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karluk 03-04-2014 01:07 PM

I had never heard of John Hussman until reading this thread. I'm not sure if that's good or bad. I guess it's good that I don't pay much attention to the pundits and their frequently wrong predictions, but bad that I don't know who the influential players are. But now that his name rings a bell with me, I see that he is the subject of a recent article in the WSJ.

Bearish Manager Missed Big Stock Gains - WSJ.com

Numerous posts in this thread have pointed out that John Hussman has a terrible investing record over the last few years, and I don't wish to belabor the point. His bearishness may very well be justified, but just premature. Time will tell.

CaliforniaMan 03-04-2014 01:33 PM

Quote:

Originally Posted by karluk (Post 1423224)
I had never heard of John Hussman until reading this thread. I'm not sure if that's good or bad. I guess it's good that I don't pay much attention to the pundits and their frequently wrong predictions, but bad that I don't know who the influential players are. But now that his name rings a bell with me, I see that he is the subject of a recent article in the WSJ.

Bearish Manager Missed Big Stock Gains - WSJ.com

Numerous posts in this thread have pointed out that John Hussman has a terrible investing record over the last few years, and I don't wish to belabor the point. His bearishness may very well be justified, but just premature. Time will tell.

Over the past 45 years that I have been observing and in the market these types come and go all the time. He is typical of this. Make a big prediction, and keep making it until it comes true. Then market your "genius" like crazy. Negative (fear) predictions are more valuable than positive ones (greed) so these are the more common. People have short attention spans and heck, you don't need to sucker everyone, just enough to get them to buy your forecasts or invest in your funds.

And cherry picking the data is so easy, you get to choose the time spans, the presentation method, the type of data presented, and you have plenty of time to get it setup. After all, you are not actually doing research to understand what is going on, just collecting data that supports your argument.

It is the same over and over again. The real question IMO is why do people seem to need these types to 'explain' things to them, when there is so much real historical data available. I guess I just don't understand peoples fascination with these P.T. Barnums.

lawman 03-04-2014 02:55 PM

Quote:

Originally Posted by karluk (Post 1423224)
I had never heard of John Hussman until reading this thread. I'm not sure if that's good or bad. I guess it's good that I don't pay much attention to the pundits and their frequently wrong predictions, but bad that I don't know who the influential players are. But now that his name rings a bell with me, I see that he is the subject of a recent article in the WSJ.

Bearish Manager Missed Big Stock Gains - WSJ.com

Numerous posts in this thread have pointed out that John Hussman has a terrible investing record over the last few years, and I don't wish to belabor the point. His bearishness may very well be justified, but just premature. Time will tell.


Had not seen that...thanks...

brewer12345 03-04-2014 02:55 PM

Quote:

Originally Posted by CaliforniaMan (Post 1423234)
Over the past 45 years that I have been observing and in the market these types come and go all the time. He is typical of this. Make a big prediction, and keep making it until it comes true. The market your "genius" like crazy. Negative (fear) predictions are more valuable than positive ones (greed) so these are the more common. People have short attention spans and heck, you don't need to sucker everyone, just enough to get them to buy your forecasts or invest in your funds.

And cherry picking the data is so easy, you get to choose the time spans, the presentation method, the type of data presented, and you have plenty of time to get it setup. After all, you are not actually doing research to understand what is going on, just collecting data that supports your argument.

It is the same over and over again. The real question IMO is why do people seem to need these types to 'explain' things to them, when there is so much real historical data available. I guess I just don't understand peoples fascination with these P.T. Barnums.

A very nice summation.

I think the reason people are such easy marks for this stuff is the way we are hardwired for survival. If you are a hunter-gatherer, not reacting to a potential threat may be the last mistake you ever make. Opportunities for good things to happen (rabbit stew) will hop by again soon enough, so if you miss one chance there will eventually be others.

mrfeh 03-05-2014 02:25 PM

If you have sufficient funds to live on forever and don't mind losing money to inflation, then more power to you, if it helps you sleep at night.

That being said, I can't see any reason to go below 30% equities, even for the most conservative investor.

lawman 03-05-2014 02:56 PM

Quote:

Originally Posted by mrfeh (Post 1423653)
If you have sufficient funds to live on forever and don't mind losing money to inflation, then more power to you, if it helps you sleep at night.

That being said, I can't see any reason to go below 30% equities, even for the most conservative investor.

When you say "losing money to inflation" I assume you mean that bond returns have not kept pace with inflation.. I tried to confirm your position that historic investment grade corporate bond returns have not kept pace with inflation but was unable to find anything..Do you have any hard data?

mrfeh 03-05-2014 03:09 PM

Quote:

Originally Posted by lawman (Post 1423665)
When you say "losing money to inflation" I assume you mean that bond returns have not kept pace with inflation.. I tried to confirm your position that historic investment grade corporate bond returns have not kept pace with inflation but was unable to find anything..Do you have any hard data?

No, I don't. However, I also recognize this is an unusual time for bonds. I cannot predict the future, but I think it's safe to say the chances are much greater that rates will increase over the next 5-10 years than that they will decrease. If that occurs, and you are selling bond fund shares for living expenses, you may very well have to deal w/ NAV losses.

Historically, anywhere from 20-80% equities does ok over the long term. It's at the extremes (less than 10% or more than 90%) where you can run into trouble.

Of course, your annual expenses and size of your nest egg need to be taken into account. You may be in the position where putting it under the mattress would be ok.

lawman 03-05-2014 04:01 PM

Catastrophes can happen but I would not invest in either bonds or equities any money that I knew I may need in the next five years..That's what C.D.'s and cash accounts are for...That's part of the appeal of bonds. I can receive the dividends from the bond funds which will decrease the likelihood of needing to sell at a loss... I would think intermediate bond funds in theory would completely turn over in about 8 years so I really don't see how one could lose on good bonds if they are willing to stay through a complete bond cycle..Anything is possible I guess. I suppose we could see hyper inflation with extended low interest rates but I know of no significant time period where that has occurred.. Any way you want to cut it I think bonds pose less risk than stocks... I remember a time when the most respected financial gurus were saying "buy and hold". Well you don't hear that much anymore..My greatest losses have occurred in equities that I failed to sell when I could have realized a very nice profit..I've learned my lesson that pigs get slaughtered..

samclem 03-05-2014 04:23 PM

Quote:

Originally Posted by lawman (Post 1423689)
I can receive the dividends from the bond funds which will decrease the likelihood of needing to sell at a loss...

You can receive the interest from bond funds. Dividends are what you would get if you held stocks. They also are a regular payment made by many companies, and can allow the holder to avoid cashing out shares in down markets.

It is a very popular investing strategy, with mutual funds set up to make it easy. Many such funds have better long term (e.g. 20 year) investing results with lower end-of-window risk than bond funds. They are great investments for conservative long-term investors who understand the risks posed by bonds and want to include bonds as a smaller part of their portfolios.

lawman 03-05-2014 04:38 PM

Quote:

Originally Posted by samclem (Post 1423701)
You can receive the interest from bond funds.

Bonds pay interest. Bond funds pay dividends.

I have a small position in VWINX and just sold PRBLX, after having it for many years, to take my profit..I like both those funds for the reasons you have mentioned and if and when we see another big correction I will go back into them in a big way..

brewer12345 03-05-2014 04:52 PM

Quote:

Originally Posted by lawman (Post 1423689)
Catastrophes can happen but I would not invest in either bonds or equities any money that I knew I may need in the next five years..That's what C.D.'s and cash accounts are for...That's part of the appeal of bonds. I can receive the dividends from the bond funds which will decrease the likelihood of needing to sell at a loss... I would think intermediate bond funds in theory would completely turn over in about 8 years so I really don't see how one could lose on good bonds if they are willing to stay through a complete bond cycle..Anything is possible I guess. I suppose we could see hyper inflation with extended low interest rates but I know of no significant time period where that has occurred.. Any way you want to cut it I think bonds pose less risk than stocks... I remember a time when the most respected financial gurus were saying "buy and hold". Well you don't hear that much anymore..My greatest losses have occurred in equities that I failed to sell when I could have realized a very nice profit..I've learned my lesson that pigs get slaughtered..

From the early/mid 1960s through the early 1980s bondholders repeatedly took it in the bakehole.

lawman 03-05-2014 04:55 PM

Quote:

Originally Posted by brewer12345 (Post 1423714)
From the early/mid 1960s through the early 1980s bondholders repeatedly took it in the bakehole.

That's the kind of information I'm looking for..Do you have a link?

lawman 03-05-2014 04:59 PM

Quote:

Originally Posted by brewer12345 (Post 1423714)
From the early/mid 1960s through the early 1980s bondholders repeatedly took it in the bakehole.


Looking at 10 year Treasuries here

Historical Returns

I don't see it..

karluk 03-05-2014 04:59 PM

Quote:

Originally Posted by mrfeh (Post 1423653)
If you have sufficient funds to live on forever and don't mind losing money to inflation, then more power to you, if it helps you sleep at night.

At the risk of drifting a little off-topic, allow me to quote hedge fund manager, Cliff Asness, on his opinion of the current bond market. The quote is from an article on Mr. Asness's "pet peeves", which I read recently and found highly entertaining. I guess this is as good a place as any to provide his take.

Mrfeh doesn't actually call the bond market a "bubble", but his post is hard to read without interpreting it as a statement that bonds are doomed to lose ground to inflation in the future. This would most likely cause it to fall into Cliff Asness's list of pet peeves, which include unjustified claims that all sorts of expensive investments are in "bubble" territory.

Quote:

in the wake of 1999–2000 and 2007–2008 and with the prevalence of the use of the word “bubble” to describe these two instances, we have dumbed the word down and now use it too much. An asset or a security is often declared to be in a bubble when it is more accurate to describe it as “expensive” or possessing a “lower than normal expected return.” The descriptions “lower than normal expected return” and “bubble” are not the same thing.
As a current example, take US government bonds. They are without a doubt priced to offer a lower prospective real return now than at most times in the past (as, in my view, are equities). But could it work out? With an unchanged yield curve, which is certainly possible, you would make a very comfortable 4%+ nominal (call it 1%–2% real) a year now on a 10-year US bond, and to find a case where bonds worked out from similar levels, one only has to utter the word “Japan.” Does this make bonds a particularly good investment right now? No. Does it show that they do not satisfy the criteria for the word bubble, thereby demonstrating how the word is overused? Yes.
Cliff Asness is a very clever man and a good writer. The entire article is well worth reading, although I admit it gets a little long-winded at time.

Random Roger: Cliff Asness' Ten Peeves

brewer12345 03-05-2014 05:09 PM

Quote:

Originally Posted by lawman (Post 1423719)
Looking at 10 year Treasuries here

Historical Returns

I don't see it..

That is because you are looking only at tax free nominal returns. Add in taxes and especially the high inflation of that period and the bondholder got crushed.

lawman 03-05-2014 05:13 PM

What I want to avoid can best be illustrated here.

https://www.moneychimp.com/features/market_cagr.htm

For one who invested a dollar on Jan. 1, 2000 and left it there a full 10 years through Dec. 31, 2009 would find his dollar worth .91 cents..That's an annual loss of .99% and that does not include inflation..That's more risk than I need to take..

brewer12345 03-05-2014 05:17 PM

Quote:

Originally Posted by lawman (Post 1423729)
What I want to avoid can best be illustrated here.

CAGR of the Stock Market: Annualized Returns of the S&P 500

For one who invested a dollar on Jan. 1, 2000 and left it there a full 10 years through Dec. 31, 2009 would find his dollar worth .91 cents..That's an annual loss of .99% and that does not include inflation..That's more risk than I need to take..


Then invest in a well diversified portfolio.

lawman 03-05-2014 05:19 PM

Quote:

Originally Posted by brewer12345 (Post 1423728)
That is because you are looking only at tax free nominal returns. Add in taxes and especially the high inflation of that period and the bondholder got crushed.

Do you have any data that supports that?

brewer12345 03-05-2014 05:29 PM

https://3.bp.blogspot.com/-EKmeHRIqhC...al+Returns.jpg

lawman 03-05-2014 05:32 PM

Quote:

Originally Posted by karluk (Post 1423720)
At the risk of drifting a little off-topic, allow me to quote hedge fund manager, Cliff Asness, on his opinion of the current bond market. The quote is from an article on Mr. Asness's "pet peeves", which I read recently and found highly entertaining. I guess this is as good a place as any to provide his take.

Mrfeh doesn't actually call the bond market a "bubble", but his post is hard to read without interpreting it as a statement that bonds are doomed to lose ground to inflation in the future. This would most likely cause it to fall into Cliff Asness's list of pet peeves, which include unjustified claims that all sorts of expensive investments are in "bubble" territory.



Cliff Asness is a very clever man and a good writer. The entire article is well worth reading, although I admit it gets a little long-winded at time.

Random Roger: Cliff Asness' Ten Peeves

I really appreciate that!... I've been struggling to understand how 10 year Treasuries could be in a bubble when everyone knows exactly what they will be worth ten years from now...Fact is they are expensive compared to recent historical prices but they are not in a bubble ..
Thanks for helping feel a little less ignorant :laugh:

lawman 03-05-2014 05:43 PM

Quote:

Originally Posted by brewer12345 (Post 1423737)

Thanks..Your chart is interesting..It confirms my belief that bonds relative to inflation move gradually over several years..Not since 1976 has real returns been negative..Remember real returns are returns after inflation..Although the trend is down it still looks to be several years away from any possibility of going negative... And only then if the trend continues..

clifp 03-05-2014 06:04 PM

Quote:

Originally Posted by lawman (Post 1423739)
Thanks..Your chart is interesting..It confirms my belief that bonds relative to inflation move gradually over several years..Not since 1976 has real returns been negative..Remember real returns are returns after inflation..Although the trend is down it still looks to be several years away from any possibility of going negative... And only then if the trend continues..

Are you looking at the same chart I am.. starting in the late 30s for a decade until 1948, 10 year treasury had yields in the 3% range and the actual annual returns were negative.

Also the chart you posted
Doesn't the results give you pause?
Cumulative return of $100 from 1928-2013 S&P $255,553.31
Tbills $1,972.72
Tbonds $6,295.79

karluk 03-05-2014 06:06 PM

Quote:

Originally Posted by lawman (Post 1423738)
I really appreciate that!... I've been struggling to understand how 10 year Treasuries could be in a bubble when everyone knows exactly what they will be worth ten years from now...Fact is they are expensive compared to recent historical prices but they are not in a bubble ..
Thanks for helping feel a little less ignorant :laugh:

You know what 10 year treasuries will be worth in ten years. What you don't know is how that will compare with ten years of inflation. You may come out with a small positive real return, or potentially a large negative real return. It all depends on the future rate of inflation.

Cliff Asness was not saying that ten year treasuries are a safe bet to beat inflation, but rather that there are circumstances where they might possibly work out ok. That's why he is distinguishing between "expensive" assets and a bubble.

lawman 03-05-2014 06:12 PM

Quote:

Originally Posted by clifp (Post 1423746)
Are you looking at the same chart I am.. starting in the late 30s for a decade until 1948, 10 year treasury had yields in the 3% range and the actual annual returns were negative.

Also the chart you posted
Doesn't the results give you pause?
Cumulative return of $100 from 1928-2013 S&P $255,553.31
Tbills $1,972.72
Tbonds $6,295.79

I never suggested that bonds were better for long term growth than equities. I suggested they are better for capital preservation for the next ten years..If I had another 85 year time frame as you use in your example I would not be as concerned..

brewer12345 03-05-2014 06:13 PM

Quote:

Originally Posted by lawman (Post 1423739)
Thanks..Your chart is interesting..It confirms my belief that bonds relative to inflation move gradually over several years..Not since 1976 has real returns been negative..Remember real returns are returns after inflation..Although the trend is down it still looks to be several years away from any possibility of going negative... And only then if the trend continues..

Confirmation bias is a seductive mistress. Enjoy.

clifp 03-05-2014 06:25 PM

Quote:

Originally Posted by lawman (Post 1423748)
I never suggested that bonds were better for long term growth than equities. I suggested they are better for capital preservation for the next ten years..If I had another 85 year time frame as you use in your example I would not be as concerned..


Fair enough, difference of opinions is what makes markets.

I've said my piece.

daylatedollarshort 03-05-2014 08:04 PM

Lawman, if you are mainly interested in reasonable safe withdrawal rates and capital preservation for a 20 - 30 year time frame you might find this blog post on TIPS vs. a stock / bond portfolio interesting -

Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living

I would be interested in seeing if others here who study safe withdrawal rates much more than I do feel the numbers are accurately reported.

lawman 03-05-2014 08:24 PM

Quote:

Originally Posted by daylatedollarshort (Post 1423800)
Lawman, if you are mainly interested in reasonable safe withdrawal rates and capital preservation for a 20 - 30 year time frame you might find this blog post on TIPS vs. a stock / bond portfolio interesting -

Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living

I would be interested in seeing if others here who study safe withdrawal rates much more than I do feel the numbers are accurately reported.

Wow! It will take me some time to fully digest that but that's pretty much what I've been saying here..I will keep about 5 - 10 % in equities UNLESS I get an opportunity to invest at much more attractive values which I fully expect within the next few years..If I do not I still expect to beat inflation over the long term with my bond funds, some of which are leveraged..

Thanks I appreciate you hunting that down for me...

BTW...I bought a lot of I-Bonds many years ago which I still own...They pay a much higher interest rate even before the inflation part is added than most new issue bonds are paying today...

karluk 03-05-2014 08:58 PM

Quote:

Originally Posted by daylatedollarshort (Post 1423800)
Lawman, if you are mainly interested in reasonable safe withdrawal rates and capital preservation for a 20 - 30 year time frame you might find this blog post on TIPS vs. a stock / bond portfolio interesting -

Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living

I would be interested in seeing if others here who study safe withdrawal rates much more than I do feel the numbers are accurately reported.

I guess I'm willing to believe that the numbers are accurately reported. What I find completely unbelievable is that the author didn't bother to point out that these relatively high SWRs are achieved by completely depleting the portfolio by the end of the spend down period. You can spend 3.33% per year with inflation adjustments for 30 years from a portfolio earning a 0% real return only if you are absolutely, positively, 100% sure that you won't have any need of money in year 31. You'd better not, because the money will be gone. In practice that means that these SWRs are achievable only for people who are clairvoyant enough to know the date they will die. I don't know anybody at all who can foresee how their health will hold out over a 30 year retirement, so there's no chance at all that a sensible new retiree will plan to exhaust their portfolio in 30 years when they might need money for 35 or 40 years instead.

lawman 03-05-2014 09:07 PM

Quote:

Originally Posted by karluk (Post 1423819)
I guess I'm willing to believe that the numbers are accurately reported. What I find completely unbelievable is that the author didn't bother to point out that these relatively high SWRs are achieved by completely depleting the portfolio by the end of the spend down period. You can spend 3.33% per year with inflation adjustments for 30 years from a portfolio earning a 0% real return only if you are absolutely, positively, 100% sure that you won't have any need of money in year 31. You'd better not, because the money will be gone. In practice that means that these SWRs are achievable only for people who are clairvoyant enough to know the date they will die. I don't know anybody at all who can foresee how their health will hold out over a 30 year retirement, so there's no chance at all that a sensible new retiree will plan to exhaust their portfolio in 30 years when they might need money for 35 or 40 years instead.

I agree that he should have been more clear about that but there is still a good point to be made there..If the retiree has other income such as pensions or s.s. he at least won't starve to death..It also causes one to really give some thought as to how much of an inheritance he may want to leave.. In my case I don't care to leave it all but neither do I want to totally deplete it..I think that the flip side of this is what I see more of and that seems to be people seem to plan as if they are going to live forever..Somewhere in between these two extremes seems to be a good plan at least for me..

daylatedollarshort 03-05-2014 11:29 PM

Quote:

Originally Posted by lawman (Post 1423823)
I agree that he should have been more clear about that but there is still a good point to be made there..If the retiree has other income such as pensions or s.s. he at least won't starve to death..It also causes one to really give some thought as to how much of an inheritance he may want to leave.. In my case I don't care to leave it all but neither do I want to totally deplete it..I think that the flip side of this is what I see more of and that seems to be people seem to plan as if they are going to live forever..Somewhere in between these two extremes seems to be a good plan at least for me..

I am thinking something along the lines of TIPS or other fixed with 0 - 1% real until age 80 or so, then having enough to buy annuities at 80 when they are much cheaper than in our 50s, and a reserve set aside for inheritances / LTC.

clifp 03-06-2014 06:15 AM

Quote:

Originally Posted by karluk (Post 1423819)
I guess I'm willing to believe that the numbers are accurately reported. What I find completely unbelievable is that the author didn't bother to point out that these relatively high SWRs are achieved by completely depleting the portfolio by the end of the spend down period. You can spend 3.33% per year with inflation adjustments for 30 years from a portfolio earning a 0% real return only if you are absolutely, positively, 100% sure that you won't have any need of money in year 31. You'd better not, because the money will be gone. In practice that means that these SWRs are achievable only for people who are clairvoyant enough to know the date they will die. I don't know anybody at all who can foresee how their health will hold out over a 30 year retirement, so there's no chance at all that a sensible new retiree will plan to exhaust their portfolio in 30 years when they might need money for 35 or 40 years instead.

I found myself screaming at the computer as the author talked about the potential (modest) problems with implementing this strategy, while neglecting the blue whale in the room. In year 31,you are down to social security and what ever pension you may have period.. Hell I can spend 10K+ a month, with ladder of TIPs. The problem is that age 85, I am down to my 2,000-2,500/month Social Security check. The huge advantage of a 60/40, 70/30 portfolio is that with modest withdrawal rate a huge percentage of the time you find yourself at age 85 after 30 years of retirement with a good size nest egg. A decent percentage of the time you'll find yourself with 2 or 3 times more money than you started with at age 75. Which gives you time to ramp up your spending.

Any of these spend your last dime in 30 years withdraw strategies, need to be supplemented with a deferred annuity (aka longevity insurance) that pays out at age 85 or so.

daylatedollarshort 03-06-2014 08:40 AM

Quote:

Originally Posted by clifp (Post 1423875)
I found myself screaming at the computer as the author talked about the potential (modest) problems with implementing this strategy, while neglecting the blue whale in the room. In year 31,you are down to social security and what ever pension you may have period.. Hell I can spend 10K+ a month, with ladder of TIPs. The problem is that age 85, I am down to my 2,000-2,500/month Social Security check. The huge advantage of a 60/40, 70/30 portfolio is that with modest withdrawal rate a huge percentage of the time you find yourself at age 85 after 30 years of retirement with a good size nest egg. A decent percentage of the time you'll find yourself with 2 or 3 times more money than you started with at age 75. Which gives you time to ramp up your spending.

Any of these spend your last dime in 30 years withdraw strategies, need to be supplemented with a deferred annuity (aka longevity insurance) that pays out at age 85 or so.

Because of pensions, modest lifestyle and SS, Lawman has already stated in the first post he won't really be spending his portfolio money most years anyway, so he will still be saving money during retirement.

So for people like him a TIPS ladder might suit his needs best. Personally I would never be comfortable having a bad sequence of returns early on and then spending 4% anyway, depleting our portfolio with fixed spending against variable and sometimes losing annual returns.

I do see many posts here from people with stock / bond portfolios planning to live to X years and spending their last dime, so I do not think the issue of depleting the portfolio is necessarily unique to owning TIPS. When most people here use FIREcalc do they go to zero at a certain age or plan to leave more than when they started? I always got the impression many people were not planning to leave a lot left over even with a stock / bond portfolio anyway, but maybe that is an incorrect understanding of other poster's plans on my part.

lawman 03-06-2014 09:16 AM

Looking at averages can sometimes distort the real life picture of what might happen..Averages change with each passing year so I'm hesitant to rely on them too much. For example, I put more relevance on what has happened since WWII that I do what happened before. But one average I cannot overlook what happened between Jan. 1, 2000 and Dec. 31, 2009 when one dollar invested grew to 91 cents..A repeat of that would mean a much lower quality of life for me in the last stages of my life if I am heavily invested in equities..If one looked only at averages one would likely conclude he doesn't really need to insure his home based on the number of policyholders whose house burns down..I'd rather gamble with the value of my home than the quality of my life. In the example above I find it interesting that even though the dollar invested for 10 years shrank to only 91 cents the arithmetic average rate of return was a positive 1.21%..That's why I question some of the data I see..Some of the advisers I most respect say that today's equities are priced as if earnings will remain as high as they have been the last couple of years..They say that will not be the case..Earnings drive equities and as soon as market expectations are for lower earnings I believe you will see values decline significantly..I'd rather be out of the market and wrong than in the market and right..It's not that I think bonds are priced low now. It's just that I think stocks stink here and bonds will do what I need them to do..

CaliforniaMan 03-06-2014 10:06 AM

Quote:

Originally Posted by lawman (Post 1423917)
Looking at averages can sometimes distort the real life picture of what might happen..Averages change with each passing year so I'm hesitant to rely on them too much. For example, I put more relevance on what has happened since WWII that I do what happened before. But one average I cannot overlook what happened between Jan. 1, 2000 and Dec. 31, 2009 when one dollar invested grew to 91 cents..A repeat of that would mean a much lower quality of life for me in the last stages of my life if I am heavily invested in equities..If one looked only at averages one would likely conclude he doesn't really need to insure his home based on the number of policyholders whose house burns down..I'd rather gamble with the value of my home than the quality of my life. In the example above I find it interesting that even though the dollar invested for 10 years shrank to only 91 cents the arithmetic average rate of return was a positive 1.21%..That's why I question some of the data I see..Some of the advisers I most respect say that today's equities are priced as if earnings will remain as high as they have been the last couple of years..They say that will not be the case..Earnings drive equities and as soon as market expectations are for lower earnings I believe you will see values decline significantly..I'd rather be out of the market and wrong than in the market and right..It's not that I think bonds are priced low now. It's just that I think stocks stink here and bonds will do what I need them to do..

Although I am more of an equities guy myself, I think you make a good point. What about having x years expenses in bonds, and then what is left over put in equities. For example having 10 years expenses in bonds and the rest in equities, or 20 years in bonds, something like that? I was wondering about the same thing in a poll a while back.

Poll: How Many Years of Withdrawals in Bonds

lawman 03-06-2014 10:53 AM

Quote:

Originally Posted by CaliforniaMan (Post 1423941)
Although I am more of an equities guy myself, I think you make a good point. What about having x years expenses in bonds, and then what is left over put in equities. For example having 10 years expenses in bonds and the rest in equities, or 20 years in bonds, something like that? I was wondering about the same thing in a poll a while back.

Poll: How Many Years of Withdrawals in Bonds


Might be a good plan..However, I work in reverse...:coolsmiley: It's difficult for me to figure my expenses because I end up adjusting my quality of life according to income.. At some point in time if I ever feel equities are at a bargain I could see myself going virtually 100% into VWINX.. I then would just live as if I were going to live to be a hundred and then go fishing...
If I live longer I'll just go on the welfare plan..;D

CaliforniaMan 03-06-2014 11:09 AM

Quote:

Originally Posted by lawman (Post 1423972)
Might be a good plan..However, I work in reverse...:coolsmiley: It's difficult for me to figure my expenses because I end up adjusting my quality of life according to income.. At some point in time if I ever feel equities are at a bargain I could see myself going virtually 100% into VWINX.. I then would just live as if I were going to live to be a hundred and then go fishing...
If I live longer I'll just go on the welfare plan..;D

It is very difficult emotionally to actually do what you suggest, to buy equities when they really are a bargain. It means we must be in some kind of panic, and the news is filled day after day with reasons why we could be going into some kind of long term depression, everyone is selling. Very very hard to buy then. That is why I think most of us who do have equity holdings as part of our plan, never try to time the market like that. What happens if you buy when equities are cheap and then the proceed to get a lot cheaper. You buy more or sell? Then when they start rising, how do you decide what to do? I think what you suggest, buying when they are a bargain is actually almost impossible. Because when they are a bargain, it sure doesn't look like it.

lawman 03-06-2014 11:16 AM

Quote:

Originally Posted by CaliforniaMan (Post 1423979)
It is very difficult emotionally to actually do what you suggest, to buy equities when they really are a bargain. It means we must be in some kind of panic, and the news is filled day after day with reasons why we could be going into some kind of long term depression, everyone is selling. Very very hard to buy then. That is why I think most of us who do have equity holdings as part of our plan, never try to time the market like that. What happens if you buy when equities are cheap and then the proceed to get a lot cheaper. You buy more or sell? Then when they start rising, how do you decide what to do? I think what you suggest, buying when they are a bargain is actually almost impossible. Because when they are a bargain, it sure doesn't look like it.

Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be heavy into equities..

ERD50 03-06-2014 12:11 PM

Quote:

Originally Posted by lawman (Post 1423983)
Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be heavy into equities..

Interesting. I read the post you quoted and would say " Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be light into equities.."


-ERD50

lawman 03-06-2014 12:37 PM

Quote:

Originally Posted by ERD50 (Post 1424016)
Interesting. I read the post you quoted and would say " Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be light into equities.."


-ERD50


I don't assume that the market will come back again from the next big correction as fast as it did from the 2008 correction..


One thing that would help a lot is if we knew when we were going to die..:angel:

CaliforniaMan 03-06-2014 02:42 PM

I think there might be an explanation why people here see equity risk so differently, and why some are comfortable with large equity positions and others are not comfortable with any.

Equities clearly have a large and very visible amount of volatility relative to other investments. Also, I would venture to guess that most of us here are quite risk averse. We have all worked a long time in LBYM mode to acquire enough for FI, and don't want to risk loosing it all to have to spend our final days as a Walmart greeter .

But IMO there is a large difference between volatility and risk, risk being the possibility of a total or substantial loss, and volatility the statistically expected variation. Based on historical returns, while equity markets are extremely volatile, they are not especially risky investments unless you are forced (emotionally or economically) to sell out during a panic.

Now of course this applies only to the equity market (S&P500 for example), not individual securities. Individual securities can and often do go to zero, or if not zero, never recover. But there has been no point in our history, none, in which the equity market has not recovered.

So the point then becomes how long is long? That is why we diversify, so that there is some amount of fixed income holdings that will remove required selling into a panic and some equities to offset inflation. In all of the discussion here I don't see any way around the need to have a balanced portfolio. The need to balance for volatility with bonds and to try to hedge against the slow death of inflation with equities.

Texas Proud 03-06-2014 02:56 PM

Well, I will bring it back to the masses instead of Lawman...

His title is "Balance is overrated" and then goes on to say why HE does not think so... great for him if he does not want to invest in equities.... it is his money and he can invest any way he wished (which many people have told him)....

HOWEVER, the people who have received Nobel Prizes and many studies and evidence shows that he is just plain wrong in his statement... a balanced investment is very good... a 100% bond investment is not... just because you don't like the evidence does not mean it is not true... So your original statement is just plain false...

Lawman then talks about risk.... but then seems to just disregard the actual risks there are in owning bonds... again, seeming to cherry pick what he thinks is risky and what he thinks is not risky.... again, risk can be measured and yes, equities are riskier than bonds.... that is why they have a higher return.... CDs are less risky than bonds, which is why they have lower returns.... you chose to pick the risk of bonds but do not want to admit there is risk.... you chose not to pick the risk of any equities... and recent posts by you seem to confirm that you will never buy into them because they will never be cheap enough for you.... even if stocks dropped 50% in the next year, the drumbeat of doom and gloom will be there and you will not pull the trigger...


As I said, your money... do what you want with it, but do not think for a second that your original statement is true... you should have said "I am just so risk adverse with equities that I am willing to forgo a balanced portfolio and live with the results"....

clifp 03-06-2014 03:12 PM

Quote:

Originally Posted by daylatedollarshort (Post 1423908)
Because of pensions, modest lifestyle and SS, Lawman has already stated in the first post he won't really be spending his portfolio money most years anyway, so he will still be saving money during retirement.

So for people like him a TIPS ladder might suit his needs best. Personally I would never be comfortable having a bad sequence of returns early on and then spending 4% anyway, depleting our portfolio with fixed spending against variable and sometimes losing annual returns.

I do see many posts here from people with stock / bond portfolios planning to live to X years and spending their last dime, so I do not think the issue of depleting the portfolio is necessarily unique to owning TIPS. When most people here use FIREcalc do they go to zero at a certain age or plan to leave more than when they started? I always got the impression many people were not planning to leave a lot left over even with a stock / bond portfolio anyway, but maybe that is an incorrect understanding of other poster's plans on my part.

There are fair number of forum members who are in Lawman's situation short of asteroid strike, massive pension failure or economic collapse, it is irrelevant where the put their money, gold, TIPs, CDs, mattress, Tesla stock, or on Red in Vegas, their lifestyles will be unaffected.

As I found in this thread I started Does anybody want to be rich when they get old? Loss aversion is much stronger than desire to be rich for a large segment of the forum members. But forums members are pretty financially savvy, I am sure most look at the average performance of a 60/40,70/30 portfolio and realized that if they restricting withdrawal to ~4% they'll generally die with a lot more than they have now. So while their plan may not to leave a lot, with average equity returns, a life long habits of frugality, their heirs maybe pleasantly surprised.

Quote:

Personally I would never be comfortable having a bad sequence of returns early on and then spending 4% anyway, depleting our portfolio with fixed spending against variable and sometimes losing annual returns.
I find this to be a bit of a straw man argument. I have yet to find a single retiree, who actually blindly withdraws 4% of their initial portfolio plus inflation. In practice in both the 2000-2002 bear market and in 2008-09, real retirees adapted and cut spending. At least all the ones who's post I read and were depending on investment income and not pensions.

daylatedollarshort 03-06-2014 03:13 PM

Quote:

Originally Posted by Texas Proud (Post 1424087)
Lawman then talks about risk.... but then seems to just disregard the actual risks there are in owning bonds... again, seeming to cherry pick what he thinks is risky and what he thinks is not risky.... again, risk can be measured and yes, equities are riskier than bonds.... that is why they have a higher return.... CDs are less risky than bonds, which is why they have lower returns.... you chose to pick the risk of bonds but do not want to admit there is risk.... you chose not to pick the risk of any equities


I am curious what risks you would see in an individual TIPS and I bond portfolio with 0+ real returns, other than the risk that people with equities might make more money than you?

youbet 03-06-2014 03:24 PM

Given Lawman's personal situation which is:
1. He has pensions and future SS to live off of and
2. "Preservation of this capital is all that matters.." (quoted from OP)

I would see no problem going with a TIPs and I bond portfolio.

But I think for most of us, we'd like to be able to withdraw and spend from our FIRE portfolios and that "Preservation of this capital is 'NOT' all that matters..". Each to his own.

We should meet again in a decade or so and see how individual strategies are going.

Lawman, you should stop doubting and talking and questioning your strategy and get on with executing it.

Texas Proud 03-06-2014 03:40 PM

Quote:

Originally Posted by daylatedollarshort (Post 1424097)
I am curious what risks you would see in an individual TIPS and I bond portfolio with 0+ real returns, other than the risk that people with equities might make more money than you?

In general or in this situation???

In general, all bonds fluctuate with interest rates... unless you have enough TIPS to live on the small distribution (I do not know enough.... but if it is priced at 0, do you get anything paid to you???), you are going to be selling them to pay expenses.... and maybe selling at a loss...


Another risk is that your individual inflation rate might be higher than CPI... so income does not keep up with your expenses..


If you are talking about a ladder of TIPS, then you have the risk of outliving your ladder... OR, you have to have a lot of money in order to retire to cover all possible years... that means you could have retired much sooner if you had some equity in your portfolio....


Just a few off the top of my head.... I am sure there are more out there that I cannot think of or do not know....

daylatedollarshort 03-06-2014 03:56 PM

Quote:

Originally Posted by Texas Proud (Post 1424112)
In general or in this situation???

In general, all bonds fluctuate with interest rates... unless you have enough TIPS to live on the small distribution (I do not know enough.... but if it is priced at 0, do you get anything paid to you???), you are going to be selling them to pay expenses.... and maybe selling at a loss...

I think the point of the ladder is to have some bonds, with principal guaranteed, mature every year.


Quote:

Another risk is that your individual inflation rate might be higher than CPI... so income does not keep up with your expenses..
True, but it could also be lower.


Quote:

If you are talking about a ladder of TIPS, then you have the risk of outliving your ladder...
I think outliving your money appears to be a common concern here, not just limited to those with TIPS.

Quote:

OR, you have to have a lot of money in order to retire to cover all possible years... that means you could have retired much sooner if you had some equity in your portfolio....
Maybe, but then there is the sequence of returns risk with equities that could wipe out half your life savings right after you retire.....

"A big portfolio drop at the end could possibly wipe out all of the portfolio gains from the first 25 years of one’s career. "

Wade Pfau's Retirement Researcher Blog: Lifetime Sequence of Returns Risk

I am not trying to convince you either way. I just like hearing other points of view for my own consideration. I am just surprised more people here are do not seem too concerned about the sequence of returns risk. I guess I am just very risk adverse compared to most of the posters here.

lawman 03-06-2014 05:09 PM

Quote:

Originally Posted by daylatedollarshort (Post 1424116)
I think the point of the ladder is to have some bonds, with principal guaranteed, mature every year.


True, but it could also be lower.


I think outliving your money appears to be a common concern here, not just limited to those with TIPS.

Maybe, but then there is the sequence of returns risk with equities that could wipe out half your life savings right after you retire.....

"A big portfolio drop at the end could possibly wipe out all of the portfolio gains from the first 25 years of one’s career. "

Wade Pfau's Retirement Researcher Blog: Lifetime Sequence of Returns Risk

I am not trying to convince you either way. I just like hearing other points of view for my own consideration. I am just surprised more people here are do not seem too concerned about the sequence of returns risk. I guess I am just very risk adverse compared to most of the posters here.


This says it..

"It is the returns experienced at the end of the 30-year period which have the biggest impacts on the final wealth accumulation, as this is when a given percentage change in the portfolio value has the biggest impact on absolute wealth. Individuals are especially vulnerable to these returns as they approach their retirement date."

That's where I am now and I'm quite happy to pick up my chips, cash them in and go home..

Texas Proud 03-06-2014 06:38 PM

Quote:

Originally Posted by daylatedollarshort (Post 1424116)

I think outliving your money appears to be a common concern here, not just limited to those with TIPS.

Maybe, but then there is the sequence of returns risk with equities that could wipe out half your life savings right after you retire.....



I will respond to these since they are the important ones to me...

If you are living off of TIPs... and do a ladder... (and I might be wrong on this)... but are you not SURE of running out of money??? IOW, you have your bond mature and use that money to live... next year you do the same... when your last bond pays up, you are done.... to me that is a bigger risk I am not willing to take...


Yes, the sequence of returns is a risk.... but history seems to show that the risk is a lot smaller than most people make it out to be.... so far in my life I have been through 3 major downturns, with the 2008/09 being considered the second worst in recent history.... my portfolio is doing just fine... now, I am not retired yet, but the results of these 3 major downturns seem to show that stocks have some big time short term risks, but not long term risks.... as long as you account for those short terms, the long term should take care of itself....

brewer12345 03-06-2014 06:55 PM

Quote:

Originally Posted by Texas Proud (Post 1424179)
I will respond to these since they are the important ones to me...

If you are living off of TIPs... and do a ladder... (and I might be wrong on this)... but are you not SURE of running out of money??? IOW, you have your bond mature and use that money to live... next year you do the same... when your last bond pays up, you are done.... to me that is a bigger risk I am not willing to take...


Yes, the sequence of returns is a risk.... but history seems to show that the risk is a lot smaller than most people make it out to be.... so far in my life I have been through 3 major downturns, with the 2008/09 being considered the second worst in recent history.... my portfolio is doing just fine... now, I am not retired yet, but the results of these 3 major downturns seem to show that stocks have some big time short term risks, but not long term risks.... as long as you account for those short terms, the long term should take care of itself....

To put it another way, if you elect a TIPS ladder you know for sure you will run out of money at a certain date. Either you have contingency plans for great longevity, or you have the <caliber of your choice> solution.

I think that sequence of returns is a risk which can be hedged in a variety of ways, many of which are fairly obvious. When I feel like sitting down and writing in a structured manner, I will spew at length on the subject.

daylatedollarshort 03-06-2014 07:59 PM

Quote:

Originally Posted by Texas Proud (Post 1424179)
I will respond to these since they are the important ones to me...

If you are living off of TIPs... and do a ladder... (and I might be wrong on this)... but are you not SURE of running out of money??? IOW, you have your bond mature and use that money to live... next year you do the same... when your last bond pays up, you are done.... to me that is a bigger risk I am not willing to take...


Yes, the sequence of returns is a risk.... but history seems to show that the risk is a lot smaller than most people make it out to be.... so far in my life I have been through 3 major downturns, with the 2008/09 being considered the second worst in recent history.... my portfolio is doing just fine... now, I am not retired yet, but the results of these 3 major downturns seem to show that stocks have some big time short term risks, but not long term risks.... as long as you account for those short terms, the long term should take care of itself....

For the most part we would probably buy new TIPS as the oldest mature so we'd get a rolling average of rates. We have pensions, two SS checks (future), we each have hobby jobs and a relatively modest lifestyle so we still plan to save money in retirement, and will try not to spend down the portfolio. If all goes according to my spreadsheet and Fidelity's RIP we should have a larger portfolio in inflation adjusted dollars when we are 100 than we do now. For us, I just don't see the need to take any risks with equities but maybe I am missing something.

photoguy 03-06-2014 08:43 PM

Quote:

Originally Posted by CaliforniaMan (Post 1424082)
Based on historical returns, while equity markets are extremely volatile, they are not especially risky investments unless you are forced (emotionally or economically) to sell out during a panic.

Are you looking at only US historical returns? Although I have a high equity position, I don't agree that equities are "not especially risky investments" even if you exclude panic selling. There could be a long period of decline or even complete market failures.

Texas Proud 03-06-2014 08:48 PM

Quote:

Originally Posted by daylatedollarshort (Post 1424200)
For the most part we would probably buy new TIPS as the oldest mature so we'd get a rolling average of rates. We have pensions, two SS checks (future), we each have hobby jobs and a relatively modest lifestyle so we still plan to save money in retirement, and will try not to spend down the portfolio. If all goes according to my spreadsheet and Fidelity's RIP we should have a larger portfolio in inflation adjusted dollars when we are 100 than we do now. For us, I just don't see the need to take any risks with equities but maybe I am missing something.

Do you have any kids or relatives you might want to leave money???


If you have already covered your expenses (which both my mom and sister have done) with pension and SS.... savings are irrelevant... therefore you can take more chances with them... if the market does what it does most of the time, you leave a much bigger chunk of money to whomever.... if it does not, who cares???


My sister is in her 70s and is saving money.... she is also spending money with many trips, a new car, etc. etc.... she has most of her savings in equities since her 'bonds' are her pension and SS.... they are worth many times what she has in equities.... if you do a PV on them, she is probably 20% equities even though 80% of her savings (or more) are in equities...

daylatedollarshort 03-06-2014 09:05 PM

Quote:

Originally Posted by Texas Proud (Post 1424207)
Do you have any kids or relatives you might want to leave money???


If you have already covered your expenses (which both my mom and sister have done) with pension and SS.... savings are irrelevant... therefore you can take more chances with them... if the market does what it does most of the time, you leave a much bigger chunk of money to whomever.... if it does not, who cares???

Since we are saving money in retirement, the kids should get an inheritance even with conservative investments. I see it as if we have enough from SS and pensions, why take chances with the rest? This way of thinking is actually described in the book Against the Gods with the theory of utility - the savings we have now means more to me than any increase, so the pain of losing it is worse than any joy from the gain of making more. I don't ever want to lose half my life savings. To each his own, but that would stress me out.

CaliforniaMan 03-06-2014 10:48 PM

Quote:

Originally Posted by photoguy (Post 1424205)
Are you looking at only US historical returns? Although I have a high equity position, I don't agree that equities are "not especially risky investments" even if you exclude panic selling. There could be a long period of decline or even complete market failures.

Yes, I was looking only at US returns. Historically we have never had a "complete market failure" in the US. We have had a lot of bad things happen of course, among them two world wars, a cold war, panics, recessions, a great depression, but never a complete market failure. Thankfully we were never 1939 Poland.

I was looking only at historical data and believe that this is all that is possible since this is all we have from which we can derive statistical information. Other than that all we have are guesses and emotion. There is no way to protect from every imaginable possibility or to even anticipate them. So I don't consider "complete market failure" in my mix, especially since we have no idea what it might look like. Build an ark and invest in guns and gold I guess.

Of course "there could be a long period of decline", and there most likely will be which is why I mentioned "So the point then becomes how long is long? That is why we diversify..."

Simply, IMO we need to differentiate risk and volatility. Buying into a single stock may be risky but buying into the equity market in the US is volatile, sometimes extremely so, but given enough time it is not particularly more risky than other investments.

Burton Malkiel has a good chart of this in his Random Walk Guide to Investing.

For example, I would venture to guess that to a person in their 20's, it would be much more risky to be invested 100% in the bond market than 100% in the equity market. In the bond case the risk of loss is inflation, and the volatility of the equity market dramatically decreases with time.

For someone in their 80s, it would be much more risky to be invested 100% in equities than 100% in bonds, since they are much more likely in the fewer years remaining to them to turn the equity volatility into a loss, than experience a loss due to inflation.

I just mean that risk and volatility are different and very dependent on the time period.

lawman 03-10-2014 06:53 AM

"A final note – in my view, it is incorrect to believe that the 2008-2009 market plunge and financial crisis were caused by the housing bubble. The housing bubble was merely the expression of a very specific underlying dynamic. The true cause of that episode can be found earlier, in Federal Reserve policies that suppressed short-term interest rates following the 2000-2002 recession, and provoked a multi-year speculative “reach for yield” into mortgage securities. Wall Street was quite happy to supply the desired “product” to investors who – observing that the housing market had never experienced major losses – misinvested trillions of dollars of savings, chasing mortgage securities and financing a speculative bubble. Of course, the only way to generate enough “product” was to make mortgage loans of progressively lower quality to anyone with a pulse. To believe that the housing bubble caused the crash was is to ignore its origin in Federal Reserve policies that forced investors to reach for yield.

Tragically, the Federal Reserve has done the same thing again – starving investors of safe returns, and promoting a reach for yield into increasingly elevated and speculative assets."



Hussman Funds - Weekly Market Comment: It Is Informed Optimism To Wait For The Rain - March 10, 2014

daylatedollarshort 03-10-2014 09:28 AM

Quote:

Originally Posted by lawman (Post 1425285)
"A final note – in my view, it is incorrect to believe that the 2008-2009 market plunge and financial crisis were caused by the housing bubble. The housing bubble was merely the expression of a very specific underlying dynamic. The true cause of that episode can be found earlier, in Federal Reserve policies that suppressed short-term interest rates following the 2000-2002 recession, and provoked a multi-year speculative “reach for yield” into mortgage securities. Wall Street was quite happy to supply the desired “product” to investors who – observing that the housing market had never experienced major losses – misinvested trillions of dollars of savings, chasing mortgage securities and financing a speculative bubble. Of course, the only way to generate enough “product” was to make mortgage loans of progressively lower quality to anyone with a pulse. To believe that the housing bubble caused the crash was is to ignore its origin in Federal Reserve policies that forced investors to reach for yield.

Tragically, the Federal Reserve has done the same thing again – starving investors of safe returns, and promoting a reach for yield into increasingly elevated and speculative assets."



Hussman Funds - Weekly Market Comment: It Is Informed Optimism To Wait For The Rain - March 10, 2014

I also wonder what 1 trillion dollars in nondischargeable student debt for the younger generation and not much in retirement savings for those nearing retirement going forward means for housing prices. I think this basically can't be good long term. We've have never had a younger generation with student loans repayments the size of house mortgage before or an older generation largely without pensions and savings.

Jaded salami 03-10-2014 10:21 AM

Quote:

Originally Posted by daylatedollarshort (Post 1425320)
I also wonder what 1 trillion dollars in nondischargeable student debt for the younger generation and not much in retirement savings for those nearing retirement going forward means for housing prices. I think this basically can't be good long term. We've have never had a younger generation with student loans repayments the size of house mortgage before or an older generation largely without pensions and savings.

I think it means cat and dog food manufacturers are a good long-term play.

photoguy 03-10-2014 03:10 PM

Quote:

Originally Posted by CaliforniaMan (Post 1424227)
Yes, I was looking only at US returns. Historically we have never had a "complete market failure" in the US. We have had a lot of bad things happen of course, among them two world wars, a cold war, panics, recessions, a great depression, but never a complete market failure. Thankfully we were never 1939 Poland.

I was looking only at historical data and believe that this is all that is possible since this is all we have from which we can derive statistical information. Other than that all we have are guesses and emotion. There is no way to protect from every imaginable possibility or to even anticipate them. So I don't consider "complete market failure" in my mix, especially since we have no idea what it might look like. Build an ark and invest in guns and gold I guess.

While US returns have been fantastic for the past century or so, if you look at SWR internationally (i.e. see work by Pfau) there are many failures. The US didn't become one of those cases but could have been if history had been a little different (what would have happened if the debt ceiling wasn't raised?). I think the danger in generalizing just from US history and ignoring other countries is that we may be subjecting ourselves to survivorship bias.

Wade Pfau's Retirement Researcher Blog: The Shocking International Experience of the 4% Rule

Quote:

Originally Posted by CaliforniaMan (Post 1424227)
Simply, IMO we need to differentiate risk and volatility. Buying into a single stock may be risky but buying into the equity market in the US is volatile, sometimes extremely so, but given enough time it is not particularly more risky than other investments.

I think it depends on what risk you are trying to counter. But if you are trying to match a known future real or nominal liability, equities are much more risky than real/nominal bonds. If I need 20k (real) in living expenses 30 years from now, TIPS or iBonds will get me there with near zero risk (US government would have to fail).

Quote:

For example, I would venture to guess that to a person in their 20's, it would be much more risky to be invested 100% in the bond market than 100% in the equity market.
This is different from saying that equities aren't risky over long periods of time.

Quote:

the volatility of the equity market dramatically decreases with time.
Can you clarify what you mean here? I don't think the volatility of equity returns is decreasing but I'm guessing you mean something else?

Quote:

I just mean that risk and volatility are different and very dependent on the time period.
Although volatility is often used as a proxy for risk, I agree that they are not the same for an ER investor.

CaliforniaMan 03-10-2014 04:42 PM

1 Attachment(s)
Quote:

Originally Posted by photoguy (Post 1425447)
While US returns have been fantastic for the past century or so, if you look at SWR internationally (i.e. see work by Pfau) there are many failures. The US didn't become one of those cases but could have been if history had been a little different (what would have happened if the debt ceiling wasn't raised?). I think the danger in generalizing just from US history and ignoring other countries is that we may be subjecting ourselves to survivorship bias.

Wade Pfau's Retirement Researcher Blog: The Shocking International Experience of the 4% Rule



I think it depends on what risk you are trying to counter. But if you are trying to match a known future real or nominal liability, equities are much more risky than real/nominal bonds. If I need 20k (real) in living expenses 30 years from now, TIPS or iBonds will get me there with near zero risk (US government would have to fail).


This is different from saying that equities aren't risky over long periods of time.



Can you clarify what you mean here? I don't think the volatility of equity returns is decreasing but I'm guessing you mean something else?



Although volatility is often used as a proxy for risk, I agree that they are not the same for an ER investor.

The attached plot illustrates the point about decreasing volatility with increasing time periods. I think it probably wasn't clear what I meant.

Historically volatility does decrease with longer time periods as would be expected from the Law of Large Numbers, where variance decreases toward the mean with increasing sample size. No real surprise here.

As for survivorship bias, I think that is the more interesting question, but I am not certain that it applies. There is a qualitative difference between the US and the other failed states in recent history, stability, rule of law, heterogeneity of society, support for the constitution, on and on.

Also, I don't take seriously the premise "what would have happened if the debt ceiling wasn't raised" that this would cause a total market collapse. We didn't even have a total market collapse tin the 1930s, even with the failure of banks and disastrous unemployment. It would have deepened the recession but in the end our system seems to be fairly self-righting. Don't forget every two years we get a chance to throw the ... out.

Again, this gets back to portfolio balance. Bonds of various types for stability and equities for long term growth. I don't really think I have anything creative to contribute to that discussion. Only what I observe from history. To me a balanced portfolio makes the most sense. How to do that balance is the question we all grapple with.

photoguy 03-10-2014 08:00 PM

1 Attachment(s)
Quote:

Originally Posted by CaliforniaMan (Post 1425481)
The attached plot illustrates the point about decreasing volatility with increasing time periods. I think it probably wasn't clear what I meant.

Historically volatility does decrease with longer time periods as would be expected from the Law of Large Numbers, where variance decreases toward the mean with increasing sample size. No real surprise here.

Thanks for posting the chart -- I have a better understanding of your point now. Malkiel's numbers are certainly very appealing as they show a steady progression in the worst case from -25% return to a healthy 8% as one increases the time frame from 1 to 25 years. However, these numbers are not very stable due to small sample sizes and fat tails. So if you recompute worst case rolling returns from 1928-2013 (Malkiel only used 1950-2002) the numbers are much lower (see attached table). Also the numbers (mine and malkiel's) do not include inflation (as far as I can tell) so real returns are even lower. So it's quite possible, even in the US with the best performing stock market, to have very different performance from the mean over long time periods.

Also, even if we use Malkiel's numbers that seem to converge to a mean (if there even is a fixed mean), the dispersion of returns in absolute dollars becomes larger not smaller over time.



Quote:

As for survivorship bias, I think that is the more interesting question, but I am not certain that it applies. There is a qualitative difference between the US and the other failed states in recent history, stability, rule of law, heterogeneity of society, support for the constitution, on and on.
I agree there are some structural advantages that may have made US stock returns better than other countries, however it's not clear that these will continue to the same extent going forward (or that they explain all of the historical out performance of the US market). For what it's worth, Pfau reduces US historical returns by 2% in his MC simulations. I don't necessarily agree with this adjustment but mention it to indicate that some leading academics think using past history will be too rosy going forward.



Quote:

Also, I don't take seriously the premise "what would have happened if the debt ceiling wasn't raised" that this would cause a total market collapse. We didn't even have a total market collapse tin the 1930s, even with the failure of banks and disastrous unemployment. It would have deepened the recession but in the end our system seems to be fairly self-righting. Don't forget every two years we get a chance to throw the ... out.
It might not have been a total market collapse but I'd bet that it would cause a lot more ER failures or extreme levels of belt tightening for high equity portfolios.



Getting back to the OP (lawman) I don't think he's crazy for wanting to go 90-95% bonds for security assuming that with very low real returns he can meet his financial objectives (isn't this basically what bernstein proposes?). It's not a path I would choose personally though.

lawman 03-10-2014 08:23 PM

You guys are a lot smarter than I. All I know is that John Hussman (someone I have much respect for ) and someone who has beaten the S & P 500 from the inception of his fund through 2013 says this market is going down in a big way. I also can look at the ten year period of 2000 through 2009 and see that the annualized rate of return for that period was a negative number. I am confident that more money at this point will not make me any happier..If I can just hang on to what I have God will have blessed me much more than I ever could have imagined..It also seems reasonable to me to expect positive returns from most bond funds as long as I'm willing to hold them for whatever duration period they have and along with a substantial amount of my portfolio invested in I-bonds purchase many years ago that pay a nice interest rate plus an inflation rate and with 5 - 10% still in equities I am optimistic that I can spend my remaining days fishing and playing with my grand kids and sleep well at night even through market turmoil...I hope for you guys sake the market keeps going straight up..That would make us all happy..:)

sengsational 03-10-2014 08:48 PM

There was bound to be someone who loaded up on derivatives, betting against the market in general, and come out looking like a hero by not getting slammed in 2008. Hussman, running a one star M* fund frankly gets zero respect from me; it doesn't take a lot of intellegence to always play the bear card.

daylatedollarshort 03-10-2014 09:02 PM

Quote:

Originally Posted by lawman (Post 1425538)
I also can look at the ten year period of 2000 through 2009 and see that the annualized rate of return for that period was a negative number. I am confident that more money at this point will not make me any happier..If I can just hang on to what I have God will have blessed me much more than I ever could have imagined..

I just look at where we are on this list:

Global Rich List

And think wow, that's pretty cool as it is. Good enough. We aren't going to gamble with what we have, even if the odds are highly in favor of gambling.

brewer12345 03-10-2014 09:04 PM

Quote:

Originally Posted by sengsational (Post 1425547)
There was bound to be someone who loaded up on derivatives, betting against the market in general, and come out looking like a hero by not getting slammed in 2008. Hussman, running a one star M* fund frankly gets zero respect from me; it doesn't take a lot of intellegence to always play the bear card.

Stupid is as stupid does.

sengsational 03-12-2014 02:43 PM

Quote:

Originally Posted by brewer12345 (Post 1425555)
Stupid is as stupid does.

I'm not sure if you mean having faith in Hussman is "ill advised" or not having faith in Hussamen is "ill advised"! :coolsmiley:

haha 03-12-2014 02:53 PM

Quote:

Originally Posted by sengsational (Post 1426170)
I'm not sure if you mean having faith in Hussman is "ill advised" or not having faith in Hussamen is "ill advised"! :coolsmiley:

I am not sure an investor should ever base his plans on faith in anyone or anything.

If a person can read and interpret graphs and has a modicum of business understanding it is easy enough to understand what Hussman points out. Unless you think his data is suspect, there is no place for belief, or opinions from others about it.

You can decide, perhaps rationally or otherwise, whether this data and the apparent distance from historical ratios etc. means anything in terms of your own investing decisions. Many people here have basically decided that nothing could make a difference in their investment decisions, and it is hard to prove that this may not be the ideal approach, though it is not mine.

Ha

CaliforniaMan 03-12-2014 04:19 PM

Quote:

Originally Posted by haha (Post 1426176)
I am not sure an investor should ever base his plans on faith in anyone or anything.

If a person can read and interpret graphs and has a modicum of business understanding it is easy enough to understand what Hussman points out. Unless you think his data is suspect, there is no place for belief, or opinions from others about it.

You can decide, perhaps rationally or otherwise, whether this data and the apparent distance from historical ratios etc. means anything in terms of your own investing decisions. Many people here have basically decided that nothing could make a difference in their investment decisions, and it is hard to prove that this may not be the ideal approach, though it is not mine.

Ha

I completely agree with your first point. And as you, I do enjoy reading about and often playing with economic data. But other than trying to figure out a SWR I don't try to apply it to time or adjust AA.

Possibly others here do this as I do, not because we think it is ideal or not, but rather to protect us from ourselves. I do play a bit with equities outside my retirement accounts, but inside my retirement accounts, other than change my AA as I got older, I haven't changed anything based on what I have heard or seen in the news. Based on my past experience, I do believe that I have done better than many others in my circumstances and better than I would have done had I tried to outsmart the market.

In fact the times I have tried it, I have done abysmally. Protecting ourselves from ourselves may be the most important thing we can do for ourselves. Sorry for so many ourselves...

In addition, it is immensely simpler and less time consuming.

REWahoo 03-12-2014 04:23 PM

Quote:

Originally Posted by CaliforniaMan (Post 1426246)
Protecting ourselves from ourselves may be the most important thing we can do for ourselves. Sorry for so many ourselves...

+1

Couldn't have said it better ourself. :)

haha 03-12-2014 04:48 PM

Quote:

Originally Posted by CaliforniaMan (Post 1426246)
I completely agree with your first point. And as you, I do enjoy reading about and often playing with economic data. But other than trying to figure out a SWR I don't try to apply it to time or adjust AA.

Possibly others here do this as I do, not because we think it is ideal or not, but rather to protect us from ourselves. I do play a bit with equities outside my retirement accounts, but inside my retirement accounts, other than change my AA as I got older, I haven't changed anything based on what I have heard or seen in the news. Based on my past experience, I do believe that I have done better than many others in my circumstances and better than I would have done had I tried to outsmart the market.

In fact the times I have tried it, I have done abysmally. Protecting ourselves from ourselves may be the most important thing we can do for ourselves. Sorry for so many ourselves...

In addition, it is immensely simpler and less time consuming.

I wouldn't disagree with this. My problem is that if I strongly think that things are getting overdone, and ignore it, and see my balances going down, I don't like it. Consensus is never appealing to me.

My judgment is so -so, but after over 40 years of active investing, much of it with no other income, I know definitely that I am not a buy high sell low kind of person. In stocks, bonds, houses or used furniture. So I see no need to be protected from myself. What I also never will be able to do is invest in the hot new industry or stock, which may make people's everlasting fortunes. Just not mine. I essentially cannot believe in stories.

Ha

lawman 03-12-2014 05:07 PM

Quote:

Originally Posted by REWahoo (Post 1426247)
+1

Couldn't have said it better ourself. :)

"We have met the enemy and the enemy is us":facepalm:


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