What happens after the risk shows up?

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PicassoSparks
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What happens after the risk shows up?

Post by PicassoSparks »

The recent pain of US value investors is well-documented. Despite good reason to think that value would outperform the market, this has been a particularly difficult decade. Difficult, but well-within the range of possibilities that value investors should have been ready to accept (it happens from time to time). Looking back over history, value investors are not alone. Every strategy has had decades that have underperformed T-Bills. This is the risk that we are being compensated for taking and as a poster here is fond of saying "Sometimes the risk shows up."

I'm interested in talking about what happens when the risk shows up.

So let's say you've had a bad decade—yes, even your prudent 3 fund portfolio can have had a bad decade. If I understand the theory, your expected return going forward shouldn't be significantly altered by past results. While we expect the risk premium to continue, we don't expect it to suddenly jump up and make up for lost time (if we did, then market timing would be possible and the core tenet of Bogleheads is that you can't time the market).

So your expected return going forward is the same as before but you are compounding a much smaller amount then when you first made your plans (losses compound just the same as gains). What do you do about this? How do you adjust your plans? What changes? You did not make your expected returns. Do you save harder? Do you hope that a reversion to the mean will give you might higher than average returns soon?

In broad strokes, stay the course, sure. But because of a rocky road, you have less gas in the tank that you had hoped to have at this point. So you can't really just stay the course. What do you do? This question applies in the opposite direction but less urgently—what happens if you have had a particularly good period and have more resources than expected?

I'm interested in how Bogleheads bridge the gap between planning for expected returns and living with actual returns.
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Re: What happens after the risk shows up?

Post by jebmke »

PicassoSparks wrote: Tue Sep 29, 2020 8:51 am I'm interested in how Bogleheads bridge the gap between planning for expected returns and living with actual returns.
You shouldn't plan simply for expected returns. You need to plan with a range of returns that probably includes the scenarios you are describing.
When you discover that you are riding a dead horse, the best strategy is to dismount.
dbr
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Re: What happens after the risk shows up?

Post by dbr »

^^^ Yes. You plan for a range of possible returns. One component of the plan might be that if risk shows up and you fall behind the mean expectation of the plan, then you work longer, spend less, and save more. Alternatively you prepare to adapt to whatever the lower level of outcome implies. All of the opposite applies if you are running ahead of the mean expectation.

However, the game ain't over until . . . You can't count on regression to the mean saving you from a bad decade; you still have to wait and see what happens next. Also, running ahead of the plan does not mean that regression to the mean will not raise its ugly head. Anyway no one knows what the mean is that one will regress to.

In the end it is all a matter of successive approximations as time goes on, the picture arriving at crystal clear at the end.
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TomatoTomahto
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Re: What happens after the risk shows up?

Post by TomatoTomahto »

PicassoSparks wrote: Tue Sep 29, 2020 8:51 am So your expected return going forward is the same as before but you are compounding a much smaller amount then when you first made your plans (losses compound just the same as gains). What do you do about this? How do you adjust your plans? What changes? You did not make your expected returns. Do you save harder? Do you hope that a reversion to the mean will give you might higher than average?
Save harder and/or longer, reduce expenses, etc.

Reversion to the mean, whatever that means exactly, seems to me to be some kind of gamblers fallacy. In any case, you could die waiting for it.

I don’t think any of this matters to people who have not calculated their retirements too finely.
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vitaflo
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Re: What happens after the risk shows up?

Post by vitaflo »

For me it's focusing on retiring early. For that I've focused on my sweat equity a lot more than my corporate equity. I also try to spend less (and thus save more). I make sure that when I can retire I can live comfortably but can still cut costs if push comes to shove.

If the risk shows up and it means I can't retire early, I just keep working. The bonus is that if the risk *doesn't* show up, I can get out of the rat race early. In essence, always have some contingency plan and that usually means padding things, both your account size, spending level and years of productive work available.

Just don't do this too much, people here like to go overboard planning for the apocalypse. But a little bit of safety around these things can help one sleep at night regardless of what happens.
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Re: What happens after the risk shows up?

Post by flaccidsteele »

PicassoSparks wrote: Tue Sep 29, 2020 8:51 am What do you do about this? How do you adjust your plans? What changes? You did not make your expected returns. Do you save harder? Do you hope that a reversion to the mean will give you might higher than average returns soon?
What do I do? Nothing.

I invest regularly and buy more during downturns. There’s nothing to do 🤷‍♂️

Don’t understand the “saving harder” option. What would that do? Bigger adult security blanket?

The US market always recovers. Always. It’s never different this time. Investing is a game of rinse and repeat
PicassoSparks wrote: Tue Sep 29, 2020 8:51 am In broad strokes, stay the course, sure. But because of a rocky road, you have less gas in the tank that you had hoped to have at this point. So you can't really just stay the course. What do you do?
Why can’t I stay the course?

Simple. Buy more during bears and stay the course

The investments are still there. Whether we go through a bull or bear market, they remain unliquidated

What else is there to do? 🤷‍♂️
PicassoSparks wrote: Tue Sep 29, 2020 8:51 am This question applies in the opposite direction but less urgently—what happens if you have had a particularly good period and have more resources than expected?
What happens? My investments and cash holdings go up.

I started investing in the 1990s and investing has been a simple straightforward game

No need to overthink it
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Kenkat
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Re: What happens after the risk shows up?

Post by Kenkat »

Back in 1999, in my mid-30s, I decided to really start tracking to a long term plan. I’d always plowed money into my 401k, rolled it over if I switched jobs, and saved some taxable dollars, but this was a long term plan going out many years.

I set up an Excel spreadsheet and plotted out a baseline value by year, using 8.5% (5% real) as a target return. Fairly aggressive. The goal was to get to “my number” by around age 60 or so.

I have a moderately slanted portfolio - slanted to value, small and includes REIT, International, Emerging Markets - all the usual players in a non-market weight portfolio. I use a benchmark to track my returns - I used a LifeStrategy fund in the past but have switched to Target Retirement 2030 since that closely matches my overall stock/bond/international mix.

The slant really helped my returns early on - from say 2000-2006. In 2006-2007, I was actually ahead of my targets at that point. Then 2008-2009 happened. Returns as compared to my benchmark have been more mixed since. This year has been particularly bad for a slanted portfolio as value, small and international have all hurt returns. I have never trailed my benchmark this much in any year before. Oh well. But the net result is I am trailing a bit overall.

However, a lot of things changed as well since 1999. I started a job in 2004 with a pension and have 17 years in now. Due to some personal family circumstances, it makes sense for me to take social security at 62. Those two things together completely change what “my number” needs to be.

Still, if I project out from this point, I am maybe 3 years behind my original plan. Saving more at this point isn’t going to help much as my portfolio dwarfs any new investments. But I can work about 3 more years and in theory make up the lost ground.

So, when the risk shows up, if you catch it early on, save more. If it is later in the game, you have to have more time - maybe work a little longer. But also realize that many things will change along the way.

I always think of the scene in Apollo 13 where Houston tells the Apollo module that they need to do an engine burn to course correct back to Earth, They have minimal to no power, so the guidance computer is down. So they line up Earth in the window and manually fire the engine. They are all over the place, so it’s not a straight, simple line but ultimately they are firing the engines in the general direction of the goal of Earth. Good enough is the final conclusion.

That’s they way I thing long term investing is - it’s a bumpy, wild and indirect ride, but as long as you are making progress to the target, you will be ok.
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HomerJ
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Re: What happens after the risk shows up?

Post by HomerJ »

PicassoSparks wrote: Tue Sep 29, 2020 8:51 am I'm interested in how Bogleheads bridge the gap between planning for expected returns and living with actual returns.
I completely ignore expected returns.

I plan around low returns (like 1%-3% real over the long run).

And if I'm pleasantly surprised (which I have been), I adjust. And if I was disappointed, I would have adjusted the other direction as well (starting with a low return in your planning means a downward adjustment isn't as painful)

"Expected" returns from the experts have been pretty worthless as predictions for many years.

In truth, when younger, I didn't worry about planning much at all... Just saved a lot, lived below my means, and increased my savings every time I got a raise.

It's hard to plan when younger because you don't what returns you're going to get, you don't know what your salary is going to be over the next 20-30 years, and you don't know what your retirement expenses will be either (so it's hard to even know what you are shooting for).

I just go with a three-fund portfolio, pretty conservative, haven't bothered to tilt to anything, and saved a lot.

Around 45-50-55, the numbers start to come together, and you can make a respectable plan at that point.

I'd still recommend just using conservative returns, and then you can ignore "expected" returns.

Some other poster: "hey, did you hear? So-so expert just said expected returns are lower for the next 10 years!"

Me: "Oh, good thing I was already planning around low returns so I don't have to care".

You get what you get and you don't throw a fit. Adjusting to what you actually get is how real life works.
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Re: What happens after the risk shows up?

Post by asif408 »

PicassoSparks wrote: Tue Sep 29, 2020 8:51 am I'm interested in talking about what happens when the risk shows up.

So let's say you've had a bad decade—yes, even your prudent 3 fund portfolio can have had a bad decade. If I understand the theory, your expected return going forward shouldn't be significantly altered by past results. While we expect the risk premium to continue, we don't expect it to suddenly jump up and make up for lost time (if we did, then market timing would be possible and the core tenet of Bogleheads is that you can't time the market).

So your expected return going forward is the same as before but you are compounding a much smaller amount then when you first made your plans (losses compound just the same as gains). What do you do about this? How do you adjust your plans? What changes? You did not make your expected returns. Do you save harder? Do you hope that a reversion to the mean will give you might higher than average returns soon?
If expected returns don't vary, I assume you never rebalance? Because there would be no need to rebalance if expected returns were consistent. As far as I can tell from history, expected returns go up when an asset has trailing poor performance, and expected returns go down when an asset has excellent trailing performance. That mainly applies to stocks, for bonds expected returns are very highly correlated to starting yields.

For instance, expecting double digit returns from a 60/40 US stock/bond portfolio was reasonable in 1990 when bond yield were 9% and stock valuations were reasonable. In 2000 stock valuations were not reasonable, though bonds yielded 6% so saved you a bit, you ended up with about a 2% returns with a 60/40 portfolio in the 2000s, and from 2000- present a 100% US stock portfolio and a 60/40 portfolio had almost exactly the same return.

In 2010, stock valuations were modest and bond yields were around 2.5%, so expectations were higher than 2000 but lower than 1990. That is how it played out, returns were not as good in the 2010s as the 1990s, but much better than the 2000s. That leads us to today, with high stock valuations and bonds yielding 0.7% for most intermediate term funds. Expectations for future returns of a US 60/40 portfolio should be lower than at any point in the last 3 decades. As far as I can tell, the most comparable time period in the past to the present is the late 1960s. But even then bonds yielded 4%. So if performance going forward exceeds expectations, it will primarily be due to the stock portion; 40% of the portfolio will be in bonds yielding less than 1%. In 2000 it was bonds doing the heavy lifting; in the next decade you'll have to depend on stocks.

That doesn't mean the expected return will show up when you think or at all, and it doesn't mean you can time it in any short term manner. But, for example, it would be reasonable to expect a higher return from value stocks in the future vs. growth stocks, and in foreign stocks vs US stocks.
PicassoSparks wrote: Tue Sep 29, 2020 8:51 amIn broad strokes, stay the course, sure. But because of a rocky road, you have less gas in the tank that you had hoped to have at this point. So you can't really just stay the course. What do you do? This question applies in the opposite direction but less urgently—what happens if you have had a particularly good period and have more resources than expected?
Sell more of what has done well and buy more of what has done poorly. Right now, that means buying more US small cap, foreign developed and emerging markets, and tilting to value in those areas. On the bond side, you could tilt to junk bonds and emerging market debt, which both yield 4-5% more than US Treasuries. Of course, everyone will tell you these are riskier investments and point out how poorly they've done the last decade or so. But that's precisely the point.

If you've had a good run and "won the game", so to speak, you could simply hold some combination cash, TIPS, & I-bonds, with a small does of stock for the remainder of your life. Nothing to worry about at that point, IMO, just try to keep up with inflation and enjoy your life.
PicassoSparks wrote: Tue Sep 29, 2020 8:51 amI'm interested in how Bogleheads bridge the gap between planning for expected returns and living with actual returns.
Simple, you don't get bogged down in details and adjust along the way. There are many more people that don't invest in the stock market and live paycheck to paycheck that those with 6 figure incomes that max out retirement accounts, like the majority here. If you're not willing to make any allocation adjustments along the way you have to take your lumps as they come.
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Re: What happens after the risk shows up?

Post by KlangFool »

OP,

My AA is 60/40. I plan for a nominal 5% return. If the actual return is much less than that, I will adapt and adjust. I do not care about the expected return.


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Re: What happens after the risk shows up?

Post by Eagle33 »

Kenkat wrote: Tue Sep 29, 2020 9:54 am I always think of the scene in Apollo 13 where Houston tells the Apollo module that they need to do an engine burn to course correct back to Earth, They have minimal to no power, so the guidance computer is down. So they line up Earth in the window and manually fire the engine. They are all over the place, so it’s not a straight, simple line but ultimately they are firing the engines in the general direction of the goal of Earth. Good enough is the final conclusion.

That’s they way I thing long term investing is - it’s a bumpy, wild and indirect ride, but as long as you are making progress to the target, you will be ok.
Excellent analogy!

Control what you can control - saving rate, spending rate, & AA. The market will return what it will return no matter what you do. If you control your spending you won't need as much in retirement because you invested what you didn't spend and your life style is not as extravagant if you had not saved as much. Focusing on maintaining AA and de-focusing off the account balance will let you sleep better at night during the journey and retirement.
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Re: What happens after the risk shows up?

Post by tibbitts »

flaccidsteele wrote: Tue Sep 29, 2020 9:32 am The US market always recovers. Always. It’s never different this time. Investing is a game of rinse and repeat
At some point it will be different; of course nobody knows when.
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Re: What happens after the risk shows up?

Post by corp_sharecropper »

60/40 (aka 90% equity risk) has the cards stacked against it at the moment. At least the people who are 100% equities seem more in tune with the fact that they're taking risk. I get the impression that people with 60% equities (let's not kid around, these are almost surely 80% US, 20% foreign, on average) which amounts to about 90% of portfolio risk, plus 60% nominal bonds (doubt there's a measurable amount of TIPS in a 3-funder portfolio) amounting to the remaining 10% of risk are in for a rude awakening when those 40 year backtests are no longer relevent. I wouldn't say that when the risk shows up it's too late, but it's definitely better to be diversified before the risk shows itself, beyond a heavily overweight domestic vs foreign equity basket that is itself heavily overweight towards a purely nominal us bond basket.

I predict, yes just a prediction, there's going to be a lot of tears and regret over all the current dogma & popular opinion regarding REITs (global), sovereign debt (global), DM/EM equities, gold (definitely under-owned, will be lots of arguments of course), commodities (if gold didn't trigger some, this will for sure), long volatility/hedges (I'm digging myself a grave now), TIPS, and... wait for it... Leverage! Basically, I predict it turns out that risk parity (us stocks + nominal bonds is not risk parity btw, maybe a perversely dumbed down version), the paradigm that is most true to the BH ethos of "no one knows nothing", yet so maligned here (b/c of recency bias, even among the most senior members), will prove to be the most robust investment strategy with the best risk adjusted returns and absolute returns for anyone but a few lucky lost souls who got lucky with an individual stock pick.

ETA: I'm happy to be wrong as I'm forced, through the unnecessary Kafkaesque complexity and limitations of our retirement system here in the US, to essentially be overweight equities and nominal bonds, I have no choice in the matter for a large portion of my own savings.
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Re: What happens after the risk shows up?

Post by JoMoney »

Lots of people manage to survive without an "investment portfolio" covering all their expenses, if yours turns out to not fully cover everything you expected/hoped-for, you'll have learn to do what those people do.

You can build a portfolio using less risky assets, liability matched on guaranteed fixed income... if you're not willing/able to bear the consequences of not having money when you need it, you probably shouldn't be taking the risk.
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Re: What happens after the risk shows up?

Post by TheDDC »

corp_sharecropper wrote: Tue Sep 29, 2020 9:42 pm 60/40 (aka 90% equity risk) has the cards stacked against it at the moment. At least the people who are 100% equities seem more in tune with the fact that they're taking risk. I get the impression that people with 60% equities (let's not kid around, these are almost surely 80% US, 20% foreign, on average) which amounts to about 90% of portfolio risk, plus 60% nominal bonds (doubt there's a measurable amount of TIPS in a 3-funder portfolio) amounting to the remaining 10% of risk are in for a rude awakening when those 40 year backtests are no longer relevent. I wouldn't say that when the risk shows up it's too late, but it's definitely better to be diversified before the risk shows itself, beyond a heavily overweight domestic vs foreign equity basket that is itself heavily overweight towards a purely nominal us bond basket.
I put all new money into VTSAX. Nobody knows nothin. I plan for 10+% pre-tax returns. The gloom and doom of some here is ridiculous advice for new investors.

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Re: What happens after the risk shows up?

Post by Uncorrelated »

My portfolio is chosen based on the expected distribution of outcomes. If stocks go up, great! That's one of the possible outcomes. If stocks go down or we enter a hyperinflation period, that's still okay, it's simply one of the possible outcomes, the possibility of such an outcome was already considered when I choose my portfolio. If I want to capture a positive risk premium, then I must also accept the possibility of low returns. Stay the course, or change the course if your risk aversion or view of future market expectations changed.

One area where future market expectations can change is in factors. Currently, I invest in value because there is overwhelming evidence regarding it's existence. But what if value underperforms for many years? At some point, I'll be forced to change course because value no longer meets my standards of proof.
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Re: What happens after the risk shows up?

Post by z3r0c00l »

Kenkat wrote: Tue Sep 29, 2020 9:54 am
I always think of the scene in Apollo 13 where Houston tells the Apollo module that they need to do an engine burn to course correct back to Earth, They have minimal to no power, so the guidance computer is down. So they line up Earth in the window and manually fire the engine. They are all over the place, so it’s not a straight, simple line but ultimately they are firing the engines in the general direction of the goal of Earth. Good enough is the final conclusion.

That’s they way I thing long term investing is - it’s a bumpy, wild and indirect ride, but as long as you are making progress to the target, you will be ok.
Well put, aim for the Pacific but be okay with merely hitting Earth and coming out alive.
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Re: What happens after the risk shows up?

Post by jebmke »

tibbitts wrote: Tue Sep 29, 2020 8:46 pm
flaccidsteele wrote: Tue Sep 29, 2020 9:32 am The US market always recovers. Always. It’s never different this time. Investing is a game of rinse and repeat
At some point it will be different; of course nobody knows when.
No civilization survives forever. No reason the expect the US to be any different.
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Re: What happens after the risk shows up?

Post by Robot Monster »

tibbitts wrote: Tue Sep 29, 2020 8:46 pm
flaccidsteele wrote: Tue Sep 29, 2020 9:32 am The US market always recovers. Always. It’s never different this time. Investing is a game of rinse and repeat
At some point it will be different; of course nobody knows when.
I disagree. See, here's the logic: because the market has always recovered, that means it always will recover. That's the very nature of what can happen in the future--it's restricted to the confines of what has happened in the past. (That principle was first discovered by either Albert Einstein, or Forrest Gump, can't recall.)
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Re: What happens after the risk shows up?

Post by Bob.Beeman »

Robot Monster wrote: Wed Sep 30, 2020 9:59 am
tibbitts wrote: Tue Sep 29, 2020 8:46 pm
flaccidsteele wrote: Tue Sep 29, 2020 9:32 am The US market always recovers. Always. It’s never different this time. Investing is a game of rinse and repeat
At some point it will be different; of course nobody knows when.
I disagree. See, here's the logic: because the market has always recovered, that means it always will recover. That's the very nature of what can happen in the future--it's restricted to the confines of what has happened in the past. (That principle was first discovered by either Albert Einstein, or Forrest Gump, can't recall.)
Robot Monster and tibbitts have it right. For further support of the risks posed by various catastrophic events see The Retirement Calculator from Hell, Part III by William J. Bernstein, a long-time and widely respected contributor here. In the linked article he points out that any projected 40 year survival rate for a retirement portfolio above 80% is rather unlikely to be realistic. And the linked article doesn't even include Pandemic as a risk factor.

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Re: What happens after the risk shows up?

Post by langlands »

Uncorrelated wrote: Wed Sep 30, 2020 5:22 am My portfolio is chosen based on the expected distribution of outcomes. If stocks go up, great! That's one of the possible outcomes. If stocks go down or we enter a hyperinflation period, that's still okay, it's simply one of the possible outcomes, the possibility of such an outcome was already considered when I choose my portfolio. If I want to capture a positive risk premium, then I must also accept the possibility of low returns. Stay the course, or change the course if your risk aversion or view of future market expectations changed.

One area where future market expectations can change is in factors. Currently, I invest in value because there is overwhelming evidence regarding it's existence. But what if value underperforms for many years? At some point, I'll be forced to change course because value no longer meets my standards of proof.
I'm curious how many years of underperformance it would require for you to question the value premium. The only reason the evidence for value is "overwhelming" is that we have many many years of data going back a century or even more. Value outperformance can disappear for decades at a time. For the US, the 30 year period from 1990-2020 shows a premium that is statistically insignificant.

A typical investing lifetime is somewhere around 30-40 years. Unless you're managing a family dynasty trust, this is the extent to which you care about investing returns. If a 30 year period isn't enough to sway support for the value premium, I doubt that things will become definitive after another 10-15 years. In fact if value underperforms even more, the economic reasons to believe in value will be even stronger (if it's due to multiple expansion)- the spread between value and growth will be astronomical and value will look even cheaper. So I don't see how the data on value is going to make anyone change course.
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Uncorrelated
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Re: What happens after the risk shows up?

Post by Uncorrelated »

langlands wrote: Wed Sep 30, 2020 10:38 pm
Uncorrelated wrote: Wed Sep 30, 2020 5:22 am My portfolio is chosen based on the expected distribution of outcomes. If stocks go up, great! That's one of the possible outcomes. If stocks go down or we enter a hyperinflation period, that's still okay, it's simply one of the possible outcomes, the possibility of such an outcome was already considered when I choose my portfolio. If I want to capture a positive risk premium, then I must also accept the possibility of low returns. Stay the course, or change the course if your risk aversion or view of future market expectations changed.

One area where future market expectations can change is in factors. Currently, I invest in value because there is overwhelming evidence regarding it's existence. But what if value underperforms for many years? At some point, I'll be forced to change course because value no longer meets my standards of proof.
I'm curious how many years of underperformance it would require for you to question the value premium. The only reason the evidence for value is "overwhelming" is that we have many many years of data going back a century or even more. Value outperformance can disappear for decades at a time. For the US, the 30 year period from 1990-2020 shows a premium that is statistically insignificant.

A typical investing lifetime is somewhere around 30-40 years. Unless you're managing a family dynasty trust, this is the extent to which you care about investing returns. If a 30 year period isn't enough to sway support for the value premium, I doubt that things will become definitive after another 10-15 years. In fact if value underperforms even more, the economic reasons to believe in value will be even stronger (if it's due to multiple expansion)- the spread between value and growth will be astronomical and value will look even cheaper. So I don't see how the data on value is going to make anyone change course.

Value is indeed statistically insignificant in the US. However, that doesn't tell you much: the premium was still positive, and the the difference between pre-publication and post-publication is statistically insignificant. There have been many 30-year periods where the market premium was statistically insignificant, surely that would not be a reason to abandon the market premium.

If we look international, the picture changes. In the US, the market premium and HmL premium have t-stats of 2.55 and 1.79 respectively. In europe, 1.87 vs 3.88. Japan, 0.42 vs 4.73. Asia-pacific, 1.94 vs 3.98. In 3 out out of 4 geographic regions, the value premium is more than twice as strong as the market premium. (source, period 1992-2014). It is clear that if one evaluates all available evidence, the out-of-sample evidence for a global value premium is very overwhelming indeed.

If statistical tests show with high confidence that the global value premium has decreased after publication, then it's a good time to re-evaluate the evidence for value. I can't say with certainty which statistical thresholds I will use when that time comes.

The effect of value/growth spreads is insignificant with my time horizon. I'm not a market timer.
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PicassoSparks
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Re: What happens after the risk shows up?

Post by PicassoSparks »

Thank you everyone for all your experiences and responses. I wonder how much survivor's bias there is on these forums. Meaning, how many people capitulate during a downturn which means they get out of investing AND they stop posting in places like this.

Some of what's informing my questions is my parents' experience with investing. My dad did a lot of investigating and was generally persuaded by low cost mutual funds and the power of compounding and the other things that are at the heart of this forum. But his lived experience was 2.1% compounded annually for 18 years, and -4.1% compounded annually for ten years (being 1999-2009 when he finally got out). Luck played big role in this: My parents sold the house in 2000, so that significant asset was invested at the perfect time to experience the lost decade of US stocks.

Looking at the overall results, my parents decided that the grief wasn't worth it. They had decent pensions and could get 2% compounded annually pretty easy with various fixed income options. They have frugal tastes and their income is more than enough for them. So they got out. Of course, knowing what we know now, we could look at the following decade and talk about what might have been.

Luck's going to play a big role for all of us.
KlangFool
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Re: What happens after the risk shows up?

Post by KlangFool »

PicassoSparks wrote: Tue Oct 13, 2020 10:55 am Thank you everyone for all your experiences and responses. I wonder how much survivor's bias there is on these forums. Meaning, how many people capitulate during a downturn which means they get out of investing AND they stop posting in places like this.
PicassoSparks,

I was 100% stock and I gambled on the Telecom stocks. Then, Telecom Bust happened. I lost 50% of my whole life savings and I no longer had any job security. I was facing quarterly and annual laid off for the last 10+ years.


A) I stayed in CASH for a major portion of my investment over many years.


B) Then, I invested in 50% Vanguard LifeStrategy Moderate Growth (60/40) and 50% Wellington Fund (65/35) fund.


C) After a few years of (B), then, I transition into 40% 3-funds, 20% mini-Larry, and 40% Wellington.


I adviced folks against 100% stock. I had been there and done that.


KlangFool
mikejuss
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Re: What happens after the risk shows up?

Post by mikejuss »

PicassoSparks wrote: Tue Oct 13, 2020 10:55 am Thank you everyone for all your experiences and responses. I wonder how much survivor's bias there is on these forums. Meaning, how many people capitulate during a downturn which means they get out of investing AND they stop posting in places like this.

Some of what's informing my questions is my parents' experience with investing. My dad did a lot of investigating and was generally persuaded by low cost mutual funds and the power of compounding and the other things that are at the heart of this forum. But his lived experience was 2.1% compounded annually for 18 years, and -4.1% compounded annually for ten years (being 1999-2009 when he finally got out). Luck played big role in this: My parents sold the house in 2000, so that significant asset was invested at the perfect time to experience the lost decade of US stocks.

Looking at the overall results, my parents decided that the grief wasn't worth it. They had decent pensions and could get 2% compounded annually pretty easy with various fixed income options. They have frugal tastes and their income is more than enough for them. So they got out. Of course, knowing what we know now, we could look at the following decade and talk about what might have been.

Luck's going to play a big role for all of us.
What do you mean when you say your father was "generally persuaded by low-cost mutual funds"? What funds was he invested in? What was his asset allocation?

I try to be realistic about the yields on index funds, but the numbers above seem low for an indexed portfolio. Was you father at least partially invested in individual stocks?
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PicassoSparks
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Re: What happens after the risk shows up?

Post by PicassoSparks »

mikejuss wrote: Tue Oct 13, 2020 11:18 am What do you mean when you say your father was "generally persuaded by low-cost mutual funds"? What funds was he invested in? What was his asset allocation?

I try to be realistic about the yields on index funds, but the numbers above seem low for an indexed portfolio. Was you father at least partially invested in individual stocks?
To the best of my knowledge, he was persuaded by Index funds. I don't know exactly what balance of index funds he had (Domestic, US, International, bonds). I do know his year by year results but I don't think he'd be comfortable with me sharing them with strangers on the Internet.
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arcticpineapplecorp.
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Re: What happens after the risk shows up?

Post by arcticpineapplecorp. »

there's an old saying around these parts...hope for the best but plan for the worst.

if you are optimistic and you don't get the returns you expect, you're toast. on the other hand...

if you are cautiously conservative and things turn out as bad as you expected, you're fine.
if you are cautiously conservative and things turn out better than you expected, you're great.

if you had expectations that didn't materialize, the only options:
1. keep working
2. keep investing
3. keep getting matching money (if available)
4. reduce expenses
5. hold off on taking SS until later (70 at latest).
6. increase contributions
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
mikejuss
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Re: What happens after the risk shows up?

Post by mikejuss »

PicassoSparks wrote: Tue Oct 13, 2020 11:51 am
mikejuss wrote: Tue Oct 13, 2020 11:18 am What do you mean when you say your father was "generally persuaded by low-cost mutual funds"? What funds was he invested in? What was his asset allocation?

I try to be realistic about the yields on index funds, but the numbers above seem low for an indexed portfolio. Was you father at least partially invested in individual stocks?
To the best of my knowledge, he was persuaded by Index funds. I don't know exactly what balance of index funds he had (Domestic, US, International, bonds). I do know his year by year results but I don't think he'd be comfortable with me sharing them with strangers on the Internet.
Hmm--it sounds like your father might not have been fully indexed.

That said, I agree with you that dumb luck does play a part in one's investment returns. The main thing is to hold onto your investments for as long as you possibly can, to sell only when you absolutely must or you have reached your retirement goal.
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HomerJ
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Re: What happens after the risk shows up?

Post by HomerJ »

PicassoSparks wrote: Tue Oct 13, 2020 10:55 amBut his lived experience was 2.1% compounded annually for 18 years, and -4.1% compounded annually for ten years (being 1999-2009 when he finally got out).
What 18 year period did he only get 2.1%?

Stock market returned around 5% a year from 1991 - 2009 (assuming one got out on March 9th, the absolute bottom). And Total Bond Market Index Fund returned like 6% a year.

Of course, very few of us can say we've bought and held the same index funds at the same allocation for 18 years... I'm sure he tried different funds, and different allocations, buying when the market was up, and selling when the market was down, and probably made mistakes like all of us, so I do believe he may have done worse than the index funds.

But yeah selling in 2009 hurt a LOT.

My parents got hurt in the stock market in the 1970s, and got spooked by it, and mostly saved using bank CDs their whole lives.

With SS, a small pension, and a good amount of savings just in CDs, they've done just fine.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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PicassoSparks
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Re: What happens after the risk shows up?

Post by PicassoSparks »

I can’t say for certain, but they’re Canadian so there would have been a significant domestic tilt and their results would have been quite different from the US market. I’d similarly assumed various stock picking mishaps on their part as part of the explanation until I came across this surprising passage in the Portfolio Charts article about Cash. https://portfoliocharts.com/2017/05/12/ ... -investor/
…here’s a real mind-bender for US-centric investors — in Canada since 1970, the safe withdrawal rates for all retirement lengths up to 40 years with a 100% cash portfolio have been equal or superior to one with 100% stocks!
mikejuss
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Re: What happens after the risk shows up?

Post by mikejuss »

HomerJ wrote: Tue Oct 13, 2020 5:48 pm
PicassoSparks wrote: Tue Oct 13, 2020 10:55 amBut his lived experience was 2.1% compounded annually for 18 years, and -4.1% compounded annually for ten years (being 1999-2009 when he finally got out).
What 18 year period did he only get 2.1%?

Stock market returned around 5% a year from 1991 - 2009 (assuming one got out on March 9th, the absolute bottom). And Total Bond Market Index Fund returned like 6% a year.

Of course, very few of us can say we've bought and held the same index funds at the same allocation for 18 years... I'm sure he tried different funds, and different allocations, buying when the market was up, and selling when the market was down, and probably made mistakes like all of us, so I do believe he may have done worse than the index funds.

But yeah selling in 2009 hurt a LOT.

My parents got hurt in the stock market in the 1970s, and got spooked by it, and mostly saved using bank CDs their whole lives.

With SS, a small pension, and a good amount of savings just in CDs, they've done just fine.
It bears repeating--and sometimes I even need to remind myself--that our asset allocations should be selected, in part, based on the assumption that we will remain comfortable with them even during market dips. If someone experiences a dip, and pulls out of the market for the rest of his life, his assets were not properly allocated in the first place. There are few reasons ever to stop buying stocks.
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PicassoSparks
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Re: What happens after the risk shows up?

Post by PicassoSparks »

The problem with this very good advice is that YOU CAN’T KNOW THAT IN ADVANCE.

“Pick an asset allocation that you’ll be comfortable with in 20 years no matter what happens”

Hmm, let’s see what asset allocation would 20 years ago me have been comfortable with through to today?
~20 years ago me working at a start-up, no plans to marry or emigrate “hmm, sorry you want me to foresee what now?”
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Portfolio7
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Re: What happens after the risk shows up?

Post by Portfolio7 »

Pull up your boots and stay the course.

The hard part was finding a portfolio I felt good about. That had to come first. I still bought and held, with one exception which didn't change much long term - but it was difficult when I didn't believe in the portfolio.

Since figuring out what I was comfortable with, the rest has been easy. Heck, I've had 4 years of substandard performance (funny, that) and it bothers me not at all. It still has been pretty good, and I suspect I just flipped 4 'Tails' in a row. Fortune of war and all that.
"An investment in knowledge pays the best interest" - Benjamin Franklin
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Re: What happens after the risk shows up?

Post by mikejuss »

PicassoSparks wrote: Tue Oct 13, 2020 7:35 pm The problem with this very good advice is that YOU CAN’T KNOW THAT IN ADVANCE.

“Pick an asset allocation that you’ll be comfortable with in 20 years no matter what happens”

Hmm, let’s see what asset allocation would 20 years ago me have been comfortable with through to today?
~20 years ago me working at a start-up, no plans to marry or emigrate “hmm, sorry you want me to foresee what now?”
I think you're misunderstanding. Asset allocation is not a matter of picking a percentage of stocks and bonds, and never changing it; you'll quite naturally change it based on your age, how close you are to your desired retirement number, and what your risk tolerance is. You'll learn a lot about how to weigh these various factors by reading this forum, which I hope you continue to do.
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Re: What happens after the risk shows up?

Post by HomerJ »

PicassoSparks wrote: Tue Oct 13, 2020 7:35 pm The problem with this very good advice is that YOU CAN’T KNOW THAT IN ADVANCE.

“Pick an asset allocation that you’ll be comfortable with in 20 years no matter what happens”

Hmm, let’s see what asset allocation would 20 years ago me have been comfortable with through to today?
~20 years ago me working at a start-up, no plans to marry or emigrate “hmm, sorry you want me to foresee what now?”
You don't have to know it 20 years in advance..

You can ask yourself the question every few years.

Here's the trick to picking an asset allocation. Pick one, today, that you can hold if the market crashes 50% tomorrow and takes 5 years to recover.

Because it might.

You don't have to hold that same allocation for 20 years.

When you're 30, you might be 90/10 even assuming a 50% crash tomorrow. Because you have plenty of time to wait for it to recover, and the money at risk isn't a huge amount yet.

When you're 40, with two kids, you might be 70/30 assuming a 50% crash could happen tomorrow. You keep the 30% because that is enough to keep your family warm, fed, and dry, even if you lose your job, while you wait for the market to come back and look for a new job.

When you're 55, you might be 50/50 or 40/60 assuming a 50% crash could happen tomorrow. You keep a large amount in bonds because you are close to retirement, and if you lose your job, it may take a long time to find another one (or never). That bond money has to get you to Social Security, and should be enough that you don't have touch the stock side until it recovers from the crash, even if it takes multiple years to recover.

Your Dad (and my Dad) didn't know these things.

They thought you should get in and out, and make moves based on what they thought (or experts told them) was going to happen.

That's not a good way to invest. Buy and hold, and pick an Asset Allocation that you can hold through the next stock market crash.

Even if it happens tomorow.

Because it might.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: What happens after the risk shows up?

Post by dru808 »

TheDDC wrote: Tue Sep 29, 2020 11:07 pm
corp_sharecropper wrote: Tue Sep 29, 2020 9:42 pm 60/40 (aka 90% equity risk) has the cards stacked against it at the moment. At least the people who are 100% equities seem more in tune with the fact that they're taking risk. I get the impression that people with 60% equities (let's not kid around, these are almost surely 80% US, 20% foreign, on average) which amounts to about 90% of portfolio risk, plus 60% nominal bonds (doubt there's a measurable amount of TIPS in a 3-funder portfolio) amounting to the remaining 10% of risk are in for a rude awakening when those 40 year backtests are no longer relevent. I wouldn't say that when the risk shows up it's too late, but it's definitely better to be diversified before the risk shows itself, beyond a heavily overweight domestic vs foreign equity basket that is itself heavily overweight towards a purely nominal us bond basket.
I put all new money into VTSAX. Nobody knows nothin. I plan for 10+% pre-tax returns. The gloom and doom of some here is ridiculous advice for new investors.

-TheDDC
Yes! :moneybag :sharebeer
60% SCHK | 25% VIGI | 15% ILTB
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Re: What happens after the risk shows up?

Post by Kelrex »

I honestly don't give things I can't control much thought.

If I want more money, I focus on making more money, not fussing with what I did or didn't make in the markets.
mikejuss
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Re: What happens after the risk shows up?

Post by mikejuss »

HomerJ wrote: Tue Oct 13, 2020 10:32 pm
PicassoSparks wrote: Tue Oct 13, 2020 7:35 pm The problem with this very good advice is that YOU CAN’T KNOW THAT IN ADVANCE.

“Pick an asset allocation that you’ll be comfortable with in 20 years no matter what happens”

Hmm, let’s see what asset allocation would 20 years ago me have been comfortable with through to today?
~20 years ago me working at a start-up, no plans to marry or emigrate “hmm, sorry you want me to foresee what now?”
You don't have to know it 20 years in advance..

You can ask yourself the question every few years.

Here's the trick to picking an asset allocation. Pick one, today, that you can hold if the market crashes 50% tomorrow and takes 5 years to recover.

Because it might.

You don't have to hold that same allocation for 20 years.

When you're 30, you might be 90/10 even assuming a 50% crash tomorrow. Because you have plenty of time to wait for it to recover, and the money at risk isn't a huge amount yet.

When you're 40, with two kids, you might be 70/30 assuming a 50% crash could happen tomorrow. You keep the 30% because that is enough to keep your family warm, fed, and dry, even if you lose your job, while you wait for the market to come back and look for a new job.

When you're 55, you might be 50/50 or 40/60 assuming a 50% crash could happen tomorrow. You keep a large amount in bonds because you are close to retirement, and if you lose your job, it may take a long time to find another one (or never). That bond money has to get you to Social Security, and should be enough that you don't have touch the stock side until it recovers from the crash, even if it takes multiple years to recover.

Your Dad (and my Dad) didn't know these things.

They thought you should get in and out, and make moves based on what they thought (or experts told them) was going to happen.

That's not a good way to invest. Buy and hold, and pick an Asset Allocation that you can hold through the next stock market crash.

Even if it happens tomorow.

Because it might.
Well said, Homer.
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Re: What happens after the risk shows up?

Post by Nowizard »

What we do: Establish your desired annual increase in assets after expenses and new contributions. Assume it is 8% during accumulative years, for example. If it is 2% in a given year (Risk shows up), then go back to whatever number of years you designate and take the asset total for that point. Compound returns between that time period and the current date, including actual contributions, and compare to current asset totals. What happens this year is not important, it is the total over time that counts. In our case we are well ahead over the past decade but below our desired goal YTD while substantially "ahead" from January 1, 2019 to the present. Last year was good, this one not so good by comparison.

Tim
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Re: What happens after the risk shows up?

Post by pkcrafter »

flaccidsteele wrote:
The US market always recovers. Always. It’s never different this time. Investing is a game of rinse and repeat
I think a good definition of risk is not having the money for something important when you need it.

There is a difference between the U.S. market has always recovered and the U.S. market will always recover. If you are positive the money will be there, then there really is no risk.

It's probably wise to have some respect for the word "risk."



Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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PicassoSparks
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Re: What happens after the risk shows up?

Post by PicassoSparks »

Nowizard wrote: Wed Oct 14, 2020 9:09 am What we do: Establish your desired annual increase in assets after expenses and new contributions. Assume it is 8% during accumulative years, for example. If it is 2% in a given year (Risk shows up), then go back to whatever number of years you designate and take the asset total for that point. Compound returns between that time period and the current date, including actual contributions, and compare to current asset totals. What happens this year is not important, it is the total over time that counts. In our case we are well ahead over the past decade but below our desired goal YTD while substantially "ahead" from January 1, 2019 to the present. Last year was good, this one not so good by comparison.

Tim
This seems interesting but I'm not sure I fully understand it. Are you saying that you save more in lean years and less in fat years, during the accumulation period?
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Re: What happens after the risk shows up?

Post by Nowizard »

Picassosparks: No, during accumulative years, we, like others, just saved whatever we could given our particular circumstances. The reference is to how we deal with risk and determining whether we have met goals established during those years on average. I used 8% as an example, but looking backward requires taking into effect compounding. For example, if one had $150,000 invested at the start of1998, then the goal at the end of 1998 would be to have $162,000. The goal for 1999 would then be to accumulate 8% based on $162,000. New contributions for a given year would be added, though for purposes of simplicity, without expectations for 8% appreciation for that year....too complicated for me to figure. So, if during 1999, the year began with $162,000, the end of the year would reflect $174,960 on that amount. However, asset total might be $185,000 if there had been contributions of approximately $10,000, so the goal for the year 2000 would be $185,000 X 8%. These figures are approximate, and I'm certain there are those astute enough to put this into a formula. However, as someone with mathematical capabilities but limited higher math, this works for me. It accomplishes the goal for me of: 1. Knowing asset totals at the end of the year after expenses, a belief that it is not how much we invest or the return on the investment but the amount you keep, and 2. It allows focus on progression over long periods of time rather than on a given year which may produce positive or negative returns. Perhaps, someone can simplify this explanation but feel free to inquire further.

Tim
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