be down in the same year. Statistically, one would occasionally expect years similar to this when almost everything seems to move in the same direction.

H-Town
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Re: Worst investing year ever....

Post by H-Town » Mon Nov 26, 2018 3:29 pm

JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.

If you get past the exaggerated headline, it actually is interesting. Would lend credence to the notion asset classes are more highly correlated.
It depends on how you want to look at it. I see it as a good year of investing.

JBTX
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Re: Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 3:35 pm

KyleAAA wrote:
Mon Nov 26, 2018 3:28 pm
Uncorrelated doesn't mean that one will go up if the other goes down, just that there is no relationship. It isn't unusual that both stocks and bonds would be down in the same year. Statistically, one would occasionally expect years similar to this when almost everything seems to move in the same direction.
Well if 90% of 70 asset classes all are negative, and that is the highest in 100+ years, that implies either:

1. Most actually are correlated
2. We just experienced one heck of a random chance statistical outlier

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willthrill81
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Re: Worst investing year ever....

Post by willthrill81 » Mon Nov 26, 2018 3:39 pm

JBTX wrote:
Mon Nov 26, 2018 3:35 pm
KyleAAA wrote:
Mon Nov 26, 2018 3:28 pm
Uncorrelated doesn't mean that one will go up if the other goes down, just that there is no relationship. It isn't unusual that both stocks and bonds would be down in the same year. Statistically, one would occasionally expect years similar to this when almost everything seems to move in the same direction.
Well if 90% of 70 asset classes all are negative, and that is the highest in 100+ years, that implies either:

1. Most actually are correlated
2. We just experienced one heck of a random chance statistical outlier
My guess is that most of those "asset classes" are various flavors of stocks.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

JBTX
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Re: Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 3:41 pm

heyyou wrote:
Mon Nov 26, 2018 3:19 pm
by willthrill81
Keep in mind that with the 'big' asset classes of stocks and bonds, they are historically uncorrelated (more or less). They could go both go up at the same time or down at the same time, or one could go up and the other down; there is virtually no observed relationship between them.

While I'm not a huge advocate for modern portfolio theory, this is a common misconception about the theory. People believe that uncorrelated or even negatively correlated assets mixed together will always provide a 'diversification benefit'. But that's just not true. There's nothing to prevent two or more asset classes from going down at the same time. Statistically, one would expect such a thing to happen at some point due to random chance.
The above has many important observations, perhaps as a verbal version of the Callan Periodic Table graphic. As a media skeptic, I often see unsurprising info presented with sensationalist headlines.

from Google, edited for brevity:
adjective: sensationalist
presenting stories in a way that is intended to provoke public interest or excitement, at the expense of accuracy.
"sensationalist reporting of the latest alleged cancer cures"
My opinion is that the article is interesting, but not actionable for buy & hold, stay-the-course investors. It is not much different from a crash forecast, but does serve to attract readers to a for-profit website.

The thread title was tongue in cheek, given the sensationalist headline. I thought I prefaced that yet still posters want to focus on that vs the real point. I suppose that is my fault nonetheless

Most things in the theory forum are not items that cause you to run out and change your investments or AA. But they may inform your long term decision making process. To that end, if the article provides evidence that most asset classes are more correlated than before, it may cause you to rethink asset allocations, long term withdrawal rates etc. Or if nothing else a reminder that diversification doesn't always provide "safety"

JBTX
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Re: Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 3:54 pm

Similar article with a little more meat to it a detail of asset classes

https://www.google.com/amp/s/www.bloomb ... mps-to-end

staythecourse
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Re: Worst investing year ever....

Post by staythecourse » Mon Nov 26, 2018 3:55 pm

JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
I don't think that is true. Diversification does not always mean something zigs when other zags. Sometimes that means one zigs less then other zags. If asset A return is -10% and asset B is -5% that is still diversification. As 100% portfolio asset A will give return of -10% and 50/50 portfolio of asset A and Asset B gives return of: -7.5%. Would you rather have the first or the second portfolio?

Diversification is not only which way but the MAGNITUDE.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

JBTX
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Re: Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 4:00 pm

staythecourse wrote:
Mon Nov 26, 2018 3:55 pm
JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
I don't think that is true. Diversification does not always mean something zigs when other zags. Sometimes that means one zigs less then other zags. If asset A return is -10% and asset B is -5% that is still diversification. As 100% portfolio asset A will give return of -10% and 50/50 portfolio of asset A and Asset B gives return of: -7.5%. Would you rather have the first or the second portfolio?

Diversification is not only which way but the MAGNITUDE.

Good luck.
I tend to look at correlation as the degree one explains the other. R squared for instance. What you are talking about is akin to Beta.

If almost everything is correlated, then diversification benefit is minimized. However, AA is still important from a risk optimization perspective.

JoeRetire
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Re: Worst investing year ever....

Post by JoeRetire » Mon Nov 26, 2018 5:13 pm

JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
It doesn't imply that at all.

We diversify across asset classes because there is no good way to pick winners among them. If many of them lost money, that makes it even less likely that you could pick out the winners and avoid the losers.

KyleAAA
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Re: Worst investing year ever....

Post by KyleAAA » Mon Nov 26, 2018 5:32 pm

JBTX wrote:
Mon Nov 26, 2018 3:35 pm
KyleAAA wrote:
Mon Nov 26, 2018 3:28 pm
Uncorrelated doesn't mean that one will go up if the other goes down, just that there is no relationship. It isn't unusual that both stocks and bonds would be down in the same year. Statistically, one would occasionally expect years similar to this when almost everything seems to move in the same direction.
Well if 90% of 70 asset classes all are negative, and that is the highest in 100+ years, that implies either:

1. Most actually are correlated
2. We just experienced one heck of a random chance statistical outlier
This happening once every 100 years doesn't seem that difficult to believe.

JBTX
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Re: Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 5:35 pm

JoeRetire wrote:
Mon Nov 26, 2018 5:13 pm
JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
It doesn't imply that at all.

We diversify across asset classes because there is no good way to pick winners among them. If many of them lost money, that makes it even less likely that you could pick out the winners and avoid the losers.
So you are saying the degree of correlation has no bearing on asset class diversification? That's not my understanding at all.

JBTX
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Re: Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 5:39 pm

KyleAAA wrote:
Mon Nov 26, 2018 5:32 pm
JBTX wrote:
Mon Nov 26, 2018 3:35 pm
KyleAAA wrote:
Mon Nov 26, 2018 3:28 pm
Uncorrelated doesn't mean that one will go up if the other goes down, just that there is no relationship. It isn't unusual that both stocks and bonds would be down in the same year. Statistically, one would occasionally expect years similar to this when almost everything seems to move in the same direction.
Well if 90% of 70 asset classes all are negative, and that is the highest in 100+ years, that implies either:

1. Most actually are correlated
2. We just experienced one heck of a random chance statistical outlier
This happening once every 100 years doesn't seem that difficult to believe.
That very well may be true. Looking at the graph it is difficult to visually perceive a trend.

It is interesting last year almost all classes made money and this year most lost money. I think what is most lost money, but did so in a somewhat modest fashion (ie none of them crashed per se).

HEDGEFUNDIE
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Re: Worst investing year ever....

Post by HEDGEFUNDIE » Mon Nov 26, 2018 5:42 pm

JoeRetire wrote:
Mon Nov 26, 2018 5:13 pm
JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
It doesn't imply that at all.

We diversify across asset classes because there is no good way to pick winners among them. If many of them lost money, that makes it even less likely that you could pick out the winners and avoid the losers.
Diversification is all about finding uncorrleated assets to hold together. Which is more diversified, a basket of ten airline stocks or a basket of five companies in completely different industries?

But back to JBTX’s point, I think one year of performance is not enough to declare asset diversification dead...

UpperNwGuy
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Re: Worst investing year ever....

Post by UpperNwGuy » Mon Nov 26, 2018 5:45 pm

Duplicate post. Please delete.
Last edited by UpperNwGuy on Mon Nov 26, 2018 5:46 pm, edited 1 time in total.

UpperNwGuy
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Re: Worst investing year ever....

Post by UpperNwGuy » Mon Nov 26, 2018 5:45 pm

It hasn't been a great year so far, but I have a hard time labeling it the worst investing year ever. Have people forgotten the recessions of the past? We're not nearly that bad in 2018.

staythecourse
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Re: Worst investing year ever....

Post by staythecourse » Mon Nov 26, 2018 6:34 pm

JBTX wrote:
Mon Nov 26, 2018 4:00 pm
staythecourse wrote:
Mon Nov 26, 2018 3:55 pm
JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
I don't think that is true. Diversification does not always mean something zigs when other zags. Sometimes that means one zigs less then other zags. If asset A return is -10% and asset B is -5% that is still diversification. As 100% portfolio asset A will give return of -10% and 50/50 portfolio of asset A and Asset B gives return of: -7.5%. Would you rather have the first or the second portfolio?

Diversification is not only which way but the MAGNITUDE.

Good luck.
I tend to look at correlation as the degree one explains the other. R squared for instance. What you are talking about is akin to Beta.

If almost everything is correlated, then diversification benefit is minimized. However, AA is still important from a risk optimization perspective.
I am simply talking about diversification (which was your and the articles point). In my example YES asset B did add diversification. Looking at movement without the MAGNITUDE of the movement is a mistake. In the graph it shows no idea of the magnitude.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

JoeRetire
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Re: Worst investing year ever....

Post by JoeRetire » Mon Nov 26, 2018 6:36 pm

JBTX wrote:
Mon Nov 26, 2018 5:35 pm
JoeRetire wrote:
Mon Nov 26, 2018 5:13 pm
JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm
JBTX wrote:
Mon Nov 26, 2018 2:05 pm
In terms of number asset classes that lost money.
Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
It doesn't imply that at all.

We diversify across asset classes because there is no good way to pick winners among them. If many of them lost money, that makes it even less likely that you could pick out the winners and avoid the losers.
So you are saying the degree of correlation has no bearing on asset class diversification? That's not my understanding at all.
Unless all asset classes are fully correlated (and they aren't) then it has no bearing on asset class diversification. I agree that it is not your understanding at all.

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Random Musings
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Re: Worst investing year ever....

Post by Random Musings » Mon Nov 26, 2018 7:10 pm

i guess it was the worst investing year ever if you were betting on this particular metric. Which no one does. I consider this financial "light" porn.

Plus, we still have another month to go anyway !!

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

JBTX
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Re: Worst investing year ever....

Post by JBTX » Mon Nov 26, 2018 9:05 pm

JoeRetire wrote:
Mon Nov 26, 2018 6:36 pm
JBTX wrote:
Mon Nov 26, 2018 5:35 pm
JoeRetire wrote:
Mon Nov 26, 2018 5:13 pm
JBTX wrote:
Mon Nov 26, 2018 2:11 pm
JoeRetire wrote:
Mon Nov 26, 2018 2:08 pm

Who cares how many asset classes lost money? What would that metric be of any concern?
In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
It doesn't imply that at all.

We diversify across asset classes because there is no good way to pick winners among them. If many of them lost money, that makes it even less likely that you could pick out the winners and avoid the losers.
So you are saying the degree of correlation has no bearing on asset class diversification? That's not my understanding at all.
Unless all asset classes are fully correlated (and they aren't) then it has no bearing on asset class diversification. I agree that it is not your understanding at all.
Ultimately if returns are equal, fully correlated is of no extra benefit. Exact negative correlation is optimal. No correlation is in between. The more positive correlation, the less benefit from a risk return perspective.

It is true that high correlation provides diversification than exact correlation, but isn't it also true that no correlation is better than high positive correlation?

What am I missing here?

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willthrill81
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Re: Worst investing year ever....

Post by willthrill81 » Mon Nov 26, 2018 9:20 pm

JBTX wrote:
Mon Nov 26, 2018 9:05 pm
JoeRetire wrote:
Mon Nov 26, 2018 6:36 pm
JBTX wrote:
Mon Nov 26, 2018 5:35 pm
JoeRetire wrote:
Mon Nov 26, 2018 5:13 pm
JBTX wrote:
Mon Nov 26, 2018 2:11 pm


In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
It doesn't imply that at all.

We diversify across asset classes because there is no good way to pick winners among them. If many of them lost money, that makes it even less likely that you could pick out the winners and avoid the losers.
So you are saying the degree of correlation has no bearing on asset class diversification? That's not my understanding at all.
Unless all asset classes are fully correlated (and they aren't) then it has no bearing on asset class diversification. I agree that it is not your understanding at all.
Ultimately if returns are equal, fully correlated is of no extra benefit. Exact negative correlation is optimal. No correlation is in between. The more positive correlation, the less benefit from a risk return perspective.

It is true that high correlation provides diversification than exact correlation, but isn't it also true that no correlation is better than high positive correlation?

What am I missing here?
Yes, the further away from a perfect positive correlation (r = +1.0) you get with asset classes, the greater the expected diversification benefit.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Keepcalm
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Re: Worst investing year ever....

Post by Keepcalm » Mon Nov 26, 2018 9:22 pm

Wouldn’t the glass half full reaction be “ I bought at a discount this year.” ?

gtwhitegold
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Re: Worst investing year ever....

Post by gtwhitegold » Mon Nov 26, 2018 9:24 pm

That you can have assets that are relatively highly correlated and still provide some level of diversification due to magnitudes being different over time. For example, US and Emerging Markets Stocks.
JBTX wrote:
Mon Nov 26, 2018 9:05 pm
JoeRetire wrote:
Mon Nov 26, 2018 6:36 pm
JBTX wrote:
Mon Nov 26, 2018 5:35 pm
JoeRetire wrote:
Mon Nov 26, 2018 5:13 pm
JBTX wrote:
Mon Nov 26, 2018 2:11 pm


In terms of portfolio diversification. It would imply asset class diversification may not be useful as it once was.
It doesn't imply that at all.

We diversify across asset classes because there is no good way to pick winners among them. If many of them lost money, that makes it even less likely that you could pick out the winners and avoid the losers.
So you are saying the degree of correlation has no bearing on asset class diversification? That's not my understanding at all.
Unless all asset classes are fully correlated (and they aren't) then it has no bearing on asset class diversification. I agree that it is not your understanding at all.
Ultimately if returns are equal, fully correlated is of no extra benefit. Exact negative correlation is optimal. No correlation is in between. The more positive correlation, the less benefit from a risk return perspective.

It is true that high correlation provides diversification than exact correlation, but isn't it also true that no correlation is better than high positive correlation?

What am I missing here?

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Re: Worst investing year ever....

Post by z3r0c00l » Mon Nov 26, 2018 9:28 pm

Well it was both boring and underwhelming, but I would take 2018 over 1930 any day.

retire2022
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Re: Worst investing year ever....

Post by retire2022 » Mon Nov 26, 2018 9:59 pm

OP

Depending your risk tolerance and age until retirement, I think this should be the best year to dive into equities.

am
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Re: Worst investing year ever....

Post by am » Mon Nov 26, 2018 10:01 pm

z3r0c00l wrote:
Mon Nov 26, 2018 9:28 pm
Well it was both boring and underwhelming, but I would take 2018 over 1930 any day.
It’s not over yet. A lot can happen in the last month.


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siamond
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Re: Worst investing year ever....

Post by siamond » Mon Nov 26, 2018 10:11 pm

Here is another short-write on the same topic, quoting the same actual source, a Wall St Journal article which is hidden behind their usual firewall. But... this short write-up includes a significantly larger extract from the WSJ... For whatever it's worth...

https://www.dollarcollapse.com/short-ev ... ht-market/

z3r0c00l
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Re: Worst investing year ever....

Post by z3r0c00l » Mon Nov 26, 2018 10:23 pm

am wrote:
Mon Nov 26, 2018 10:01 pm
z3r0c00l wrote:
Mon Nov 26, 2018 9:28 pm
Well it was both boring and underwhelming, but I would take 2018 over 1930 any day.
It’s not over yet. A lot can happen in the last month.
One bet I will gladly take is that the last month of this year won't come close to 1930 : ) In fact I doubt we will see it again in my lifetime.

columbia
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Re: Worst investing year ever....

Post by columbia » Mon Nov 26, 2018 10:25 pm

My guess is that 2019 will be worse. 😬

venkman
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Re: Worst investing year ever....

Post by venkman » Mon Nov 26, 2018 10:52 pm

Looking at Vanguard's website, the following are up YTD:

-Short term bonds (treasuries, corporates, and munis)
-US Large cap growth and blend
-US Mid-cap growth
-US Small-cap growth and blend

So, if you don't count the asset classes that probably make up a majority of what most BH's invest in, this has indeed been a terrible year for investing. :happy

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Re: Worst investing year ever....

Post by oldzey » Mon Nov 26, 2018 11:17 pm

aristotelian wrote:
Mon Nov 26, 2018 2:09 pm
I think anyone who went through the Great Depression or 2008 would beg to differ.
+1 - 2008-2009 were the worst investing years for me.
"The broker said the stock was 'poised to move.' Silly me, I thought he meant up." ― Randy Thurman

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Re: Worst investing year ever....

Post by willthrill81 » Mon Nov 26, 2018 11:20 pm

oldzey wrote:
Mon Nov 26, 2018 11:17 pm
aristotelian wrote:
Mon Nov 26, 2018 2:09 pm
I think anyone who went through the Great Depression or 2008 would beg to differ.
+1 - 2008-2009 were the worst investing years for me.
They were probably the worst investing years for almost everyone since 1973-1974.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Worst investing year ever....

Post by bottlecap » Mon Nov 26, 2018 11:25 pm

Perhaps it's not that asset prices that are highly correlated, but that overall price inflation has shown up in assets across the board.

Something to think about.

JT

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Re: Worst investing year ever....

Post by MossySF » Mon Nov 26, 2018 11:46 pm

Diversification down is not the only important issue. Diversification up also is. When things rebound, not all stock classes rebound in the same magnitude. After 2002, international rebounded more -- especially EM which went up 90% in 2003. After 2008, US rebounded more -- especially REITs. Getting 250% instead of just 125% makes a huge difference for your portfolio recovery after a downturn. (Yeah, if you guessed right each time, you could have gotten 400%.)

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Re: Worst investing year ever....

Post by fennewaldaj » Tue Nov 27, 2018 2:57 am

While it may be true that everything is going down at once the magnitude is not exactly scary. I think I can deal with my bonds being down 2% while my US stock is down 1-2% and my ex US equity is down a bit more. Even if it was like say -5% for bonds and -15-20% for stocks that is really not all that bad.

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Re: Worst investing year ever....

Post by Valuethinker » Tue Nov 27, 2018 3:34 am

JBTX wrote:
Mon Nov 26, 2018 3:35 pm
KyleAAA wrote:
Mon Nov 26, 2018 3:28 pm
Uncorrelated doesn't mean that one will go up if the other goes down, just that there is no relationship. It isn't unusual that both stocks and bonds would be down in the same year. Statistically, one would occasionally expect years similar to this when almost everything seems to move in the same direction.
Well if 90% of 70 asset classes all are negative, and that is the highest in 100+ years, that implies either:

1. Most actually are correlated
2. We just experienced one heck of a random chance statistical outlier
The real reason is because they all have a degree of correlation with an underlying factor?

US interest rates. Monetary tightening globally, in general, but in particular the USD is the fuel of the world economy. As that gets more expensive to borrow every asset class has to readjust its valuation base.

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Re: Worst investing year ever....

Post by Valuethinker » Tue Nov 27, 2018 4:22 am

willthrill81 wrote:
Mon Nov 26, 2018 11:20 pm
oldzey wrote:
Mon Nov 26, 2018 11:17 pm
aristotelian wrote:
Mon Nov 26, 2018 2:09 pm
I think anyone who went through the Great Depression or 2008 would beg to differ.
+1 - 2008-2009 were the worst investing years for me.
They were probably the worst investing years for almost everyone since 1973-1974.
We are taught to think in real return terms.

That thinking was not common in 1973-74. What happened was you had quite negative returns e.g. on bank accounts *but* you still had your money (in nominal terms). Stock market plunged but 401ks in US were a new thing (I believe) and not many people had exposure to stocks - it was still a rich person's game.

UK had a horrendous stock market crash (70%+ in real terms). But there was also a housing crash - house prices didn't move for 2 years when retail prices rose by 40%. It was a "crash" but, by and large, people did not notice -- they had lost 40% of the value of their main asset in real terms, but life went on.

2008-09 the impact was directly on the portfolio - the real loss and the nominal loss were quite close.

What 2008-09 taught was the importance of having safe bonds in the portfolio - credit risk free fixed income instruments. The only thing that went up. That was basically the only form of diversification that worked.
To top it off for most Americans their house fell by 20-50% in value?

I doubt people were really paying attention or that people who have come into the markets since then have absorbed that lesson. Each generation gets to relearn the hard-learned lessons of the previous.

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