Why does anyone invest in bonds long term?

[Fedup]

I wish I could understand what's been discussed here sometime. It's like rain falling on duck feather or whatever the saying is.

 

[rayvt]

Absolutely true, the key words being "as long as you have."

I invested a small amount of Google time in this "Meb Faber-type SMA signal" thing and was unable to find any examples where it successfully predicted future market action over a reasonable period.

In a nutshell, this comment typifies the reason that a "Meb Faber-type SMA signal" will continue to be successful --- on its own terms.


I mention that it is an alternative way to implement the the scheme of "shift money away from declining stocks to a safe harbor" than rebalancing stocks/bonds allocation. And the immediate response is that it fails to predict market direction and does not deliver out-performance.


Well, duh! By that light, a SmartCar is a failed vehicle because you can't tow a boat-trailer with it. And fire insurance is a failure because it doesn't keep your house from catching on fire.


Stop looking at SMA timing as a scheme to beat the market. Look at it as what it is --- a scheme to avoid taking the full brunt of a deep bear market.


People keep looking for esoteric schemes to beat the market, and evaluate *every* strategy -- except buy&hold -- from that perspective.

Just about all retirees would not be keen on the implementation details:
[restated]
1) [90 seconds of work once a month]
2) thru 5) [a modicum of discipline]

All true. A majority of people won't put out that effort. That's why a majority of people are never F.I.R.E.'d.


Or they are looking for some complex finely-tuned scheme with variables like the Fiji salt index or ruble/rupee exchange rate.
"Good God, man! No scheme as simplistic as looking at a 10-month broad market price trend could possibly be worthwhile. Everybody knows that it would take an incredibly complex scheme to be worthwhile. No reason to even consider something simple."

 

[teejayevans]

My view would be that trend following systems try to capture momentum in the markets. They are not really predictive but the better ones are trying to quickly capture momentum before other future events occur that have their own momentum affects (possibly in the opposite direction).

Momentum has been studied by academics and Wall Street types. It appears to be an acknowledged force in the markets. Can it be exploited by trading is the question.

Long term trends maybe, I think anyone could have predicted the market would be higher today then it was in 2009. I've listened to many an expert try to predict when to get out and back in. They get killed in choppy markets.

 

[Lsbcal]

...
Stop looking at SMA timing as a scheme to beat the market. Look at it as what it is --- a scheme to avoid taking the full brunt of a deep bear market.

People keep looking for esoteric schemes to beat the market, and evaluate *every* strategy -- except buy&hold -- from that perspective.
...

This topic probably deserves it's own thread. I think the 10 month SMA and its variants are fine for the pragmatic investor who wants to avoid some of the possibility of a deep bear market in equities. It takes a real commitment. I confess to having my own market timing ideas which are somewhat different then a moving average approach but seek a similar outcome.

I did take a look at this yesterday as a replacement for some part of the bond part of the portfolio. For me, I concluded that bonds are still the place to be for peace of mind and capital preservation in the event of a deep recession (depression).

The reason is because of events like October 1987 where the market fell off a cliff before the end of that month. Many times the equity markets roll off gradually due to a business contraction and that is perfect for a moving average withdrawal. But they do not always behave that way.
I could present the data but it is probably too much for this thread.

 

[laurence]

I agree this method seems to make good sense, but this is market timing, which I was trying to exclude from this discussion. Whether I'll try my hand at any market timing or not I don't know. I'm talking here about set-it-and-forget-it AA.

It's sort of the "buckets of money" approach, but not totally disagreeing. I plan on having 10-20% in fixed assets as the draw pool initially and then seeing how it goes...

 

[OldShooter]

... I mention that it is an alternative way to implement the the scheme of "shift money away from declining stocks to a safe harbor" than rebalancing stocks/bonds allocation. And the immediate response is that it fails to predict market direction and does not deliver out-performance. ... Stop looking at SMA timing as a scheme to beat the market. Look at it as what it is --- a scheme to avoid taking the full brunt of a deep bear market. ...

Well, I guess I don't see much sematic difference between "beat the market" and a "scheme to shift money away from declining stocks" or "a scheme to avoid taking the brunt of a deep bear market."

But back to the point, can you direct me somewhere that will show me a track record of this "scheme to shift money away from declining stocks" actually being successful? Real predictions of an unknown future, consistently followed by confirming results.

And, hey, I'd like a magic formula as much as anyone else. In fact my first investment efforts in the early '70s involved using fast Fourier transforms to deconstruct stock price series. The effort failed, of course. That was the first of many experiences that lead me to be very skeptical of magic formulas. Including this one.

 

[Lsbcal]

Oldshooter, here is a paper that seems to fill your request. Title is Quantitative Approach to Tactical Asset Allocation
It is by Ferber and is very readable.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

 

[OldShooter]

Oldshooter, here is a paper that seems to fill your request. Title is Quantitative Approach to Tactical Asset Allocation
It is by Ferber and is very readable.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

Thanks. I'll spend some time with it. As I said, I'm as greedy as the next guy.

 

[GravitySucks]

It's all Weiner Dogs....
http://smbc-comics.com/comic/modeling

 

[rayvt]

Well, I guess I don't see much sematic difference between "beat the market" and a "scheme to shift money away from declining stocks" or "a scheme to avoid taking the brunt of a deep bear market."

I guess the difference is in the perspective. "Beating the market" implies a focus on making more money. It a kind of active focus to better yourself.

"Avoid bear market" implies a focus on keeping what you have. The focus is on protection.

But back to the point, can you direct me somewhere that will show me a track record of this "scheme to shift money away from declining stocks" actually being successful? Real predictions of an unknown future, consistently followed by confirming results.

Well, of course there's Faber's classic paper, and his book. IMHO, the first version of his paper was the best. Later versions got much longer and diluted the message.

If you want to see something more concrete than text, take a look at this spreadsheet: https://www.dropbox.com/s/cbzvg74iyeyfwt6/SPX-monthly-1950-2013-and-IUL-test.xls

Ignore the part about IULs, and just look at the (rebalanced) buy-and-hold vs, the SMA timing. You can adjust start date of accumulation and for withdrawals, asset allocation, etc.

Only 48 timing signals in 66 years, and using the default parameter settings, much better maximum drawdown and better Sortino Ratio, and lower volatility.

 

[Nords]

IIRC, there are a few ER.org members who do something similar.

I think Nords uses home equity as investment leverage but, don't recall the details

Nords has spending covered by pensions, so they could get by without income from their investments if necessary. At least that was his situation many years ago.

When someone has all expenses covered by pensions, annuities and/or SS, they are in a different ball game with respect to their investments.

That's all correct. We're still >90% equities in our asset allocation and still doing mortgage arbitrage.

http://www.early-retirement.org/for...-losing-your-ass-ets-15237-2.html#post1530160

We started the arbitrage in 2004 with a mortgage at 5.375%, and by 2010 we'd refinanced it to 3.625%. Meanwhile the small-cap value ETF has produced about 8.2% APY (after taxes) through 2016, and will probably stay near that value.

While our mortgage payments have dropped over 25% through multiple refis and our other spending has remained relatively flat, the military pension COLA has risen a total of 34% over the last 15 years.

Today we're in the middle of yet another refinance, trying to reduce the interest rate one final time while pulling out even more cash. The P&I payments will still be covered by my pension.

 

[OldShooter]

I guess the difference is in the perspective. ... Faber's classic paper ... https://www.dropbox.com/s/cbzvg74iyeyfwt6/SPX-monthly-1950-2013-and-IUL-test.xls... much better maximum drawdown and better Sortino Ratio, and lower volatility.

Thanks. I've had an interesting time reading and researching.

The SMA stuff is, frankly, more real than I thought. I'm still very skeptical of all good backtesting results because it is so easy to overfit/tweak the parameters until the data confesses. But the "catch" of the 2008 bear market gets my attention. As, does, however the poor performance of the scheme subsequently to 2008 reported in the Faber paper. I'd be curious to know how it has done since his last date of 2012.

I also found commentaries, several by Mark Hulburt (What the Dow’s losing streak is telling us - MarketWatch), and a number of references to work by Blake LeBaron at Brandeis (Professor Blake LeBaron on the recent stock market downturn : Department of Economics Blog). A Google search on LeBaron produces more.

Re drawdowns and volatility I have learned over the years, beginning October 19, 1987, that these are not of great concern to me. In fact, I think using SD, Sharpe Ratio, Sortino Ratio, etc. is misleading because it doesn't consider an investor's timeframe nor his/her financial ability to ignore volatility. Volatility notwithstanding, Rip Van Winkle had zero risk during his 20 year nap. What is risk to a widow with a small portfolio is a blip to me, equal Sortino ratios notwithstanding.

So, I've enjoyed the research and have an improved understanding of the SMA arguments but, for me, it's still not of interest. Thanks again.

 

[brett]

We only do short term bonds.

 

[Lsbcal]

We only do short term bonds.

And your reasoning?