How do you reconcile these two opposing views

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
UberGrub
Posts: 87
Joined: Wed Aug 21, 2019 3:47 pm

How do you reconcile these two opposing views

Post by UberGrub » Sat Nov 02, 2019 9:40 pm

Hello,
I have been reading a couple of books from William Bernstein and I am a little confused on how to digest some of his views.

It seems to me like there's two classes of investing philosophies: Those who truly believe markets are efficient and no predictions of future events can be done, and those who believe in some level of "mean-reversion"/"history will repeat"/"markets can get somewhat irrational".

Regarding stocks:
Bernstein makes the case that investors systematically buy high and sell low. They lose their nerve on market drops and buy once it's recovered. That's why he makes a big deal about not taking more risk than you should and dealing with your psychological demons.

However, if the market is truly efficient and unpredictable, then why is it bad to sell during Bear markets? It's not any more likely to go up than down from there right? Bernstein seems to make the point that investors must be courageous and disciplined and have cash to buy bargains. I'm having a hard time reconciling that with the view that markets are just unpredictable.

Regarding bonds:
I hear that because we cannot predict interest rates, you should just invest independent of your beliefs (ignore "rates have nowhere to go but up!") and perhaps go with LT bonds if you're a long term investor. However, Bernstein, again, seems to say to stick to ST high quality bonds because high inflationary periods can come. He says young investors (like me) get used to low inflation and low rates due to recency bias.

On one end, I know I can't predict the future. But I also don't want to be falling prey to my recency bias, keep buying IT/LT bonds and then 5 years later, look back and say "well obviously that happened! It's happened many times in history! Rates go up and down! Why didn't you learn from financial history?"

Any thoughts here? Not necessarily about predictions but also as to which camps you guys fall in and why.
Thanks.

GoldenFinch
Posts: 1971
Joined: Mon Nov 10, 2014 11:34 pm

Re: How do you reconcile these two opposing views

Post by GoldenFinch » Sat Nov 02, 2019 10:05 pm

I fall in the camp of believing that the general trend of stocks over time is up and the best way to avoid behavioral mistakes (like buying high and selling low) is to automate your investing and only sell when you need the money. The general Boglehead philosophy outlined in the Wiki works pretty well.

Spirit Rider
Posts: 11871
Joined: Fri Mar 02, 2007 2:39 pm

Re: How do you reconcile these two opposing views

Post by Spirit Rider » Sat Nov 02, 2019 10:26 pm

UberGrub wrote:
Sat Nov 02, 2019 9:40 pm
"It seems to me like there's two classes of investing philosophies: Those who truly believe markets are efficient and no predictions of future events can be done,"

"and those who believe in some level of "mean-reversion"/"history will repeat"/"markets can get somewhat irrational".
These two statements are not in conflict.
However, if the market is truly efficient and unpredictable, then why is it bad to sell during Bear markets? It's not any more likely to go up than down from there right?
EMH is not that markets are accurately priced. Just that markets are accurately priced based on all available public information. Markets can and often are mis-priced. The point is that you have no realistic way of knowing when and by how much.

The problem with selling in a bear market is that when you realized it, it is too late and when you realize it is time to buy it is also too late. This is the general problem with security/market timing in general. You have to be right twice.
Bernstein seems to make the point that investors must be courageous and disciplined and have cash to buy bargains. I'm having a hard time reconciling that with the view that markets are just unpredictable.
I agree with your problem with this statement. It is just another form of trying to time the markets. I have always felt that after you have an emergency fund, it is best to stay fully invested.

I am solidly in the camp of applying the serenity prayer to investing. Have a reasonable asset allocation, keep expenses low, stay invested, let time work and sleep well at night.

User avatar
JoMoney
Posts: 7755
Joined: Tue Jul 23, 2013 5:31 am

Re: How do you reconcile these two opposing views

Post by JoMoney » Sat Nov 02, 2019 10:46 pm

I believe the market is difficult to beat, impossibly so in aggregate (we can't all be above average).
I believe there are some who are able to garner something extra through skill, unique information, etc...
I know there are others who try to exploit behavioral weaknesses, marketing risky securities and strategies that are of no advantage to the buyer, and often at higher expense and higher risk.
I have no reason to think I have the ability compete with the professionals in that game, and lots of reasons to believe I might be vulnerable to those preying on ''dumb money", and to other behavioral issues that have shown over and over again to cause a "behavior gap" between the investments people buy, and the returns actually realized by most investors.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
Forester
Posts: 547
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: How do you reconcile these two opposing views

Post by Forester » Sun Nov 03, 2019 4:46 am

UberGrub wrote:
Sat Nov 02, 2019 9:40 pm
Hello,
I have been reading a couple of books from William Bernstein and I am a little confused on how to digest some of his views.

It seems to me like there's two classes of investing philosophies: Those who truly believe markets are efficient and no predictions of future events can be done, and those who believe in some level of "mean-reversion"/"history will repeat"/"markets can get somewhat irrational".

Regarding stocks:
Bernstein makes the case that investors systematically buy high and sell low. They lose their nerve on market drops and buy once it's recovered. That's why he makes a big deal about not taking more risk than you should and dealing with your psychological demons.

However, if the market is truly efficient and unpredictable, then why is it bad to sell during Bear markets? It's not any more likely to go up than down from there right? Bernstein seems to make the point that investors must be courageous and disciplined and have cash to buy bargains. I'm having a hard time reconciling that with the view that markets are just unpredictable.

Regarding bonds:
I hear that because we cannot predict interest rates, you should just invest independent of your beliefs (ignore "rates have nowhere to go but up!") and perhaps go with LT bonds if you're a long term investor. However, Bernstein, again, seems to say to stick to ST high quality bonds because high inflationary periods can come. He says young investors (like me) get used to low inflation and low rates due to recency bias.

On one end, I know I can't predict the future. But I also don't want to be falling prey to my recency bias, keep buying IT/LT bonds and then 5 years later, look back and say "well obviously that happened! It's happened many times in history! Rates go up and down! Why didn't you learn from financial history?"

Any thoughts here? Not necessarily about predictions but also as to which camps you guys fall in and why.
Thanks.
Markets are micro fairly-efficient and macro... random.

In principle it isn't bad to sell in bear markets, in the long run it's a good idea if the strategy is not a large part of your portfolio and done systematically. It's the same thing as a stop loss, which stock pickers do to manage risk.

User avatar
Stinky
Posts: 2425
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: How do you reconcile these two opposing views

Post by Stinky » Sun Nov 03, 2019 5:21 am

UberGrub wrote:
Sat Nov 02, 2019 9:40 pm

Regarding bonds:
I hear that because we cannot predict interest rates, you should just invest independent of your beliefs (ignore "rates have nowhere to go but up!") and perhaps go with LT bonds if you're a long term investor. However, Bernstein, again, seems to say to stick to ST high quality bonds because high inflationary periods can come. He says young investors (like me) get used to low inflation and low rates due to recency bias.

On one end, I know I can't predict the future. But I also don't want to be falling prey to my recency bias, keep buying IT/LT bonds and then 5 years later, look back and say "well obviously that happened! It's happened many times in history! Rates go up and down! Why didn't you learn from financial history?"

Any thoughts here? Not necessarily about predictions but also as to which camps you guys fall in and why.
Thanks.
Having seen interest rates in my investing past that are much, much higher than today's interest rates, I just can't stomach the idea of buying LT bonds today.

So my bond fund investments are pretty evenly split between ST and IT. I'm open to reviewing that profile, but it's going to take a lot higher LT rates for me to lock in LT rates.
It's a GREAT day to be alive - Travis Tritt

User avatar
firebirdparts
Posts: 339
Joined: Thu Jun 13, 2019 4:21 pm

Re: How do you reconcile these two opposing views

Post by firebirdparts » Sun Nov 03, 2019 5:23 am

Two keys. When someone says the EMH means you can’t do this or you must do that, ignore that. The second key is to believe nobody knows nothing.

I am totally a fundamentalist and so I never take a philosophical view about the EMH. It is what it is and no more. There is nothing to reconcile for me because I don’t mangle it mentally to start with,
A fool and your money are soon partners

Uncorrelated
Posts: 141
Joined: Sun Oct 13, 2019 3:16 pm

Re: How do you reconcile these two opposing views

Post by Uncorrelated » Sun Nov 03, 2019 6:08 am

Spirit Rider wrote:
Sat Nov 02, 2019 10:26 pm
UberGrub wrote:
Sat Nov 02, 2019 9:40 pm
"It seems to me like there's two classes of investing philosophies: Those who truly believe markets are efficient and no predictions of future events can be done,"

"and those who believe in some level of "mean-reversion"/"history will repeat"/"markets can get somewhat irrational".
These two statements are not in conflict.
Unless you think the first statement contradicts itself, both statements are in conflict. If no predictions of future events can be done, then mean reversion does not exist and markets will not be irrational. It markets are irrational, then it is possible to make money by longing or shorting the irrational side which contradicts the efficient market hypothesis.
EMH is not that markets are accurately priced. Just that markets are accurately priced based on all available public information. Markets can and often are mis-priced. The point is that you have no realistic way of knowing when and by how much.

The problem with selling in a bear market is that when you realized it, it is too late and when you realize it is time to buy it is also too late. This is the general problem with security/market timing in general. You have to be right twice.
This is in contradiction with the efficient market hypothesis. In an efficient market it is hard to be right twice, but it is equivalently hard to be wrong twice. Selling during a bear market is not worse than selling during a bull market. There is no problem with selling during a bear market. There is a problem with selling in general.

You don't have to be right twice to make money on market timing. If you know the market is overpriced or under priced, then acting on that information improves your risk-adjusted return in general. You don't need to have the same level of information when you step in again, an 'average' trade is good enough.




From an efficient market hypothesis viewpoint, selling during a bear market is not any worse than selling at any other time. The badness comes from varying your asset allocation (a constant asset allocation of 60/40 is better than constantly switching between 40/60 and 80/20).

From a non-efficient market hypothesis standpoint, selling during a bear market is worse than selling at any other time because the liquidity is lower and volatility is higher. This generally results in worse trades because market makers demand higher premiums when the market is volatile.


Note that the efficient market hypothesis doesn't necessarily imply that you should keep a constant asset allocation. For example, suppose that the equity market premium is 5% and natural disaster destroys the west half of the US causing the future equity risk premium to change to 4%. At this point it is rational to change your asset allocation. However, this has nothing to do with being in a bull or bear market. It also doesn't mean that you should keep cash on hand to prepare for this situation.

acegolfer
Posts: 1486
Joined: Tue Aug 25, 2009 9:40 am

Re: How do you reconcile these two opposing views

Post by acegolfer » Sun Nov 03, 2019 6:22 am

UberGrub wrote:
Sat Nov 02, 2019 9:40 pm
Those who truly believe markets are efficient and no predictions of future events can be done,
I'm afraid you have a misunderstanding of EMH. For example, analysts can make predictions on a company's EPS or FOMC's next move. EMH says these expectations are already reflected in the price.

bgf
Posts: 1089
Joined: Fri Nov 10, 2017 9:35 am

Re: How do you reconcile these two opposing views

Post by bgf » Sun Nov 03, 2019 6:35 am

JoMoney wrote:
Sat Nov 02, 2019 10:46 pm
I believe the market is difficult to beat, impossibly so in aggregate (we can't all be above average).
I believe there are some who are able to garner something extra through skill, unique information, etc...
I know there are others who try to exploit behavioral weaknesses, marketing risky securities and strategies that are of no advantage to the buyer, and often at higher expense and higher risk.
I have no reason to think I have the ability compete with the professionals in that game, and lots of reasons to believe I might be vulnerable to those preying on ''dumb money", and to other behavioral issues that have shown over and over again to cause a "behavior gap" between the investments people buy, and the returns actually realized by most investors.
pretty much how i feel as well.

OP, check out "A Man For All Markets" by Thorp. I loved it, and you might find it interesting as well. I find his view of markets as the most realistic and accurate. It is also a great example of what it took to have an edge in the market.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

User avatar
DartThrower
Posts: 905
Joined: Wed Mar 11, 2009 4:10 pm
Location: Philadelphia

Re: How do you reconcile these two opposing views

Post by DartThrower » Sun Nov 03, 2019 6:56 am

You might want to look into Burten Malkiel's concept of weak efficiency:
https://www.investopedia.com/terms/w/weakform.asp

And also Andrew Lo's Adaptive Market Hypothesis:
https://en.wikipedia.org/wiki/Adaptive_ ... hypothesis

Markets can be inefficient, but there is fairly broad agreement that the cost of exploiting those inefficiencies often far outweighs the expected benefit that can be derived from them, especially for retail investors. One of the greatest hazards of investing is overconfidence in one's ability to be smarter than the market.

I prefer to see the market as being so efficient that my time is better spent on other pursuits besides finding ways to beat it. e.g. education to enhance job skills, time with family, time exercising... etc.

I am more than happy with my results in investing in the broad stock and bond markets over the course of the last 40 years. As Bogle would say I got "my fair share".
A Boglehead can stay the course longer than the market can stay irrational.

User avatar
siamond
Posts: 5010
Joined: Mon May 28, 2012 5:50 am

Re: How do you reconcile these two opposing views

Post by siamond » Sun Nov 03, 2019 8:09 am

UberGrub wrote:
Sat Nov 02, 2019 9:40 pm
It seems to me like there's two classes of investing philosophies: Those who truly believe markets are efficient and no predictions of future events can be done, and those who believe in some level of "mean-reversion"/"history will repeat"/"markets can get somewhat irrational".
Anybody who's been through the Internet crisis in the 2000s (or who has looked closely at the corresponding numbers) should know that a perfectly efficient market is just a figment of overactive academic imagination. Robert Shiller made a very clear demonstration in his 'Irrational Exuberance' book, but come on, this is just common sense, human nature IS irrational, individually and in crowds. If one's recollection of the 2000s isn't enough to get the point, then one should read the fascinating "Devil Take the Hindmost: A History of Financial Speculation" by Edward Chancellor.

Now the thing is, EVEN if mean reversion happened and will happen again, EVEN if history repeated and will repeat (well, rhyme with) itself, EVEN if markets got and will get somewhat irrational at times, this does NOT mean that one can make actionable predictions that would meaningfully help to beat the market. Case in point, when the US market is overvalued (ahem, definitely looks like it nowadays!), nobody knows when the market will crash and display some kind of return to the mean. Strategies switching to cash or fixed income when markets appear overvalued can be demonstrated (via backtesting) as failing to extract a premium over a fixed asset allocation.

Bottomline: once you get out of the 'pure EMH' ivory tower and enter the real world, there is no contradiction. Markets are loosely efficient, but not always. Loose patterns of irrationality and return-the-mean are part of the game. None of that means that actionable predictions can be done.

Topic Author
UberGrub
Posts: 87
Joined: Wed Aug 21, 2019 3:47 pm

Re: How do you reconcile these two opposing views

Post by UberGrub » Sun Nov 03, 2019 9:23 am

Thank you for responses but I'm a little annoyed by those who don't see the conflict or think is because of my misunderstanding. It's probably because I'm not explaining well. Here's two quotes from Bernstein:

"As of this writing, for example, both developed and emerging foreign equities are selling at lower valuations by most parameters than their U.S. cousins. Accordingly, I believe that the investor should tilt his or her portfolio abroad."

And
"beware. Sooner or later, we’re going to have an inflationary crisis, and in such an environment, long duration will be a killer. Stick to short Treasuries, CDs, and munis."

If yields were 15%+, I think Bernstein would be recommending extending maturity no?

Do people seriously not think the above are contradictory to BH philosophy of "you cannot time markets, no one knows future expected returns, stay the course"? I mean, some might call the above market timing, but that's something Bernstein seems to be against also haha.

User avatar
JoMoney
Posts: 7755
Joined: Tue Jul 23, 2013 5:31 am

Re: How do you reconcile these two opposing views

Post by JoMoney » Sun Nov 03, 2019 9:37 am

Yes, you will see these sort of contradictory statements often among money managers who supposedly believe in the "Efficient Market Hypothesis" .

As far as your examples go, I don't see a conflict with the statement:
"beware. Sooner or later, we’re going to have an inflationary crisis, and in such an environment, long duration will be a killer. Stick to short Treasuries, CDs, and munis."
In that case, he is warning you about a known risk, and then stating his own risk preference.

I do see the conflicts/concerns with:
"As of this writing, for example, both developed and emerging foreign equities are selling at lower valuations by most parameters than their U.S. cousins. Accordingly, I believe that the investor should tilt his or her portfolio abroad."
In that case, at first he simply points out price multiple disparity (which is simply a fact), but then goes on to imply that the market valuation is somehow wrong and that you'll get some advantage by doing so... and at least in your snipit, seems to ignore warning of the risks involved with foreign/emerging equities.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
siamond
Posts: 5010
Joined: Mon May 28, 2012 5:50 am

Re: How do you reconcile these two opposing views

Post by siamond » Sun Nov 03, 2019 9:38 am

UberGrub wrote:
Sun Nov 03, 2019 9:23 am
Thank you for responses but I'm a little annoyed by those who don't see the conflict or think is because of my misunderstanding. It's probably because I'm not explaining well. Here's two quotes from Bernstein: [...]
Well, we were reacting to your OP... Now that you spelled out more specifics, then yes, I do agree with you, the good Dr. Bernstein is occasionally guilty of dubious tactical recommendations like the ones you mentioned. Nobody is perfect. I actually applaud your critical reading, it's good to keep solid 'healthy criticism', even when it comes to one of the best and most grounded luminaries we have in the Boglehead community.

Disclaimer: Dr. Bernstein is my hero. He truly is. More than anybody else (incl. John Bogle himself), he was the one who truly convinced me to switch to passive indexing and I will be eternally grateful to him. This doesn't mean I 100% agree with him on every single point though...

dbr
Posts: 30798
Joined: Sun Mar 04, 2007 9:50 am

Re: How do you reconcile these two opposing views

Post by dbr » Sun Nov 03, 2019 9:42 am

I don't fall into camps and I don't try to use theoretical constructs like those to guide how I invest. I won't accuse you of misunderstanding anything because I am not sure I understand exactly what the discussion is about EMH in its different forms.

User avatar
Kenkat
Posts: 5344
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

Re: How do you reconcile these two opposing views

Post by Kenkat » Sun Nov 03, 2019 9:54 am

I think there is some difference between classic market timing - moving your money completely in and out of the market based on valuation, tea leaves or some other predictor and making targeted, rather small asset allocation decisions within major asset classes. Let’s say you’ve decided on a 50/50 allocation between stocks and bonds. That decision alone will dictate to a large extent your future expected returns. During a bear market, you stocks will presumably drop much more than your bonds. You don’t sell stocks during a bear market because of future predictions — you don’t sell stocks during a bear market because your stock allocation is lower than your plan. You should be a buyer during a bear market.

Now, if I say I’m going to allocate a larger portion of my overall 50% stock allocation to international based on current valuations, then yes, you are making predictions about future returns. I wouldn’t call it market timing per se as you aren’t really intending to move rapidly from investment to another, but yes there is perhaps a mild contradiction in the statements. I would not call them opposing but rather a more general statement (don’t market time) vs. a more nuanced statement (don’t be completely blind to valuations either).

A key point made above is that even if you don't believe in fully efficient markets, there is nothing actionable that you can do about it. So allocating more to international stocks and less to domestic might make sense, but it also may not work out for a long time or ever. I tend towards just sticking to my target allocation regardless of all the noise because I don’t see these things being very actionable overall.

Topic Author
UberGrub
Posts: 87
Joined: Wed Aug 21, 2019 3:47 pm

Re: How do you reconcile these two opposing views

Post by UberGrub » Sun Nov 03, 2019 10:26 am

Kenkat wrote:
Sun Nov 03, 2019 9:54 am
During a bear market, you stocks will presumably drop much more than your bonds. You don’t sell stocks during a bear market because of future predictions — you don’t sell stocks during a bear market because your stock allocation is lower than your plan. You should be a buyer during a bear market.
Yes, that's what I would call the BH philosophy. Bernstein, OTOH, seems to be more "opportunistic". He seems to say you should keep cash and really ST bonds to buy during the downturn. If all you needed to do was rebalance, you could do that with any maturity (ex: 3-Fund Portfolio). He seems to imply that could also mean your bonds drop in value and you won't be able to buy as many stocks. You'll rebalance just fine; but won't acquire as many shares because your bonds also had the potential of dropping (ex: if you use corporate bonds).

These are slightly different things no?
siamond wrote:
Sun Nov 03, 2019 9:38 am
UberGrub wrote:
Sun Nov 03, 2019 9:23 am
Thank you for responses but I'm a little annoyed by those who don't see the conflict or think is because of my misunderstanding. It's probably because I'm not explaining well. Here's two quotes from Bernstein: [...]
Well, we were reacting to your OP... Now that you spelled out more specifics, then yes, I do agree with you, the good Dr. Bernstein is occasionally guilty of dubious tactical recommendations like the ones you mentioned. Nobody is perfect. I actually applaud your critical reading, it's good to keep solid 'healthy criticism', even when it comes to one of the best and most grounded luminaries we have in the Boglehead community.

Disclaimer: Dr. Bernstein is my hero. He truly is. More than anybody else (incl. John Bogle himself), he was the one who truly convinced me to switch to passive indexing and I will be eternally grateful to him. This doesn't mean I 100% agree with him on every single point though...
Ok so let me boil it down to my current problem. I need to buy some bonds right now. Here's my two viewpoints:

Viewpoint A
Just buy bonds as per your portfolio (ex: 3-Fund). Disregard the current yields, future expected returns, or any other predictions. Buy into BND.

Viewpoint B
After periods of high returns, multiples/yields change to produce future lower expected returns (and vice-versa). That's why people can manage to systematically underperform the market by buying high and selling low; that's why emotions are detrimental. Right now, you're evidently on a period of very low bond yields. If you buy right now, rates will eventually go up again, like they always do, and you'll become another one of Bernstein's stories about irrational humans buying LT bonds at the peak of the bond market, blinded by recency bias.

But I know it's not recency bias. I'm just trying to make the rational choice. Then again, every other "novice investor" who systematically underperforms the market because they overestimate their risk tolerance, probably thought like me also. They also didn't think they were being irrational. If they bought at the top or sold at the bottom, they probably had their own reasonable justifications. So how do I tell?

Do you guys see the conundrum?
Last edited by UberGrub on Sun Nov 03, 2019 10:28 am, edited 1 time in total.

User avatar
willthrill81
Posts: 13865
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: How do you reconcile these two opposing views

Post by willthrill81 » Sun Nov 03, 2019 10:28 am

Spirit Rider wrote:
Sat Nov 02, 2019 10:26 pm
The problem with selling in a bear market is that when you realized it, it is too late and when you realize it is time to buy it is also too late. This is the general problem with security/market timing in general. You have to be right twice.
I've heard this often, but it's not quite accurate. You don't have to be 'right' with regard to when you sell. Where you need to be right is when you buy back in. As long as you buy back in at a lower price than you sold at, you're ahead with timing vs. not. So strictly speaking, you only need to be right once.

That being said, given that the general trend of markets is to go up, market timers are facing that headwind any time they sell.
“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
Posts: 14113
Joined: Sat Oct 11, 2008 12:35 pm

Re: How do you reconcile these two opposing views

Post by KlangFool » Sun Nov 03, 2019 10:38 am

UberGrub wrote:
Sun Nov 03, 2019 10:26 am
Kenkat wrote:
Sun Nov 03, 2019 9:54 am
During a bear market, you stocks will presumably drop much more than your bonds. You don’t sell stocks during a bear market because of future predictions — you don’t sell stocks during a bear market because your stock allocation is lower than your plan. You should be a buyer during a bear market.
Yes, that's what I would call the BH philosophy. Bernstein, OTOH, seems to be more "opportunistic". He seems to say you should keep cash and really ST bonds to buy during the downturn. If all you needed to do was rebalance, you could do that with any maturity (ex: 3-Fund Portfolio). He seems to imply that could also mean your bonds drop in value and you won't be able to buy as many stocks. You'll rebalance just fine; but won't acquire as many shares because your bonds also had the potential of dropping (ex: if you use corporate bonds).

These are slightly different things no?
siamond wrote:
Sun Nov 03, 2019 9:38 am
UberGrub wrote:
Sun Nov 03, 2019 9:23 am
Thank you for responses but I'm a little annoyed by those who don't see the conflict or think is because of my misunderstanding. It's probably because I'm not explaining well. Here's two quotes from Bernstein: [...]
Well, we were reacting to your OP... Now that you spelled out more specifics, then yes, I do agree with you, the good Dr. Bernstein is occasionally guilty of dubious tactical recommendations like the ones you mentioned. Nobody is perfect. I actually applaud your critical reading, it's good to keep solid 'healthy criticism', even when it comes to one of the best and most grounded luminaries we have in the Boglehead community.

Disclaimer: Dr. Bernstein is my hero. He truly is. More than anybody else (incl. John Bogle himself), he was the one who truly convinced me to switch to passive indexing and I will be eternally grateful to him. This doesn't mean I 100% agree with him on every single point though...
Ok so let me boil it down to my current problem. I need to buy some bonds right now. Here's my two viewpoints:

Viewpoint A
Just buy bonds as per your portfolio (ex: 3-Fund). Disregard the current yields, future expected returns, or any other predictions. Buy into BND.

Viewpoint B
After periods of high returns, multiples/yields change to produce future lower expected returns (and vice-versa). That's why people can manage to systematically underperform the market by buying high and selling low; that's why emotions are detrimental. Right now, you're evidently on a period of very low bond yields. If you buy right now, rates will eventually go up again, like they always do, and you'll become another one of Bernstein's stories about irrational humans buying LT bonds at the peak of the bond market, blinded by recency bias.

But I know it's not recency bias. I'm just trying to make the rational choice. Then again, every other "novice investor" who systematically underperforms the market because they overestimate their risk tolerance, probably thought like me also. They also didn't think they were being irrational. If they bought at the top or sold at the bottom, they probably had their own reasonable justifications. So how do I tell?

Do you guys see the conundrum?
UberGrub,

1) I do not buy the LT bond.

2) I do not buy the ST bond.

3) I buy the bond index fund and the Inter-mediate term treasury.

4) I know that I know nothing and I cannot predict the market future.

5) Your problem is you believe that you know enough to predict the market's (bond or stock) future. I don't.

KlangFool

User avatar
willthrill81
Posts: 13865
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: How do you reconcile these two opposing views

Post by willthrill81 » Sun Nov 03, 2019 10:38 am

UberGrub wrote:
Sun Nov 03, 2019 10:26 am
Ok so let me boil it down to my current problem. I need to buy some bonds right now. Here's my two viewpoints:

Viewpoint A
Just buy bonds as per your portfolio (ex: 3-Fund). Disregard the current yields, future expected returns, or any other predictions. Buy into BND.

Viewpoint B
After periods of high returns, multiples/yields change to produce future lower expected returns (and vice-versa). That's why people can manage to systematically underperform the market by buying high and selling low; that's why emotions are detrimental. Right now, you're evidently on a period of very low bond yields. If you buy right now, rates will eventually go up again, like they always do, and you'll become another one of Bernstein's stories about irrational humans buying LT bonds at the peak of the bond market, blinded by recency bias.

But I know it's not recency bias. I'm just trying to make the rational choice. Then again, every other "novice investor" who systematically underperforms the market because they overestimate their risk tolerance, probably thought like me also. They also didn't think they were being irrational. If they bought at the top or sold at the bottom, they probably had their own reasonable justifications. So how do I tell?

Do you guys see the conundrum?
Yes, I see what you're getting at. Belief in the EMH does not automatically mean that an investor views the expected return of asset classes to always be the same. Generally speaking, most agree that the expected return of bonds, at least intermediate-term bonds, is the current yield. There is lot less agreement about stocks, but many view the expected return of stocks as 1/PE or 1/CAPE.

There's a subtle but very important distinction between predictions and expectations. Imagine that someone is rolling a fair six-sided die. The odds of 5 or 6 coming up are 1 in 3. So if this person 'wins' when 4 or a smaller number is rolled, and the amount that could be lost is equal to the amount that could be gained, then the expectation of any roll of the die is positive (i.e. the person will win 2 out of 3 times). Someone trying to make a prediction might say something like 'neither 5 nor 6 have come up over the last 10 rolls, so they must come on the next roll, so I won't play this time'.
“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

Chrono Triggered
Posts: 128
Joined: Wed Feb 17, 2016 12:55 pm

Re: How do you reconcile these two opposing views

Post by Chrono Triggered » Sun Nov 03, 2019 10:44 am

UberGrub wrote:
Sun Nov 03, 2019 10:26 am
Ok so let me boil it down to my current problem. I need to buy some bonds right now. Here's my two viewpoints:

Viewpoint A
Just buy bonds as per your portfolio (ex: 3-Fund). Disregard the current yields, future expected returns, or any other predictions. Buy into BND.

Viewpoint B
After periods of high returns, multiples/yields change to produce future lower expected returns (and vice-versa). That's why people can manage to systematically underperform the market by buying high and selling low; that's why emotions are detrimental. Right now, you're evidently on a period of very low bond yields. If you buy right now, rates will eventually go up again, like they always do, and you'll become another one of Bernstein's stories about irrational humans buying LT bonds at the peak of the bond market, blinded by recency bias.
I like to think of it as a combination of the two. You decide your allocation of equities and fixed income to account for different outcomes. So one could buy bonds over time while still accounting for the possibility in the second viewpoint, such as half LT and half INT bonds, or something along the lines.

If one's fixed income allocation is solely dependent on future forecasts, that appears to be market timing to me.

Or, in an equity situation, going 50/50 between domestic and international, reaping returns over the long term regardless of what happens.

dbr
Posts: 30798
Joined: Sun Mar 04, 2007 9:50 am

Re: How do you reconcile these two opposing views

Post by dbr » Sun Nov 03, 2019 10:44 am

UberGrub wrote:
Sun Nov 03, 2019 10:26 am

Ok so let me boil it down to my current problem. I need to buy some bonds right now. Here's my two viewpoints:

Viewpoint A
Just buy bonds as per your portfolio (ex: 3-Fund). Disregard the current yields, future expected returns, or any other predictions. Buy into BND.

Viewpoint B
After periods of high returns, multiples/yields change to produce future lower expected returns (and vice-versa). That's why people can manage to systematically underperform the market by buying high and selling low; that's why emotions are detrimental. Right now, you're evidently on a period of very low bond yields. If you buy right now, rates will eventually go up again, like they always do, and you'll become another one of Bernstein's stories about irrational humans buying LT bonds at the peak of the bond market, blinded by recency bias.

But I know it's not recency bias. I'm just trying to make the rational choice. Then again, every other "novice investor" who systematically underperforms the market because they overestimate their risk tolerance, probably thought like me also. They also didn't think they were being irrational. If they bought at the top or sold at the bottom, they probably had their own reasonable justifications. So how do I tell?

Do you guys see the conundrum?
Why do you need to buy bonds right now?
What would you do with this money otherwise?
Over what length of time do you plan to keep this money invested and why do you think ups and downs in the near future even matter?
Is there any strategy to avoid the bad luck of investing today if you can't control that today's conditions are what they are?
How do you even know that today's conditions are bad luck for investors?

Topic Author
UberGrub
Posts: 87
Joined: Wed Aug 21, 2019 3:47 pm

Re: How do you reconcile these two opposing views

Post by UberGrub » Sun Nov 03, 2019 10:58 am

KlangFool wrote:
Sun Nov 03, 2019 10:38 am
5) Your problem is you believe that you know enough to predict the market's (bond or stock) future. I don't.
dbr wrote:
Sun Nov 03, 2019 10:44 am
How do you even know that today's conditions are bad luck for investors?
I feel misunderstood. Shame indeed. Other posters seem to know what I'm getting at though:


willthrill81 wrote:
Sun Nov 03, 2019 10:38 am
Yes, I see what you're getting at. Belief in the EMH does not automatically mean that an investor views the expected return of asset classes to always be the same. Generally speaking, most agree that the expected return of bonds, at least intermediate-term bonds, is the current yield. There is lot less agreement about stocks, but many view the expected return of stocks as 1/PE or 1/CAPE.

There's a subtle but very important distinction between predictions and expectations. Imagine that someone is rolling a fair six-sided die. The odds of 5 or 6 coming up are 1 in 3. So if this person 'wins' when 4 or a smaller number is rolled, and the amount that could be lost is equal to the amount that could be gained, then the expectation of any roll of the die is positive (i.e. the person will win 2 out of 3 times). Someone trying to make a prediction might say something like 'neither 5 nor 6 have come up over the last 10 rolls, so they must come on the next roll, so I won't play this time'.
No, absolutely, I understand that. I think both BH/Bernstein viewpoints would agree that forward expected returns are lower than in the past for bonds of all maturities.

The part I can't reconcile is this tactical choice based on those future returns. Because BHs seem to ignore it completely ("yes they're lower future expected returns... but that doesn't change my plan, I will just save more"), while Bernstein seems to actually act on it ("stay on very short duration to avoid buying at the peak of the tremendous bull market/Go with more Int stocks because they have better valuations").

dbr
Posts: 30798
Joined: Sun Mar 04, 2007 9:50 am

Re: How do you reconcile these two opposing views

Post by dbr » Sun Nov 03, 2019 11:02 am

UberGrub wrote:
Sun Nov 03, 2019 10:58 am
KlangFool wrote:
Sun Nov 03, 2019 10:38 am
5) Your problem is you believe that you know enough to predict the market's (bond or stock) future. I don't.
dbr wrote:
Sun Nov 03, 2019 10:44 am
How do you even know that today's conditions are bad luck for investors?
I feel misunderstood. Shame indeed. Other posters seem to know what I'm getting at though:
Then most likely I am at fault for not understanding.

I don't understand your comment about shame either.

KlangFool
Posts: 14113
Joined: Sat Oct 11, 2008 12:35 pm

Re: How do you reconcile these two opposing views

Post by KlangFool » Sun Nov 03, 2019 11:08 am

UberGrub wrote:
Sun Nov 03, 2019 10:58 am


The part I can't reconcile is this tactical choice based on those future returns. Because BHs seem to ignore it completely ("yes they're lower future expected returns... but that doesn't change my plan, I will just save more"), while Bernstein seems to actually act on it ("stay on very short duration to avoid buying at the peak of the tremendous bull market/Go with more Int stocks because they have better valuations").
UberGrub,

A) Some people could ignore it totally. I save 1 year of expense every year. I could get to my number with a 5% nominal return over the next few years.

With my number, I am 25X my current annual expense without social security income and 50X with social security income.

B) Even if you cannot ignore it, what actually you can do about this? It requires some level of prediction which may not accurate.

C) In the end, you come to the conclusion that

1) It is safer to save more

2) Or be flexible about your retirement expense.

3) Or both.

KlangFool

User avatar
siamond
Posts: 5010
Joined: Mon May 28, 2012 5:50 am

Re: How do you reconcile these two opposing views

Post by siamond » Sun Nov 03, 2019 11:29 am

UberGrub wrote:
Sun Nov 03, 2019 10:58 am
I feel misunderstood. [...]

The part I can't reconcile is this tactical choice based on those future returns. Because BHs seem to ignore it completely ("yes they're lower future expected returns... but that doesn't change my plan, I will just save more"), while Bernstein seems to actually act on it ("stay on very short duration to avoid buying at the peak of the tremendous bull market/Go with more Int stocks because they have better valuations").
There is no question that Bernstein occasionally suggests a 'light' form of market timing based on expected returns (aka tactical asset allocation). Which tempted me too in the past, because it makes so much intuitive sense. Except that I am fairly good at backtesting and that I debunked my own intuition (and those Bernstein's claims). Same thing for 'dry powder' ideas, this just doesn't pass thorough backtesting. So count me squarely in the 'Viewpoint A' camp.

I think I finally understood what you meant though - sorry for being slow. You're going one step further... If such 'light' form of market timing does NOT work, then why emotional people who sell or change their AA when emotions are high (e.g. after a market drop) actually shoot in their own foot?

For those who sell and stay in cash until the market 'feels' better, the case is clear. The less you're exposed to the market, the less gains (on average, in the long run) you will get. Cash isn't king, it's drag!

For those who change their AA to something more conservative (e.g. stocks to bonds) until the market 'feels' better, the case is similar. The less you're exposed to high-growth assets, the less gains (on average, in the long run) you will get. Bonds aren't king either, they are an emotional ballast, kind of a deliberate drag on BOTH emotions and returns.

For those who change their AA (equity to equity) to something more attractive based on current valuations or rumors/politics of the day, then... I am not so sure they actually shoot in their foot (besides transaction costs and possible tax consequences). But I am pretty sure they won't get a bonus either.

Did I get closer to your conundrum? :shock:

stan1
Posts: 7685
Joined: Mon Oct 08, 2007 4:35 pm

Re: How do you reconcile these two opposing views

Post by stan1 » Sun Nov 03, 2019 11:42 am

Economics is riddled with human influences. There's a reason its called the efficient market hypothesis not the efficient market theorem. I'm not aware of any provable theorems governing human behavior.

Therefore my focus is not on models or theory but on my assessments of my needs, risks, and trying to come up with something that mitigates those risks as best as possible with what I know and can control. One way of managing risk is to transfer it to someone else but that's getting harder to do. Traditional ways of transferring risk to an institution (such as government, pensions or insurance) but today (and I think even more so in the future) institutions are being more cautious about assuming those risks and are charging more when they do. I also try to avoid making ridiculous assumptions such as assuming future tax laws will never change or even that I will never move to a different state. To summarize: I reconcile by trying to balance.

User avatar
JoMoney
Posts: 7755
Joined: Tue Jul 23, 2013 5:31 am

Re: How do you reconcile these two opposing views

Post by JoMoney » Sun Nov 03, 2019 11:47 am

Dr. Bernstein is an investment adviser, he sells books and offers his professional advice. He offers both perspectives of simply taking the broad averages and sticking to it (guaranteeing your fair share of whatever the average returns are), and advice for those who want to play the tactical game on what his professional opinion is.

You'll have to decide for yourself what type of investor you are.
Benjamin Graham in The Intelligent Investor wrote:Investment policy, as it has been developed here, depends in the first place on a choice by the investor of either the defensive (passive) or aggressive (enterprising) role ...
Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement ...
It follows from this reasoning that the majority of security owners should elect the defensive classification ...
They should therefore be satisfied with the excellent return now obtainable from a defensive portfolio (and with even less), and they should stoutly resist the recurrent temptation to increase this return by deviating into other paths ...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Lee_WSP
Posts: 1205
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: How do you reconcile these two opposing views

Post by Lee_WSP » Sun Nov 03, 2019 12:01 pm

UberGrub wrote:
Sun Nov 03, 2019 10:58 am
The part I can't reconcile is this tactical choice based on those future returns. Because BHs seem to ignore it completely ("yes they're lower future expected returns... but that doesn't change my plan, I will just save more"), while Bernstein seems to actually act on it ("stay on very short duration to avoid buying at the peak of the tremendous bull market/Go with more Int stocks because they have better valuations").
Well, you are given the choice between slightly higher returns in return for taking on the risk of capital losses (long bonds) vs basically getting exactly the SEC yield, no matter what happens (intermediate & short bonds).

BH philosophy is to develop a plan that will weather all seasons and just keep on dumping money into the plan until you retire.

In today's market total bond is the safe play. You'll neither lose nor gain a lot of money. But it'll be there serving as emotional and portfolio ballast as others have stated.

If you invest in long bonds, you take on additional risk for additional reward.

Here's the problem: you and I nor anyone else can accurately predict the future. Just because we know something will implode, does not mean we know when it will implode. The stock market can go on for years and years until finally imploding to a level that is significantly higher than it is today. Or it can tank tomorrow and enter a severe and long bear market. Or it can just go sideways until valuations revert to the mean. We just can't know.

Topic Author
UberGrub
Posts: 87
Joined: Wed Aug 21, 2019 3:47 pm

Re: How do you reconcile these two opposing views

Post by UberGrub » Sun Nov 03, 2019 12:09 pm

siamond wrote:
Sun Nov 03, 2019 11:29 am

For those who sell and stay in cash until the market 'feels' better, the case is clear. The less you're exposed to the market, the less gains (on average, in the long run) you will get. Cash isn't king, it's drag!

For those who change their AA to something more conservative (e.g. stocks to bonds) until the market 'feels' better, the case is similar. The less you're exposed to high-growth assets, the less gains (on average, in the long run) you will get. Bonds aren't king either, they are an emotional ballast, kind of a deliberate drag on BOTH emotions and returns.
That's what another poster mentioned (Uncorrolated) but I'm not convinced. The difference in returns between investors who sell in Bear market panic and buy in bulls seem to be much larger than you'd get from williy-nilly changing to a more conservative allocation. It's like the former is systematically worse.

In other words, I'm not sure that the difference in returns between a disciplined investor (say 50/50) and an undisciplined (who goes 0/100 at the bottom of 2008 and buys back in 2010) are really just because the latter had a little less exposure to the high growth assets. I can't help but feel that it's because the latter had less exposure to the high growth asset precisely when its returns were going to be really good. Like there's actual bad timing involved.

Otherwise, why so much focus on judging your risk tolerance? And not panicking and selling? Why is it that changing to a more conservative allocation is recommended when we're NOT in a Bear market ("take risk off the table"), but not recommended when we ARE in one?

User avatar
Kenkat
Posts: 5344
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

Re: How do you reconcile these two opposing views

Post by Kenkat » Sun Nov 03, 2019 12:49 pm

UberGrub wrote:
Sun Nov 03, 2019 10:26 am
Kenkat wrote:
Sun Nov 03, 2019 9:54 am
During a bear market, you stocks will presumably drop much more than your bonds. You don’t sell stocks during a bear market because of future predictions — you don’t sell stocks during a bear market because your stock allocation is lower than your plan. You should be a buyer during a bear market.
Yes, that's what I would call the BH philosophy. Bernstein, OTOH, seems to be more "opportunistic". He seems to say you should keep cash and really ST bonds to buy during the downturn. If all you needed to do was rebalance, you could do that with any maturity (ex: 3-Fund Portfolio). He seems to imply that could also mean your bonds drop in value and you won't be able to buy as many stocks. You'll rebalance just fine; but won't acquire as many shares because your bonds also had the potential of dropping (ex: if you use corporate bonds).

These are slightly different things no?
Yeah, they are slightly different things. You can do one and not the other, however, so I don’t think they are completely opposing either; more of a fine tuning and I do agree it has a flavor of market timing although I would say it is more managing expected returns that pure market timing. That said, I just don’t do this. I’ve seen enough misses over the years by the experts that I don’t bother. For example, 5 years ago, interest rates had nowhere to go but up, so you should have used short term bonds according to the predictors. Except that didn’t happen. So now you have 5 years in on short term bonds and their lower returns and now where do you go next? Stick with short term bonds again? What if rates stay down? So, I just don’t bother. I buy Bond Market Index for my investment grade bond allocation and I am done with it.

Same for International. Do I think International equities look attractive right now? Yes, I do. Has my allocation percentage to international equities changed because of it. No it has not. It’s been the same percentage for years. Again, just because international equity valuations seem attractive doesn’t really mean it will lead to anything actionable to do about it.

I do agree that many investment gurus can’t help but to make little predictions like this that fly in the face of their mainstream advice, so I do get your point. I feel very confident that the mainstream advice of stick to your plan is good. All of the tweaking around the edges? No - especially when it leads to deviating from your plan.

User avatar
siamond
Posts: 5010
Joined: Mon May 28, 2012 5:50 am

Re: How do you reconcile these two opposing views

Post by siamond » Sun Nov 03, 2019 12:51 pm

UberGrub wrote:
Sun Nov 03, 2019 12:09 pm
siamond wrote:
Sun Nov 03, 2019 11:29 am
For those who sell and stay in cash until the market 'feels' better, the case is clear. The less you're exposed to the market, the less gains (on average, in the long run) you will get. Cash isn't king, it's drag!

For those who change their AA to something more conservative (e.g. stocks to bonds) until the market 'feels' better, the case is similar. The less you're exposed to high-growth assets, the less gains (on average, in the long run) you will get. Bonds aren't king either, they are an emotional ballast, kind of a deliberate drag on BOTH emotions and returns.
That's what another poster mentioned (Uncorrolated) but I'm not convinced. The difference in returns between investors who sell in Bear market panic and buy in bulls seem to be much larger than you'd get from williy-nilly changing to a more conservative allocation. It's like the former is systematically worse.

In other words, I'm not sure that the difference in returns between a disciplined investor (say 50/50) and an undisciplined (who goes 0/100 at the bottom of 2008 and buys back in 2010) are really just because the latter had a little less exposure to the high growth assets. I can't help but feel that it's because the latter had less exposure to the high growth asset precisely when its returns were going to be really good. Like there's actual bad timing involved.
I don't disagree. You raised an intriguing question. I hesitated to post my previous answer because it did feel incomplete. This being said, we both used the word 'feel' in our exchange, hence using our intuition. Maybe it's time to quantify the thought and run a solid test. I have other things on my plate, but if you're Excel-savvy, feel free to use the Simba backtesting spreadsheet (which I maintain) to get raw historical data, get valuation data from Prof. Shiller's Web site (or simpler, multpl.com), and give it a go. We can learn a lot by asking ourselves questions like that in an open-minded manner and then running the numbers...
UberGrub wrote:
Sun Nov 03, 2019 12:09 pm
Otherwise, why so much focus on judging your risk tolerance? And not panicking and selling? Why is it that changing to a more conservative allocation is recommended when we're NOT in a Bear market ("take risk off the table"), but not recommended when we ARE in one?
I think this is a slightly different matter. Changing one's AA when reaching some critical point in life (e.g. retirement or else) to something more conservative is perfectly fine as long as this is truly a long-term decision. When emotions run high (bear OR bull), it is pretty hard to distinguish between such cold-blooded strategic decision and an overreacting impulsive decision which will be reversed later on (e.g. when things cool off). So yeah, I'd rather make strategic decisions when the weather is milder...

Uncorrelated
Posts: 141
Joined: Sun Oct 13, 2019 3:16 pm

Re: How do you reconcile these two opposing views

Post by Uncorrelated » Sun Nov 03, 2019 1:26 pm

siamond wrote:
Sun Nov 03, 2019 12:51 pm
UberGrub wrote:
Sun Nov 03, 2019 12:09 pm
siamond wrote:
Sun Nov 03, 2019 11:29 am
For those who sell and stay in cash until the market 'feels' better, the case is clear. The less you're exposed to the market, the less gains (on average, in the long run) you will get. Cash isn't king, it's drag!

For those who change their AA to something more conservative (e.g. stocks to bonds) until the market 'feels' better, the case is similar. The less you're exposed to high-growth assets, the less gains (on average, in the long run) you will get. Bonds aren't king either, they are an emotional ballast, kind of a deliberate drag on BOTH emotions and returns.
That's what another poster mentioned (Uncorrolated) but I'm not convinced. The difference in returns between investors who sell in Bear market panic and buy in bulls seem to be much larger than you'd get from williy-nilly changing to a more conservative allocation. It's like the former is systematically worse.

In other words, I'm not sure that the difference in returns between a disciplined investor (say 50/50) and an undisciplined (who goes 0/100 at the bottom of 2008 and buys back in 2010) are really just because the latter had a little less exposure to the high growth assets. I can't help but feel that it's because the latter had less exposure to the high growth asset precisely when its returns were going to be really good. Like there's actual bad timing involved.
I don't disagree. You raised an intriguing question. I hesitated to post my previous answer because it did feel incomplete. This being said, we both used the word 'feel' in our exchange, hence using our intuition. Maybe it's time to quantify the thought and run a solid test. I have other things on my plate, but if you're Excel-savvy, feel free to use the Simba backtesting spreadsheet (which I maintain) to get raw historical data, get valuation data from Prof. Shiller's Web site (or simpler, multpl.com), and give it a go. We can learn a lot by asking ourselves questions like that in an open-minded manner and then running the numbers...
There is academic literature available that answers that question. The best attempt I've seen so far is from "Forecasting the Equity Risk Premium: The Role of Technical Indicators", 2013 edition. If you combine enough different indicators then it is possible to beat a constant asset allocation in terms of certainty equivalent return (in-sample). However, performance from popular indicators such as CAPE ratio is disappointing (near zero). I think Fama & French also did a similar study based on bond yield curve inversions.

Although it is possible to time the market, doing so is not easy. Of course the arguments works the other way, too: bad timing is equally hard as good timing. If you get the impression that market timers are significantly worse off, then that is probably just bad luck instead of actual bad timing.

Topic Author
UberGrub
Posts: 87
Joined: Wed Aug 21, 2019 3:47 pm

Re: How do you reconcile these two opposing views

Post by UberGrub » Sun Nov 03, 2019 2:39 pm

Writes Bernstein (2013-2014):
"At the time of this writing, this sort of analysis (fundamental) shows that, in general, U.S. stocks are about as expensive as they were just before the Global Financial Crisis. Emerging markets stocks are nearly as cheap as they were in 2009, and developed markets stocks are in between these two extremes.This is useful information for the investing adult."

^My own bolding.

The implication above is to reduce US allocation and increase Int. However, the US market proceeded to outperform Int. since 2014. So was that really "useful information for the investing adult"?

He also writes:
"...replace some of the domestic REITs with international ones, and add in a few percent of precious metals equity, especially given the dramatic recent price falls of the gold miners."

But SPY proceeded outperform GDX since 2014, right after their heavy drop.

Personal Conclusion
As others voiced, he's just an advisor and one just has to decide how they feel about it. But frankly, I'm not connecting with many of these thoughts/suggestions. I mean they're borderline market timing (just smaller in magnitude). I'm very thankful for Bogleheads giving me a heavy dose of reality to just stick to a plan and ignore the noise.

Apologies to William Bernstein for posting some of these quotes and if he feels it's inappropriate, I will immediately take them down.

User avatar
305pelusa
Posts: 979
Joined: Fri Nov 16, 2018 10:20 pm

Re: How do you reconcile these two opposing views

Post by 305pelusa » Sun Nov 03, 2019 2:47 pm

Bernstein is a bit of a market timer. His 3-Fund recommendation in that book used ST bonds instead of BND precisely because rates were low at the time. He also overbalances (tactical AA change). He makes a big deal about "dry powder" and "liquid cash" precisely to deploy on downturns. It's easy to suggest this in the face of history where the US always recovered. What about a market downturn that stays down for decades? I'd like to see if Bernstein will be happy after dumping all of his "dry powder" after the first few years, overbalancing into it, and acquiring more from whatever lost the most without recovery for decades.

I like the BH philosophy far more. Pick the AA that matches your circumstances, and just stick to it. Don't over balance but don't under balance either. And just forget this noise.

mptfan
Posts: 5626
Joined: Mon Mar 05, 2007 9:58 am

Re: How do you reconcile these two opposing views

Post by mptfan » Sun Nov 03, 2019 2:49 pm

Spirit Rider wrote:
Sat Nov 02, 2019 10:26 pm
UberGrub wrote:
Sat Nov 02, 2019 9:40 pm
"It seems to me like there's two classes of investing philosophies: Those who truly believe markets are efficient and no predictions of future events can be done,"

"and those who believe in some level of "mean-reversion"/"history will repeat"/"markets can get somewhat irrational".
These two statements are not in conflict.
Exactly.

pkcrafter
Posts: 13643
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: How do you reconcile these two opposing views

Post by pkcrafter » Sun Nov 03, 2019 8:28 pm

From 2017-- Bernstein's bond choice.

viewtopic.php?t=230930

What have we learned?

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

User avatar
DartThrower
Posts: 905
Joined: Wed Mar 11, 2009 4:10 pm
Location: Philadelphia

Re: How do you reconcile these two opposing views

Post by DartThrower » Mon Nov 04, 2019 8:32 am

Bogle himself voiced concerns about an overvalued stock market in recent years before his passing. But, heeding his own advice that "nobody knows nuthin", he didn't advise radical reallocation of assets. His advice was to make small changes towards a somewhat more conservative portfolio if one was so inclined. He always strongly cautioned against making large scale allocation changes. He knew that the phrase "nobody knows nuthin" applied to himself as well.

We are all human and so we are all subject to some behavioral impulses. Staying the course is hard for almost everyone. Fortunately there are many many common sense portfolios that will serve investors well over the course of an investing lifetime. If you switch from one good portfolio to another one from time to time you're not likely to get hurt badly, although you are making a behavioral error.

Identifying what is optimal beforehand is utterly impossible, but we humans can't help trying. This is why I still consider myself a fan of Bob Shiller, Jeremy Siegel, Bill Bernstein, Jack Bogle, Gene Fama... etc. It's obviously not because they always agree or that they are immune from behavioral flaws but that the general thrust of their advice did and will serve investors well over the course of decades. I listen to them all, carefully consider what they have to say and then make up my own mind.
A Boglehead can stay the course longer than the market can stay irrational.

3funder
Posts: 1081
Joined: Sun Oct 15, 2017 9:35 pm

Re: How do you reconcile these two opposing views

Post by 3funder » Mon Nov 04, 2019 9:35 am

Spirit Rider wrote:
Sat Nov 02, 2019 10:26 pm
UberGrub wrote:
Sat Nov 02, 2019 9:40 pm
"It seems to me like there's two classes of investing philosophies: Those who truly believe markets are efficient and no predictions of future events can be done,"

"and those who believe in some level of "mean-reversion"/"history will repeat"/"markets can get somewhat irrational".
These two statements are not in conflict.
However, if the market is truly efficient and unpredictable, then why is it bad to sell during Bear markets? It's not any more likely to go up than down from there right?
EMH is not that markets are accurately priced. Just that markets are accurately priced based on all available public information. Markets can and often are mis-priced. The point is that you have no realistic way of knowing when and by how much.

The problem with selling in a bear market is that when you realized it, it is too late and when you realize it is time to buy it is also too late. This is the general problem with security/market timing in general. You have to be right twice.
Bernstein seems to make the point that investors must be courageous and disciplined and have cash to buy bargains. I'm having a hard time reconciling that with the view that markets are just unpredictable.
I agree with your problem with this statement. It is just another form of trying to time the markets. I have always felt that after you have an emergency fund, it is best to stay fully invested.

I am solidly in the camp of applying the serenity prayer to investing. Have a reasonable asset allocation, keep expenses low, stay invested, let time work and sleep well at night.
+1

User avatar
firebirdparts
Posts: 339
Joined: Thu Jun 13, 2019 4:21 pm

Re: How do you reconcile these two opposing views

Post by firebirdparts » Mon Nov 04, 2019 10:00 am

pkcrafter wrote:
Sun Nov 03, 2019 8:28 pm
What have we learned?

Paul
Nobody knows nothing.
A fool and your money are soon partners

MotoTrojan
Posts: 6789
Joined: Wed Feb 01, 2017 8:39 pm

Re: How do you reconcile these two opposing views

Post by MotoTrojan » Mon Nov 04, 2019 10:29 am

There is a big difference between selling during a bear market to fund your expenses (such as being in retirement during a downturn) and selling because you are afraid of the market.

Even if it were a true 50/50 whether the market goes up or down at any point (obviously this is not the case and there are reasons it would go up over time), if you sell more when the market is down than up, you are going to lose.

Random Walker
Posts: 4188
Joined: Fri Feb 23, 2007 8:21 pm

Re: How do you reconcile these two opposing views

Post by Random Walker » Mon Nov 04, 2019 10:32 am

We can’t time markets, but each individual can put the odds in his own favor. Past returns result from increased valuations, which in turn result in lower future expected returns. Not only is the mean expected return shifted left, the whole potential distribution of future returns shifts left. Good outcomes are less good and bad outcomes are worse. One can look at his own personal circumstance (age, net worth, where he is relative to goals, etc) and adjust his asset allocation appropriately.

This is why I have a bit of a problem with target date funds that reduce the equity allocation 1-2% per year; the stock market has a standard deviation of about 15-20% per year. Instead, one can sort of opportunistically customize his own glide path towards the retirement portfolio.

viewtopic.php?t=236967

Dave

Post Reply