Bogle on future returns

[NW-Bound]

I read again the transcript of the 2nd video clip. Something does not make sense to me. Bogle said

"Well, I am not basically a rebalancer. In the long run, rebalancing is going to cost you because the higher-yielding, the higher-returning, asset is going to get to be a bigger and bigger part of the portfolio, and if you suppress it by rebalancing, you will almost definitely have a lower return over the long run.

In the short run, that's something else, and I think if people want to rebalance, that's fine."​

Perhaps Bogle was thinking that if one rebalanced too often, he would miss out on a long secular run, such as the rise of equities in the 1980-2000 period.

But if it is OK to rebalance in the short run like he said, how can one undo it for the long run?

 

[Hermit]

My boonies home is also very comfy, where the only disturbance is an occasional woodpecker. If I live there full-time, all I would need is to add an internet connection.

Will have to add the cost for making grocery runs (40 mi one way), but other than that, everything is cheaper (because it's non-existent ). Except for RE taxes that is. They charge by property value, whether they plow the road for you or not!

PS. I was tempted to make up the adjective "Hermitian" to describe a dwelling, but then realized that it would cause a mathematician to have a fit.

This whole Hermit thing sounds pretty good to me!

And yes, my current internet, cable, phone, cell phone bundled bill is well over $300.00 per month. (Two kids with their high data smart phones. -Thats gotta change when I retire next summer.)

 

[JoeWras]

I would be quite content with real returns in the 2.5-3% range (in line with planned SWR).

DItto

 

[ejman]

I read again the transcript of the 2nd video clip. Something does not make sense to me. Bogle said

"Well, I am not basically a rebalancer. In the long run, rebalancing is going to cost you because the higher-yielding, the higher-returning, asset is going to get to be a bigger and bigger part of the portfolio, and if you suppress it by rebalancing, you will almost definitely have a lower return over the long run.

In the short run, that's something else, and I think if people want to rebalance, that's fine."​

Perhaps Bogle was thinking that if one rebalanced too often, he would miss out on a long secular run, such as the rise of equities in the 1980-2000 period.

But if it is OK to rebalance in the short run like he said, how can one undo it for the long run?

I guess that would be because in the long run, stocks have outperformed bonds. So any long term rebalancing will be out of stocks (the better performing asset) to bonds - the lesser performing. Intuitively that should result in lower performance for the rebalanced portfolio - over the long run. Personally, I don't rebalance because I expect higher performance. I rebalance because being all in stocks scares the hell out of me.

 

[Lsbcal]

I guess that would be because in the long run, stocks have outperformed bonds. So any long term rebalancing will be out of stocks (the better performing asset) to bonds - the lesser performing. Intuitively that should result in lower performance for the rebalanced portfolio - over the long run. Personally, I don't rebalance because I expect higher performance. I rebalance because being all in stocks scares the hell out of me.

Who has come out ahead in the past:
1) The 65/35 investor who never let's it get more then 66/34 out of whack
2) The 50/50 investor who lets it get to 65/35 before rebalancing back to 50/50

Both investors have an SWR = 4%.

My bet is on the 65/35 investor but I've only modeled that investor because that's me.

 

[NW-Bound]

Here's another thing I did not understand.

I knew of Bogle as being pro indexing (he invented it) and against market timing. But if he did not care about rebalancing because one might miss out on a secular asset run, then is that not also an expectation of a certain market trend? In other words, just another form of market timing?

Personally, I don't rebalance because I expect higher performance. I rebalance because being all in stocks scares the hell out of me.

I like to rebalance because I want to have some free cash to buy back whenever I feel like it, hopefully at a lower price. In plain words, I attempt to "buy low sell high". Some call it rebalancing, some call it market timing. I just don't care. Yes, and the smoothing out of the total portfolio value is also a nice effect to have.

 

[unclemick]

Saint Jack sounds very reasonable as he usually does. I've been paying attention to what he says for about 20 years now and so far he's at the top of my list as far as forecasting and common sense financial advice is concerned. As for speculative returns who knows - if people feel optimistic the PE ratio may well double it has before. The converse, it may be cut by half.

Heh heh heh - Listening to Jack has got me 19 years of ER and counting.

 

[ejman]

Who has come out ahead in the past:
1) The 65/35 investor who never let's it get more then 66/34 out of whack
2) The 50/50 investor who lets it get to 65/35 before rebalancing back to 50/50

Both investors have an SWR = 4%.

My bet is on the 65/35 investor but I've only modeled that investor because that's me.

Maybe so. But when I look at Vanguard's model portfolio returns I note that a 50/50 portfolio has an average return of 8.2% for the period 1926-2011 while a portfolio of 80% stock 20 % bonds has an average return over the same period of 9.4% (9.9% for 100% stocks). I thus conclude that if one lets the portfolio ride over a long period of time (for the period 1926-2011) one would end up with a higher percentage of stocks hence a higher return.

I must say that I don't let my portfolio "ride" I rebalance within wide 10% bands. The reason I do this is to mitigate volatility as I get older, not in search of higher returns. Frankly a lot of studies I've read on rebalancing are highly suspect because depending on how one picks start and end points one can torture the data to fit one's original notion of which way it ought to turn out.

 

[pb4uski]

Maybe so. But when I look at Vanguard's model portfolio returns I note that a 50/50 portfolio has an average return of 8.2% for the period 1926-2011 while a portfolio of 80% stock 20 % bonds has an average return over the same period of 9.4% (9.9% for 100% stocks). I thus conclude that if one lets the portfolio ride over a long period of time (for the period 1926-2011) one would end up with a higher percentage of stocks hence a higher return....

If you really believe this is the future then you would be best off to just go 100% into equities and call it day but I don't think that Vanguard would recommend that to anyone. I wonder if they "let it ride" in their managed funds (like Star, Wellington, etc.) I doubt it and suspect there is some rebalancing going on. I think of rebalancing as a way to beat the average for a specific AA target by selling winners when prices are relatively high and buying more equities when prices are relatively lower.

 

[ejman]

If you really believe this is the future then you would be best off to just go 100% into equities and call it day but I don't think that Vanguard would recommend that to anyone. I wonder if they "let it ride" in their managed funds (like Star, Wellington, etc.) I doubt it and suspect there is some rebalancing going on. I think of rebalancing as a way to beat the average for a specific AA target by selling winners when prices are relatively high and buying more equities when prices are relatively lower.

I don't know why you snipped my reply where you did as it continued "I must say that I don't let my portfolio "ride" I rebalance within wide 10% bands. The reason I do this is to mitigate volatility as I get older, not in search of higher returns. Frankly a lot of studies I've read on rebalancing are highly suspect because depending on how one picks start and end points one can torture the data to fit one's original notion of which way it ought to turn out."

I don't think anybody who is concerned about market volatility ( as I am at my age) would be happy to have 100% stocks. That was not the meaning of my post. As to Vanguard letting "ride" Wellington's or other balanced funds stock allocation. Why in the world would they do something different from what they state in their prospectus? Really not sure what the intent of your post is. If you wish to rebalance (or not) please do so at your pleasure.

 

[Lsbcal]

Maybe so. But when I look at Vanguard's model portfolio returns I note that a 50/50 portfolio has an average return of 8.2% for the period 1926-2011 while a portfolio of 80% stock 20 % bonds has an average return over the same period of 9.4% (9.9% for 100% stocks). I thus conclude that if one lets the portfolio ride over a long period of time (for the period 1926-2011) one would end up with a higher percentage of stocks hence a higher return.

I must say that I don't let my portfolio "ride" I rebalance within wide 10% bands. The reason I do this is to mitigate volatility as I get older, not in search of higher returns. Frankly a lot of studies I've read on rebalancing are highly suspect because depending on how one picks start and end points one can torture the data to fit one's original notion of which way it ought to turn out.

I don't think we are really disagreeing. That's really what my example was about. The higher average equity allocation has historically provided the higher CAGR although the standard deviation also goes up.

So rebalancing can be simplistically thought of as just taking the average of a sawtooth pattern. Selecting the higher AA to begin with and then tightly rebalancing can be equivalent to selecting a lower AA and then loosely rebalancing. I have not done a study to show this modeling for various time periods but conceptually it seems to be likely. Of course, there is some dependency on how the market zigs and zags, but we do not know this ahead of time.

Now if you do selective rebalancing based on your guesses, then it's a matter of how good (or lucky) you are as to how well this turns out.

 

[NW-Bound]

So rebalancing can be simplistically thought of as just taking the average of a sawtooth pattern.

With a perfect execution, it will be more like riding the crests of the sawtooth pattern.

In any event, that sawtooth pattern'd better slope upwards, else all of our geese get cooked!

Now if you do selective rebalancing based on your guesses, then it's a matter of how good (or lucky) you are as to how well this turns out.

Yes, even when we all agree that rebalancing is a good thing to do, exactly how and when we do it may cause a big difference in performance.

"In theory, there is no difference between theory and practice. But, in practice, there is." - Jan L. A. van de Snepscheut/Yogi Berra

 

[ejman]

...snip...
So rebalancing can be simplistically thought of as just taking the average of a sawtooth pattern. Selecting the higher AA to begin with and then tightly rebalancing can be equivalent to selecting a lower AA and then loosely rebalancing. I have not done a study to show this modeling for various time periods but conceptually it seems to be likely. Of course, there is some dependency on how the market zigs and zags, but we do not know this ahead of time.
...snip...

Intriguing. I don't recall seeing research directly comparing the results from the approaches you suggest i.e. tight rebalancing with high stock allocation vs. loose rebalancing with a lower stock allocations. Do you (or any one else) know of any research with this comparison in mind? I would be most interested.

 

[Lsbcal]

Intriguing. I don't recall seeing research directly comparing the results from the approaches you suggest i.e. tight rebalancing with high stock allocation vs. loose rebalancing with a lower stock allocations. Do you (or any one else) know of any research with this comparison in mind? I would be most interested.

I haven't read of this sort of comparison but it would probably be pretty easy to do. However it probably depends somewhat on the time period you investigate, your withdrawal rate, what equity assets you invest in, what bond assets you invest in, etc. So to make it relevant everyone ought to probably do this for themselves. Fat chance of that.

We do know that in general the higher your average equity allocation, over long periods historically you have done better then lower equity allocations (see https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations). So I'm content with just deciding on my max equity and doing tight rebalancing. There are so many variables that one has to just decide on some foundation without endless analysis. Not that I'd mind reading of some relevant not too academic analysis.

 

[samclem]

As noted previously, the highest returns come from not rebalancing at all (because the higher historic returns of equities cause them to become more and more of the portfolio, leading to higher returns). We rebalance in order to reduce volatility, not to improve returns.

There are so many variables that one has to just decide on some foundation without endless analysis. Not that I'd mind reading of some relevant not too academic analysis.

Well, this is definitely not academic. I recall reading a source indicating that the "best" time period for rebalancing (if one is using time rather than %age windows) is about every 24 moths. Again, working from memory, this appeared to allow the "winning" asset classes sufficient time to run up (e.g. to take advantage of momentum), but stood a good chance of rebalancing gains into other asset classes before the "winners" succumbed to gravity. Sorry, I don't recall the source.
Anyway, I don't do this--I just rebalance annually near the end of the year when preparing for taxes.

 

[Lsbcal]

I recently realized there was one other benefit to frequent rebalancing as I'm doing. Generating cash for spending. It turns out that when one rebalances after equities go 1% above the max equity mark, there are on average 4 of these 1% events per year. So many years (but not all of them) one generates much of the cash needed for spending. This year I've rebalanced only twice in 9+ months so this mechanism is a bit short and I take the remaining needs from short term bonds.

I just realized this thread is now morphing towards rebalancing instead of future returns, sorry to the OP (oops, that's me).

 

[NW-Bound]

Eh, we already reached the consensus that investment return will most likely suck in the decade ahead. What more can we say about that?

The thread was slow-going until we started to talk about how to deal with this bleak future. Things get more lively, don't you think?

 

[foxfirev5]

My passive rebalancing by allocating new $ into the lagging class and selling off when that class exceeds my AA has helped in reducing overall volatility. I also feel that has helped me ride out some pretty good downturns without panic or selling low. While I agree with Bogles most basic advice I don't blindly follow every statement made, which can at times be slightly contradictory.

 

[Lsbcal]

Eh, we already reached the consensus that investment return will most likely suck in the decade ahead. What more can we say about that?

The thread was slow-going until we started to talk about how to deal with this bleak future. Things get more lively, don't you think?

What to do about the bleak projections is a fine direction IMO.

My own thought is to engage in very limited market timing. That's after a very careful data analysis and what is sometimes called data mining -- fitting the method to what has happened in the past.

My feeling is that even if the longer term returns are more modest then historical returns, there will be periods of speculative returns before the inevitable correction. But my primary purpose for doing this is to reduce risk. I don't want to go through another 2008 without at least trying to avoid it. So instead of buy-hold I'm doing buy-mostly-hold.

 

[Chuckanut]

Eh, we already reached the consensus that investment return will most likely suck in the decade ahead. What more can we say about that?

This is good news for the contrarians in the group!

 

[Chuckanut]

Perhaps all stocks is the best way to go in theory. But, remember men like John Bogle (who I have great respect for) could lose 90% of their assets in a down market and still live far better than that vast majority of us here. Most of us are middle-class folks who need to protect what we have earned if we don't want to see a huge and permanent drop into a poverty standard of living. Thus, what makes sense for the wealthy may not make sense for us.

 

[rbmrtn]

My own thought is to engage in very limited market timing. That's after a very careful data analysis and what is sometimes called data mining -- fitting the method to what has happened in the past.

My feeling is that even if the longer term returns are more modest then historical returns, there will be periods of speculative returns before the inevitable correction. But my primary purpose for doing this is to reduce risk. I don't want to go through another 2008 without at least trying to avoid it. So instead of buy-hold I'm doing buy-mostly-hold.

I agree. But even B&H/indexing is based on "fitting the method to what has happened in the past", it assumes the market will be higher at some point in the future, hopefully when you need it.

What one might do going forward may depend on where one is in their investment lifetime. Currently I'm more interested in aquiring dividend payers than maxing CGs. One thing I've done to take advantage of the volitilty is to put good-till-canceled buy orders at some "crazy" price for the stock. I picked up some nice chunks during the "flash crash" and the sell off in 2011. I have no plans to sell them going forward. Never say never, hope I don't buy any Enron/Worldcomm types.

 

[NW-Bound]

This is good news for the contrarians in the group!

My AA is 70% equities. So, am I one of those contrarians or not?

What to do about the bleak projections is a fine direction IMO.

Being a self-admitted timer, I have exercised my right to vary AA as I see fit. In the past, it has gone from 80% equities down to 50% in a matter of a month, although in most years, my portfolio turn-over is very low, and even lower than Wellesley.

As I own individual stocks as well as sector ETFs, I like to watch how they move, then try understand the reasons. I have been trying to "rebalance" between sectors, but my results have been mixed. Some years I did better than just holding S&P500, some years not as well.

I am leaning more and more towards dividend stocks for income, as I own little bonds at this point. And some of those dividend stocks are international companies too, which serve the need for diversification out of the US market.

 

[obgyn65]

I pay close to $400 a month for TV cable, phone, and wireless bills. And I don't watch football.

That is my monthly for phone, internet and cable as well. And no NFL Package either.

 

[obgyn65]

I am quite pessimistic about the future, and this is why I have started to buy some deferred annuities this year, as discussed in other threads. I guess I will continue to buy deferred annuities until I reach 62, or until I reach the $250-300k limit.

Nice short 5 minute interview with Bogle where he discusses future guesses at stock/bond returns: Bogle's Outlook for the Market

Short summary: nominal returns for stocks = 7%, bonds = 2% ... maybe

I liked the way he mentioned "speculative returns". Might we see a little of this as bonds end their path down the rate declines and start some sort of upward rate journey? My guess is ... maybe.