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Old 11-24-2013, 01:40 PM   #21
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Anyway, if the spending is very good then I've probably won the game. Especially when we've gone several years into a recovery, then it is reasonable to dial back the risk.

So that's what I'm planning on doing, reducing equities. For me it is hard to reduce equities because it's a battle between greed and fear and I'm a bit of a gambler.
People who maintain the same AA after several years into a bull market are also gambling. They are betting that the same market rise will continue.

The chance of a big gain is a lot higher during a recession than that after the market has fully recovered. If the potential reward has been reduced as well as the probability of a large gain has diminished, one should bet differently. This is for risk mitigation.

That common sense has been proven mathematically by "Kelly Criterion" as I mentioned in an earlier post. Of course when applied to the stock market, the probabilities become fuzzy and one can only talk in a qualitative manner.

Sign a market timer who has dialed back his 80% equities to 67%.
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Old 11-24-2013, 04:01 PM   #22
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...(snip)...
Any ideas for figuring out a calculation for #2?

Does anyone have any thoughts on taking this type of approach for determining a stock / bond ratio?

I could recalculate the ratio quarterly, semi-annually, and adjust my allocation when I rebalance.
...
I thought about this a little more. What I would do is a historical backtest at least to 1950 with monthly data. The data is available from the Shiller website in Excel form.

I would rank the PE10. Maybe start at 1920 and cumulatively rank the PE10. So at 1950 you only have 30 years of data, no cheating by using forward data. Then check the rank and postulate rules for adjusting AA. Any system you use should at least work with historical data.

Here is a plot of PE10 versus the SP500 with that kind of ranking. The SP500 has been adjusted periodically to keep it easily visible on the chart:



I personally only use PE10 ranking (RANK function in Excel) in conjunction with some other variables. I've done a lot of studies.
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Old 11-24-2013, 07:12 PM   #23
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Some people think of a market timer as someone who jumps all in or all out of equities. It does not have to be that way.

Adjusting one's AA by 10 to 20% based on extreme market conditions is a prudent thing to do in my view, and not at all reckless like many people make it out to be.

And speaking of one's performance during the 2008-2009 Great Recession, I just looked back at my record, just to refresh my memory of how I reacted, and to observe my past actions in a more objective manner. As I made a graph, and as a picture is worth a thousand words, I am thinking of sharing it in a new thread to be started soon.

I allow myself to allocate stocks between a range of 50-65%, based on perceived value. I first moved from large cap & technology to small value in 1999-2000 when I looked at the S&P PE, which was crazy. I reduced from 80% stock to 60% in '07, pretty much like the above poster, only I just kept my and DW mutual stock monthly 401/403 buys in stock and shifted 30-40% of gains in some riskier areas to TIPS and some other bond areas, to diversify further.
That said, 1999 and '07 were extreme situations and I did everything slowly, selling about 3-5% at a time. If the crash had come quicker in '07 rather than '08, I wouldn't look so smart, would I? I would move more to bonds after coming close to "winning the game" but I don't like bonds longterm and have most locked up in 401 and 403bs where I can't use Bulletbonds or individual bonds. That said, I don't think yield rates will rise quickly--Volcker is not in the Fed and deflation (or low growth and the zerobound), not inflation is in the driver's seat.
I am looking at low beta stocks, however, and small/international value, although the correlations are still high.
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Old 11-25-2013, 05:58 AM   #24
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Instead of trying to adjust a portfolio depending on risk, how about William Berstein's idea of creating 2 portfolios: (1) a safe portfolio (CDs, short term bonds, etc) for lifetime necessities, and (2) a risk portfolio for luxuries/growth/legacy.
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Old 11-25-2013, 09:18 AM   #25
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Instead of trying to adjust a portfolio depending on risk, how about William Berstein's idea of creating 2 portfolios: (1) a safe portfolio (CDs, short term bonds, etc) for lifetime necessities, and (2) a risk portfolio for luxuries/growth/legacy.
That makes sense, and I've been working on a spreadsheet with those two types of portfolios in mind. Nevertheless within the legacy portfolio, I'll still take some approach that manages risk.
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Old 11-25-2013, 04:05 PM   #26
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Instead of trying to adjust a portfolio depending on risk, how about William Berstein's idea of creating 2 portfolios: (1) a safe portfolio (CDs, short term bonds, etc) for lifetime necessities, and (2) a risk portfolio for luxuries/growth/legacy.
If pensions, SS and annuities count as part of a portfolio, then I do have a 2 portfolio system

I even have diversification in the safe portfolio, with 2 UK pensions and a UK SS as well as 2 US pensions plus mine and DW's US SS. That took a lot of good luck planning.
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