Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 05-19-2011, 06:14 PM   #21
Thinks s/he gets paid by the post
GregLee's Avatar
 
Join Date: Oct 2010
Location: Waimanalo, HI
Posts: 1,881
Quote:
Originally Posted by Senin View Post
... but I have a theory about asset allocation.
It's very possible that I don't understand AA at all -- I never heard anything about it until I started reading in this forum less than a year ago. What I have been able to make of it: it's a version of buy-low-sell-high, coupled with a simple cyclic theory of stocks that estimates the future behavior of the market by looking at the recent history of your portfolio. If the value of your stocks relative to your bonds has increased, stocks are probably high and so you should sell stocks (or, if dollar-cost-averaging, buy bonds in preference to stocks), because you should bet that stocks will decrease in value in the future. Or if your stocks have become worth less relative to your bonds, you should bet that they will rise in value in the future and buy more of them.

Is that sort of it?

If my rendition is reasonable, my reservation about it is that, while one can understand why it often works, the underlying theory of the market seems pretty crude. Stock values go up and down, is basically all it says. I think that sometimes I might have a better idea than this about when stocks values are high or when they are low.
__________________

__________________
Greg (retired in 2010 at age 68, state pension)
GregLee is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-19-2011, 06:53 PM   #22
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by GregLee View Post
Is that sort of it?
The most common way to think about asset allocation has nothing to do with valuation and everything to do with risk tolerance. The conventional advice is to select an asset allocation that matches your tolerance for losses. The more tolerant you are, the more equity you should own.

That seems like a fine first step, but it misses the second part, which is equally important, in my view. And that is asking 'how much risk do I need to take?" It seems like the answer to that question changes based on a lot of conditions, and therefore, so might the appropriate asset allocation.
__________________

__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Old 05-19-2011, 07:56 PM   #23
Thinks s/he gets paid by the post
DblDoc's Avatar
 
Join Date: Aug 2007
Posts: 1,224
Quote:
Originally Posted by Gone4Good View Post
The most common way to think about asset allocation has nothing to do with valuation and everything to do with risk tolerance. The conventional advice is to select an asset allocation that matches your tolerance for losses. The more tolerant you are, the more equity you should own.

That seems like a fine first step, but it misses the second part, which is equally important, in my view. And that is asking 'how much risk do I need to take?" It seems like the answer to that question changes based on a lot of conditions, and therefore, so might the appropriate asset allocation.

Well put. Many think of the re-balancing part as a form of market timing that increases your returns. It does not do so in any significant manner unless you cherry pick your data. It is all about risk management.

DD
__________________
At 54% of FIRE target
DblDoc is offline   Reply With Quote
Old 05-19-2011, 11:57 PM   #24
Thinks s/he gets paid by the post
 
Join Date: Jul 2003
Location: Pasadena CA
Posts: 2,695
Quote:
Originally Posted by haha View Post
People like upward movement more than a cheap valuation, or they do not trust themselves to decide when valuation is cheap.


Ha
I do not trust myself to know when valuations are too high. Really low valuations are more obvious and haven't seen them recently. The other problem is what else to do with the $$$? The major other option is bonds and I distrust them more than stocks. And I think its too late for me to get into commodities. So unless I just want to sit on cash and wait for a major correction I just look for the best deal I can find in stocks and some still seem reasonable although not cheap.
__________________
T.S. Eliot:
Old men ought to be explorers
yakers is offline   Reply With Quote
Old 05-20-2011, 12:04 AM   #25
Full time employment: Posting here.
urn2bfree's Avatar
 
Join Date: Feb 2011
Posts: 711
THIS IS A SORT OF MARKET TIMING THAT I WONDER ABOUT in moving cash to investments:
some sort of progressive betting /investing...in such a plan you invest some set amount into your portfolio-say monthly-but always adding--it is allocated appropriately according to set percentage- ie 60% stocks, 40% bonds--each month you add at least one UNIT(could be $100 could be $10,000 or whatever, but some monthly addition) YOU buy whichever to KEEP THIS PERCENTAGE ALLOCATION--nothing new here-simple asset allocation If at the end of the month the values of stocks are much higher you end up buying more bonds to keep the AA at 60% stocks and 40% bonds...
BUT here is the wrinkle- it involves varying how much cash you put in instead of DOLLAR COST AVERAGING always the same you also vary your investment based on the prior month performance-if up performance--no matter what--put in 1 unit...if down increase above 1 unit...( the most aggressive increase-2 units after the first month down, 4 units if a second month in a row is down, 8 units if 3 consecutive down months, 16 for a fourth down month, etc...obviously liquidity is key to be ready to make such exponential increases)
---a less expensive system might just go 1 unit, 1.5, 2, 2.5 or increase the monthly input equal to the percent loss in some way--but increasing for every consecutive down month-the idea is that the more months go down the more you want to be getting in more thh lower it goes-THEN if there is an up month you return to putting in 1 unit... I have no idea how this would work...for a simple gambling scenario it works but only if You have unlimited money to double the bet after every loss AND there are not upper bet limits --that is why they have upper bet limits at casinos what other reason would they care how much you bet if it is high...?) But as much as the markets can feel like a casino-- it is very different in that gambled money is not generally lost all at once and the remainder stays on the table and the payoffs vary so much anywhere from total loss to many x 100%
__________________
urn2bfree is online now   Reply With Quote
Old 05-20-2011, 12:09 AM   #26
Thinks s/he gets paid by the post
GregLee's Avatar
 
Join Date: Oct 2010
Location: Waimanalo, HI
Posts: 1,881
Quote:
Originally Posted by Gone4Good View Post
The most common way to think about asset allocation has nothing to do with valuation and everything to do with risk tolerance. The conventional advice is to select an asset allocation that matches your tolerance for losses.
Hmmm. I'm trying to make sense of that. I don't want to lose anything. Why would anyone ever want to lose anything? The only reason anyone would risk loss, I'd think, is to gain value. I don't see how investing can be divorced from valuation.
__________________
Greg (retired in 2010 at age 68, state pension)
GregLee is offline   Reply With Quote
Old 05-20-2011, 12:15 AM   #27
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,386
Quote:
Originally Posted by yakers View Post
I do not trust myself to know when valuations are too high. Really low valuations are more obvious and haven't seen them recently. The other problem is what else to do with the $$$? The major other option is bonds and I distrust them more than stocks. And I think its too late for me to get into commodities. So unless I just want to sit on cash and wait for a major correction I just look for the best deal I can find in stocks and some still seem reasonable although not cheap.
You bring up important issues. What I try to remember is that a portfolio can last a very long time in a short term CD ladder, even with today's ridiculous interest rates. But it can be badly damaged almost overnight by investing in equities that are seriously overpriced.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 05-20-2011, 06:29 AM   #28
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by GregLee View Post
I don't see how investing can be divorced from valuation.

You must be new here.

Buy-and-hold investing, by definition, is divorced from value. The idea (and it's a good one, with a lot of empirical evidence to support it) is that the market is really very efficient at pricing securities. So much so that few of us (some would say none of us) can do better through security selection and/or market timing than simply holding 'the market portfolio.' If that is true, and if we really can't do better on a risk adjusted basis than the market, our only optimal choice is to decide how much risk we can stomach with our portfolio. That risk is determined by how we allocate our cash between the risky 'market portfolio' and a risk free asset. That process is known as asset allocation and has strong advocates on this forum.

But I think many people don't fully understand the concept. Swapping the market portfolio for the risk free asset is not 'market timing' as defined by Modern Portfolio Theory. It simply moves you from one point on the efficient 'Capital Allocation Line' (CAL in the graph below) to another. In other words, you move from one optimal portfolio with one risk profile and return expectation to a different optimal portfolio with a different risk profile and return expectation.

I see nothing wrong, either in theory or in practice, in evaluating whether current valuations adequately reward for the level of risk taken, and adjusting the portfolio's risk profile to compensate. Clearly there are times when the CAL is very steep (valuations low) and times when it is very flat (valuations high), indicating that the risk-return trade off is better (steep) or worse (flat). It makes little sense (to me anyway) to stay in a high risk portfolio when the CAL is flat.

__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Old 05-20-2011, 07:02 AM   #29
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by yakers View Post
The major other option is bonds and I distrust them more than stocks.
CDs still look very attractive on a relative, if not absolute, basis. They yield more than similar duration treasuries with the same default risk and a tiny fraction of the duration risk (if you choose ones with good early withdrawal terms).

At today's rates I see almost no reason to take duration risk in the bond market.
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Old 05-20-2011, 08:51 AM   #30
Full time employment: Posting here.
Patrick's Avatar
 
Join Date: Mar 2005
Location: Northern, Florida
Posts: 925
Quote:
Originally Posted by urn2bfree View Post
THIS IS A SORT OF MARKET TIMING THAT I WONDER ABOUT in moving cash to investments:
some sort of progressive betting /investing...in such a plan you invest some set amount into your portfolio-say monthly-but always adding--it is allocated appropriately according to set percentage- ie 60% stocks, 40% bonds--each month you add at least one UNIT(could be $100 could be $10,000 or whatever, but some monthly addition) YOU buy whichever to KEEP THIS PERCENTAGE ALLOCATION--nothing new here-simple asset allocation If at the end of the month the values of stocks are much higher you end up buying more bonds to keep the AA at 60% stocks and 40% bonds...
BUT here is the wrinkle- it involves varying how much cash you put in instead of DOLLAR COST AVERAGING always the same you also vary your investment based on the prior month performance-if up performance--no matter what--put in 1 unit...if down increase above 1 unit...( the most aggressive increase-2 units after the first month down, 4 units if a second month in a row is down, 8 units if 3 consecutive down months, 16 for a fourth down month, etc...obviously liquidity is key to be ready to make such exponential increases)
---a less expensive system might just go 1 unit, 1.5, 2, 2.5 or increase the monthly input equal to the percent loss in some way--but increasing for every consecutive down month-the idea is that the more months go down the more you want to be getting in more thh lower it goes-THEN if there is an up month you return to putting in 1 unit... I have no idea how this would work...
This seems like it would use up your cash quickly in a downtrend. If the downtrend continued, you wouldn't have any cash left to invest when the market was closer to its bottom, so you would lose out on some of the upside.

Quote:
. . . for a simple gambling scenario it works but only if You have unlimited money to double the bet after every loss AND there are not upper bet limits --that is why they have upper bet limits at casinos what other reason would they care how much you bet if it is high...?)
They have a limit so you can't "break the bank" with a large bet, putting the casino out of business. The "double down when you lose" strategy has been analyzed extensively and is a net loser because eventually the bettor will lose enough hands in a row to come up against the table limit, where he can't double down again. This typically only requires 7 losses in a row IIRC (statistically it doesn't happen often, but it does happen). He will not win enough hands, over time, to make up for the losses of a losing streak that hits the limit.
__________________
Retired in 2006 at age 49.

"Who among us is smart enough to learn from the mistakes of others?" - Voltaire
Patrick is offline   Reply With Quote
Old 05-20-2011, 10:02 AM   #31
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,386
Quote:
Originally Posted by Gone4Good View Post
At today's rates I see almost no reason to take duration risk in the bond market.
After your treatise on efficient markets above it seems odd that you apparently exempt interest rates from efficiency.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 05-20-2011, 10:04 AM   #32
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by haha View Post
After your treatise on efficient markets above it seems odd that you apparently exempt interest rates from efficiency.

Ha
The treasury market is very efficient.

But if you look at the rest of the comment you quoted from you'll see I was talking about the retail bank product market - specifically CDs, which are not efficient. CD's and even savings accounts offer yields that are higher than those offered in the efficient treasury market and have considerably less duration risk than similar maturity treasuries. My point is that I don't need to play in the bond market. I can get far better yields, with lower risk, in the retail bank market. Until that changes, that is where my money will go.
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Old 05-20-2011, 10:36 AM   #33
Dryer sheet aficionado
 
Join Date: Apr 2011
Posts: 44
It is very difficult to find the top. Who knows how high things can go. But we all know when we are in a declining market. You get a pretty good sense of it after a few months. That would be the time I would shift, very slowly month by month, on average from my GNMA bond (which hopefully withstood the drop) and into the stock funds. This could last the 16 months, or until you are all in, or the market had again gone back into positive territory.

I am not in favor of constant rebalancing-- only at select times. Too many shifts are not good either.
__________________
Senin is offline   Reply With Quote
Old 05-20-2011, 11:23 AM   #34
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by Senin View Post
But we all know when we are in a declining market. You get a pretty good sense of it after a few months.
You might get a pretty good sense of it after a few months, but, not me. We don't all know when we are in a declining market. At least not until the decline has taken place. The past recessionary decline left me totally unable to predict where the bottom might be. What did you do?
Quote:
This could last the 16 months, or until you are all in, or the market had again gone back into positive territory.
How will you handle it if it doesn't last 16 months, which is just as probable? Say you "get a pretty good sense of it" (as you said) and start moving $$$ from GNMA to TSM but after a short time the market reverses and heads back up? And after that, starts back down. Then what?

My point is that looking at historical charts and dreaming about what you might have done is easy. Looking into the future is more challenging. What are you doing now to support your "sense" about the rest of 2011?
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 05-20-2011, 11:47 AM   #35
Thinks s/he gets paid by the post
GregLee's Avatar
 
Join Date: Oct 2010
Location: Waimanalo, HI
Posts: 1,881
Quote:
Originally Posted by Gone4Good View Post
Buy-and-hold investing, by definition, is divorced from value.
..., our only optimal choice is to decide how much risk we can stomach with our portfolio.
But, but, but, you would never risk your money unless you expected stock values to go up, and of course you want the values to go up as much as possible. Maybe buy-and-hold is the best way to do that, or maybe not, but it's not divorced from value. You "stomach" risk because you want to make money.
__________________
Greg (retired in 2010 at age 68, state pension)
GregLee is offline   Reply With Quote
Old 05-20-2011, 12:09 PM   #36
Thinks s/he gets paid by the post
GregLee's Avatar
 
Join Date: Oct 2010
Location: Waimanalo, HI
Posts: 1,881
Quote:
Originally Posted by youbet View Post
We don't all know when we are in a declining market. At least not until the decline has taken place.
But that's exactly when we need to know it -- when the decline has taken place. For major events like the recent recession, I don't think it's that hard. I missed the bottom, myself, by at least two months, but that was close enough to pick up a nice profit.

I have a kind of primitive theory about this search for market bottoms. I don't think ideally, in the long run, it would be possible to beat the market this way, because occasionally you would find yourself investing in a market that just keeps going down and down, and wipes out the profits you made from buying in declining markets that turned up again in a year or two. But it makes some sense to discount the truly bad markets, because those will likely wipe you out no matter what.
__________________
Greg (retired in 2010 at age 68, state pension)
GregLee is offline   Reply With Quote
Old 05-20-2011, 01:46 PM   #37
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by GregLee View Post
But, but, but, you would never risk your money unless you expected stock values to go up, and of course you want the values to go up as much as possible. Maybe buy-and-hold is the best way to do that, or maybe not, but it's not divorced from value. You "stomach" risk because you want to make money.
If you buy something regardless of price and never intend to sell it regardless of price I'm not sure how valuation comes into play in your investment decision making process.

Just because you expect it to go up, doesn't mean your expectation is based on any assessment of value - realistic or otherwise.

Please note, I'm not saying that buy and hold investment outcomes are divorced from valuation. I'm saying the investment decision making process is divorced from valuation considerations.
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Old 05-20-2011, 02:22 PM   #38
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,386
Quote:
Originally Posted by Gone4Good View Post
Please note, I'm not saying that buy and hold investment outcomes are divorced from valuation. I'm saying the investment decision making process is divorced from valuation considerations.
This is truly an amazing statement.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 05-20-2011, 04:15 PM   #39
Dryer sheet aficionado
 
Join Date: Apr 2011
Posts: 44
"We don't all know when we are in a declining market."

We don't? I think we had a pretty darn good idea in 2008-2009. There seemed to be panic just about everywhere. Now I am not saying, predict it ahead of time. I am saying, once you are knee deep in sh--.

First of all, I am saying don't do anything for the first couple of months. Then dollar cost average for the next 16 months. That cover over 18 months of decline. That is a pretty good stretch to get some bargain basement prices, even if you don't get the exact bottom (which would be unlikely in that time frame).

If the thing reverses and heads back up after a couple of months-- good!! That is what we want. Your stocks are back up and everything is peachy. Then you stop the DCA'ing. If it then drops again, you do the same things.

I would prefer not to buy and hold. Because you just waste years in a decline. The problem is, nobody really knows when the top is, to sell. At least my theory (which may or may not be viable) is to hold all during good times, but buy during bad times. At least at that rate, you are buying at the right time.

I may be totally wrong about this. But I kinda makes sense to me. I really appreciate the contrary views because it makes me look at all sides of ths situation.
__________________
Senin is offline   Reply With Quote
Old 05-20-2011, 04:57 PM   #40
Full time employment: Posting here.
urn2bfree's Avatar
 
Join Date: Feb 2011
Posts: 711
Quote:
Originally Posted by Patrick View Post
They have a limit so you can't "break the bank" with a large bet, putting the casino out of business. The "double down when you lose" strategy has been analyzed extensively and is a net loser because eventually the bettor will lose enough hands in a row to come up against the table limit, where he can't double down again. This typically only requires 7 losses in a row IIRC (statistically it doesn't happen often, but it does happen). He will not win enough hands, over time, to make up for the losses of a losing streak that hits the limit.
well you are sort of agreeing with me but not realizing it---the limit is set way too low to be simply a hedge against "breaking the bank." The limit is set as you noted at a point that you cannot double down again to try to win back all that you lost (+more) The progressive strategy is a loser-BUT only if there is a table limit...in a limitless bet allowed and over the long run the progressive strategy is not a loser...everytime you win you win one more unit of bet than you had before---even if you lose 100 times in a row- if you could double the 101st bet- to be twice the 100th bet-you will be up one more unit than you had when the losing streak started.
In the market scenario- it is true you will deplete your cash in a long downturn-so you are in effect catching the falling knife...BUT on the inevitable upswing of the efficient market we believe in--you are still likely to be better off than just sitting on cash until things are back up==particularly when you add in the effect of dividends.
__________________

__________________
urn2bfree is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
big chunk, dollar cost average? Spartacus FIRE and Money 47 11-24-2009 01:28 PM
Cash, cost average, or jump both feet roger r FIRE and Money 25 11-11-2008 02:02 PM
Dollar cost averaging is... a lie? Sisyphus Young Dreamers 43 07-09-2007 05:15 PM
Dollar cost average large amounts currently? Natalie FIRE and Money 2 07-16-2003 11:51 AM

 

 
All times are GMT -6. The time now is 07:39 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.