Portfolios for long term investors

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Robert T
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Portfolios for long term investors

Post by Robert T »

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Portfolios for long term investors by John Cochrane

Quite a long read, but may be of interest to some.

Robert
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Re: Portfolios for long term investors

Post by MIretired »

Nice read for me. Even I can understand the 1st 1/4 of it.
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Re: Portfolios for long term investors

Post by drumboy256 »

Good reminder that every buyer has a seller…. Even total market index funds.
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Re: Portfolios for long term investors

Post by imak »

Robert T wrote: Sat Sep 11, 2021 8:18 pm .
Portfolios for long term investors by John Cochrane

Quite a long read, but may be of interest to some.

Robert
.
Thanks for sharing this, John Cochrane is insightful as always. A payoff based view of investment, buying cashflows cheap, makes a lot of sense.
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Re: Portfolios for long term investors

Post by redbarn »

Very insightful article, thanks for posting this.
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Re: Portfolios for long term investors

Post by muffins14 »

Interesting paper. As an individual, an actionable thing to me seems to be that to the extent that I think my income cash flows are not correlated with the same risks that show up in economic downturns, value may be a good investment. At least to the degree that I’m not bothered by possibly deeper drawdowns during the decline, I’d be the other side of the trade for those who are sensitive to those drawdowns, thus providing them some liquidity and earning me a small premium for doing so, which is a nice explanation for the value premium.

One piece that I didn’t expect was the recommendation that a truly long-term investor should prefer mixed AAA bonds over treasuries due to the higher yield. In isolation that seems correct, but in the context of a portfolio, that wasn’t my prior assumption.

How should I think about bonds in my portfolio then? I hold long term treasuries as my only bonds because I see them as providing the best boost if equities decline. I guess that means I’m the one willing to give up the yield difference between treasuries and AAA bonds because I’m willing to pay for the downside protection it provides to my portfolio?

If that’s the case and it’s also the case that I really don’t need to withdraw anything for 10 more years, then it seems like I should be 100% equities instead of holding any bonds now
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Re: Portfolios for long term investors

Post by sycamore »

I didn't get through the whole paper, and didn't understand all of what I did read, but I did notice some interesting tidbits.

In section 3 "A General Equilibrium Approach" Cochrane says (emphasis mine)
General equilibrium thinking starts with a deep, powerful and frequently overlooked theorem:

The average investor must hold the market portfolio.

The first implication: If you are not identifiably different than average, then you should hold the market portfolio. You should not even rebalance. If stock prices go up, from 60/40 of total assets, to 80/20, and you rebalance to 60/40, someone else has to overweight equities. Rebalancing is a zero-sum market-timing strategy ...

The average-investor theorem is powerful, because portfolio theory is hard. You have to estimate or otherwise understand time-varying means and covariances of asset returns and state variables, alphas and betas. Then you have to make a difficult computation, and do a lot of massaging to keep it from blowing up. But if you know that you’re no different than the average – or if you don’t really know you are different and how – you’re done, you know the answer. Off to the total market portfolio with you.
That sounds promising. Many of us can come up with reasons why we're special or different (job situation, family situation, health, etc.), but that doesn't mean we're really all that different from average. We're probably all close enough to average that it's safe to say we're average. And knowing that "an average portfolio is a good portfolio" is helpful advice in the face of financial chit-chatters saying "go buy stocks!" or "things look bad, better sell now!". Stick with an average portfolio and you're done.

However I don't quite follow what he means by the "market portfolio". His statement "The average investor must hold the market portfolio" makes sense to me if I apply it to the US stock market. And it still makes sense to me if international stocks are included. But what does he really mean by "market portfolio" -- does it means the stock and bond markets in aggregate? Or all the investible markets like stocks and bonds and real estate and commodities, etc.? Maybe he describes that in the part of the paper I didn't read.
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Re: Portfolios for long term investors

Post by djm2001 »

sycamore: By "market portfolio" he means all publicly traded assets, including global stocks and bonds.
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Re: Portfolios for long term investors

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sycamore wrote: Mon Sep 13, 2021 4:24 pm I didn't get through the whole paper, and didn't understand all of what I did read, but I did notice some interesting tidbits.

In section 3 "A General Equilibrium Approach" Cochrane says (emphasis mine)
General equilibrium thinking starts with a deep, powerful and frequently overlooked theorem:

The average investor must hold the market portfolio.
I don't know if that is actually true. It would only some sort of dollar-weighted average investor that would have to match the market, wouldn't it? And some of those investors are insurance companies, pensions funds, and non-profits. And then even among US households, about 1% represent something like half of the dollars invested.
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Re: Portfolios for long term investors

Post by tre3sori »

Presentation/summary of this paper by John Cochrane himself on youtube: https://www.youtube.com/watch?v=omL29oK_juI
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Re: Portfolios for long term investors

Post by imak »

There are some excellent quotes in this paper.

On hedging income streams:

"The income streams of well-paid people or business owners are likely a lot like S&P500 dividends, and if anything more cyclical, and prone to disaster shocks in bad times, and correlated with the dividend streams of their firms or industries.
Where did we get the idea that wages are a bond-like investment? Well, because we are not very good at marking wages to market with the nebulous but highly time-varying discount rates that apply to marketed dividend streams. If you marked S&P500 dividends to market using a constant discount rate, they would look pretty bond-like too."

On value investing:

"Much of value investing consists of deliberately not looking under the hood. When investors look at value stock names, companies that have fallen, companies with no news or glamor, companies on the edge of failure that statistically come back more frequently than not, companies just offering steady streams of dividends at low prices, those investors
often run away. Now, perhaps by forcing a quantitative selection over behavioral bias, value strategies allow people to buy what they would not buy if they looked under the hood, and allow all investors to buy stocks that others irrationally shun. But perhaps investors who shun value stocks when they see the names are seeing in those names some commonality with their own fortunes. But if it is wise not to look under the hood at company names, perhaps not looking under the hood at high frequency returns, at least without really understanding state variables and cross-derivatives of the value function, is also valuable discipline."

On Home-ownership:

"The average personal investor sits on a non-traded, highly leveraged, illiquid asset chock full of idiosyncratic risk – the owner-occupied home. That government policy heavily encourages such a disastrous investment, under the fallacy that homes “build wealth” (better than stocks), is obviously partly to blame. People in many other countries rent houses, and the first thing a consumer financial protection effort should do is to discourage such investment. (Getting 401(k) out of company stock might be the second.)"
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Re: Portfolios for long term investors

Post by RubyTuesday »

muffins14 wrote: Mon Sep 13, 2021 8:18 am

One piece that I didn’t expect was the recommendation that a truly long-term investor should prefer mixed AAA bonds over treasuries due to the higher yield. In isolation that seems correct, but in the context of a portfolio, that wasn’t my prior assumption.

How should I think about bonds in my portfolio then? I hold long term treasuries as my only bonds because I see them as providing the best boost if equities decline. I guess that means I’m the one willing to give up the yield difference between treasuries and AAA bonds because I’m willing to pay for the downside protection it provides to my portfolio?

If that’s the case and it’s also the case that I really don’t need to withdraw anything for 10 more years, then it seems like I should be 100% equities instead of holding any bonds now
I found the paper very interesting and his thoughts on long term treasuries particularly interesting.

My understanding is that he thinks long term investors should not want to pay high prices (accept low yields) for assets whose price has been driven up on volume, information trading, and liquidity needs. Certainly LTT trade on volume and liquidity. If you don’t care about liquidity don’t buy LTT. That’s not really a surprise for LTT, but it is a different way of looking at treasuries more generally, including shorter and intermediate term.

Since TIPS are less liquid, and there aren’t much if any inflation protected corporate securities, I would think the long term investor that is not 100% equity, would have either all long term TIPS (the true risk free asset) or a combination of TIPS and AAA Corporates, and with maybe some CDs mixed in for liquidity.

Thoughts?
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Re: Portfolios for long term investors

Post by jeffyscott »

RubyTuesday wrote: Tue Sep 14, 2021 1:01 pm
muffins14 wrote: Mon Sep 13, 2021 8:18 am

One piece that I didn’t expect was the recommendation that a truly long-term investor should prefer mixed AAA bonds over treasuries due to the higher yield. In isolation that seems correct, but in the context of a portfolio, that wasn’t my prior assumption.

How should I think about bonds in my portfolio then? I hold long term treasuries as my only bonds because I see them as providing the best boost if equities decline. I guess that means I’m the one willing to give up the yield difference between treasuries and AAA bonds because I’m willing to pay for the downside protection it provides to my portfolio?

If that’s the case and it’s also the case that I really don’t need to withdraw anything for 10 more years, then it seems like I should be 100% equities instead of holding any bonds now
I found the paper very interesting and his thoughts on long term treasuries particularly interesting.

My understanding is that he thinks long term investors should not want to pay high prices (accept low yields) for assets whose price has been driven up on volume, information trading, and liquidity needs. Certainly LTT trade on volume and liquidity. If you don’t care about liquidity don’t buy LTT. That’s not really a surprise for LTT, but it is a different way of looking at treasuries more generally, including shorter and intermediate term.

Since TIPS are less liquid, and there aren’t much if any inflation protected corporate securities, I would think the long term investor that is not 100% equity, would have either all long term TIPS (the true risk free asset) or a combination of TIPS and AAA Corporates, and with maybe some CDs mixed in for liquidity.

Thoughts?
Other than things like pensions, SS, and indexed annuities, those TIPS as well as I-bonds are the closest thing to an inflation indexed perpetuity.

The liquidity of nominal treasuries doesn't matter, if you don't view short term volatility as risk and don't rebalance. Two things that he seems to be suggesting, though I have read less than halfway through so far.
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Re: Portfolios for long term investors

Post by secondopinion »

imak wrote: Tue Sep 14, 2021 3:22 am There are some excellent quotes in this paper.

On hedging income streams:

"The income streams of well-paid people or business owners are likely a lot like S&P500 dividends, and if anything more cyclical, and prone to disaster shocks in bad times, and correlated with the dividend streams of their firms or industries.
Where did we get the idea that wages are a bond-like investment? Well, because we are not very good at marking wages to market with the nebulous but highly time-varying discount rates that apply to marketed dividend streams. If you marked S&P500 dividends to market using a constant discount rate, they would look pretty bond-like too."

On value investing:

"Much of value investing consists of deliberately not looking under the hood. When investors look at value stock names, companies that have fallen, companies with no news or glamor, companies on the edge of failure that statistically come back more frequently than not, companies just offering steady streams of dividends at low prices, those investors
often run away. Now, perhaps by forcing a quantitative selection over behavioral bias, value strategies allow people to buy what they would not buy if they looked under the hood, and allow all investors to buy stocks that others irrationally shun. But perhaps investors who shun value stocks when they see the names are seeing in those names some commonality with their own fortunes. But if it is wise not to look under the hood at company names, perhaps not looking under the hood at high frequency returns, at least without really understanding state variables and cross-derivatives of the value function, is also valuable discipline."

On Home-ownership:

"The average personal investor sits on a non-traded, highly leveraged, illiquid asset chock full of idiosyncratic risk – the owner-occupied home. That government policy heavily encourages such a disastrous investment, under the fallacy that homes “build wealth” (better than stocks), is obviously partly to blame. People in many other countries rent houses, and the first thing a consumer financial protection effort should do is to discourage such investment. (Getting 401(k) out of company stock might be the second.)"
To the last point, I think it is garbage. After 40-50+ years, where does all that rent expense go to for the payer? Lost forever; it is 100% expense. At least home ownership saves some of that expense into some asset and it often saves money in the long run, especially if there is considerable inflation. Over the past three generations of results in my family, it has been a safe and invaluable investment to have home ownership. If renting was all what they did, it would have been a financial blunder for them and the following generations.
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Re: Portfolios for long term investors

Post by jeffyscott »

secondopinion wrote: Tue Sep 14, 2021 5:13 pm
imak wrote: Tue Sep 14, 2021 3:22 am There are some excellent quotes in this paper.

On hedging income streams:

"The income streams of well-paid people or business owners are likely a lot like S&P500 dividends, and if anything more cyclical, and prone to disaster shocks in bad times, and correlated with the dividend streams of their firms or industries.
Where did we get the idea that wages are a bond-like investment? Well, because we are not very good at marking wages to market with the nebulous but highly time-varying discount rates that apply to marketed dividend streams. If you marked S&P500 dividends to market using a constant discount rate, they would look pretty bond-like too."

On value investing:

"Much of value investing consists of deliberately not looking under the hood. When investors look at value stock names, companies that have fallen, companies with no news or glamor, companies on the edge of failure that statistically come back more frequently than not, companies just offering steady streams of dividends at low prices, those investors
often run away. Now, perhaps by forcing a quantitative selection over behavioral bias, value strategies allow people to buy what they would not buy if they looked under the hood, and allow all investors to buy stocks that others irrationally shun. But perhaps investors who shun value stocks when they see the names are seeing in those names some commonality with their own fortunes. But if it is wise not to look under the hood at company names, perhaps not looking under the hood at high frequency returns, at least without really understanding state variables and cross-derivatives of the value function, is also valuable discipline."

On Home-ownership:

"The average personal investor sits on a non-traded, highly leveraged, illiquid asset chock full of idiosyncratic risk – the owner-occupied home. That government policy heavily encourages such a disastrous investment, under the fallacy that homes “build wealth” (better than stocks), is obviously partly to blame. People in many other countries rent houses, and the first thing a consumer financial protection effort should do is to discourage such investment. (Getting 401(k) out of company stock might be the second.)"
To the last point, I think it is garbage. After 40-50+ years, where does all that rent expense go to for the payer? Lost forever; it is 100% expense. At least home ownership saves some of that expense into some asset and it often saves money in the long run, especially if there is considerable inflation. Over the past three generations of results in my family, it has been a safe and invaluable investment to have home ownership. If renting was all what they did, it would have been a financial blunder for them and the following generations.
It should not be treated as an investment, it should be looked at as the he does in another section (page 10):

House prices vary a lot. Yet most of us do not market-time housing. Yes, the transactions costs are larger. But the main reason is, we have to live somewhere. The house you want to buy goes up just as much as the house you want to sell...Indeed one of the major benefits of buying a house is that you are protected from rent variation, and can live there as long as you want no matter how high rents go. A house is a housing services perpetuity.
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Re: Portfolios for long term investors

Post by muffins14 »

secondopinion wrote: Tue Sep 14, 2021 5:13 pm
To the last point, I think it is garbage. After 40-50+ years, where does all that rent expense go to for the payer? Lost forever; it is 100% expense. At least home ownership saves some of that expense into some asset and it often saves money in the long run, especially if there is considerable inflation. Over the past three generations of results in my family, it has been a safe and invaluable investment to have home ownership. If renting was all what they did, it would have been a financial blunder for them and the following generations.
That’s one example. Your case isn’t a general rule though. I’m glad it worked out for you, but this can be a quantitative question with different answers for different situations.

For example the opportunity cost of a down payment can be a very big cost. Someone could easily say the decision to dump money into a house instead of investing would be a blunder instead

In other words the “rent expense” is offset by higher investment gains because your still-larger portfolio of size X is producing more gains than X -(down payment). At some point, the equation works in favor of renting unless your owned-home goes up enough in value faster than the S&P 500
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Re: Portfolios for long term investors

Post by muffins14 »

Robert T wrote: Sat Sep 11, 2021 8:18 pm .
Portfolios for long term investors by John Cochrane

Quite a long read, but may be of interest to some.

Robert
.
Robert, I am curious what your takeaways are here, given your portfolio tendencies
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Re: Portfolios for long term investors

Post by secondopinion »

muffins14 wrote: Tue Sep 14, 2021 5:46 pm
secondopinion wrote: Tue Sep 14, 2021 5:13 pm
To the last point, I think it is garbage. After 40-50+ years, where does all that rent expense go to for the payer? Lost forever; it is 100% expense. At least home ownership saves some of that expense into some asset and it often saves money in the long run, especially if there is considerable inflation. Over the past three generations of results in my family, it has been a safe and invaluable investment to have home ownership. If renting was all what they did, it would have been a financial blunder for them and the following generations.
That’s one example. Your case isn’t a general rule though. I’m glad it worked out for you, but this can be a quantitative question with different answers for different situations.

For example the opportunity cost of a down payment can be a very big cost. Someone could easily say the decision to dump money into a house instead of investing would be a blunder instead

In other words the “rent expense” is offset by higher investment gains because your still-larger portfolio of size X is producing more gains than X -(down payment). At some point, the equation works in favor of renting unless your owned-home goes up enough in value faster than the S&P 500
Can you explain how long-term renting will be better than long-term homeownership? I understand those who move a lot or otherwise need to rent, but I am talking those who stay put for long periods.

I know the house value will not grow as fast as the S&P; I never said it would. But after some point, there is no rent. It is easy to say invest it all, but you will be at the mercy of rent indefinitely. You get the benefit of home appreciation and lack of having to pay rent after some point (of course, homeownership is not free; but it is less than rent once you own it without a mortgage [or rent has continued to increase while the mortgage payment has not]).

In short, it is not what you make but it is what you keep that matters here. The renters hope that they will make more income; the homeowners hope that they will pay less expenses. Less expenses does not result in more taxes; more income does. You might suppose that the renters will outperform homeowners (and they might), but I have yet to see how long-term that homeownership is bad choice for long-term residency.
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Post by chuckwalla »

Can someone summarize the paper?
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Re: Portfolios for long term investors

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secondopinion wrote: Wed Sep 15, 2021 3:23 pm Can you explain how long-term renting will be better than long-term homeownership? I understand those who move a lot or otherwise need to rent, but I am talking those who stay put for long periods.
Let's take me as an example. My mortgage payment + insurance + property taxes have historically been around the amount it would take to rent an apartment. If I take my down payment and run it thorough an 80/20 allocation, my wealth would be $250K higher, even factoring in the equity in the house.

Yes, at some point, my mortgage payment will go to $0. But the insurance and property taxes will remain. In addition, there's more maintenance involved. People tend to forget the latter. They may count big ticket items, like HVAC or roofs, but they forget that they spend $1500 on paint. Or $500/yr for 10 years to get the lawn mowed.

Up until the COVID run-up in prices, my house was worth less than I paid for it in 2005. For 15ish years I was sitting on a loss without even counting the effect of run-of-the-mill inflation. (I bought it in 2005 dollars and even in 2020 it was nominally worth less, let alone in real dollars. 2005-2020, my 2005 dollars were worth 33% more than a 2020 dollar.) Even right now, in real dollars, I'm sitting at a loss without even counting the maintenance dollars.

You can make an argument that as a renter, you're implicitly paying those same expenses. And that's true, to an extent. However, you haven't tied up a substantial amount of money into an illiquid asset. There will be some volume savings on the maintenance costs, especially for multifamily units or apartment buildings. E.g., a 3 family house has the same size roof as my single family, effectively cutting the cost to 1/3 rd.

My home needs to appreciate by another 33% + inflation for me to be equal. It needs go up 50% from there to match what my down payment at an 80/20 allocation would netted me.

Would I have preferred to live in an apartment? Probably not. I like having a garage and not sharing a wall with strangers. But the flexibility would have been nice.
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Re: Portfolios for long term investors

Post by secondopinion »

exodusNH wrote: Wed Sep 15, 2021 4:17 pm
secondopinion wrote: Wed Sep 15, 2021 3:23 pm Can you explain how long-term renting will be better than long-term homeownership? I understand those who move a lot or otherwise need to rent, but I am talking those who stay put for long periods.
Let's take me as an example. My mortgage payment + insurance + property taxes have historically been around the amount it would take to rent an apartment. If I take my down payment and run it thorough an 80/20 allocation, my wealth would be $250K higher, even factoring in the equity in the house.

Yes, at some point, my mortgage payment will go to $0. But the insurance and property taxes will remain. In addition, there's more maintenance involved. People tend to forget the latter. They may count big ticket items, like HVAC or roofs, but they forget that they spend $1500 on paint. Or $500/yr for 10 years to get the lawn mowed.

Up until the COVID run-up in prices, my house was worth less than I paid for it in 2005. For 15ish years I was sitting on a loss without even counting the effect of run-of-the-mill inflation. (I bought it in 2005 dollars and even in 2020 it was nominally worth less, let alone in real dollars. 2005-2020, my 2005 dollars were worth 33% more than a 2020 dollar.) Even right now, in real dollars, I'm sitting at a loss without even counting the maintenance dollars.

You can make an argument that as a renter, you're implicitly paying those same expenses. And that's true, to an extent. However, you haven't tied up a substantial amount of money into an illiquid asset. There will be some volume savings on the maintenance costs, especially for multifamily units or apartment buildings. E.g., a 3 family house has the same size roof as my single family, effectively cutting the cost to 1/3 rd.

My home needs to appreciate by another 33% + inflation for me to be equal. It needs go up 50% from there to match what my down payment at an 80/20 allocation would netted me.

Would I have preferred to live in an apartment? Probably not. I like having a garage and not sharing a wall with strangers. But the flexibility would have been nice.
It seems like you got the short end of the stick here. However, was having "a garage and not sharing a wall with strangers" for 15 years worth it? And it could have been the other way, too, that you would have done well instead with the home equity.

That is why I try to look at the expense picture and judge based on equivalent living circumstances with rentals. I can be cheap and do better renting; but I doubt I want cheap living though.
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Re: Portfolios for long term investors

Post by jeffyscott »

exodusNH wrote: Wed Sep 15, 2021 4:17 pm
secondopinion wrote: Wed Sep 15, 2021 3:23 pm Can you explain how long-term renting will be better than long-term homeownership? I understand those who move a lot or otherwise need to rent, but I am talking those who stay put for long periods.
Let's take me as an example. My mortgage payment + insurance + property taxes have historically been around the amount it would take to rent an apartment.
...
Would I have preferred to live in an apartment? Probably not. I like having a garage and not sharing a wall with strangers. But the flexibility would have been nice.
It is not really valid to compare two completely different housing choices. If your preference is to live in an apartment, then the valid comparison is buying an apartment style condo vs. renting a similar apartment. If your preference is to live in a single family house, then the valid comparison is buying a house vs. renting a similar house.

This may be why the paper seems to be on both sides, in one place calling buying a home "a disastrous investment" and in another saying that "one of the major benefits of buying a house is that you are protected from rent variation, and can live there as long as you want no matter how high rents go" and that "a house is a housing services perpetuity".
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Re: Portfolios for long term investors

Post by exodusNH »

secondopinion wrote: Wed Sep 15, 2021 4:31 pm
exodusNH wrote: Wed Sep 15, 2021 4:17 pm
secondopinion wrote: Wed Sep 15, 2021 3:23 pm Can you explain how long-term renting will be better than long-term homeownership? I understand those who move a lot or otherwise need to rent, but I am talking those who stay put for long periods.
Let's take me as an example. My mortgage payment + insurance + property taxes have historically been around the amount it would take to rent an apartment. If I take my down payment and run it thorough an 80/20 allocation, my wealth would be $250K higher, even factoring in the equity in the house.

Yes, at some point, my mortgage payment will go to $0. But the insurance and property taxes will remain. In addition, there's more maintenance involved. People tend to forget the latter. They may count big ticket items, like HVAC or roofs, but they forget that they spend $1500 on paint. Or $500/yr for 10 years to get the lawn mowed.

Up until the COVID run-up in prices, my house was worth less than I paid for it in 2005. For 15ish years I was sitting on a loss without even counting the effect of run-of-the-mill inflation. (I bought it in 2005 dollars and even in 2020 it was nominally worth less, let alone in real dollars. 2005-2020, my 2005 dollars were worth 33% more than a 2020 dollar.) Even right now, in real dollars, I'm sitting at a loss without even counting the maintenance dollars.

You can make an argument that as a renter, you're implicitly paying those same expenses. And that's true, to an extent. However, you haven't tied up a substantial amount of money into an illiquid asset. There will be some volume savings on the maintenance costs, especially for multifamily units or apartment buildings. E.g., a 3 family house has the same size roof as my single family, effectively cutting the cost to 1/3 rd.

My home needs to appreciate by another 33% + inflation for me to be equal. It needs go up 50% from there to match what my down payment at an 80/20 allocation would netted me.

Would I have preferred to live in an apartment? Probably not. I like having a garage and not sharing a wall with strangers. But the flexibility would have been nice.
It seems like you got the short end of the stick here. However, was having "a garage and not sharing a wall with strangers" for 15 years worth it? And it could have been the other way, too, that you would have done well instead with the home equity.

That is why I try to look at the expense picture and judge based on equivalent living circumstances with rentals. I can be cheap and do better renting; but I doubt I want cheap living though.
Absolutely. Just like comparing fund returns, starting date matters. Had I bought my house in 2009, the results would be completely different!

I feel many people are if the opinion that rent is "throwing away money." It's not always the case. I also feel that people forget the on-going maintenance involved in a house. It's like the people who say they "won" $1000 at the casino. They don't mention that they first lost $900.

If you sell your house for $200,000 more than you bought it for, you haven't made $200K. You need to subtract inflation, the opportunity costs of your down payment, all the little costs -- toilet seats, paint, window treatments, etc., the big costs -- furnace, roof, and arguably the interest paid.
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Re: Portfolios for long term investors

Post by arcticpineapplecorp. »

portfolio for long term investors:
total world stock market index fund
total bond market index fund

percentages in each according to need, ability and willingness to take risk.

just saved you all a bunch of reading.

https://www.bogleheads.org/wiki/Three-fund_portfolio
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events.
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Re: Portfolios for long term investors

Post by chem6022 »

chuckwalla wrote: Wed Sep 15, 2021 3:31 pm Can someone summarize the paper?
I started to summarize but it looked like the first few slides of the YouTube linked talk above, so just to watch him summarize. Topic is academic research into portfolio theory with an eye toward income streams and heterogeneous investor objectives.
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Re: Portfolios for long term investors

Post by Valuethinker »

secondopinion wrote: Tue Sep 14, 2021 5:13 pm

To the last point, I think it is garbage. After 40-50+ years, where does all that rent expense go to for the payer? Lost forever; it is 100% expense. At least home ownership saves some of that expense into some asset and it often saves money in the long run, especially if there is considerable inflation. Over the past three generations of results in my family, it has been a safe and invaluable investment to have home ownership. If renting was all what they did, it would have been a financial blunder for them and the following generations.
See Neil Monnery "Safe as Houses: 8 centuries of housing prices"

Not all houses rise in price. Even those that do, do not always beat inflation. Buffalo NY was one of the wealthiest cities in North America once (more millionaires than any other city). You can look at those big Victorian houses and see it. But the last 50 years has not been kind to Buffalo (nor any of those upstate NY cities, I don't think). The same house in Brooklyn? Well, if you could survive the 1970s (remember the big blackout, and Bushwick burning in the looting?) then a house in Brooklyn, same price in 1970 say, is on a different planet now.

If you had bought a $20k house in Cleveland, Buffalo and Toronto in 1960, then my guess is that the former 2 have at best matched inflation or a bit extra. Say $500k? The house in Toronto? $2m or so (say somewhat less in USD).

Location. Location. Location. A home is not a diversified investment.

Monnery makes the point that it's likely that homeowners significantly underestimate the running costs of a home (taxes etc) but also the costs of repair, maintenance and modernization. If you've every shopped 30-40 year old houses, they look it - they need up to date kitchens, replaced HVAC etc, typically. Roofs are another good one.

But, you might have bought a house in Melbourne or Sydney or Toronto or Vancouver or San Francisco 30-40 years ago. And not St Louis or some other Midwestern city which has struggled. In which case, congratulations.

Like-for-like ie condos v rental apartments, the costs of home ownership are much clearer.

The main benefits of home ownership are:
- forced savings arising from repayment of mortgage
- various tax breaks awarded by governments -- some of which are absolutely huge. Conversely they also drive up the *entry* price of homes, so it's a moot point re how much you benefit
- greater utility of owning and controlling your own place (although most Americans seem to suffer under HOAs ... which have their own enforced taste and control)
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Re: Portfolios for long term investors

Post by exodusNH »

jeffyscott wrote: Wed Sep 15, 2021 4:32 pm
exodusNH wrote: Wed Sep 15, 2021 4:17 pm
secondopinion wrote: Wed Sep 15, 2021 3:23 pm Can you explain how long-term renting will be better than long-term homeownership? I understand those who move a lot or otherwise need to rent, but I am talking those who stay put for long periods.
Let's take me as an example. My mortgage payment + insurance + property taxes have historically been around the amount it would take to rent an apartment.
...
Would I have preferred to live in an apartment? Probably not. I like having a garage and not sharing a wall with strangers. But the flexibility would have been nice.
It is not really valid to compare two completely different housing choices. If your preference is to live in an apartment, then the valid comparison is buying an apartment style condo vs. renting a similar apartment. If your preference is to live in a single family house, then the valid comparison is buying a house vs. renting a similar house.

This may be why the paper seems to be on both sides, in one place calling buying a home "a disastrous investment" and in another saying that "one of the major benefits of buying a house is that you are protected from rent variation, and can live there as long as you want no matter how high rents go" and that "a house is a housing services perpetuity".
I agree they're different. However, the context is often: "Renting is stupid. You should always buy." It was in that context that I was relaying my experience. I'm obviously a sample size of one, but I think it's fair to state that many who bought from 2005-2008 and aren't in a crazy real estate place like California / NYC have had similar experiences. My house isn't some outlier. It's in a nice, mostly single family neighborhood. Lot sizes are .10-.30 acre. City water, sewer, trash pickup. Close (but not too close) to the interstate. Property taxes are lower than in surrounding towns due to a much larger business base.
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Re: Portfolios for long term investors

Post by jeffyscott »

exodusNH wrote: Thu Sep 16, 2021 8:41 am
jeffyscott wrote: Wed Sep 15, 2021 4:32 pm
exodusNH wrote: Wed Sep 15, 2021 4:17 pm
secondopinion wrote: Wed Sep 15, 2021 3:23 pm Can you explain how long-term renting will be better than long-term homeownership? I understand those who move a lot or otherwise need to rent, but I am talking those who stay put for long periods.
Let's take me as an example. My mortgage payment + insurance + property taxes have historically been around the amount it would take to rent an apartment.
...
Would I have preferred to live in an apartment? Probably not. I like having a garage and not sharing a wall with strangers. But the flexibility would have been nice.
It is not really valid to compare two completely different housing choices. If your preference is to live in an apartment, then the valid comparison is buying an apartment style condo vs. renting a similar apartment. If your preference is to live in a single family house, then the valid comparison is buying a house vs. renting a similar house.

This may be why the paper seems to be on both sides, in one place calling buying a home "a disastrous investment" and in another saying that "one of the major benefits of buying a house is that you are protected from rent variation, and can live there as long as you want no matter how high rents go" and that "a house is a housing services perpetuity".
I agree they're different. However, the context is often: "Renting is stupid. You should always buy." It was in that context that I was relaying my experience. I'm obviously a sample size of one, but I think it's fair to state that many who bought from 2005-2008 and aren't in a crazy real estate place like California / NYC have had similar experiences. My house isn't some outlier. It's in a nice, mostly single family neighborhood. Lot sizes are .10-.30 acre. City water, sewer, trash pickup. Close (but not too close) to the interstate. Property taxes are lower than in surrounding towns due to a much larger business base.
That did turn out to be a bad time to buy. A friend mentioned his place now finally being worth slightly more than he paid 15 years ago. On the other hand, he got an inflated price from selling his previous condo.

I guess one who is looking to buy for the first time could look at the rent to buy ratio and delay buying based on that. I imagine that was probably highly in favor of renting from 2005-08 and then had reversed by 2009 and subsequent years?

Buying in 2016 as a purely financial decision seemed like a good move for my son. He would have been happy to continue renting. He went from paying $525 per month rent on about the cheapest 1 bedroom apartment that he could find to paying about $50K (cash) to buy (and about $275 per month taxes, fees, insurance) for about the cheapest 1 bedroom apartment condo that he could find.

The condo included some upgrades that he would have been willing to pay about $100 per month or so in additional rent to acquire (underground parking, A/C, and dishwasher). To get these added amenities in an apartment, he'd have been looking at paying $750-800 per month in rent at that time and he was not willing to pay that much. His was a like for like comparison and I think the effective initial "yield" of almost 8% on his ~$50K investment made it a good financial move (I am including his $100 per month value for the added amenities and assuming 0.5% maintenance cost, which is probably high for an apartment). To someone who was willing to pay the $200-300 rental market price of the added amenities, it would have been a "yield" of 11% or so.
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Re: Portfolios for long term investors

Post by Grt2bOutdoors »

Robert T wrote: Sat Sep 11, 2021 8:18 pm .
Portfolios for long term investors by John Cochrane

Quite a long read, but may be of interest to some.

Robert
.
Thanks for posting the link, read a couple of pages and it looks interesting enough to continue reading it.
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Re: Portfolios for long term investors

Post by Grt2bOutdoors »

arcticpineapplecorp. wrote: Wed Sep 15, 2021 8:22 pm portfolio for long term investors:
total world stock market index fund
total bond market index fund

percentages in each according to need, ability and willingness to take risk.

just saved you all a bunch of reading.

https://www.bogleheads.org/wiki/Three-fund_portfolio
What you don’t want to read about those high expense ratios paid by the “smart money” institutional investors?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Portfolios for long term investors

Post by exodusNH »

jeffyscott wrote: Thu Sep 16, 2021 11:02 am That did turn out to be a bad time to buy. A friend mentioned his place now finally being worth slightly more than he paid 15 years ago. On the other hand, he got an inflated price from selling his previous condo.
Indeed. You can't win them all!
jeffyscott wrote: Thu Sep 16, 2021 11:02 am I guess one who is looking to buy for the first time could look at the rent to buy ratio and delay buying based on that. I imagine that was probably highly in favor of renting from 2005-08 and then had reversed by 2009 and subsequent years?
If I'm remembering correctly, my original mortgage was about $1,600 /mo. Property taxes at that time were around $350-400/mo. (New Hampshire has no income or general sales tax; funding comes mainly from property taxes.)

A two-bedroom apartment in a comparable neighborhood would probably have rented for $1100.
jeffyscott wrote: Thu Sep 16, 2021 11:02 am Buying in 2016 as a purely financial decision seemed like a good move for my son. He would have been happy to continue renting. He went from paying $525 per month rent on about the cheapest 1 bedroom apartment that he could find to paying about $50K (cash) to buy (and about $275 per month taxes, fees, insurance) for about the cheapest 1 bedroom apartment condo that he could find.

The condo included some upgrades that he would have been willing to pay about $100 per month or so in additional rent to acquire (underground parking, A/C, and dishwasher). To get these added amenities in an apartment, he'd have been looking at paying $750-800 per month in rent at that time and he was not willing to pay that much. His was a like for like comparison and I think the effective initial "yield" of almost 8% on his ~$50K investment made it a good financial move (I am including his $100 per month value for the added amenities and assuming 0.5% maintenance cost, which is probably high for an apartment). To someone who was willing to pay the $200-300 rental market price of the added amenities, it would have been a "yield" of 11% or so.
It absolutely can make financial sense. I'm glad it worked out for your son! I think people take too firm a stance on buy vs rent, though. There are so many variables. Just like the market, there will be long periods were one is objectively better than the other, but over a lifetime, I wouldn't be surprised if it was a financial wash. It's difficult to put a price on the emotional aspect, though. I don't enjoy being a home owner as I don't have the skills -- and don't have the interest in learning them -- to do any of the maintenance. I like the privacy aspect and the freedom to make changes, like the patio and hot tub I put in right before COVID. (What a lifesaver!)

In looking at Zillow's estimate on the place, I'm about "$50K" above I paid for it, but factoring in inflation, it would need to rise about another $50K before I'm whole. Of course, the $17K roof I need to put on... should have cost $10K, but supplies are 25% more expensive than in January and labor is short. (And the central air died in June, which would have been $7-$10K, but that went on hold when it was clear the roof needed replacing.)
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Re: Portfolios for long term investors

Post by imak »

exodusNH wrote: Thu Sep 16, 2021 12:06 pm I think people take too firm a stance on buy vs rent, though. There are so many variables. Just like the market, there will be long periods were one is objectively better than the other, but over a lifetime, I wouldn't be surprised if it was a financial wash.
There is an indicator called price-to-rent ratio which maybe useful in identifying relatively cheap assets. It is interpreted similar to CAPE ratio for equities but this chart varies a lot with location and cities.
https://fredblog.stlouisfed.org/2018/09 ... indicator/

Just like CAPE, price-to-rent ratio is not useful as a market timing tool. We still need to evaluate each buying opportunity on its own, but probably useful in avoiding highly expensive properties.
muffins14 wrote: Wed Sep 15, 2021 3:00 pm
Robert T wrote: Sat Sep 11, 2021 8:18 pm .
Portfolios for long term investors by John Cochrane

Quite a long read, but may be of interest to some.

Robert
.
Robert, I am curious what your takeaways are here, given your portfolio tendencies
+1. Curious as well to know Robert's thoughts on this.
Also, IMHO, this article is worthy of inclusion in "Collective Thoughts [investing mini-reference]" stickied thread on the front page as it highlights a cash-flow centric approach for thinking about long-term portfolios.
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Re: Portfolios for long term investors

Post by ScubaHogg »

Good read. Tons I didn’t understand, buts it’s refreshing to see someone say we should think harder about the earnings/“payoffs” of equities as opposed to just the price level of the stock (at least that’s how I took it). Nothing may come of it, but it’s nice to see someone want to think about.
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Re: Portfolios for long term investors

Post by ScubaHogg »

secondopinion wrote: Wed Sep 15, 2021 3:23 pm Less expenses does not result in more taxes; more income does.
People’s property taxes go up all the time. Just ask my friends in Texas.

So even with a house paid off you still have:

- property taxes
- maintenance
- insurance
- opportunity cost of your money not being invested in equities
- transactions costs if/when you need to sell

These are real costs. Doesn’t mean homeownership is bad, but it’s not always a slam dunk either.
“The purpose of the margin of safety is to render the forecast unnecessary.” - Ben Graham
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Re: Portfolios for long term investors

Post by secondopinion »

ScubaHogg wrote: Thu Sep 16, 2021 1:57 pm
secondopinion wrote: Wed Sep 15, 2021 3:23 pm Less expenses does not result in more taxes; more income does.
People’s property taxes go up all the time. Just ask my friends in Texas.

So even with a house paid off you still have:

- property taxes
- maintenance
- insurance
- opportunity cost of your money not being invested in equities
- transactions costs if/when you need to sell

These are real costs. Doesn’t mean homeownership is bad, but it’s not always a slam dunk either.
I know these factors; I am just saying that spending less money is usually a tax-free way to increase profits (versus increasing income).

I agree that either way (rent or homeownership) can be good or bad, but one must make the choice and hope it is the right one.
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Re: Portfolios for long term investors

Post by jeffyscott »

ScubaHogg wrote: Thu Sep 16, 2021 1:53 pm Good read. Tons I didn’t understand, buts it’s refreshing to see someone say we should think harder about the earnings/“payoffs” of equities as opposed to just the price level of the stock (at least that’s how I took it).
Same here.

One of the things I did not understand is what is meant by "the consumption claim":
If the indexed perpetuity is the riskless asset, then the consumption claim, that pays one unit of aggregate consumption, must be the risky
claim and held by the average investor.

(section 2.8, pg. 17)

Can anyone explain that?

My other random highlights:
A colleague estimates that Stanford pays $800 million a year in fees on a $30 Billion endowment.
2.67% :!: :?:

A good test of a portfolio theory, a portfolio maximization program, or portfolio adviser, is that there must be a question to which the answer is “do nothing” – hold the market portfolio without rebalancing. This is a vital placebo test. If the program or adviser says “you should buy value and short growth,” then ask, “and who are you telling to short value and buy growth?” If the answer is “nobody, this is a great deal for any investor,” at a minimum the portfolio view is not fleshed out.

If trading demands push prices around, then an uninformed investor can profit by underweighting, or even shorting, assets that trading has pushed up in value...

Highly traded securities have higher prices, lower average returns, due to the convenience yield that their shares give to information traders.
The conclusion is natural: long-term investors should avoid such assets.

If a security has a high value due to its liquidity or transactions value, and you don’t care about liquidity or transactions value, don’t buy it.

This is where he gets into AAA bonds over treasuries, which could also be applied to CDs over treasuries (where you don't even have the concern of the small default risk).

...a great deal of security value may lie in the value of shares for information trading – and that there are broad categories of stocks that long-term investors should avoid, substantially shading their portfolio away from the market-weighted index.

The “growth” stocks are where all the trading action is, where all the information is, where all the fun is. And, as we know, growth is where the prices are highest and returns are lowest.
Of course, the second sentence has not been true in recent times. I actually checked when this paper was written, when I read that :happy .

Avoiding stocks with high information trading is again something professional management can help with, for a fee.
My thought is that maybe fundamental indexing is also a way to underweight those types of stocks? But maybe that's just my confirmation bias.
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Re: Portfolios for long term investors

Post by Beensabu »

jeffyscott wrote: Thu Sep 16, 2021 2:42 pm One of the things I did not understand is what is meant by "the consumption claim":
If the indexed perpetuity is the riskless asset, then the consumption claim, that pays one unit of aggregate consumption, must be the risky
claim and held by the average investor.

(section 2.8, pg. 17)

Can anyone explain that?
It's basically using indexed perpetuity for the bond side and consumption claim for the equity side.

Look up "consumption based asset pricing" or "consumption capital asset pricing model" for more math that's completely over my head -- essentially the idea is that increased aggregate consumption leads to a higher equity risk premium and increased expected returns (and vice versa).

If the point of investment is to fund future consumption, then an investor should arguably be more interested in consumption beta than market beta, but the benchmark would vary based on the individual investor and I have no idea how to come up with that (other than that it's not the S&P 500).

It's interesting, but they sure don't like putting much in laymen's terms (probably because it's kind of impossible to do), which makes it really difficult for me to try muddle through. Thus the "maybe it's worth paying someone who actually bothers to figure this out properly for investors and their individual circumstances" bit that was in there, which felt more like hope that their students might eventually be allowed to go out in the world and be useful rather than swallowed into the status quo of the industry.

There's a huge assumption in the paper that the reader already knows this stuff. It's written by an academic for other academics.

Lesson: Be the average investor, unless you know exactly how you're not the average investor and what to do about it and why.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: Portfolios for long term investors

Post by spdoublebass »

Beensabu wrote: Thu Sep 16, 2021 7:15 pm
Lesson: Be the average investor, unless you know exactly how you're not the average investor and what to do about it and why.
Do you think he means hold the market weight of stocks and bonds? Like William Sharpe?

Or to just hold index funds with any AA you decide?
I'm trying to think, but nothing happens
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Re: Portfolios for long term investors

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secondopinion wrote: Wed Sep 15, 2021 3:23 pm
Can you explain how long-term renting will be better than long-term homeownership? I understand those who move a lot or otherwise need to rent, but I am talking those who stay put for long periods.
Two important things to understand:

1) You always consume shelter, i.e. "pay rent", whether it's to yourself as the homeowner or to someone else.

2) A mortgage is just a loan on your balance sheet that either amplifies or attenuates your total portfolio return depending on whether or not your total return > the loan interest cost. Whether your debt is zero or greater than zero is irrelevant to the question of whether allocating to a house asset is "better" than allocating to some other asset. (Therefore, do not intertwine your mortgage and the house asset when considering this question).

You can answer the question with a simple hypothetical. Say you have a job that produces income, and $1m in savings. You could put the $1m into stocks or you could buy a house for $1m and live in it.

When you put the money into stocks, you use your income stream to buy your shelter from someone else. When you put the money into the house, you buy the shelter from yourself. You "pay rent" (consume shelter) either way and let's assume it's an equal payment. Now you can simply compare historical returns for each investment:

House: yield (~5%) + appreciation (~1%) - expense (~1%) = 5%.

Stocks: 8%.

Thus, on an expected returns basis, in general, owning stocks (and paying someone else for shelter) beats owning a house with a given allotment of money. However, owning a stock/bond portfolio instead of a house may or may not be "better", it depends on the allocation.
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Re: Portfolios for long term investors

Post by gblack »

countmein wrote: Fri Sep 17, 2021 12:58 am
secondopinion wrote: Wed Sep 15, 2021 3:23 pm
Can you explain how long-term renting will be better than long-term homeownership? I understand those who move a lot or otherwise need to rent, but I am talking those who stay put for long periods.
Two important things to understand:

1) You always consume shelter, i.e. "pay rent", whether it's to yourself as the homeowner or to someone else.

2) A mortgage is just a loan on your balance sheet that either amplifies or attenuates your total portfolio return depending on whether or not your total return > the loan interest cost. Whether your debt is zero or greater than zero is irrelevant to the question of whether allocating to a house asset is "better" than allocating to some other asset. (Therefore, do not intertwine your mortgage and the house asset when considering this question).

You can answer the question with a simple hypothetical. Say you have a job that produces income, and $1m in savings. You could put the $1m into stocks or you could buy a house for $1m and live in it.

When you put the money into stocks, you use your income stream to buy your shelter from someone else. When you put the money into the house, you buy the shelter from yourself. You "pay rent" (consume shelter) either way and let's assume it's an equal payment. Now you can simply compare historical returns for each investment:

House: yield (~5%) + appreciation (~1%) - expense (~1%) = 5%.

Stocks: 8%.

Thus, on an expected returns basis, in general, owning stocks (and paying someone else for shelter) beats owning a house with a given allotment of money. However, owning a stock/bond portfolio instead of a house may or may not be "better", it depends on the allocation.
Good points. But perhaps worth adding in areas with high demand for housing, the benefits of home ownership become amplified because a) rents increase substantially over time b) increased rents can coincide with people needing to consume more shelter, ie having family, etc. c) home price appreciates at a higher rate. d) And at least in California with Prop 13, some expenses related to home ownership are are limited.

And I suppose the opposite occurs if housing prices stagnate over time. But still, buying a house makes sense as a hedge against the possibility of shelter inflation if you like and want to stay in the place you live.

It further makes me wonder if there is some type of evidence that housing prices "mean revert" in the way stock factors do over time. The markets strike me as substantially different, so I don't see any reason that rent and housing costs in VHCOL areas will slow, nor obvious that LCOL areas will develop. Is there any good general knowledge on this topic out there?
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Re: Portfolios for long term investors

Post by jeffyscott »

countmein wrote: Fri Sep 17, 2021 12:58 am
secondopinion wrote: Wed Sep 15, 2021 3:23 pm
Can you explain how long-term renting will be better than long-term homeownership? I understand those who move a lot or otherwise need to rent, but I am talking those who stay put for long periods.
Two important things to understand:

1) You always consume shelter, i.e. "pay rent", whether it's to yourself as the homeowner or to someone else.

2) A mortgage is just a loan on your balance sheet that either amplifies or attenuates your total portfolio return depending on whether or not your total return > the loan interest cost. Whether your debt is zero or greater than zero is irrelevant to the question of whether allocating to a house asset is "better" than allocating to some other asset. (Therefore, do not intertwine your mortgage and the house asset when considering this question).

You can answer the question with a simple hypothetical. Say you have a job that produces income, and $1m in savings. You could put the $1m into stocks or you could buy a house for $1m and live in it.

When you put the money into stocks, you use your income stream to buy your shelter from someone else. When you put the money into the house, you buy the shelter from yourself. You "pay rent" (consume shelter) either way and let's assume it's an equal payment. Now you can simply compare historical returns for each investment:

House: yield (~5%) + appreciation (~1%) - expense (~1%) = 5%.

Stocks: 8%.

Thus, on an expected returns basis, in general, owning stocks (and paying someone else for shelter) beats owning a house with a given allotment of money. However, owning a stock/bond portfolio instead of a house may or may not be "better", it depends on the allocation.
I don't understand your figures. Are they meant to be real or nominal?

I assume housing yield is what you would pay to rent? So renting this $1 million house would cost $50,000 per year (rent to buy ratio of 20) in your example?

Where are you getting appreciation of 1% for house vs. 8% for stocks? If this is a real return it seems extremely optimistic for stocks at current prices. If is is nominal, the 1% for houses seems very low.

In my location, the rent to buy ratio is more like 12-15, so maybe 7% yield. But I would put expenses (property tax, insurance, maintenance at about 2%, and appreciation at 0% real (2-3% nominal). So does that end up at 5% real or is it 7-8% nominal? IMO, either figure is better than the expected return for stocks at this time.
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Re: Portfolios for long term investors

Post by jeffyscott »

Beensabu wrote: Thu Sep 16, 2021 7:15 pm
jeffyscott wrote: Thu Sep 16, 2021 2:42 pm One of the things I did not understand is what is meant by "the consumption claim":
If the indexed perpetuity is the riskless asset, then the consumption claim, that pays one unit of aggregate consumption, must be the risky
claim and held by the average investor.

(section 2.8, pg. 17)

Can anyone explain that?
It's basically using indexed perpetuity for the bond side and consumption claim for the equity side.

Look up "consumption based asset pricing" or "consumption capital asset pricing model" for more math that's completely over my head -- essentially the idea is that increased aggregate consumption leads to a higher equity risk premium and increased expected returns (and vice versa).
Yes, when trying to figure it out ran across those things, but as you say...they sure don't like putting much in laymen's terms (probably because it's kind of impossible to do), which makes it really difficult for me to try muddle through.

If the point of investment is to fund future consumption, then an investor should arguably be more interested in consumption beta than market beta, but the benchmark would vary based on the individual investor and I have no idea how to come up with that (other than that it's not the S&P 500).
So would weighting stocks by something more related to consumption, sales for example, be getting closer?
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Beensabu
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Re: Portfolios for long term investors

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jeffyscott wrote: Fri Sep 17, 2021 7:43 am
Beensabu wrote: Thu Sep 16, 2021 7:15 pm If the point of investment is to fund future consumption, then an investor should arguably be more interested in consumption beta than market beta, but the benchmark would vary based on the individual investor and I have no idea how to come up with that (other than that it's not the S&P 500).
So would weighting stocks by something more related to consumption, sales for example, be getting closer?
I'm on the same level as you looking into this. It's new to me. Intuitively, the concept makes sense, and it's one of the things I've always felt like everyone one was dismissing (the general population's ability to continue consuming at the same or greater rate). In practice, there are probably a bunch of different variables that get looked at and weighed together (like with everything). I'll let you know if I come across anything interesting that I can understand.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Kevin K
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Re: Portfolios for long term investors

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djm2001 wrote: Mon Sep 13, 2021 8:17 pm sycamore: By "market portfolio" he means all publicly traded assets, including global stocks and bonds.
Thanks to the OP for sharing this paper. I read about a quarter of it, skimmed the rest and understood probably 10% of what I read. But in thinking about actionable take-aways for an individual investor (and I realize that's not who the paper is designed for and that there may be nothing actionable in it) I recalled this "total market" portfolio on the Portfolio Charts site:

https://portfoliocharts.com/portfolio/g ... portfolio/

If nothing else, it certainly seems to cover a wider range of investable assets than just going with VT and BNDW.
countmein
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Re: Portfolios for long term investors

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jeffyscott wrote: Fri Sep 17, 2021 7:22 am
countmein wrote: Fri Sep 17, 2021 12:58 am
secondopinion wrote: Wed Sep 15, 2021 3:23 pm
Can you explain how long-term renting will be better than long-term homeownership? I understand those who move a lot or otherwise need to rent, but I am talking those who stay put for long periods.
Two important things to understand:

1) You always consume shelter, i.e. "pay rent", whether it's to yourself as the homeowner or to someone else.

2) A mortgage is just a loan on your balance sheet that either amplifies or attenuates your total portfolio return depending on whether or not your total return > the loan interest cost. Whether your debt is zero or greater than zero is irrelevant to the question of whether allocating to a house asset is "better" than allocating to some other asset. (Therefore, do not intertwine your mortgage and the house asset when considering this question).

You can answer the question with a simple hypothetical. Say you have a job that produces income, and $1m in savings. You could put the $1m into stocks or you could buy a house for $1m and live in it.

When you put the money into stocks, you use your income stream to buy your shelter from someone else. When you put the money into the house, you buy the shelter from yourself. You "pay rent" (consume shelter) either way and let's assume it's an equal payment. Now you can simply compare historical returns for each investment:

House: yield (~5%) + appreciation (~1%) - expense (~1%) = 5%.

Stocks: 8%.

Thus, on an expected returns basis, in general, owning stocks (and paying someone else for shelter) beats owning a house with a given allotment of money. However, owning a stock/bond portfolio instead of a house may or may not be "better", it depends on the allocation.
I don't understand your figures. Are they meant to be real or nominal?

I assume housing yield is what you would pay to rent? So renting this $1 million house would cost $50,000 per year (rent to buy ratio of 20) in your example?

Where are you getting appreciation of 1% for house vs. 8% for stocks? If this is a real return it seems extremely optimistic for stocks at current prices. If is is nominal, the 1% for houses seems very low.

In my location, the rent to buy ratio is more like 12-15, so maybe 7% yield. But I would put expenses (property tax, insurance, maintenance at about 2%, and appreciation at 0% real (2-3% nominal). So does that end up at 5% real or is it 7-8% nominal? IMO, either figure is better than the expected return for stocks at this time.
Real. Yes, housing yield is by definition what you'd pay to rent. Of course YMMV, but, in general, stocks have outperformed residential RE by a little. That's the general answer to the general question. Goes without saying that there are many other considerations.
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Beensabu
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Re: Portfolios for long term investors

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spdoublebass wrote: Thu Sep 16, 2021 11:28 pm
Beensabu wrote: Thu Sep 16, 2021 7:15 pm
Lesson: Be the average investor, unless you know exactly how you're not the average investor and what to do about it and why.
Do you think he means hold the market weight of stocks and bonds? Like William Sharpe?

Or to just hold index funds with any AA you decide?
I'm pretty sure when he talks about the average investor, he's talking about global market cap weight stocks/bonds. One of the points is that for every investor deviating from the market portfolio in some way, there is another investor on the other side. So if, for example, small value is good for one investor to buy, then ask who is the investor that it's good for to sell that? Why is it good for one person to buy and the other one to sell the same thing? How are they each different from the average investor and different from each other? Same for weighting more towards equities or bonds than the market portfolio. Why does it make sense for you to do it? And why does it make sense for the other person to do the opposite? Only deviate if you know that you're different from the average investor in the right way that tilting in a particular direction would be more likely to benefit you than not, versus whoever is selling that tilt to you in order to tilt in a different direction.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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