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Old 05-31-2012, 09:09 AM   #81
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Exactly! Which is why I'm hoping my more diversified allocation will translate to a better portfolio survival. It certainly outperformed the traditional large-cap/US-bond balanced funds in the late 00's.

I don't own commodities or emerging market equities directly, but I know some of my funds hold this stuff directly or indirectly (actually, one of them holds quite a bit of commodity related stuff like Ag and Oil). And even big US companies sell into emerging markets.

At times I have considered adding something like Fidelity Strategic Real Return to my allocation (mix of REITs, commodities, floating rate loans and TIPs), but frankly, I have been slow to act on this point simply because I expect the global slowdown to last for a while.
This is GMO's most recent 7 year forecast




This is their forecast 10 years ago



and this is a look at 10 years actual performance of 4 major equity classes reflected in the S&P and 3 DFA funds over the past 10 years.



Just a graphical view of the point I made earlier. Which is the bigger risk for the new retiree withdrawing 4%? Low expected returns or a portfolio limited to US investments?

Finally, a paper here by GMO on investing in emerging country debt. Registration is required by no fee or spam. Well worth it IMHO.
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Old 05-31-2012, 10:22 AM   #82
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Interesting GMO comparison, thanks Michael. Grantham got the differential between international and US right at the beginning of 2003.

Somewhat sobering future gain prospects, if you can believe any forecasts. I do not understand why US equities are shown forcast so low. And a differential of about 5% compounded between US and International -- seems hard to believe. Anyone care to explain or have a link to the GMO explanation?
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Old 05-31-2012, 10:30 AM   #83
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Interesting... I wonder how they came to the prediction that both international and us small stocks will trail large caps? If that actually happens, it'll be a rare event (has happened before but not often)

Might be that it occurred over the last decade (and they missed it in their 2002 numbers) so they're swinging too far back in their forward projections thinking it'll happen again for the next decade?

FWIW, I'm very confident in small/mid caps right now... looking ahead 10 years. Enough to invest 40% of my 401k in them through index funds
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Old 05-31-2012, 10:34 AM   #84
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This whole thing feels like recency bias to me. We "feel" like equity returns are going to stink like they have for the last 12 years and assume the long term will be the same.
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Old 05-31-2012, 11:20 AM   #85
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I think Grantham's models are more based on returning to the long-term mean for each asset class - the opposite of recency bias. Govt bonds are overvalued with respect to their traditional values, so Grantham predicts underperformance over the next 7 years. According to their model, international and emerging market stocks are undervalued relative to US stocks, so they expect them to outperform US stocks over the next 7 years.

Note that his model predicts equities will outperform bonds over the next 7 years. He's not saying equities stink on a relative valuation basis. But yes, he is expecting that global growth over the next 7 years will be constrained compared to the past couple of decades, so that aspect could be considered recency bias.

Grantham's 7 year model is updated quarterly, so as asset classes grow or decline, they affect the 7 year (rolling) model.
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Old 05-31-2012, 11:24 AM   #86
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Quote:
Originally Posted by EvrClrx311 View Post
Interesting... I wonder how they came to the prediction that both international and us small stocks will trail large caps? If that actually happens, it'll be a rare event (has happened before but not often)

Might be that it occurred over the last decade (and they missed it in their 2002 numbers) so they're swinging too far back in their forward projections thinking it'll happen again for the next decade?

FWIW, I'm very confident in small/mid caps right now... looking ahead 10 years. Enough to invest 40% of my 401k in them through index funds
I think the predicted underperfomance is based on the current economic environment - less economic stability, harder to obtain credit, less exposure to international developing markets (for US small cap stocks). The current slow-growth tight-credit environment favors large companies over small. Small caps do better under higher growth conditions.

Anyway - I suspect that's were they are comping from. I hold mid and small cap too, simply because in the long run I expect it to pay off. In the short run - who knows?
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Old 05-31-2012, 11:43 AM   #87
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Quote:
Originally Posted by EvrClrx311 View Post
Interesting... I wonder how they came to the prediction that both international and us small stocks will trail large caps? If that actually happens, it'll be a rare event (has happened before but not often)

Might be that it occurred over the last decade (and they missed it in their 2002 numbers) so they're swinging too far back in their forward projections thinking it'll happen again for the next decade?

FWIW, I'm very confident in small/mid caps right now... looking ahead 10 years. Enough to invest 40% of my 401k in them through index funds
I have some overweighting (versus market) to mid/small caps for the long term. As you say there have been periods of large cap outperformance. Not exactly a rare event though. Here is a long term picture showing 5 year (60 months) rolling returns for large, small, and midcaps. The mid-caps are just charted for about the last decade.

It seems that in general periods of small cap out performance are followed by periods of under performance. Would be interesting to see relative PE ratios (large vs small cap) for the long term but I don't have that data.


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Old 05-31-2012, 12:08 PM   #88
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This whole thing feels like recency bias to me. We "feel" like equity returns are going to stink like they have for the last 12 years and assume the long term will be the same.
Here, have a cigar.
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