de ja vu all over again

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larryswedroe
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de ja vu all over again

Post by larryswedroe » Thu Oct 09, 2008 7:17 am

We have the equity risk premium rising from two fronts now
Valuations are falling,but also the riskless alternative is now zero.

So what are investors doing--many are panicking and selling just when the expected returns are now far higher than they were when they were buying.

This type behavior is exactly why investors earn Dollar Weighted Returns well below the Time Weighted Returns of the very funds in which they invest.

The great equity returns come from very short bursts that are unpredictable, the fat tails are 6x what a normal distribution would predict.

Here is an amazing stat. From 1900-2006 if you miss the best one hundred days you have less than your original investment. And that of course ignores 107 years of inflation. Of course the other tail is wide too--if you missed the worst 100 days your return grows astronomically. But those days are less than one tenth of one percent of the days so the odds of timing the market succcessfully are terrible, which is why Lynch concluded that far more money has been lost anticipating bear markets than in bear markets and Bernard Baruch said that only liars manage to be in bull markets and out of bear markets.

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jeffyscott
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Re: de ja vu all over again

Post by jeffyscott » Thu Oct 09, 2008 7:35 am

larryswedroe wrote:the riskless alternative is now zero.

Not if you consider TIPS the riskless alternative :D .
Time is your friend; impulse is your enemy. - John C. Bogle

Stevewc
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Post by Stevewc » Thu Oct 09, 2008 7:36 am

Any thoughts or suggestions on adding new lump sum's of money to Total Stock & FTSE ? Wait for a while? Buy on down days ?
Any thoughts appreciated,
Steve
PS. I was calling myself buying on the dips. But seems there are more dips than I got money :lol: :lol: :lol:
Ladies and Gentiles | Monkeys and Reptiles | I come before ya, to stand behind ya, tell you something I know nothing about !!!

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larryswedroe
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Post by larryswedroe » Thu Oct 09, 2008 7:38 am

Jeffy, I agree when viewed that way, which is certainly a good way to do it.

But the ERP is measured off of the one month bill rate

And where are investors fleeing, not to TIPS but to one month bills

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jeffyscott
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Post by jeffyscott » Thu Oct 09, 2008 7:47 am

where are investors fleeing, not to TIPS

Yeah, that was pretty obvious yesterday, wasn't it?

I've been following a version of your TIPS advice using the vanguard fund. Now that I am moving back in to TIPS (from a stable value fund), I can say that it seems to have worked well...thanks.
Time is your friend; impulse is your enemy. - John C. Bogle

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Robert T
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Post by Robert T » Thu Oct 09, 2008 7:53 am

.
Larry,

Here are some other numbers on the same point:

Code: Select all


July 1963 to August 2008
 
                                              Missed days as                                         
                                              % of all days      Growth in $1     
Continuous investment in the market               0.000              80           
Missed best 1 day                                 0.009              73
Missed best 5 days                                0.044              60
Missed best 10 days                               0.088              48
Missed best 15 days                               0.132              39  

Source: Fama-Fench Research Factors – daily returns file

Just took missing the best 15 days to halve portfolio end value. Most of those 'best day' returns were from market bottoms. As Taleb says - in finance 'outliers' drive the mean.

Staying the course.

Robert
.

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Henry Sadovsky
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You do not know the future ERP...

Post by Henry Sadovsky » Thu Oct 09, 2008 8:28 am

.
larryswedroe wrote:We have the equity risk premium rising from two fronts now

Valuations are falling,but also the riskless alternative is now zero.
The equity risk premium (past) has actually been falling during this downturn. You are, no doubt, stating your guess as to expected (future) equity returns, not future risk premium. The problem with this is that it assumes valuations will not get even better still for a considerable time to come. It also assumes that there will not be a long-term decrease in Earnings. I am not disagreeing with the tenor of your message, just with its logic.

The ERP during a given time period is known, with certainty, in retrospect. Expected returns on the other hand are just educated guesses.

H.

edited
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woof755
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Post by woof755 » Thu Oct 09, 2008 8:49 am

Stevewc wrote:I was calling myself buying on the dips. But seems there are more dips than I got money :lol: :lol: :lol:
This is my first market downturn / bear market, and this is the second thing I learned.

The first is that because of all I have read and b/c of this website, I was actually able to feel comfortable (in the accumulation phase, of course) with my current asset allocation, and with buying and holding. I haven't sold any equities, except to tax loss harvest a bit.

The second is what you allude to. Months and months ago, I was "buying on the dips" with some extra cash. Indeed, next time one of these comes around, I'll do so only to rebalance, because what was a "dip" 6 months ago would be dreamy territory right now!

So, regarding your question, I'd say if you need to rebalance, go ahead and buy. If the market "dips" further buy again when you need to rebalance again.
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

livesoft
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Re: de ja vu all over again

Post by livesoft » Thu Oct 09, 2008 9:00 am

larryswedroe wrote:...
Here is an amazing stat. From 1900-2006 ...

if you missed the worst 100 days your return grows astronomically. But those days are less than one tenth of one percent of the days so the odds of timing the market succcessfully are terrible, ....
Actually, the odds of timing the market in this case are nearly perfect. The money that I had allocated to cash and fixed income has just missed a few of the worst days in the last few weeks. If I take that money and rebalance into equities, then I have missed some of the worst days with that money and my returns for this bit of assets should be practically "astronomical" going forward.

That's the beauty of the worst day statistics: You can act with hindsight. You can't do that with best day statistics.

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Post by linenfort » Thu Oct 09, 2008 9:18 am

The money that I had allocated to cash and fixed income has just missed a few of the worst days in the last few weeks
I don't get it. In the last few weeks, yes, but but what if it gets worse?

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Post by larryswedroe » Thu Oct 09, 2008 1:56 pm

Henry
The ERP is foreward looking--that is what I was referring to

The HISTORICAL ERP has of course fallen. But the ERP is now higher than what it was weeks ago

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Post by livesoft » Thu Oct 09, 2008 2:01 pm

linenfort wrote:
The money that I had allocated to cash and fixed income has just missed a few of the worst days in the last few weeks
I don't get it. In the last few weeks, yes, but but what if it gets worse?
That's the beauty of it. It doesn't matter if it gets worse or not. By virtue of missing even some of the worst days, you come out way ahead. You don't have to miss all the worst days. There aren't really that many of them anyways.

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bob90245
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Post by bob90245 » Thu Oct 09, 2008 2:13 pm

larryswedroe wrote:The HISTORICAL ERP has of course fallen. But the ERP is now higher than what it was weeks ago
What inputs do you use to calculate the Forward Equitiy Risk Premium (FERP)?

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larryswedroe
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Post by larryswedroe » Thu Oct 09, 2008 2:26 pm

Livesoft
That's the beauty of it. It doesn't matter if it gets worse or not. By virtue of missing even some of the worst days, you come out way ahead. You don't have to miss all the worst days. There aren't really that many of them anyways.
But doesnt work that way since odds of missing them are miniscule

Also there are far more large up months for example than large down months---so far more likely (70%) to miss a big up than miss a big down if out for a month

Bob--you can use the Gordon model which takes div yield and adds growth (say 2.5% or so) and then add estimated inflation and subtract the risk free rate. That gets you the ERP.

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G12
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Post by G12 » Thu Oct 09, 2008 2:41 pm

Someone please PM me when VWO hits $14. I have the dumptruck loaded with greenbacks waiting to deploy. All kidding aside, and after rebalancing into VEU/VWO twice this year, what is the over/under on VWO? $18? $12? With this decline does it matter when one starts rebalancing again?

Not that I know where the Dow or S&P will end up, but with the currency reversal and international decline I am glad I did not go to global market weight international. Sheesh, that would be even more stressful, 30% international has been brutal enough.

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Post by Amishman » Thu Oct 09, 2008 3:18 pm

Larry,

You sound like a guy that is 75% Bonds. :D

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Post by larryswedroe » Thu Oct 09, 2008 4:05 pm

Yep, and bond ratio rising daily

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jeffyscott
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Post by jeffyscott » Thu Oct 09, 2008 4:27 pm

larryswedroe wrote:Yep, and bond ratio rising daily
Don't you need to rebalance :?:

C'mon, someone needs buy here :!:

:)
Time is your friend; impulse is your enemy. - John C. Bogle

Enzo IX
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Post by Enzo IX » Thu Oct 09, 2008 7:47 pm

Larry,

Hello, I have really enjoyed all the books you have written, and the various audios that I have had the pleasure of listening to(ie. Paul Merriman's site). Sorry I missed the bond book, cost me dearly, ordered on Amazon now. Expect check in the mail soon.

I know you have a relatively low equity position in the market, because of your low marginal utility of wealth, but is there a point where you would entertain upping your equity allocation.

Just as you pulled back your allocation in the mania up, which proved to be a great call. Couldn't the markets become inefficient on the way down and fear overcome rationality, leading to a great risk/reward ratio.

I'm not a timer, MPT portfolio buy and hold, but wall street, hedge funds, and individuals seem to starting to jettison everything to liquify.


Thanks,

Doug






Thankyou,

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Post by LGRZEMKOWSKI » Thu Oct 09, 2008 8:16 pm

Larry

I agree with your comments. I am in a position where I have to TLH and am wondering if the IRS will consider VWLTX (long term tax exempt muni) similar to VWISX (intermediate tax exempt) muni and VWSTX (short term) muni?

Larry G

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larryswedroe
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Post by larryswedroe » Thu Oct 09, 2008 8:29 pm

Larry G
Need to be substantially identical to create wash sale problem, and maturity is one way to not be substantially identical so no problem. That is actually one advantage of a fund--much easier to TLH than with individual bonds, but with individual bonds can TLH at individual bond level.

ENZO
markets can be clearly irrational in bubbles where it is literally impossible to justify the prices. 1999 was one of those times. Some stocks could justify those high p/es but was impossible all could.
On down side that is not true. The world could "come to an end." Meaning the risks do show up to justify the low prices.

Since I have no need to take risk I would not raise my AA target, ---see above

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Post by Enzo IX » Thu Oct 09, 2008 8:36 pm

Larry,

Thanks for the reply, I keep getting tripped up on, "Don't treat the unlikely as impossible."

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Post by larryswedroe » Thu Oct 09, 2008 8:57 pm

Not sure what you are asking but
Dont treat the unikely as impossible means like--a 911 can happen, a Japan type stock market can happen here, etc.

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renditt
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Post by renditt » Thu Oct 09, 2008 9:05 pm

Stevewc wrote:Any thoughts or suggestions on adding new lump sum's of money to Total Stock & FTSE ? Wait for a while? Buy on down days ?
Any thoughts appreciated,
Steve
PS. I was calling myself buying on the dips. But seems there are more dips than I got money :lol: :lol: :lol:
Steve
Same problem here, I was buying so much on dips that I am running out of cash :)

I decided to slow down my buying a bit, as the market really seems in a free fall. I rebalanced a few days ago back to my target AA and now I set myself a couple of 'targets' (not sure you can call that) for the S&P
- When S&P hits 800, I'll move another 5% from cash into bonds (will then probably overweight stocks)
- Should S&P hit 650, I will do a final move from bonds into cash.

After that I am done with rebalancing and won't do anything.

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