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Re: SWR should not be constant over a Retirement L
Old 03-14-2004, 09:11 AM   #41
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Re: SWR should not be constant over a Retirement L

Cut-Throat, I just pulled one mutual fund at random out of my portfolio -- Vanguard Healthcare (VGHCX). Started 20 years ago, annualized return of 20.43% since inception. I believe that beats "the market."

But my main point was that it is harder for a fund with lots of money to beat the market than it is for an individual, so just comparing active fund managers to a market index isn't "proof" of anything.

I liked Bernstein's book. He's a smart guy who writes well, but he basically just reads research done by others and repackages it for the masses. A useful service for sure, but I still prefer understanding the underlying assumptions and making my own decisions based on how solid I believe those assumptions to be.

The fundamental assumptions MPT makes are that the stock market always trends up, and that the market is very efficient at valuing stocks. I think these assumptions are worth questioning.
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Re: SWR should not be constant over a Retirement L
Old 03-14-2004, 11:05 AM   #42
 
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Re: SWR should not be constant over a Retirement L

Wab,

The Vanguard Fund that you mentioned did not perform better than the average fund of the Health Care Sector. I had a web page up (but have now lost it) where the VGHCX fund had bettered the Health Care Sector about half the time (which is what you'd expect) - The other half of the time the other funds in that sector Clobbered this fund.

There have been index funds created lately at Vanguard to track this sector. I'm betting the index fund will outperform the activley managed fund over the next long term periods.

So, it was not this Fund Manager's stock picking ability that helped him have a 20% return, but rather the whole sector in general. I would not make my whole portfolio this sector, but you could certainly have it be asset class like Real Estate and make it 10% of your portfoilo.

I do understand why the bigger the fund the harder it is to beat the market. And that is why index funds look even better.
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Re: SWR should not be constant over a Retirement L
Old 03-14-2004, 11:34 AM   #43
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Re: SWR should not be constant over a Retirement L

Cut-Throat, now we're splitting hairs. The Efficient Market Hypothesis says that all stocks are fairly valued, so you can't beat the broader market by making a sector bet. Yet, health care is a sector that has beaten the market for the last 20 years. You can't wiggle out of this one by trying to reclassify health care stocks as a separate asset class.

To prove to yourself that is possible for an active manager to beat the market for whatever term you want to pick, use this trivial portfolio:

1) Pick a stock, sector, or whatever that you think will outperform for some term, say 1 year.

2) Be right. Just for 1 year. You seem to agree that this is easy to do.

3) Now switch to TSM. Your annualized returns will beat the market forever. Guaranteed.

This may seem "dumb" to you, even though it would prove Bernstein wrong. However, this is basically what I do with my stock investments. I have a core holding of TSM, and I try to juice it up with a few side-bets that I think will outperform. I also adjust my allocation based on what I think will happen on a macro level. Finally, I allocate a larger chunk to real assets than most people, because I want to have something left if everything goes completely to hell.
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Re: SWR should not be constant over a Retirement L
Old 03-14-2004, 11:46 AM   #44
 
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Re: SWR should not be constant over a Retirement L

Quote:
1) Pick a stock, sector, or whatever that you think will outperform for some term, say 1 year.

2) Be right. Just for 1 year. You seem to agree that this is easy to do.
I certainly do not agree that this is easy to do at all ! That is why I will remain invested in a group of asset classes and in index funds.

Listen WAB, I have already admitted that I cannot outsmart the market! I don't think I'm smarter than Bernstein either.

So if you've found a method that works for you, I'm happy for you!
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Re: SWR should not be constant over a Retirement L
Old 03-14-2004, 12:21 PM   #45
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Re: SWR should not be constant over a Retirement L

Professor Shiller did the heavy lifting when he created P/E10. [P/E10 is the price of the S&P500 index divided by the average of the most recent 10 years of earnings.] He got the idea to use the average of ten years of earnings from Benjamin Graham's writings. He has posted his research at his site.
http://www.econ.yale.edu/~shiller/

The kind of timing that I am talking about is the kind that Warren Buffett and Sir John Templeton have engaged in. You buy when there is value. You don't buy when everything is overpriced. Warren Buffett has stated recently that he cannot find anything worth buying these days. He is not happy about that. But he is willing to wait.

I have posted much, but not all, of my research on the SWR Group Research discussion board at www.nofeeboards.com. Almost everything that I have done uses the historical sequence method that FIRECalc and the Retire Early Safe Withdrawal Calculator use. In fact, I routinely use those calculators. [One finding that really surprised me was that www.retireearlyhomepage.com misreported the effects of switching in accordance with P/E10.]

There are many details. But if you are looking for a short-term frequent trading kind of activity you will have to exclude me. I am talking in terms of one or two allocation changes per decade. In addition, my focus has been upon Safe Withdrawal Rates, which necessarily looks over a long time period.

My example with Merck was not to make a specific portfolio recommendation. It was to point out that you have many more options available than those that are built into Safe Withdrawal Rate calculators. There are broad-based indexes that are reasonably safe but which throw off higher dividends than the S&P500 does at this moment. In addition, there are REITS, which I know relatively little about, but which have been around for only a short time.

For retirement purposes, people are seldom interested in the best average returns alone. They are usually looking for an income floor that is reasonably well assured plus some growth, but not at great risk.

Yes, I have read William Bernstein's The Four Pillars of Investing.

[Bernstein's single, consistent error is that he acts as if accepting higher risk guarantees a higher return. The proper way to state things is that you should never accept any risk with receiving adequate compensation.]

The reason that almost all money managers fail to keep up with the market is their expenses. I consider a long-term advantage of 1% as excellent and 2% to be rare and outstanding. If active managers kept all mutual fund fees well below 0.5%, I think that they could give low cost index funds a run for their money. [WARNING: hidden trading costs add to expenses. Buying or selling in large volumes affects prices.]

I posted brief overview of my research earlier in this post.
http://64.37.106.236/cgi-bin/yabb/Ya...num=1078877131

The historical record shows that a total return (for the S&P500 index with dividends reinvested) that matches inflation a decade from now is highly unlikely based on today's valuations. In fact, a total return in real dollars two decades from now is unlikely to be as high as 2% above inflation. The market has very little predictability in the short-term, but it has quite a bit in the long-term. There are always dramatic moves in the market, whether as bear market rallies or as bull market corrections.

Have fun.

John R.
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Re: SWR should not be constant over a Retirement L
Old 03-14-2004, 12:43 PM   #46
 
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Re: SWR should not be constant over a Retirement L

Quote:
Bernstein's single, consistent error is that he acts as if accepting higher risk guarantees a higher return. The proper way to state things is that you should never accept any risk with receiving adequate compensation.]
John,

I suggest that you go back and read the 4 Pillars, because he absolutely does not say this! *What he does say is that a higher risk will give you a chance of a higher return. And that you expect to receive only the chance at the higher return.

I think you'll admit that Berstein would have been a fool to say guarantee a higher return. Guarantee a Chance of higher return Yes. But only a Chance.
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Re: SWR should not be constant over a Retirement L
Old 03-14-2004, 04:41 PM   #47
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Re: SWR should not be constant over a Retirement L

It may be that I was remembering some of his posts at his web site.

I read his writings frequently.

I know that I have seen him make this error in presentation often. I do not think that he actually believes the misstatement.

Have fun.

John R.
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Re: SWR should not be constant over a Retirement L
Old 03-14-2004, 05:18 PM   #48
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Re: SWR should not be constant over a Retirement L

My experience is not good with market timing and stock picks. In the mid-90's I thought I was pretty good for a couple of years. I did so well with my investments that I convinced myself that I was pretty smart even. But over the long haul, I would have been better off in a total market index fund. As Bob Smith often points out, you have to be right twice -- when to get in and when to get out. I've had similar sub-index experience with sector funds.

Now maybe my poor results are because I'm just not as smart as some of you who are convinced that timing or trading is a good thing. Okay . . . I can accept that, but unless you give me a formula that really works for you or you are willing to give me day-to-day advice on what to buy and what to sell, it does me no good to acknowledge your superior mental abilities. I'll be better off sticking with index funds.

Regarding the site wabmester points us to: I remember reading that article previously. Although the method described did seem to provide some advantage when backtested over a significant time period, it involved some pretty drastic moves into and out of the market. It wasn't clear to me that these moves would not end up costing more in tax implications and fees than it would have made above the market index approach.

A fundamental issue I see with trying to develop a trigger formula using P/E or P/E10 is that you are buying (or selling) based on a rearview mirror metric. When you buy stock, you are buying the right to participate in future earnings -- not past earnings. If you assume that future earnings and future prices will not change dramatically from the immediate past or 10 years past, then these metrics might be of some use. But it seems to me that when the market moves most dramatically, this assumption is wrong. Yet that's exactly when you need to get in or get out.
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Re: SWR should not be constant over a Retirement L
Old 03-14-2004, 06:17 PM   #49
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Re: SWR should not be constant over a Retirement L

It is important to remember that P/E10 is based on the average of ten years of earnings. The E10 part varies slowly. It is well behaved. Prices fluctuate immediately.

I have looked at the normal, single year trailing P/E alone and in combination P/E10. It does poorly.

The underlying logic is that prices are necessarily related to earnings, although loosely. This narrows the spread in long-term returns to something less than what we would expect from the almost purely random variation that we see from one year to the next.

In terms of the 1990s and the bubble years, I believe that the rational indication would have been to avoid stocks. That is why Greenspan picked up and used the term Irrational Exuberance. But bubbles happen every now and then, no matter how obvious they may seem looking backward.

Notice that the historical sequence method does not include sequences at current valuations at the start or middle of the retirement period. Today's extreme valuations show up only at the end of the sequences. But portfolio safety is most heavily influenced by what happens at the beginning of one's retirement. After 10 or 11 years, your portfolio will have grown a lot or you may be in danger. There are very few intermediate cases.

Have fun.

John R.
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Re: SWR should not be constant over a Retirement L
Old 03-14-2004, 09:07 PM   #50
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Re: SWR should not be constant over a Retirement L

John, I briefly scanned Shiller's paper on Valuation Ratios, and I didn't see anything to get excited about. *He was basically arguing that the stock market of 1996 was overvalued, and that P/E ratios should return to historical levels.

I felt that way in 1996 too. *And in 1997. *And in 1998. *And in 1999. I finally decided at the end of 1999 that I shouldn't be investing in a market that I no longer understood, and I liquidated about 90% of my stocks.

Things don't look much better today, but at least I feel I have a better understanding of the forces contributing to the new bubble, so I plan to ride it out until those forces weaken.

One thing that Shiller's new research highlights is kind of interesting though. * He points out that just before Japan's bubble popped in 1989, investor confidence had reached an all-time high (around 90%). * Today, US investor confidence is at a similar level.

There's only one thing that scares me more than investor overconfidence, and that's when people start saying "the rules have changed."
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Re: SWR should not be constant over a Retirement L
Old 03-15-2004, 04:28 AM   #51
 
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Re: SWR should not be constant over a Retirement L

Quote:
Today, US investor confidence is at a similar level. There's only one thing that scares me more than investor overconfidence, and that's when people start saying "the rules have changed."
I am not seeing Invester confidence, much less overconfidence. No one is talking about stocks at the cocktail parties yet.

The only people I hearing saying "The rules have changed" are people here - when commenting on Firecalc. "We will never see the returns of the US market like we did during 1871-1999"
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Re: SWR should not be constant over a Retirement L
Old 03-15-2004, 07:01 AM   #52
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Re: SWR should not be constant over a Retirement L

Touche, Cut-Throat. The good news is that the people saying you should expect lower forward returns are the same people who were saying that the 1996 market was overvalued

I don't get to as many cocktail parties as I did back in my rat-race days, so this is all I have to go on as far as investor confidence:

http://icf.som.yale.edu/confidence.i...earIndex.shtml
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