If we cannot predict future and if past results are not a reliable predictor of future...

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antisa
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If we cannot predict future and if past results are not a reliable predictor of future...

Post by antisa »

...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
Marseille07
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Marseille07 »

While we can't predict future, there's an underlying assumption that both equities and bonds go up over time. If this doesn't hold then Boglehead portfolios don't work.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by retiredjg »

We don't know now which will "do better" in the future. That' why it's a good idea to just hold pretty much all of it.

Control the amount of risk you take by your stock to bond ratio. Within stocks and bonds, diversify.
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antisa
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by antisa »

Marseille07 wrote: Thu Jan 07, 2021 12:19 pm While we can't predict future, there's an underlying assumption that both equities and bonds go up over time. If this doesn't hold then Boglehead portfolios don't work.
What is this assumption based on?
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antisa
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by antisa »

retiredjg wrote: Thu Jan 07, 2021 12:24 pm We don't know now which will "do better" in the future. That' why it's a good idea to just hold pretty much all of it.

Control the amount of risk you take by your stock to bond ratio. Within stocks and bonds, diversify.
You see, you mention stocks and bonds like that's a given. Why didn't you say - control the amount of risk you take by your gold to REIT ratio?

You see what I mean? If US stocks historical CAGR was 1%, wouold you still be recommending them?
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Morse Code »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
I've always thought it was silly to say that. Past results are the only logical way to build a portfolio, in my opinion.

Past investment results are not guaranteed to repeat, but they generally do and what else do you have to go on?

Somehow we morphed from "past results do not guarantee..." to "do not predict...". :?
Last edited by Morse Code on Thu Jan 07, 2021 12:56 pm, edited 1 time in total.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Normchad »

I’ve never liked that saying. Personally, I think past performance is the best indicator of future success. It’s not perfect, but it’s good.

And there’s a big difference between an individual company and a mutual fund.

When you buy an S&P, you’re not buying a lottery ticket. You’re buying an ownership interest in very large, very successful companies. You’re a part owner of businesses that are good at making money. If some of them figure out how to innovate new products, be more efficient, or make more money, the price will go up. Even if lots of them can’t do it, some will, and it will be enough.

Long term it will go up because this collection of businesses will figure out how to grow and make more money. And you own a share of that.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Fallible »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
Which asset is better than another depends on which is right for you and that depends on knowing yourself, how much risk you can and want to handle in the face of market (and life) uncertainty.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Marseille07 »

antisa wrote: Thu Jan 07, 2021 12:37 pm
Marseille07 wrote: Thu Jan 07, 2021 12:19 pm While we can't predict future, there's an underlying assumption that both equities and bonds go up over time. If this doesn't hold then Boglehead portfolios don't work.
What is this assumption based on?
GDP / population growth and monies flowing into equities / bonds because investors seek to generate returns.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Morse Code »

Fallible wrote: Thu Jan 07, 2021 12:56 pm
antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
Which asset is better than another depends on which is right for you and that depends on knowing yourself, how much risk you can and want to handle in the face of market (and life) uncertainty.
And how will you know which asset is better for you if you don't look at their past?
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by firebirdparts »

Next summer we might be living at the bottom of the ocean and eating rocks. But I doubt it.

Unthinking people will sometimes take a proverb of some sort and replace a word or two and come up with something that is really crazy. An example of that is to say that "past results are no indication of future results." That's crazy, but it gets passed around like some sort of wise saying. The key word, of course, is "indication". You can change that word and get a sentence that's not ridiculous.

The fact is, the information we have today is the best information we have today. The non-imaginary kind. No amount of jibber jabber is ever going to change that. There is widespread prediction published about individual investments, from multiple analysts and even the company itself, for sizeable companies. Shocks may occur, and then you say "we didn't plan for that" and then we say "better luck next year." There is a range of unpredictability in these things, some more than others.
Last edited by firebirdparts on Thu Jan 07, 2021 1:10 pm, edited 2 times in total.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by abc132 »

Morse Code wrote: Thu Jan 07, 2021 12:58 pm And how will you know which asset is better for you if you don't look at their past?
One thing you can look do is look at what each asset guarantees and how much it can grow.

You will get a much different answer for stocks and bonds.

A better way to frame this is the future will look something like the past, but which future varies enough to make actionable predictions to beat the market as a whole difficult.

It is really wise to take on the philosophy that you will take whatever the market gives, at low cost, with diversification. The is very likely to be positive over many years, but investing is a risk in search of rewards, and there are few absolute guarantees.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Shallowpockets »

Past results are not a predictor of future results probably came from an Edward Jones disclaimer so they can weasel out of failing to make your money grow.
It is also found in small print in any business that has first touted past results to get you to look at them in the first place.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by alex_686 »

Who says that we can't?

We can either look at the glass as half empty or half full.

On the half empty side we are trying to model a dynamic and chaotic - and I use this in the mathematical sense of the word - social system.

What is happening is that key variables mean's vary by time. For example, we can identify periods with certain levels of interest rates, earnings growth, equity risk premium, volatility, correlation between assets. Then at random times we jump from one secular period to another where all of these values change. Sometimes slowly, sometimes quickly, often during a crash.

2 critical take always here.

Historical data needs to be treated with care. Often more data leads to worse results. Trend analysis is tricky because the market does not revert to mean values. On the other hand, we can use historical data to validate theory. We do have a logical framework. We can build models. We need to be aware of their limitations and assumptions, but we do get actionable results.

We are Bogleheads in part due to the Efficient Market Hypothesis and Keynesian's Beauty Contest. If we are going to try to time the market we can't build a high quality model. We can't even build a model that is of higher quality then everybody else. We have to build a model that predicts what the other models are doing.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Fallible »

Morse Code wrote: Thu Jan 07, 2021 12:58 pm
Fallible wrote: Thu Jan 07, 2021 12:56 pm
antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
Which asset is better than another depends on which is right for you and that depends on knowing yourself, how much risk you can and want to handle in the face of market (and life) uncertainty.
And how will you know which asset is better for you if you don't look at their past?
I didn't say not to look at past performance, which is best reviewed with the understanding and acceptance that past is not prologue. What to use from the past for the present will, again, depend on what is right for the individual investor and on the investor knowing what is right.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by firebirdparts »

I think everybody predicts the future every day without realizing it. I do. I came to the office today. My prediction was that it was safe to come in here. I was right (so far).

I am also planning to go back home tonight based on the prediction that my wife is not lying in wait there to kill me. We'll see.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by aktx97 »

I'm 31 and dollar cost averaging into the entire U.S. stock market through index funds for the next 30+ years for this exact reason. I don't know what will happen but see no issues putting my money on the entire haystack.
Keep calm and stay the course.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by NoRegret »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
Uncertainty is not the same as total lack of knowledge.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by MishkaWorries »

antisa wrote: Thu Jan 07, 2021 12:37 pm
Marseille07 wrote: Thu Jan 07, 2021 12:19 pm While we can't predict future, there's an underlying assumption that both equities and bonds go up over time. If this doesn't hold then Boglehead portfolios don't work.
What is this assumption based on?
Past results :|
We plan. G-d laughs.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by MishkaWorries »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
Oh and don't forget the efficient market theory that everything is already priced in to the price of stocks and bonds. :shock:
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Barsoom »

I am no expert, and am likely in the bottom 20% of expertise here, but I still think that Newton's First Law of Motion applies:
An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an external force.
In other words, if nothing appears to have changed in the system, then why expect a change in the outcomes?

I take some liberties with this thinking, generally implying that the outcomes historically have varied within a defined range of probabilities but follow a general trajectory (speed and direction).

To me, "outside forces" that would affect the speed and direction of outcomes would be things like global wars, technology revolutions, massive regulatory change, etc. Real examples might be how the USA market behaved from Reconstruction to World War 1, from Black Friday to World War 2, post WWII to the personal computer (1980s), the PC revolution to the World Wide Web of today.

Maybe a technology breakthrough that makes fossil fuels obsolete will be market-transformative. Maybe Star Trek-like transporters and replicators would revolutionize transportation and supply chain management. But short of that, what external forces would cause fundamental changes to the way markets work that would make using the past as a guide to the future unreliable?

-B
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by chuckb84 »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
In the aggregate (index funds) and over long periods of time, I think the past is---somewhat---a predictor of the future. That, combined with a few other boglehead grounding ideas is the basis of the philosophy.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by corysold »

I always just assumed "Past results are not an indicator of future success" was a way for the guy taking his 1% off the top to avoid being sued if the 32 investments he had me in tanked.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by HomerJ »

antisa wrote: Thu Jan 07, 2021 12:37 pm
Marseille07 wrote: Thu Jan 07, 2021 12:19 pm While we can't predict future, there's an underlying assumption that both equities and bonds go up over time. If this doesn't hold then Boglehead portfolios don't work.
What is this assumption based on?
A couple of billion people going to work each day. It's not a closed system. Human work and capital is input into the system every day, making the system more valuable over time.
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: If we cannot predict future and if past results are not a reliable predictor of future...

Post by MathWizard »

antisa wrote: Thu Jan 07, 2021 12:37 pm
Marseille07 wrote: Thu Jan 07, 2021 12:19 pm While we can't predict future, there's an underlying assumption that both equities and bonds go up over time. If this doesn't hold then Boglehead portfolios don't work.
What is this assumption based on?
Bonds have a non-negative interest rate. You can always just hold the bonds to maturity.

For stocks, you assume that businesses make a profit, and that stock entitles you to a share of the profits.
If the stock has a dividend, you at least get that.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Scooter57 »

HomerJ wrote: Thu Jan 07, 2021 2:28 pm
antisa wrote: Thu Jan 07, 2021 12:37 pm
Marseille07 wrote: Thu Jan 07, 2021 12:19 pm While we can't predict future, there's an underlying assumption that both equities and bonds go up over time. If this doesn't hold then Boglehead portfolios don't work.
What is this assumption based on?
A couple of billion people going to work each day. It's not a closed system. Human work and capital is input into the system every day, making the system more valuable over time.
The market only goes up over time if there are more people and more products and more people. That has been true for the last couple hundred years. Does it have to stay true? Who knows. The OP asked a good question.

We have seen way too many things happen this past year (and week) that we would never have imagined could happen. There is still a huge amount of denial coupled with wishful thinking going on stating how temporary this all is and how everything will be back to the way it used to be within a few more months. But there are several possible scenarios that are not as crazy as they might have seemed a year ago in which things do not go back to normal any time soon and the world population contracts dramatically over the next decade or two, something that hasn't happened since the 1340s when the world population dropped by about 50%.

The academic research so beloved by many participants on this forum is based on backtesting markets going back for more than a century that were operating under very different conditions than we have now. There are no immutable laws, like the Laws of Physics, that accurately describe and predict market behavior, though Economists, desperately trying to pretend they practice a scientific discipline, pretend there are.

If you stated this in terms of betting odds, the odds for the market going up over 30 years or more are pretty good. A lot better than you get with lottery tickets or the slots at Vegas. But there are still odds involved ,and there is a non-zero possibility that investing in the markets using the strategies beloved here, which assume that the market will go up over time, will fail.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by HomerJ »

Scooter57 wrote: Thu Jan 07, 2021 4:15 pm
HomerJ wrote: Thu Jan 07, 2021 2:28 pm
antisa wrote: Thu Jan 07, 2021 12:37 pm
Marseille07 wrote: Thu Jan 07, 2021 12:19 pm While we can't predict future, there's an underlying assumption that both equities and bonds go up over time. If this doesn't hold then Boglehead portfolios don't work.
What is this assumption based on?
A couple of billion people going to work each day. It's not a closed system. Human work and capital is input into the system every day, making the system more valuable over time.
The market only goes up over time if there are more people and more products and more people.
I don't believe that's correct.

It's not a closed system. There is input into the system which makes the system more valuable over time. Steady input would still be input. I'm not sure it's necessary for there to be increasing input.

We have seen way too many things happen this past year (and week) that we would never have imagined could happen. There is still a huge amount of denial coupled with wishful thinking going on stating how temporary this all is and how everything will be back to the way it used to be within a few more months. But there are several possible scenarios that are not as crazy as they might have seemed a year ago in which things do not go back to normal any time soon and the world population contracts dramatically over the next decade or two, something that hasn't happened since the 1340s when the world population dropped by about 50%.

The academic research so beloved by many participants on this forum is based on backtesting markets going back for more than a century that were operating under very different conditions than we have now. There are no immutable laws, like the Laws of Physics, that accurately describe and predict market behavior, though Economists, desperately trying to pretend they practice a scientific discipline, pretend there are.

If you stated this in terms of betting odds, the odds for the market going up over 30 years or more are pretty good. A lot better than you get with lottery tickets or the slots at Vegas. But there are still odds involved ,and there is a non-zero possibility that investing in the markets using the strategies beloved here, which assume that the market will go up over time, will fail.
Highlighted statement is true. We can all adjust to that new reality if necessary.
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: If we cannot predict future and if past results are not a reliable predictor of future...

Post by djm2001 »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
By leaving the construction to our betters and simply holding all asset classes in their (free-float) market cap proportion. William Sharpe proposes a practical implementation of this that he calls the World Bond Stock portfolio. References: You can get fancier by using the World Bond Stock portfolio as a starting point, and then adjusting for personal circumstance. E.g., if earning fixed income (salary) from a steady job, you can underweight bonds accordingly.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Seasonal »

People invest in stocks and bonds because they expect them to provide value. The market sets prices to provide such value. If the market doesn't think returns are adequate, it can lower prices, which increases the chances of higher returns.

Bonds contractually guarantee a return; stocks don't. Stocks are therefore riskier and no rational person would buy them without the hope of a higher return. Again, the market sets prices taking this higher risk into account. Of course, higher risk includes the possibility of worse performance, otherwise it wouldn't be risk.

How to construct a portfolio? If you don't have superior portfolio construction ability, use the cap weighted market, unless you have a good reason to do something else.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by 59Gibson »

You are investing in worldwide businesses with an intent and requirement to make a profit. This will be reflected in their stocks, eventually. There can be periods of time where stocks of profitable businesses do nothing or go down, but if you mean a long term situation where stocks are going down and never appreciate- That would probably mean severe systemic problems in the world economy, lead to instability and eventually collapses. Reits, bonds, and commodities will not save you. Only choice is to invest in the most likely highest risk/reward option.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by livesoft »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
We cannot predict the future, so past results are an unreliable predictor of the future.

That's it. Simple.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by oldfort »

At some level of generality, we all rely on past performance to estimate future stock returns. Is there some fundamental economic reason, stock prices should go up? I expect corporate earnings to continue to grow. Is there any fundamental reason to think some fifth order Markov model can accurately predict when to sell and when to buy? This seems closer to data mining.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by eucalyptus »

Sometimes it feels like there might be a problem with induction in general.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by z3r0c00l »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
I think you are begging the question, since we can predict the future and the past is the best predictor of the future. Can we know the future for sure? Does the future have to look exactly like the past? No on both fronts.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by ohboy! »

aktx97 wrote: Thu Jan 07, 2021 1:17 pm I'm 31 and dollar cost averaging into the entire U.S. stock market through index funds for the next 30+ years for this exact reason. I don't know what will happen but see no issues putting my money on the entire haystack.
I’m less certain of your future than you are. Regardless the results I think we can have a plan but even the best of plans can go awry.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Marseille07 »

I think the premise is wrong. We can't predict future but we don't have to, so long as stocks go up over time. Now, this is also not a guarantee but the default assumption is that monies continue flowing into the markets and push equities higher. At least, I haven't found evidence to believe that that has stopped like the 1989 Nikkei.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by dru808 »

firebirdparts wrote: Thu Jan 07, 2021 1:11 pm I think everybody predicts the future every day without realizing it. I do. I came to the office today. My prediction was that it was safe to come in here. I was right (so far).

I am also planning to go back home tonight based on the prediction that my wife is not lying in wait there to kill me. We'll see.
:D Good stuff
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by 000 »

HomerJ wrote: Thu Jan 07, 2021 5:05 pm
Scooter57 wrote: Thu Jan 07, 2021 4:15 pm The market only goes up over time if there are more people and more products and more people.
I don't believe that's correct.

It's not a closed system. There is input into the system which makes the system more valuable over time. Steady input would still be input. I'm not sure it's necessary for there to be increasing input.
You're forgetting that the market is pricing in growth. If there is less growth than expected, equities could have negative real returns.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by TheoLeo »

Well the past does help predict future returns. I think that is obvious. It is just not a simple as looking at a chart going up over the last 100 years and then continue drawing the trendline into infinity.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Northern Flicker »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
Investing is an activity of probabilities. We don't know what will happen, but we can invest in portfolios that provide a good chance of meeting our goals while not taking more risk than is appropriate.
Risk is not a guarantor of return.
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antisa
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by antisa »

Northern Flicker wrote: Fri Jan 08, 2021 4:30 am
antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
Investing is an activity of probabilities. We don't know what will happen, but we can invest in portfolios that provide a good chance of meeting our goals while not taking more risk than is appropriate.

What is this good chance based on other than past returns?
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by sixtyforty »

"Buy everything and hold it forever" - Jack Bogle

https://www.youtube.com/watch?v=65FIl71 ... dex=3&t=0s
"Simplicity is the ultimate sophistication" - Leonardo Da Vinci
jello_nailer
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by jello_nailer »

“In a roaring bull market, knowledge is superfluous and experience is a handicap.” – Benjamin Graham
bitdocmd
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by bitdocmd »

jello_nailer wrote: Fri Jan 08, 2021 8:58 am “In a roaring bull market, knowledge is superfluous and experience is a handicap.” – Benjamin Graham
I like that.

Also: In an era of endless QE, knowledge is superfluous and experience is a handicap.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by pkcrafter »

...how are we to go about constructing our portfolio?

Don't look for the needle in the haystack. Just buy the haystack!
John Bogle
If we cannot predict future and if past results are not a reliable predictor of future, why is any asset better than the other one?
The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course.
John Bogle

Yes, investing in the stock market is risky, so always hold some assets that are not in stocks.
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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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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Nowizard »

I would add that momentum investing works in many instances whether it is holding on to investments that have done well recently, even adding to them in expectation of further gains, and with purchase of vehicles that have shown recent momentum. Once again, no guarantees, but there are few certainties, with all complex topics and concepts where there is unknown and constantly evolving data. We establish our own narratives in many areas including investing, and there are many approaches to it whether choosing a Buffett or Boglehead approach, to name two. Generally, I suspect people come here because it is the best and most accepting site for investing, because they are dyed in the wool Bogleheads or because they generally follow Boglehead approaches with some nuance added.

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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by acegolfer »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
You need a better understanding of statistics. Stock returns have a higher standard deviation than the mean. That's why we can't predict the next return. But we can still estimate the mean and standard deviation, based on which we form portfolios.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Cyclesafe »

The harder I try to peer into the future, the more my eyes hurt.

Past results tell us the effect of what has happened, not what will happen.

Depression-scarred investors, now largely gone, would never have considered starting out in the 1960's with a 100% equity portfolio. Their strategy was to build an investment pyramid starting with fixed at its base. Of course, hindsight proved them dead wrong. They made a behavioral error because, like today, they ought to have had faith that equities would always recover and would always be trending upwards.

But young investors can now easily imagine catastrophes that will have them (and us) eating dog food regardless of whether they go 100% equity or not. At least with the former, they will have a chance when they retire in 50 years they will have a comfortable retirement - if they can manage to avoid the parade of horribles.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by JackoC »

antisa wrote: Thu Jan 07, 2021 12:40 pm
retiredjg wrote: Thu Jan 07, 2021 12:24 pm We don't know now which will "do better" in the future. That' why it's a good idea to just hold pretty much all of it.

Control the amount of risk you take by your stock to bond ratio. Within stocks and bonds, diversify.
You see, you mention stocks and bonds like that's a given. Why didn't you say - control the amount of risk you take by your gold to REIT ratio?

You see what I mean? If US stocks historical CAGR was 1%, wouold you still be recommending them?
Both your original point and that one have some merit. Especially by quoting an actual number like 1%. Fortunately though, a general belief in efficient markets means you don't really have to worry that the expected return (some kind of centroid of possible future returns, not 'what I say is going to happen') of REIT's given their uncertainty is vastly different than stocks in general given theirs. And in case of 'riskless' bonds you basically do know the return, to a 30 yr horizon at least. You *choose* to take various term/rollover, prepayment, credit etc risks to buy a 'total bond' fund, you could just buy the 30 yr TIPS, wherein the return is inflation -0.28% pre tax give or take only reinvestment rate on a very small coupon (and whatever probability you give to a US govt default on TIPS). It just seems some people don't want to face how low that number is now, so instead set up the artificial process where you *have* to buy total bond and since the fund is only 8 yr avg maturity anything could happen after that, so why don't I assume rates will 'go back up'. :happy

On stocks the problem with looking at past return would not be the qualitative idea that companies have valuable assets on which they are likely to make profits on average. That's reasonable enough. Where it goes off track is quantifying the expected stock return now as being the average of past stock return, whatever excuses or mental gymnastics you employ to effectively get to that conclusion. But you pay significantly more now for a $ of earnings than you generally did in the past, just like you pay more for a $ of coupon from a riskless bond than in the past. So if 'all we have is the past' means you end up looking at past stock returns and figuring that's the 'over/under' for future returns, you're being pretty clearly over optimistic IMO. If you just assume 'stocks will probably go up', that's reasonable enough.

Although this doesn't exactly answer your question which is a difficult one. If your appetite for risk was a close function of absolute expected return, or the difference in expected return between stocks and bonds (aka expected equity risk premium, and some theoretical treatments would say your risk appetite should be a function of the ERP), then there is indeed a difficult issue to estimate the expected total return or ERP more accurately than averaging a bunch of numbers from 'all' past situations (actually a pretty limited data set of only ~100 yrs in one country, usually) including ones clearly different from now*. Personally my risk appetite is not a close function of my estimate of total expected return or expected ERP of stocks. A lot of the responses on threads like this I think are saying the same thing in different words.

*this is a factor even with ERP, a recent thread posited that average of all past ERP was a better estimate than ones based on current valuation, then add it to the actual current 'riskless' rate. But why is market clearing investors' view of stock risk in the years/decades immediately following the Great Depression a good measure of risk preferences built into current stock prices now after recent years/decades of great stock returns and where the sharp downturns were 'all better now' in a few years or even months? That doesn't make a lot more sense to me than just averaging together past total stock returns when valuations were much lower than now as if valuation makes no difference at all. And in the riskless rate+ERP case we're *admitting* that now's bond valuations matter, but still saying now's stock valuations somehow don't matter.
Last edited by JackoC on Fri Jan 08, 2021 12:11 pm, edited 1 time in total.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by HomerJ »

000 wrote: Thu Jan 07, 2021 11:59 pm
HomerJ wrote: Thu Jan 07, 2021 5:05 pm
Scooter57 wrote: Thu Jan 07, 2021 4:15 pm The market only goes up over time if there are more people and more products and more people.
I don't believe that's correct.

It's not a closed system. There is input into the system which makes the system more valuable over time. Steady input would still be input. I'm not sure it's necessary for there to be increasing input.
You're forgetting that the market is pricing in growth. If there is less growth than expected, equities could have negative real returns.
In the short-term sure. Steady input is still growth. Not as fast as increasing input, but system still grows over time.
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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