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Old 11-19-2013, 07:02 PM   #21
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We can depend on human emotions -- greed and fear. No stats needed.

+1 for the most sensible comment.
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Old 11-19-2013, 07:06 PM   #22
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"Please God, one more stock bubble" - Bumper sticker.

This time, I swear I will do better.

Pray tell, are we irrationally exuberant with the recent stock performance, or just plain exuberant?
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Old 11-19-2013, 07:23 PM   #23
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Even if 4% pa is the average total return, there will be considerable variation in annual returns around that - which is potentially good news for those who practice rebalancing and those who are skilled lucky at market timing and bad news for others.

Right now, I'd be a very happy retiree if the local market would just play catch up with the US and Europe.
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Old 11-19-2013, 07:28 PM   #24
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Even if 4% pa is the average total return, there will be considerable variation in annual returns around that - which is potentially good news for those who practice rebalancing and those who are skilled lucky at market timing and bad news for others.
...
That is my plan, to be skilled and/or lucky (don't care which).
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Old 11-19-2013, 08:00 PM   #25
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I prefer that we all will be lucky, meaning that the decade(s) ahead will be like 1980-2000 so that we can all retire into the sunset and live the rest of our life in prosperity and serenity.

Failing that, I wish that "capgain+dividend-inflation=3.5%WR" so that I can maintain my standard of living and still leave something to my children and grandchildren.

But if that does not work out, at the first sign of trouble, OK maybe the 2nd or 3rd sign, I will liquidate everything and go to cash. I have no qualm about leaving y'all holding the bag. Every man for himself. I am sure you would do no less if you knew it was coming.

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Old 11-19-2013, 08:11 PM   #26
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I prefer that we all will be lucky, meaning that the decade(s) ahead will be like 1980-2000 so that we can all retire into the sunset and live the rest of our life in prosperity and serenity.

Failing that, I wish that "capgain+dividend-inflation=3.5%WR" so that I can maintain my standard of living and still leave something to my children and grandchildren.

But if that does not work out, at the first sign of trouble, OK maybe the 2nd or 3rd sign, I will liquidate everything and go to cash. I have no qualm about leaving y'all holding the bag. Every man for himself. I am sure you would do no less if you knew it was coming.

Sign the Tremulous Market Timer.
No need to worry about it too much. The financial advisory industry will give us plenty of notice so everyone can cash out before the market starts to go down.
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Old 11-19-2013, 08:36 PM   #27
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But if that does not work out, at the first sign of trouble, OK maybe the 2nd or 3rd sign, I will liquidate everything and go to cash.
You forgot to mention the part where you ditch the sticks n' bricks and take off into the sunset in your RV
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Old 11-19-2013, 08:42 PM   #28
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The RV full-timing is my plan B, no, plan C, when I fail to execute my sell-high-buy-low-ride-back high plan, and suffer the same fate as everybody else when SHTF.

Note that the entire sequence above has to happen. What if I sell high, and buy low, but the market stays low? Well, then that's my plan B; start selling off assets to live on (RV's got to go too), claim SS early, and learn 100 dishes that one can make with rice and beans.
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Old 11-19-2013, 08:53 PM   #29
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The RV full-timing is my plan B, no, plan C, when I fail to execute my sell-high-buy-low-ride-back high plan, and suffer the same fate as everybody else when SHTF.

Note that the entire sequence above has to happen. What if I sell high, and buy low, but the market stays low? Well, then that's my plan B; start selling off assets to live on (RV's got to go too), claim SS early, and learn 100 dishes that one can make with rice and beans.
You remind of myself when I was young and trying to come to terms with the idea of working for a living by reading the Whole Earth Catalog and looking into land in the Peace River Valley of BC.

Until I saw the Peace River Valley and decided that working in Southern California would be better than trying to live in a log cabin or tent in the Peace River Valley.

Ha
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Old 11-19-2013, 08:57 PM   #30
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................ learn 100 dishes that one can make with rice and beans.
We are already on top of that down this way........
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Old 11-19-2013, 09:09 PM   #31
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...(snip)...
But if that does not work out, at the first sign of trouble, OK maybe the 2nd or 3rd sign, I will liquidate everything and go to cash. I have no qualm about leaving y'all holding the bag. Every man for himself. I am sure you would do no less if you knew it was coming.

Sign the Tremulous Market Timer.
I got a chuckle out of this one.

To be serious for a moment, when we sell and go to cash we are simply giving the equities to others who may or may not be smarter (or luckier). At that sell point in time nobody, buyer or seller, has a certainty of success. One is not really being a traitor in selling as there are always buyers at the right price. There are too many buy-holders that see this as almost a religious thing. It's just about making money, period.

If we go to cash, that cash goes somewhere like banks or whatever and gets invested by others as we collect the interest and that interest gets spent or saved. It's all just conversions of various investment flows.

I have certain criteria, carefully studied, that would if triggered have me out of the equity markets. We are nowhere near those yet.
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Old 11-19-2013, 09:15 PM   #32
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Welcome to the 4% return market - The Term Sheet: Fortune's deals blogTerm Sheet



I generally don't pay a lot of attention to stock market predictions, and ordinarily I would feel the same about this article. But what struck me about this 4% prediction is how close it is to current long term bond yields. Vanguard offers a number of long term bond funds with yields in this range. For example, the long-term bond index fund (VBLTX) has a current yield of 4.49%. Unfortunately, VBLTX also has a duration of 14.1 years, so its yield is not directly comparable to the ten year predictions for stock market returns.

Still, it seems likely that one could put together a mixture of intermediate and long term bond funds that would have an average duration of ten years and average yield of about 4%. Considering that the expected return of such a portfolio would be quite similar to the 4% prediction for stocks, it seems to me this might be a viable option for at least some of one's long term investments.

Note that this is for long term investments only. Over periods shorter than a decade, it's very possible that both stocks and long term bonds might generate negative returns. Over a full ten years, who knows? My guess is that with a properly designed portfolio, bonds would offer more chance of delivering positive returns than stocks, with historically have occasionally fallen over the course of a decade or more.

For me, the problem is that a bond fund never matures. So if we have 10-15 years of generally rising interest rates, you keep getting hit with the capital loss year after year.

I've been using CD's as my stand in for a bond ladder, because of the potential for future bond fund capital losses and the complexity of trying to buy individual bonds.

But I'm willing to learn...
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Old 11-19-2013, 09:18 PM   #33
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You remind of myself when I was young and trying to come to terms with the idea of working for a living by reading the Whole Earth Catalog and looking into land in the Peace River Valley of BC.

Until I saw the Peace River Valley and decided that working in Southern California would be better than trying to live in a log cabin or tent in the Peace River Valley.

Ha
Well, the young Ha might have had some romantic ideas of living off the land, but I was just talking (jokingly hopefully) about surviving and living off the state of New Mexico's generous policy of camping in state parks. I am too old and tired to have illusions. Still have my humor though.

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I got a chuckle out of this one.

To be serious for a moment, when we sell and go to cash we are simply giving the equities to others who may or may not be smarter (or luckier)...
Yes, some people think that we need to stay together to keep the market up, meaning if nobody sells, it will be all OK.
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Old 11-19-2013, 09:40 PM   #34
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For me, the problem is that a bond fund never matures. So if we have 10-15 years of generally rising interest rates, you keep getting hit with the capital loss year after year.

I've been using CD's as my stand in for a bond ladder, because of the potential for future bond fund capital losses and the complexity of trying to buy individual bonds.

But I'm willing to learn...
While it is (almost) uncontestable that interest rates rising will result in bond prices falling I have to wonder how much money has already been and/or will be "lost" by investors migrating from longer maturities (with higher yields) to shorter maturities (with lower yields) in anticipation of a rise in interest rates? People have been talking about the bond market
"crashing" for years and a lot of people currently expect ZIRP to be with us even after the Fed starts tapering.
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Old 11-19-2013, 11:38 PM   #35
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We can depend on human emotions -- greed and fear. No stats needed.
There are a few other choices here, too:

We can:

-assume the null hypothesis (stock market returns aren't possible to predict)
-depend on human beings finding patterns that don't really exist, then bet against them.
-Explain 19x earnings as natural in a low-rates environment.
-Be contrarians, bet against other peoples' prior views, and make money off of it.

I really think the smartest answer here is "I don't know; maybe."

I think that betting your life savings on eight independent data points (only 2-3 of which are similar to yours') that someone else calls stats is... suboptimal.

I think it's irresponsible to say we can pick out anything statistically significant yet on stock price returns over the 10 year period without at the very least trying to justify it using 3 year or 5 year returns.

I'm dubious about the stats these guys are using. If you count cars for 10 minutes on I-95 at 3AM and get 15 cars, and then come out and say "I-95 averages 1.5 cars per minute", that's not really accurate. To be fair, these guys have taken eight samples of I-95, but they may not be at completely different random times of the day, and if one of those samples is an outlier, now you need several dozen more samples to see how thick the tail is.

Here's another way of putting it. An insurance company studies 8 houses to see how much risk there is in insuring them. Last year, one house filed $200 a claim for a broken window when the neighborhood kids were playing baseball. The insurance company concluded that next year, they should expect about $25/house in claims, and billed everyone $30 for their insurance premium the next year.

The moral of the story is that when you're dealing with these heavy-tailed distributions, you need more samples. Normal distributions need about 20-30 data points; the market has fatter tails; these guys are trying to make some sort of statement with eight points, which is a tad dangerous.
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Old 11-20-2013, 12:01 AM   #36
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While it is (almost) uncontestable that interest rates rising will result in bond prices falling I have to wonder how much money has already been and/or will be "lost" by investors migrating from longer maturities (with higher yields) to shorter maturities (with lower yields) in anticipation of a rise in interest rates? People have been talking about the bond market "crashing" for years and a lot of people currently expect ZIRP to be with us even after the Fed starts tapering.
This year, the anticipated "correction" finally happened.

I see that Vanguard long-bond MF VUSTX is down -11% YTD. Its bond average duration is 15 years. Current yield is 3.4%.

Vanguard Treasury ETF EDV is down a whopping -18% YTD because its bond average duration is 25 years. Current yield is 3.92%.

Do you want to buy either one now for the above yields? Is the correction done?

How about Vanguard long corporate bond ETF VCLT with average duration of 13 years and a current yield of 5.15%? It's down -6.45% YTD.

Long-bond index VBLTX with duration of 14 years and yield of 4.49%? It's down -1.51% YTD.

The latter 2 look more attractive to me, but what do I know.

PS. Some balanced funds, but not all, also trail the S&P badly this year because of their bond components. Their performance is worse than their AA would indicate. If their stock portion matches the S&P, then their bond portion must be really negative.
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Old 11-20-2013, 12:04 AM   #37
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The only problem is that we only have about 85 years of data in CRSP and if you do a study on 10 year returns, you can only get about 8-9 independent variables out of that. Schiller has data going back to the 1860s, but I don't know how much we want to trust ten railroads and two other stocks to determine S&P 500 returns. Even then, that's only 15 independent data points for a study on 10 year returns, and you really want about 20, more like 30 data points in a regression to say you have statistical significance.
I've heard this criticism many times that we only have X independent 10, 20, 30 year periods and hence the statistics are too weak to conclude anything.

I don't think this is correct and it's more likely that consecutive years are independent. If consecutive years were not independent (and hence dependent) we would by definition be able to predict the returns from one year to the next. But nobody thinks this is true (that one can predict the return in the next year) -- hence consecutive years are independent.

Personally I'm more worried about non-stationarity.
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Old 11-20-2013, 01:09 AM   #38
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I've heard this criticism many times that we only have X independent 10, 20, 30 year periods and hence the statistics are too weak to conclude anything.

I don't think this is correct and it's more likely that consecutive years are independent. If consecutive years were not independent (and hence dependent) we would by definition be able to predict the returns from one year to the next. But nobody thinks this is true (that one can predict the return in the next year) -- hence consecutive years are independent.
Sure. My point is that I'm a little suspicious of 10 year terms on some ARMA or GARCH model. Maybe let's stick to five years?

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Personally I'm more worried about non-stationarity.
This is a really good point.

I agree that the economy has changed a lot.

I am suspicious of using utilities data from the 1920s, when it was basically a tech sector, to predict how utilities will fare today.

I am a bit less suspicious of using a total equity index.

I admit that leverage has changed a lot over the past 80 years, but that can be corrected.

I think humans are just as dumb and predictable as ever when it comes to valuing stocks and investing; I should know, I'm one of them.

I think crashes and recessions play out similarly; they probably happen faster today than they did in May 2010 or 1987.

I still think data from 1930 is informative. The 1929 DJIA was the first place I turned to after the Lehman Bankruptcy I am just less willing to trust it for sector/situation specific stuff.
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Old 11-20-2013, 02:41 AM   #39
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This year, the anticipated "correction" finally happened.

I see that Vanguard long-bond MF VUSTX is down -11% YTD. Its bond average duration is 15 years. Current yield is 3.4%.

Vanguard Treasury ETF EDV is down a whopping -18% YTD because its bond average duration is 25 years. Current yield is 3.92%.

Do you want to buy either one now for the above yields? Is the correction done?

How about Vanguard long corporate bond ETF VCLT with average duration of 13 years and a current yield of 5.15%? It's down -6.45% YTD.

Long-bond index VBLTX with duration of 14 years and yield of 4.49%? It's down -1.51% YTD.

The latter 2 look more attractive to me, but what do I know.

PS. Some balanced funds, but not all, also trail the S&P badly this year because of their bond components. Their performance is worse than their AA would indicate. If their stock portion matches the S&P, then their bond portion must be really negative.
You can tell I live in a different part of the world. The very limited range of low cost bond funds available to us out here have moved a lot less (and some of that movement is due to currency factors). FWIW, even if such a fund were available to me, I probably would not buy a bond fund with an average duration of 10+ years unless the after tax return was well above the rate of inflation (and possibly not even then). I would rather take equity risk.
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Old 11-20-2013, 05:51 AM   #40
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We are already on top of that down this way........
And as veg*ns we're only interested in those recipes. Could always use a few more.
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