In what ways could BogleHeads be badly wrong ?

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willthrill81
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Re: In what ways could BogleHeads be badly wrong ?

Post by willthrill81 » Wed Jan 24, 2018 11:57 pm

rbaldini wrote:
Wed Jan 24, 2018 11:20 pm
willthrill81 wrote:
Wed Jan 24, 2018 10:21 pm
rbaldini wrote:
Wed Jan 24, 2018 10:14 pm
IMO trying to time the market isn't *terrible*. Why? Because the market seems to be pretty close to a random walk. That means that any time you exit the market, you're just replacing a random sample of (unknown) returns with 0% return over that time period that you exit. The effects of this are ultimately to (1) reduce long-term expected return and (2) reduce down-side risk / volatility, since you can't lose money while you're out. So it's not terribly different from putting some large chunk of your money into a 0-interest checking account: not optimal, but it does technically reduce risk. Of course, once you factor in the higher costs of buying and selling more frequently (e.g. short term cap gains), then it's worse.
The notion of the 'random walk' of stock returns has been debunked many times over and is no longer widely accepted in the academic community.

Here's a simple table illustrating this.

Image

When stocks are in a downward trend (i.e. below 200 day moving average), their return is far lower than when it is above the 200 DMA.
Can you help me unpack that table? I'm guessing that they're comparing the annual returns following days that are either above or below the 200-day moving average. I'm guessing the "p" row is the p-value for each of those being above or below the average annual return. If I'm right about that... then that is not very impressive. A p-value of 35% means that the observed result (or greater) would have been observed 35% of the time even if the null hypothesis (i.e. no difference) were true (calculated via normal or t distribution, usually). Usually people don't start perking up until you get down into the 10% or 5% level, though that's totally arbitrary. (Not sure why they wouldn't show a p-value of the difference between the two effects - looks like they only compared each to the baseline...)
Being a trained applied statistician, I can tell you that trying to use statistics in this context is somewhat dubious. Why? Because these returns are not samples coming from a larger population; they are the actual numbers. When we're looking at population parameters, there is no need for statistics because the differences are 100%, guaranteed, bona fide, real.

The bigger question is will this replicate itself in the future. The answer is obviously unknowable, but the 'trend' (no pun intended) would have to turn itself on its head for simple trend following to fall significantly behind buy-and-hold, and I don't think the likelihood of that event is high.
rbaldini wrote:
Wed Jan 24, 2018 11:20 pm
I've read that the important thing is that non-randomness has to be actionable enough to be profitable. One could buy and sell more often to try to take advantage of trends... but then you're paying more in taxes and perhaps trading costs, so maybe not. Seems to me that the efficient market hypothesis posits that the only predictable trends remaining would be hard to profit on - and that would include relatively short-term (< 1 year?) momentum. Similarly, house prices show a lot of momentum, I think - but, then, flipping houses is slow and costly.
In tax-advantaged accounts these days, trading costs are low to zero. I could trade in my 401k and IRAs every day if I wanted to for virtually no cost. In taxable accounts, you're right that trend following would make less sense.

As far as it being actionable, take a look at this graph from Portfolio Visualizer. A 10 month (~200 day) moving average is used with only one trade 'allowed' per month. When VTSMX is above the average, that's where all the money is. Otherwise, all of the money is moved into VBMFX. It's very simple and actionable. And this is just the result of data-mining as this type of strategy has been used for decades.

Image

Over this 24 year period, trend following smashed buy-and-hold with annual returns of 12.11% vs. 9.58% and a lower max drawdown of -17.57% vs. -50.89%. I do not expect identical performance going forward, but this kind of performance is in line with the table above. When stocks are in a downward trend, volatility goes up and returns go down. During this time, bonds are the 'safe haven'. When stocks are in an upward trend, volatility drops and returns go up.

Why then do more investors not do this? I believe it's primarily due to a lack of patience. During a bull market, buy-and-hold is very likely to beat trend following. This occurred during the bull market of the late 1990s and again in the current bull market. It's difficult for investors to see that they're lagging behind the total market, potentially for a decade or more. The fear of missing out is very real. But for those willing to pay that price, they have been spared from the worst ravages of bear markets and saved their portfolios from the big drawdowns.

I do not expect the absolute returns of trend following to exceed or even match those of buy-and-hold of equities going forward. But I believe it will continue to be a more efficient strategy than buying-and-holding balanced portfolios.
“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

sreynard
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Re: In what ways could BogleHeads be badly wrong ?

Post by sreynard » Thu Jan 25, 2018 12:04 am

dbr wrote:
Wed Jan 24, 2018 5:37 pm
willthrill81 wrote:
Wed Jan 24, 2018 5:35 pm
White Coat Investor wrote:
Wed Jan 24, 2018 10:52 am
# 1 Trend following may work better than buy and hold
Even Larry Swedroe has said that he wouldn't be surprised to see trend following earn higher risk-adjusted returns than buy-and-hold going forward. It's certainly been true in the past.
Is this a contention that "Never time the market" could be "BADLY WRONG"?
Sure it could be badly wrong. Just because nobody has ever been able to do it successfully long term in the past doesn't mean that someone may figure out a way to do it someday. Past (poor) performance is no guarantee.... :twisted:

"Develop a workable plan" may be questionable. If you can't predict what the future holds how is that one possible? How do you know if it is a workable plan for you? Or does it only need to be reasonably workable for many people under likely future conditions? :shock:

sreynard
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Re: In what ways could BogleHeads be badly wrong ?

Post by sreynard » Thu Jan 25, 2018 12:31 am

Halicar wrote:
Wed Jan 24, 2018 6:31 pm
dbr wrote:
Wed Jan 24, 2018 5:29 pm
Here is the philoosphy as intended to be applied to investing in stock and bond mutual funds. Item by item what could be badly wrong about any of those? It isn't enough that one find something that could GO wrong; the question is what could BE wrong. BH is not a philosophy for life in general and all the things that can happen, so you can't present absurd considerations.

1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course
#3 is the one that worries me sometimes. Political discussion is not allowed on Bogleheads, and for good reason. However, an unfortunate side effect of this is that political risk (i.e., potential for dramatic changes in the law within one's lifetime) and how to mitigate it is never discussed.
OK, #3 does sometimes bother me as well, though for perhaps the opposite reason as your example. I never liked "ability to sleep at night" as a criteria for setting asset allocation. It seems to me that education is a better solution than going with a "gut feeling" emotional response. Something I learned in pilot training is that "gut feelings" can be really, really, "badly wrong"!

I don't recall which early retirement blogger was using the meme, "Toughen Up Snowflake!" but it reflects my own philosophy of trying to make rational decisions instead of basing them on emotion. I don't believe that fear is a rational decision making tool.

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Re: In what ways could BogleHeads be badly wrong ?

Post by rbaldini » Thu Jan 25, 2018 12:41 am

willthrill81 wrote:
Wed Jan 24, 2018 11:57 pm
Being a trained applied statistician, I can tell you that trying to use statistics in this context is somewhat dubious. Why? Because these returns are not samples coming from a larger population; they are the actual numbers. When we're looking at population parameters, there is no need for statistics because the differences are 100%, guaranteed, bona fide, real.
I'm also a trained applied statistician, if we're going to compare credentials. This argument is pedantry, in my opinion. Obviously we're still trying to do inference about something here, e.g. the behavior of the market in general. They wouldn't have produced p-values otherwise.
willthrill81 wrote:
Wed Jan 24, 2018 11:57 pm
The bigger question is will this replicate itself in the future. The answer is obviously unknowable,
Agreed, especially on the unknowable part. Sometimes the best you can do is hold out data after a certain time period and then test your fitted model on that... but even then it's not the "real" future, so biases can creep in.
willthrill81 wrote:
Wed Jan 24, 2018 11:57 pm
The answer is obviously unknowable, but the 'trend' (no pun intended) would have to turn itself on its head for simple trend following to fall significantly behind buy-and-hold, and I don't think the likelihood of that event is high.
I mean, if the trend isn't actually real, then there is no trend to reverse. Seems like you could make that same argument about any well-under-significant statistical result.
willthrill81 wrote:
Wed Jan 24, 2018 11:57 pm
In tax-advantaged accounts these days, trading costs are low to zero. I could trade in my 401k and IRAs every day if I wanted to for virtually no cost. In taxable accounts, you're right that trend following would make less sense.
Good point.

As for the strategy you mention - I've seen that mentioned a bit before, and I'm willing to believe that it could work. A hard-core EMH theorist would predict that, once an actionable trend is discovered, then it should quickly disappear. But I'm not a hard-core EMH theorist; you could well be right that human impatience and poor discipline prevent people from slowly beating the market with these kinds of strategies. Of course one would want to see the strategy tested on other time periods - ideally later time periods - but data is scarce.

I do suspect that beating the market will get harder and harder using simple rules like these. I work in the data science world, where pretty much everyone and his mom has thought about building a recurrent neural network to predict the stock market. Neural networks would be able to do much more sophisticated rules than a 200-day moving average (if such signals are there in the data). Kaggle, the main place for data science competitions online, had a competition on this years ago (https://www.kaggle.com/c/the-winton-sto ... -challenge); there were 800+ participants. If this stuff continues to move into the hands of professional traders, it will be hard to beat them. (Though an index should basically do just as well as the average neural net, once they become common.)

sreynard
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Re: In what ways could BogleHeads be badly wrong ?

Post by sreynard » Thu Jan 25, 2018 1:09 am

rbaldini wrote:
Thu Jan 25, 2018 12:41 am
willthrill81 wrote:
Wed Jan 24, 2018 11:57 pm
Being a trained applied statistician, I can tell you that trying to use statistics in this context is somewhat dubious. Why? Because these returns are not samples coming from a larger population; they are the actual numbers. When we're looking at population parameters, there is no need for statistics because the differences are 100%, guaranteed, bona fide, real.
I'm also a trained applied statistician, if we're going to compare credentials. This argument is pedantry, in my opinion. Obviously we're still trying to do inference about something here, e.g. the behavior of the market in general. They wouldn't have produced p-values otherwise.
willthrill81 wrote:
Wed Jan 24, 2018 11:57 pm
The bigger question is will this replicate itself in the future. The answer is obviously unknowable,
Agreed, especially on the unknowable part. Sometimes the best you can do is hold out data after a certain time period and then test your fitted model on that... but even then it's not the "real" future, so biases can creep in.
willthrill81 wrote:
Wed Jan 24, 2018 11:57 pm
The answer is obviously unknowable, but the 'trend' (no pun intended) would have to turn itself on its head for simple trend following to fall significantly behind buy-and-hold, and I don't think the likelihood of that event is high.
I mean, if the trend isn't actually real, then there is no trend to reverse. Seems like you could make that same argument about any well-under-significant statistical result.
willthrill81 wrote:
Wed Jan 24, 2018 11:57 pm
In tax-advantaged accounts these days, trading costs are low to zero. I could trade in my 401k and IRAs every day if I wanted to for virtually no cost. In taxable accounts, you're right that trend following would make less sense.
Good point.

As for the strategy you mention - I've seen that mentioned a bit before, and I'm willing to believe that it could work. A hard-core EMH theorist would predict that, once an actionable trend is discovered, then it should quickly disappear. But I'm not a hard-core EMH theorist; you could well be right that human impatience and poor discipline prevent people from slowly beating the market with these kinds of strategies. Of course one would want to see the strategy tested on other time periods - ideally later time periods - but data is scarce.

I do suspect that beating the market will get harder and harder using simple rules like these. I work in the data science world, where pretty much everyone and his mom has thought about building a recurrent neural network to predict the stock market. Neural networks would be able to do much more sophisticated rules than a 200-day moving average (if such signals are there in the data). Kaggle, the main place for data science competitions online, had a competition on this years ago (https://www.kaggle.com/c/the-winton-sto ... -challenge); there were 800+ participants. If this stuff continues to move into the hands of professional traders, it will be hard to beat them. (Though an index should basically do just as well as the average neural net, once they become common.)
I'm not a trained statistician, but I did stay at Best Western a couple of times.... :wink:

I don't see much evidence of either being "badly wrong."

Just because trend following worked for some time periods in the past doesn't mean that it is the best choice going forward. It could turn out that way in retrospect, but which one has the best risk/reward ratio going forward? What's the theory behind the 200-day moving average being the optimal solution in the future? Or is it just data mining the past? Someone tried 1 through 100,000 day averages and 200 was the best?!? :P

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Re: In what ways could BogleHeads be badly wrong ?

Post by AlohaJoe » Thu Jan 25, 2018 1:49 am

deltaneutral83 wrote:
Wed Jan 24, 2018 9:41 pm
BigMoneyNoWhammies wrote:
Wed Jan 24, 2018 5:13 pm
#5. Low stock returns relative to historical norms worries me more than anything else listed here.
Yep, I already think it's happening. The worst rolling 30 for the S&P would be right before the great depression and that even got 7.6% CAGR (Sept 1929-1959) I believe. If you start 9/1/2000 as you're starting point (which is cherry picked), we will need a lot of 10%+ annual rises in the S&P to get to 7.6% by Sept 2030. I'm sure someone can figure out the annual CAGR from now until 9/1/2030 to get to 7.6% CAGR for the period. We will all be thrilled if it's 7.6%.
We've received 6.1% returns on the S&P 500 from your cherry picked start date. It looks like only 2 years of >10% returns are required over the next 13 years in order to reach that 7.6% goal. That doesn't seem like an especially unreasonable thing to happen.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Caduceus » Thu Jan 25, 2018 5:42 am

I don't think the Bogleheads philosophy can be "badly" wrong, simply because the performance of index funds will closely match the average of the relevant investable universe.

What's also become apparent to me, but which is not often stated, is that index investing benefits from both value and momentum effects. When stocks are at low valuations, buying the entire market probably will underperform a truly talented value investor, but you will still make great gains; when stocks are at relatively high valuations, value investors are sitting on the sidelines while index investors make significant gains from momentum effects. I think it's hard to outperform an index strategy for this reason - the Bogleheads will get a slice of the pie in the long run no matter which way the market turns.

I say this as someone whose actively-managed part of my portfolio has outperformed the index by more than 15% per annum for a while now, so I'm by no means a Bogleheads "diehard".

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Re: In what ways could BogleHeads be badly wrong ?

Post by Watty » Thu Jan 25, 2018 6:53 am

White Coat Investor wrote:
Wed Jan 24, 2018 10:52 am
# 1 Trend following may work better than buy and hold
# 2 Choosing stocks may become easier than it has been in the past
# 3 Picking mutual fund managers may become easier than it has been in the past
# 4 Factor investing may work out a lot better than many of us think[/color]
# 5 Future stock returns may be 3% while real estate (buying local properties) provides 10%+ returns
If it turns out that something would have worked better that does not mean that things like index funds would be "badly wrong". It is sort of like when you to to a restaurant and someone else at the table orders something that is fantastic when your choice is only really good.

Over the short or even medium term it is almost certain that some other investments will beat index funds.

White Coat Investor wrote:
Wed Jan 24, 2018 10:52 am
# 6 The entire economic world melts down and you would have been better off spending your money rather than saving/investing at all
It does not even take a worldwide melt down since you can have personal catastrophes like a early death that would make you regret your choices to not spend more earlier in life. While not explicitly part of the Boglehead philosophy it there are often posts encouraging people to have a good "now vs later" balance.

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Re: In what ways could BogleHeads be badly wrong ?

Post by VinhoVerde » Thu Jan 25, 2018 7:11 am

"The one I see is inflation risk to the bond portion of a portfolio. There is *some* talk of TIPS, etc. but the returns have been so poor for so long on them that they are rarely more than a small portion of most people's holdings, if at all. (I think this is a classic case of recency bias - but I'm guilty as well, so?) There is an assumption that 'bonds are safe' but for someone nearing retirement at something like 50/50 or 60/40, a sudden and unexpected inflation event could be much more harmful that I think we give credit to."

A high inflation environment is the Achilles heel of the typical Bogleheads portfolio. 1970-1980 was a terrible time to be in stocks and nominal bonds, particularly if you were at the beginning of retirement.Retired in 2014, I have modified my investment plan to include:

(1)-TIPS and Ibonds in half of my fixed income allocation.
(2)-Unhedged International stocks in half of my stock portfolio.
(3)- A 10% allocation of gold.
This helps mitigate the return to a 70's paradigm.
VinhoVerde

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Re: In what ways could BogleHeads be badly wrong ?

Post by Dandy » Thu Jan 25, 2018 8:39 am

I think becoming too dogmatic in the philosophy could be problematic.
1. Stay the course - wise almost always - sometimes could be a major issue. Even Mr. Bogle said there are times when the market is extremely overheated that a major adjustment to equity allocation is warranted. Something like reducing your equity allocation from 80% to 50%. Tricky decision as to when/if to do that especially when staying the course has worked well for you/us in the past.
2. Stick to your IPS - Similar concern - lots of personal and economic issues that could/should prompt you to alter an
IPS made even in the relatively recent past. Retirement, health issues, reaching your number, material change in expenses, drastic drop in assets due to market performance, etc. How to determine when your IPS should be altered vs sticking to your well thought out plan.
3. Always Re balance - again similar. When does a retiree who is taking RMDs in a prolonged market decline and also withdrawing money to supplement living expenses decide not to re balance or not to fully re balance? How low can/should your assets go before you alter this investment management plan.

The wisdom to know when to change and when not to change is a key factor in success or failure. No investment plan, withdrawal plan is really a set it and forget it. But, we all know that we are subject to making irrational decisions, especially about our investments. On the whole sticking to the plan seems better than changes that can be short sighted or based on irrational fears (often stoked by media/advisers). My guess is that if you are in retirement and in good health and your assets are plunging while you are withdrawing there may come a point, if this condition persists, that you will be challenged to change your approach and hopefully will have the wisdom to know what changes, if any, should be made. My personal feelings are that you can never fully close the door on making changes.

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Re: In what ways could BogleHeads be badly wrong ?

Post by deltaneutral83 » Thu Jan 25, 2018 8:41 am

AlohaJoe wrote:
Thu Jan 25, 2018 1:49 am
deltaneutral83 wrote:
Wed Jan 24, 2018 9:41 pm
BigMoneyNoWhammies wrote:
Wed Jan 24, 2018 5:13 pm
#5. Low stock returns relative to historical norms worries me more than anything else listed here.
Yep, I already think it's happening. The worst rolling 30 for the S&P would be right before the great depression and that even got 7.6% CAGR (Sept 1929-1959) I believe. If you start 9/1/2000 as you're starting point (which is cherry picked), we will need a lot of 10%+ annual rises in the S&P to get to 7.6% by Sept 2030. I'm sure someone can figure out the annual CAGR from now until 9/1/2030 to get to 7.6% CAGR for the period. We will all be thrilled if it's 7.6%.
We've received 6.1% returns on the S&P 500 from your cherry picked start date. It looks like only 2 years of >10% returns are required over the next 13 years in order to reach that 7.6% goal. That doesn't seem like an especially unreasonable thing to happen.
I'm showing 5.49% CAGR (Divs reinvested) for SPY from 9/1/2000 to yesterday. Not only that, the sentiment that we need several double digit years JUST to get to the level of the weakest rolling 30 year CAGR isn't a good thing to me. And that doesn't even take into account down years between now and 2030.

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Re: In what ways could BogleHeads be badly wrong ?

Post by dbr » Thu Jan 25, 2018 9:09 am

willthrill81 wrote:
Wed Jan 24, 2018 11:57 pm


Being a trained applied statistician, I can tell you that trying to use statistics in this context is somewhat dubious. Why? Because these returns are not samples coming from a larger population; they are the actual numbers. When we're looking at population parameters, there is no need for statistics because the differences are 100%, guaranteed, bona fide, real.
The exercise in discussion here is a theoretical one where those numbers are conceived to be samples from a hypothetical population of all possible returns that can be delivered by the market. Future returns are considered to be future samples drawn one by one from that same hypothetical population. It is in that context that one is doing the statistics. That is why it makes sense to talk about the sample mean and sample standard deviation as being estimates of the mean and standard deviation of the hypothetical distribution. It is also necessary to hypothesize what kind of distribution we want to use in the model. The normal distribution is often selected because it offers many mathematical conveniences. The fact that the sampled data might be tested to be rather not normal still does not prevent the model from being generally useful.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Da5id » Thu Jan 25, 2018 9:29 am

sreynard wrote:
Thu Jan 25, 2018 12:31 am
OK, #3 does sometimes bother me as well, though for perhaps the opposite reason as your example. I never liked "ability to sleep at night" as a criteria for setting asset allocation. It seems to me that education is a better solution than going with a "gut feeling" emotional response.
I find the frequent sleep well at night, or "SWAN", references one of the more troubling bogleheads tropes as well. What lets you sleep well at night is subject to change on a moments notice, and is very squishy and emotionally based. It is basically license to go with your gut rather than stick to a plan.

I don't personally see how the general bogleheads principles (low costs, staying the course, diversify, live below your means, etc) could be badly wrong as such But applications of them of course can be. And of course they don't guarantee successful retirement at any particular point, they are just a good general approach to take. If we have a huge stock crash and runaway inflation things can get ugly, and there are many black swans that can destroy a good plan.

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Re: In what ways could BogleHeads be badly wrong ?

Post by wolf359 » Thu Jan 25, 2018 9:32 am

1. Bogleheads Philosophy may be too conservative, resulting in significant oversaving and resources transferred to the next generation (and lost to this one.)
2. There is a significant home country bias, particularly toward the US, in implementation. Many Bogleheads use Total US Stock Market or S&P 500 for most if not all of their equity exposure. If the United States loses a major world war (like Germany, Japan, France, Poland), or is subject to significant political upheaval (Russia and Eastern Europe during Communist era), or other changes which affect the US economy, this could be catastrophic for US-centric investors.
3. There is a human tendency to overestimate the ability to take risks during boom times, and to exaggerate risks during bust times. You don't know if you picked the right asset allocation for you until a crash occurs. Since the last crash was 10 years ago, many current investors, including many Bogleheads, can't be sure they picked the right stock/bond mix.
4. Your planned retirement date may not be your retirement date. Any number of things may happen to make it come sooner than you planned.
5. Most of Boglehead wealth is concentrated, not surprisingly, in index funds, in a single broker (usually Vanguard.) There are a number of reasons I'm personally comfortable with this, but if I'm wrong...
6. Not everything in life is about the money. If you focus only on the money, you could be the richest guy in the graveyard. Or the 90 year old travelling the world after saving his whole life. Or the rich guy alone in the big house with no family or friends.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Cycle » Thu Jan 25, 2018 9:33 am

HomerJ wrote:
Wed Jan 24, 2018 12:39 pm
I agree with the other posters that "Living below your means" is probably the best message to take from these boards. It's not technically part of the "Boglehead investment philosophy", but your saving rate, and keeping expenses low, are far more important for financial success than any other factors.
Also agree. Keeping expenses low in investments tends to flow to other areas.

I've been trying to figure out why peer 20 years my senior is nearing retirement and still trying to hit his first million with several hundred thousands of dollars in a mortgage (houses are cheap here, lcol). Despite a salary in the high 100s. It is two things: expensive vehicles and housing. I calculate his housing expenses to be 17k more per year and his vehicle costs to be 10k more per year than us. He runs all his financial decisions past his financial advisor. I once recommended Taylor's book, but it fell on deaf ears.

The key I take away from these boards is: Simplify

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Re: In what ways could BogleHeads be badly wrong ?

Post by dbr » Thu Jan 25, 2018 9:35 am

Da5id wrote:
Thu Jan 25, 2018 9:29 am
sreynard wrote:
Thu Jan 25, 2018 12:31 am
OK, #3 does sometimes bother me as well, though for perhaps the opposite reason as your example. I never liked "ability to sleep at night" as a criteria for setting asset allocation. It seems to me that education is a better solution than going with a "gut feeling" emotional response.
I find the frequent sleep well at night, or "SWAN", references one of the more troubling bogleheads tropes as well. What lets you sleep well at night is subject to change on a moments notice, and is very squishy and emotionally based. It is basically license to go with your gut rather than stick to a plan.
There is a whole litany of mantras that get thrown around here that in my opinion range from useless to distracting to downright dangerous. Most of them are "not even wrong." The danger is replacing thoughtful, logical discussion with ambiguous slogans which are evidence of lazy thinking. At their best such slogans are references to a longer and more thoughtful discussion that can be consulted. That is not necessarily bad.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Top99% » Thu Jan 25, 2018 9:47 am

Thanks OP for initiating what I find a thought provocative thread. White Coat Investor in particular and others in general touched on some of mine but here is one derived from what others already posted: Market behavior in the future diverges drastically from the last several hundred years. This could be due to advanced AI making it possible to accurately predict what we currently view as unpredictable or some other type of black swan technological or other advance or change. The Boglehead "stay the course" dogma then becomes the wrong thing to do because the investing world has completely changed. But, since convictions in stay the course are so strong we stay the course right over the cliff. Hence my email signature.
Adapt or perish

Greg in Idaho
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Re: In what ways could BogleHeads be badly wrong ?

Post by Greg in Idaho » Thu Jan 25, 2018 10:00 am

How could it be wrong? : "Somebody knows something"

But I'm not sure how badly wrong it would be. This could be seen as part of the active/passive debate, as well as trend following - etc.

As I've said before, I think the actual point is that the "nobody knows nothin" line, while a pretty effective rhetorical device, and while it captures a valuable note of caution about predicting the future, remains incoherent, and ironically so for a group so dedicated to making use of available knowledge (data and applied theory) to invest...rather than, say, using some article of faith or ideology.

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Re: In what ways could BogleHeads be badly wrong ?

Post by SonnyDMB » Thu Jan 25, 2018 11:04 am

Thanks to the OP for starting a thought provoking thread. My 2 adds:

1) While I agree with the comments that low cost stock/bond funds isn't badly wrong, ignoring other potential assets that can diversify from stocks/bonds due to costs may be wrong. I've often seen comments of 'don't let the tax tail wag the dog'. Seems its possible that same concept applies to costs that may be necessary for diversification from stocks/bonds.

2) I'm not sure most people want or should live below their means. Living at your means seems like the more logical and desirable approach.

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Re: In what ways could BogleHeads be badly wrong ?

Post by willthrill81 » Thu Jan 25, 2018 11:15 am

dbr wrote:
Thu Jan 25, 2018 9:09 am
willthrill81 wrote:
Wed Jan 24, 2018 11:57 pm


Being a trained applied statistician, I can tell you that trying to use statistics in this context is somewhat dubious. Why? Because these returns are not samples coming from a larger population; they are the actual numbers. When we're looking at population parameters, there is no need for statistics because the differences are 100%, guaranteed, bona fide, real.
The exercise in discussion here is a theoretical one where those numbers are conceived to be samples from a hypothetical population of all possible returns that can be delivered by the market. Future returns are considered to be future samples drawn one by one from that same hypothetical population. It is in that context that one is doing the statistics. That is why it makes sense to talk about the sample mean and sample standard deviation as being estimates of the mean and standard deviation of the hypothetical distribution. It is also necessary to hypothesize what kind of distribution we want to use in the model. The normal distribution is often selected because it offers many mathematical conveniences. The fact that the sampled data might be tested to be rather not normal still does not prevent the model from being generally useful.
I understand that, but that argument, namely that annual returns are "samples from a hypothetical population of all possible returns" assumes that there is indeed a population of all possible returns to draw from. I'll admit that there's some sense to it, but make no mistake that that is an unproven assumption.

Regardless, it is undeniable, based on the data from the sample I provided, that the returns 'were what they were'. Again, this brings us back to whether this 'trend' will continue (i.e. stocks in an upward trend exhibit far less volatility than do stocks in a downward trend). I see no reason for this to change going forward, but that's just my opinion.
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Re: In what ways could BogleHeads be badly wrong ?

Post by willthrill81 » Thu Jan 25, 2018 11:26 am

sreynard wrote:
Thu Jan 25, 2018 1:09 am
Just because trend following worked for some time periods in the past doesn't mean that it is the best choice going forward. It could turn out that way in retrospect, but which one has the best risk/reward ratio going forward? What's the theory behind the 200-day moving average being the optimal solution in the future? Or is it just data mining the past? Someone tried 1 through 100,000 day averages and 200 was the best?!? :P
Actually, the length of the moving average used doesn't really matter over the long term. In the time period I referenced above, literally every moving average from 2-month to 15-month outperformed buy-and-hold. Meb Faber studied this effect using stock returns from other countries and over many time periods and found the same effect.

The logic behind trend following centers around volatility clustering, a now well accepted concept in the academic community. Here's a paper discussing it. https://www.lpsm.paris/pageperso/ramaco ... tering.pdf

The short answer behind why it works is because stocks in a downward trend exhibit far greater volatility than do stocks in an upward trend.

Interestingly, some who are disdainful of trend following say "Time in the market is what matters! If you missed the X best days of the market, your return would have been a measly Y percent!" That's true, but it ignores the fact that nearly all of the best and worst days occur when the market is in a downward trend (i.e. volatility clustering).
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Re: In what ways could BogleHeads be badly wrong ?

Post by nick evets » Thu Jan 25, 2018 11:31 am

There seems to be a clear bias against owning/picking individual stocks. Certainly, I understand the aversion and the philosophy in general, and would NOT risk my retirement savings, etc., but I also believe it's not necessarily stupid to make an intelligent and well-reasoned investment in a single company, or companies.

Sometimes you're familiar with a technology personally, because you work in the space, and can see for yourself that it's unique, and appreciate the potential for growth. Or simply think the business model will succeed. And if you're correct, no it doesn't mean:
"Why don't you become the next Warren Buffet, then?"

But it may mean, you've dramatically increased some discretionary savings through a calculated gamble.

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Re: In what ways could BogleHeads be badly wrong ?

Post by WhiteMaxima » Thu Jan 25, 2018 11:45 am

jalbert wrote:
Wed Jan 24, 2018 2:56 pm
Having invested in index funds for over 30 years, I can say that the biggest benefit is that you don't have to be right. You will get the index return. That may be good. That may be not so good, but it often aligns with what is going on in the economy. In 2009, it was not very good, but there also were decent brand new cars selling for $6500. Home prices and rents were lower. Today, the market has recovered tremendously, and we have higher car and housing prices to show for it.
Actually, new car price is lower inflation adjusted than 2009. Thanks to Toyota manufacturing system. Also, more tech feature added to new vehicle.

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Re: In what ways could BogleHeads be badly wrong ?

Post by tarmangani » Thu Jan 25, 2018 12:32 pm

I don't think it's quite accurate to consider BH philosophy as "badly wrong," or even sans adverb badly wrong, if it loses to trend following. That's already "priced into" the BH philosophy, I think: you will lose to certain approaches. Maybe one such approach is trend following. That's fine. I accept that my investment philosophy is not the most profitable. I'm not sure if anyone here's explicitly arguing otherwise--just addressing the issue.

As someone who used to win a lot playing online poker, I'm well aware that only some people can profit in environments that look like random noise. I'd happily sit at almost any table in my limits and win. But it's not 2008 anymore. If you sat me down with some of the good online pros now, I'd get killed, so I would prefer to not play the game at all, and if I HAD to play, I'd choose a strategy which introduced randomness to level the playing field. Probably, for those who play poker, I'd scumbag shortstack and follow preflop push charts. I certainly wouldn't sit 200BBs deep minimum like I once did.

Many people don't think this way because they overestimate their skill. They assume, whether consciously or not, that they're naturally gifted at everything. Whether it's poker or stock picking or sports betting or driving, they assume they will do it better than everyone else. And the problem with results-oriented thinking is that it's often, though not necessarily anchored, to the short term. Investing seems especially vulnerable to this because it's easy to win in a bull market. Suppose instead of VTSAX last year you put all your money on FB. Well, that's great, you made way more money, but the yield doesn't reflect the nature of the risk you assumed. You won't know that risk unless you're wiped out, in which case we won't hear from you anymore.

I have very little skill in the financial world. I know about as much as any other bum out there, so I want to not introduce randomness per se--that's where the analogy breaks down--but simplification. I know that if I try to play "the game" then I will probably lose because I don't know what I'm doing. And what's great about investing is that it's not really zero sum at all, so you can win, and I can win, and we all can win. Hooray! Maybe you win more than me, but you put in more time/effort/analysis so you deserve to. That's why I'm a Boglehead, so naturally I don't think that this means the philosophy is wrong. I know exactly what the philosophy entails and that it's not the most profitable. In every human pursuit, profession, whatever, some people win because of randomness and some people win because of repeatable skill. I'm not the latter, for sure.

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Re: In what ways could BogleHeads be badly wrong ?

Post by pkcrafter » Thu Jan 25, 2018 12:47 pm

Those who worry or wonder about the Boglehead philosophy seem to be simply making the valid point that STOCKS ARE RISKY, and that is something that should never be overlooked! Everyone who invests is exposed to that risk. If the market crashes, it won't only be Bogleheads who take the hit. The Boglehead philosophy cannot ever be "badly wrong" Higher expenses create return drag, and all other strategies involve gambling, speculation, or timing. Trend following (might also be called performance chasing) might work until it doesn't. I don't buy and hold because I've already bought, so I'm just holding. :beer

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Re: In what ways could BogleHeads be badly wrong ?

Post by H-Town » Thu Jan 25, 2018 12:59 pm

Dudley wrote:
Wed Jan 24, 2018 10:48 am
The broad BogleHead investment philosophy has (or would have) served investors well for the last few decades.
i.e. establish a stock/bond mix in line with age/risk; invest in a broad, low cost index funds; hold and rebalance over cycles. Is that going to be true going forward ?

Whats the possibility such an approach is simply the product of the market behavior over the last few decades and also influenced by experience in USA. In what ways, and in what (realistic) economic circumstances, do you think it could turn out to be badly wrong in the decade(s) to come ? e.g. :

- the risk in stocks being underestimated given US history
- rising rates and/or inflation hammering bonds
- prolonged stagflation crushing both stocks and bonds
- absence of asset class diversification outside stocks and bonds
- buy and hold may not give adequate recovery in unusually long down turn

Just interested to try get some open minded, non-dogmatic, opinions on how bogleheads may possibly be deluding themselves (ourselves) or be blind-sighted by certain economic conditions ?
That bitcoin and crypto currency will rule the world. All other investment vehicles (stocks, bonds, REITs, etc.) become worthless. All bogleheads missed a lifetime opportunity to be set for life.

^ See how ridiculous that is?

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Re: In what ways could BogleHeads be badly wrong ?

Post by SimplicityNow » Thu Jan 25, 2018 1:03 pm

Of course SWAN is based in emotion but so are most of our decisions in life. People who are more emotional about other topics will tend to be emotional about investing and make their decisions accordingly.

I think that phrase used here can be translated into a more conservative philosophy. Less stocks, more fixed assets, less risk, less reward.
Is that thinking going to yield the best possible return for one's scenario? probably not but for some it helps them overcome the desire to make decisions that are even more subtractive to their financial well being.

Some people don't want to digest the discussions or arguments. You can take a look at all the people that want portfolio advice from a bunch of internet strangers (us) but don't want to take the time to read the wiki, the getting started guide or a few books on investing that could give them a base of knowledge to answer many of their own questions.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Whakamole » Thu Jan 25, 2018 2:11 pm

VinhoVerde wrote:
Thu Jan 25, 2018 7:11 am
"The one I see is inflation risk to the bond portion of a portfolio. There is *some* talk of TIPS, etc. but the returns have been so poor for so long on them that they are rarely more than a small portion of most people's holdings, if at all. (I think this is a classic case of recency bias - but I'm guilty as well, so?) There is an assumption that 'bonds are safe' but for someone nearing retirement at something like 50/50 or 60/40, a sudden and unexpected inflation event could be much more harmful that I think we give credit to."

A high inflation environment is the Achilles heel of the typical Bogleheads portfolio. 1970-1980 was a terrible time to be in stocks and nominal bonds, particularly if you were at the beginning of retirement.Retired in 2014, I have modified my investment plan to include:

(1)-TIPS and Ibonds in half of my fixed income allocation.
(2)-Unhedged International stocks in half of my stock portfolio.
(3)- A 10% allocation of gold.
This helps mitigate the return to a 70's paradigm.
VinhoVerde
I tend to agree that stagflation is not friendly to the typical Bogleheads portfolio. I'm not sure what the best solution is - some assets like real estate have been thought in the past to be a good hedge against inflation but there is no guarantee of that, and real estate in popular areas of the country have already seen a run-up in prices. Gold did well last time, maybe next time it will be some kind of cryptocurrency, but even if that is the case, who knows which one it will be. Commodities have their own issues and are also tied to the global economy as a whole - if the economy is stagnating the commodity producers may be hurting too.

Maybe the biggest problem is that most of these asset classes are very specifically tied to doing well in bad times, and the BH portfolio assumes that bad times are temporary. It's easy to say this in good times. If it was 1976 (10 years after 1966, which I think is the cohort that failed the Trinity Study) I might see things very differently.

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Re: In what ways could BogleHeads be badly wrong ?

Post by itstoomuch » Thu Jan 25, 2018 3:02 pm

bookmarked
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Re: In what ways could BogleHeads be badly wrong ?

Post by dbr » Thu Jan 25, 2018 3:32 pm

willthrill81 wrote:
Thu Jan 25, 2018 11:15 am

I understand that, but that argument, namely that annual returns are "samples from a hypothetical population of all possible returns" assumes that there is indeed a population of all possible returns to draw from. I'll admit that there's some sense to it, but make no mistake that that is an unproven assumption.
The word "assume" in the context of a theory does not mean what you probably are thinking it means. The issue in such a procedure is not whether or not the assumptions are proven or not but whether or not the conclusions derived from that theory are useful and not contradicted by facts. Even in the case the conclusions are contradicted by facts, theories are still kept on if they are "close enough" and/or when they provide valuable heuristics for organizing data and making predictions.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Whakamole » Thu Jan 25, 2018 4:00 pm

itstoomuch wrote:
Thu Jan 25, 2018 3:02 pm
bookmarked
FYI you can subscribe or bookmark a topic without replying to it, there's a button on the website for this.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Da5id » Thu Jan 25, 2018 4:01 pm

I think this thread is rather interesting, though I worry that it will simply cause FUD and not end up actually helping anyone.

A different -- and perhaps better -- question is "does there exist is a vastly better general approach than that of Bogleheads that can be known prospectively".

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Re: In what ways could BogleHeads be badly wrong ?

Post by itstoomuch » Thu Jan 25, 2018 4:36 pm

Whakamole wrote:
Thu Jan 25, 2018 4:00 pm
itstoomuch wrote:
Thu Jan 25, 2018 3:02 pm
bookmarked
FYI you can subscribe or bookmark a topic without replying to it, there's a button on the website for this.
I know the technique.
I just wanted everyone to know that I'm monitoring everything they say :annoyed :twisted: :oops:
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Re: In what ways could BogleHeads be badly wrong ?

Post by Leesbro63 » Thu Jan 25, 2018 4:45 pm

WhiteMaxima wrote:
Thu Jan 25, 2018 11:45 am
jalbert wrote:
Wed Jan 24, 2018 2:56 pm
Having invested in index funds for over 30 years, I can say that the biggest benefit is that you don't have to be right. You will get the index return. That may be good. That may be not so good, but it often aligns with what is going on in the economy. In 2009, it was not very good, but there also were decent brand new cars selling for $6500. Home prices and rents were lower. Today, the market has recovered tremendously, and we have higher car and housing prices to show for it.
Actually, new car price is lower inflation adjusted than 2009. Thanks to Toyota manufacturing system. Also, more tech feature added to new vehicle.
Please name one decent brand new car selling for $6500 nine years ago. I agree with the second part of this post...the mainstream mid-size mobiles (Camry/Corolla and Accord/Civic) are cheaper today, with the same equipment, than in 2009. Or at least about the same. With better quality.

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Re: In what ways could BogleHeads be badly wrong ?

Post by iceport » Thu Jan 25, 2018 4:59 pm

rbaldini wrote:
Wed Jan 24, 2018 10:14 pm
aristotelian wrote:
Wed Jan 24, 2018 9:25 pm
I have asked this before and haven't gotten a good answer. If you have a rules based system for market timing, and you stick with it, even when it looks like it's not working, doesn't that count as staying the course?
Well... if your rule-based system is a bad one, then staying the course would be a bad thing.

IMO trying to time the market isn't *terrible*. Why? Because the market seems to be pretty close to a random walk. That means that any time you exit the market, you're just replacing a random sample of (unknown) returns with 0% return over that time period that you exit. The effects of this are ultimately to (1) reduce long-term expected return and (2) reduce down-side risk / volatility, since you can't lose money while you're out. So it's not terribly different from putting some large chunk of your money into a 0-interest checking account: not optimal, but it does technically reduce risk. Of course, once you factor in the higher costs of buying and selling more frequently (e.g. short term cap gains), then it's worse.
rbaldini,

You might be interested in an analysis showing how market returns are not truly random: How much of a Random Walk is the Stock Market? (posted here by snarlyjack). I suppose this increases the risk — in both directions — of trying to time the market.
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Re: In what ways could BogleHeads be badly wrong ?

Post by snarlyjack » Thu Jan 25, 2018 7:39 pm

This is the #1 method to success. :beer

"The shockingly simple math behind early retirement".

Enjoy this article...

http://www.mrmoneymustache.com/2012/01/ ... etirement/

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Re: In what ways could BogleHeads be badly wrong ?

Post by jeroly » Thu Jan 25, 2018 7:50 pm

1. The average new car price in the US in 2009 was actually $28,970.

2. If the cost of an average new car had tracked inflation, it would have cost $32,370 in 2016 (edited to show the year), but actually cost $34,450 so the cost of new cars has outstripped inflation.

3. New cars now have lots of safety features they didn't have back in '09, so even if everything else was equal it would have made sense that they'd have gotten relatively more expensive.

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Re: In what ways could BogleHeads be badly wrong ?

Post by munemaker » Thu Jan 25, 2018 9:02 pm

There could be a Zombie apocalypse and all this planning and investing would be for naught.

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Re: In what ways could BogleHeads be badly wrong ?

Post by Wildebeest » Thu Jan 25, 2018 9:13 pm

munemaker wrote:
Thu Jan 25, 2018 9:02 pm
There could be a Zombie apocalypse and all this planning and investing would be for naught.
What does a Zombie apocalypse have over a Black Swan? Why believe in the the supernatural over chance?

I take a Black Swan every time. I just hope that it it does not happen in my life time.
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Re: In what ways could BogleHeads be badly wrong ?

Post by jalbert » Thu Jan 25, 2018 11:30 pm

Please name one decent brand new car selling for $6500 nine years ago.
In 2009 where I live Chrysler dealerships were going out of business and a considerable number of brand new PT Cruisers were for sale for $6400.
Risk is not a guarantor of return.

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Re: In what ways could BogleHeads be badly wrong ?

Post by jalbert » Thu Jan 25, 2018 11:58 pm

iceport wrote:
Thu Jan 25, 2018 4:59 pm
You might be interested in an analysis showing how market returns are not truly random: How much of a Random Walk is the Stock Market?
Unfortunately, that article sheds no light on whether or not the stock market is a random walk. The concept is widely misunderstood. Many people consider that random in this case means what you might find as the definition of you look it up in a pocket dictionary, that is having no tendency for the direction or magnitude of movements to have any bias or predictability. That would be a random process with a uniform probability distribution.

Consider an unfair coin that has a 1 in 10,000 chance of landing on tails and 9,999 in 10,000 chance of landing on heads. If I flip it repeatedly, the sequence of outcomes is a random walk but you would not think so if you saw a sequence of 100 flips.

The other piece is that a random walk can be a Markov chain or process where the transition probabilities take both current state and new information into account. This is the essence of the Efficient Market Hypothesis. EMH would posit that the current state has incorporated all public information (probabilistically) and when new information becomes publicly available, the probability of entering any given new state would be a function of the current state and the new information. This is a Markov chain or process and is the most general form of random walk. Nothing prevents the transition probabilities from at times being reasonably well approximated by distributions of interest by the authors of the above-cited article for modeling market movements.
Risk is not a guarantor of return.

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Re: In what ways could BogleHeads be badly wrong ?

Post by willthrill81 » Fri Jan 26, 2018 12:11 am

jalbert wrote:
Thu Jan 25, 2018 11:58 pm
iceport wrote:
Thu Jan 25, 2018 4:59 pm
You might be interested in an analysis showing how market returns are not truly random: How much of a Random Walk is the Stock Market?
Unfortunately, that article sheds no light on whether or not the stock market is a random walk. The concept is widely misunderstood. Many people consider that random in this case means what you might find as the definition of you look it up in a pocket dictionary, that is having no tendency for the direction or magnitude of movements to have any bias or predictability. That would be a random process with a uniform probability distribution.

Consider an unfair coin that has a 1 in 10,000 chance of landing on tails and 9,999 in 10,000 chance of landing on heads. If I flip it repeatedly, the sequence of outcomes is a random walk but you would not think so if you saw a sequence of 100 flips.

The other piece is that a random walk can be a Markov chain or process where the transition probabilities take both current state and new information into account. This is the essence of the Efficient Market Hypothesis. EMH would posit that the current state has incorporated all public information (probabilistically) and when new information becomes publicly available, the probability of entering any given new state would be a function of the current state and the new information. This is a Markov chain or process and is the most general form of random walk. Nothing prevents the transition probabilities from at times being reasonably well approximated by distributions of interest by the authors of the above-cited article for modeling market movements.
At any rate, we can suffice it to say that the random walk hypothesis is not universally accepted in the academic community. I know that Jeremy Siegel hasn't believed it for at least the last 20 years.
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Re: In what ways could BogleHeads be badly wrong ?

Post by technovelist » Fri Jan 26, 2018 1:01 am

linenfort wrote:
Wed Jan 24, 2018 5:06 pm
Dudley wrote:
Wed Jan 24, 2018 10:48 am
- prolonged stagflation crushing both stocks and bonds
- absence of asset class diversification outside stocks and bonds
- buy and hold may not give adequate recovery in unusually long down turn
I think about the above sometimes. Clearly, a classic 60/40 stock/bond portfolio should see more severe and longer drawdowns than, say, Harry Browne's permanent portfolio. If a long drawdown due to a stock crash coincides with my retirement, I will probably wish I had put more into the permanent portfolio and less into stocks. And I will feel I was wrong.
I think one of the bases for the Boglehead approach is that we shouldn't think we know more than we actually do about the future.

If that is correct, then the Permanent Portfolio (PP) is even more agnostic about the future, since it doesn't assume that the extreme outlier called the "US stock market" will necessarily continue to be an outlier in the positive direction.

If I were looking for an agnostic portfolio, I think the PP portfolio would match that desire better than a BH portfolio.
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Re: In what ways could BogleHeads be badly wrong ?

Post by stemikger » Fri Jan 26, 2018 1:18 am

jalbert wrote:
Thu Jan 25, 2018 11:30 pm
Please name one decent brand new car selling for $6500 nine years ago.
In 2009 where I live Chrysler dealerships were going out of business and a considerable number of brand new PT Cruisers were for sale for $6400.
Jalbert, that is not a car, it's a sofa with wheels. lol. :P :beer
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Re: In what ways could BogleHeads be badly wrong ?

Post by iceport » Fri Jan 26, 2018 1:49 am

jalbert wrote:
Thu Jan 25, 2018 11:58 pm
Nothing prevents the transition probabilities from at times being reasonably well approximated by distributions of interest by the authors of the above-cited article for modeling market movements.
Could you please rephrase this part? I'm not sure what you are trying to say. Thanks.
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Re: In what ways could BogleHeads be badly wrong ?

Post by SGM » Fri Jan 26, 2018 9:17 am

Active management isn't likely to buy you much in a black swan event. Meanwhile you would be paying the extra cost of owning such a fund. Active funds find it difficult to consistently beat the market after accounting for increased expense ratios and increased taxes due to trading.

Nothing in the BH philosophy argues against investing in real estate or career advancement.

Efficient market theory is not price-equals-value-efficient, but that does not imply that the market is easy to beat. If you can find someone with a hot hand go for it if you dare, but often active funds lag the market after beating the market.

I have occasionally made money when I saw market anomalies in specific industries or companies, but I wouldn't stretch my luck by investing the bulk of my savings in such excursions from the BH way.

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Re: In what ways could BogleHeads be badly wrong ?

Post by jalbert » Fri Jan 26, 2018 2:14 pm

iceport wrote:
Fri Jan 26, 2018 1:49 am
jalbert wrote:
Thu Jan 25, 2018 11:58 pm
Nothing prevents the transition probabilities from at times being reasonably well approximated by distributions of interest by the authors of the above-cited article for modeling market movements.
Could you please rephrase this part? I'm not sure what you are trying to say. Thanks.
A random walk does not require the probability distribution of the random sequence of outcomes to be the uniform distribution, i.e. where all outcomes are equally likely. Thus, when the authors proposed a probability distribution that they believe models the distribution of future stock returns somewhat well, that is not evidence against the hypothesis that stocks are a random walk.
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Re: In what ways could BogleHeads be badly wrong ?

Post by iceport » Fri Jan 26, 2018 8:04 pm

jalbert wrote:
Fri Jan 26, 2018 2:14 pm
iceport wrote:
Fri Jan 26, 2018 1:49 am
jalbert wrote:
Thu Jan 25, 2018 11:58 pm
Nothing prevents the transition probabilities from at times being reasonably well approximated by distributions of interest by the authors of the above-cited article for modeling market movements.
Could you please rephrase this part? I'm not sure what you are trying to say. Thanks.
A random walk does not require the probability distribution of the random sequence of outcomes to be the uniform distribution, i.e. where all outcomes are equally likely. Thus, when the authors proposed a probability distribution that they believe models the distribution of future stock returns somewhat well, that is not evidence against the hypothesis that stocks are a random walk.
Thank you, that helps! My brief introduction to stochastics was over 35 years ago, and I haven't really used it since.

Aside from the question of terminology you raised, I found the article to be interesting and informative. And though the analysis didn't focus on them directly, my grossly simplified take-away is along the lines of "valuations matter."
"Discipline matters more than allocation.” ─William Bernstein

staythecourse
Posts: 5983
Joined: Mon Jan 03, 2011 9:40 am

Re: In what ways could BogleHeads be badly wrong ?

Post by staythecourse » Fri Jan 26, 2018 8:47 pm

Late to the party and too lazy to read all the responses, but a question for the more knowledgeable trend followers...

Is there a mutual fund that has used a simple trend strategy, i.e. 200 day moving averages that have been shown to be successful over the last ?10 years or so in REAL life? I don't know much about it so would love to hear the real life prospective returns of a strategy based on trends.

First time I really heard about it was from Mebane Farber's "Ivy Portfolio". I believe he went live with the same strategy that did not fare well. For those in know which funds have done it on a PROSPECTIVE basis and what were the results like?

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

Leesbro63
Posts: 5460
Joined: Mon Nov 08, 2010 4:36 pm

Re: In what ways could BogleHeads be badly wrong ?

Post by Leesbro63 » Fri Jan 26, 2018 10:10 pm

For what it's worth, this is a good thread. It's good and prudent to honestly ask yourself and consider how you might be wrong.

My own thought on this are two points addressed above.

1. Having all your assets at Vanguard. Esp for large accounts. I guess if Vanguard fails, the whole system is kaput. But considering we diversify everything else, it seems prudent not to have all of a large portfolio at any one place, including Vanguard. The way people treat Vanguard as some sort of saintly heaven for money might be a bit over the top.

2. A sustained 1974ish period rerun. Where big but not hyperinflation pummels stocks and bonds. But it's not clear what can be done to mitigate against this. It's not clear that real estate will do well like it did in the late 70s and it's not clear that gold will be a hedge. In this scenario, those who whizzed away their money might end up getting the last laugh. I guess the diversifier here might be to actually spend a little more than just for the usual 3 year old, new-to-the-Boglehead Honda Civic every 15 years, whether it's needed or not. 8-)

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