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Old 09-20-2014, 04:51 PM   #21
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Originally Posted by karluk View Post
I enjoy reading about these alternative approaches to portfolio management, but I think it's rather obvious that Kitces and Pfau come from academic backgrounds, where one's reputation is made by publishing a large number of well-researched papers, rather than dealing with clients in the real world. Their suggested approach to valuation based investing has the same weakness as all other such approaches - it requires nerves of steel to increase stock allocations from 30% to 60% after the market has crashed and valuations are starting to look attractive again. Some people, including some on this forum, can keep their emotions in check and make these huge reallocations after a major market meltdown, but for the average investor this is an insane approach to portfolio management. It assumes decision making that requires huge leaps of faith, that may easily backfire, and is to be implemented by retirees, whose lack of earned income will render them unable to recover from missteps.

There was a recent thread about Bill Bernstein, who has gone in exactly the opposite direction, based on observing his own clients' behavior in 2008. He is intentionally advocating non-optimal conservative portfolios, hoping to prevent his clients from the engaging in the kind of panic selling he saw back then. Maybe he is being excessively cautious, but at least his advice has a chance to work in the real world.

You raise good points there is a world of difference between the behavior of the experienced investors with a ton of INTJ personalities that inhabit these forums and the rest of the world.

Still i have much simpler formula for moving in out of various asset class, listen to Warren Buffett.
In summer of 1999, when said stocks were very over priced especially internet stock, you could nit pick and say he was a year too early but still great advice.

In Oct of 2008 when he said buy stocks, sure he was 5 months too early but..

In 2010 he said that if he only had a few million he'd be buy residential real estate in hard hit markets. If you followed his advice (and especially used leverage) you'd have done very well even as cash buyer I did fine.

For the last few year he has been calling long bond "return free risk" He hasn't be right about the risk yet, but the return part is true.

I know he isn't going to be around that much longer but in the mean time.
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Old 09-20-2014, 05:57 PM   #22
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Quote:
Originally Posted by karluk View Post
I enjoy reading about these alternative approaches to portfolio management, but I think it's rather obvious that Kitces and Pfau come from academic backgrounds, where one's reputation is made by publishing a large number of well-researched papers, rather than dealing with clients in the real world. Their suggested approach to valuation based investing has the same weakness as all other such approaches - it requires nerves of steel to increase stock allocations from 30% to 60% after the market has crashed and valuations are starting to look attractive again. Some people, including some on this forum, can keep their emotions in check and make these huge reallocations after a major market meltdown, but for the average investor this is an insane approach to portfolio management. It assumes decision making that requires huge leaps of faith, that may easily backfire, and is to be implemented by retirees, whose lack of earned income will render them unable to recover from missteps.

There was a recent thread about Bill Bernstein, who has gone in exactly the opposite direction, based on observing his own clients' behavior in 2008. He is intentionally advocating non-optimal conservative portfolios, hoping to prevent his clients from the engaging in the kind of panic selling he saw back then. Maybe he is being excessively cautious, but at least his advice has a chance to work in the real world.
actually in an interview bill mentioned that the timing now would be poor for his equity-less portfolio because of negative rates on tips and low to no interest.

so much for working in the real world
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"I wrote "Ages of the Investor" as a way to think about the retirement investing process, not as a normative prescription. -

In a perfect world, the TIPS yield curve is positive at all maturites, which are available at least every few years all the way out to, oh, age 110 or so.

But we don't live in that world right now: below 6 years, rates are negative, which means you have to pay >$1.00 to consume $1.00 0-6 years hence. And even if rates rise, there's a gaping maturity hole between 2032 and 2040. Finally there are no maturities beyond 2043. And so forth.

In a perfect world, an inflation-adjusted annuity will never default. There have been no major ones in the past, but you could also have said the same thing about major terrorist events on U.S. soil before 9/11/01, and if the GFC wasn't a wake-up on that one, you're not conscious.

So there are leaps of faith that have to be made; I can't tell you when or whether to buy inflation-protected annuities or a TIPS ladder now. No one can tell you whether that's better than waiting in short-term instruments.

But the LMP/RP framework at least allows you to make an informed decision.

Bill Bernstein
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