Balance is overrated

[daylatedollarshort]

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]

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]

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]

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]

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]

"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]

"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]

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]

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

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).

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.

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?

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]

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]

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.

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.

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]

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]

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]

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]

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]

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"!

 

[haha]

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

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]

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]

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]

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]

+1

Couldn't have said it better ourself.

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