Nobody knows nothing and AA

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ChinchillaWhiplash
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Nobody knows nothing and AA

Post by ChinchillaWhiplash » Tue May 14, 2019 8:23 am

Since no one can predict future returns are there any good strategies for AA where you adapt it to what the market is doing at any given time? Surely there is a way to market time to get better results than sticking to a set AA, right? Anybody actually able to out perform the standard rebalancing methods of a set AA with standard rebalance bands of 5-10%? Thinking of strategies like over tilting to specific asset class so your rebalance gives you more buying power in a downturn. Just thinking out loud, but would like to hear other people's thoughts on this.

azanon
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Re: Nobody knows nothing and AA

Post by azanon » Tue May 14, 2019 8:27 am

ChinchillaWhiplash wrote:
Tue May 14, 2019 8:23 am
Since no one can predict future returns are there any good strategies for AA where you adapt it to what the market is doing at any given time? Surely there is a way to market time to get better results than sticking to a set AA, right? Anybody actually able to out perform the standard rebalancing methods of a set AA with standard rebalance bands of 5-10%? Thinking of strategies like over tilting to specific asset class so your rebalance gives you more buying power in a downturn. Just thinking out loud, but would like to hear other people's thoughts on this.
I think the comment/elaboration in your post, and the title topic are conflicting. If you really believe nobody knows nothing and are looking for an AA that would respect that belief, then I'd lean more towards something like a Risk Parity strategy (unlevered), where all of the included asset classes have an expected return higher than cash, but their proportions are adjusted to where the risk exposure of the portfolio is approximately the same for all economic conditions.

Conversely, if you overweight an asset class that only performs well in a certain economic condition, then you're implying that you do know something.
Last edited by azanon on Tue May 14, 2019 8:28 am, edited 1 time in total.

RadAudit
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Re: Nobody knows nothing and AA

Post by RadAudit » Tue May 14, 2019 8:28 am

ChinchillaWhiplash wrote:
Tue May 14, 2019 8:23 am
Since no one can predict future returns are there any good strategies for AA where you adapt it to what the market is doing at any given time?
Possibly. Haven't found one yet.

I gave up on market timing several decades ago. Now I'm in to finding / staying with an AA that gives me a reasonable chance of keeping enough money for as long as I need it. That's challenging enough for me.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

Topic Author
ChinchillaWhiplash
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Re: Nobody knows nothing and AA

Post by ChinchillaWhiplash » Tue May 14, 2019 11:09 am

azanon wrote:
Tue May 14, 2019 8:27 am
ChinchillaWhiplash wrote:
Tue May 14, 2019 8:23 am
Since no one can predict future returns are there any good strategies for AA where you adapt it to what the market is doing at any given time? Surely there is a way to market time to get better results than sticking to a set AA, right? Anybody actually able to out perform the standard rebalancing methods of a set AA with standard rebalance bands of 5-10%? Thinking of strategies like over tilting to specific asset class so your rebalance gives you more buying power in a downturn. Just thinking out loud, but would like to hear other people's thoughts on this.
I think the comment/elaboration in your post, and the title topic are conflicting. If you really believe nobody knows nothing and are looking for an AA that would respect that belief, then I'd lean more towards something like a Risk Parity strategy (unlevered), where all of the included asset classes have an expected return higher than cash, but their proportions are adjusted to where the risk exposure of the portfolio is approximately the same for all economic conditions.

Conversely, if you overweight an asset class that only performs well in a certain economic condition, then you're implying that you do know something.
I do think we can have a good idea of what will happen in the short term. Probably within the next few months at least. Beyond that would probably just be speculation. We do have a good idea of where bonds will go for the next year based on interest rates though. Seems like some results can be improved with this limited knowledge.

magicrat
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Re: Nobody knows nothing and AA

Post by magicrat » Tue May 14, 2019 11:29 am

ChinchillaWhiplash wrote:
Tue May 14, 2019 11:09 am
azanon wrote:
Tue May 14, 2019 8:27 am
ChinchillaWhiplash wrote:
Tue May 14, 2019 8:23 am
Since no one can predict future returns are there any good strategies for AA where you adapt it to what the market is doing at any given time? Surely there is a way to market time to get better results than sticking to a set AA, right? Anybody actually able to out perform the standard rebalancing methods of a set AA with standard rebalance bands of 5-10%? Thinking of strategies like over tilting to specific asset class so your rebalance gives you more buying power in a downturn. Just thinking out loud, but would like to hear other people's thoughts on this.
I think the comment/elaboration in your post, and the title topic are conflicting. If you really believe nobody knows nothing and are looking for an AA that would respect that belief, then I'd lean more towards something like a Risk Parity strategy (unlevered), where all of the included asset classes have an expected return higher than cash, but their proportions are adjusted to where the risk exposure of the portfolio is approximately the same for all economic conditions.

Conversely, if you overweight an asset class that only performs well in a certain economic condition, then you're implying that you do know something.
I do think we can have a good idea of what will happen in the short term. Probably within the next few months at least. Beyond that would probably just be speculation. We do have a good idea of where bonds will go for the next year based on interest rates though. Seems like some results can be improved with this limited knowledge.
So what are your forecasts for stocks over the next few months and bonds over the next year? Be specific please.

rkhusky
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Re: Nobody knows nothing and AA

Post by rkhusky » Tue May 14, 2019 11:38 am

ChinchillaWhiplash wrote:
Tue May 14, 2019 11:09 am
I do think we can have a good idea of what will happen in the short term. Probably within the next few months at least. Beyond that would probably just be speculation. We do have a good idea of where bonds will go for the next year based on interest rates though. Seems like some results can be improved with this limited knowledge.
So, you are able to predict geopolitical events? Tell me whether the US and China will agree to a trade and tariff agreement or not in the next few months, or whether things will escalate.

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ChinchillaWhiplash
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Re: Nobody knows nothing and AA

Post by ChinchillaWhiplash » Tue May 14, 2019 11:56 am

magicrat wrote:
Tue May 14, 2019 11:29 am
ChinchillaWhiplash wrote:
Tue May 14, 2019 11:09 am
azanon wrote:
Tue May 14, 2019 8:27 am
ChinchillaWhiplash wrote:
Tue May 14, 2019 8:23 am
Since no one can predict future returns are there any good strategies for AA where you adapt it to what the market is doing at any given time? Surely there is a way to market time to get better results than sticking to a set AA, right? Anybody actually able to out perform the standard rebalancing methods of a set AA with standard rebalance bands of 5-10%? Thinking of strategies like over tilting to specific asset class so your rebalance gives you more buying power in a downturn. Just thinking out loud, but would like to hear other people's thoughts on this.
I think the comment/elaboration in your post, and the title topic are conflicting. If you really believe nobody knows nothing and are looking for an AA that would respect that belief, then I'd lean more towards something like a Risk Parity strategy (unlevered), where all of the included asset classes have an expected return higher than cash, but their proportions are adjusted to where the risk exposure of the portfolio is approximately the same for all economic conditions.

Conversely, if you overweight an asset class that only performs well in a certain economic condition, then you're implying that you do know something.
I do think we can have a good idea of what will happen in the short term. Probably within the next few months at least. Beyond that would probably just be speculation. We do have a good idea of where bonds will go for the next year based on interest rates though. Seems like some results can be improved with this limited knowledge.
So what are your forecasts for stocks over the next few months and bonds over the next year? Be specific please.
Federal Reserve itself has predicted no interest rate hikes for 2019. They might change their minds, but we will probably see very little change in the rate.

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ChinchillaWhiplash
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Re: Nobody knows nothing and AA

Post by ChinchillaWhiplash » Tue May 14, 2019 11:58 am

rkhusky wrote:
Tue May 14, 2019 11:38 am
ChinchillaWhiplash wrote:
Tue May 14, 2019 11:09 am
I do think we can have a good idea of what will happen in the short term. Probably within the next few months at least. Beyond that would probably just be speculation. We do have a good idea of where bonds will go for the next year based on interest rates though. Seems like some results can be improved with this limited knowledge.
So, you are able to predict geopolitical events? Tell me whether the US and China will agree to a trade and tariff agreement or not in the next few months, or whether things will escalate.
We do not know if or when an agreement will be made. We do know that the markets will be on edge until an agreement has been made. Probably a lot of volatility in equities until this is resolved. Some sectors and specific businesses will be less effected by tariffs than others.

rkhusky
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Re: Nobody knows nothing and AA

Post by rkhusky » Tue May 14, 2019 12:03 pm

ChinchillaWhiplash wrote:
Tue May 14, 2019 11:58 am
rkhusky wrote:
Tue May 14, 2019 11:38 am
ChinchillaWhiplash wrote:
Tue May 14, 2019 11:09 am
I do think we can have a good idea of what will happen in the short term. Probably within the next few months at least. Beyond that would probably just be speculation. We do have a good idea of where bonds will go for the next year based on interest rates though. Seems like some results can be improved with this limited knowledge.
So, you are able to predict geopolitical events? Tell me whether the US and China will agree to a trade and tariff agreement or not in the next few months, or whether things will escalate.
We do not know if or when an agreement will be made. We do know that the markets will be on edge until an agreement has been made. Probably a lot of volatility in equities until this is resolved. Some sectors and specific businesses will be less effected by tariffs than others.
I suspect the market will react quite differently to an agreement being reached, maintaining the status quo, and significant increase in tensions.

Beehave
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Re: Nobody knows nothing and AA

Post by Beehave » Tue May 14, 2019 12:14 pm

There is a strong relationship between "nobody knows nothing" and AA. It's the same as for most forays into the unknown future where decisions have to be made.

You define (even if somewhat blurry) a target for success and possible paths to it (not necessarily in that order. You look at probabilities of the the various paths leading to success (together with risks and costs). You pick the best one. This is usually (and with stocks almost certainly unless trading on insider info) loaded with "nobody-knows-nothingness." It is probabilistic and subject to vast disagreement and error. But it's the best you can do.

Now that you've made your (fraught with peril) strategic decision, it's time for implementation. This should be done in a disciplined, unemotiional, algorithmic, deterministic, robotic, follow-the-rules fashion.

SO - - setting the AA is based on doing the best you can probabilistic-type (inductive logic) thinking, whereas maintaining the AA, once decided on, should be done according to deterministic-type (deductive logic) thinking.

What' critical to realize is that NONE of this process is illogical. It's just that different logics apply to the different portions of the process.

azanon
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Re: Nobody knows nothing and AA

Post by azanon » Tue May 14, 2019 12:52 pm

ChinchillaWhiplash wrote:
Tue May 14, 2019 11:09 am
azanon wrote:
Tue May 14, 2019 8:27 am
ChinchillaWhiplash wrote:
Tue May 14, 2019 8:23 am
Since no one can predict future returns are there any good strategies for AA where you adapt it to what the market is doing at any given time? Surely there is a way to market time to get better results than sticking to a set AA, right? Anybody actually able to out perform the standard rebalancing methods of a set AA with standard rebalance bands of 5-10%? Thinking of strategies like over tilting to specific asset class so your rebalance gives you more buying power in a downturn. Just thinking out loud, but would like to hear other people's thoughts on this.
I think the comment/elaboration in your post, and the title topic are conflicting. If you really believe nobody knows nothing and are looking for an AA that would respect that belief, then I'd lean more towards something like a Risk Parity strategy (unlevered), where all of the included asset classes have an expected return higher than cash, but their proportions are adjusted to where the risk exposure of the portfolio is approximately the same for all economic conditions.

Conversely, if you overweight an asset class that only performs well in a certain economic condition, then you're implying that you do know something.
I do think we can have a good idea of what will happen in the short term. Probably within the next few months at least. Beyond that would probably just be speculation. We do have a good idea of where bonds will go for the next year based on interest rates though. Seems like some results can be improved with this limited knowledge.
All due respect, I don't agree with any of that. I would say the opposite - that the only kind of timing that has been show to have at least some degree of dependability is longer-term. CAPE/Shiller PE as an example used for 7+ years planning.

We might know what is forecasted for bonds rates, but that has already been priced in, so there is actually nothing useful about that. It's been years now where I've seen countless people talk about rates only having one direction to go (up), and yet LT bonds have continued to outperform short-term.

But I'd prefer to move back to your post title and restate my point. If you believe "nobody knows nothing", then I think that's an argument for not timing at all, and just having a neutral portfolio. If you're advocating any sort of timing, you need a thread title revision.

MichCPA
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Re: Nobody knows nothing and AA

Post by MichCPA » Tue May 14, 2019 1:17 pm

This post implies that AA is an attempt to predict some future event or market condition and time it accordingly.

The real goal is to level load risk. A run up in stocks increases exposure to equity market risk. A relative increase in bonds compared to the total portfolio increases credit risk, interest rate risk, etc.

AA isn't a market timing mechanism, it is a risk management tool. All securities have risk profiles and those need to be balanced.

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gilgamesh
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Re: Nobody knows nothing and AA

Post by gilgamesh » Tue May 14, 2019 3:46 pm

OP, this is one way to think about it...it’s not only being able to know something, but it’s to know something others don’t. So think about it...if you can think of something, would the investing populace also know the same info, then it’s already priced in. You have to have info others don’t have. I don’t know of any legal way of doing that.

This is an easy way of figuring out that it’s impossible to do what you are contemplating...

I also studied “active asset allocation’ along the way, and figured it’s a futile endeavor.

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Re: Nobody knows nothing and AA

Post by Fallible » Tue May 14, 2019 3:48 pm

ChinchillaWhiplash wrote:
Tue May 14, 2019 8:23 am
Since no one can predict future returns are there any good strategies for AA where you adapt it to what the market is doing at any given time? ...
You'e asking for help to "somehow" adapt an AA to what the market is doing at any given time while acknowledging you can't know what the market will be doing at any given time (and that, btw, does include the short term, when humans are especially prone to see patterns that don't exist).

What you're really asking for is a way to time the market successfully and consistently enough to produce returns big enough to justify the increased risk you'll take.

So, have you identified the increased risk and do you have the ability, willingness, and need to take it?
"John Bogle has changed a basic industry in the optimal direction. Of very few can this be said." ~Paul A. Samuelson

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tennisplyr
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Re: Nobody knows nothing and AA

Post by tennisplyr » Wed May 15, 2019 7:10 am

One can try lots of things that seem to make sense at the moment but who knows. It's not how you start, it's how you finish.
Those who move forward with a happy spirit will find that things always work out.

BJJ_GUY
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Re: Nobody knows nothing and AA

Post by BJJ_GUY » Wed May 15, 2019 10:05 am

ChinchillaWhiplash wrote:
Tue May 14, 2019 11:09 am

I do think we can have a good idea of what will happen in the short term. Probably within the next few months at least. Beyond that would probably just be speculation. We do have a good idea of where bonds will go for the next year based on interest rates though. Seems like some results can be improved with this limited knowledge.
The exact opposite of everything here would have been a strong comment.

asif408
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Re: Nobody knows nothing and AA

Post by asif408 » Wed May 15, 2019 10:31 am

gilgamesh wrote:
Tue May 14, 2019 3:46 pm
OP, this is one way to think about it...it’s not only being able to know something, but it’s to know something others don’t. So think about it...if you can think of something, would the investing populace also know the same info, then it’s already priced in. You have to have info others don’t have. I don’t know of any legal way of doing that.

This is an easy way of figuring out that it’s impossible to do what you are contemplating...

I also studied “active asset allocation’ along the way, and figured it’s a futile endeavor.
There are other considerations besides just having knowledge others don't. You also have to have the ability to implement the strategy and the patience to stick with it, especially if it underperforms for a few years. The longer your time horizon and the more impatient your competition, the better chance you have. So I surely wouldn't try any short term strategy (say less than 2-3 years) where the competition is fierce. I think if the OP is willing to stick with a strategy for a decade or two, he might stand a better chance, because most of the big investment managers (e.g., pension plans, hedge funds, etc.) won't be around if they underperform for a few years and be replace by someone with a different strategy.

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gilgamesh
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Re: Nobody knows nothing and AA

Post by gilgamesh » Wed May 15, 2019 12:17 pm

asif408 wrote:
Wed May 15, 2019 10:31 am
gilgamesh wrote:
Tue May 14, 2019 3:46 pm
OP, this is one way to think about it...it’s not only being able to know something, but it’s to know something others don’t. So think about it...if you can think of something, would the investing populace also know the same info, then it’s already priced in. You have to have info others don’t have. I don’t know of any legal way of doing that.

This is an easy way of figuring out that it’s impossible to do what you are contemplating...

I also studied “active asset allocation’ along the way, and figured it’s a futile endeavor.
There are other considerations besides just having knowledge others don't. You also have to have the ability to implement the strategy and the patience to stick with it, especially if it underperforms for a few years. The longer your time horizon and the more impatient your competition, the better chance you have. So I surely wouldn't try any short term strategy (say less than 2-3 years) where the competition is fierce. I think if the OP is willing to stick with a strategy for a decade or two, he might stand a better chance, because most of the big investment managers (e.g., pension plans, hedge funds, etc.) won't be around if they underperform for a few years and be replace by someone with a different strategy.
It was just a preliminary framework or an angle to start thinking about. It wasn’t meant to be a comprehensive answer.

bizkitgto
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Re: Nobody knows nothing and AA

Post by bizkitgto » Wed May 15, 2019 1:50 pm

Ray Dalio's "All Weather" portfolio comes to mind, although I think it's really hard to execute for DIY investor due to the use of futures and hedging strategies.
Keep it simple: 20% BND, 50% VTI and 30% VXUS

bikechuck
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Re: Nobody knows nothing and AA

Post by bikechuck » Wed May 15, 2019 1:52 pm

Inertia is your friend

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