Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

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alex123711
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Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by alex123711 »

Institutional investor wrote:Despite the longest economic expansion in U.S. history, the gap between the present value of liabilities and assets at U.S. state pensions is measured in trillions of dollars. To make matters worse, pensions are now faced with the reality that standard diversification — including extremely low-yielding bonds — may no longer serve as an effective hedge for equity risk.

The traditional 60/40 mix of stocks and bonds, commonly portrayed as an optimal portfolio, is supposed to mitigate the effects of this sort of extreme market volatility and deliver returns that pension fund managers can rely on. But the 60/40 mix is an artifact from another time. The optimal mix presumes it is possible to achieve a high rate of return while simultaneously constraining volatility. In practice, it limits portfolio volatility in benign market environments over the short term while making huge sacrifices in long-run performance. The so-called optimal portfolio is, in effect, the worst of all worlds. It offers scant protection against tail risk and, at the same time, achieves an under-allocation to riskier assets with higher returns in long periods of economic expansion, such as the past decade.
[Article content from source below quoted by admin LadyGeek.]

https://www.institutionalinvestor.com/a ... -Time?s=09
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Cheez-It Guy »

Perhaps you missed it. The economic expansion is over. Starting new phase.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Trader Joe »

alex123711 wrote: Sun Aug 16, 2020 7:07 pm Despite the longest economic expansion in U.S. history, the gap between the present value of liabilities and assets at U.S. state pensions is measured in trillions of dollars. To make matters worse, pensions are now faced with the reality that standard diversification — including extremely low-yielding bonds — may no longer serve as an effective hedge for equity risk.

The traditional 60/40 mix of stocks and bonds, commonly portrayed as an optimal portfolio, is supposed to mitigate the effects of this sort of extreme market volatility and deliver returns that pension fund managers can rely on. But the 60/40 mix is an artifact from another time. The optimal mix presumes it is possible to achieve a high rate of return while simultaneously constraining volatility. In practice, it limits portfolio volatility in benign market environments over the short term while making huge sacrifices in long-run performance. The so-called optimal portfolio is, in effect, the worst of all worlds. It offers scant protection against tail risk and, at the same time, achieves an under-allocation to riskier assets with higher returns in long periods of economic expansion, such as the past decade.

https://www.institutionalinvestor.com/a ... -Time?s=09
So what is your investment strategy?
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by sambb »

if returns are lower, just have to work a little longer or lower expenses. such is life in low returns.
000
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by 000 »

Buying negative yield bonds is bad, but throwing more at stocks (which are risky despite the common refrain that they always go up eventually) than you can handle is even worse.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by UpperNwGuy »

I am confused. What is the point of this thread?
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by nisiprius »

6/2009, Bill Gross, at that time the famous "Bond King"--manager of a bond fund which for a while was the largest mutual fund in the world--was quoted:
Echoing views expressed by Peter L. Bernstein, Gross said that the policy portfolio is dead. A 60/40 allocation and the promotion of risky (equity) assets was how you got rich in the past, but past results don’t foretell future performance. Risk and return may be correlated, but Gross said investors must pay closer attention to the price they pay for risky assets.
I think the reference is to something Peter L. Bernstein wrote circa 2003 or 2004 but I can't find it, so let's take 2009 as our starting point.

The Vanguard Balanced Index Fund is equivalent to 60% Total Stock, 40% Total Bond. From the article date through today, the Vanguard Balanced Index Fund would have tripled your money, an average (CAGR) return of over 10%/year.

Source

Image

Since inception, including two complete business cycles, high and low interest rates, the dot-bomb crash and the global financial crisis, it would have multiplied your money by nine, an average return of over 8%.

Image

And during that time, people have been saying continuously that 60/40 is dead and it worked fine in the past but can't possibly go on working.

O, "death," where is thy sting?
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by JBTX »

nisiprius wrote: Sun Aug 16, 2020 8:04 pm 6/2009, Bill Gross, at that time the famous "Bond King"--manager of a bond fund which for a while was the largest mutual fund in the world--was quoted:
Echoing views expressed by Peter L. Bernstein, Gross said that the policy portfolio is dead. A 60/40 allocation and the promotion of risky (equity) assets was how you got rich in the past, but past results don’t foretell future performance. Risk and return may be correlated, but Gross said investors must pay closer attention to the price they pay for risky assets.
I think the reference is to something Peter L. Bernstein wrote circa 2003 or 2004 but I can't find it, so let's take 2009 as our starting point.

The Vanguard Balanced Index Fund is equivalent to 60% Total Stock, 40% Total Bond. From the article date through today, the Vanguard Balanced Index Fund would have tripled your money, an average (CAGR) return of over 10%/year.

Source

Image

Since inception, including two complete business cycles, high and low interest rates, the dot-bomb crash and the global financial crisis, it would have multiplied your money by nine, a CAGR of over 8%.

Image

And during that time, people have been saying continuously that 60/40 is dead and it worked fine in the past but won't go on working.

O, "death," where is thy sting?
Just for arguments sake, what purpose do near zero percent bonds play in a 60/40 portfolio?

How does one get 7%-8% return if 40% is zero?
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by asset_chaos »

While not wasting my time reading the article, from the snippet quoted my guess is that the author has a "solution" to the touted problem that pension funds can purchase.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by goodenyou »

JBTX wrote: Sun Aug 16, 2020 8:18 pm
nisiprius wrote: Sun Aug 16, 2020 8:04 pm 6/2009, Bill Gross, at that time the famous "Bond King"--manager of a bond fund which for a while was the largest mutual fund in the world--was quoted:
Echoing views expressed by Peter L. Bernstein, Gross said that the policy portfolio is dead. A 60/40 allocation and the promotion of risky (equity) assets was how you got rich in the past, but past results don’t foretell future performance. Risk and return may be correlated, but Gross said investors must pay closer attention to the price they pay for risky assets.
I think the reference is to something Peter L. Bernstein wrote circa 2003 or 2004 but I can't find it, so let's take 2009 as our starting point.

The Vanguard Balanced Index Fund is equivalent to 60% Total Stock, 40% Total Bond. From the article date through today, the Vanguard Balanced Index Fund would have tripled your money, an average (CAGR) return of over 10%/year.

Source

Image

Since inception, including two complete business cycles, high and low interest rates, the dot-bomb crash and the global financial crisis, it would have multiplied your money by nine, a CAGR of over 8%.

Image

And during that time, people have been saying continuously that 60/40 is dead and it worked fine in the past but won't go on working.

O, "death," where is thy sting?
Just for arguments sake, what purpose do near zero percent bonds play in a 60/40 portfolio?

How does one get 7%-8% return if 40% is zero?
The interest rate is zero. Bond values fluctuate with interest rates. I don't expect that the interest rates will be fixed at zero or close to zero forever.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by FishTaco »

Maybe there is an economy of scale for larger portfolios that is improved for fund managers vs the individual investor, but I have trouble believing that the 4.9% premium of a 100/0 portfolio over a 60/40 wouldn't be totally consumed by long term purchasing of put options to hedge against equity tail risk.

Pensions are underfunded because they have long been too optimistic regarding their returns and have not increased contributions or decreased projections in order to account for difference between expectations and reality. When an individual is confronted with a similar situation regarding their self-funded retirement, the realistic solutions are work longer, save more, and/or decrease their expenses. Lacking a deus ex machina type solution, the pension situation will have to be resolved by a similar decision process.

How its going to be resolved is, of course, more debt will be issued in the name of municipalities and goverments with no real clear plan on how that debt will ever be repaid.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Jags4186 »

JBTX wrote: Sun Aug 16, 2020 8:18 pm Just for arguments sake, what purpose do near zero percent bonds play in a 60/40 portfolio?

How does one get 7%-8% return if 40% is zero?
A ~12% return on the equity side plus a ~0% on the bond side would get you 7%-8%. Of course, returns will only be zero if interest rates are zero and simply stay there. If interest rates continue to drop, you will have bond price appreciation. If interest rates increase, your return will match the yield to maturity. Of course, you also will get a rebalancing bonus.

Low interest rates are bad for returns, but good for folks who borrow money. You can have more money invested in equities and hold long term low rate debt (i.e. a sub 3% mortgage) to augment your returns.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by FishTaco »

JBTX wrote: Sun Aug 16, 2020 8:18 pm Just for arguments sake, what purpose do near zero percent bonds play in a 60/40 portfolio?

How does one get 7%-8% return if 40% is zero?
Source of funds for rebalancing.
Ability to draw for living expenses during down market times.

Not sure I'd hold zero percent bonds when cash yields the same without principal risk.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by goodenyou »

Jags4186 wrote: Sun Aug 16, 2020 8:31 pm
JBTX wrote: Sun Aug 16, 2020 8:18 pm Just for arguments sake, what purpose do near zero percent bonds play in a 60/40 portfolio?

How does one get 7%-8% return if 40% is zero?
A ~12% return on the equity side plus a ~0% on the bond side would get you 7%-8%. Of course, returns will only be zero if interest rates are zero and simply stay there. If interest rates continue to drop, you will have bond price appreciation. If interest rates increase, your return will match the yield to maturity. Of course, you also will get a rebalancing bonus.

Low interest rates are bad for returns, but good for folks who borrow money. You can have more money invested in equities and hold long term low rate debt (i.e. a sub 3% mortgage) to augment your returns.
I am sure that if you (JBTX) ask Nisi the question "In that illustration of the 60/40 portfolio, what role did bonds play in the total contribution of that growth?", you will get a detailed answer. It may be a small fraction. In other words, just because the portfolio is 40% bonds doesn't mean it (bonds) contributed very much to the total growth of the portfolio. Bonds are for safety has been said often around here.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by JBTX »

goodenyou wrote: Sun Aug 16, 2020 8:23 pm
JBTX wrote: Sun Aug 16, 2020 8:18 pm
nisiprius wrote: Sun Aug 16, 2020 8:04 pm 6/2009, Bill Gross, at that time the famous "Bond King"--manager of a bond fund which for a while was the largest mutual fund in the world--was quoted:
Echoing views expressed by Peter L. Bernstein, Gross said that the policy portfolio is dead. A 60/40 allocation and the promotion of risky (equity) assets was how you got rich in the past, but past results don’t foretell future performance. Risk and return may be correlated, but Gross said investors must pay closer attention to the price they pay for risky assets.
I think the reference is to something Peter L. Bernstein wrote circa 2003 or 2004 but I can't find it, so let's take 2009 as our starting point.

The Vanguard Balanced Index Fund is equivalent to 60% Total Stock, 40% Total Bond. From the article date through today, the Vanguard Balanced Index Fund would have tripled your money, an average (CAGR) return of over 10%/year.

Source

Image

Since inception, including two complete business cycles, high and low interest rates, the dot-bomb crash and the global financial crisis, it would have multiplied your money by nine, a CAGR of over 8%.

Image

And during that time, people have been saying continuously that 60/40 is dead and it worked fine in the past but won't go on working.

O, "death," where is thy sting?
Just for arguments sake, what purpose do near zero percent bonds play in a 60/40 portfolio?

How does one get 7%-8% return if 40% is zero?
The interest rate is zero. Bond values fluctuate with interest rates. I don't expect that the interest rates will be fixed at zero or close to zero forever.
The interest rate is zero. The expected rate of return is zero. When interest rates are near zero, reinvestment of interest at different future rates has a negligible effect. The return on the bonds, to the extent of their duration, will effectively be zero.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by JBTX »

Jags4186 wrote: Sun Aug 16, 2020 8:31 pm
JBTX wrote: Sun Aug 16, 2020 8:18 pm Just for arguments sake, what purpose do near zero percent bonds play in a 60/40 portfolio?

How does one get 7%-8% return if 40% is zero?
A ~12% return on the equity side plus a ~0% on the bond side would get you 7%-8%. Of course, returns will only be zero if interest rates are zero and simply stay there. If interest rates continue to drop, you will have bond price appreciation. If interest rates increase, your return will match the yield to maturity. Of course, you also will get a rebalancing bonus.

Low interest rates are bad for returns, but good for folks who borrow money. You can have more money invested in equities and hold long term low rate debt (i.e. a sub 3% mortgage) to augment your returns.
12% could happen, and has happened, but that would be an outlier. Even guys like Bogle were saying to expect 4-5% nominal on stocks.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by bottlecap »

I appreciate your posting this. But do you think you could put some thought into it?

You just copied word-for-word two paragraphs of the article without comment.

JT
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by JBTX »

goodenyou wrote: Sun Aug 16, 2020 8:40 pm
Jags4186 wrote: Sun Aug 16, 2020 8:31 pm
JBTX wrote: Sun Aug 16, 2020 8:18 pm Just for arguments sake, what purpose do near zero percent bonds play in a 60/40 portfolio?

How does one get 7%-8% return if 40% is zero?
A ~12% return on the equity side plus a ~0% on the bond side would get you 7%-8%. Of course, returns will only be zero if interest rates are zero and simply stay there. If interest rates continue to drop, you will have bond price appreciation. If interest rates increase, your return will match the yield to maturity. Of course, you also will get a rebalancing bonus.

Low interest rates are bad for returns, but good for folks who borrow money. You can have more money invested in equities and hold long term low rate debt (i.e. a sub 3% mortgage) to augment your returns.
I am sure that if you (JBTX) ask Nisi the question "In that illustration of the 60/40 portfolio, what role did bonds play in the total contribution of that growth?", you will get a detailed answer. It may be a small fraction. In other words, just because the portfolio is 40% bonds doesn't mean it (bonds) contributed very much to the total growth of the portfolio. Bonds are for safety has been said often around here.
That's kind of the point. Is something that has a near zero nominal return, negative exoected real return, minimal value as an equity hedge, and the potential to take a signicant hit in real terms if inflation or inters at rates went up "safe"?

The point of the article is bonds at these rates don't perform the same was as bonds historically have.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by CurlyDave »

Cheez-It Guy wrote: Sun Aug 16, 2020 7:17 pm Perhaps you missed it. The economic expansion is over. Starting new phase.
How did you decide this?

I must have been doing something else on the day it was announced.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by alex123711 »

My thoughts are I don't know what the answer is to low bonds, if bond yields are going to be low for 10+ years I can see the argument for not holding them but I don't really know any other viable alternatives
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Rick Ferri »

I would not bet against a 60/40 portfolio over the long-term. That has never turned out well for investors who said it won't work going forward because this time is different.

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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by CurlyDave »

FishTaco wrote: Sun Aug 16, 2020 8:26 pm ...How its going to be resolved is, of course, more debt will be issued in the name of municipalities and goverments with no real clear plan on how that debt will ever be repaid...
Oh, there is a plan. Ever since the time of the Roman Republic governments have dealt with debt by inflating it away. Back in the days of gold coins it was called "debasing the currency", i.e. less gold and more base metal in each coin. Today it is called inflation because we don't use gold coins, but it is exactly the same thing.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by columbia »

One thing you can be assured of is that an "optimal" portfolio doesn't exist.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by alex123711 »

Rick Ferri wrote: Sun Aug 16, 2020 9:04 pm I would not bet against a 60/40 portfolio over the long-term. That has never turned out well for investors who said it won't work going forward because this time is different.

Rick Ferri
Good point, so I guess you just have to accept that returns are going to be low(er) going forward and create a drag on your portfolio but its still probably the best thing to do because there aren't any better options?
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by goodenyou »

alex123711 wrote: Sun Aug 16, 2020 9:14 pm
Rick Ferri wrote: Sun Aug 16, 2020 9:04 pm I would not bet against a 60/40 portfolio over the long-term. That has never turned out well for investors who said it won't work going forward because this time is different.

Rick Ferri
Good point, so I guess you just have to accept that returns are going to be low(er) going forward and create a drag on your portfolio but its still probably the best thing to do because there aren't any better options?
You'll probably make a lot of mistakes trying to find better options.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Random Musings »

Perhaps go with a 60/40 stocks/ CD's instead. Regardless, I think we have to embrace the suck on the bond side right now. Increasing equity exposure has risks as well, including investor behavioral issues. And it's now like equities started at historically low valuations when the quick bear came to an end. Stick with your written investment plan and ignore the noise.

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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by geerhardusvos »

nisiprius wrote: Sun Aug 16, 2020 8:04 pm 6/2009, Bill Gross, at that time the famous "Bond King"--manager of a bond fund which for a while was the largest mutual fund in the world--was quoted:
Echoing views expressed by Peter L. Bernstein, Gross said that the policy portfolio is dead. A 60/40 allocation and the promotion of risky (equity) assets was how you got rich in the past, but past results don’t foretell future performance. Risk and return may be correlated, but Gross said investors must pay closer attention to the price they pay for risky assets.
I think the reference is to something Peter L. Bernstein wrote circa 2003 or 2004 but I can't find it, so let's take 2009 as our starting point.

The Vanguard Balanced Index Fund is equivalent to 60% Total Stock, 40% Total Bond. From the article date through today, the Vanguard Balanced Index Fund would have tripled your money, an average (CAGR) return of over 10%/year.

Source

Image

Since inception, including two complete business cycles, high and low interest rates, the dot-bomb crash and the global financial crisis, it would have multiplied your money by nine, an average return of over 8%.

Image

And during that time, people have been saying continuously that 60/40 is dead and it worked fine in the past but can't possibly go on working.

O, "death," where is thy sting?
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by telemark »

Allow me to rephrase the question, with equal accuracy: with interest rates near 2.3%, what is the expected return of a 60/40 portfolio?

Some people will observe that interest rates are not actually at 2.3%, and that would be technically correct: if you look at Vanguard Total Bond Market, the TTM yield for VBTLX is 2.3% but the 30-day SEC yield is only 1.14%. Which brings us to the part about equal accuracy: 2.3 is as close to 1.14 as zero is, and incidentally better reflects historical performance.

Some more people will observe that this is a biased way of looking at the matter, and that would be 100% correct. :D
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by JBTX »

alex123711 wrote: Sun Aug 16, 2020 9:14 pm
Rick Ferri wrote: Sun Aug 16, 2020 9:04 pm I would not bet against a 60/40 portfolio over the long-term. That has never turned out well for investors who said it won't work going forward because this time is different.

Rick Ferri
Good point, so I guess you just have to accept that returns are going to be low(er) going forward and create a drag on your portfolio but its still probably the best thing to do because there aren't any better options?
For the most part I'd agree with this. Think of bonds is money basically parked, avoiding the risk of equities, ready to buy more via rebalancing if they falter. I might argue that high yielding cash accounts and equivalents may be just as good or better at these rates, but that is mostly minor tinkering.

As usual, the context of these articles is usually lost, and the headline of the article attacked because of its seeming contradiction of conventional wisdom. The author is mainly talking about pension funds, and the fact that they are promising 7%, and if 40% of your portfolio is practically zero return, 7% is mathematically difficult to get over time. Which is absolutely true. The author recommends instead using options (presumably deep out of the money puts?) to hedge against tail risk. Something that larger institutions can probably do better than individual investors.

Where I differ with the author is he seems to be implying that while bonds have low returns, equities can be expected to have high returns, with occasional downturns. In such a scenario stocks plus options against tail risk may work. But if stocks were to slowly grind out either low single digit returns, or negative single digit returns, then I would think that strategy would bust on both ends, poor returns on the stocks, and the options expire worthless.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by heyyou »

As mentioned previously by several, using different wording, I suppose that I will just have to muddle through the future, trying to adapt my spending to whatever my portfolio will tolerate. Oh, I'm already doing that by using the RMD % withdrawal plan based on each recent annual portfolio value.

As an early retiree, my pension is also at risk of being greatly reduced if it fails, but my delayed but newly started SS is near the same size, so there is another buffer to the dreaded future. Please keep me updated about the dire situation so I will recognize it.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Forester »

re earlier posts on the US 60/40 returning over 10% in the 2010s. Intermediate bonds only returned 2.89%, basically the rate of inflation. The 10yr yield started the decade at 3.73% and ended in Dec 2019 at 1.76%. It's likely bonds will lose money in real terms in this decade and also will be less effective at bolstering a portfolio when equities sell off.

Who gains from throwing bonds under the bus? Arguably the US govt which has to balance a new cold war & calming internal division, and young people who are asset poor and slowly gaining political power. Who loses? Retirees/boomers who have already done very well and who are losing political influence through attrition.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by jeffyscott »

Article written on Aug 3 and says: At the most recent peak in the U.S. equity market in February 2020, the average funded ratio for state pension funds was only 72 percent (ranging from 33 percent to 108 percent). That status undoubtedly has worsened with the recent turmoil in financial markets due to the global pandemic.

Vg LifeStrategy Moderate Growth (60/40) return from Feb 19 high to Aug 3 = +0.11%. So I kinda doubt that this has worsened, actually, unless contributions are not being made.
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Beehave »

OP says:

"The traditional 60/40 mix of stocks and bonds, commonly portrayed as an optimal portfolio, is supposed to mitigate the effects of this sort of extreme market volatility and deliver returns that pension fund managers can rely on. But the 60/40 mix is an artifact from another time."

OP's mistake is referring to 60/40 as "an artifact from another time."

Anyone who has invested 60/40 for, as an example, 20 years, has compounded their initial and succeeding investments significantly. This compounded value is no artifact. It is today's living reality and today's living benefit. The 60/40 was never proposed as the max-possible overall result allocation. It was proposed as a pathway to long-term security. For those who have stuck with it, It continues to work.

Nest eggs require steady investment. If a pension fund is in trouble, that's usually because the contributions to the fund are insufficient relative to its obligations. Normally and hopefully, for an individual, contributions are sufficient and can stop at the time of retirement. Pension funds may be different and have growing needs and require perpetual upkeep, so that if they are in trouble the issue is increasing obligations over time not matched by increased annual funding, which is anything but a 60/40 issue.

To call the 60/40 "dead" as if it were a dinasaur-era artifact presupposes knowledge of the future. The current 0% bond environment may become a negative 4% or a positive 4% or hover where it is. No one knows. If you make a lucky guess you can well-outdo the 60/40. Alternatively, you can walk home, sans carfare, wearing a barrel. The safe bet is balanced diversification to weather the political, social, and economic vicissitudes over time, and self-control and self-discipline in tending one's physical/intellectual capital and tethering one's wants and needs expenditures to practical reality.
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jeffyscott
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by jeffyscott »

asset_chaos wrote: Sun Aug 16, 2020 8:23 pm While not wasting my time reading the article, from the snippet quoted my guess is that the author has a "solution" to the touted problem that pension funds can purchase.
It's a pretty short article, but you are correct.

The proposed solution is "direct tail-risk hedging using equity put options" and the author, Ron Lagnado is a director at Universa Investments. And from their website: Universa Investments L.P. (“Universa”) is an investment management firm that has specialized in risk mitigation since it was founded in 2007 by President and Chief Investment Officer Mark Spitznagel. Spitznagel and Universa’s Distinguished Scientific Advisor, Nassim Nicholas Taleb, together began tail hedging formally for client portfolios over twenty years ago.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
rich126
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by rich126 »

000 wrote: Sun Aug 16, 2020 7:40 pm Buying negative yield bonds is bad, but throwing more at stocks (which are risky despite the common refrain that they always go up eventually) than you can handle is even worse.
Yeah, I've been wondering how that is going to work out for people. You see people quite often not be happy with low rates so they go into riskier investments (high yield/junk/etc.) chasing yield. Now since bonds maybe be near zero, people are suggesting more and more allocation to stocks. It is quite possible that a long term period of low/negative interest rates could be combined with poor stock returns (often low yields are due to a bad economy) and now you are in more trouble.

I don't have a good solution but assuming stock returns will be good/solid over the next few years is dangerous IMO. That 1.7% yield on SPY looks good by itself but if stocks go down for a while, it won't help much.
minimalistmarc
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by minimalistmarc »

000 wrote: Sun Aug 16, 2020 7:40 pm Buying negative yield bonds is bad, but throwing more at stocks (which are risky despite the common refrain that they always go up eventually) than you can handle is even worse.
Depends. I don’t equate volatility with risk over long time frames.
TropikThunder
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by TropikThunder »

jeffyscott wrote: Mon Aug 17, 2020 12:10 pm
asset_chaos wrote: Sun Aug 16, 2020 8:23 pm While not wasting my time reading the article, from the snippet quoted my guess is that the author has a "solution" to the touted problem that pension funds can purchase.
It's a pretty short article, but you are correct.

The proposed solution is "direct tail-risk hedging using equity put options" and the author, Ron Lagnado is a director at Universa Investments. And from their website: Universa Investments L.P. (“Universa”) is an investment management firm that has specialized in risk mitigation since it was founded in 2007 by President and Chief Investment Officer Mark Spitznagel. Spitznagel and Universa’s Distinguished Scientific Advisor, Nassim Nicholas Taleb, together began tail hedging formally for client portfolios over twenty years ago.
Scientific Advisor? Doesn’t everyone know Economics is not a science? :P
Jags4186
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Jags4186 »

JBTX wrote: Sun Aug 16, 2020 8:48 pm
Jags4186 wrote: Sun Aug 16, 2020 8:31 pm
JBTX wrote: Sun Aug 16, 2020 8:18 pm Just for arguments sake, what purpose do near zero percent bonds play in a 60/40 portfolio?

How does one get 7%-8% return if 40% is zero?
A ~12% return on the equity side plus a ~0% on the bond side would get you 7%-8%. Of course, returns will only be zero if interest rates are zero and simply stay there. If interest rates continue to drop, you will have bond price appreciation. If interest rates increase, your return will match the yield to maturity. Of course, you also will get a rebalancing bonus.

Low interest rates are bad for returns, but good for folks who borrow money. You can have more money invested in equities and hold long term low rate debt (i.e. a sub 3% mortgage) to augment your returns.
12% could happen, and has happened, but that would be an outlier. Even guys like Bogle were saying to expect 4-5% nominal on stocks.
Yes, that's true. That's where the second part of my answer comes in. You should hold a large, low rate mortgage which allows you to have more money invested. More money invested at a lower return will at least partially make up for less money invested at a higher return.
000
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by 000 »

rich126 wrote: Mon Aug 17, 2020 12:14 pm
000 wrote: Sun Aug 16, 2020 7:40 pm Buying negative yield bonds is bad, but throwing more at stocks (which are risky despite the common refrain that they always go up eventually) than you can handle is even worse.
Yeah, I've been wondering how that is going to work out for people. You see people quite often not be happy with low rates so they go into riskier investments (high yield/junk/etc.) chasing yield. Now since bonds maybe be near zero, people are suggesting more and more allocation to stocks. It is quite possible that a long term period of low/negative interest rates could be combined with poor stock returns (often low yields are due to a bad economy) and now you are in more trouble.

I don't have a good solution but assuming stock returns will be good/solid over the next few years is dangerous IMO. That 1.7% yield on SPY looks good by itself but if stocks go down for a while, it won't help much.
I predict the stock market will be more volatile yet offer less return due to valuations being pushed up and the perceived safety of the Fed put.
minimalistmarc wrote: Mon Aug 17, 2020 12:17 pm
000 wrote: Sun Aug 16, 2020 7:40 pm Buying negative yield bonds is bad, but throwing more at stocks (which are risky despite the common refrain that they always go up eventually) than you can handle is even worse.
Depends. I don’t equate volatility with risk over long time frames.
True. Stocks can return 0% real or less with high volatility for extended periods of time (US Stagflation, Japan 1989 - 2016?). They can also go to zero.
TPIR
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by TPIR »

jeffyscott wrote: Mon Aug 17, 2020 12:10 pm
asset_chaos wrote: Sun Aug 16, 2020 8:23 pm While not wasting my time reading the article, from the snippet quoted my guess is that the author has a "solution" to the touted problem that pension funds can purchase.
It's a pretty short article, but you are correct.

The proposed solution is "direct tail-risk hedging using equity put options" and the author, Ron Lagnado is a director at Universa Investments. And from their website: Universa Investments L.P. (“Universa”) is an investment management firm that has specialized in risk mitigation since it was founded in 2007 by President and Chief Investment Officer Mark Spitznagel. Spitznagel and Universa’s Distinguished Scientific Advisor, Nassim Nicholas Taleb, together began tail hedging formally for client portfolios over twenty years ago.
Also of interest...

CalPERS stopped using Universa and built its own tail risk capability. Although the CIO there just got let go for some indiscretions. In other words there's some bad blood between Universa and the author's former employer.

That said, tail risk hedging has a place - but probably not as extreme a position as the author states.
Lee_WSP
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Lee_WSP »

nisiprius wrote: Sun Aug 16, 2020 8:04 pm
The Vanguard Balanced Index Fund is equivalent to 60% Total Stock, 40% Total Bond. From the article date through today, the Vanguard Balanced Index Fund would have tripled your money, an average (CAGR) return of over 10%/year.

But if bonds return 0.5% per year, wouldn't a 60/40 look more like this:

https://www.portfoliovisualizer.com/bac ... tion3_3=40

Still great, but not as good without the boost from the higher interest rate jump off point.
nanameg
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by nanameg »

heyyou wrote: Sun Aug 16, 2020 10:49 pm As mentioned previously by several, using different wording, I suppose that I will just have to muddle through the future, trying to adapt my spending to whatever my portfolio will tolerate. Oh, I'm already doing that by using the RMD % withdrawal plan based on each recent annual portfolio value.

As an early retiree, my pension is also at risk of being greatly reduced if it fails, but my delayed but newly started SS is near the same size, so there is another buffer to the dreaded future. Please keep me updated about the dire situation so I will recognize it.
:happy
duffer
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by duffer »

Cheez-It Guy wrote: Sun Aug 16, 2020 7:17 pm Perhaps you missed it. The economic expansion is over. Starting new phase.
He didn't miss anything. The economic expansion is very likely to be entering a new bull market.
duffer
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by duffer »

000 wrote: Sun Aug 16, 2020 7:40 pm Buying negative yield bonds is bad, but throwing more at stocks (which are risky despite the common refrain that they always go up eventually) than you can handle is even worse.
Loss aversion is a greater risk to one's financial welfare than is equity risk.
000
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by 000 »

duffer wrote: Mon Aug 17, 2020 9:36 pm
000 wrote: Sun Aug 16, 2020 7:40 pm Buying negative yield bonds is bad, but throwing more at stocks (which are risky despite the common refrain that they always go up eventually) than you can handle is even worse.
Loss aversion is a greater risk to one's financial welfare than is equity risk.
Loss aversion may be psychologically unavoidable for some.

Also, equities don't have to go up.
flaccidsteele
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by flaccidsteele »

The US market always recovers. Always. It’s never different this time. Ever.

Nobody would play this boring game if it wasn’t for the fact that it’s a simple way to grow wealth 😴
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Derpalator
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Derpalator »

Beehave wrote: Mon Aug 17, 2020 11:56 am OP says:

"The traditional 60/40 mix of stocks and bonds, commonly portrayed as an optimal portfolio, is supposed to mitigate the effects of this sort of extreme market volatility and deliver returns that pension fund managers can rely on. But the 60/40 mix is an artifact from another time."

OP's mistake is referring to 60/40 as "an artifact from another time."

Anyone who has invested 60/40 for, as an example, 20 years, has compounded their initial and succeeding investments significantly. This compounded value is no artifact. It is today's living reality and today's living benefit. The 60/40 was never proposed as the max-possible overall result allocation. It was proposed as a pathway to long-term security. For those who have stuck with it, It continues to work.

Nest eggs require steady investment. If a pension fund is in trouble, that's usually because the contributions to the fund are insufficient relative to its obligations. Normally and hopefully, for an individual, contributions are sufficient and can stop at the time of retirement. Pension funds may be different and have growing needs and require perpetual upkeep, so that if they are in trouble the issue is increasing obligations over time not matched by increased annual funding, which is anything but a 60/40 issue.

To call the 60/40 "dead" as if it were a dinasaur-era artifact presupposes knowledge of the future. The current 0% bond environment may become a negative 4% or a positive 4% or hover where it is. No one knows. If you make a lucky guess you can well-outdo the 60/40. Alternatively, you can walk home, sans carfare, wearing a barrel. The safe bet is balanced diversification to weather the political, social, and economic vicissitudes over time, and self-control and self-discipline in tending one's physical/intellectual capital and tethering one's wants and needs expenditures to practical reality.
Well said! :thumbsup
Northern Flicker
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Northern Flicker »

I'm not suggesting that the highly paid Calpers active managers should be judged by a single year's performance, but Calpers portfolio return for the most recent reporting year, 7/1/2019 to 6/30/2020 was 4.7%.

https://www.calpers.ca.gov/page/newsroo ... rn-2019-20

What did Calpers release to the press about this performance when announcing the resignation of their CIO?
CalPERS achieved a 4.7% return in fiscal year 2019-20 during the most volatile market conditions in our country’s history. This is a testament to the dedication of our team and the strength of our plan. We beat our benchmark of 4.3%, and the Wall Street Journal has reported that public pension funds returned an average of 3.2%. This significant achievement is the result of a great team effort.
https://www.calpers.ca.gov/page/newsroo ... esignation

The Vanguard Balanced Index Fund (vanilla 60/40 index fund portfolio over the same period returned 8.24%. The LifeStrategy Moderate Growth Fund, 60/40 with international diversification returned 4.87% over the period.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
Risk is not a guarantor of return.
Greg in Idaho
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Greg in Idaho »

This place is pretty hilarious...people constantly trying to find ways to question why they shouldn't just stay the course, invest in broadly diversified low cost funds, etc. etc.

A mix of slice and dice maximizers and folks who can't seem to accept the BH principles (or those who just enjoy flogging), fueled by the poor financial industry folks who are working furiously to find ways to convince more people to give them their money. The latter seem to be having a hey-day lately with low interest rates as their latest excuse.

Wait...why am I here? :confused :confused :confused
cheezit
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Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by cheezit »

minimalistmarc wrote: Mon Aug 17, 2020 12:17 pm Depends. I don’t equate volatility with risk over long time frames.
Stocks are risky over all time frames, cf. the research of [Nobel laureate economist] Paul Samuelson.
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