Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
flaccidsteele
Posts: 1159
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by flaccidsteele »

cheezit wrote: Tue Aug 18, 2020 8:04 am
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.
Stocks are risky if you don’t know what you’re doing or don’t have the right temperament cf. the practical experience of [One of the richest on the planet for over 4 decades] Warren Buffett
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Grt2bOutdoors
Posts: 23159
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Grt2bOutdoors »

JBTX wrote: Sun Aug 16, 2020 9:43 pm
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.
Comparing a traditional 60/40 equity/bond portfolio to that of an institutional pension fund is not quite apples to apples either. Many pension funds also hold alternative investments not available to the mere commoner such as private equity and hedge funds, farmland, timberland, commodities, etc. So yes, the pension fund may be 60/40 or 70/30 but it’s the composition of the fund that will drive the returns or lack thereof over the long haul.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Random Walker
Posts: 4631
Joined: Fri Feb 23, 2007 8:21 pm

Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by Random Walker »

60/40 TSM/TBM portfolio has about 85-90% of its risk wrapped up in a single factor, the equity market factor. That’s a lot of eggs in one basket.

Dave
cheezit
Posts: 377
Joined: Sat Jul 14, 2018 7:28 pm

Re: Investors Are Clinging to an Outdated Strategy — At the Worst Possible Time

Post by cheezit »

flaccidsteele wrote: Tue Aug 18, 2020 8:51 am
cheezit wrote: Tue Aug 18, 2020 8:04 am
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.
Stocks are risky if you don’t know what you’re doing or don’t have the right temperament cf. the practical experience of [One of the richest on the planet for over 4 decades] Warren Buffett

Samuelson wasn't referring to behavioral risk. Stocks are risky over all time frames. Consider reading the research, or at least a layman-accessible summary of it, before making assertions about it.
TheDDC
Posts: 1157
Joined: Mon Jan 08, 2018 11:11 am

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

Post by TheDDC »

VTSAX or VTSAX/VTIAX and chill. Doesn’t need to be any more complicated.

-TheDDC
Rules to wealth building: 90-100% VTSAX piled high and deep, 0-10% VIGAX tilt, 0% given away to banks, minimize amount given to medical-industrial complex
User avatar
geerhardusvos
Posts: 1295
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

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

Post by geerhardusvos »

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
I agree; stick with whatever program you decide on. Anything between 50/50 and 100/0 is reasonable to bet on long term, with the higher equity very likely paying off for those who stick with it.
VTSAX and chill
User avatar
abuss368
Posts: 22231
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

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

Post by abuss368 »

I would bet that an investor who uses a 60 stock and 40 bond portfolio and tuned out the noise has done just fine over the long term.
John C. Bogle: “Simplicity is the master key to financial success."
JackoC
Posts: 1872
Joined: Sun Aug 12, 2018 11:14 am

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

Post by JackoC »

FishTaco wrote: Sun Aug 16, 2020 8:26 pm 1. 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.

2. 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.
1. This is really the question. The article spends most of its time explaining the perceived problem with traditional stock/bond mix, does briefly mention heavier/all equity portfolio with tail risk hedging (via put options) as alternative, but doesn't provide any detail on the exact method. However, buying equity puts is not the only method and there is a transparent benchmark for another tail risk hedging method, buying out of money calls on the VIX.

The CBOE's VXTH index tracks the total return of the S&P plus above-money call options on the VIX bought monthly at fixed portfolio weights per a formula depending on the level of the VIX. Doing a semi-eyeball comparison of CBOE's graph over 10 yrs to the '$10k invested' chart of VBIAX (60/40*) on Vanguard's site, VXTH was at ~212% of its Aug 2010 level on Feb 24 2020, VBIAX looked to be ~244%. Now VXTH is at 309%, VBIAX recently ~256% (~2% pa diff over 10 yrs)**. That's pretty unsurprising. Tail hedging strategies are pretty much supposed to fall behind conventional diversification strategies like 60/40* in reasonably good times, then look really good right after panics in a moderate term time window. Whether they are worth considering tends to depend how often you think they're will be major panics in the future, and nature of the panics. Also noting the VXTH method was pretty ideal for a panic like this spring's. It stops buying VIX calls with (forward) VIX>50, so would not do as well in a prolonged market tailspin at sustained VIX>50 where bought index puts would continue to pay off all the way down. It's particularly good for a VIX explosion followed by a rapid bounce back of S&P: VXTH pocketed big profits on the VIX calls this spring but as of now has a small YTD profit on S&P also.
https://www.cboe.com/index/dashboard/vxth#vxth-overview

There are firms offering semi-black box tail hedging which apparently uses equity index puts. Universa and their principal Mark Spitznagel (Nassin Taleb lends his name to that firm but seems to be about all he does with it) are terms to search. There are papers which get part way into what they actually do, but those outfits never say exactly. Or, they might in a closed meeting with a big pension fund, but much less likely to a retail investor, even assuming enough scale to be their client at all.

2. Right, the problems of public pension funds, though arguably relevant to individual investors in muni bonds, are not specifically about having chosen 'too traditional' investment options.

*Though looking backward is more than normally fraught in this case because the issue is very low bond yields' implication for future return and diversification value of the 40%, the tailwind generally falling yields gave bond returns up to now obscures that.
**it's not clear how CBOE takes into account transactions cost DIY v the Vang fund's ER already subtracted from those returns (I believe there are ETF's doing this but then you'd have to add their presumably much higher than Vang ER's). But just trying to roughly illustrate; if the future was the past then exact precision in past comparisons would make more of a difference. :happy And the transactions cost of the VIX options would be pretty small on a DIY basis if the investor were up for that.
User avatar
HomerJ
Posts: 15351
Joined: Fri Jun 06, 2008 12:50 pm

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

Post by HomerJ »

goodenyou wrote: Sun Aug 16, 2020 9:17 pm
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.
I agree with this.

Super low interest rates will likely lower returns for 60/40 portfolio.

But, in no way, does that mean that 60/40 is dead. It's still a solid portfolio. It may return less than historical averages for a while, but none of us were counting on historical averages, right?
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
Northern Flicker
Posts: 6638
Joined: Fri Apr 10, 2015 12:29 am

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

Post by Northern Flicker »

JBTX wrote: 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?
Just for argument's sake, how does one get 7-8% return when the risk free rate is zero without taking substantially more risk than a 60/40 portfolio?
Risk is not a guarantor of return.
User avatar
HomerJ
Posts: 15351
Joined: Fri Jun 06, 2008 12:50 pm

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

Post by HomerJ »

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?
They don't go down during the next crash.

If I have $1 million invested 60/40, and the market crashes 50% and it looks like it may crash even farther, and it looks like I may lose my job, I still have $400,000 in bonds as a safety net.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
JBTX
Posts: 7141
Joined: Wed Jul 26, 2017 12:46 pm

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

Post by JBTX »

Northern Flicker wrote: Tue Aug 18, 2020 12:11 pm
JBTX wrote: 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?
Just for argument's sake, how does one get 7-8% return when the risk free rate is zero without taking substantially more risk than a 60/40 portfolio?
No idea. The author was advocating more equity risk offset by options. I don't buy it.
Seasonal
Posts: 2156
Joined: Sun May 21, 2017 1:49 pm

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

Post by Seasonal »

cheezit wrote: Tue Aug 18, 2020 10:47 am
flaccidsteele wrote: Tue Aug 18, 2020 8:51 am
cheezit wrote: Tue Aug 18, 2020 8:04 am
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.
Stocks are risky if you don’t know what you’re doing or don’t have the right temperament cf. the practical experience of [One of the richest on the planet for over 4 decades] Warren Buffett
Samuelson wasn't referring to behavioral risk. Stocks are risky over all time frames. Consider reading the research, or at least a layman-accessible summary of it, before making assertions about it.
There's a tendency around here to say that risk is purely behavioral. There's certainly a behavioral component, but there is real economic risk. The justification for stocks earning a premium over bonds is that they are riskier. If there were't genuine risks, there wouldn't be any reason for stocks to earn more than bonds.

To cite a one out of several billion investor as a paradigm for investing is at least a bit strange.
flaccidsteele
Posts: 1159
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

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

Post by flaccidsteele »

abuss368 wrote: Tue Aug 18, 2020 10:56 am I would bet that an investor who uses a 60 stock and 40 bond portfolio and tuned out the noise has done just fine over the long term.
+1 ^this
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
flaccidsteele
Posts: 1159
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

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

Post by flaccidsteele »

Seasonal wrote: Tue Aug 18, 2020 12:26 pm
cheezit wrote: Tue Aug 18, 2020 10:47 am
flaccidsteele wrote: Tue Aug 18, 2020 8:51 am
cheezit wrote: Tue Aug 18, 2020 8:04 am
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.
Stocks are risky if you don’t know what you’re doing or don’t have the right temperament cf. the practical experience of [One of the richest on the planet for over 4 decades] Warren Buffett
Samuelson wasn't referring to behavioral risk. Stocks are risky over all time frames. Consider reading the research, or at least a layman-accessible summary of it, before making assertions about it.
There's a tendency around here to say that risk is purely behavioral. There's certainly a behavioral component, but there is real economic risk.
I started investing in the 1990s and have only been through the dot com bust, credit crisis and housing crash. What consequential economic risks to my stock portfolio are we talking about? 🤷‍♂️
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Elysium
Posts: 3228
Joined: Mon Apr 02, 2007 6:22 pm

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

Post by Elysium »

flaccidsteele wrote: Tue Aug 18, 2020 1:23 pm
Seasonal wrote: Tue Aug 18, 2020 12:26 pm
cheezit wrote: Tue Aug 18, 2020 10:47 am
flaccidsteele wrote: Tue Aug 18, 2020 8:51 am
cheezit wrote: Tue Aug 18, 2020 8:04 am

Stocks are risky over all time frames, cf. the research of [Nobel laureate economist] Paul Samuelson.
Stocks are risky if you don’t know what you’re doing or don’t have the right temperament cf. the practical experience of [One of the richest on the planet for over 4 decades] Warren Buffett
Samuelson wasn't referring to behavioral risk. Stocks are risky over all time frames. Consider reading the research, or at least a layman-accessible summary of it, before making assertions about it.
There's a tendency around here to say that risk is purely behavioral. There's certainly a behavioral component, but there is real economic risk.
I started investing in the 1990s and have only been through the dot com bust, credit crisis and housing crash. What consequential economic risks to my stock portfolio are we talking about? 🤷‍♂️
One of those times stocks may not recover from their depths over an extended period, unlike those instances you mentioned above when they did recover relatively soon. You may be blindsided by your own experience of having only positive outcomes from stock market crash followed by quick recoveries.

This is the graph showing inflation adjusted returns for real life fund, DFA Japanese Small Company Stocks (DFJSX), since 1989. 31 years of stock market investing to nowhere. This is the real risk of investing in equities, not those up/down swings that we call volatility which can be overcome, but real risk never goes away.

Image

Link
Last edited by Elysium on Tue Aug 18, 2020 2:32 pm, edited 3 times in total.
heyyou
Posts: 3818
Joined: Tue Feb 20, 2007 4:58 pm

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

Post by heyyou »

So far, staying the course during uncertain times in spite of "sky is falling" forecasts from biased sources, has worked fine for those of us who don't have deep insights into economics.
I too agree with Firechief who discerned the difference between expecting lower returns for a while in the near future, and the suggestion of abject failure of the 60/40, by someone biased who is subtly marketing a proprietary alternative.
Super low interest rates will likely lower returns for 60/40 portfolio.
But, in no way, does that mean that 60/40 is dead. It's still a solid portfolio. It may return less than historical averages for a while, but none of us were counting on historical averages, right?
Expecting to adapt to your income during retirement, seems reasonable. That is just an extension of living-within-your-means that was practiced during your work years.
User avatar
nisiprius
Advisory Board
Posts: 42248
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

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

Post by nisiprius »

This is just the "salesperson's inverse."

a) The stuff you have sucks.
b) The stuff I offer you is not the stuff you have.
c) Therefore, what I offer you doesn't suck.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
minimalistmarc
Posts: 1078
Joined: Fri Jul 24, 2015 4:38 pm

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

Post by minimalistmarc »

cheezit wrote: Tue Aug 18, 2020 8:04 am
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.
What is less risky over several decades though?
000
Posts: 3346
Joined: Thu Jul 23, 2020 12:04 am

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

Post by 000 »

flaccidsteele wrote: Tue Aug 18, 2020 12:23 am It’s never different this time. Ever.
How can you possibly know this?
flaccidsteele
Posts: 1159
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

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

Post by flaccidsteele »

Elysium wrote: Tue Aug 18, 2020 2:00 pm
flaccidsteele wrote: Tue Aug 18, 2020 1:23 pm
Seasonal wrote: Tue Aug 18, 2020 12:26 pm
cheezit wrote: Tue Aug 18, 2020 10:47 am
flaccidsteele wrote: Tue Aug 18, 2020 8:51 am

Stocks are risky if you don’t know what you’re doing or don’t have the right temperament cf. the practical experience of [One of the richest on the planet for over 4 decades] Warren Buffett
Samuelson wasn't referring to behavioral risk. Stocks are risky over all time frames. Consider reading the research, or at least a layman-accessible summary of it, before making assertions about it.
There's a tendency around here to say that risk is purely behavioral. There's certainly a behavioral component, but there is real economic risk.
I started investing in the 1990s and have only been through the dot com bust, credit crisis and housing crash. What consequential economic risks to my stock portfolio are we talking about? 🤷‍♂️
One of those times stocks may not recover from their depths over an extended period, unlike those instances you mentioned above when they did recover relatively soon. You may be blindsided by your own experience of having only positive outcomes from stock market crash followed by quick recoveries.
Not sure why you care about Japan. Are you posting from Japan? Do you own Japanese stocks? Japan is irrelevant. I’m not Japanese. I don’t live in Japan. I don’t invest in Japanese stocks. Nobody cares about Japan

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

What’s a “slow” recovery on this chart?

Image
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
flaccidsteele
Posts: 1159
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

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

Post by flaccidsteele »

000 wrote: Tue Aug 18, 2020 3:17 pm
flaccidsteele wrote: Tue Aug 18, 2020 12:23 am It’s never different this time. Ever.
How can you possibly know this?
Innocent until proven guilty

It’s never different this time. Ever
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
000
Posts: 3346
Joined: Thu Jul 23, 2020 12:04 am

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

Post by 000 »

flaccidsteele wrote: Tue Aug 18, 2020 3:52 pm
000 wrote: Tue Aug 18, 2020 3:17 pm
flaccidsteele wrote: Tue Aug 18, 2020 12:23 am It’s never different this time. Ever.
How can you possibly know this?
Innocent until proven guilty

It’s never different this time. Ever
You are the one making a positive claim. The mere fact that we are unable or unwilling to disprove it does not make it true.
Seasonal
Posts: 2156
Joined: Sun May 21, 2017 1:49 pm

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

Post by Seasonal »

flaccidsteele wrote: Tue Aug 18, 2020 3:52 pm
000 wrote: Tue Aug 18, 2020 3:17 pm
flaccidsteele wrote: Tue Aug 18, 2020 12:23 am It’s never different this time. Ever.
How can you possibly know this?
Innocent until proven guilty

It’s never different this time. Ever
How's it going?

Fine so far, said the man falling from the 95th floor.

Because of course, the past is a perfect guide to the future.
flaccidsteele
Posts: 1159
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

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

Post by flaccidsteele »

000 wrote: Tue Aug 18, 2020 3:57 pm
flaccidsteele wrote: Tue Aug 18, 2020 3:52 pm
000 wrote: Tue Aug 18, 2020 3:17 pm
flaccidsteele wrote: Tue Aug 18, 2020 12:23 am It’s never different this time. Ever.
How can you possibly know this?
Innocent until proven guilty

It’s never different this time. Ever
You are the one making a positive claim. The mere fact that we are unable or unwilling to disprove it does not make it true.
It also doesn’t make it false
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
flaccidsteele
Posts: 1159
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

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

Post by flaccidsteele »

Seasonal wrote: Tue Aug 18, 2020 4:07 pm
flaccidsteele wrote: Tue Aug 18, 2020 3:52 pm
000 wrote: Tue Aug 18, 2020 3:17 pm
flaccidsteele wrote: Tue Aug 18, 2020 12:23 am It’s never different this time. Ever.
How can you possibly know this?
Innocent until proven guilty

It’s never different this time. Ever
How's it going?

Fine so far, said the man falling from the 95th floor.

Because of course, the past is a perfect guide to the future.
In the case of the US market it has been, hasn’t it? 🇺🇸 👍
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
tibbitts
Posts: 12295
Joined: Tue Feb 27, 2007 6:50 pm

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

Post by tibbitts »

flaccidsteele wrote: Tue Aug 18, 2020 1:19 pm
abuss368 wrote: Tue Aug 18, 2020 10:56 am I would bet that an investor who uses a 60 stock and 40 bond portfolio and tuned out the noise has done just fine over the long term.
+1 ^this
Except that "has done well" has nothing to do with this conversation: nobody is debating that in the past, 60/40 has served investors well. This thread is about whether this time is different. Eventually, a time will come that is different; whether this is that time is debatable.
000
Posts: 3346
Joined: Thu Jul 23, 2020 12:04 am

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

Post by 000 »

flaccidsteele wrote: Tue Aug 18, 2020 4:39 pm
000 wrote: Tue Aug 18, 2020 3:57 pm
flaccidsteele wrote: Tue Aug 18, 2020 3:52 pm
000 wrote: Tue Aug 18, 2020 3:17 pm
flaccidsteele wrote: Tue Aug 18, 2020 12:23 am It’s never different this time. Ever.
How can you possibly know this?
Innocent until proven guilty

It’s never different this time. Ever
You are the one making a positive claim. The mere fact that we are unable or unwilling to disprove it does not make it true.
It also doesn’t make it false
That's your best argument for your position?

A backtest + hope is not a good investing plan.
User avatar
willthrill81
Posts: 21548
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

Post by willthrill81 »

Random Walker wrote: Tue Aug 18, 2020 9:25 am 60/40 TSM/TBM portfolio has about 85-90% of its risk wrapped up in a single factor, the equity market factor. That’s a lot of eggs in one basket.

Dave
Agreed. And while bonds seem likely to continue to serve as effective ballast, they seem very unlikely to provide a meaningfully positive return for at least the next decade.

The incredible bull market for bonds that lasted from 1982-2012 is over unless interest rates keep falling and go negative.
“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
User avatar
abuss368
Posts: 22231
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

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

Post by abuss368 »

flaccidsteele wrote: Tue Aug 18, 2020 1:19 pm
abuss368 wrote: Tue Aug 18, 2020 10:56 am I would bet that an investor who uses a 60 stock and 40 bond portfolio and tuned out the noise has done just fine over the long term.
+1 ^this
Thanks. The older I get the more I realize the value of simplicity. It simply works.
John C. Bogle: “Simplicity is the master key to financial success."
SteadyOne
Posts: 216
Joined: Fri Mar 22, 2019 5:26 pm

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

Post by SteadyOne »

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.
Why 0% on a bond side? Bonds also have capital appreciation.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court
SteadyOne
Posts: 216
Joined: Fri Mar 22, 2019 5:26 pm

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

Post by SteadyOne »

Grt2bOutdoors wrote: Tue Aug 18, 2020 9:12 am
JBTX wrote: Sun Aug 16, 2020 9:43 pm
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.
Comparing a traditional 60/40 equity/bond portfolio to that of an institutional pension fund is not quite apples to apples either. Many pension funds also hold alternative investments not available to the mere commoner such as private equity and hedge funds, farmland, timberland, commodities, etc. So yes, the pension fund may be 60/40 or 70/30 but it’s the composition of the fund that will drive the returns or lack thereof over the long haul.
The institutional pension fund does not plan to expire in 30 years after you retire. It plans to stay ongoing enterprise forever. This is the key difference that determines withdrawal rate. Plus it has mortality components since some people who pay into program die before drawing anything, etc.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court
Jags4186
Posts: 5234
Joined: Wed Jun 18, 2014 7:12 pm

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

Post by Jags4186 »

SteadyOne wrote: Tue Aug 18, 2020 5:45 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.
Why 0% on a bond side? Bonds also have capital appreciation.
A theoretical bond with a 0% yield will not appreciate unless newly issued bonds have a negative interest rate. Assuming bond yields drop to 0% and stay at 0% your bond would return 0%.
flaccidsteele
Posts: 1159
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

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

Post by flaccidsteele »

tibbitts wrote: Tue Aug 18, 2020 4:44 pm
flaccidsteele wrote: Tue Aug 18, 2020 1:19 pm
abuss368 wrote: Tue Aug 18, 2020 10:56 am I would bet that an investor who uses a 60 stock and 40 bond portfolio and tuned out the noise has done just fine over the long term.
+1 ^this
Except that "has done well" has nothing to do with this conversation: nobody is debating that in the past, 60/40 has served investors well. This thread is about whether this time is different. Eventually, a time will come that is different; whether this is that time is debatable.
It’s never different this time. Ever 🥱
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
flaccidsteele
Posts: 1159
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

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

Post by flaccidsteele »

000 wrote: Tue Aug 18, 2020 5:10 pm
flaccidsteele wrote: Tue Aug 18, 2020 4:39 pm
000 wrote: Tue Aug 18, 2020 3:57 pm
flaccidsteele wrote: Tue Aug 18, 2020 3:52 pm
000 wrote: Tue Aug 18, 2020 3:17 pm

How can you possibly know this?
Innocent until proven guilty

It’s never different this time. Ever
You are the one making a positive claim. The mere fact that we are unable or unwilling to disprove it does not make it true.
It also doesn’t make it false
That's your best argument for your position?

A backtest + hope is not a good investing plan.
But assuming that the US market always recovers. Always. It’s never different this time. Ever... 🇺🇸

That has turned out gangbusters 🤑💰🤑

I’m glad I ignored everybody who told me otherwise 💪
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
000
Posts: 3346
Joined: Thu Jul 23, 2020 12:04 am

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

Post by 000 »

flaccidsteele wrote: Tue Aug 18, 2020 7:58 pm
000 wrote: Tue Aug 18, 2020 5:10 pm
flaccidsteele wrote: Tue Aug 18, 2020 4:39 pm
000 wrote: Tue Aug 18, 2020 3:57 pm
flaccidsteele wrote: Tue Aug 18, 2020 3:52 pm

Innocent until proven guilty

It’s never different this time. Ever
You are the one making a positive claim. The mere fact that we are unable or unwilling to disprove it does not make it true.
It also doesn’t make it false
That's your best argument for your position?

A backtest + hope is not a good investing plan.
But assuming that the US market always recovers. Always. It’s never different this time. Ever... 🇺🇸

That has turned out gangbusters 🤑💰🤑

I’m glad I ignored everybody who told me otherwise 💪
I can't believe I'm hearing this from a Canadian :mrgreen:

And I can't tell if it's satire! :twisted:
KSActuary
Posts: 611
Joined: Fri Jan 13, 2012 10:53 pm

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

Post by KSActuary »

Those interested in learning about hedging and tail risk should read up on Mark Spitznagel and his firm. I happen to agree with him that the 60/40 portfolio gives up too much return for volatility dampening that never really helps when everything correlates. The Fed may induce more frequent volatility.
User avatar
goodenyou
Posts: 2440
Joined: Sun Jan 31, 2010 11:57 pm
Location: Skating to Where the Puck is Going to Be..or on the golf course

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

Post by goodenyou »

nisiprius wrote: Tue Aug 18, 2020 2:33 pm This is just the "salesperson's inverse."

a) The stuff you have sucks.
b) The stuff I offer you is not the stuff you have.
c) Therefore, what I offer you doesn't suck.
Sounds like a “political inverse”.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.
User avatar
jason2459
Posts: 616
Joined: Wed May 06, 2020 7:59 pm

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

Post by jason2459 »

So, who is this 60/40 supposedly dead for? Who was is alive for? Why does the press care about this specific ratio so much?
flaccidsteele
Posts: 1159
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

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

Post by flaccidsteele »

000 wrote: Tue Aug 18, 2020 8:03 pm
flaccidsteele wrote: Tue Aug 18, 2020 7:58 pm
000 wrote: Tue Aug 18, 2020 5:10 pm
flaccidsteele wrote: Tue Aug 18, 2020 4:39 pm
000 wrote: Tue Aug 18, 2020 3:57 pm

You are the one making a positive claim. The mere fact that we are unable or unwilling to disprove it does not make it true.
It also doesn’t make it false
That's your best argument for your position?

A backtest + hope is not a good investing plan.
But assuming that the US market always recovers. Always. It’s never different this time. Ever... 🇺🇸

That has turned out gangbusters 🤑💰🤑

I’m glad I ignored everybody who told me otherwise 💪
I can't believe I'm hearing this from a Canadian :mrgreen:

And I can't tell if it's satire! :twisted:
It’s irony 😂

I have more faith in America than most Americans 🇺🇸

My indoctrination is complete 🧠

And it has rewarded me well 🤑

Nothing better than having American investment results 💰 and Canadian healthcare 🩺
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Grt2bOutdoors
Posts: 23159
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

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

Post by Grt2bOutdoors »

SteadyOne wrote: Tue Aug 18, 2020 5:56 pm
Grt2bOutdoors wrote: Tue Aug 18, 2020 9:12 am
JBTX wrote: Sun Aug 16, 2020 9:43 pm
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.
Comparing a traditional 60/40 equity/bond portfolio to that of an institutional pension fund is not quite apples to apples either. Many pension funds also hold alternative investments not available to the mere commoner such as private equity and hedge funds, farmland, timberland, commodities, etc. So yes, the pension fund may be 60/40 or 70/30 but it’s the composition of the fund that will drive the returns or lack thereof over the long haul.
The institutional pension fund does not plan to expire in 30 years after you retire. It plans to stay ongoing enterprise forever. This is the key difference that determines withdrawal rate. Plus it has mortality components since some people who pay into program die before drawing anything, etc.
What makes you think I intend for my pension to terminate in exactly 30 years? 😉 And to stay within context of the thread, we are simply differentiating on the investment components- a mortality credit is not an investment option available to a self funded plan, hence I draw no comparison to it. As for intentions, well more than one pension has gone belly up as they could meet their own expectations even after accounting for those intangibles that self directed plans could not.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
JackoC
Posts: 1872
Joined: Sun Aug 12, 2018 11:14 am

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

Post by JackoC »

KSActuary wrote: Tue Aug 18, 2020 10:17 pm Those interested in learning about hedging and tail risk should read up on Mark Spitznagel and his firm. I happen to agree with him that the 60/40 portfolio gives up too much return for volatility dampening that never really helps when everything correlates. ...
I agree, at least that that's the actual point of the article to either be embraced or rejected, based on discussion or evidence. The point of the article is not US-only stocks v international stocks. It's definitely not 'rah-rah-USA' vs. 'Americans are just like North Koreans' :? . And it's not about unnamed alternatives to 60/40 you're supposed to guess. The big flaw in the article IMO is to emphasize what's wrong (in the author's view) with 60/40 stock/bond, looking forward, for so much of the article then discuss and defend 100% stock with tail risk hedging as the alternative for so little of the article that most people seem to have missed that part altogether (though as usual many posters are probably responding to an article they didn't read :happy ).

But that is the alternative to 60/40 stock/bond being suggested, 100% stock with tail risk hedging. As I said earlier, I agree one follow up would be to Google up and check out papers by Spitznagel (his firm's is names Universa) which give some idea what he actually does, exact details 'proprietary'. Or, as I also outlined in the previous post, check out the nature and history of the CBOE VXTH tail hedged S&P index, which uses a different approach than Spitznagel apparently does (his published stuff is about optimizing stock index put buying, VXTH uses VIX call buying) and is completely transparent. It could be replicated by retail investors with reasonable comfort dealing in options. Although it's the usual trade off in 'alternatives' between a free simple formula that back tests relatively favorably but might itself be called 'outdated strategy' vs. paying for continuing 'proprietary' innovations that are non-transparent and might not be any better, especially after accounting for that extra cost.
User avatar
coingaroo
Posts: 93
Joined: Fri Apr 26, 2019 11:31 am

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

Post by coingaroo »

VXTH and other tail risk hedging strategies only work for sudden and rapid movements like what we saw earlier this year. It would have been nearly completely ineffective against the GFC crash, for example.

It's an active bet on the speed of crashes. Not a solution.
User avatar
oldcomputerguy
Moderator
Posts: 9504
Joined: Sun Nov 22, 2015 6:50 am
Location: In the middle of five acres of woods in East Tennessee

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

Post by oldcomputerguy »

Some comments were removed that were off-topic and trolling the discussion. See Non-actionable (Trolling) Topics:
If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:
  • US or world economic, political, tax, health care and climate policies
  • conspiracy theories of any type
  • discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.
The topic is locked for moderator review.
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)
Locked