Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
JonnyB
Posts: 586
Joined: Sun Jan 19, 2020 5:28 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by JonnyB » Wed Jun 24, 2020 11:43 am

fsh71 wrote:
Wed Jun 24, 2020 11:07 am
Can central banks service their debt @ 5%? Sure, they can print, but that'll push rates even higher. We've seen this before..
The debt doesn't belong to the central bank. The debt belongs to the U.S. Treasury.

The Federal Reserve owns a lot of Treasury bonds. These are assets, not debts. The Fed refunds the interest it earns on those bonds to the Treasury.

Seasonal
Posts: 1642
Joined: Sun May 21, 2017 1:49 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Seasonal » Wed Jun 24, 2020 3:23 pm

JackoC wrote:
Wed Jun 24, 2020 8:14 am
Greg in Idaho wrote:
Wed Jun 24, 2020 7:37 am
I'm regularly amused at how easily the maxim "nobody knows nuthin'" gets brushed aside here...
Sometimes it's gets pushed back on because it's so over used it becomes illogical. If you had absolutely no idea of the statistical distribution of future returns on what basis could you possibly invest?
On what basis could you invest? Stocks are riskier than bonds, because bonds guarantee a specified return, subject to credit risk. The only reason rational investors would choose a riskier investment would be if they expect higher returns.

How much higher? There are no reliable ways of knowing. Pick 50/50 or something in the range of 75/25 to 25/75 depending on how good you feel.

How much should you save? Pick a popular rule of thumb and see how it goes. Another case for which there are no reliable guides.

Always passive
Posts: 513
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Always passive » Wed Jun 24, 2020 4:03 pm

Seasonal wrote:
Wed Jun 24, 2020 3:23 pm
JackoC wrote:
Wed Jun 24, 2020 8:14 am
Greg in Idaho wrote:
Wed Jun 24, 2020 7:37 am
I'm regularly amused at how easily the maxim "nobody knows nuthin'" gets brushed aside here...
Sometimes it's gets pushed back on because it's so over used it becomes illogical. If you had absolutely no idea of the statistical distribution of future returns on what basis could you possibly invest?
On what basis could you invest? Stocks are riskier than bonds, because bonds guarantee a specified return, subject to credit risk. The only reason rational investors would choose a riskier investment would be if they expect higher returns.

How much higher? There are no reliable ways of knowing. Pick 50/50 or something in the range of 75/25 to 25/75 depending on how good you feel.

How much should you save? Pick a popular rule of thumb and see how it goes. Another case for which there are no reliable guides.
If you are not retired or near retirement, there is little incentive in investing in bonds. Just look at the yield to maturity of either Treasurys or corporate bonds. The current miserable yields are a fact, and nothing can change that.
Thus, if retirement is your goal and you have 10 or more years in front of you, my view is that you should invest in stocks up to your risk tolerance. Why? Because you have no other choice. That is what I think Siegel is saying.

Leesbro63
Posts: 6547
Joined: Mon Nov 08, 2010 4:36 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Leesbro63 » Wed Jun 24, 2020 4:22 pm

Isn't the REAL issue not losing big in stocks...versus not getting enough interest in bonds? In other words, it might be an issue of (just) the return OF your money even if there's no (bond) return ON your money.

User avatar
Topic Author
mrspock
Posts: 1069
Joined: Tue Feb 13, 2018 2:49 am
Location: Vulcan

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by mrspock » Wed Jun 24, 2020 4:28 pm

Seasonal wrote:
Wed Jun 24, 2020 3:23 pm
JackoC wrote:
Wed Jun 24, 2020 8:14 am
Greg in Idaho wrote:
Wed Jun 24, 2020 7:37 am
I'm regularly amused at how easily the maxim "nobody knows nuthin'" gets brushed aside here...
Sometimes it's gets pushed back on because it's so over used it becomes illogical. If you had absolutely no idea of the statistical distribution of future returns on what basis could you possibly invest?
On what basis could you invest? Stocks are riskier than bonds, because bonds guarantee a specified return, subject to credit risk. The only reason rational investors would choose a riskier investment would be if they expect higher returns.

How much higher? There are no reliable ways of knowing. Pick 50/50 or something in the range of 75/25 to 25/75 depending on how good you feel.

How much should you save? Pick a popular rule of thumb and see how it goes. Another case for which there are no reliable guides.
It's not just subject to credit risk, it's subject to inflation risk as well, that's one of Jeremy's big points here. As bond holders we all just wave our hands and assume yields will rise in an inflationary environment to compensate us (still allowing us to keep up with inflation), he's say hey... that's not necessarily the case here. And it's looking more like governments options are going to be fairly limited going forward to a policy which looks more akin to the 50's and 60's, as raising interest rates will not be possible due to debt levels. Inflation might be the the tool they use to "pay for our monetary sins" as it were.

As bond holders we need to be aware of this outcome, prepare for it and accept it if it comes to pass. As such, I'm mitigating my (inflation) risk here by reducing my bond exposure (to 70/30 and 75/25 if I save more)) and saving more money for retirement. To be sure equities may struggle to keep up with inflation as well, but they have a better chance. The price I pay for this? Well I'll need to keep my wits about me in downturns with the higher equity risk, based on my experience in prior downturns, I find this far easier to do on the equity side than see my bond portfolio go into an inflation wood chipper with basically nothing I can do beyond a reduction in my lifestyle/spending.

Seasonal
Posts: 1642
Joined: Sun May 21, 2017 1:49 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Seasonal » Wed Jun 24, 2020 5:11 pm

mrspock wrote:
Wed Jun 24, 2020 4:28 pm
Seasonal wrote:
Wed Jun 24, 2020 3:23 pm
JackoC wrote:
Wed Jun 24, 2020 8:14 am
Greg in Idaho wrote:
Wed Jun 24, 2020 7:37 am
I'm regularly amused at how easily the maxim "nobody knows nuthin'" gets brushed aside here...
Sometimes it's gets pushed back on because it's so over used it becomes illogical. If you had absolutely no idea of the statistical distribution of future returns on what basis could you possibly invest?
On what basis could you invest? Stocks are riskier than bonds, because bonds guarantee a specified return, subject to credit risk. The only reason rational investors would choose a riskier investment would be if they expect higher returns.

How much higher? There are no reliable ways of knowing. Pick 50/50 or something in the range of 75/25 to 25/75 depending on how good you feel.

How much should you save? Pick a popular rule of thumb and see how it goes. Another case for which there are no reliable guides.
It's not just subject to credit risk, it's subject to inflation risk as well, that's one of Jeremy's big points here. As bond holders we all just wave our hands and assume yields will rise in an inflationary environment to compensate us (still allowing us to keep up with inflation), he's say hey... that's not necessarily the case here. And it's looking more like governments options are going to be fairly limited going forward to a policy which looks more akin to the 50's and 60's, as raising interest rates will not be possible due to debt levels. Inflation might be the the tool they use to "pay for our monetary sins" as it were.

As bond holders we need to be aware of this outcome, prepare for it and accept it if it comes to pass. As such, I'm mitigating my (inflation) risk here by reducing my bond exposure (to 70/30 and 75/25 if I save more)) and saving more money for retirement. To be sure equities may struggle to keep up with inflation as well, but they have a better chance. The price I pay for this? Well I'll need to keep my wits about me in downturns with the higher equity risk, based on my experience in prior downturns, I find this far easier to do on the equity side than see my bond portfolio go into an inflation wood chipper with basically nothing I can do beyond a reduction in my lifestyle/spending.
Nominal bonds are subject to inflation risk. TIPS are not, or at least not as much. Stocks are also subject to inflation risk, although the hope is that their revenues rise in accordance with inflation, which should mitigate the risk, or their returns will be high enough that inflation is not as much of a problem.

Anyway, the point is that there is a basis for investing with "absolutely no idea of the statistical distribution of future returns".

Major central banks are inflation hawks at heart, which is of course no guarantee about future behavior. Sufficient growth will also deal with debt ( g > r as the economists put it).

Always passive
Posts: 513
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Always passive » Thu Jun 25, 2020 1:35 am

For sure we do not know what will happen to stocks, but we do know what will happen to bonds. Today’s yields are the best forecast.
Now if inflation shows up, many have mentioned TIPS as an option, but TIPS are currently yielding negative real returns, meaning that in real terms those buying now have decided to lock in loses, meaning that no matter what happens to inflation, TIPS will deliver less.
My view is that for those, like me, who must hold bonds (I am retired), the only alternative, and certainly not an ideal one, is to hold short term bonds or a short duration CD ladder, for those that prefer to hold CDs. The yield curve is flat, thus no point in taking duration risk. This is the reason that I am questioning Total Bond, its duration at 6 years is too long.

Leesbro63
Posts: 6547
Joined: Mon Nov 08, 2010 4:36 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Leesbro63 » Thu Jun 25, 2020 4:37 am

mrspock wrote:
Wed Jun 24, 2020 4:28 pm
As bond holders we all just wave our hands and assume yields will rise in an inflationary environment to compensate us (still allowing us to keep up with inflation), he's say hey... that's not necessarily the case here. And it's looking more like governments options are going to be fairly limited going forward to a policy which looks more akin to the 50's and 60's, as raising interest rates will not be possible due to debt levels. Inflation might be the the tool they use to "pay for our monetary sins" as it were.
You say “raising interest rates may not be possible” by governments due to the fact that this will increase the costs of debt service. But government only controls short term rates. Doesn’t THE MARKET control all but short term rate? If inflation spikes, won’t bond buyers demand a higher yield (lower price) to compensate?

JackoC
Posts: 1354
Joined: Sun Aug 12, 2018 11:14 am

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by JackoC » Thu Jun 25, 2020 7:58 am

Seasonal wrote:
Wed Jun 24, 2020 3:23 pm
JackoC wrote:
Wed Jun 24, 2020 8:14 am
Greg in Idaho wrote:
Wed Jun 24, 2020 7:37 am
I'm regularly amused at how easily the maxim "nobody knows nuthin'" gets brushed aside here...
Sometimes it's gets pushed back on because it's so over used it becomes illogical. If you had absolutely no idea of the statistical distribution of future returns on what basis could you possibly invest?
On what basis could you invest? Stocks are riskier than bonds, because bonds guarantee a specified return, subject to credit risk. The only reason rational investors would choose a riskier investment would be if they expect higher returns.

How much higher? There are no reliable ways of knowing. Pick 50/50 or something in the range of 75/25 to 25/75 depending on how good you feel.

How much should you save? Pick a popular rule of thumb and see how it goes. Another case for which there are no reliable guides.
Again if people really had *no* idea of an expected return they would not invest. They will always default to something as an assumption. And IME the most common actual practical product of 'we can't predict the future so don't talk to me about expected return', is those people assume the expected return is the average* of past returns. Which is a pretty clearly optimistic assumption now. Again if even super perma bull Siegel now realizes that, it's probably worth noting.

Huge mental block with some people in the concept of *expected return*, just can't be overcome by some it seems. It is *not* a prediction of the future realized return. It's an estimate of the centroid of a wide range of future realized returns. Again, there is no way to rationally invest if you really think the 'over/under', the return as likely to be exceeded as not, could be 1% real** or 7% real. Eventually the discussion will always turn to 'I'm not predicting the future, but if you look at the past 100 yrs...' IOW that estimate becomes the past realized return. It has to be something. It really can't be 'I invest based on no estimate whatsoever of expected return'.

*geometric, etc
**this is not strictly inconsistent with 'stocks are riskier than bonds', because the expected 'riskless' bond return is below 0.

Seasonal
Posts: 1642
Joined: Sun May 21, 2017 1:49 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Seasonal » Thu Jun 25, 2020 8:46 am

JackoC wrote:
Thu Jun 25, 2020 7:58 am
Seasonal wrote:
Wed Jun 24, 2020 3:23 pm
JackoC wrote:
Wed Jun 24, 2020 8:14 am
Greg in Idaho wrote:
Wed Jun 24, 2020 7:37 am
I'm regularly amused at how easily the maxim "nobody knows nuthin'" gets brushed aside here...
Sometimes it's gets pushed back on because it's so over used it becomes illogical. If you had absolutely no idea of the statistical distribution of future returns on what basis could you possibly invest?
On what basis could you invest? Stocks are riskier than bonds, because bonds guarantee a specified return, subject to credit risk. The only reason rational investors would choose a riskier investment would be if they expect higher returns.

How much higher? There are no reliable ways of knowing. Pick 50/50 or something in the range of 75/25 to 25/75 depending on how good you feel.

How much should you save? Pick a popular rule of thumb and see how it goes. Another case for which there are no reliable guides.
Again if people really had *no* idea of an expected return they would not invest. They will always default to something as an assumption. And IME the most common actual practical product of 'we can't predict the future so don't talk to me about expected return', is those people assume the expected return is the average* of past returns. Which is a pretty clearly optimistic assumption now. Again if even super perma bull Siegel now realizes that, it's probably worth noting.

Huge mental block with some people in the concept of *expected return*, just can't be overcome by some it seems. It is *not* a prediction of the future realized return. It's an estimate of the centroid of a wide range of future realized returns. Again, there is no way to rationally invest if you really think the 'over/under', the return as likely to be exceeded as not, could be 1% real** or 7% real. Eventually the discussion will always turn to 'I'm not predicting the future, but if you look at the past 100 yrs...' IOW that estimate becomes the past realized return. It has to be something. It really can't be 'I invest based on no estimate whatsoever of expected return'.

*geometric, etc
**this is not strictly inconsistent with 'stocks are riskier than bonds', because the expected 'riskless' bond return is below 0.
"Again if people really had *no* idea of an expected return they would not invest." What would they do? The choices are current consumption or setting aside the money for the future (aka investing). Those who expect to need money in the future and won't have another source (salary, Social Security, a pension, etc.) would seem to have to set aside something for the future.

I gave you a basis for investing without a statistical distribution or any notion of future numbers. I don't disagree with your discussion of expected return (a widely misunderstood term), but my post had nothing to do with the quantification of future returns. It rests on the notion that people wouldn't invest in riskier assets without the thought of higher return than less risky assets.

sabtastic
Posts: 164
Joined: Tue Dec 03, 2013 1:00 am

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by sabtastic » Thu Jun 25, 2020 9:00 am

Thanks for posting this. Siegel sounds like Peter Schiff.

I think we all need to take a deep breath and realize why we are holding bonds. Do you hold them as speculation or do you hold them as ballast? For my portfolio they exist to preserve wealth and I don't expect to keep up with inflation. If investors are spooked stocks are going to tank, and many will be seeking shelter in bonds just like our last few downturns. Think about how you felt in Dec 2018 or March 2020 for a while before you sell bonds and buy more equity.

If he spoke the truth, Siegel and all of us are nervous because we allow banks like the fed to manipulate interest rates in a futile attempt at a planned economy. We should not be placing our faith in men as no amount of planning can predict the future.

JackoC
Posts: 1354
Joined: Sun Aug 12, 2018 11:14 am

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by JackoC » Thu Jun 25, 2020 9:06 am

Seasonal wrote:
Thu Jun 25, 2020 8:46 am
JackoC wrote:
Thu Jun 25, 2020 7:58 am
Seasonal wrote:
Wed Jun 24, 2020 3:23 pm
JackoC wrote:
Wed Jun 24, 2020 8:14 am
Greg in Idaho wrote:
Wed Jun 24, 2020 7:37 am
I'm regularly amused at how easily the maxim "nobody knows nuthin'" gets brushed aside here...
Sometimes it's gets pushed back on because it's so over used it becomes illogical. If you had absolutely no idea of the statistical distribution of future returns on what basis could you possibly invest?
On what basis could you invest? Stocks are riskier than bonds, because bonds guarantee a specified return, subject to credit risk.
Again if people really had *no* idea of an expected return they would not invest.
"Again if people really had *no* idea of an expected return they would not invest." What would they do? The choices are current consumption or setting aside the money for the future (aka investing). Those who expect to need money in the future and won't have another source (salary, Social Security, a pension, etc.) would seem to have to set aside something for the future.

I gave you a basis for investing without a statistical distribution or any notion of future numbers. I don't disagree with your discussion of expected return (a widely misunderstood term), but my post had nothing to do with the quantification of future returns. It rests on the notion that people wouldn't invest in riskier assets without the thought of higher return than less risky assets.
I might have qualified it by saying 'how would they choose between lower risk and higher risk assets'. But to some degree actual average people's propensity to invest actually does seem to depend on both riskless and risky expected returns. Not saying that's your approach, but one obvious implicit reason, occasionally it slips out explicitly, people who view themselves a 'guardians' of this site react badly to statements about low expected returns is they think it will scare potential new BH's from investing at all. And there's probably some truth to that. It doesn't make sense necessarily, and plenty of people who post here seem to realize that lower expected return could at least as easily imply more saving, not less. But it's not ridiculous to assume that would be some retail investors' reaction. 'That's all I can expect? I won't even bother'.

But certainly the expected premium to take the risk of stocks is a rational thing to factor into buying them v. sticking with less risky assets. Taken that way, I think at worst my statement glosses over a very few people (perhaps yourself, or perhaps you were just making the argument rhetorically) who really have absolutely no expected equity risk premium in mind when selecting an allocation to stocks. Very rare IMHO. Whereas there are loads of people saying (whether understanding the concept of E[r] or not) 'expected return schmexpected return, nobody knows nuthin' but it's pretty apparent they are actually assuming the expected return is the average past realized return, since 'we at least know history'. They discuss the past distributions of returns endlessly, like what %-tile portfolio failure at what % SWR according to *past returns*. Why would they do that if not at some level assuming a stationary distribution of returns, the past one, not conditional on starting valuation?

Always passive
Posts: 513
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Always passive » Thu Jun 25, 2020 11:46 am

sabtastic wrote:
Thu Jun 25, 2020 9:00 am
Thanks for posting this. Siegel sounds like Peter Schiff.

I think we all need to take a deep breath and realize why we are holding bonds. Do you hold them as speculation or do you hold them as ballast? For my portfolio they exist to preserve wealth and I don't expect to keep up with inflation. If investors are spooked stocks are going to tank, and many will be seeking shelter in bonds just like our last few downturns. Think about how you felt in Dec 2018 or March 2020 for a while before you sell bonds and buy more equity.

If he spoke the truth, Siegel and all of us are nervous because we allow banks like the fed to manipulate interest rates in a futile attempt at a planned economy. We should not be placing our faith in men as no amount of planning can predict the future.
I do not know if you have read my previous comments, so let me say that depending on what type of bonds you hold, the statement you make, and I quote “For my portfolio they exist to preserve wealth” may be producing the opposite of what you wish. If you hold any intermediate term bonds, say duration between 5-7 years, any increase in interest rates, which will eventually happen and rather quickly, will cause your bonds to drop in value of about 5 to 7% per 1% of increase in rates. You pay very little price by holding short term bonds instead.
Obviously if you hold them for a long time, longer than duration, no matter what happens in between you will get about today’s YTM.

Seasonal
Posts: 1642
Joined: Sun May 21, 2017 1:49 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Seasonal » Thu Jun 25, 2020 2:35 pm

JackoC wrote:
Thu Jun 25, 2020 9:06 am
I might have qualified it by saying 'how would they choose between lower risk and higher risk assets'. But to some degree actual average people's propensity to invest actually does seem to depend on both riskless and risky expected returns. Not saying that's your approach, but one obvious implicit reason, occasionally it slips out explicitly, people who view themselves a 'guardians' of this site react badly to statements about low expected returns is they think it will scare potential new BH's from investing at all. And there's probably some truth to that. It doesn't make sense necessarily, and plenty of people who post here seem to realize that lower expected return could at least as easily imply more saving, not less. But it's not ridiculous to assume that would be some retail investors' reaction. 'That's all I can expect? I won't even bother'.

But certainly the expected premium to take the risk of stocks is a rational thing to factor into buying them v. sticking with less risky assets. Taken that way, I think at worst my statement glosses over a very few people (perhaps yourself, or perhaps you were just making the argument rhetorically) who really have absolutely no expected equity risk premium in mind when selecting an allocation to stocks. Very rare IMHO. Whereas there are loads of people saying (whether understanding the concept of E[r] or not) 'expected return schmexpected return, nobody knows nuthin' but it's pretty apparent they are actually assuming the expected return is the average past realized return, since 'we at least know history'. They discuss the past distributions of returns endlessly, like what %-tile portfolio failure at what % SWR according to *past returns*. Why would they do that if not at some level assuming a stationary distribution of returns, the past one, not conditional on starting valuation?
I believe predictions of returns based on valuation metrics do better than those based on history or anything else (there are various studies that support this view), but that neither do very well. If forced to predict, I'd use e/p (or 1/CAPE) for equities, but attach very wide error bands around the results. For example, I'd guess real equity returns to be around 4% plus or minus 8 percentage points.

Personally, I have a low enough withdrawal rate that none of this really matters. I do actually believe that it's difficult to do much better than to stay within 75/25 and 25/75 depending on whatever you want to depend on, and that most well known rules of thumb for savings, withdrawal, etc. are good enough, especially if you monitor and adjust.

Grt2bOutdoors
Posts: 22543
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Grt2bOutdoors » Thu Jun 25, 2020 6:03 pm

YRT70 wrote:
Mon Jun 22, 2020 8:28 pm
Grt2bOutdoors wrote:
Mon Jun 22, 2020 10:55 am
YRT70 wrote:
Mon Jun 22, 2020 8:11 am
Grt2bOutdoors wrote:
Mon Jun 22, 2020 5:49 am
whodidntante wrote:
Sun Jun 21, 2020 10:45 pm


I don't really care where European working stiff money went, because there probably isn't that much of it to move the needle. But I do wonder where European institutional money went, and when I'm going to see some trader wearing a DAX 20,000 hat and a mask. Germany has no baseball, so I guess it'll be a Fedora. Or maybe a button.

Are they bidding up the American stock market?
European money is in US Treasuries - they are chasing yield too!
Interesting. Do you have a reference for that?
No, but if you were an astute investor where would you be? This isn’t Zimbabwe you know.
I'm in the Netherlands and active on several forums. From what I can tell the majority of posters do not or hardly invest in US treasuries because of currency risk. Deposits are getting more popular than local bonds at the moment.

Personally I only hold a small portion of US treasuries and EU bonds. Most of my safe assets are in deposits that yield about 1%.
For clarity, I was referring to institutional money from Europe and elsewhere (pensions, hedge funds, super wealthy family offices) investing in US Treasuries. Not retail money, in any event, institutional investors are not likely to be found posting on forums.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

YRT70
Posts: 522
Joined: Sat Apr 27, 2019 8:51 am

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by YRT70 » Fri Jun 26, 2020 12:11 am

Grt2bOutdoors wrote:
Thu Jun 25, 2020 6:03 pm
YRT70 wrote:
Mon Jun 22, 2020 8:28 pm
Grt2bOutdoors wrote:
Mon Jun 22, 2020 10:55 am
YRT70 wrote:
Mon Jun 22, 2020 8:11 am
Grt2bOutdoors wrote:
Mon Jun 22, 2020 5:49 am


European money is in US Treasuries - they are chasing yield too!
Interesting. Do you have a reference for that?
No, but if you were an astute investor where would you be? This isn’t Zimbabwe you know.
I'm in the Netherlands and active on several forums. From what I can tell the majority of posters do not or hardly invest in US treasuries because of currency risk. Deposits are getting more popular than local bonds at the moment.

Personally I only hold a small portion of US treasuries and EU bonds. Most of my safe assets are in deposits that yield about 1%.
For clarity, I was referring to institutional money from Europe and elsewhere (pensions, hedge funds, super wealthy family offices) investing in US Treasuries. Not retail money, in any event, institutional investors are not likely to be found posting on forums.
Good to know. And do you have a reference for this?

JackoC
Posts: 1354
Joined: Sun Aug 12, 2018 11:14 am

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by JackoC » Fri Jun 26, 2020 7:59 am

Seasonal wrote:
Thu Jun 25, 2020 2:35 pm
JackoC wrote:
Thu Jun 25, 2020 9:06 am
But certainly the expected premium to take the risk of stocks is a rational thing to factor into buying them v. sticking with less risky assets. Taken that way, I think at worst my statement glosses over a very few people (perhaps yourself, or perhaps you were just making the argument rhetorically) who really have absolutely no expected equity risk premium in mind when selecting an allocation to stocks. Very rare IMHO. Whereas there are loads of people saying (whether understanding the concept of E[r] or not) 'expected return schmexpected return, nobody knows nuthin' but it's pretty apparent they are actually assuming the expected return is the average past realized return, since 'we at least know history'. They discuss the past distributions of returns endlessly, like what %-tile portfolio failure at what % SWR according to *past returns*. Why would they do that if not at some level assuming a stationary distribution of returns, the past one, not conditional on starting valuation?
1. I believe predictions of returns based on valuation metrics do better than those based on history or anything else (there are various studies that support this view), but that neither do very well. If forced to predict, I'd use e/p (or 1/CAPE) for equities, but attach very wide error bands around the results. For example, I'd guess real equity returns to be around 4% plus or minus 8 percentage points.

2. Personally, I have a low enough withdrawal rate that none of this really matters. I do actually believe that it's difficult to do much better than to stay within 75/25 and 25/75 depending on whatever you want to depend on, and that most well known rules of thumb for savings, withdrawal, etc. are good enough, especially if you monitor and adjust.
1. But this gets back to confusion about the meaning of expected return. The *expected return* does not have a plausible band of uncertainty as wide as +/- 8% points pa . Whereas the *future realized return* has an arguably wider band depending on what confidence interval you have in mind. I agree with the first statement a reasonable estimate for the *expected return* for stocks is 1/CAPE which is mid 3's% for the S&P. There is some uncertainty in that estimate based on a) how accurate the assumptions in the mathematical derivation (anyone not familiar can look up, it's a mathematical derivation not just a 'theory') that says real expected return ~ 1/PE, including which 'PE' to use and b) that the portfolio might be internationally diversified and foreign earnings yields tend to be higher than US. But I also use a round 4%, real pre tax for stocks, for planning purposes. Whereas I don't think there's a plausible argument that the *expected return* might really be -4% or 12% real. Back to the beginning of the point, nobody is planning based on -4% and hardly anybody (even on a optimistically skewed, IMO, forum like this) 12% real pa compounded for many years or decades. They are either planning based on a 'most likely' number (aka, very roughly, the expected return), or a (pseudo) sophisticated model spitting out probabilities, but the probabilities of much higher/lower realized returns will be a lot different if the centroid of that model is the historical 7% than the now more realistic 4%. The 3%-point difference in expected return is a big difference, and that's not changed by the fact that nobody knows the 100%-tile max/min future return.

2. People's willingness to accept that today's high asset valuations/low expected returns compared to historical, 100% obvious for bonds, pretty obvious for stocks, is partly a function of whether it rains on their parade in terms of a plan that requires the past distribution of returns to have a high probability succeeding, v being far enough ahead of the game that less optimistic assumptions don't matter much. That's only natural, and pretty apparent in many of these discussions.

YRT70
Posts: 522
Joined: Sat Apr 27, 2019 8:51 am

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by YRT70 » Fri Jun 26, 2020 9:24 pm

Grt2bOutdoors wrote:
Thu Jun 25, 2020 6:03 pm
YRT70 wrote:
Mon Jun 22, 2020 8:28 pm
Grt2bOutdoors wrote:
Mon Jun 22, 2020 10:55 am
YRT70 wrote:
Mon Jun 22, 2020 8:11 am
Grt2bOutdoors wrote:
Mon Jun 22, 2020 5:49 am


European money is in US Treasuries - they are chasing yield too!
Interesting. Do you have a reference for that?
No, but if you were an astute investor where would you be? This isn’t Zimbabwe you know.
I'm in the Netherlands and active on several forums. From what I can tell the majority of posters do not or hardly invest in US treasuries because of currency risk. Deposits are getting more popular than local bonds at the moment.

Personally I only hold a small portion of US treasuries and EU bonds. Most of my safe assets are in deposits that yield about 1%.
For clarity, I was referring to institutional money from Europe and elsewhere (pensions, hedge funds, super wealthy family offices) investing in US Treasuries. Not retail money, in any event, institutional investors are not likely to be found posting on forums.
I was interested in this so I decided to look up some numbers. I looked up the largest pension fund in the Netherlands (ABP).

In the end of 2016 they had 21.32 billion Euro in US Treasury. In the end of 2019 it had declined to 19.50 billion Euro. This makes up less than 2% of their portfolio. They have much more money is invested in other bonds.

Obviously these numbers are far from conclusive but I remain skeptical of the idea that large European institutions are chasing yield in American treasuries. Mainly because the currency risks involved can easily outweigh the slightly higher yield.

sabtastic
Posts: 164
Joined: Tue Dec 03, 2013 1:00 am

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by sabtastic » Fri Jun 26, 2020 11:39 pm

Always passive wrote:
Thu Jun 25, 2020 11:46 am
I do not know if you have read my previous comments, so let me say that depending on what type of bonds you hold, the statement you make, and I quote “For my portfolio they exist to preserve wealth” may be producing the opposite of what you wish. If you hold any intermediate term bonds, say duration between 5-7 years, any increase in interest rates, which will eventually happen and rather quickly, will cause your bonds to drop in value of about 5 to 7% per 1% of increase in rates. You pay very little price by holding short term bonds instead.
Obviously if you hold them for a long time, longer than duration, no matter what happens in between you will get about today’s YTM.
If your argument is duration I can't participate as there is no telling if interest rates will go up or down. That decision is unfortunately at the whim of a small minority of experts in a private institution. Place your bets accordingly.

The point I intended to make was to discourage anyone from moving from bonds to equities in order to "decrease risk". It is entirely possible for US stocks to lose 50% or more in the next year or even next week. It obviously depends on your investment horizons but I assume most would associate "risky" with 50% loss vs a 5-7% loss.

I would stay the course.

Always passive
Posts: 513
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Always passive » Sat Jun 27, 2020 2:32 am

sabtastic wrote:
Fri Jun 26, 2020 11:39 pm
Always passive wrote:
Thu Jun 25, 2020 11:46 am
I do not know if you have read my previous comments, so let me say that depending on what type of bonds you hold, the statement you make, and I quote “For my portfolio they exist to preserve wealth” may be producing the opposite of what you wish. If you hold any intermediate term bonds, say duration between 5-7 years, any increase in interest rates, which will eventually happen and rather quickly, will cause your bonds to drop in value of about 5 to 7% per 1% of increase in rates. You pay very little price by holding short term bonds instead.
Obviously if you hold them for a long time, longer than duration, no matter what happens in between you will get about today’s YTM.
If your argument is duration I can't participate as there is no telling if interest rates will go up or down. That decision is unfortunately at the whim of a small minority of experts in a private institution. Place your bets accordingly.

The point I intended to make was to discourage anyone from moving from bonds to equities in order to "decrease risk". It is entirely possible for US stocks to lose 50% or more in the next year or even next week. It obviously depends on your investment horizons but I assume most would associate "risky" with 50% loss vs a 5-7% loss.

I would stay the course.
I agree fully on the second point, buying stocks is like going to the casino.
On the duration issue, I will again try to explain. Let us say that you own the Total Bond market, a darling of Bogleheads. Its duration is 6 years and currently its yield to maturity is somewhere between 1.5 and 1.8 % depending on which day you look at it. Now, that yield to maturity is extremely close to what you will get if you hold this fund/ETF for its duration, no matter what happens to interest rates in the interim. Therefore, and given that the yield curve is so flat nowadays, it is my view that the best option is to hold short term bonds. Why? If interest rates go up, which eventually will occur, you will be able to capture the benefit of the higher yields sooner.
Please note that this can happen without the Fed intervention if inflation shows up. The Fed only controls short term yields, anything longer is in the hands of the market.

Chicken Little
Posts: 294
Joined: Fri Feb 22, 2019 5:03 am

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Chicken Little » Sat Jun 27, 2020 8:19 am

JonnyB wrote:
Wed Jun 24, 2020 11:43 am
fsh71 wrote:
Wed Jun 24, 2020 11:07 am
Can central banks service their debt @ 5%? Sure, they can print, but that'll push rates even higher. We've seen this before..
The debt doesn't belong to the central bank. The debt belongs to the U.S. Treasury.

The Federal Reserve owns a lot of Treasury bonds. These are assets, not debts. The Fed refunds the interest it earns on those bonds to the Treasury.
This is my favorite play on here...the fed correction without answering the question.

Ordinary people with real, constructive, jobs often mistakenly use Fed in place of government.

I assume what was meant was can municipal, state, federal government service their debt in inflationary environment with rising rates.

I haven’t watched podcast yet, but the idea that there’s a choice to let inflation (and rates) move into a Goldilocks zone where it will sit there happily while debt is devalued and the economy is relatively strong?

Beensabu
Posts: 306
Joined: Sun Aug 14, 2016 3:22 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Beensabu » Sat Jun 27, 2020 12:16 pm

duricka wrote: I have one question: if bonds are such a bad investment and everyone know we will have inflation, why are rates so low?
Because the Fed is buying a lot of treasury bonds.
Leesbro63 wrote: Does it matter if the Fed raises or not? The Fed only controls short rates. The MARKET controls long term rates. If inflation goes to 5-6%, bond prices will drop so that rates go up.
The Fed is part of the market. A large enough part of the market that it can actually move it. It doesn't care how low the interest rates are, because it refunds the interest annually back to the treasury anyway.

Quarterly breakdown of U.S. Treasury outstanding by bond holder type is available for download here:

https://www.sifma.org/resources/researc ... s-holders/

Look at 2019 Q4 vs 2020 Q1. "Monetary authority" picked up ~92% of that increase in debt.

I wonder what 2020 Q2 will show.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."

Jeff Albertson
Posts: 783
Joined: Sat Apr 06, 2013 7:11 pm
Location: Springfield

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Jeff Albertson » Mon Jun 29, 2020 8:50 am

Barry Ritholtz discusses his interview with Siegel, including a mention of the bogleheads.

'The Re-Education of Jeremy Siegel'
https://ritholtz.com/2020/06/education- ... um=twitter
Can an esteemed professor of finance ever escape his reputation as a “perma-bull?”

That was the question running through my mind during a long conversation with Jeremy Siegel, professor of finance at the Wharton School. We discussed stock valuations, bonds, government rescues, inflation — even gold. It was our first in depth conversation in 5 years and probably the 10th such conversation since the mid-2000s.

jocdoc
Posts: 89
Joined: Wed Oct 30, 2013 5:29 am

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by jocdoc » Tue Jun 30, 2020 6:20 am

he also recommends According to Barry Ritholz's summary 3% gold. Is that really enough to significantly change returns in a portfolio to make a differnce?

AlohaJoe
Posts: 5388
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by AlohaJoe » Tue Jun 30, 2020 7:39 am

mrspock wrote:
Mon Jun 22, 2020 9:31 pm
It's also not as simple as raising interest rates, they need to raise them enough, quickly enough (long enough?) that you don't lose capital as a bond holder in real terms. Go examine interest rates in the 50s [1] vs. inflation [2]. It started out with 10% inflation and interest rates barely budged: As a bond holder you lost capital.
I don't quite follow what you're trying to say here. Interest rates did that in the 1950s because the Federal Reserve didn't set interest rates at that time, the Department of Treasury did and it adopted an explicit position of forcing loses on bondholders to pay for WW2. In 1946, for instance, after war-time price controls were relaxed, inflation surged. The Philadelphia Fed wrote a letter urging higher interest rates in order to counter inflation; they were told to be quiet and Treasury was in charge.

I'm not really sure any lessons about anything can be drawn because the entire system was quite different compared to today. Rates barely budged because there was no policy of trying to curb inflation by raising rates in 1950.
Treasury Secretary John Snyder would simply announce the terms of a Treasury offering and assume that the New York [ed: Federal Reserve] open-market desk would intervene to buy whatever securities remained unsold
The entire situation led to an open revolt among the Federal Reserve who were tired of being second fiddle to Treasury. President Truman summoned the entire Federal Open Market Committee to the White House in January 1951 for a dressing down. Truman's press released said they had agreed to pipe down. The Fed chairman responded by leaking stories to the New York Times and Washington Post that they hadn't agreed any such thing with the President.

Over the following weeks open warfare between the Treasury and the Federal Reserve erupted. Peace talks were held in March 1951. A new Chairman of the Fed was appointed and it was assumed he would take Treasury's side. He didn't; instead he cemented the independence of the Federal Reserve from the Treasury. Years later the new Chairman happened to cross paths with Truman while walking down the street and Truman simply said "Traitor" and continued on.

While the Federal Reserve won eventual full independence there was a period of transition (among other things the Fed agreed to support a ceiling of 2.5% on outstanding long-term Treasury bonds and not to change the discount rate until 1952).
Last edited by AlohaJoe on Tue Jun 30, 2020 7:52 am, edited 1 time in total.

Leesbro63
Posts: 6547
Joined: Mon Nov 08, 2010 4:36 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Leesbro63 » Tue Jun 30, 2020 7:48 am

Just saw Siegel on CNBC. He’s still bullish, basically because of the “easy money” money supply thing. He said the political risk is mainly about the Senate. He sees “4-5-6 percent” inflation in 2021-22, because unemployment will prevent the Fed from tamping it down. And he says that a few years of that will lower the deficit to GDP ratio. He’s optimistic that we’ll be at Dow 30,000 at some point not too far away.

bi0hazard
Posts: 101
Joined: Mon Mar 14, 2016 10:36 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by bi0hazard » Tue Jun 30, 2020 10:49 pm

I don’t know 99.99% about finance/investing. However, I am pretty sure talking heads aren’t that much off from my stats. Who cares what this dude thinks? It has little bearing on future reality.

Always passive
Posts: 513
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Always passive » Tue Jun 30, 2020 11:10 pm

bi0hazard wrote:
Tue Jun 30, 2020 10:49 pm
I don’t know 99.99% about finance/investing. However, I am pretty sure talking heads aren’t that much off from my stats. Who cares what this dude thinks? It has little bearing on future reality.
What you are referring is the B&H strategy. What will be, will be. History has shown that in the long run you are ok.

garlandwhizzer
Posts: 2849
Joined: Fri Aug 06, 2010 3:42 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by garlandwhizzer » Wed Jul 01, 2020 12:52 pm

Jeff Ablertson wrote:

'The Re-Education of Jeremy Siegel'
https://ritholtz.com/2020/06/education- ... um=twitter
I really enjoyed this article on Mr. Siegel written by Mr. Ritholtz. Thanks for posting JA. I found Mr. Siegel's advice to switch from 60/40 to 75/25 an interesting departure from traditional tine honored wisdom. He's been bullish on stocks almost constantly (except 3/2000 to his credit) but his rather deep pessimism about bonds (negative real returns in the future) is new. There are rational reasons for the portfolio switch IMO if you're in the accumulation phase and need significant long term positive real returns. In much of the history of last 40 years in the USA investors have been lucky with strong tailwinds at their backs driving returns of both stocks and bonds. We have gotten high levels of both safety and return at the same time with 60/40 for 4 decades. Going forward from where we are now, similar risk adjusted returns for 60/40 seem unlikely IMO. Hope I'm wrong.

Garland Whizzer

aristotelian
Posts: 7579
Joined: Wed Jan 11, 2017 8:05 pm

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by aristotelian » Wed Jul 01, 2020 1:00 pm

garlandwhizzer wrote:
Wed Jul 01, 2020 12:52 pm
Jeff Ablertson wrote:

'The Re-Education of Jeremy Siegel'
https://ritholtz.com/2020/06/education- ... um=twitter
I really enjoyed this article on Mr. Siegel written by Mr. Ritholtz. Thanks for posting JA. I found Mr. Siegel's advice to switch from 60/40 to 75/25 an interesting departure from traditional tine honored wisdom. He's been bullish on stocks almost constantly (except 3/2000 to his credit) but his rather deep pessimism about bonds (negative real returns in the future) is new. There are rational reasons for the portfolio switch IMO if you're in the accumulation phase and need significant long term positive real returns. In much of the history of last 40 years in the USA investors have been lucky with strong tailwinds at their backs driving returns of both stocks and bonds. We have gotten high levels of both safety and return at the same time with 60/40 for 4 decades. Going forward from where we are now, similar risk adjusted returns for 60/40 seem unlikely IMO. Hope I'm wrong.

Garland Whizzer
Seems like he is in effect trying to time the bond market. It is not so much that he is especially bullish on stocks as bearish on bonds and nowhere else for money to go. I agree, there are good reasons to think the bull market in bonds can't go on forever. On the other hand, those reasons should be priced in to the market already.

User avatar
Kevin M
Posts: 11528
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Kevin M » Thu Jul 02, 2020 5:18 pm

aristotelian wrote:
Wed Jul 01, 2020 1:00 pm
I agree, there are good reasons to think the bull market in bonds can't go on forever. On the other hand, those reasons should be priced in to the market already.
Of course they're priced in. That's why the yield on the 30-year tips is negative (-0.18%). It's hard to have much of a bull market starting with a negative real yield on the longest-term bond available. Of course it could go even more negative, but betting on that, with the intention of selling for a capital gain, would be trying to time the bond market.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

Always passive
Posts: 513
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Always passive » Thu Jul 02, 2020 11:57 pm

Kevin M wrote:
Thu Jul 02, 2020 5:18 pm
aristotelian wrote:
Wed Jul 01, 2020 1:00 pm
I agree, there are good reasons to think the bull market in bonds can't go on forever. On the other hand, those reasons should be priced in to the market already.
Of course they're priced in. That's why the yield on the 30-year tips is negative (-0.18%). It's hard to have much of a bull market starting with a negative real yield on the longest-term bond available. Of course it could go even more negative, but betting on that, with the intention of selling for a capital gain, would be trying to time the bond market.

Kevin
I also took notice of the issue you mentioned above, and because of that I have concluded that it makes no sense to hold anything but short term bonds. The yield difference between a 1-3 year bond fund and a longer term one is minimal and the risk goes up substantial as the duration increases.

Post Reply