Recognizing an historic crash vs. correction or bear market.

[MichaelB]

Quote:

Originally Posted by karluk In this sense it is identical to any other market timing scheme - you end up making big bets on the future direction of the stock market. If you're lucky, you win big. If you're unlucky, you lose big. And as is also typical of market timing schemes, it fails to outperform buy and hold over the long run. If you want to make big bets that will probably backfire on you, then PE10 market timing is worth considering.

Not necessarily. Eyeballing the data RunningMan presented it looks like volatility is considerable lower. This might lead to a greater probability for portfolio survival, which is more important than yearly return once you are in the withdrawal phase.

[karluk]

Quote:

Originally Posted by MichaelB Not necessarily. Eyeballing the data RunningMan presented it looks like volatility is considerable lower. This might lead to a greater probability for portfolio survival, which is more important than yearly return once you are in the withdrawal phase.

I agree that overall PE10 market timing reduces volatility when compared to buy and hold. And in particular, I think that it greatly reduces market risk at high PE10 values. I can't speak for him, but I strongly suspect that this is why someone like our fellow member haha swears by it and appears to have taken action to implement his personal version of PE10 market timing. Good for him, and I hope it works out well.

I don't agree, though, that as a general rule PE10 timing increases portfolio survivability. What I think an analysis of the data would show is that you get improved survivability at high PE10 values, but probably worse survivability when PE10 is low. In a market crash situation, the typical retiree is likely to be locked into a timing system that could force him to go from 25% stocks to 75% stocks in just a year or two. The hope is that "over the long run" the low valuations will translate into higher returns. But what if "over the long run" means many years down the road and stocks continue to fall after our unfortunate retiree has committed 75% of his portfolio to them? He is out of luck. He has placed his trust in a market timing mechanism that forces him to expose the money he is relying on to fund his retirement to the whims of the stock market.

[Hamlet]

I think that there are times that valuation is so out of wack that it makes sense to lighten up on stocks. The stock bubble of 1998-2000 was one such time. When PEs of large companies start approaching 50 it is pretty clear that there is no way that a basket of them is going to provide acceptable long term returns.

I remember ending up with a lot of cash in '99 because I would look at the stocks I owned and ask "how is this company going to earn enough money to justify this valuation?". If you can't come up with even a longshot scenario that justifies the price, then it makes sense to sell.

That is the only time I ever felt that the market was that out of wack though. I started the latest market crash fully invested and stayed fully invested. I have a little cash now, but I have it because my situation requires a slightly more conservative asset allocation, not because I think valuations are out of wack.

[Running_Man]

I calculated what would have occurred if one had a 75/25 SP500/Bonds vs the Schiller from 1980, 1990 and 2000 with a withdrawal rate of 4%.
With a starting portfolio of $100,000 and $4,000 withdrawn at the start of the year the results at the end of 12/31/2013 would have been:

YEAR _ SCHILLER __ 75/25 _
1980 $1,562,743 __$1,906,914 _________$12,840 Withdrawal for 2014
1990 $__316,222__$_409,864 __________$7,520 Withdrawal for 2014
2000 $__126,967__$__70,131 __________$5,593 Withdrawal for 2014

At this point I do not propose that anything has been proven, only some interesting data. What it does prove is 1980 would have been a nice year to retire, could do whatever you want to at this point! As has been pointed out the last 2 years has allowed the 1980 & 1990 portfolio to pull ahead. At 1/1/2012 the portfolios were virtually tied, but Schiller is still showing overvaluation at this point, but investors are disagreeing.

I will compare versus Psssssstt... and work on the 60's and 70's next PEACE!

[Lsbcal]

I'm not sure I understand your presentation Running Man.

It would be best to show a semilog chart to compare two separate schemes. That way it is easy to see periods of out and under performance, i.e. one just looks at the convergence and divergence of the lines. That is what was done in the market timing thread mentioned above: Market Timing Models .

Also another way is to give CAGR's for various time periods.

[haha]

Quote:

Originally Posted by karluk I agree that overall PE10 market timing reduces volatility when compared to buy and hold. And in particular, I think that it greatly reduces market risk at high PE10 values. I can't speak for him, but I strongly suspect that this is why someone like our fellow member haha swears by it and appears to have taken action to implement his personal version of PE10 market timing. Good for him, and I hope it works out well. I don't agree, though, that as a general rule PE10 timing increases portfolio survivability. What I think an analysis of the data would show is that you get improved survivability at high PE10 values, but probably worse survivability when PE10 is low. In a market crash situation, the typical retiree is likely to be locked into a timing system that could force him to go from 25% stocks to 75% stocks in just a year or two. The hope is that "over the long run" the low valuations will translate into higher returns. But what if "over the long run" means many years down the road and stocks continue to fall after our unfortunate retiree has committed 75% of his portfolio to them? He is out of luck. He has placed his trust in a market timing mechanism that forces him to expose the money he is relying on to fund his retirement to the whims of the stock market.

All interesting points. I think the most practical objection to PE10 market timing is seen today. By PE10 we are obviously pretty far extended, yet equities are on a tear. I takes grit to sell positions that are going up daily, especially after the experience of the late '90s when we saw just how wild this can get. People tend to think that their superior expertise will allow them to stay until the music stops, then and only then to exit ahead of all the others.(Sometimes derisively called the masses.) I figure we are all the masses, only those of us attempting market timing are the market timing masses. I put essentially no faith in optimization. Within the bounds of my desire to pay LTCG taxes, I will use this kind of crude market valuation timing, but since most of my investments are taxable, it could never really become 25:75.

I tend to think that those of us who make some strategic sales at these levels will not have to wait too long to be glad we did, but it is much less that a dead cert that this will happen.

Anyway, market timers and buy and holders are not really in direct competition with one another, so may we all be satisfied.

Ha

[Running_Man]

Lsbcal,
I agree with your critique of the presentation, it certainly is not user friendly yet, I am going to put this together over time if it continues to be as interesting as it appears to be to me. I hope to improve the visuals, but as a numbers guy I am finding the base data fascinating in potential.

There were 14 times in the past 86 years where the model suggested stocks should be under weighted by this model to 30 percent stocks or less. All but 2 have been since 1996, 6 of those 14 occasions have been a negative year for stocks.

[Lsbcal]

Quote:

Originally Posted by Running_Man Lsbcal, I agree with your critique of the presentation, it certainly is not user friendly yet, I am going to put this together over time if it continues to be as interesting as it appears to be to me. I hope to improve the visuals, but as a numbers guy I am finding the base data fascinating in potential. There were 14 times in the past 86 years where the model suggested stocks should be under weighted by this model to 30 percent stocks or less. All but 2 have been since 1996, 6 of those 14 occasions have been a negative year for stocks.

Sounds like there may be a lot of recency in this approach. The bond rate decline won't be like 1996 to present when 5 year Treasuries went from 5.3% to 1.5%, i.e. we cannot go down another 4%. Also PE10 is a pretty recent popular discovery. Not as bad as Gazarelli in the post-1987 years but certainly has a lot of admirers. Their are a few naysayers though.

So something to consider when marrying any particular methodology and/or AA ... whether that is MT or buy-hold.

I don't know if there has been a bad sustained stock market when the Fed has been so loose with a highly sloped yield curve. Corrections yes, but many months of poor returns, probably not.

[Options]

What always scares me with any market timing scheme, no matter how "sophisticated" is the extraordinary opportunity for human error. Behavioral biases abound in the market. I have to ask, who could be arrogant enough to think they're smarter than the market, an amalgamation of the best and brightest? It's a dangerous road to travel, one littered with ghosts of the financially ruined.

For hundreds of years, in countries all over the world, again and again, in every kind of wild human get rich scheme imaginable some very wise and talented people have convinced themselves they could beat the market. Sometimes they're lucky, but as they say, even a stopped clock is right twice a day. Too, too much research, too, too much history, and even a plethora of posts on this board and others evidences people who won big only to later regret/hindsight/if only.

Predictions are noise, speculation, distracting at best. Who was it that said there are two kinds of economists (?), those that don't know and those that don't know they don't know. I'm no economist, but I know that I don't know.

[Lsbcal]

Quote:

Originally Posted by Options What always scares me with any market timing scheme, no matter how "sophisticated" is the extraordinary opportunity for human error. Behavioral biases abound in the market. I have to ask, who could be arrogant enough to think they're smarter than the market, an amalgamation of the best and brightest? It's a dangerous road to travel, one littered with ghosts of the financially ruined. For hundreds of years, in countries all over the world, again and again, in every kind of wild human get rich scheme imaginable some very wise and talented people have convinced themselves they could beat the market. Sometimes they're lucky, but as they say, even a stopped clock is right twice a day. Too, too much research, too, too much history, and even a plethora of posts on this board and others evidences people who won big only to later regret/hindsight/if only. Predictions are noise, speculation, distracting at best. Who was it that said there are two kinds of economists (?), those that don't know and those that don't know they don't know. I'm no economist, but I know that I don't know.

Just thought I'd highlight the words I find a little too hard to swallow. Maybe you didn't mean to be so negative?

[FIREd]

I think there are different kinds of market timing strategies. All too often, it is "hey, stocks were up big last year. I'm going all in". But, personally, I think that a market timing strategy based on valuation is very unlikely to send you to the poor house (though you may very well leave some money on the table).

[ERD50]

Quote:

Originally Posted by Hamlet I think that there are times that valuation is so out of wack that it makes sense to lighten up on stocks. The stock bubble of 1998-2000 was one such time. When PEs of large companies start approaching 50 it is pretty clear that there is no way that a basket of them is going to provide acceptable long term returns. ... .

But the problem with this, it is kind of a rear-view mirror look. Sure, 'approaching P/E of 50' is a pretty clear sign that there can't be much upside, but on the way there, you went through PE20 (historically pretty rarefied territory), and then PE25 (surpassed only by the Black Tuesday run-up!), and then PE30 (the absolute PEAK before Black Tuesday crash - so are you shooting for timing this to PERFECTION, expecting history to repeat itself exactly!?), and then PE 35 and 40 before 'approaching 50'.

If you held on into '99, then you held on through unprecedented levels of PE. I would think anyone using this as guide would have been out far sooner, and missed a lot of gains (enough to more than make up for the drop? I don't know, the numbers will tell us that).

Now, If I played Rip Van Winkle, and woke up after sleeping for 20 years, and saw that the Schiller PE was above 40, yep, I'd do some major selling. But if I were awake and followed this, I would have been easing out along the way. That might or might not work out.

-ERD50

[redduck]

Quote:

Originally Posted by Lsbcal Just thought I'd highlight the words I find a little too hard to swallow. Maybe you didn't mean to be so negative?

I think "scheme" in the very first sentence deserves to be highlighted. (Up until your post I thought that I wouldn't be able to be a valuable contributor to this thread).

[haha]

Quote:

Originally Posted by ERD50 But the problem with this, it is kind of a rear-view mirror look. Sure, 'approaching P/E of 50' is a pretty clear sign that there can't be much upside, but on the way there, you went through PE20 (historically pretty rarefied territory), and then PE25 (surpassed only by the Black Tuesday run-up!), and then PE30 (the absolute PEAK before Black Tuesday crash - so are you shooting for timing this to PERFECTION, expecting history to repeat itself exactly!?), and then PE 35 and 40 before 'approaching 50'. If you held on into '99, then you held on through unprecedented levels of PE. I would think anyone using this as guide would have been out far sooner, and missed a lot of gains (enough to more than make up for the drop? I don't know, the numbers will tell us that). Now, If I played Rip Van Winkle, and woke up after sleeping for 20 years, and saw that the Schiller PE was above 40, yep, I'd do some major selling. But if I were awake and followed this, I would have been easing out along the way. That might or might not work out. -ERD50

There is no doubt that everything you say is true. Is anyone disputing this?

Popular childhood games like musical chairs and others teach children this very fundamental human understanding needed to thrive in our competitive society.

It's a case of pay your money, and take your choice. Right now I am spending a fair amount of money on option time decay. This may or may not be intelligent, but it is certainly a reasonable cost given my goals and constraints, and the choice is mine.

Ha

[Lsbcal]

Quote:

Originally Posted by haha ... Popular childhood games like musical chairs and others teach children this very fundamental human understanding needed to thrive in our competitive society. Ha

I missed musical chairs in childhood. We just played cops and robbers, "bang, bang, your dead!". Sounds a bit like the stockmarket, don't you think.

[Options]

Quote:

Originally Posted by Lsbcal Just thought I'd highlight the words I find a little too hard to swallow. Maybe you didn't mean to be so negative?

Actually, I meant every word of it, and meant it to be cautionary. I was paraphrasing much of what I've read elsewhere--either in studies, books, talks. A study of the history of investing and speculation validates all of it, as all of what I mentioned has in fact happened, over hundred of years, all over the world. It's why Bernstein states that if you've studied history, you'll see there's no such thing as a black swan. In fact, he says, you'll recognize that "we've been here before."

[redduck]

Quote:

Originally Posted by Options Who was it that said there are two kinds of economists (?), those that don't know and those that don't know they don't know. I'm no economist, but I know that I don't know.

Are you referring to this quote?

“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
― John Kenneth Galbraith

[Lsbcal]

Hi Options, I think you are missing the point.

Anyway, it's good that we have these financial markets because we can all individually decide this stuff. I get my votes (expressed in $'s) and you get yours.

[NoMoreJob]

Hindsight is 20/20. You won't see it coming next time - it won't be like the last time, or the time before.

Know your psychological loss limits, diversify to insure you remain within that range (plan on 50% equity losses) and sit tight. If not working, have some readily available funds (i.e. CDs) to tide you over and prevent you from having to sell at a low point.

Timing doesn't work unless you are Spock.

[Options]

Quote:

Originally Posted by redduck Are you referring to this quote? “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” ― John Kenneth Galbraith

Thank you, redduck. I believe the quote would apply to those with "predictions" as well.

Quote:

Originally Posted by Lsbcal Hi Options, I think you are missing the point. Anyway, it's good that we have these financial markets because we can all individually decide this stuff. I get my votes (expressed in $'s) and you get yours.

Lsbcal, I agree. If you are one of the lucky ones who has extra $ to play with, at a minimum I'm highly envious

OTOH, many people come to this board looking to gain insight into investing, and it concerns me that someone without a lot of experience think they can time/predict/win/outthink any market. The parallels throughout history of market manias, booms, bubbles, and busts, suckers and fool schemes, is absolutely uncanny. The only way this stuff can repeat is because enough time elapses between the last fraud perpetrated on the investing public and the new one.

As I stated above, I do believe that it is an act of arrogance for any individual investor to think they know more than the market. Throughout history, and we're talking hundreds of years in countries all over the world, markets have outsmarted the most knowledgeable, most recently to wit:

"On the minus side, Greenspan’s reputation has suffered from two big mistakes. The first was his failure to see the importance of the housing bubble and the dangerous vulnerability of the financial mechanism that supported it. Had he done so and punctured the bubble promptly, the economy would have been spared the prolonged weakness that it is still suffering. The second was his deep-seated conviction that the unregulated financial system was self-stabilizing, that the self-interest of all those clever and experienced participants with a lot of their wealth at stake would keep the accumulation of risk within tolerable bounds. So he promoted deregulation and financial consolidation (as did others, of course) and, when this simple faith proved wrong, allowed disaster to strike."

-MIT Economics Professor Robert M. Solow writing on Alan Greenspan in The New Republic

If Alan Greenspan, who surely has/had more inside knowledge of the economy and markets, could get it wrong, what could possible lead an individual investor to think they know more? This would be the behavioral biases of overconfidence and confirmation bias in action.

John Bogle has some brilliant things to say about the marketing side of Wall Street, which includes planting stories in the financial press. By the time the individual investor gets any information, it is virtually worthless. This includes the current hoopla about which way the wind is going to blow in the bond markets.

The best deal for the invididual investor is indexing, picking an AA while accounting for one's risk tolerance, rebalancing, and minimizing costs (the single most important factor determining superior PF performance, according to a number of studies), and staying the course. Since 1920, this has always been the superior approach, and with calculators like FIRECALC, modelling demontrates the approach would work as far back as 1871.

OTOH, for people like you Lbscal with extra $$ to play with, a great investment might be writing me a check to cover the $3300 I had to drop yesterday to replace a 20 year old bed/mattress. You'll get a guaranteed return of making someone else very happy!