Asset Class Forecasts

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aburntoutcase
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Asset Class Forecasts

Post by aburntoutcase » Tue May 22, 2018 3:48 pm

We have been in a long bull-market for the past 9 years, so I realize that there is recency bias here, but I am constantly struck by how actual realized long-term equity returns in the US have often exceeded forecasts. About the only time they were relatively close was at height of 1998-2000 Tech bubble where frankly at > 30x trailing earnings and > 25x forward earnings you didn't need to be a genius to see market was quite overvalued.

At this point, trailing 15-year total returns on the Vanguard Total Stock Market fund are 10.2% annualized, 10-year returns are 9.5% annualized. Back in 2003 or 2008 I don't think anyone would have forecast these. We always seem to be anticipating profit margin reversion and multiple compression and mock return assumptions that are significantly over mid-single digits. I myself used to be of the thinking that anyone who expected 10% LT US equity returns was an idiot, that something like 6-7% was probably reasonable best case.

Ironically I am turning more bearish now and have been reducing my equity allocation from low 60% range in November 2017 to 50% currently and might reduce more if I can convince my spouse to go to 40%.

However I do wonder if the case for profit margin reversion is just plain wrong at this point and whether steady-state earnings growth estimates are too low. Most predictions seem to use 1.5% per share real EPS growth, sometimes lower, even though real S&P 500 operating EPS growth has been 3.2% annualized from past 20 years from 1997-2017, matching the 3.3% annualized since S&P started tracking operating EPS for the S&P 500 in 1988. From 2007 YE to 2017 YE we have 2.6% real operating EPS growth even though 2007 EPS had unusually large energy and finance sector earnings. In absence of valuation multiple effects it would be seem that a best guess real return should be dividend yield + real EPS growth so call it 5% real return. With 2% inflation you get 7% nominal.

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Taylor Larimore
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Re: Asset Class Forecasts

Post by Taylor Larimore » Tue May 22, 2018 4:25 pm

Ironically I am turning more bearish now and have been reducing my equity allocation from low 60% range in November 2017 to 50% currently and might reduce more if I can convince my spouse to go to 40%.
aburntoutcase:

It appears you are attempting to market-time. Sorry, it seldom works. Listen to Jack Bogle:
"Stay the Course. No matter what happens, stick to your program. I've said "Stay the course" a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

mega317
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Re: Asset Class Forecasts

Post by mega317 » Tue May 22, 2018 4:44 pm

aburntoutcase wrote:
Tue May 22, 2018 3:48 pm
We always seem to be anticipating profit margin reversion
I didn't understand a word of that but I'd like to point out that your post is the only one in the searchable history of this forum with the exact phrase "profit margin reversion" and there are only a handful that seem to talk about reversion to the mean so I wouldn't say we're always anticipating it.

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willthrill81
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Re: Asset Class Forecasts

Post by willthrill81 » Tue May 22, 2018 4:46 pm

aburntoutcase wrote:
Tue May 22, 2018 3:48 pm
We have been in a long bull-market for the past 9 years, so I realize that there is recency bias here, but I am constantly struck by how actual realized long-term equity returns in the US have often exceeded forecasts.
Bogle himself has a terrible track record in predicting market returns. I believe that he has underestimated future returns every single time.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

RadAudit
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Re: Asset Class Forecasts

Post by RadAudit » Tue May 22, 2018 4:50 pm

Case,

Assuming we knew future EPS and dividend growth rates, how were you going to use the info to modify your portfolio and plans?
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

gmaynardkrebs
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Re: Asset Class Forecasts

Post by gmaynardkrebs » Tue May 22, 2018 4:58 pm

Taylor Larimore wrote:
Tue May 22, 2018 4:25 pm
Ironically I am turning more bearish now and have been reducing my equity allocation from low 60% range in November 2017 to 50% currently and might reduce more if I can convince my spouse to go to 40%.
aburntoutcase:

It appears you are attempting to market-time. Sorry, it seldom works. Listen to Jack Bogle:
"Stay the Course. No matter what happens, stick to your program. I've said "Stay the course" a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."
Best wishes.
Taylor
Note: If Jack Bogle is wrong, he will not reimburse you.
Make your own judgments.

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dwickenh
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Re: Asset Class Forecasts

Post by dwickenh » Tue May 22, 2018 5:21 pm

gmaynardkrebs wrote:
Tue May 22, 2018 4:58 pm
Taylor Larimore wrote:
Tue May 22, 2018 4:25 pm
Ironically I am turning more bearish now and have been reducing my equity allocation from low 60% range in November 2017 to 50% currently and might reduce more if I can convince my spouse to go to 40%.
aburntoutcase:

It appears you are attempting to market-time. Sorry, it seldom works. Listen to Jack Bogle:
"Stay the Course. No matter what happens, stick to your program. I've said "Stay the course" a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."
Best wishes.
Taylor
Note: If Jack Bogle is wrong, he will not reimburse you.
Make your own judgments.
No one with vast experience will "reimburse" you if wrong, but experience is one of the best contributors to knowledge.
You can make your own judgement about crossing the street in busy traffic, but experience will tell you to look for a crosswalk light!
Don't minimize experience, it can save you money every day.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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aburntoutcase
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Re: Asset Class Forecasts

Post by aburntoutcase » Tue May 22, 2018 5:50 pm

mega317 wrote:
Tue May 22, 2018 4:44 pm
aburntoutcase wrote:
Tue May 22, 2018 3:48 pm
We always seem to be anticipating profit margin reversion
I didn't understand a word of that but I'd like to point out that your post is the only one in the searchable history of this forum with the exact phrase "profit margin reversion" and there are only a handful that seem to talk about reversion to the mean so I wouldn't say we're always anticipating it.
If you go to the GMO site and look at their whitepapers (GMO is a well respected asset management firm known for its forecasts) they keep harming on profit margins for the S&P 500 being unsuitably high and expecting them to revert to historical mean. That is a big driver of their bearish forecasts for US equities going back for nearly a decade.

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aburntoutcase
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Re: Asset Class Forecasts

Post by aburntoutcase » Tue May 22, 2018 5:54 pm

RadAudit wrote:
Tue May 22, 2018 4:50 pm
Case,

Assuming we knew future EPS and dividend growth rates, how were you going to use the info to modify your portfolio and plans?
My post was more about tendency of the well-known "moderate" forecasters to be way too conservative. The equity reduction is more specific to my being reasonably close (say 75-80%) to what would be my minimum required retirement portfolio size and wanting to reduce risk. Normally my default has been in 60-65% equity range. 40% would be my permanent equity allocation range, don't see ever going below that no matter age or portfolio size.

But knowing future EPS and dividend growth rates is a great way to proxy future equity market returns and compare it with bond market yields. If gap is low, should favor less equity in asset allocation mix.

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aburntoutcase
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Re: Asset Class Forecasts

Post by aburntoutcase » Tue May 22, 2018 6:01 pm

Taylor Larimore wrote:
Tue May 22, 2018 4:25 pm
Ironically I am turning more bearish now and have been reducing my equity allocation from low 60% range in November 2017 to 50% currently and might reduce more if I can convince my spouse to go to 40%.
aburntoutcase:

It appears you are attempting to market-time. Sorry, it seldom works. Listen to Jack Bogle:
"Stay the Course. No matter what happens, stick to your program. I've said "Stay the course" a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."
Best wishes.
Taylor
Taylor to be fair I have followed Jack's interviews and I think he himself tweaks his equity allocation from time to time. I believe he reduced his equity allocation from 70%-75% to 30-35% in 2000. I am within striking distance (lets say 75-80% of target) of what I would consider a minimum retirement nest egg. My need for taking risk is less. I can live with the difference between 40% equities and 60% equities if the market continues to do well, but if there is a steep bear market I would rather go in with 40% exposure.

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Re: Asset Class Forecasts

Post by gmaynardkrebs » Tue May 22, 2018 6:35 pm

aburntoutcase wrote:
Tue May 22, 2018 6:01 pm
Taylor Larimore wrote:
Tue May 22, 2018 4:25 pm
Ironically I am turning more bearish now and have been reducing my equity allocation from low 60% range in November 2017 to 50% currently and might reduce more if I can convince my spouse to go to 40%.
aburntoutcase:

It appears you are attempting to market-time. Sorry, it seldom works. Listen to Jack Bogle:
"Stay the Course. No matter what happens, stick to your program. I've said "Stay the course" a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."
Best wishes.
Taylor
Taylor to be fair I have followed Jack's interviews and I think he himself tweaks his equity allocation from time to time. I believe he reduced his equity allocation from 70%-75% to 30-35% in 2000. I am within striking distance (lets say 75-80% of target) of what I would consider a minimum retirement nest egg. My need for taking risk is less. I can live with the difference between 40% equities and 60% equities if the market continues to do well, but if there is a steep bear market I would rather go in with 40% exposure.
I feel the same way. Even if there risks were 50/50, a gain of 40% is not worth the risk of losing 40%. The fact that I think it's not 50/50 (I think stocks are over-valued now), is a minor factor.

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aburntoutcase
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Re: Asset Class Forecasts

Post by aburntoutcase » Tue May 22, 2018 7:07 pm

gmaynardkrebs wrote:
Tue May 22, 2018 6:35 pm
I feel the same way. Even if there risks were 50/50, a gain of 40% is not worth the risk of losing 40%. The fact that I think it's not 50/50 (I think stocks are over-valued now), is a minor factor.
They way I look at it is that by the end of June we will be on par with March 1991-March 2001 US economic expansion in terms of duration (120 months). By the end of September we will be on par with the Oct 1990 - Mar 2000 US stock market expansion (114 months). That doesn't mean we can't go up more of course (see bull case below) but we are getting long in the tooth. During the 1990s bull market the S&P 500 was up +417% (excluding dividends), in the current post March 2009 bull market the S&P has been up +306% (we had much faster GDP growth in prior bull market though).

I don't know when the next bear market or recession will hit, but it will hit at some point. We have gone pretty long without a > 20% draw-down (although April thru Oct 2011 decline of 19.4% was pretty close) and it is long due. Average bear market since 1927 I believe is ~30% and we have seen two > 50% drawdowns in the past two decades.

Bull case is that we are going to go well past the prior high mark for an economic expansion because we have a pro-Business Presidential administration and we might end up getting to 3% GDP growth for several years. I could see S&P 500 earnings growing another 20-30% before peaking (normal earnings growth would be 7-8% annually unless we are transitioning from expansion to recession or vice-versa) and lets add in some exuberant multiple expansion for another 20-30%, so I can definitely see a bull case for 40-60% increase in S&P 500 over next 2-4 years.

However even if the bull case were to materialize, the difference to my portfolio value between a 40% equity allocation and a 60% equity allocation would be 8%-12% in foregone stock price appreciation, but since bond fund yields are about 1% more than equity fund yields, presumably 2%-4% of this would be offset, so we are taking about a 6%-10% difference to ending portfolio value. I can live with that as long as I don't head into next bear market with 60% equities. I have become sensitive to losses and bear markets as my retirement savings are approaching 80% of what I would consider potential retirement threshold (low level not target level).

Am I market timing? Yes I am, but I do have the satisfaction of having participated with a 60-65% equity portfolio in this bull market till November of this year since then reduction to 50% has been gradual. If I am going to market time I think this is a less worse time than others. I would be happy to be proven wrong, as economic growth would mean wonderful things for my fellow Americans, and with 40% equity allocation I would be having decent participation in the upside.

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Artsdoctor
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Re: Asset Class Forecasts

Post by Artsdoctor » Tue May 22, 2018 7:15 pm

aburntoutcase wrote:
Tue May 22, 2018 5:54 pm
RadAudit wrote:
Tue May 22, 2018 4:50 pm
Case,

Assuming we knew future EPS and dividend growth rates, how were you going to use the info to modify your portfolio and plans?
My post was more about tendency of the well-known "moderate" forecasters to be way too conservative. The equity reduction is more specific to my being reasonably close (say 75-80%) to what would be my minimum required retirement portfolio size and wanting to reduce risk. Normally my default has been in 60-65% equity range. 40% would be my permanent equity allocation range, don't see ever going below that no matter age or portfolio size.

But knowing future EPS and dividend growth rates is a great way to proxy future equity market returns and compare it with bond market yields. If gap is low, should favor less equity in asset allocation mix.
It's sounds as if you're trying to justify decreasing your equity allocation for good reasons but, at the same time, using current valuations as a catalyst to do so.

It is true that this bull market has exceeded most expectations. Many of us have profited much more than anticipated--and we've exceeded our financial expectations. In my opinion, this would serve as a respectable reason to decrease equity allocations, not because of valuations, but because you simply don't need the risk of a high equity allocation to reach your goals. In essence, you may switch your goals from wealth accumulation to wealth conservation.

The flip side of relatively high valuations is that high returns over the next decade or so would be less likely than low returns--so you should make sure that you've calculated your portfolios goals properly and position yourself accordingly.

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aburntoutcase
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Re: Asset Class Forecasts

Post by aburntoutcase » Tue May 22, 2018 8:50 pm

Artsdoctor wrote:
Tue May 22, 2018 7:15 pm
It is true that this bull market has exceeded most expectations. Many of us have profited much more than anticipated--and we've exceeded our financial expectations. In my opinion, this would serve as a respectable reason to decrease equity allocations, not because of valuations, but because you simply don't need the risk of a high equity allocation to reach your goals. In essence, you may switch your goals from wealth accumulation to wealth conservation.
Yes that is a fair assessment. If I were an investor in my 20s or 30s a long way off from reaching my target nest egg I doubt I would be that concerned. However as one gets older and closer to meeting one's retirement target I think it is rationale to be more sensitive to risk of drawdowns.

Also just to be clear, I am not saying that valuations today are unreasonable. In fact, I find msyelf in the camp that they are not with the caveat that the expansion continue. For me it is more of a time duration argument. At some point the economic expansion and bull market will stop and we will have a recession and bear market. We just don't know when. I think it is fair to say that even if we get 40-60% upside in the equity market from current levels, the great majority of the upside since March 2009 has been captured. I can live with only getting two-thirds of whatever upside is left (40%/60% = 2/3rds) but would rather not go into next bear market with 60% equity. Still need to convince spouse of the last 10% though, we are currently at 50%.

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Re: Asset Class Forecasts

Post by gmaynardkrebs » Tue May 22, 2018 10:02 pm

aburntoutcase wrote:
Tue May 22, 2018 8:50 pm
... would rather not go into next bear market with 60% equity.
Who would?

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aburntoutcase
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Re: Asset Class Forecasts

Post by aburntoutcase » Wed May 23, 2018 8:43 am

gmaynardkrebs wrote:
Tue May 22, 2018 10:02 pm
aburntoutcase wrote:
Tue May 22, 2018 8:50 pm
... would rather not go into next bear market with 60% equity.
Who would?
Someone with a modest portfolio early in savings cycle might not care whether they are at 60% or even 100%.

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willthrill81
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Re: Asset Class Forecasts

Post by willthrill81 » Wed May 23, 2018 10:23 am

aburntoutcase wrote:
Wed May 23, 2018 8:43 am
gmaynardkrebs wrote:
Tue May 22, 2018 10:02 pm
aburntoutcase wrote:
Tue May 22, 2018 8:50 pm
... would rather not go into next bear market with 60% equity.
Who would?
Someone with a modest portfolio early in savings cycle might not care whether they are at 60% or even 100%.
Hence the traditional wisdom of the glidepath.
“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

magicrat
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Re: Asset Class Forecasts

Post by magicrat » Wed May 23, 2018 11:12 am

aburntoutcase wrote:
Tue May 22, 2018 5:50 pm
mega317 wrote:
Tue May 22, 2018 4:44 pm
aburntoutcase wrote:
Tue May 22, 2018 3:48 pm
We always seem to be anticipating profit margin reversion
I didn't understand a word of that but I'd like to point out that your post is the only one in the searchable history of this forum with the exact phrase "profit margin reversion" and there are only a handful that seem to talk about reversion to the mean so I wouldn't say we're always anticipating it.
If you go to the GMO site and look at their whitepapers (GMO is a well respected asset management firm known for its forecasts) they keep harming on profit margins for the S&P 500 being unsuitably high and expecting them to revert to historical mean. That is a big driver of their bearish forecasts for US equities going back for nearly a decade.
In other words, this GMO firm has been wrong for nearly a decade.

Also, what makes you think this is a 9 year bull market? Stocks were roughly flat in 2015, so wouldn't this be more like a 2-3 year bull market? Or, when I look at stock charts going back a couple hundred years it looks like a steady upward trajectory, so why not conclude we're in a 200 year bull market?

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aburntoutcase
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Re: Asset Class Forecasts

Post by aburntoutcase » Wed May 23, 2018 11:34 am

magicrat wrote:
Wed May 23, 2018 11:12 am
Also, what makes you think this is a 9 year bull market? Stocks were roughly flat in 2015, so wouldn't this be more like a 2-3 year bull market? Or, when I look at stock charts going back a couple hundred years it looks like a steady upward trajectory, so why not conclude we're in a 200 year bull market?
Generally it is defined as trough of prior bear market to peak of market before following bear market. Since we haven't had a 20% decline since 2009 I think it is fair to consider it a continuous bull market. We did have a close call in 2011 when market declined 19.4% from April 29th thru Oct 3rd. Obviously there is no hard and fast science to it, but I think looking at 20% drawdowns and economic recessions to call a period a bull market is pretty reasonable. If you don't like the criteria of a 20% drawdown, looking at length between economic contractions is pretty quantitative and well defined. By this yardstick we are pretty close to exceeding the longest previous economic bull market in history.

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aj76er
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Re: Asset Class Forecasts

Post by aj76er » Wed May 23, 2018 12:00 pm

aburntoutcase wrote:
Wed May 23, 2018 11:34 am
magicrat wrote:
Wed May 23, 2018 11:12 am
Also, what makes you think this is a 9 year bull market? Stocks were roughly flat in 2015, so wouldn't this be more like a 2-3 year bull market? Or, when I look at stock charts going back a couple hundred years it looks like a steady upward trajectory, so why not conclude we're in a 200 year bull market?
Generally it is defined as trough of prior bear market to peak of market before following bear market. Since we haven't had a 20% decline since 2009 I think it is fair to consider it a continuous bull market. We did have a close call in 2011 when market declined 19.4% from April 29th thru Oct 3rd. Obviously there is no hard and fast science to it, but I think looking at 20% drawdowns and economic recessions to call a period a bull market is pretty reasonable. If you don't like the criteria of a 20% drawdown, looking at length between economic contractions is pretty quantitative and well defined. By this yardstick we are pretty close to exceeding the longest previous economic bull market in history.
I think you might be making the "gambler's fallacy". Corrections in the market are independent events, so there's not necessarily a correlation between corrections and the time between them. It's like getting 10 consecutive "red" spins at a roulette table and thinking that increases the odds of "black" on the next spin. It doesn't.

If you hold broad total market indexes, then you can look at some traditional leading indicators of economic expansions and contractions (e.g. yield curves, jobless claims, manufacturing index, etc...). Check out the blog "calculated risk" if you want to track these things. Keep in mind that millions of other market participants have access to this data and trade accordingly. The market is very efficient.

You seem to be trying to justify holding a lower equity allocation. An honest assessment of your "ability, need, and willingness" to take short-term risk should be the only driver of your stock/bond split. Any attempt to market time should not.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

gmaynardkrebs
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Re: Asset Class Forecasts

Post by gmaynardkrebs » Wed May 23, 2018 12:18 pm

aj76er wrote:
Wed May 23, 2018 12:00 pm
...You seem to be trying to justify holding a lower equity allocation. An honest assessment of your "ability, need, and willingness" to take short-term risk should be the only driver of your stock/bond split. Any attempt to market time should not.
So your advice is to completely ignore long term risk?

2015
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Re: Asset Class Forecasts

Post by 2015 » Wed May 23, 2018 12:29 pm

As with all things in life, it pays to take the "balcony" view, the "10,000 foot" view, or the "helicopter" view. Asset class forecasts fall prey to narratives fallacy, and a host of other issues.
There is emotional attachment and engagement with narrative but not with science. If we gaze upon the night sky and only think about orbital rotation we will not be moved in the same way as a discussion of our smallness in the universe. The narrative will be remembered after the equations are forgotten. People will use the narrative to win hearts and minds when the science may not convince by itself.

Still, it may be valuable to apply the narrativeness thesis to investment management. Is it science? For some, the quants, it is. For others who are discretionary managers, rules and laws cannot be applied to what they do, it is a narrative. Some investors demand or want only a science. Some managers cannot explain what they do without narrative. Where it gets interesting is when quants use storytelling to explain their models or when storytellers try to suggest their opinions are a model or a theory. Just telling a complex story or using a "model" to explain the current economic environment may not be science.

The problem in investment management is that it has both the science of testable models and the language of narrative. Additionally, the narrators often use data and the quants often use storytelling. This forces the investor to do the heavy work of separating true data analysis from potential false narratives. In that sense, investment management is a netherworld of near-science.
http://mrzepczynski.blogspot.com/2018/0 ... e-use.html

Also, see this:
There are two communication problems with global macro investing. First, the stories used to explain the global macro economy are confusing, contradictory, and haven't proved to be true. This is an outgrowth of the poor forecasting of macroeconomics in general. Second, the stories used to explain the investment process especially for quants goes over the head of most investors
http://mrzepczynski.blogspot.com/2017/0 ... tions.html

Simplicity in all things is the anecdote to the behavioral failures of man/woman. Beware false prophets of complexity with ulterior motives.

gmaynardkrebs
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Re: Asset Class Forecasts

Post by gmaynardkrebs » Wed May 23, 2018 1:05 pm

2015 wrote:
Wed May 23, 2018 12:29 pm
As with all things in life, it pays to take the "balcony" view, the "10,000 foot" view, or the "helicopter" view. Asset class forecasts fall prey to narratives fallacy, and a host of other issues.
Simplicity in all things is the anecdote to the behavioral failures of man/woman. Beware false prophets of complexity with ulterior motives.
Is "anecdote" intentional? Either way, it's brilliant, because an anecdote is a form of narrative, and your theory of simplicity is itself a "narrative," just different from the other narratives you seem to warn against.

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aburntoutcase
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Re: Asset Class Forecasts

Post by aburntoutcase » Wed May 23, 2018 1:09 pm

aj76er wrote:
Wed May 23, 2018 12:00 pm
You seem to be trying to justify holding a lower equity allocation. An honest assessment of your "ability, need, and willingness" to take short-term risk should be the only driver of your stock/bond split. Any attempt to market time should not.
I am not "justifying" anything. I even sketched out a bullish scenario in which the market could rise 40-60% from current levels over the next 2-4 years and said that valuation levels are reasonable if expansion continues.

What I did say was having come within shouting distance of my retirement target I felt less need to take risk, was sensitive to downside and anyway didn't think I would be giving up much upside for a 40% vs 60% allocation. Sorry that is considered a heresy in your asset allocation theology.

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Electron
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Re: Asset Class Forecasts

Post by Electron » Wed May 23, 2018 2:20 pm

aburntoutcase wrote:
Tue May 22, 2018 3:48 pm
At this point, trailing 15-year total returns on the Vanguard Total Stock Market fund are 10.2% annualized, 10-year returns are 9.5% annualized.
The nine year return for VTSAX going back to May 23, 2009 is currently 15.86%.
Electron

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FrugalInvestor
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Re: Asset Class Forecasts

Post by FrugalInvestor » Wed May 23, 2018 2:49 pm

Whatever.

If you like spending your time trying to predict the market have at it. Chances are it won't help your investments in the long run. Chances are that it will hurt them. But in the meantime you'll be able to sound very intelligent to your friends who believe that there are those with superior knowledge about what the stock market will do.

By the way, that's me over there on the right hand side ignoring the noise. LaLaLaLaLaLa :happy
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

gmaynardkrebs
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Re: Asset Class Forecasts

Post by gmaynardkrebs » Wed May 23, 2018 2:59 pm

FrugalInvestor wrote:
Wed May 23, 2018 2:49 pm
Whatever.
If you like spending your time trying to predict the market have at it. Chances are it won't help your investments in the long run. Chances are that it will hurt them. But in the meantime you'll be able to sound very intelligent to your friends who believe that there are those with superior knowledge about what the stock market will do.

By the way, that's me over there on the right hand side ignoring the noise. LaLaLaLaLaLa :happy
I don't think the OP was trying to sound superior at all. It was just a question.

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FrugalInvestor
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Re: Asset Class Forecasts

Post by FrugalInvestor » Wed May 23, 2018 3:30 pm

gmaynardkrebs wrote:
Wed May 23, 2018 2:59 pm
FrugalInvestor wrote:
Wed May 23, 2018 2:49 pm
Whatever.
If you like spending your time trying to predict the market have at it. Chances are it won't help your investments in the long run. Chances are that it will hurt them. But in the meantime you'll be able to sound very intelligent to your friends who believe that there are those with superior knowledge about what the stock market will do.

By the way, that's me over there on the right hand side ignoring the noise. LaLaLaLaLaLa :happy
I don't think the OP was trying to sound superior at all. It was just a question.
Sorry if I came across like that, I didn't intend to. What I was trying to say is that he's wasting his time unless he is just wanting to sound intelligent to those who might believe in predicting the market. It sounds as if he actually puts some stock in these 'white papers' he mentions and they are the 'noise' along with all the other 'expert' opinions.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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Re: Asset Class Forecasts

Post by deltaneutral83 » Wed May 23, 2018 3:59 pm

aburntoutcase wrote:
Wed May 23, 2018 1:09 pm
I am not "justifying" anything. I even sketched out a bullish scenario in which the market could rise 40-60% from current levels over the next 2-4 years and said that valuation levels are reasonable if expansion continues.

What I did say was having come within shouting distance of my retirement target I felt less need to take risk, was sensitive to downside and anyway didn't think I would be giving up much upside for a 40% vs 60% allocation. Sorry that is considered a heresy in your asset allocation theology.
I think BH are just more in the camp of not having a 20% swing in AA (in either direction) overnight, in this case, 60/40 to 40/60. It seems as though you are coasting into retirement as well which a lot of people aren't afforded that option. Seems like your plan before the noise got to you is just fine unless of course you didn't have an AA ironed out beforehand. The last thing I think about with regards to my AA is my ability to forecast the market.

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Re: Asset Class Forecasts

Post by aburntoutcase » Wed May 23, 2018 4:15 pm

FrugalInvestor wrote:
Wed May 23, 2018 2:49 pm
If you like spending your time trying to predict the market have at it. Chances are it won't help your investments in the long run. Chances are that it will hurt them. But in the meantime you'll be able to sound very intelligent to your friends who believe that there are those with superior knowledge about what the stock market will do.
Umm ... the main point of my post was actually to say that LT equity returns always seem to end up being *better* than what moderate experts tell us, not to try to pretend that I was some market timing expert. I then segued into a caveat that despite this I was reducing my equity allocation because of less need to take risk and my view that risk/reward wasn't as great because of length of expansion. I still offered a fairly large bull case that would make my equity reduction decision look foolish. I am not claiming to know anything with certainty, but did say that if my equity reduction decisions turned out to be wrong, I can live with it, as the difference between a 40% equity and 60% equity allocation was basically going to be immaterial to me in that bullish scenario.

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Re: Asset Class Forecasts

Post by aburntoutcase » Wed May 23, 2018 4:23 pm

deltaneutral83 wrote:
Wed May 23, 2018 3:59 pm
I think BH are just more in the camp of not having a 20% swing in AA (in either direction) overnight, in this case, 60/40 to 40/60. It seems as though you are coasting into retirement as well which a lot of people aren't afforded that option. Seems like your plan before the noise got to you is just fine unless of course you didn't have an AA ironed out beforehand. The last thing I think about with regards to my AA is my ability to forecast the market.
I am actually at 50% right now, down from 62% in November. Would like to go to 40% eventually but spouse demurs, so we are in a holding pattern. I don't understand why you say "the noise got to me". I am actually saying that the pessimistic LT equity return forecasts tend to be wrong. I am sorry but I have never been a believer of a permanent asset allocation for life. BTW neither is Jack Bogle as judged by his actions in 2000. Generally a fan of 60/40, but I think things should be treated differently when you get closer to hitting the target you are seeking. I am in my mid-40s, had the benefit of a long bull run and have absolutely no regret or guilt about lowering my risk profile. I think my timing is good, but if it is not and we have another 40-60% upside before the next bear market I can live with ending up with a portfolio that is modestly lower than if I had stuck to 60%.

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FrugalInvestor
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Re: Asset Class Forecasts

Post by FrugalInvestor » Wed May 23, 2018 4:30 pm

aburntoutcase wrote:
Wed May 23, 2018 4:15 pm
FrugalInvestor wrote:
Wed May 23, 2018 2:49 pm
If you like spending your time trying to predict the market have at it. Chances are it won't help your investments in the long run. Chances are that it will hurt them. But in the meantime you'll be able to sound very intelligent to your friends who believe that there are those with superior knowledge about what the stock market will do.
Umm ... the main point of my post was actually to say that LT equity returns always seem to end up being *better* than what moderate experts tell us, not to try to pretend that I was some market timing expert. I then segued into a caveat that despite this I was reducing my equity allocation because of less need to take risk and my view that risk/reward wasn't as great because of length of expansion. I still offered a fairly large bull case that would make my equity reduction decision look foolish. I am not claiming to know anything with certainty, but did say that if my equity reduction decisions turned out to be wrong, I can live with it, as the difference between a 40% equity and 60% equity allocation was basically going to be immaterial to me in that bullish scenario.
In my opinion you should make your equity allocation decision based on risk tolerance -in other words how much can you stomach losing during a market severe market downturn - not any kind of guess about where the market is today or where it might go tomorrow or the likelihood of it going one way or the other. Earnings and white papers and the like are, in my opinion, neither here nor there.

Personally I was at 60/40 going into early retirement because that was my 'sleep at night' number, or at least I thought it was. The '08-'09 downturn taught me that wasn't quite right right because I couldn't bring myself to rebalance all the way back to 60/40 as the market plummeted. I ended up at 50/50 and took that as a very practical indication that 50/50 is my true comfort level. That's where I remain today.

I think you're using the wrong criteria to make your decision about asset allocation. It doesn't matter what the market might do because it might do anything. What matters is what you do as the market gyrates which it inevitably will. Your emotions and whether you act on them is the enemy and the most important thing you can do is be comfortable enough with your asset allocation that to paraphrase Jack you don't do something but instead just stand there.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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Re: Asset Class Forecasts

Post by aj76er » Wed May 23, 2018 5:43 pm

gmaynardkrebs wrote:
Wed May 23, 2018 12:18 pm
aj76er wrote:
Wed May 23, 2018 12:00 pm
...You seem to be trying to justify holding a lower equity allocation. An honest assessment of your "ability, need, and willingness" to take short-term risk should be the only driver of your stock/bond split. Any attempt to market time should not.
So your advice is to completely ignore long term risk?
Yes, long-term risk and short-term risks must both be considered.
Based on history, stocks are risky in the short-term; bonds are risky over the long-term.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Asset Class Forecasts

Post by aburntoutcase » Wed May 23, 2018 6:00 pm

FrugalInvestor wrote:
Wed May 23, 2018 4:30 pm
In my opinion you should make your equity allocation decision based on risk tolerance -in other words how much can you stomach losing during a market severe market downturn - not any kind of guess about where the market is today or where it might go tomorrow or the likelihood of it going one way or the other. Earnings and white papers and the like are, in my opinion, neither here nor there.
I think risk tolerance is not the only factor, need to take risk is also equally important. So as one reaches retirement target need to take risk is lower.

You are confusing my reference to earnings and GMO white papers - admittedly because my post mixed two very separate and contradictory issues: consistent underestimation of equity returns by forecasters and my personal reduction in equity allocation in less than clear fashion.

My reduction in equity allocation had nothing to do with GMO or Jack Bogle's expectations for US equity returns. I think GMO has been wrong about profit margins in US mean-reverting to LT average and they have missed the mark for a decade. If I believed in their LT asset class forecasts I would hold zero US equity, and any equity I held would be EM.

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Re: Asset Class Forecasts

Post by aburntoutcase » Wed May 23, 2018 6:05 pm

FrugalInvestor wrote:
Wed May 23, 2018 4:30 pm

It doesn't matter what the market might do because it might do anything. What matters is what you do as the market gyrates which it inevitably will. Your emotions and whether you act on them is the enemy and the most important thing you can do is be comfortable enough with your asset allocation that to paraphrase Jack you don't do something but instead just stand there.
I personally outlined a bull case where the market could go up 40%-60% in a relatively short time. That hardly sounds like someone who is discounting what market gyrations could do. My precise point was that the difference between having a 40% equity allocation or a 60% equity allocation would be relatively immaterial to me in that scenario (6%-8% difference).

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Re: Asset Class Forecasts

Post by Broken Man 1999 » Wed May 23, 2018 6:48 pm

Honestly if you feel more comfortable in scaling back your equity allocation, as you are nearing retirement, it is a perfectly natural thing to do.

I did so myself a couple of years ago, working my equity allocation down to current equity allocation of 50%. My "market timing" decision was simple, I no longer wanted to expose my portfolio to the uncertainty of future returns. I had my retirement funded, and I would have been a fool to risk the number I had, it simply wasn't necessary, or prudent on any level.

Your allocation should reflect your need to take risk, your ability to take risk, and your willingness to take risk. If any of the three changes, and you specifically mentioned you are feeling bearish, and are nearing your retirement, then you should change your AA to the AA that lets you sleep at night. You willingness to take risk has changed, and that is an appropriate reason to change.

One thing stressed repeatedly on this forum is making sure your allocation lets you sleep well at night. So change to the AA that lets you sleep well.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Re: Asset Class Forecasts

Post by FrugalInvestor » Wed May 23, 2018 8:12 pm

aburntoutcase wrote:
Wed May 23, 2018 6:05 pm
FrugalInvestor wrote:
Wed May 23, 2018 4:30 pm

It doesn't matter what the market might do because it might do anything. What matters is what you do as the market gyrates which it inevitably will. Your emotions and whether you act on them is the enemy and the most important thing you can do is be comfortable enough with your asset allocation that to paraphrase Jack you don't do something but instead just stand there.
I personally outlined a bull case where the market could go up 40%-60% in a relatively short time. That hardly sounds like someone who is discounting what market gyrations could do. My precise point was that the difference between having a 40% equity allocation or a 60% equity allocation would be relatively immaterial to me in that scenario (6%-8% difference).
Okay, then it doesn't matter what you do so either do nothing or flip a coin.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

gmaynardkrebs
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Re: Asset Class Forecasts

Post by gmaynardkrebs » Wed May 23, 2018 10:31 pm

aj76er wrote:
Wed May 23, 2018 5:43 pm
gmaynardkrebs wrote:
Wed May 23, 2018 12:18 pm
aj76er wrote:
Wed May 23, 2018 12:00 pm
...You seem to be trying to justify holding a lower equity allocation. An honest assessment of your "ability, need, and willingness" to take short-term risk should be the only driver of your stock/bond split. Any attempt to market time should not.
So your advice is to completely ignore long term risk?
Yes, long-term risk and short-term risks must both be considered.
Based on history, stocks are risky in the short-term; bonds are risky over the long-term.
Stocks are risky over all time frames. The risks do not decrease over time; in fact, the risks increase over time.

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aj76er
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Re: Asset Class Forecasts

Post by aj76er » Wed May 23, 2018 10:54 pm

gmaynardkrebs wrote:
Wed May 23, 2018 10:31 pm
aj76er wrote:
Wed May 23, 2018 5:43 pm
gmaynardkrebs wrote:
Wed May 23, 2018 12:18 pm
aj76er wrote:
Wed May 23, 2018 12:00 pm
...You seem to be trying to justify holding a lower equity allocation. An honest assessment of your "ability, need, and willingness" to take short-term risk should be the only driver of your stock/bond split. Any attempt to market time should not.
So your advice is to completely ignore long term risk?
Yes, long-term risk and short-term risks must both be considered.
Based on history, stocks are risky in the short-term; bonds are risky over the long-term.
Stocks are risky over all time frames. The risks do not decrease over time; in fact, the risks increase over time.
You should quantify the risk you are referring to. I would call day-to-day or even year-to-year volatility a "shallow risk". I would call the loss of real (inflation adjusted) purchase power a deeper risk. There have been times in history where bonds have failed to deliver positive real returns (i.e. returns above inflation) for decades at a time. And there have been times when bonds lost as much or more than stocks in real, after-inflation terms.

There is a role for bonds in a portfolio, certainly; just as there is a role for stocks. It's important to view both asset classes with eyes wide open, so to speak.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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aj76er
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Re: Asset Class Forecasts

Post by aj76er » Wed May 23, 2018 11:02 pm

aj76er wrote:
Wed May 23, 2018 10:54 pm
gmaynardkrebs wrote:
Wed May 23, 2018 10:31 pm
aj76er wrote:
Wed May 23, 2018 5:43 pm
gmaynardkrebs wrote:
Wed May 23, 2018 12:18 pm
aj76er wrote:
Wed May 23, 2018 12:00 pm
...You seem to be trying to justify holding a lower equity allocation. An honest assessment of your "ability, need, and willingness" to take short-term risk should be the only driver of your stock/bond split. Any attempt to market time should not.
So your advice is to completely ignore long term risk?
Yes, long-term risk and short-term risks must both be considered.
Based on history, stocks are risky in the short-term; bonds are risky over the long-term.
Stocks are risky over all time frames. The risks do not decrease over time; in fact, the risks increase over time.
You should quantify the risk you are referring to. I would call day-to-day or even year-to-year volatility a "shallow risk". I would call the loss of real (inflation adjusted) purchase power a deeper risk. There have been times in history where bonds have failed to deliver positive real returns (i.e. returns above inflation) for decades at a time. And there have been times when bonds lost as much or more than stocks in real, after-inflation terms.

There is a role for bonds in a portfolio, certainly; just as there is a role for stocks. It's important to view both asset classes with eyes wide open, so to speak.
For some data on this, here is a good article by W. Bernstein. Notice the table near the top, which shows the after-inflation returns of stocks and bonds. Stocks have been relatively immune to inflationary forces; Bonds not so much. Over longer time frames, I would say the (real) returns of bonds are much more unpredictable.

http://www.efficientfrontier.com/ef/402/2cent.htm
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

3funder
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Re: Asset Class Forecasts

Post by 3funder » Thu May 24, 2018 7:16 am

aburntoutcase wrote:
Tue May 22, 2018 6:01 pm
Taylor Larimore wrote:
Tue May 22, 2018 4:25 pm
Ironically I am turning more bearish now and have been reducing my equity allocation from low 60% range in November 2017 to 50% currently and might reduce more if I can convince my spouse to go to 40%.
aburntoutcase:

It appears you are attempting to market-time. Sorry, it seldom works. Listen to Jack Bogle:
"Stay the Course. No matter what happens, stick to your program. I've said "Stay the course" a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."
Best wishes.
Taylor
Taylor to be fair I have followed Jack's interviews and I think he himself tweaks his equity allocation from time to time. I believe he reduced his equity allocation from 70%-75% to 30-35% in 2000. I am within striking distance (lets say 75-80% of target) of what I would consider a minimum retirement nest egg. My need for taking risk is less. I can live with the difference between 40% equities and 60% equities if the market continues to do well, but if there is a steep bear market I would rather go in with 40% exposure.
Leave your AA at 50/50 and call it a day.

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Re: Asset Class Forecasts

Post by aburntoutcase » Thu May 24, 2018 8:50 am

FrugalInvestor wrote:
Wed May 23, 2018 8:12 pm
Okay, then it doesn't matter what you do so either do nothing or flip a coin.
Wrong. It doesn't matter much to me on the upside, but it matters a lot more on the downside.

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aburntoutcase
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Re: Asset Class Forecasts

Post by aburntoutcase » Thu May 24, 2018 8:51 am

3funder wrote:
Thu May 24, 2018 7:16 am
Leave your AA at 50/50 and call it a day.
Yes we might have to stay that way as spousal veto prevails :happy

CantPassAgain
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Re: Asset Class Forecasts

Post by CantPassAgain » Thu May 24, 2018 9:12 am

gmaynardkrebs wrote:
Wed May 23, 2018 10:31 pm
aj76er wrote:
Wed May 23, 2018 5:43 pm
gmaynardkrebs wrote:
Wed May 23, 2018 12:18 pm
aj76er wrote:
Wed May 23, 2018 12:00 pm
...You seem to be trying to justify holding a lower equity allocation. An honest assessment of your "ability, need, and willingness" to take short-term risk should be the only driver of your stock/bond split. Any attempt to market time should not.
So your advice is to completely ignore long term risk?
Yes, long-term risk and short-term risks must both be considered.
Based on history, stocks are risky in the short-term; bonds are risky over the long-term.
Stocks are risky over all time frames. The risks do not decrease over time; in fact, the risks increase over time.
You seem to have a lot of thoughts and weigh in with what you think the wrong answers are. What are your thoughts on what "should" be done? If you are going to pooh pooh everyone's thoughts all the time then you should advocate for something. General angst isn't very helpful.

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Re: Asset Class Forecasts

Post by Random Walker » Thu May 24, 2018 9:50 am

I think staying the course is always the disciplined default course of (in)action. But as one progresses through the investing stages: early accumulation, late accumulation/Pre retirement, early retirement, later retirement, it makes sense to evaluate where one is relative to their financial goals, look at current valuations and future expected returns, and make informed asset allocation changes. I view this as a personally opportunistically customized glide path as opposed to market timing. These are more one direction changes to the asset allocation in step wise fashion rather than a blind approach cooling off a certain percent every year or so.

Dave

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aburntoutcase
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Re: Asset Class Forecasts

Post by aburntoutcase » Thu May 24, 2018 10:40 am

Random Walker wrote:
Thu May 24, 2018 9:50 am
I think staying the course is always the disciplined default course of (in)action. But as one progresses through the investing stages: early accumulation, late accumulation/Pre retirement, early retirement, later retirement, it makes sense to evaluate where one is relative to their financial goals, look at current valuations and future expected returns, and make informed asset allocation changes. I view this as a personally opportunistically customized glide path as opposed to market timing. These are more one direction changes to the asset allocation in step wise fashion rather than a blind approach cooling off a certain percent every year or so.
Agree completely. Not sure why this arises so much hostility. I think it is because general distrust of any human decision making by the purists. Even Jack Bogle is not as much of a purist as some Bogleheads.

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Re: Asset Class Forecasts

Post by gmaynardkrebs » Thu May 24, 2018 11:43 am

CantPassAgain wrote:
Thu May 24, 2018 9:12 am
gmaynardkrebs wrote:
Wed May 23, 2018 10:31 pm
aj76er wrote:
Wed May 23, 2018 5:43 pm
gmaynardkrebs wrote:
Wed May 23, 2018 12:18 pm
aj76er wrote:
Wed May 23, 2018 12:00 pm
...You seem to be trying to justify holding a lower equity allocation. An honest assessment of your "ability, need, and willingness" to take short-term risk should be the only driver of your stock/bond split. Any attempt to market time should not.
So your advice is to completely ignore long term risk?
Yes, long-term risk and short-term risks must both be considered.
Based on history, stocks are risky in the short-term; bonds are risky over the long-term.
Stocks are risky over all time frames. The risks do not decrease over time; in fact, the risks increase over time.
You seem to have a lot of thoughts and weigh in with what you think the wrong answers are. What are your thoughts on what "should" be done? If you are going to pooh pooh everyone's thoughts all the time then you should advocate for something. General angst isn't very helpful.
Overall, my personal program is to follow the Merton/Bodie approach via TIPS and annuities for my "must have" retirement program. As a result, I have very little angst personally. I adopted the Merton/Bodie approach when I realized that stocks are definitely NOT safer as T years increase, which many (but certainly not all) Bogleheads seem to accept. I would add, that I do think stocks are likely to outperform my portfolio, possibly by a lot, which is why I have a portion of my non-IRA/401K money in index funds. However, I only invest money in stocks that I am sure I can lose without affecting my retirement needs.

Angst and gain are always trade offs. I see a lot of the "stay the course" mentality as a form of whistling in the dark, which to me is an evasion of angst. I think that's why i feel the need to push back on the extreme positions in this regard. Perhaps I should not do, as I can see how it might be viewed as pompous, arrogant, or simply rude, which is not what motivates me. I do believe that there may be as many different answers to solving this puzzle as there are people. However, the statement that stocks become "less risky over longer time horizons" is demonstrably incorrect, and I hope no one relies upon it. I would also say, that those who recognize these greater risks for what they are, and choose to invest in equities anyway, are making an informed choice, which I respect.

2015
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Re: Asset Class Forecasts

Post by 2015 » Thu May 24, 2018 12:48 pm

gmaynardkrebs wrote:
Wed May 23, 2018 1:05 pm
2015 wrote:
Wed May 23, 2018 12:29 pm
As with all things in life, it pays to take the "balcony" view, the "10,000 foot" view, or the "helicopter" view. Asset class forecasts fall prey to narratives fallacy, and a host of other issues.
Simplicity in all things is the anecdote to the behavioral failures of man/woman. Beware false prophets of complexity with ulterior motives.
Is "anecdote" intentional? Either way, it's brilliant, because an anecdote is a form of narrative, and your theory of simplicity is itself a "narrative," just different from the other narratives you seem to warn against.
Thanks for catching that. Yes, I meant "antidote" (and I didn't find it brilliant as much as I found it amusing). Everything is a narrative. Some are more useful than others.

I also stand corrected regarding using the phrase "simplicity in all things". In some systems, such as closed systems, it's more useful to take a physics approach. In such a closed system, cause and effect are observable. with limited inputs (like an automobile engine). In open, complex, adaptive systems, of which the financial market is part, taking a biological approach is warranted, because virtually endless inputs thus cause and effect are obscured. As has been said many times in a plethora of fields outside of economics, investing, and finance, forecasts in CAS are worthless. Such systems are so affected by initial starting conditions and subsequent inputs as to make predictions useless. These predictions/forecasts/"discussions" are useless, of course, unless you like reading click bait by advertisers such as etf.com or like engaging in circular debates driven by behavioral errors.

I personally find it useful/critical not to focus on what's "right" or "wrong" (because anything can be deemed so), but instead to focus on what is useful or not. Generally, those concepts which are historical and have withstood the test of time are far more valuable/useful than any shiny new debate (usually without being "settled") you will read here or any latest financial blog post (aka, advertisement).

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