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Re: ECRI
Old 01-23-2004, 05:47 PM   #21
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Re: ECRI

Bernsteins stuff, from what i've read, make a nice case for DFA's balanced index funds, but it looks like the generic vanguard types dont do as well. I dont do financial planners, I dont care what instruments they give me access to, so hence no DFA funds for me. Plus I come away from reading his stuff like I just enjoyed a marketmercial for DFA.

But again, his information is based on hindsight, just like much of ours. The key question is still: is the next 20 going to be like the last 20 (or more specifically, like the last 5) up/down/up/down/up/down...net: nowhere.

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Re: ECRI
Old 01-23-2004, 07:29 PM   #22
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Re: ECRI

OK, I'll go out on a limb here. The next 20 years will not be like the last 20.
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Re: ECRI
Old 01-24-2004, 04:00 AM   #23
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Re: ECRI

One thing that is virtually certain is that, whatever the markets do in the future, a person who simply holds a broad index of stocks and bonds, at a low expense ratio, will do better than most other investors.
One thing that is rather remarkable about past returns -- especially on stocks -- is that a person taking this approach would have done extremely well because of the effects of compounding. (I don't expect future returns to be as high, but there is no "system" that will allow investors as a group to escape this reality.)

If a person departs from this "passive" approach, they presumably believe that they have some "system" that will allow them to "beat the market." Without counting transaction costs, roughly half of the money invested this way will "beat the market" and half won't. (After transaction costs, the fraction beating the market shrinks considerably.) But even if a person comes up with a "system" that improves their returns, say, 80% of the time, there is a pretty good chance that it involves risks that will involve big losses the other 20% of the time.

While it is impossible for there to be any system that will allow all investors (who are "the market") to "beat the market," it should be possible for all investors to (1) reduce their transaction costs by doing less trading and (2) reduce the volatility of the market by doing less trading. Item 1 implies that there would be fewer people employed in the financial services industry. Hopefully they would find employment doing something more productive. :-/
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Re: ECRI
Old 01-24-2004, 08:45 AM   #24
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Re: ECRI

Sound thinking and definitely the current "right think".

However, what if the stock market runs stagnant for 10 years. Considering its ups and downs over the last 5, the indexes are still below their highs.

Hence (and I'm not trying to be a troublemaker), if we get 5 more like this, does the buy and hold low cost index owner get anywhere?

Someone making one or two decisions per year to sell on a high or buy on a low, using one or more moderately helpful indicators might at least pick up a few more percentage points per year.

I'm constantly reminded by my Dad of the following, and I dont recall the years, but the sentiment fits: "I owned stock once. I bought it (sometime in the early 70's), the prices dropped in half and after I waited about 8 years they came back to almost what I paid for them and I got rid of them and bought bonds".

Of course, had he held those to today from that times Dow of below 1000, he'd be quite well off.

The point is, what if we get one of those 8 year stagnant periods? Even a sub-4% SWR will see your portfolio fairly well picked over to meet expenses.
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Re: ECRI
Old 01-24-2004, 09:46 AM   #25
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Re: ECRI

There were times in the 70's when dull but well run companies paid 6% dividends.
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Re: ECRI
Old 01-24-2004, 10:05 AM   #26
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Re: ECRI

And stock yields were considered totally 'puny' compared to bonds which peaked in the early 80's. I worked with a guy who buoght 30 yr bonds at 12% (82?) and still was struggling whether to buy 'some stocks' in the early 90's before we ER'd.

'right think' says yields have got to go back up after this long a slide. When is the question. (Glad I'm not Japanese - they're still on hold).
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Re: ECRI
Old 01-24-2004, 10:05 AM   #27
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Re: ECRI

But in that case, buying and holding a broad index would have paid you roughly diddley squat for dividends, yes?
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Re: ECRI
Old 01-24-2004, 10:27 AM   #28
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Re: ECRI

Dividend growth 4.5%, inflation 3.1% for the S&P 500, 1926-1994.

BUT- if you could fast forward yourself back to the 70's and early 80's you 'felt yourself' daily getting 'pooer' against inflation. Luckly, I was maxing my 401k into the S&P index/GIC's for 59 1/2 - the far distant future - and NO 401k loans in those days.
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Re: ECRI
Old 01-26-2004, 05:29 AM   #29
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Re: ECRI

Quote:

This one has been touted as a successful market timing indicator by none other than a fed economist:
http://www.kc.frb.org/publicat/reswk...F/rwp02-01.pdf
I looked at this and, in a nutshell, the strategy that it found to substantially increase returns above the return on the S&P 500 was this: to switch entirely into short term Treasuries whenever the interest rate on short term Treasuries rose to more than 100 basis points (1%) above the E/P ratio of the S&P 500 (based on trailing 12 months' earnings). *Essentially, this is a strategy of selling stocks when the market is greatly over-valued and destined for a drop, as signalled by tight monetary policy driving up short-term interest rates. *

I think that it has merit, although I would be reluctant to ever sell 100% of my stocks. *(Doing so can be psychologically bad when the market keeps going up for awhile and everyone else is celebrating!)

Right now, the short term rate on Treasuries is about 1%, and the earnings yield on the S&P 500 is 3.6%. *So according to this indicator it is a "safe" time to be holding stocks.

An important economic principle that this article did not address, but plenty of others have, is that the accomodative monetary policy that keeps short term interest rates low eventually leads to increased inflation that drives long term interest rates higher. That's why stocks are more attractive now than long term bonds.
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