Larry Swedroe: Valuations Too High?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
columbia
Posts: 776
Joined: Tue Aug 27, 2013 5:30 am

Re: Larry Swedroe: Valuations Too High?

Post by columbia » Fri Aug 10, 2018 8:30 am

gmaynardkrebs wrote:
Thu Aug 09, 2018 7:01 am
I'm willing to accept that CAPE10 can't tell us whether stocks are overpriced. But, I can't help but wonder what stock prices would look like if CAPE could do that? The point is, they'd look exactly the same, because the market would price-in the dire CAPE10 warning.
One would think that the pessimistic predictions for the next decade (independent of CAPE) have indeed been priced in.

User avatar
HomerJ
Posts: 11429
Joined: Fri Jun 06, 2008 12:50 pm

Re: Larry Swedroe: Valuations Too High?

Post by HomerJ » Fri Aug 10, 2018 9:00 am

larryswedroe wrote:
Fri Aug 10, 2018 8:14 am
Thus, there is a big difference if expected returns are 7% than 5%. The difference is that at 7% investors have a choice they can make. They can increase their withdrawal rate (that's what the assets are for, to spend and enjoy life, and spending now is more valuable than spending later, so want to avoid being excessively conservative), or can lower equity allocation if your preference is to "sleep better." Being conservative is fine and the right choice for many. But others will choose, right for them, to spend more currently, perhaps donating more to charity every year, or traveling more. No right answer, it just depends on personal situation. But clearly it matters.
See, I respectfully disagree.

There is absolutely ZERO chance I would start withdrawing more in retirement just because some writer/pundit/PhD told me that "expected" returns are higher. Expected returns of 7% really means 1%-13%.

I would stick with my conservative withdrawal rate, and only spend more after the ACTUAL returns show up. If we actually get higher returns for a couple of years, THEN I might give more to charity or travel more.

You call me foolish for ignoring "expected" returns. I think I'm smart to not spend money I don't have yet.

You seem to indicate above that both choices are fine. So maybe we're making progress.

I understand your point of view. I just don't agree with it.
The J stands for Jay

CraigTester
Posts: 25
Joined: Wed Aug 08, 2018 6:34 am

Re: Larry Swedroe: Valuations Too High?

Post by CraigTester » Fri Aug 10, 2018 9:17 am

Interesting and well thought out article.

Several observations/questions:

1) I breath a sigh of relief to see a tempered voice recognizing that, of course, valuations matter.

For anyone taking the time to actually study the data, instead of just responding to sound-bytes, its ludicrous to suggest otherwise.

But as you point out, they only matter over longer periods of time. Always entertaining to watch the witch hunt ensue against anyone who declares markets are historically high - only to be followed by markets randomly going up the next day or year anyway…..

The key understanding is that you have to look long-term. No idea where markets will be in a year, or 5. But if one buys/owns an SP500 index fund in 2018, there exists a high probability that today’s price will not look very attractive in 10+ years.

Now the million dollar question is what do you do with this information? Ignore/discredit the facts because it scares you; shut your eyes real tight and hope for the best; or make appropriate adjustments to your AA (independent of how you "rationalize" it).

2) How does changing the amortization schedule “permanently” affect average earnings, over time? And by extension, PE10. Clearly it alters things when initially changed, but at the end of the day, the cost being recognized still exists. So if you are comparing profitability of a firm in 1929 versus 2018, shouldn’t this come out in the wash over time….?

User avatar
nedsaid
Posts: 9890
Joined: Fri Nov 23, 2012 12:33 pm

Re: Larry Swedroe: Valuations Too High?

Post by nedsaid » Fri Aug 10, 2018 9:19 am

There does get to be a point where you have to agree to disagree. Larry isn't willy-nilly market timing but he does take valuations and future expected return into account when determining asset allocation. HomerJ says he is taking a conservative approach and so he isn't concerned about valuations. I am seeing agreement here that younger investors need not be so concerned about this, they just need to get started saving and investing. I am beginning to see discussion that older investors with shorter time horizons and less remaining human capital should consider valuations in asset allocation. The academics pretty much say that higher valuations cause lower expected future returns.

There of course is disagreement here because to a degree valuations are in the eye of the beholder. That is what makes a market. Earnings growth will sometimes catch up with higher expectations and higher prices. Experts can disagree whether or not the market is overvalued.

My take on this is that most of the time, investors should just plod on and invest regardless of expert opinion. There have been very few times in my lifetime where stocks got to valuation extremes, extremely expensive or extremely cheap. Maybe 3 great buying opportunities and 3 times when markets got very overheated. Thing is, I was 14-15 years old during the 1973-74 bear market and obviously I had no money to invest. I was just starting grade school during the go-go 1960's era. So I can point to two examples of each since I started investing back in 1984. I wasn't even around back in 1929. So it isn't like we have to subscribe to timing services.

In another thread, I said that we have to make our own choices and that circumstances vary from investor to investor. One unnamed poster just cannot accept choices that I made regarding advice from Larry Swedroe and REITs. I chose a course that didn't fit their version of logic and I have been hammered in at least one other thread over this. Ultimately, we all make our own choices of investments. Some tilt, many more don't. Different choices have been made regarding such asset classes like TIPS and REITs, which in many quarters here have fallen out of favor.

I guess the worst thing you can say to another poster on this forum is to accuse them of market timing. So we have to come up with euphemisms like aggressive rebalancing or opportunistic reallocation. Most all of us have done some form of market timing, though probably in its very mildest forms. Probably something like aggressive rebalancing. There is another poster here who does trend following but most of us in our hearts of hearts realize markets are fairly efficient and don't aggressively time the market. Even the Boglemeister himself made adjustments to his portfolio back in 2000 when stock valuations got to be extreme. But it seems verboten here to even take a profit, which at one time was considered prudent, but now is a capital offense around here. Taking a bit off the top, which I have done at least twice, is hardly market timing.

It is okay on this forum to have differing opinions. Folks aren't always going to agree. Let's agree to disagree here. I guess the very mild market timing that many of us have practiced should be renamed risk control. Maybe that will help the medicine go down a bit easier.
A fool and his money are good for business.

User avatar
vineviz
Posts: 985
Joined: Tue May 15, 2018 1:55 pm

Re: Larry Swedroe: Valuations Too High?

Post by vineviz » Fri Aug 10, 2018 9:39 am

HomerJ wrote:
Fri Aug 10, 2018 9:00 am
larryswedroe wrote:
Fri Aug 10, 2018 8:14 am
Thus, there is a big difference if expected returns are 7% than 5%. The difference is that at 7% investors have a choice they can make. They can increase their withdrawal rate (that's what the assets are for, to spend and enjoy life, and spending now is more valuable than spending later, so want to avoid being excessively conservative), or can lower equity allocation if your preference is to "sleep better." Being conservative is fine and the right choice for many. But others will choose, right for them, to spend more currently, perhaps donating more to charity every year, or traveling more. No right answer, it just depends on personal situation. But clearly it matters.
See, I respectfully disagree.

There is absolutely ZERO chance I would start withdrawing more in retirement just because some writer/pundit/PhD told me that "expected" returns are higher. Expected returns of 7% really means 1%-13%.

I would stick with my conservative withdrawal rate, and only spend more after the ACTUAL returns show up. If we actually get higher returns for a couple of years, THEN I might give more to charity or travel more.
I, on the other hand, might very well use the information to influence a decision to (say) take one last trip with my aging parents or with my children before they went off to college.

To me, the downside of dying rich will be the realization that I didn't live my life as fully as I could have.

Assuming I die slowly enough to think about it, I guess.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Fri Aug 10, 2018 9:46 am

nedsaid wrote:
Fri Aug 10, 2018 9:19 am
I guess the worst thing you can say to another poster on this forum is to accuse them of market timing. So we have to come up with euphemisms like aggressive rebalancing or opportunistic reallocation. Most all of us have done some form of market timing, though probably in its very mildest forms. Probably something like aggressive rebalancing. There is another poster here who does trend following but most of us in our hearts of hearts realize markets are fairly efficient and don't aggressively time the market. Even the Boglemeister himself made adjustments to his portfolio back in 2000 when stock valuations got to be extreme. But it seems verboten here to even take a profit, which at one time was considered prudent, but now is a capital offense around here. Taking a bit off the top, which I have done at least twice, is hardly market timing.

It is okay on this forum to have differing opinions. Folks aren't always going to agree. Let's agree to disagree here. I guess the very mild market timing that many of us have practice should be renamed risk control. Maybe that will help the medicine go down a bit easier.
It is interesting indeed that the 'market timing' label carries such negative connotations. I think that much of this is because we tend to associate it with people who are making portfolio changes on the basis of emotional, gut reactions. That's clearly what a lot of people do, but it's not what everyone who isn't 'buy-and-hold' does either.

Being a trend follower helps me sleep better at night, and all but the most die-hard buy-and-holder would say that I'm likely to do no worse over the long-term than a balanced, static AA. I think that finding a strategy that makes sense to you personally and you are very confident you will stick with is more important than whether one is a buy-and-holder or a trend follower. I've little doubt that many proclaimed buy-and-holders (not necessarily anyone in this thread) would abandon their position if stocks dropped 50%. We even this somewhat with bond holders who are understandably not pleased with the returns of TBM over the last few years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Fri Aug 10, 2018 9:49 am

vineviz wrote:
Fri Aug 10, 2018 9:39 am
To me, the downside of dying rich will be the realization that I didn't live my life as fully as I could have.
In my mind, that and the 'guarantee' of never running out of money are what the real appeal of annuities are.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
HomerJ
Posts: 11429
Joined: Fri Jun 06, 2008 12:50 pm

Re: Larry Swedroe: Valuations Too High?

Post by HomerJ » Fri Aug 10, 2018 10:05 am

nedsaid wrote:
Fri Aug 10, 2018 9:19 am
I guess the worst thing you can say to another poster on this forum is to accuse them of market timing. So we have to come up with euphemisms like aggressive rebalancing or opportunistic reallocation. Most all of us have done some form of market timing, though probably in its very mildest forms. Probably something like aggressive rebalancing. There is another poster here who does trend following but most of us in our hearts of hearts realize markets are fairly efficient and don't aggressively time the market. Even the Boglemeister himself made adjustments to his portfolio back in 2000 when stock valuations got to be extreme. But it seems verboten here to even take a profit, which at one time was considered prudent, but now is a capital offense around here. Taking a bit off the top, which I have done at least twice, is hardly market timing.

It is okay on this forum to have differing opinions. Folks aren't always going to agree. Let's agree to disagree here. I guess the very mild market timing that many of us have practiced should be renamed risk control. Maybe that will help the medicine go down a bit easier.
Great post. :)

Nothing wrong with taking a bit off the top, even beyond normal rebalancing, since your need to take risk has decreased with a larger portfolio, and another year closer to retirement.
The J stands for Jay

User avatar
sperry8
Posts: 1571
Joined: Sat Mar 29, 2008 9:25 pm
Location: Miami FL

Re: Larry Swedroe: Valuations Too High?

Post by sperry8 » Fri Aug 10, 2018 10:17 am

Random Walker wrote:
Thu Aug 09, 2018 8:40 pm
larryswedroe wrote:
Thu Aug 09, 2018 7:34 pm

I will add this, we invest in equities even though they are riskier. Reason we anticipate a risk premium. Now at some point you should believe the risk premium isn't worth it. That is a different level for every person. The ERP has historically been high because wealthy people have little need to take risk, they have the money, and what can entice them to buy stocks is a high ERP. Lower it and they might move to safer bonds. At some point that should be true for everyone.

Hope that is helpful
I think this is especially true when we keep in mind that all estimates of future returns are only means with big dispersions. Generous past returns result in current high valuations and lower future expected returns. Those lower future expected returns represent a whole dispersion which has shifted left: good outcomes that are less good and bad outcomes that are worse. Knowing from behavioral finance that the pain of a loss is way more than the happiness from an equal sized gain, at a certain point the risk seems silly. For someone around retirement, an extra 2-4% above bond yields as the ERP just doesn’t seem worth the risk represented by the left side of the potential return distribution.

Dave
This! (bold/italics are my emphasis)

I deal with this via my AA. I recall someone saying (maybe it was Larry) "you don't want to be picking up pennies in front of a steamroller" or something to that effect. It was in reference to bond yields - but it holds true for stocks too. As the whole thing shifts left due to valuations, the extra alpha we may get in stocks may not be worth it any longer. Of course - the dispersion of returns even thought shifted left are still too great to truly now. If it were as small as 2-4%, I could likely run some numbers to determine my personal risk tolerance, but since it's more like -3% to +8% it's just too great to deal (as I surely still want the upside of the high side.

I tend to agree with HomerJ here - stuns me too ;) I'm retired and live off my monies. Expected returns are now 4.6% to 4.9%? What do i do? Nothing. I don't really know if that's going to be true or false. I heard years ago that expected returns would be lower as well - and here I am in Aug of 2018 at all time highs in net worth (due to equities). So I will modify my spend based on actual returns... and just as HomerJ does it - modify it after actual returns have come in over a period of years. I'm still spending ~3% and yet actual returns have exceeded my expectations when I set my AA. I can't spend based on projections. Nor will I tighten my belt because of them. I, like HomerJ, simply watch actuals and then make decisions based on total net worth.

I totally believe (as Larry does) that valuations matter a great deal. I know that future returns should be lower than the past - but I don't see how actionable this can be. What am I to do? Start to spend less? I already spend only 3%. As Larry says, I don't NEED to take more risk. So I suppose I could cut my equity valuations some. But NEED and desire differ. I am a middle aged retiree. Perhaps I'll increase my spend in my latter years if returns are higher than 4.6% to 4.9%. Maybe they'll be closer to 6%. If I cut my AA now because I don't have the NEED I assure myself of not getting those potential returns. On the other side, I realize returns could be south of 3%. Perhaps then I'll rue the day I stayed the course. Seems to me if you're ultra conservative (which 3% absolutely is), then valuations don't matter and one doesn't have to worry about NEED and can position AA for some potential long term GREED.
Humbling BH contest results: 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

User avatar
HomerJ
Posts: 11429
Joined: Fri Jun 06, 2008 12:50 pm

Re: Larry Swedroe: Valuations Too High?

Post by HomerJ » Fri Aug 10, 2018 10:32 am

sperry8 wrote:
Fri Aug 10, 2018 10:17 am
As the whole thing shifts left due to valuations, the extra alpha we may get in stocks may not be worth it any longer. Of course - the dispersion of returns even thought shifted left are still too great to truly now. If it were as small as 2-4%, I could likely run some numbers to determine my personal risk tolerance, but since it's more like -3% to +8% it's just too great to deal (as I surely still want the upside of the high side.
THAT'S the problem.

It would be one thing if the economists could tell me that returns will be 6% instead of 4%.

I could make some changes based on that.

But what they are REALLY saying is that returns will be 0%-12% instead of -2% - 10%. That's good news.

But that plus/minus 6% is too big for me to make any sweeping changes to my retirement plan.

In retirement, I don't look at average historical returns, I look at worst historical returns.

Same with savings to a certain extent. I'm not going to plan around the middle numbers. I want to reach my savings goal even if we get poor historical returns. Just like I want my retirement to succeed if we get poor historical returns.

The odds are pretty high I'm going to be pleasantly surprised (so far I have been), but I'm prepared for bad times too.

0%-12% is too big a range to use for planning purposes.
The J stands for Jay

Random Walker
Posts: 2870
Joined: Fri Feb 23, 2007 8:21 pm

Re: Larry Swedroe: Valuations Too High?

Post by Random Walker » Fri Aug 10, 2018 10:40 am

Sperry,
If you’ve benefitted from the long bull, and want to spend those profits, might it make sense to realize some of those profits and save them as cash and short term bonds? That would be an AA change towards the more conservative.

Dave

User avatar
iceport
Posts: 3874
Joined: Sat Apr 07, 2007 4:29 pm

Re: Larry Swedroe: Valuations Too High?

Post by iceport » Fri Aug 10, 2018 10:42 am

larryswedroe wrote:
Thu Aug 09, 2018 7:00 pm
To help those for whom this seems difficult

First, when young and starting out on your investment career, unless lucky to be born to wealth, your AA should be dominated by your ability and willingness to take risk. Valuations won't matter much if at all because you should be saving and investing as much as possible. And you should hope for poor returns with valuations falling so you can invest more at lower valuations and earn higher expected returns with larger amounts of assets.

Then as age and gain wealth and get closer to goals the need to take risk should begin to play a more dominant role, though of course tempered by ability and willingness to take risk. If actual returns exceed expected, likely should lower equity as don't NEED as much risk. Has NOTHING to do with timing market. No different decision would be made if returns were the same as expected but inherited money. You lower equity allocation because your need to take risk is lower. And perhaps vice versa, depending on ability and willingness to take risk.

Very simple. And exactly the same thing I've said for almost 25 years now.
This is very clear and helpful. I'm not sure where the controversy arises. I'd just like to reiterate that the whole concept of being close enough to one's financial goals that a diminishing need to take risk plays a dominant role seems very much a high net worth "problem."

Most people just don't have enough. Period. And they need to wring as much return out of their portfolio as their ability and willingness to withstand risk will allow. This included me for the majority of my investing life.

As I got closer to retirement, it became apparent that I would have enough for a comfortable, though not luxurious, lifestyle. The need to take risk was, for the first time, becoming a conscious consideration. But it still didn't drive my risk level. Instead, I changed my risk level in response to my diminishing ability to withstand risk as my working years dwindled. The decision was driven by confronting sequence of return risk. Did it occur to me that my need to take risk was lower, also? Sure it did. But that served mainly as a psychological consolation to dialing back my expected return. The need to take risk was never reduced to the point where it played a "dominant" role. A somewhat meaningful role, maybe, but certainly not a dominant role.

If the reports on retirement readiness and savings levels are even remotely accurate, it seems to me that most folks are in a similar position: where the need to take risk will always be strong enough that ability and willingness to withstand risk will play the dominate roles in setting risk levels.
"Discipline matters more than allocation.” ─William Bernstein

User avatar
sperry8
Posts: 1571
Joined: Sat Mar 29, 2008 9:25 pm
Location: Miami FL

Re: Larry Swedroe: Valuations Too High?

Post by sperry8 » Fri Aug 10, 2018 10:47 am

HomerJ wrote:
Fri Aug 10, 2018 10:32 am
sperry8 wrote:
Fri Aug 10, 2018 10:17 am
As the whole thing shifts left due to valuations, the extra alpha we may get in stocks may not be worth it any longer. Of course - the dispersion of returns even thought shifted left are still too great to truly now. If it were as small as 2-4%, I could likely run some numbers to determine my personal risk tolerance, but since it's more like -3% to +8% it's just too great to deal (as I surely still want the upside of the high side.
THAT'S the problem.

It would be one thing if the economists could tell me that returns will be 6% instead of 4%.

I could make some changes based on that.

But what they are REALLY saying is that returns will be 0%-12% instead of -2% - 10%. That's good news.

But that plus/minus 6% is too big for me to make any sweeping changes to my retirement plan.

In retirement, I don't look at average historical returns, I look at worst historical returns.

Same with savings to a certain extent. I'm not going to plan around the middle numbers. I want to reach my savings goal even if we get poor historical returns. Just like I want my retirement to succeed if we get poor historical returns.

The odds are pretty high I'm going to be pleasantly surprised (so far I have been), but I'm prepared for bad times too.

0%-12% is too big a range to use for planning purposes.
Sounds like you and I have similar risk tolerances and planning methods. At 3%, we are basically living as though the bad times are here (even though they aren't). Of course, this means at some point (assuming the bad times don't arrive or aren't too bad), our net worth will push us to higher annual spend, donations, or bequeathments.

I don't think you and Larry actually disagree on these points. I think you are speaking about two different things. You are saying valuations aren't actionable. Larry says they matter and if you know they are high - then you can 'action' a change in your need to take risk tolerance (by modifying AA). I think the issue is the concept around "need". For you (us) valuations aren't actionable because you (we) are so conservative that they don't really matter to us. But if we actually lived right up against our "plan" (let's say spending 5-6% WR), then this may change our minds re our NEED to take risk if we find valuations to be high. Because if we spent a higher number our margin for error would shrink and then we would constantly be shifting based on projections. Many may live/plan like this. But since we don't - valuations don't really matter to us. But they do to many who are not as conservative and/or have less vs their need.
Humbling BH contest results: 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

User avatar
sperry8
Posts: 1571
Joined: Sat Mar 29, 2008 9:25 pm
Location: Miami FL

Re: Larry Swedroe: Valuations Too High?

Post by sperry8 » Fri Aug 10, 2018 11:04 am

Random Walker wrote:
Fri Aug 10, 2018 10:40 am
Sperry,
If you’ve benefitted from the long bull, and want to spend those profits, might it make sense to realize some of those profits and save them as cash and short term bonds? That would be an AA change towards the more conservative.

Dave
Yes, if I realized profits then it would be more conservative. It is a choice that can be made for sure. The question is whether I want to make it. I surely don't need to. To Larry's point, if expected future valuations were like his 2000 example where TIPS were higher than E/P - yes, I'd make such a call. But -3% - +8% is such a large possibility that I could be leaving a lot of money on the table by doing that.
I'm currently 73/27. I could lower back down to 70/30 (which is supposed to be AA but huge run up put me a bit out of whack). I could even lower to 65/35 by going more conservative and "booking profits".

But "booking profits" only works if stocks go down. For example, what if I realized some profits in 2016? I'd have not really made profits - but rather lost 2017 & 2018 returns. So yes, factually those profits were "booked", but now, going forward I'm losing out on future gains (potentially of course). So to me it only makes sense to "book profits" if I want my ongoing AA to now be at that new level. Otherwise it truly would be market timing. And I am not sure I want my AA to be at that new lower level going forward. Although I am expending a lot of brainpower thinking about it (but mostly due to me thinking valuations are high). And I don't like that as a reason to modify AA, so, so far I've done nothing and just stayed the course.
Humbling BH contest results: 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

GAAP
Posts: 549
Joined: Fri Apr 08, 2016 12:41 pm

Re: Larry Swedroe: Valuations Too High?

Post by GAAP » Fri Aug 10, 2018 11:30 am

larryswedroe wrote:
Thu Aug 09, 2018 3:08 pm
they are only making the mistake of believing that forecasts have to be highly accurate to have value. 40% is plenty of explanatory power especially when you know the whole distribution shifts.
Voltaire:
In his writings, a wise Italian says that the best is the enemy of the good
No, CAPE10 is not precise -- but it doesn't need to be. It is reasonably accurate, depending on what you want to do with it.

It occurs to me that perhaps the people advocating for using CAPE10 are also generally the people that advocate for variable withdrawal methods and vice versa. The underlying method assumption then colors their perspective on the need or lack of need for CAPE10.

I don't use CAPE to set or modify my AA. I'm also not willing to count on history to tell me what a "safe" withdrawal rate is -- especially a real rate when the USA has never experienced hyperinflation, or anything remotely like it. I do use CAPE10 to evaluate likely outcomes from decisions like Roth conversions, and I do use it to estimate the internal rate for a variable method, knowing that I need only reasonable accuracy for a self-correcting withdrawal rate.

CraigTester
Posts: 25
Joined: Wed Aug 08, 2018 6:34 am

Re: Larry Swedroe: Valuations Too High?

Post by CraigTester » Fri Aug 10, 2018 12:03 pm

Summarizing Larry for any Charlie Daniels fans:

A poor girl wants to marry, a rich girl wants to flirt,

A rich boy gets to time the market, but a poor boy has to let the market do its work.

User avatar
Johnnie
Posts: 502
Joined: Sat May 28, 2016 3:18 pm
Location: Michigan

Re: Larry Swedroe: Valuations Too High?

Post by Johnnie » Fri Aug 10, 2018 12:16 pm

GAAP wrote:
Fri Aug 10, 2018 11:30 am
I don't use CAPE to set or modify my AA. I'm also not willing to count on history to tell me what a "safe" withdrawal rate is -- especially a real rate when the USA has never experienced hyperinflation, or anything remotely like it. I do use CAPE10 to evaluate likely outcomes from decisions like Roth conversions, and I do use it to estimate the internal rate for a variable method, knowing that I need only reasonable accuracy for a self-correcting withdrawal rate.
Interesting on the Roth conversions. Can you describe your decision tree, and how CAPE plays into it?
"I know nothing."

GAAP
Posts: 549
Joined: Fri Apr 08, 2016 12:41 pm

Re: Larry Swedroe: Valuations Too High?

Post by GAAP » Fri Aug 10, 2018 12:46 pm

Johnnie wrote:
Fri Aug 10, 2018 12:16 pm

Interesting on the Roth conversions. Can you describe your decision tree, and how CAPE plays into it?
To estimate the impact of a chain of conversions, I need to estimate account balances. I use 1/CAPE10 as a proxy for real stock returns, apply it to my AA in the correct proportions for a given account, and go from there. I can then compare two different chains that use different amounts but the same return estimate. My wife and I have multiple defined benefit variables that trade-off start date with benefit amount. That in turn affects taxable income, and therefore the degree of Roth conversion available at any given tax bracket.

marcopolo
Posts: 955
Joined: Sat Dec 03, 2016 10:22 am

Re: Larry Swedroe: Valuations Too High?

Post by marcopolo » Fri Aug 10, 2018 12:52 pm

Random Walker wrote:
Fri Aug 10, 2018 10:40 am
Sperry,
If you’ve benefitted from the long bull, and want to spend those profits, might it make sense to realize some of those profits and save them as cash and short term bonds? That would be an AA change towards the more conservative.

Dave
Doesn't re-balancing do this without needing to change your asset allocation? I prefer to base my AA changes more on life milestones rather than market performance. i can see how others come to different decisions.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Random Walker
Posts: 2870
Joined: Fri Feb 23, 2007 8:21 pm

Re: Larry Swedroe: Valuations Too High?

Post by Random Walker » Fri Aug 10, 2018 1:37 pm

marcopolo wrote:
Fri Aug 10, 2018 12:52 pm
Random Walker wrote:
Fri Aug 10, 2018 10:40 am
Sperry,
If you’ve benefitted from the long bull, and want to spend those profits, might it make sense to realize some of those profits and save them as cash and short term bonds? That would be an AA change towards the more conservative.

Dave
Doesn't re-balancing do this without needing to change your asset allocation? I prefer to base my AA changes more on life milestones rather than market performance. i can see how others come to different decisions.
I was thinking of permanent decrease in the equity allocation now that enough money has been generated to spend.

More to your point about making AA changes in response to life milestones and/or market performance, I think that has been a big part of this thread. The point being that life milestones, previous market performance, current valuations, and future expected returns are all interrelated. We might reach a certain life financial milestone as a result of the combination of working/saving for years and benefiting from a strong market. So I think really need to consider all those factors in setting up an AA looking forward. The assumptions underlying a plan can change, and when they do it makes good sense I think to reassess the plan.
This is my problem with Target Date funds. We know how old we are going to be in any given year, but we have no idea what the market will do in any given year or several years. To me, it makes sense to sort of move in a personalized stepwise fashion towards the retirement portfolio depending on what the market gives. Equities have an SD of 15-20%; changes can be abrupt. Taking 1% or so out of equities per year on autopilot doesn’t seem so effective. For example, we’ve had a big 10 year bull market and all of us late accumulators are 10 years closer to retirement than we were in 2008. The market has more than doubled in that time. Maybe makes sense to more aggressively take risk off the table than a Target Date Fund would do. I strongly recommend William Bernstein’s short e-book on Lifecycle investing. He brings this issue up right at the end.

Dave
Last edited by Random Walker on Fri Aug 10, 2018 1:39 pm, edited 1 time in total.

User avatar
FIREchief
Posts: 2434
Joined: Fri Aug 19, 2016 6:40 pm

Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Fri Aug 10, 2018 1:38 pm

CraigTester wrote:
Fri Aug 10, 2018 12:03 pm
Summarizing Larry for any Charlie Daniels fans:

A poor girl wants to marry, a rich girl wants to flirt,

A rich boy gets to time the market, but a poor boy has to let the market do its work.
This is actually really good! (and captures the general message very well) :sharebeer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

larryswedroe
Posts: 15650
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: Larry Swedroe: Valuations Too High?

Post by larryswedroe » Fri Aug 10, 2018 1:48 pm

Thought to consider

So Homer thinks he is being conservative by not changing his AA when expected returns are high, just stick with his withdrawal rate. But that IMO is just an emotional answer and MIGHT be right, or might not be right. The best tool we have to determine if that is more conservative is to run an MCS and see if staying with that AA and that same withdrawal rate gives highest odds of not running out of money (if that is the main objective, and is often for conservative investors) or if lowering the equity allocation would improve the odds by reducing the left tail risk. It might even be the case that you can cut equity allocation and that would increase odds of success, or cut it and withdrawal rate and still have sufficiently high odds of achieving goal. Only way to know which makes the most sense for you is to run the analysis and then can make an informed decision. The point is you don't know until you do the analysis.

User avatar
FIREchief
Posts: 2434
Joined: Fri Aug 19, 2016 6:40 pm

Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Fri Aug 10, 2018 2:00 pm

larryswedroe wrote:
Fri Aug 10, 2018 1:48 pm
So Homer thinks he is being conservative by not changing his AA when expected returns are high, just stick with his withdrawal rate. But that IMO is just an emotional answer and MIGHT be right, or might not be right.
Based upon the posts I've read, it sounds less like emotion and more like a healthy skeptisim of an analytical approach that has been highly inaccurate so many times in the recent past.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Fri Aug 10, 2018 2:05 pm

larryswedroe wrote:
Fri Aug 10, 2018 1:48 pm
Thought to consider

So Homer thinks he is being conservative by not changing his AA when expected returns are high, just stick with his withdrawal rate. But that IMO is just an emotional answer and MIGHT be right, or might not be right. The best tool we have to determine if that is more conservative is to run an MCS and see if staying with that AA and that same withdrawal rate gives highest odds of not running out of money (if that is the main objective, and is often for conservative investors) or if lowering the equity allocation would improve the odds by reducing the left tail risk. It might even be the case that you can cut equity allocation and that would increase odds of success, or cut it and withdrawal rate and still have sufficiently high odds of achieving goal. Only way to know which makes the most sense for you is to run the analysis and then can make an informed decision. The point is you don't know until you do the analysis.
But the problem with that analysis is that the margin of error is large. There's a big difference between getting +8% and 0%, for instance.
“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

larryswedroe
Posts: 15650
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: Larry Swedroe: Valuations Too High?

Post by larryswedroe » Fri Aug 10, 2018 2:07 pm

Firechief
Sorry that isn't right.
It's misusing the information ---as pointed out by others, a tool doesn't have to be perfect or even close to that to add value. And the evidence is very clear that the CAPE 10 or similar metrics has signficant value as has been pointed out, and as noted all professionals I know agree and even Vanguard and your beloved Bogle agrees, as he uses a similar tool, the gordon model. IMO only fools would argue otherwise when you have monotonic changes in returns as valuations go higher and the whole curve shifts to the left. How can any rational person say that has no information? They cannot.

The issue is you have to be aware that the dispersion around that mean estimate is fairly wide, as unexpected risks show up or don't and you build plans accordingly to deal with the risks of the left tail.

Re being far off, In fact when I wrote about the actual estimates we used and showed all the results for periods of more than 10 years there was only one single year where there were any returns outside of one standard deviation, and that was very close to the one standard deviation.

We know that all we have are estimates, but they are the best tools we have and they do have value. With that all we can do is put the odds in our favor, instead of burying heads in sand which is IMO what those who ignore valuations are doing

Will,
first it's less than 8%, more like about 6%, which is still wide, and it must be the case because otherwise there would be no risk in investing in stocks and the ERP would shrink/disappear. And that is why all plans should have a Plan B in case the left tail risks show up. Ignoring the facts doesn't change them. It's still about putting ODDS IN YOUR FAVOR. Which is best we can do given investing involves not only risk but uncertainty. That's the best way to address uncertainty.
Last edited by larryswedroe on Fri Aug 10, 2018 2:11 pm, edited 1 time in total.

CantPassAgain
Posts: 577
Joined: Fri Mar 15, 2013 8:49 pm

Re: Larry Swedroe: Valuations Too High?

Post by CantPassAgain » Fri Aug 10, 2018 2:09 pm

CraigTester wrote:
Fri Aug 10, 2018 9:17 am
Interesting and well thought out article.

Several observations/questions:

1) I breath a sigh of relief to see a tempered voice recognizing that, of course, valuations matter.

For anyone taking the time to actually study the data, instead of just responding to sound-bytes, its ludicrous to suggest otherwise.

But as you point out, they only matter over longer periods of time. Always entertaining to watch the witch hunt ensue against anyone who declares markets are historically high - only to be followed by markets randomly going up the next day or year anyway…..

The key understanding is that you have to look long-term. No idea where markets will be in a year, or 5. But if one buys/owns an SP500 index fund in 2018, there exists a high probability that today’s price will not look very attractive in 10+ years.

Now the million dollar question is what do you do with this information? Ignore/discredit the facts because it scares you; shut your eyes real tight and hope for the best; or make appropriate adjustments to your AA (independent of how you "rationalize" it).

2) How does changing the amortization schedule “permanently” affect average earnings, over time? And by extension, PE10. Clearly it alters things when initially changed, but at the end of the day, the cost being recognized still exists. So if you are comparing profitability of a firm in 1929 versus 2018, shouldn’t this come out in the wash over time….?
I thought you advocated staying out of the market altogether in your thread that you started that ended up being closed?
CraigTester wrote:No, not at all. Whether I am investing every dollar I own, or just 1% of all the dollars I own, my goal is the same.

It just doesn't seem terribly intelligent to invest ANY of my dollars at a point in time when valuations are at their second highest level in history....But if its my hard earned money, seems much more intelligent to wait for history to repeat itself and offer a better entry point in the future.
CraigTester wrote:And I've yet to hear a compelling argument why anyone would possibly invest in the SP500 at today's valuation level.

Random Walker
Posts: 2870
Joined: Fri Feb 23, 2007 8:21 pm

Re: Larry Swedroe: Valuations Too High?

Post by Random Walker » Fri Aug 10, 2018 2:12 pm

I’ve become a big fan of Monte Carlo Simulation. The results can be surprising. In my own case, I found that there was surprisingly little sensitivity to AA of me meeting my goals. I also found that maximizing terminal wealth and meeting specific goals are very separate and distinct goals. As Larry mentioned above, one might increase the likelihood of reaching a specific goal with a less aggressive AA that does not maximize likely terminal wealth. I find the exercise forces me to get much more clear on what I’m realistically trying to achieve in my financial life.

Dave

Park
Posts: 523
Joined: Sat Nov 06, 2010 4:56 pm

Re: Larry Swedroe: Valuations Too High?

Post by Park » Fri Aug 10, 2018 2:15 pm

A common R-squared for CAPE in this thread is around 0.4.

I've never see an analysis on this, but my guess is that the R-squared depends on valuation. At present, it wouldn't surprise me if it is less than 0.4. But at either extreme, it may be considerably more than 0.4.

User avatar
FIREchief
Posts: 2434
Joined: Fri Aug 19, 2016 6:40 pm

Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Fri Aug 10, 2018 2:27 pm

larryswedroe wrote:
Fri Aug 10, 2018 2:07 pm
Re being far off, In fact when I wrote about the actual estimates we used and showed all the results for periods of more than 10 years there was only one single year where there were any returns outside of one standard deviation, and that was very close to the one standard deviation.
All you're telling me is that the past has been a reliable predictor of the past. Imagine my surprise.... :annoyed
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

larryswedroe
Posts: 15650
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: Larry Swedroe: Valuations Too High?

Post by larryswedroe » Fri Aug 10, 2018 2:48 pm

Firechief, have anything valuable to contribute?

What I showed was that the estimates we made were in fact providing useful information by any reasonable definition. The MCS based on the estimates then allowed us to ESTIMATE (not know) what the best of success were for various strategies of withdrawal rates and equity allocations. That's best we can do in world of uncertainty. And that is also why everyone should have a Plan B in place that addresses what happens if that left tail of that distribution showed up. I would also note that the 2008 market was within the bottom 5% of the distribution, so the estimates did include the risk of the worst bear market since the Great Depression

I don't think there is anything more I can add to be helpful. So I'm done. If anyone has questions I can address please email or PM.

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Fri Aug 10, 2018 3:22 pm

larryswedroe wrote:
Fri Aug 10, 2018 2:07 pm
Will,
first it's less than 8%, more like about 6%, which is still wide, and it must be the case because otherwise there would be no risk in investing in stocks and the ERP would shrink/disappear. And that is why all plans should have a Plan B in case the left tail risks show up. Ignoring the facts doesn't change them. It's still about putting ODDS IN YOUR FAVOR. Which is best we can do given investing involves not only risk but uncertainty. That's the best way to address uncertainty.
We put the odds in our favor when we expect low returns to begin with. I don't use 7% real returns in my planning, and I don't hear many others here doing that either. We are told by many CAPE proponents to expect around 4% going forward for the next decade. That's about what I use for my own planning, so it's a non-issue. But if they were telling me it was 8%, I wouldn't change anything about my planning since it would just mean that I might have a bigger portfolio at the end than I absolutely need. What a wonderful first-world problem that would be. I'm not out to get the mathematically optimal risk-adjusted returns I possibly can, and I frankly have grave doubts that anyone can do that with any measure of certainty a priori.

I'm not investing for the next decade, the time frame where CAPE has had maximal predictiveness. I'm investing for the next 60 years, and I'm very likely going to be heavy in stocks throughout that entire period. I'm not just investing for me; I'm also investing for others who will survive me.

I'm planning for a comfortable retirement by age 55. My plan B is to work longer than that. With 0% real returns, I could still easily be financially independent with ease by age 60. If we get 0% real returns for 20+ years in the global markets, there are likely to be bigger problems to deal with than retirement.
Last edited by willthrill81 on Fri Aug 10, 2018 3:26 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
Artsdoctor
Posts: 3403
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Larry Swedroe: Valuations Too High?

Post by Artsdoctor » Fri Aug 10, 2018 3:24 pm

sperry8 wrote:
Fri Aug 10, 2018 11:04 am
Random Walker wrote:
Fri Aug 10, 2018 10:40 am
Sperry,
If you’ve benefitted from the long bull, and want to spend those profits, might it make sense to realize some of those profits and save them as cash and short term bonds? That would be an AA change towards the more conservative.

Dave
Yes, if I realized profits then it would be more conservative. It is a choice that can be made for sure. The question is whether I want to make it. I surely don't need to. To Larry's point, if expected future valuations were like his 2000 example where TIPS were higher than E/P - yes, I'd make such a call. But -3% - +8% is such a large possibility that I could be leaving a lot of money on the table by doing that.
I'm currently 73/27. I could lower back down to 70/30 (which is supposed to be AA but huge run up put me a bit out of whack). I could even lower to 65/35 by going more conservative and "booking profits".

But "booking profits" only works if stocks go down. For example, what if I realized some profits in 2016? I'd have not really made profits - but rather lost 2017 & 2018 returns. So yes, factually those profits were "booked", but now, going forward I'm losing out on future gains (potentially of course). So to me it only makes sense to "book profits" if I want my ongoing AA to now be at that new level. Otherwise it truly would be market timing. And I am not sure I want my AA to be at that new lower level going forward. Although I am expending a lot of brainpower thinking about it (but mostly due to me thinking valuations are high). And I don't like that as a reason to modify AA, so, so far I've done nothing and just stayed the course.
Sperry,

I've read your posts a few times now because your posts are always helpful and thoughtful. A few things come to mind.

You mention that "booking profits" only works if stocks go down. And then you describe "seller's remorse" if stocks go up after a sale. Put that way, it sounds like you're in a race or you view this as a sport. I can easily see that but that's not how I view investing (however, my younger self would've probably been more interested in "winning"). With investing, you can never really look back and wish you would've held on or sold something because you'll drive yourself crazy. Unless there's an irrefutable learning experience that you can apply elsewhere, you can't have remorse.

By booking profits, you may indeed be scaling back the equity portion of your portfolio and creating an asset allocation which is less aggressive. But if you've met your goals (presumably, we all have specific goals and are not just playing), why would you continue on at the same pace? The last 10 years have catapulted many of us beyond where we anticipated being so why not scale back to "preservation of capital" mode if it's appropriate? I would have no remorse if the next 12 months returns 20% in equities after a scale back because I didn't need that risk. The only serious remorse that I'd feel is if I had met my goals and put those funds at risk needlessly only to have those gains evaporate during a brutal market decline.

I don't think you'd call it "market timing" if your life circumstances (including financial circumstances) have changed considerably.

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Fri Aug 10, 2018 3:27 pm

Artsdoctor wrote:
Fri Aug 10, 2018 3:24 pm
I don't think you'd call it "market timing" if your life circumstances (including financial circumstances) have changed considerably.
Certainly not. Changing your portfolio on the basis of your own personal situation is not market timing. But changing your portfolio on the basis of current or anticipated market conditions is bona fide market timing. Those who do it rarely call it that; 'dynamic asset allocation' has been a popular term for it in recent years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
Artsdoctor
Posts: 3403
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Larry Swedroe: Valuations Too High?

Post by Artsdoctor » Fri Aug 10, 2018 3:35 pm

willthrill81 wrote:
Fri Aug 10, 2018 3:27 pm
Artsdoctor wrote:
Fri Aug 10, 2018 3:24 pm
I don't think you'd call it "market timing" if your life circumstances (including financial circumstances) have changed considerably.
Certainly not. Changing your portfolio on the basis of your own personal situation is not market timing. But changing your portfolio on the basis of current or anticipated market conditions is bona fide market timing. Those who do it rarely call it that; 'dynamic asset allocation' has been a popular term for it in recent years.
Just don't forget that it goes both ways as well. You can scale back the equity risk as you meet your goals. However, if you're overestimated the return you need to accomplish your goals and start falling short, you might find yourself in the position where you'll need to actually increase your equity allocation and/or increase your savings rate significantly.

User avatar
FIREchief
Posts: 2434
Joined: Fri Aug 19, 2016 6:40 pm

Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Fri Aug 10, 2018 3:36 pm

larryswedroe wrote:
Fri Aug 10, 2018 2:48 pm
Firechief, have anything valuable to contribute?
I might ask you the same question wrt your unwavering faith in CAPE10. Some of us believe that CAPE10 is anything but "valuable," (it has proved as much a number of times) and may be doing a disservice to the more easily influenced in the audience. There are actually folks who conclude that "if stocks are only going to return 3% - 4%, then I'm just going to stick everything into CDs and work until I'm 75." It would likely be better if people who don't know the future would just admit that they don't know anything about the future. :beer
Last edited by FIREchief on Fri Aug 10, 2018 3:40 pm, edited 1 time in total.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Fri Aug 10, 2018 3:39 pm

Artsdoctor wrote:
Fri Aug 10, 2018 3:35 pm
willthrill81 wrote:
Fri Aug 10, 2018 3:27 pm
Artsdoctor wrote:
Fri Aug 10, 2018 3:24 pm
I don't think you'd call it "market timing" if your life circumstances (including financial circumstances) have changed considerably.
Certainly not. Changing your portfolio on the basis of your own personal situation is not market timing. But changing your portfolio on the basis of current or anticipated market conditions is bona fide market timing. Those who do it rarely call it that; 'dynamic asset allocation' has been a popular term for it in recent years.
Just don't forget that it goes both ways as well. You can scale back the equity risk as you meet your goals. However, if you're overestimated the return you need to accomplish your goals and start falling short, you might find yourself in the position where you'll need to actually increase your equity allocation and/or increase your savings rate significantly.
Absolutely. :beer
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
Artsdoctor
Posts: 3403
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Larry Swedroe: Valuations Too High?

Post by Artsdoctor » Fri Aug 10, 2018 3:56 pm

FIREchief wrote:
Fri Aug 10, 2018 3:36 pm
larryswedroe wrote:
Fri Aug 10, 2018 2:48 pm
Firechief, have anything valuable to contribute?
I might ask you the same question wrt your unwavering faith in CAPE10. Some of us believe that CAPE10 is anything but "valuable," (it has proved as much a number of times) and may be doing a disservice to the more easily influenced in the audience. There are actually folks who conclude that "if stocks are only going to return 3% - 4%, then I'm just going to stick everything into CDs and work until I'm 75." It would likely be better if people who don't know the future would just admit that they don't know anything about the future. :beer
I don't think you're implying that "ignorance is bliss," are you? There were posts a couple of years ago on this forum asking people what figure they used to calculate anticipated returns going forward. Many people, including me, used a 2% real return; as you can imagine, plenty of people disagreed and one person said just what you mentioned, more or less ("if I thought my portfolio were only going to return 2% real over the next decade, I'd just invest in real estate"). Clearly, nobody on Bogleheads did that, at least that's been reported.

The CAPE is just one of many metrics and no one is using it to project out 30 years. When people talk "projections," they're generally talking in terms of the next decade. Which ultimately means that investors might have to adjust their expectations periodically and, God forbid, act on that.

gmaynardkrebs
Posts: 810
Joined: Sun Feb 10, 2008 11:48 am

Re: Larry Swedroe: Valuations Too High?

Post by gmaynardkrebs » Fri Aug 10, 2018 4:02 pm

willthrill81 wrote:
Fri Aug 10, 2018 3:22 pm
... I don't use 7% real returns in my planning, and I don't hear many others here doing that either. We are told by many CAPE proponents to expect around 4% going forward for the next decade. That's about what I use for my own planning, so it's a non-issue.
As of June 30, 2018, the CAPE 10 predicts future real returns for the U.S. was just 3.2%. However, I assume you have some international exposure.
willthrill81 wrote:
Fri Aug 10, 2018 3:22 pm
If we get 0% real returns for 20+ years in the global markets, there are likely to be bigger problems to deal with than retirement.
Actually, it's quite easy to envision a world with 0% real returns that is quite pleasant. Example: Japan, during it's lost decades. Very much the same as it had been before, and as it is today.

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Fri Aug 10, 2018 4:26 pm

gmaynardkrebs wrote:
Fri Aug 10, 2018 4:02 pm
willthrill81 wrote:
Fri Aug 10, 2018 3:22 pm
If we get 0% real returns for 20+ years in the global markets, there are likely to be bigger problems to deal with than retirement.
Actually, it's quite easy to envision a world with 0% real returns that is quite pleasant. Example: Japan, during it's lost decades. Very much the same as it had been before, and as it is today.
Japan's citizens were far less reliant on the stock market (far more pensions) than are American citizens today, who seldom have a significant pension unless they work for a government entity. Besides that, I suspect that the U.S. stock market going nowhere for multiple decades would have a far more significant impact on both the U.S.'s and the world's economy than Japan did. But I hope that we'll never know.
“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

GAAP
Posts: 549
Joined: Fri Apr 08, 2016 12:41 pm

Re: Larry Swedroe: Valuations Too High?

Post by GAAP » Fri Aug 10, 2018 5:47 pm

FIREchief wrote:
Fri Aug 10, 2018 3:36 pm
It would likely be better if people who don't know the future would just admit that they don't know anything about the future.
I work every day in a field where 100s of millions of people depend on someone to predict the future sufficiently well for their phones to have service. We don't "know" the future, and we don't require perfect accuracy. Nevertheless, those phones have reliable service, and without wasting money on excess capacity. Like the financial markets, the overall result is a collection of individual random actions -- yet still understandable in the aggregate.

You don't have to "know the future" to take reasonable actions based upon likely outcomes. That is true for wireless carriers and nearly every business of any magnitude. It is also true for investing. It has NOTHING to do with "predicting the future".

CantPassAgain
Posts: 577
Joined: Fri Mar 15, 2013 8:49 pm

Re: Larry Swedroe: Valuations Too High?

Post by CantPassAgain » Fri Aug 10, 2018 6:08 pm

This all boils down to "tactical asset allocation" ie "market timing" despite the gobledygook double-talk from various posters. If that floats some peoples boat that's fine, but for God's sake quit denying it.

I've heard tell of so-called tactical allocation funds from days gone by. Funny they aren't around anymore, guess they didn't use the right model.

User avatar
FIREchief
Posts: 2434
Joined: Fri Aug 19, 2016 6:40 pm

Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Fri Aug 10, 2018 6:11 pm

GAAP wrote:
Fri Aug 10, 2018 5:47 pm
FIREchief wrote:
Fri Aug 10, 2018 3:36 pm
It would likely be better if people who don't know the future would just admit that they don't know anything about the future.
I work every day in a field where 100s of millions of people depend on someone to predict the future sufficiently well for their phones to have service. We don't "know" the future, and we don't require perfect accuracy. Nevertheless, those phones have reliable service, and without wasting money on excess capacity. Like the financial markets, the overall result is a collection of individual random actions -- yet still understandable in the aggregate.

Fortunately for you, there are a lot less variables in a cell phone system than a world system of interacting governments and economies.

Besides, I doubt you spend much time looking at how the cell phone system behaved in 2008 when trying to project future performance. OTOH, I'm guessing that it is highly likely you've spent a lot of time looking at current system performance and how that system has behaved over the past year. As should be obvious from my recent posts, the main source of my skepticism of those trying to predict "future returns" is their reliance upon CAPE10 (i.e. looking ten years in the rear view mirror). 12 month actual returns and near term forecasts have much more validity, but even those don't allow us to predict the future with any useable degree of accuracy.
You don't have to "know the future" to take reasonable actions based upon likely outcomes. That is true for wireless carriers and nearly every business of any magnitude. It is also true for investing. It has NOTHING to do with "predicting the future".
I agree with you. You don't have to "know the future" to take reasonable actions based upon likely outcomes. I think HomerJ has been saying the same thing throughout this thread. He feels that 3% - 4% is likely a worst case, long term outcome, and he is moving forward based upon that. But, he's not basing that on some award winning metric that changes all the time.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

happytrades
Posts: 89
Joined: Tue Mar 02, 2010 6:44 pm

Re: Larry Swedroe: Valuations Too High?

Post by happytrades » Fri Aug 10, 2018 6:17 pm

A recent WSJ article by Mark Hulburt is pertinent:

The Eight Best Predictors of the Long-Term Market

https://www.wsj.com/articles/the-8-best ... 1533521521

gmaynardkrebs
Posts: 810
Joined: Sun Feb 10, 2008 11:48 am

Re: Larry Swedroe: Valuations Too High?

Post by gmaynardkrebs » Fri Aug 10, 2018 6:21 pm

FIREchief wrote:
Fri Aug 10, 2018 6:11 pm
[Homer J] feels that 3% - 4% is likely a worst case, long term outcome, and he is moving forward based upon that. But, he's not basing that on some award winning metric that changes all the time.
I don't think Homer J said he views 3-4% as a worst case outcome. Moreover, I don't see how any rational investor could believe that.

User avatar
FIREchief
Posts: 2434
Joined: Fri Aug 19, 2016 6:40 pm

Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Fri Aug 10, 2018 6:32 pm

gmaynardkrebs wrote:
Fri Aug 10, 2018 6:21 pm
FIREchief wrote:
Fri Aug 10, 2018 6:11 pm
[Homer J] feels that 3% - 4% is likely a worst case, long term outcome, and he is moving forward based upon that. But, he's not basing that on some award winning metric that changes all the time.
I don't think Homer J said he views 3-4% as a worst case outcome. Moreover, I don't see how any rational investor could believe that.
HomerJ wrote:
Thu Aug 09, 2018 4:46 pm
I'm going to get what I get, and I'll adjust to that. I'll plan for 3%-4% (no matter what you predict), and if I get higher, I'll retire earlier or loosen the purse-strings, and if I get lower, I'll adjust by working longer, saving more, or reducing expenses in retirement (all reasonable options that you mentioned as well).
You are correct that he didn't use the exact words "worst case outcome." My bad. You may also wish to note my use of the qualifier "likely," if that helps to clarify my post for you.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Random Walker
Posts: 2870
Joined: Fri Feb 23, 2007 8:21 pm

Re: Larry Swedroe: Valuations Too High?

Post by Random Walker » Fri Aug 10, 2018 6:34 pm

willthrill81 wrote:
Fri Aug 10, 2018 3:27 pm
Artsdoctor wrote:
Fri Aug 10, 2018 3:24 pm
I don't think you'd call it "market timing" if your life circumstances (including financial circumstances) have changed considerably.
Certainly not. Changing your portfolio on the basis of your own personal situation is not market timing. But changing your portfolio on the basis of current or anticipated market conditions is bona fide market timing. Those who do it rarely call it that; 'dynamic asset allocation' has been a popular term for it in recent years.
But the point made well by ArtsDoctor is that personal situation and valuations are linked to each other. An investor’s personal situation certainly includes his financial circumstance, and that depends on past returns. In turn, past returns are at least partly due to changes in valuations. And those current valuations affect future expected returns. So I think it is fair to say that a periodic assessment of where one is, where one wants to get, in the presence of current valuations, is not market timing. Rather it is fine tuning the plan or customizing a glide path. Personally I view this as more customizing the glide path towards the retirement portfolio than market timing. For me, these are unidirectional changes towards a less aggressive portfolio.

Dave

GAAP
Posts: 549
Joined: Fri Apr 08, 2016 12:41 pm

Re: Larry Swedroe: Valuations Too High?

Post by GAAP » Fri Aug 10, 2018 6:36 pm

CantPassAgain wrote:
Fri Aug 10, 2018 6:08 pm
This all boils down to "tactical asset allocation" ie "market timing" despite the gobledygook double-talk from various posters. If that floats some peoples boat that's fine, but for God's sake quit denying it.
Only if you use it for asset allocation -- I don't.
FIREchief wrote:
Fri Aug 10, 2018 6:11 pm
Fortunately for you, there are a lot less variables in a cell phone system than a world system of interacting governments and economies.
There are far more variables than you realize -- but that isn't relevant. For both cell phones and investing, it's the individual actions of individual investors that drive the aggregate result. Each individual has a "rational reason" to do whatever actions they do. In some cases, they react to others (we call those "mass calling events" in the industry, "panic" in the markets). The other cases basically help define "normality". I don't need to do anything about the actions of any government beyond those that tax me -- and even less about interacting economies. I'm guessing that you don't model those interactions to make your decisions either.

We don't look back ten years to project growth for ten years. A 10-year projection is meaningless in this industry, a 5-year projection is a fantasy. But a 3-year projection can drive longer term initiatives that prepare for future needs -- building infrastructure takes a lot of time. We do look back farther than 10 months to project growth for 10 months. You have to look back farther than you are projecting to get anything approaching a reliable projection.
FIREchief wrote:
Fri Aug 10, 2018 6:11 pm
12 month actual returns and near term forecasts have much more validity, but even those don't allow us to predict the future with any useable degree of accuracy.
I'm curious, how do you define "useable degree of accuracy" keeping in mind that we're considering a 12-15 year period CAGR?

For me it's: close enough to use a PMT-based withdrawal equation with reasonable reliability or close enough to make informed decisions about strategies (such as Roth conversions) that cross multiple years. My first example will self-correct, the second one provides a way to compare alternatives using the same measuring stick.

User avatar
FIREchief
Posts: 2434
Joined: Fri Aug 19, 2016 6:40 pm

Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Fri Aug 10, 2018 6:48 pm

GAAP wrote:
Fri Aug 10, 2018 6:36 pm
FIREchief wrote:
Fri Aug 10, 2018 6:11 pm
12 month actual returns and near term forecasts have much more validity, but even those don't allow us to predict the future with any useable degree of accuracy.
I'm curious, how do you define "useable degree of accuracy" keeping in mind that we're considering a 12-15 year period CAGR?
Accurate enough to make it useable for investment decisions (i.e. actionable). These valuation based predictions have such wide dispersion, and their means have been so far from the actual results enough times that they are highly questionable inputs to any meaningful life planning.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

GAAP
Posts: 549
Joined: Fri Apr 08, 2016 12:41 pm

Re: Larry Swedroe: Valuations Too High?

Post by GAAP » Fri Aug 10, 2018 7:27 pm

FIREchief wrote:
Fri Aug 10, 2018 6:48 pm
GAAP wrote:
Fri Aug 10, 2018 6:36 pm
FIREchief wrote:
Fri Aug 10, 2018 6:11 pm
12 month actual returns and near term forecasts have much more validity, but even those don't allow us to predict the future with any useable degree of accuracy.
I'm curious, how do you define "useable degree of accuracy" keeping in mind that we're considering a 12-15 year period CAGR?
Accurate enough to make it useable for investment decisions (i.e. actionable). These valuation based predictions have such wide dispersion, and their means have been so far from the actual results enough times that they are highly questionable inputs to any meaningful life planning.
Ok, sounds like your needs are different than mine -- perhaps precision would be a better term for what you need. I don't really care about precision for what I'm doing, but I'm also not making investment decisions based upon CAPE10. I do make other decisions, utilizing CAPE10 as a simulation input.

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Fri Aug 10, 2018 7:32 pm

Random Walker wrote:
Fri Aug 10, 2018 6:34 pm
willthrill81 wrote:
Fri Aug 10, 2018 3:27 pm
Artsdoctor wrote:
Fri Aug 10, 2018 3:24 pm
I don't think you'd call it "market timing" if your life circumstances (including financial circumstances) have changed considerably.
Certainly not. Changing your portfolio on the basis of your own personal situation is not market timing. But changing your portfolio on the basis of current or anticipated market conditions is bona fide market timing. Those who do it rarely call it that; 'dynamic asset allocation' has been a popular term for it in recent years.
But the point made well by ArtsDoctor is that personal situation and valuations are linked to each other. An investor’s personal situation certainly includes his financial circumstance, and that depends on past returns. In turn, past returns are at least partly due to changes in valuations. And those current valuations affect future expected returns. So I think it is fair to say that a periodic assessment of where one is, where one wants to get, in the presence of current valuations, is not market timing. Rather it is fine tuning the plan or customizing a glide path. Personally I view this as more customizing the glide path towards the retirement portfolio than market timing. For me, these are unidirectional changes towards a less aggressive portfolio.

Dave
At best, valuations only have an indirect relationship with your current personal situation. Your prior returns, however, have a direct relationship with your current personal situation (i.e. they're partly how you got where you are). So why bother with valuations at all? What have you gained by examining them that you didn't know already by examining your returns?
“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

Post Reply