That's enough for me in 2019

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
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TN_Boy
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Re: That's enough for me in 2019

Post by TN_Boy »

james22 wrote: Tue Apr 09, 2019 8:30 am
TN_Boy wrote: Tue Apr 09, 2019 7:48 amI don't understand why you find Hussman's thoughts valuable.
You find the thoughts of lottery winners valuable?
No. Lottery winners think differently from successful stock market investors.

What would need to occur for you to think that Hussman's views are useless? That's a serious question. At what point would you say, "Wow, his worldview is simply not working?"

He has been wrong for 15 years. Obviously, there will be another crash at some point. At that point the stopped clock will be right again for a short time. But he wasn't able to convert his views into money for his investors during a major crash in 2008/09.
marcopolo
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Re: That's enough for me in 2019

Post by marcopolo »

james22 wrote: Tue Apr 09, 2019 1:33 am
HomerJ wrote: Mon Apr 08, 2019 9:37 pmA CAPE of 25 was extreme. And yet it was a great time to buy. How can CAPE proponents wrap their head around this, and continue to proclaim that CAPE is a good prediction tool?
I know you believe:
HomerJ wrote: Tue Mar 26, 2019 12:32 pmNothing that special about 2009-2019. There have been 10-year periods like it in the past.
But it really is different this time. The Fed's actions were special and unlike anything in the past.

It is forgivable to not have foreseen such actions.

Those of us who believe it won't *end* differently though, and that deferring the consequences of overvaluation only magnify them, are leery.

As I’ve often observed, the key feature of bubbles like 2000, 2007 and today is that, by the market peak, actual S&P 500 total returns over the most recent 12-year period outpace the return that one would have anticipated on the basis of valuations 12-years earlier. This is not an indication that valuations have failed, but rather an indication that prices are likely to do so.

https://www.hussmanfunds.com/comment/mc190303/

HomerJ wrote: Mon Apr 08, 2019 11:20 pm"1996 was one of the cheapest years in the past 23 years to buy stocks, even though valuations at the time were at extremely high levels."
Yet:

...the 2000-2002 collapse (which wiped out the entire total return of the S&P 500 – over and above T-bill returns – all the way back to May 1996) ... and ... the 2007-2009 collapse (which wiped out the entire total return of both preceding bubbles – over and above T-bill returns – all the way back to June 1995).

https://www.hussmanfunds.com/comment/mc190408/


While we are quoting meaningless fund managers, here is one from Peter Lynch.
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
Once in a while you get shown the light, in the strangest of places if you look at it right.
Chris42163
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Re: That's enough for me in 2019

Post by Chris42163 »

marcopolo wrote: Tue Apr 09, 2019 8:17 am While I am sure you are familiar with the term "data mining", you seem not to accept or understand how it might apply to CAPE10.
I'm actually a data scientist (technically Operations Research Analyst). Were you just being pithy, or were you serious? What are you referring to? The metric? It's basic: price / 10yr earnings. It's simple and it cuts to the heart of what investors are after. They want to EARN money, and to do it, they must pay a PRICE. It's not some overfitted 5th order polynomial that really might diverge from the truth in the future. Its peaks and troughs after 1996 match the best moments to buy and sell the S&P, respectively. It should, because the numerator is effectively the instantaneous S&P and its denominator moves slowly.

If anything is wrong in reference to the data mined, it might be that the true reversion line does not equal the mean(CAPE). I'm ok investing with a CAPE > mean(CAPE). But at some point, a prudent and rational investor has to start asking when they're no longer getting a good deal for the risk, in my opinion.
goblue100
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Re: That's enough for me in 2019

Post by goblue100 »

larryslocum1982 wrote: Sun Apr 07, 2019 12:03 am Something is very wrong. Are not Bogleheads all about buy and hold of index funds forever? Why is everyone here now doing market timing?
Those threads are boring. Market timing and leverage allow people to talk forever.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns
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HomerJ
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Re: That's enough for me in 2019

Post by HomerJ »

gmaynardkrebs wrote: Tue Apr 09, 2019 7:25 am
HomerJ wrote: Mon Apr 08, 2019 11:30 pm The model was DERIVED in 1988 from the data from those previous years. You really must understand this.
While I am sure you are familiar with the term "fooled by randomness," you seem not to accept or undestand how it might apply to CAPE10. Let's say the data establish that a coin is fair after after 1000 tosses. Would 10 consecutive tails convince you that it is not a fair coin? No. Would 20? Possibly. Would 100? Probably. In my view, CAPE10 is now at 10-20 tosses. Time will tell -- but you are premature in declaring it invalid. Moreover, CAPE at best "predicts" only about 40% of the results. It could still be correct if by the laws of chance (animal spirits, fed action, oil gluts etc ) the other 60% all happened at once. I happen to think that the latter is what is going on now.
I am not declaring CAPE invalid.

I am questioning those who claim that CAPE is valid and a good prediction tool.

I'm not saying CAPE is definitely wrong; I'm saying how can you guys believe it's so right?

Let's get the analogy correct. We only have 100 tosses of the coin, and then 25 more.

If you have a coin that appears to be 50/50 after 100 tosses, and then 24 of the next 25 tosses are all tails, is it not reasonable to wonder if maybe, just maybe, the coin isn't actually 50/50?

Either the CAPE model is flawed, or some variable has changed.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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gmaynardkrebs
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Re: That's enough for me in 2019

Post by gmaynardkrebs »

marcopolo wrote: Tue Apr 09, 2019 8:17 am
gmaynardkrebs wrote: Tue Apr 09, 2019 7:25 am
HomerJ wrote: Mon Apr 08, 2019 11:30 pm The model was DERIVED in 1988 from the data from those previous years. You really must understand this.
While I am sure you are familiar with the term "fooled by randomness," you seem not to accept or undestand how it might apply to CAPE10. Let's say the data establish that a coin is fair after after 1000 tosses. Would 10 consecutive tails convince you that it is not a fair coin? No. Would 20? Possibly. Would 100? Probably. In my view, CAPE10 is now at 10-20 tosses. Time will tell -- but you are premature in declaring it invalid. Moreover, CAPE at best "predicts" only about 40% of the results. It could still be correct if by the laws of chance (animal spirits, fed action, oil gluts etc ) the other 60% all happened at once. I happen to think that the latter is what is going on now.
While I am sure you are familiar with the term "data mining", you seem not to accept or understand how it might apply to CAPE10.

Again, here is what Shiller himself had to say about it:
The conclusion of this paper that the stock market is expected to decline over the next ten years and to earn a total return of just about nothing has to be interpreted with great caution.

Our search over economic relations that us to study the price divided by 30-year moving average of earnings may have stumbled upon a chance relation with no significance. In other words, the relation studied here might be a spurious relation, the result of data mining. Neither the statistical tests nor the monte carlo experiments take account of the search over other possible relations.

It is also dangerous to assume that historical relations are necessarily applicable to the future. There could be fundamental structural changes occurring now that mean that the past of the stock market is no longer a guide to the future.
I was responding to Homer on a different point. I have responded to your point several times already.
EnjoyIt
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Re: That's enough for me in 2019

Post by EnjoyIt »

Just a thought about CAPE:

Prior to 1975 to invest in the stock market one had to have some wealth and able to afford the very high transaction cost of buying and selling. In May, 1975 the trading fees were deregulated and gave the birth to discount brokerage houses. Schwab was one of the first to offer discount trading allowing mainstream investors to dabble in the stock market. Over the next 10 years more and more discount brokerage houses kept popping up increasing the volume of investors. With advent of the internet and the ability to track, buy, and sell stocks online, just about anyone was able to invest in the stock market. Since there were many more investors out there, demand for equities increased and as demand increased so has the price and the PE ratios. Maybe CAPE 30 is now the new average due to higher volume. Maybe with 2 billion people in India and China making more money and also investing in the market the CAPE may continue to rise even further reaching new highs.

Just a thought.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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gmaynardkrebs
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Re: That's enough for me in 2019

Post by gmaynardkrebs »

EnjoyIt wrote: Tue Apr 09, 2019 9:45 am Just a thought about CAPE:

Prior to 1975 to invest in the stock market one had to have some wealth and able to afford the very high transaction cost of buying and selling. In May, 1975 the trading fees were deregulated and gave the birth to discount brokerage houses. Schwab was one of the first to offer discount trading allowing mainstream investors to dabble in the stock market. Over the next 10 years more and more discount brokerage houses kept popping up increasing the volume of investors. With advent of the internet and the ability to track, buy, and sell stocks online, just about anyone was able to invest in the stock market. Since there were many more investors out there, demand for equities increased and as demand increased so has the price and the PE ratios. Maybe CAPE 30 is now the new average due to higher volume. Maybe with 2 billion people in India and China making more money and also investing in the market the CAPE may continue to rise even further reaching new highs.

Just a thought.
)Over 70% of the S&P 500 is owned by US investors. Indian and Chinese investors are a very minor factor. The high valuations are primarily a US phenomenon.
Chris42163
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Re: That's enough for me in 2019

Post by Chris42163 »

HomerJ wrote: Tue Apr 09, 2019 9:40 am
I am not declaring CAPE invalid.

I am questioning those who claim that CAPE is valid and a good prediction tool.

I'm not saying CAPE is definitely wrong; I'm saying how can you guys believe it's so right?
Aren't we just talking past each other? You say it's not a good prediction tool, but also say that the model is not invalid. That seems contradictory to me, but that's probably because "prediction tool" to you means something different than to me.

It seems like when a model predicts 0% and the real result is 6%, you say the model was wrong for that period (correct me, if necessary), while I say that a 6% return is very unlikely but still within our distribution of possible outcomes.
Let's get the analogy correct. We only have 100 tosses of the coin, and then 25 more.

If you have a coin that appears to be 50/50 after 100 tosses, and then 24 of the next 25 tosses are all tails, is it not reasonable to wonder if maybe, just maybe, the coin isn't actually 50/50?

Either the CAPE model is flawed, or some variable has changed.
I'm a math nerd, so:
- you'd have to perform your experiment 1,290,555 times before you'd expect to see 24 out of 25 flips come up tails, if the coin were fair.
- you'd have to get fewer than 8 of one side of the coin before you'd be 95% confident that the coin is not fair
- the probability that a coin that landed tails 24 of 25 attempts also landed 50 tails out of 100 attempts is so low that I had to look up the name of the number of 100-flip experiments you'd need before you'd get 50 tails. It's over 1 Tredecillion! lol

Conclusion: something changed between the experiments.

Back to the CAPE's validity, we've only had 2.3-ish 10-year period's since its inception. That would be like flipping the coin twice. But actually, the this is the first time the CAPE has been above 30 since it dropped below. So, really, we have just flipped the coin, and it's still in the air.

Let me reiterate -- I think this is true of others commenting here, too -- the CAPE is only potentially a valuable market timing tool at its extremes, and even then only over long periods of time. Shiller picked specific numbers like 10 years, and calculated the exact expected value of those somewhat arbitrary time periods, because 99% of people don't speak the language of stats and don't understand distributions. However, we don't need exact numbers to make a binary decision.

Now, did the CAPE really fail in 1996? Wasn't it overvalued and then even more overvalued throughout the tech bubble? What was the real return to the bottom of the market in 2009? If stocks didn't outperform other MUCH SAFER investments, why do you insist that they weren't "overvalued."
Last edited by Chris42163 on Tue Apr 09, 2019 11:00 am, edited 4 times in total.
james22
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Re: That's enough for me in 2019

Post by james22 »

TN_Boy wrote: Tue Apr 09, 2019 9:03 am
james22 wrote: Tue Apr 09, 2019 8:30 am
TN_Boy wrote: Tue Apr 09, 2019 7:48 amI don't understand why you find Hussman's thoughts valuable.
You find the thoughts of lottery winners valuable?
No. Lottery winners think differently from successful stock market investors.

What would need to occur for you to think that Hussman's views are useless? That's a serious question. At what point would you say, "Wow, his worldview is simply not working?"

He has been wrong for 15 years. Obviously, there will be another crash at some point. At that point the stopped clock will be right again for a short time. But he wasn't able to convert his views into money for his investors during a major crash in 2008/09.
You confuse outcome and strategy.

I believe Bogleheads were very lucky to have been saved by the Fed. Just as I believe confidence in buy-and-hold will never be higher than at the market's peak.

The great thing is, we'll see. And I promise to be gracious whether right or wrong.

But that's enough for me in this thread.
EnjoyIt
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Re: That's enough for me in 2019

Post by EnjoyIt »

gmaynardkrebs wrote: Tue Apr 09, 2019 10:11 am
EnjoyIt wrote: Tue Apr 09, 2019 9:45 am Just a thought about CAPE:

Prior to 1975 to invest in the stock market one had to have some wealth and able to afford the very high transaction cost of buying and selling. In May, 1975 the trading fees were deregulated and gave the birth to discount brokerage houses. Schwab was one of the first to offer discount trading allowing mainstream investors to dabble in the stock market. Over the next 10 years more and more discount brokerage houses kept popping up increasing the volume of investors. With advent of the internet and the ability to track, buy, and sell stocks online, just about anyone was able to invest in the stock market. Since there were many more investors out there, demand for equities increased and as demand increased so has the price and the PE ratios. Maybe CAPE 30 is now the new average due to higher volume. Maybe with 2 billion people in India and China making more money and also investing in the market the CAPE may continue to rise even further reaching new highs.

Just a thought.
)Over 70% of the S&P 500 is owned by US investors. Indian and Chinese investors are a very minor factor. The high valuations are primarily a US phenomenon.
My China comment is a future looking and not now. AS more people have money, they will invest and likely add may add to the growing PE ratios.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
marcopolo
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Re: That's enough for me in 2019

Post by marcopolo »

Chris42163 wrote: Tue Apr 09, 2019 9:21 am
marcopolo wrote: Tue Apr 09, 2019 8:17 am While I am sure you are familiar with the term "data mining", you seem not to accept or understand how it might apply to CAPE10.
I'm actually a data scientist (technically Operations Research Analyst). Were you just being pithy, or were you serious? What are you referring to? The metric? It's basic: price / 10yr earnings. It's simple and it cuts to the heart of what investors are after. They want to EARN money, and to do it, they must pay a PRICE. It's not some overfitted 5th order polynomial that really might diverge from the truth in the future. Its peaks and troughs after 1996 match the best moments to buy and sell the S&P, respectively. It should, because the numerator is effectively the instantaneous S&P and its denominator moves slowly.

If anything is wrong in reference to the data mined, it might be that the true reversion line does not equal the mean(CAPE). I'm ok investing with a CAPE > mean(CAPE). But at some point, a prudent and rational investor has to start asking when they're no longer getting a good deal for the risk, in my opinion.

I was mostly being facetious.
But, as a data scientist, surely you must be aware of the pitfalls of data mining, or over fitting to the data.

Read the quoute from Shiller himself, they clearly did a lot of data mining to settle on CAPE10. He cautions against it. Yet, people seem to imbue it with some fundamental truth.
It may hold up over time, but the jury is still out on that IMHO.

I understand your point about paying X dollars for Y dollars of earnings. So, why not current P/E, or CAPE3, or CAPE5?

What is the fundamental underpinning that makes earnings from 10 years ago relevant to valuations today? There is none; it is just that using 10 years fit the data nicely back when Shiller was researching it. You don't think he tried 5 and 7?

Since publishing, the definition of E has changed significantly due to GAAP and other effects. He did not take dividends into account, the transition from dividends to stock buybacks also changes the nature of E.
So, I am not sure how one can compare today's CAPE10 to historical values and draw any real conclusions from it.

I am open to the idea that it may have predictive power, but I am far from convinced that the current evidence proves that to be the case. I can see how others might come to a different conclusion. But, I believe they should do so with open eyes relative to the derivation of the metric.
Once in a while you get shown the light, in the strangest of places if you look at it right.
ignition
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Re: That's enough for me in 2019

Post by ignition »

Chris42163 wrote: Mon Apr 08, 2019 4:46 pm
DonIce wrote: Mon Apr 08, 2019 4:12 pm Depends on the assumptions you make. If you held cash under a mattress from 1996 onward, then sure. If on the other hand you held US treasuries (a very reasonable thing to hold if you "get out" from the equity market) from 1996-2009 and then bought in 2009, then you would have done better than just holding equities from 1996. Quite substantially better if you managed to get in near the bottom in 2009.
Image
Fantastic. It doesn't come across at all when I say it, but put it in a graph and Boom!
Well, you're 60/40 now so this is a better comparison: https://www.portfoliovisualizer.com/bac ... tion2_3=40

60/40 beat both 100% stock and 100% bond. Stay the course?

Also very unlikely that bonds will return 6% annually over the next 13 years at current yields.
ignition
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Re: That's enough for me in 2019

Post by ignition »

Chris42163 wrote: Tue Apr 09, 2019 10:44 am Now, did the CAPE really fail in 1996? Wasn't it overvalued and then even more overvalued throughout the tech bubble? What was the real return to the bottom of the market in 2009? If stocks didn't outperform other MUCH SAFER investments, why do you insist that they weren't "overvalued."
Because at the bottom of the market in 2009, stocks were undervalued. The S&P500 had a 16% annual return over the next 10 years. Only a full blown panic would cause that. So the question you have to ask: is it likely that we will see a full blown panic over the next 10 years?

Who knows.

(Oh and also: good luck getting in at the bottom of the market when that panic does occur.)
Chris42163
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Re: That's enough for me in 2019

Post by Chris42163 »

@marcopolo

I agree with everything you just said. In answer to the questions, I'd speculate that he either picked it because it's a nice round number (arbitrarily) or because it had the highest correlation. His data is at least as fine grained as monthly. So, it seems very likely that if he chose 10 based on correlation, then he at least rounded to a whole number. What's to say 11 years didn't come out better, but he chose CAPE/10 because it has a nicer ring to it? I think, also, that CAPE/9 and CAPE/11 almost certainly insignificantly differ from CAPE/10. But you already know the answer to why not P/E. Earnings vary just as rapidly and will far more often mislead, as in March, 2009 when it spiked.

@ignition I 100% agree with your comment about the bottom, but I figured, "while we're cherry-picking..." Also, thanks for the tool. I'd heard about it but never used it. Looks cool.
Last edited by Chris42163 on Tue Apr 09, 2019 3:51 pm, edited 1 time in total.
siriusblack
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Re: That's enough for me in 2019

Post by siriusblack »

TN_Boy wrote: Tue Apr 09, 2019 7:48 am I don't understand why you find Hussman's thoughts valuable.
For me, one valuable element of this discussion is that it reminds me WHY it's important for my risk tolerance to be fully reflected in my asset allocation. Let's say for a second that Hussman is right. Could my financial plan tolerate a 50%, 60% or even larger decline in stocks? If not... maybe I'm too heavy on stocks vs. my need/ability/willingness to take risk. I think it's quite valuable to plan your portfolio such that you know what you'll do regardless of whether stocks go up or down from current valuations. In my case, I'm uncomfortable owning more than 50% stocks at current levels. If valuations were a lot lower, I would be more comfortable with a higher allocation (maybe as high as 70-80% stocks). You can call this market timing, but I call it giving proper respect to the possibility that valuation actually does matter in expected returns.
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HomerJ
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Re: That's enough for me in 2019

Post by HomerJ »

siriusblack wrote: Tue Apr 09, 2019 1:02 pm
TN_Boy wrote: Tue Apr 09, 2019 7:48 am I don't understand why you find Hussman's thoughts valuable.
For me, one valuable element of this discussion is that it reminds me WHY it's important for my risk tolerance to be fully reflected in my asset allocation. Let's say for a second that Hussman is right. Could my financial plan tolerate a 50%, 60% or even larger decline in stocks? If not... maybe I'm too heavy on stocks vs. my need/ability/willingness to take risk. I think it's quite valuable to plan your portfolio such that you know what you'll do regardless of whether stocks go up or down from current valuations. In my case, I'm uncomfortable owning more than 50% stocks at current levels. If valuations were a lot lower, I would be more comfortable with a higher allocation (maybe as high as 70-80% stocks). You can call this market timing, but I call it giving proper respect to the possibility that valuation actually does matter in expected returns.
Are you saying that if valuations were lower, you could ignore the risk of a 50% or 60% decline in stocks? Are you saying the risk is zero if valuations were lower? How much lower? At what CAPE number does the risk of a crash become zero?

See, my position is that valuations do not matter BECAUSE I do not believe the risk is ever zero.

I would be at 50% stocks, regardless of valuations, because my plan takes into account that there is a possibility that stocks could crash 50%-60% tomorrow and stay down for extended time. Because it might. Maybe even tomorrow.

I'm always prepared. The fact that the risk may be 2% at THESE valuations or 8% at THOSE valuations does not matter to me. Because the risk is never zero.

So when someone comes on TV or on these boards saying, "This indicator states the chance of a crash or low returns is higher now!!", I can say "Ah, well good thing I'm already prepared for that."

My plan is built to survive low returns or a 50% crash. Then I don't have to worry about it anymore. Its like carrying around an umbrella all the time.

If you tell me "Hey the chance of rain is higher today than yesterday", I don't have to care or change anything because I'm already carrying an umbrella.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
Chris42163
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Re: That's enough for me in 2019

Post by Chris42163 »

Nice post @siriusblack

@HomerJ, there's nothing wrong with your plan or your logic. I'm sure you'll reach your goals. I think there are rare times when there is a better way, and you think that I'm wrong. No sweat. We'll see how it goes. Nevertheless, I appreciate all of the counter points you've raised, as regardless of which side of the "debate" I'm on, I'm still learning and exploring ideas that wouldn't otherwise occur.
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gmaynardkrebs
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Re: That's enough for me in 2019

Post by gmaynardkrebs »

HomerJ wrote: Tue Apr 09, 2019 1:17 pm See, my position is that valuations do not matter BECAUSE I do not believe the risk is ever zero.
My position is that texting while driving does not matter BECAUSE I do not believe the risk of collision is ever zero.
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dogagility
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Re: That's enough for me in 2019

Post by dogagility »

I'm a convert to market timing and using my personal CAPE! Over the course of just two days, I was able to increase one of my investments by 0.05% compared to not market timing via CAPEing.

What did it for me was I determined my CAPE was at 24.5893292 after the close yesterday. That was my bellweather to sell. After the open, my CAPE and was down 0.000003 units. An obvious buy! Which I did... makin' money. I'm hooked!
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HomerJ
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Re: That's enough for me in 2019

Post by HomerJ »

gmaynardkrebs wrote: Tue Apr 09, 2019 4:05 pm
HomerJ wrote: Tue Apr 09, 2019 1:17 pm See, my position is that valuations do not matter BECAUSE I do not believe the risk is ever zero.
My position is that texting while driving does not matter BECAUSE I do not believe the risk of collision is ever zero.
You'll have to explain that.

I am saying the opposite. I'm saying don't ever text while driving, not even when you feel you're in fairly safe spot to do so, because the risk is never zero. If you resolve to never text while driving, then you no longer have to worry about gauging the risk of texting on this road or that road.

Just like I don't have to worry about valuations or trying to quantify the risk of a stock market crash or low returns.

Because I'm always prepared for a stock market crash or low returns.

I don't change my plan or portfolio year-to-year based on what I guess might happen next.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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HomerJ
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Re: That's enough for me in 2019

Post by HomerJ »

Chris42163 wrote: Tue Apr 09, 2019 3:53 pm@HomerJ, there's nothing wrong with your plan or your logic. I'm sure you'll reach your goals. I think there are rare times when there is a better way, and you think that I'm wrong. No sweat. We'll see how it goes.
Just FYI, since this is an important distinction...

It's not saying that I'm sure you or CAPE is wrong. The model may be right, and we just got lucky over the past 25 years. That's certainly possible.

I'm just saying CAPE hasn't been proven right. There's no way I'm moving millions of dollars around based on signals from a model that hasn't fit the data very well (not even close!) since it was discovered.

The theory sure sounds correct, but past predictions based on that theory have been way off. There are too many variables in economics to be making any huge financial decisions based mainly on one of them.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
Chris42163
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Re: That's enough for me in 2019

Post by Chris42163 »

Yep, that's fair.
DonIce
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Re: That's enough for me in 2019

Post by DonIce »

Seems like if one was inclined to "market time" there are better ways than just getting out of the equity market and therefore giving up all returns if you're wrong.

Some other possibilities:
- Buy puts. If markets go up or stay flat, you'll lose the premium you paid for the puts, but that's all, you'll still participate in the upswing. On the other hand if you're right and the markets go down, the puts will protect your downside. Protecting your equity portfolio with puts that make you break even in case of a market crash will likely cost you 3-4% per year.

- Buy treasury futures. If markets go down significantly, the fed will almost certainly cut rates to try to prevent a recession. The increase in the value of the treasury futures will offset your losses in the market.

These strategies can protect your downside if you believe markets are poised for a crash but aren't as all or nothing as just getting out.
Chris42163
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Re: That's enough for me in 2019

Post by Chris42163 »

So, I'd lose 3-4%/year and would participate if, say 2019 has another 20% upswing in it. This is an interesting idea. To make a better decision about it, I'd have to estimate the probability of a drop, the probability of an upswing, and weigh them against the cost of the puts. It certainly has merit, though I'll need time to process that.

I'd have to compare that approach with reducing my exposure and earning 2.5%+ in treasuries and perhaps more in high quality corporate bonds. Being in grad school is a huge time sync.
Last edited by Chris42163 on Tue Apr 09, 2019 6:41 pm, edited 1 time in total.
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jose
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Re: That's enough for me in 2019

Post by jose »

sambb wrote: Sat Mar 16, 2019 10:31 am if your RISK TOLERANCE has changed, then rebalance to a lower allocation. Sounds like your risk tolerance has changed, so i would rebalance.

People have risk tolerance changes for all sorts of life events, aging, job issues, feelings of financial security,etc. if yours has changed then rebalance to whatever you desire. If you were comfortable before with 80S/20B, and now, you are more comfy with 50/50, then your risk tolerance has changed. Rebalance to your desired allocation based on your ability to tolerate risk - upside and downside. If you cant tolerate a 20% pullback, then i would not be heavy in stocks.
OK, I have to admit that I sold about 10% of my holdings. Call it "time-based rebalancing". I will explain my rationale.
I believe the market will fluctuate. I bet it will. Logically, this implies that it will go up, then down, and so on.
I don't believe you have to get the timing right twice, or even once. Just know "high" and "low" more or less.
I don't believe that risk tolerance changed for me. Risk changed. The higher the market goes, the lower the upside, the higher the downside. Well, you get the point. So, I change my allocation accordingly. I do that very infrequently very similar to over-balancing at times like this.

About December 20, I don't remember, S&P500 fell to about 2420 or so. Upside was better, I increased my allocation to stock about 10%. If it goes up, I made money. If it keeps going down, I buy more in about 5% decline intervals. I just don't think about it. I make one of these moves every year or so, infrequently enough to do it in my retirement plan, so no taxable events. Informal, timed rebalancing. Call it a hybrid.

Last Friday, I sold a little more than I added in December. I have realized a gain but just betting that the market will get higher than 2420 at some point, which I don't claim to know. I made 17% in 3.5 months. Good enough for a few years. I don't even do much math or have those bands calculated in my IPS because they vary, but you don't have to be a genius to know that 2400 is "low", and 2900 is "high".

When will I buy and sell? If the market keeps going up very fast, I will sell another 10%, and so on. If not, I will not sell. If it goes back to the 2400s, I will buy more again. Sooner or later, it will happen, and the "stocks in free fall" thread will get busy, and I start to think. Rinse and repeat. Whatever happens, I am happy. This has always worked better for me than buy and hold. The market will continue to fluctuate medium term, and go higher long term. That is a basic boglehead assumption. I don't pretend to know the future, but I know the past.

What many of us feel is that it is more likely for the market to go lower at some point in the future. Now is a good time to rebalance, that's all. :beer

Jose
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Re: That's enough for me in 2019

Post by Chris42163 »

@jose :sharebeer
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Re: That's enough for me in 2019

Post by letsgobobby »

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Re: That's enough for me in 2019

Post by siriusblack »

HomerJ wrote: Tue Apr 09, 2019 1:17 pm
siriusblack wrote: Tue Apr 09, 2019 1:02 pm
TN_Boy wrote: Tue Apr 09, 2019 7:48 am I don't understand why you find Hussman's thoughts valuable.
For me, one valuable element of this discussion is that it reminds me WHY it's important for my risk tolerance to be fully reflected in my asset allocation. Let's say for a second that Hussman is right. Could my financial plan tolerate a 50%, 60% or even larger decline in stocks? If not... maybe I'm too heavy on stocks vs. my need/ability/willingness to take risk. I think it's quite valuable to plan your portfolio such that you know what you'll do regardless of whether stocks go up or down from current valuations. In my case, I'm uncomfortable owning more than 50% stocks at current levels. If valuations were a lot lower, I would be more comfortable with a higher allocation (maybe as high as 70-80% stocks). You can call this market timing, but I call it giving proper respect to the possibility that valuation actually does matter in expected returns.
Are you saying that if valuations were lower, you could ignore the risk of a 50% or 60% decline in stocks? Are you saying the risk is zero if valuations were lower? How much lower? At what CAPE number does the risk of a crash become zero?

See, my position is that valuations do not matter BECAUSE I do not believe the risk is ever zero.

I would be at 50% stocks, regardless of valuations, because my plan takes into account that there is a possibility that stocks could crash 50%-60% tomorrow and stay down for extended time. Because it might. Maybe even tomorrow.

I'm always prepared. The fact that the risk may be 2% at THESE valuations or 8% at THOSE valuations does not matter to me. Because the risk is never zero.

So when someone comes on TV or on these boards saying, "This indicator states the chance of a crash or low returns is higher now!!", I can say "Ah, well good thing I'm already prepared for that."

My plan is built to survive low returns or a 50% crash. Then I don't have to worry about it anymore. Its like carrying around an umbrella all the time.

If you tell me "Hey the chance of rain is higher today than yesterday", I don't have to care or change anything because I'm already carrying an umbrella.
Don't get me wrong, I don't think there is anything wrong with picking an "all weather" allocation and sticking with it, come what may, rain or shine. In fact, I think that's a very good approach. If I were forced to pick an all-weather allocation, I would probably go with my age in bonds (so, a 60/40 portfolio).

For me, however, I would ideally like to have a higher allocation to stocks (70-80%), but I don't easily tolerate that risk... and this aversion to risk is heightened when valuations (as measured by CAPE, MAPE, or whatever) are at levels that have been historically correlated with forward returns well below the overall historical average market return (according to one of the studies I've seen, the forward returns at today's levels have been associated with the bottom 20% of outcomes).

So, I think my basic answer to your question is the relationship between risk and potential reward. People are willing to tolerate more risk when the potential reward is higher. Conversely, if the potential reward is smaller, willingness to take risk is also smaller. At high valuations, I'm willing to take less risk in equities. At lower valuations, I'm willing to take more risk because the expected returns are higher.

(By the way, if you completely reject the research that shows a relationship between valuation and forward returns -- and this is a view that I've heard expressed many times on this forum -- then my argument here is not going to be very convincing. However, I do accept this research.)

At what levels of CAPE, you ask? I personally like Vanguard's "fair value" range of ~22 to ~28 (give or take). Above 28, I don't feel very comfortable above 50% stocks, and so I "sell to the sleeping point". Below 22, I would feel comfortable taking on more risk (70-80%) because the expected return is more in line with historical norms or maybe even a little higher than historical norms. In between, I gravitate towards the 60/40 portfolio.
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Re: That's enough for me in 2019

Post by siriusblack »

letsgobobby wrote: Tue Apr 09, 2019 9:17 pm
siriusblack wrote: Tue Apr 09, 2019 1:02 pm
TN_Boy wrote: Tue Apr 09, 2019 7:48 am I don't understand why you find Hussman's thoughts valuable.
For me, one valuable element of this discussion is that it reminds me WHY it's important for my risk tolerance to be fully reflected in my asset allocation. Let's say for a second that Hussman is right. Could my financial plan tolerate a 50%, 60% or even larger decline in stocks? If not... maybe I'm too heavy on stocks vs. my need/ability/willingness to take risk. I think it's quite valuable to plan your portfolio such that you know what you'll do regardless of whether stocks go up or down from current valuations. In my case, I'm uncomfortable owning more than 50% stocks at current levels. If valuations were a lot lower, I would be more comfortable with a higher allocation (maybe as high as 70-80% stocks). You can call this market timing, but I call it giving proper respect to the possibility that valuation actually does matter in expected returns.
This is quite close to my actual CAPE-based IPS. However it works for me only because my need to take risk is very low. I could probably remain FI indefinitely even with TIPS-like returns. So any risk I take has to be worth taking. When future returns appear restrained, it would be reasonable to take some risk off the table, mostly because under these conditions the risk of a large downside dislocation increases.

But I think this is different than what markettimer first posted about, or what some of the other thread respondents have argued. They are not arguing for a semi-permanent change in risk exposure. There is no claim that they can afford to permanently sit out the markets if they are wrong for a decade or more. They are really just market-timing, plain and simple.
Agreed ... there is a possibility that valuations remain at today's levels indefinitely or even continue drifting higher for a very very long time. In that case, reducing stock allocation becomes semi-permanent and you are stuck with returns below what would have been possible with a higher allocation to stocks. This comes back to "need" to take risk-- some people have the "need" and therefore could not tolerate a semi-permanent 50/50 allocation. It sounds like you and I are both in the same place, i.e. in my case, willing and able to be at 50/50 for an extended period if necessary... this is the flipside of reducing risk exposure, the rewards may also be muted.
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Re: That's enough for me in 2019

Post by TN_Boy »

siriusblack wrote: Tue Apr 09, 2019 1:02 pm
TN_Boy wrote: Tue Apr 09, 2019 7:48 am I don't understand why you find Hussman's thoughts valuable.
For me, one valuable element of this discussion is that it reminds me WHY it's important for my risk tolerance to be fully reflected in my asset allocation. Let's say for a second that Hussman is right. Could my financial plan tolerate a 50%, 60% or even larger decline in stocks? If not... maybe I'm too heavy on stocks vs. my need/ability/willingness to take risk. I think it's quite valuable to plan your portfolio such that you know what you'll do regardless of whether stocks go up or down from current valuations. In my case, I'm uncomfortable owning more than 50% stocks at current levels. If valuations were a lot lower, I would be more comfortable with a higher allocation (maybe as high as 70-80% stocks). You can call this market timing, but I call it giving proper respect to the possibility that valuation actually does matter in expected returns.
The problem with Hussman is that he's been saying things are bad, like, forever. It doesn't seem remotely actionable to me.

My asset allocation is based more upon how much risk I want to take than anything else. Valuations can be "high" for a long time. They can also be "low" for a long time.
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Re: That's enough for me in 2019

Post by Chris42163 »

letsgobobby wrote: Tue Apr 09, 2019 9:17 pm There is no claim that they can afford to permanently sit out the markets if they are wrong for a decade or more. They are really just market-timing, plain and simple.
I am always open to reevaluate the model, but until I don't believe valuations are extreme, I will remain out. I could/would sit out of the markets permanently, and look for alternative ways of investing (rental property, business, etc...). If this were the case, it would be extremely unexpected and very disappointing, as I am still in the accumulation phase, and though my plan will conservatively reach my goal of FI by 44, permanently high valuations would imply permanently lower returns across all of the passive investment asset classes.
Last edited by Chris42163 on Wed Apr 10, 2019 2:31 am, edited 1 time in total.
TN_Boy
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Re: That's enough for me in 2019

Post by TN_Boy »

james22 wrote: Tue Apr 09, 2019 10:48 am
TN_Boy wrote: Tue Apr 09, 2019 9:03 am
james22 wrote: Tue Apr 09, 2019 8:30 am
TN_Boy wrote: Tue Apr 09, 2019 7:48 amI don't understand why you find Hussman's thoughts valuable.
You find the thoughts of lottery winners valuable?
No. Lottery winners think differently from successful stock market investors.

What would need to occur for you to think that Hussman's views are useless? That's a serious question. At what point would you say, "Wow, his worldview is simply not working?"

He has been wrong for 15 years. Obviously, there will be another crash at some point. At that point the stopped clock will be right again for a short time. But he wasn't able to convert his views into money for his investors during a major crash in 2008/09.
You confuse outcome and strategy.

I believe Bogleheads were very lucky to have been saved by the Fed. Just as I believe confidence in buy-and-hold will never be higher than at the market's peak.

The great thing is, we'll see. And I promise to be gracious whether right or wrong.

But that's enough for me in this thread.
No, I believe I understand outcome versus strategy quite well.

For several years, I've had a conservative stock/bond allocation. I've also had more international exposure than most on this board. The *outcome* has been somewhat disappointing -- I'd have more money if I'd been more aggressive and US focused. But I'm quite happy with the *strategy*. I've still made good money. My choice of stock/bond ratio is based upon my current need and willingness to take risk. And while international stocks have lagged in general, I still like having a good chunk of money in non-US stocks.

I've had about same belief in buy and hold through two major crashes. Mostly because I don't see how to intelligently time the market. I don't feel especially "lucky" that we were "saved" by the Fed .... obviously the US government will use the tools it has to stabilize markets. It will not always succeed, and in some cases might make things worse. But it will try.
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Re: That's enough for me in 2019

Post by letsgobobby »

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Re: That's enough for me in 2019

Post by Chris42163 »

letsgobobby wrote: Tue Apr 09, 2019 11:14 pm
Chris42163 wrote: Tue Apr 09, 2019 10:16 pmmy plan will conservatively reach my goal of FI by 44,
I am curious about this plan! Aren’t you a twenty-something grad student? Is your plan, “Make a lot of money... retire!”?
@letsgobobby, have I said a negative word to you?

The answers are No, and no. Even at FI, if I retire, it will only be to another career. The FI goal is $75k/yr without withdrawing more than 3% of my portfolio. I do not need any returns as long as I keep my job and continue to save at a lower rate than I ever have, or I could stop and earn 3.4%/yr, total return. I'm 7 years away.
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Re: That's enough for me in 2019

Post by letsgobobby »

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Re: That's enough for me in 2019

Post by Chris42163 »

Possibly not. I am a grad student who is not in my twenties, but it's all-expenses-paid and I still receive my salary while I attend school.
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Re: That's enough for me in 2019

Post by sambb »

jose wrote: Tue Apr 09, 2019 6:39 pm
sambb wrote: Sat Mar 16, 2019 10:31 am if your RISK TOLERANCE has changed, then rebalance to a lower allocation. Sounds like your risk tolerance has changed, so i would rebalance.

People have risk tolerance changes for all sorts of life events, aging, job issues, feelings of financial security,etc. if yours has changed then rebalance to whatever you desire. If you were comfortable before with 80S/20B, and now, you are more comfy with 50/50, then your risk tolerance has changed. Rebalance to your desired allocation based on your ability to tolerate risk - upside and downside. If you cant tolerate a 20% pullback, then i would not be heavy in stocks.
OK, I have to admit that I sold about 10% of my holdings. Call it "time-based rebalancing". I will explain my rationale.
I believe the market will fluctuate. I bet it will. Logically, this implies that it will go up, then down, and so on.
I don't believe you have to get the timing right twice, or even once. Just know "high" and "low" more or less.
I don't believe that risk tolerance changed for me. Risk changed. The higher the market goes, the lower the upside, the higher the downside. Well, you get the point. So, I change my allocation accordingly. I do that very infrequently very similar to over-balancing at times like this.

About December 20, I don't remember, S&P500 fell to about 2420 or so. Upside was better, I increased my allocation to stock about 10%. If it goes up, I made money. If it keeps going down, I buy more in about 5% decline intervals. I just don't think about it. I make one of these moves every year or so, infrequently enough to do it in my retirement plan, so no taxable events. Informal, timed rebalancing. Call it a hybrid.

Last Friday, I sold a little more than I added in December. I have realized a gain but just betting that the market will get higher than 2420 at some point, which I don't claim to know. I made 17% in 3.5 months. Good enough for a few years. I don't even do much math or have those bands calculated in my IPS because they vary, but you don't have to be a genius to know that 2400 is "low", and 2900 is "high".

When will I buy and sell? If the market keeps going up very fast, I will sell another 10%, and so on. If not, I will not sell. If it goes back to the 2400s, I will buy more again. Sooner or later, it will happen, and the "stocks in free fall" thread will get busy, and I start to think. Rinse and repeat. Whatever happens, I am happy. This has always worked better for me than buy and hold. The market will continue to fluctuate medium term, and go higher long term. That is a basic boglehead assumption. I don't pretend to know the future, but I know the past.

What many of us feel is that it is more likely for the market to go lower at some point in the future. Now is a good time to rebalance, that's all. :beer

Jose


If risk tolerance changes, then yes one should rebalance, Dont see what the big deal is, or why people see that differently. Doesnt matter why the risk tolerance changes, just that it changed
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Re: That's enough for me in 2019

Post by gmaynardkrebs »

HomerJ wrote: Tue Apr 09, 2019 4:34 pm
gmaynardkrebs wrote: Tue Apr 09, 2019 4:05 pm
HomerJ wrote: Tue Apr 09, 2019 1:17 pm See, my position is that valuations do not matter BECAUSE I do not believe the risk is ever zero.
My position is that texting while driving does not matter BECAUSE I do not believe the risk of collision is ever zero.
You'll have to explain that.

I am saying the opposite. I'm saying don't ever text while driving, not even when you feel you're in fairly safe spot to do so, because the risk is never zero. If you resolve to never text while driving, then you no longer have to worry about gauging the risk of texting on this road or that road.

Just like I don't have to worry about valuations or trying to quantify the risk of a stock market crash or low returns.

Because I'm always prepared for a stock market crash or low returns.

I don't change my plan or portfolio year-to-year based on what I guess might happen next.
I think you are saying that since you have enough safe assets due to re-balancing, if there is a crash, you won't suffer serious injury. That makes sense to me. I suppose that's true in my case as well, as I still have about 30% in stocks (age 69), and the rest in TIPS and munis. Even though I expect to have a permanent loss of one half of my equity allocation (I think the market is obscenely overvalued), I going to stick with bonds = age. It's served me too well to quit now. For younger people....I just hope they are not counting on the stock market for anything close to its historic returns.
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Re: That's enough for me in 2019

Post by 4strings »

and this is why you don't time the market...
Chris42163
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Re: That's enough for me in 2019

Post by Chris42163 »

4strings wrote: Fri Apr 12, 2019 9:07 am and this is why you don't time the market...
If you're referring to today's uptick, that's like calling the NBA Finals after the first basket on the first game. :-D
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Re: That's enough for me in 2019

Post by molecular »

ignition wrote: Tue Apr 09, 2019 11:46 am 60/40 beat both 100% stock and 100% bond. Stay the course?
So does 20/80.

https://www.portfoliovisualizer.com/bac ... total3=100
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Re: That's enough for me in 2019

Post by MotoTrojan »

molecular wrote: Sun Apr 14, 2019 1:39 pm
ignition wrote: Tue Apr 09, 2019 11:46 am 60/40 beat both 100% stock and 100% bond. Stay the course?
So does 20/80.

https://www.portfoliovisualizer.com/bac ... total3=100
LTT is a bit of a different beast, no?
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Re: That's enough for me in 2019

Post by KlangFool »

Folks,

For those people that adjust your AA because you believe that the valuation is too high and stock return will be low, please explain why your approach is better versus a fixed AA like 60/40 with annual and/or band based rebalancing.

With a fixed AA like 60/40, I am buying fixed income with my new money. It has nothing to do with whether I think the valuation is high or low. It has to do with my stock allocation is higher than 60% due to market movement.

And, if and when the stock market goes crazy, my band based rebalancing will trigger. I do not need to market time or predict the future of the stock market.

I made money from my REIT index fund before the 2008/2009 market crash. It has nothing to do with I was very good with my market timing. I had 10% allocation to REIT index. And, it went up above 25% and it triggered my band based rebalancing. I sold before the market crashed.

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Re: That's enough for me in 2019

Post by gmaynardkrebs »

KlangFool wrote: Sun Apr 14, 2019 2:23 pm Folks,

For those people that adjust your AA because you believe that the valuation is too high and stock return will be low, please explain why your approach is better versus a fixed AA like 60/40 with annual and/or band based rebalancing.

With a fixed AA like 60/40, I am buying fixed income with my new money. It has nothing to do with whether I think the valuation is high or low. It has to do with my stock allocation is higher than 60% due to market movement.

And, if and when the stock market goes crazy, my band based rebalancing will trigger. I do not need to market time or predict the future of the stock market.

I made money from my REIT index fund before the 2008/2009 market crash. It has nothing to do with I was very good with my market timing. I had 10% allocation to REIT index. And, it went up above 25% and it triggered my band based rebalancing. I sold before the market crashed.

KlangFool
You should address your question to the investors in Japanese stocks at the peak of the bubble.
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Re: That's enough for me in 2019

Post by KlangFool »

gmaynardkrebs wrote: Sun Apr 14, 2019 2:49 pm
KlangFool wrote: Sun Apr 14, 2019 2:23 pm Folks,

For those people that adjust your AA because you believe that the valuation is too high and stock return will be low, please explain why your approach is better versus a fixed AA like 60/40 with annual and/or band based rebalancing.

With a fixed AA like 60/40, I am buying fixed income with my new money. It has nothing to do with whether I think the valuation is high or low. It has to do with my stock allocation is higher than 60% due to market movement.

And, if and when the stock market goes crazy, my band based rebalancing will trigger. I do not need to market time or predict the future of the stock market.

I made money from my REIT index fund before the 2008/2009 market crash. It has nothing to do with I was very good with my market timing. I had 10% allocation to REIT index. And, it went up above 25% and it triggered my band based rebalancing. I sold before the market crashed.

KlangFool
You should address your question to the investors in Japanese stocks at the peak of the bubble.
gmaynardkrebs,

A) I am not 100% in Japan stock and/or US stock. So, why is that relevant?

B) I am 60/40. So, in a bubble, I would rebalance away from the bubble and capture my gain.

KlangFool
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Re: That's enough for me in 2019

Post by gmaynardkrebs »

KlangFool wrote: Sun Apr 14, 2019 3:01 pm
gmaynardkrebs wrote: Sun Apr 14, 2019 2:49 pm
KlangFool wrote: Sun Apr 14, 2019 2:23 pm Folks,

For those people that adjust your AA because you believe that the valuation is too high and stock return will be low, please explain why your approach is better versus a fixed AA like 60/40 with annual and/or band based rebalancing.

With a fixed AA like 60/40, I am buying fixed income with my new money. It has nothing to do with whether I think the valuation is high or low. It has to do with my stock allocation is higher than 60% due to market movement.

And, if and when the stock market goes crazy, my band based rebalancing will trigger. I do not need to market time or predict the future of the stock market.

I made money from my REIT index fund before the 2008/2009 market crash. It has nothing to do with I was very good with my market timing. I had 10% allocation to REIT index. And, it went up above 25% and it triggered my band based rebalancing. I sold before the market crashed.

KlangFool
You should address your question to the investors in Japanese stocks at the peak of the bubble.
gmaynardkrebs,

A) I am not 100% in Japan stock and/or US stock. So, why is that relevant?

B) I am 60/40. So, in a bubble, I would rebalance away from the bubble and capture my gain.

KlangFool
Maybe we are talking about different things. Agreed, rebalancing as the bubble inflates is better than not re-balancing at all. But it's not as good as having sold off more at or near the peak. Your base case seems to be that the bubble is going to keep inflating for a while longer. But for all we know, it could crash tomorrow. If one believes, based on excessive valuations that the bubble is about to burst, one is better off selling off a lot more than just maintaining 60/40.
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Re: That's enough for me in 2019

Post by KlangFool »

gmaynardkrebs wrote: Sun Apr 14, 2019 4:36 pm
KlangFool wrote: Sun Apr 14, 2019 3:01 pm
gmaynardkrebs wrote: Sun Apr 14, 2019 2:49 pm
KlangFool wrote: Sun Apr 14, 2019 2:23 pm Folks,

For those people that adjust your AA because you believe that the valuation is too high and stock return will be low, please explain why your approach is better versus a fixed AA like 60/40 with annual and/or band based rebalancing.

With a fixed AA like 60/40, I am buying fixed income with my new money. It has nothing to do with whether I think the valuation is high or low. It has to do with my stock allocation is higher than 60% due to market movement.

And, if and when the stock market goes crazy, my band based rebalancing will trigger. I do not need to market time or predict the future of the stock market.

I made money from my REIT index fund before the 2008/2009 market crash. It has nothing to do with I was very good with my market timing. I had 10% allocation to REIT index. And, it went up above 25% and it triggered my band based rebalancing. I sold before the market crashed.

KlangFool
You should address your question to the investors in Japanese stocks at the peak of the bubble.
gmaynardkrebs,

A) I am not 100% in Japan stock and/or US stock. So, why is that relevant?

B) I am 60/40. So, in a bubble, I would rebalance away from the bubble and capture my gain.

KlangFool
Maybe we are talking about different things. Agreed, rebalancing as the bubble inflates is better than not re-balancing at all. But it's not as good as having sold off more at or near the peak. Your base case seems to be that the bubble is going to keep inflating for a while longer. But for all we know, it could crash tomorrow. If one believes, based on excessive valuations that the bubble is about to burst, one is better off selling off a lot more than just maintaining 60/40.
gmaynardkrebs,

<<But it's not as good as having sold off more at or near the peak. >>

My question is why do you think that a simple 5/25 band based rebalancing with fixed AA will not catch that?

<<But for all we know, it could crash tomorrow. >>

It won't matter anyhow. Because of the fixed AA and rebalancing, I am buying fixed income while the stock market is going up. And, if my stock still exceeds my allocation, my annual or band based rebalancing will force me to sell stock.

Why do I need to market time if I buy, hold, and rebalance with a fixed AA that is not 100/0 or 0/100?

What do I miss here?

KlangFool
User avatar
gmaynardkrebs
Posts: 2128
Joined: Sun Feb 10, 2008 11:48 am

Re: That's enough for me in 2019

Post by gmaynardkrebs »

KlangFool wrote: Sun Apr 14, 2019 4:43 pm
gmaynardkrebs wrote: Sun Apr 14, 2019 4:36 pm
KlangFool wrote: Sun Apr 14, 2019 3:01 pm
gmaynardkrebs wrote: Sun Apr 14, 2019 2:49 pm
KlangFool wrote: Sun Apr 14, 2019 2:23 pm Folks,

For those people that adjust your AA because you believe that the valuation is too high and stock return will be low, please explain why your approach is better versus a fixed AA like 60/40 with annual and/or band based rebalancing.

With a fixed AA like 60/40, I am buying fixed income with my new money. It has nothing to do with whether I think the valuation is high or low. It has to do with my stock allocation is higher than 60% due to market movement.

And, if and when the stock market goes crazy, my band based rebalancing will trigger. I do not need to market time or predict the future of the stock market.

I made money from my REIT index fund before the 2008/2009 market crash. It has nothing to do with I was very good with my market timing. I had 10% allocation to REIT index. And, it went up above 25% and it triggered my band based rebalancing. I sold before the market crashed.

KlangFool
You should address your question to the investors in Japanese stocks at the peak of the bubble.
gmaynardkrebs,

A) I am not 100% in Japan stock and/or US stock. So, why is that relevant?

B) I am 60/40. So, in a bubble, I would rebalance away from the bubble and capture my gain.

KlangFool
Maybe we are talking about different things. Agreed, rebalancing as the bubble inflates is better than not re-balancing at all. But it's not as good as having sold off more at or near the peak. Your base case seems to be that the bubble is going to keep inflating for a while longer. But for all we know, it could crash tomorrow. If one believes, based on excessive valuations that the bubble is about to burst, one is better off selling off a lot more than just maintaining 60/40.
gmaynardkrebs,

<<But it's not as good as having sold off more at or near the peak. >>

My question is why do you think that a simple 5/25 band based rebalancing with fixed AA will not catch that?

<<But for all we know, it could crash tomorrow. >>

It won't matter anyhow. Because of the fixed AA and rebalancing, I am buying fixed income while the stock market is going up. And, if my stock still exceeds my allocation, my annual or band based rebalancing will force me to sell stock.

Why do I need to market time if I buy, hold, and rebalance with a fixed AA that is not 100/0 or 0/100?

What do I miss here?

KlangFool
I think it's me that's missing something, as I'm not familiar with all of the the terminology (eg., 5/25 band based re balancing). I don't have a major point here. All I am saying is that in my case for example, where I do bonds=age, at a really high valuation I think I would consider having more bonds than equals my age. So I'm 69 now. I might go to 75% or even 80% bonds. If the market crashes by 50%, my loss will be less. It just so happens I'm sticking with bonds=age, but if the market crashes, I will wish that I had gone to 80% bonds. Like I say, no major insights on my part.
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Tycoon
Posts: 1500
Joined: Wed Mar 28, 2012 7:06 pm

Re: That's enough for me in 2019

Post by Tycoon »

KlangFool, you aren't missing anything. Your plan is sound and you'll do fine.
Emotionless, prognostication free investing. Ignoring the noise and economists since 1979. Getting rich off of "smart people's" behavioral mistakes.
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