1982 all over again?

[Dawg52]

+1

My portfolio is so flush I can't believe 2008 actually happened. I feel sorry for the people that pulled everything out during the panic. I just rebalanced. I will say it was very hard to do but I did it.

It was hard, but my med's worked like a charm.

 

[NW-Bound]

When I said that stocks suck, it was a tongue-in-cheek statement, but it is exactly what many people feel about its volatility. And the volatility is what got me ahead. And I have no doubt that many people here who call themselves rebalancers did well too.

Here's what I meant. Look at the chart below that shows the S&P over the period of 1/2000 to 8/2013. It was so volatile that one can pick any two end points and claim any return he wants.



I happened to mention the last 10 years, meaning 2003 to now. Well, 2003 was a trough year so of course most people do well between 2003 and 2013, as long as one did not bail out. I thought I did fairly well as an active investor, considering that my portfolio matched the market while I was also drawing heavily from it.

Again, people who rebalanced would also do well, and their performance might vary over a wide range, depending on when they rebalanced. That should be obvious from the graph. I would venture that ones who rebalanced on Jan 1st would not do as well as ones who rebalanced based on % out-of-whack. The latter had a better chance of picking the top and bottom, but I could be wrong (I used neither).

Now, suppose the market were not volatile, and moved steadily from the peak of 8/2000 to now, 8/2013. That would be a steady rise from 1525 to 1700, or a gain of 11.5% over 13 years. That's an annualized gain of 0.84%. Now add to that the S&P yield of 1.98%, and we have 2.82% nominal return.

But, but, but the inflation over the last 13 years was 2.36% annualized. That would leave one with a meager 0.46% real return. I do not know what the average bond yield was in the last 13 years, but that S&P total return of 0.46% looks bleak compared to a WR of 3.5%.

So, if the market were not volatile but instead placid, then we would not have so many happy people here.

By the way, we are right at the 13th year mark from that peak in Aug 2000. Anyone who is superstitious here?

PS. I forgot to add that accumulators or ER wannabes who have been buying through this last terrible 13 years also did OK, whether they rebalanced or not.

 

[Gatordoc50]

When I said that stocks suck, it was a tongue-in-cheek statement, but it is exactly what many people feel about its volatility. And the volatility is what got me ahead. And I have no doubt that many people here who call themselves rebalancers did well too.

Here's what I meant. Look at the chart below that shows the S&P over the period of 1/2000 to 8/2013. It was so volatile that one can pick any two end points and claim any return he wants.

http://s713.photobucket.com/user/NW-Bound/media/Finance/SP_Cyclical_zpsd3678679.png.html

I happened to mention the last 10 years, meaning 2003 to now. Well, 2003 was a trough year so of course most people do well, as long as one did not bail out. I thought I did fairly well as an active investor, considering that my portfolio matched the market while I was also drawing heavily from it.

Again, people who rebalanced would also do well, and their performance might vary over a wide range, depending on when they rebalanced. That should be obvious from the graph. I would venture that ones who rebalanced on Jan 1st would not do as well as ones who rebalanced based on % out-of-whack. The latter had a better chance of picking the top and bottom, but I could be wrong (I used neither).

Now, suppose the market were not volatile, and moved steadily from the peak of 8/2000 to now, 8/2013. That would be a steady rise from 1525 to 1700, or a gain of 11.5% over 13 years. That's an annualized gain of 0.84%. Now add to that the S&P yield of 1.98%, and we have 2.82% nominal return.

But, but, but the inflation over the last 13 years was 2.36% annualized. That would leave one with a meager 0.46% real return. I do not know what the average bond yield was in the last 13 years, but that S&P total return of 0.46% looks bleak compared to a WR of 3.5%.

So, if the market were not volatile but instead placid, then we would not have so many happy people here.

By the way, we are right at the 13th year mark from that peak in Aug 2000. Anyone who is superstitious here?

PS. I forgot to add that accumulators or ER wannabes who have been buying through this last terrible 13 years also did OK, whether they rebalanced or not.

+1
We had a lost decade. Basically, we missed out on one "doubling of stocks" period. So, if you have a million right now, you would have had two.

 

[NW-Bound]

+1
We had a lost decade. Basically, we missed out on one "doubling of stocks" period. So, if you have a million right now, you would have had two.

Well, looking at the above graph, one could not help having a lot of woulda and shoulda thoughts. There have been two chances to double one's money, so one could theoretically have turned $1 into $4. But how likely is that? How does one pick the top and bottom impeccably?

Let us consider someone with a 50/50 portfolio. Suppose the market crashes hard to 50% of its value, and catches him by surprise, and he does not sell any during the decline. And suppose his bonds do not go up much (long Treasuries went up a few % during the 2009 stock rout, nowhere near enough to cancel out the stock drop). So, his $1MM 50/50 portfolio becomes $750K at the market bottom.

Suppose he has the guts to put all his bonds into stocks at the bottom. When the market recovers and doubles from the bottom, he will turn his $750K into $1.5M. So, an investor who impeccably sells high then buys low will increase his money by 2X, but one who did not call the high, but nevertheless audaciously buys low will increase his stash by 1.5X.

I suspect most of us gained a lot less than that.

I do not day trade, but did quite a bit of trading during the Great Recession. My records show that in Oct 2007, I was 20% in cash, but by Nov 2008, I was up to 65% in cash. Part of that was due to selling stocks, but quite a bit was due to stock dropping so much.

In Feb 2009, I have bought back enough so that I was only 38% in cash. I did make some posts here back then about "buy, buy, buy", but of course I did not have the guts to go "all in" at the bottom (which no one knew was the bottom).

I keep a diary of my portfolio value, and just now looked back and saw that from the top of 2007 to the bottom of 2009, my $1 became $0.67. It then rebounded and is now $1.19. And that is after some withdrawal for living expenses, but it was not 3.5%WR as it is now, because I still had some sporadic income back then.

It was not easy. Maybe it was for some heroic people here, but I was sweating bullets when I made these trades. And business conditions were bad then, and my part-time work dried up, and no money was coming in until the bottom in 2009 was already past. It wasn't easy! The story was all recorded here in posts in this forum with people commiserating. It was a hell of a time!

I am fully retired now, so who knows what I'll do for the next rout.

 

[Lsbcal]

I have a chart that aligns some market crash peaks. These were the 1929, 1987 and 2008 crashes. The takeaway, each crash had a different recovery path. Had one bought stocks in 1930 after a similar optimal number of months like in 2009, one would have had their head handed to them.

So I'm not a fan of buying into a declining market when one thinks it has hit bottom. I'd rather wait a few months and make sure a trend is in place. Still could loose on that strategy too.

There is no strategy that is guaranteed. I personally think anyone, even the buy-holder, is kidding themselves about the solidity of market timing (or non-market timing, or rebalancing, or whatever).

Still we all have to pick our poison.

 

[haha]

There is no strategy that is guaranteed. I personally think anyone, even the buy-holder, is kidding themselves about the solidity of market timing (or non-market timing, or rebalancing, or whatever).

I believe that if you have a robust valuation tool like PE10, and you are willing to wait until a good buy opportunity and will not fret when the market is going up when valuations are high, or going down when valuations are low, short of a revolution or losing a big war you will succeed. (I realize that we now lose wars routinely, but scale counts.)

This presents problems with taxable accounts, but really has no drawbacks in tax deferred or tax free accounts.

One cannot optimize stock trading, in the sense that he will beat the averages annually, but over time it is a pretty solid bet. People don't like that though, I remember the 90s, everyone even made fun of Warren Buffet, the consummate value investor. I am thankful of this human quirk. We seem to want all of it, all the time. This makes it relatively easy for one who more reasonably wants some, some of the time.

To me, the stock market has very little to do with techniques or magic formulas, and very much to do with certain character traits.

Ha

 

[BigNick]

I read a story about a guy that ran a website which dealt with small cap stock trading during the 90s. This guy basically cold called 1000 people telling they him had a "system" that would dramatically improve their chances in the market. He told the people he would prove to them his system worked. He told half of them a specific stock would increase or stay flat in the next 30 days, and the other half that it would go down. After 30 days he would contact the half he got right and do it again. And finally he did it a third time. So he ended up with 125 people for which he had made 3 correct calls in a row. Some fraction of them became true believers, that he then fleeced them for everything he could get his hands on.

Not sure if this was anecdotal or not, but I always liked the story.

This is a very old anecdote, or a very old scam, or both. I've heard the same told about betting (half the people get a mail out of the blue saying the Yankees will win this Friday, and half get one saying they will lose, etc).

Slightly more worrying is that this is also basically how large investment banks decide who is a "star trader". If you have 64 traders then on average one of them will have beaten the market 6 years straight.

 

[NW-Bound]

There is no strategy that is guaranteed. I personally think anyone, even the buy-holder, is kidding themselves about the solidity of market timing (or non-market timing, or rebalancing, or whatever).

Still we all have to pick our poison.

I agree that there's no technique that works all the time, if we look back in history. Rebalancers do not consider themselves market timers, but they in fact use price and price only to time the market, without considering fundamentals like P/E or any other market condition. It seems to work in the last 13 years. But how did that work in the past?

So, I looked up some data for the bull market of 1980-2000. See the S&P chart below.



During this stratospheric rising period, a rebalancer would keep selling his stocks, just to see them rising higher. Would he keep doing it for 20 years? But if he did, what would his performance be? For that, I ran a historical simulation to get numbers for 3 portfolios, as shown below for a $1M starting in 1980.

100% stock: $10.4M
50 stock/50 long rate: $5.1M
100% long rate: $2.3M

Note that the above are inflation adjusted. As the inflation over that period was 117%, the nominal values would be $22.6M, $11.1M, and $5M.

Mind boggling, is it not? It's amazing that nobody lost! You won big, or you won small, but no matter what you did, you did not lose.

Out of curiosity, I also tried 100% 5-yr treasury. The answers are $2.24M for inflation-adjusted return, or $4.85M nominal. Can't lose again.

Do we agree that the last 13 years sucked for both stocks and bonds compared to 1980-2000?

By the way, the problem with PE10 the way I see it is that it would lock you out during most of this period. You still did not lose, but it's tough to sit on the sideline while your brother was rolling in dough.

PS. I do not follow Bogle closely, but happened to see in a recent interview him saying that he was not much of a rebalancer. He said that made you sell out on a rising asset, and miss out. Was he thinking of the past 1980-2000 period, or a new secular bull period to come, I wonder.

 

[ERD50]

...

So, I looked up some data for the bull market of 1980-2000. See the S&P chart below.

.....

During this stratospheric rising period, a rebalancer would keep selling his stocks, just to see them rising higher. Would he keep doing it for 20 years? But if he did, what would his performance be? For that, I ran a historical simulation to get numbers for 3 portfolios, as shown below for a $1M starting in 1980.

100% stock: $10.4M
50 stock/50 long rate: $5.1M
100% long rate: $2.3M

Note that the above are inflation adjusted. As the inflation over that period was 117%, the nominal values would be $22.6M, $11.1M, and $5M. ...

Maybe I'm not following. Are those the numbers with re-balancing? Once a year, or at a target %? If you have numbers to compare a 75/25 AA with and w/o re-balancing, I would be very interested.


-ERD50

 

[NW-Bound]

As typically computed, the numbers are with dividend reinvested and inflation-adjusted. For the 50/50 portfolio, the rebalancing is done on Jan 1st. I have checked the numbers between FIRECalc and another historical simulation, and while they do not agree to the last dollar, they come close.

And the 75/25 number you asked for is $7.37M (inflation-adjusted) at the end of 20 years, as computed by these simulations.

As there's no way to turn off the rebalancing in these simulations, to compute the number for no rebalancing in a mixed portfolio, I would take the proper weighting between the two 100/0 and 0/100 numbers.

For example, the no-rebalance 75/25 number would be 0.75*10.4 + 0.25*2.3 = $8.375M. Note that this number is higher than the $7.37M above. That makes sense because rebalancing dilutes out your gain if one of the assets is constantly growing faster than the other.

And by the way, the return of the 100% long bond in 1980-2000 works out to an annualized 3.5% real return. Thus, even without stocks, one could still withdraw a 3.5%WR in 1980-2000, and still retained the same buying power of his principal 20 years later. Was that not nice?

And I also looked at the return of long bonds in 2000-2013. It worked out to an annualized real return of 1.5%. This is much better than the annualized return of 0.46% for S&P, but still far short of the 3.5% WR.

So, I repeat: the period of 2000-2013 really sucks for both stock and bond. The only way to survive was to jump in/out of stock by rebalancing or market timing, or what have you.

 

[almost there]

This is the chart, few care to look at. Seldom mentioned anywhere in the news.

[FONT=Arial, Helvetica, sans-serif]I am happy just to have gotten through it. In one piece.[/FONT]
[FONT=Arial, Helvetica, sans-serif]It did teach me a few things about investing in the stock market.[/FONT]
[FONT=Arial, Helvetica, sans-serif]Patience[/FONT]
[FONT=Arial, Helvetica, sans-serif]The effect interest rates have on stocks (Greenspan)[/FONT]
[FONT=Arial, Helvetica, sans-serif]I have an easier time missing a run, than taking a huge loss. Even if its only on paper. [/FONT]
I got through it with a small gain. And was just happy not to have taken a loss.

 

[LOL!]

@almost there, I am happy to realize a loss since then other taxpayers give me 25% to 33% of my loss back to me. It is simply amazing that I can get a huge rebate for a loss.

Also if you do practice rebalancing, then those troughs are a huge windfall for you.

So I don't look at the dips as a way to lose money, I look at them as an opportunity to make tons of money. Those peaks do not present the same opportunities at all.

 

[MichaelB]

There is no strategy or approach that is guaranteed, but there are some characteristics of situations that lead to very strong gains in the capital markets over the next decade or two. Three in particular that, if they were present today, would point to very favorable future expectations:

- High real interst rates. In 1981 the federal funds rate was at its all time high
- Age demographics skewed toward lower ages combined with increasing labor participation rate.
- End of a recession.

Actually, the US seems to be missing on all three. Our real interest rates are negative, the age demographics skewed toward middle age with declining participation, and the capital markets have fully recovered from the last recession. GMO, Hussman, PE10 and others that forecast low real returns for the next decade may be on to something.

There are other countries in the world where those characteristics are present, however. Brazil and India, to name two that are large enough to be "investable".

 

[Which Roger]

The internet is still relatively new, and it has transformed so many things we do to the point that we almost forget how once-difficult things have become easy. I think that it will continue to evolve, along with other uses of technology, and new sources of productivity will pop up where we can barely imagine them today, and that will in turn drive economic growth.

 

[REWahoo]

This is the chart, few care to look at. Seldom mentioned anywhere in the news.

[FONT=Arial, Helvetica, sans-serif]I am happy just to have gotten through it. In one piece.[/FONT]
[FONT=Arial, Helvetica, sans-serif]It did teach me a few things about investing in the stock market.[/FONT]
[FONT=Arial, Helvetica, sans-serif]Patience[/FONT]
[FONT=Arial, Helvetica, sans-serif]The effect interest rates have on stocks (Greenspan)[/FONT]
[FONT=Arial, Helvetica, sans-serif]I have an easier time missing a run, than taking a huge loss. Even if its only on paper. [/FONT]
I got through it with a small gain. And was just happy not to have taken a loss.

@almost there, I am happy to realize a loss since then other taxpayers give me 25% to 33% of my loss back to me. It is simply amazing that I can get a huge rebate for a loss.

Also if you do practice rebalancing, then those troughs are a huge windfall for you.

So I don't look at the dips as a way to lose money, I look at them as an opportunity to make tons of money. Those peaks do not present the same opportunities at all.

Real world examples of the "glass half empty/glass half full" theory of investing...

 

[ERD50]

As typically computed, the numbers are with dividend reinvested and inflation-adjusted. For the 50/50 portfolio, the rebalancing is done on Jan 1st. I have checked the numbers between FIRECalc and another historical simulation, and while they do not agree to the last dollar, they come close. ....

OK, I realized there is a rough and tumble way to get some numbers from FIRECalc.

In the "Your Portfolio" Tab, I set fees to 0%, and to 1980 here:

Total market, split between equities and fixed income. Include performance since [1980] (must be after 1870 and early enough to show a full cycle and preferably many cycles).

On "Start Here", $1M portfolio, $0 spend, 20 years. This gives 12 cycles, so starting years 1980-1991.

Then I ran with 100% stocks and again with 0% stocks. So with only one class, no rebalancing, right?

Then I ran 50/50, and it will auto-rebalance, right? Results:

100% FIXED 12 cycles 	- Average ending: $2,053,916

100% EQ 12 cycles 	- Average ending: $5,762,339

			- AVG of above:   $3,908,128


50/50 - so auto rebal  	- Average ending: $3,603,917

I'll look at some other time periods, but I found that interesting. I'm lazy, have not rebalanced in many years.

You also might incur some fees with rebal, and possible taxes if in a taxable account. While I do like the idea of maintaining an AA that matches your risk tolerance, I am thinking more and more that the whole idea is over-blown.

I'll be out much of the day, but plan to try some other time frames when I have time.

-ERD50

 

[GrayHare]

While I do like the idea of maintaining an AA that matches your risk tolerance, I am thinking more and more that the whole idea is over-blown.

Rebalancing works better when stock prices and bond prices move in opposite directions, something that historically occurs when the 10-year Tbill yield is below 5% like it is now. During the 1980s and 1990s the 10-year was over 5%; as yields fell stock and bond prices both rose, negating much of the benefit of rebalancing.

 

[NW-Bound]

Three in particular that, if they were present today, would point to very favorable future expectations:

- High real interst rates. In 1981 the federal funds rate was at its all time high
- Age demographics skewed toward lower ages combined with increasing labor participation rate.
- End of a recession.

Actually, the US seems to be missing on all three.

There are other countries in the world where those are large enough to be "investable".

China has been the driver for growth. Its demand for raw materials has driven the economy of countries like Australia, and Brazil. But its population is aging already due to the "one child" policy, before this country reaches its full potential. India is so disorganized and not ready to take the lead. So, I am not sure where the next growth comes from.

Real world examples of the "glass half empty/glass half full" theory of investing...

I miss the glass of 1980-2000. The one that refilled itself after every time one took a big gulp.

Rebalancing works better when stock prices and bond prices move in opposite directions, something that historically occurs when the 10-year Tbill yield is below 5% like it is now. During the 1980s and 1990s the 10-year was over 5%; as yields fell stock and bond prices both rose, negating much of the benefit of rebalancing.

As it is not likely we will enter a secular bull market, I think rebalancing should be the way to go looking forward. And if it is a bull market, one does not lose but simply wins less with rebalancing. It is a good insurance policy.

 

[ERD50]

Rebalancing works better when stock prices and bond prices move in opposite directions, something that historically occurs when the 10-year Tbill yield is below 5% like it is now. During the 1980s and 1990s the 10-year was over 5%; as yields fell stock and bond prices both rose, negating much of the benefit of rebalancing.

OK, so I had a minute to take a look at 2000-2012 (I am using code tags to try to keep things aligned):

1980 - 20 years; 12 cycles

100% FIXED 12 cycles 	- Average ending: $2,053,916
100% EQ    12 cycles 	- Average ending: $5,762,339
			- AVG of above:   $3,908,128

50/50 - so auto rebal  	- Average ending: $3,603,917   92.22% with rebal

____________________________________________________________



so lets try since 2000 - 12 years; 2 cycles

100% FIXED 2 cycles 	- Average ending: $1,268,514
100% EQ    2 cycles 	- Average ending: $1,001,905
			- AVG of above:   $1,135,209

50/50 - so auto rebal  	- Average ending: $1,200,935  105.79% with rebal

So you are correct (if we can claim that from two samples), but the delta isn't that great, and rebal hurt by 7.78% through the 80's-90's. And that would take an 8.44% gain to recover. Maybe I'll do more trials, but I suspect it will vary from time period to time period, and mostly wash out?

-ERD50

 

[Which Roger]

The purpose of rebalancing in not to attempt to increase gains by selling high and buying low. Rather, its purpose it to keep the portolio from straying beyond one's risk tolerance.

 

[NW-Bound]

ERD50, how do you get the numbers from FIRECalc for the years 2011, 2012? It only has data up to 2010, as I could see. I have problems duplicating your numbers.

And by the way, the numbers I presented earlier were not averages, but specific to the periods 1/1980-1/2000, and then 1/2000 to 1/2012. They are not averages of 20 years periods starting from 1980, 1981, 1982, etc...

Just to let you know, in case you see any discrepancies.

 

[NW-Bound]

The purpose of rebalancing in not to attempt to increase gains by selling high and buying low. Rather, its purpose it to keep the portolio from straying beyond one's risk tolerance.

Whatever the intention, a benefit of rebalancing in a cyclical market is that it provides extra gains. It may not be your initial goal, but that is still the end result. And we now know that, in hindsight of course.

And when the yield of bond is low and the stock return is also weak as we have experienced from 2000 till now, one needs that extra bit to get that 3.5% WR.

 

[ERD50]

ERD50, how do you get the numbers from FIRECalc for the years 2011, 2012? It only has data up to 2010, as I could see. I have problems duplicating your numbers.

Well, I told it to start the market data in 2000 ("Your Portfolio Tab"), and a portfolio length of 12 years. It spit out a graph with two sequences, 12 years each. Whether those numbers are accurate or not, I have not yet tried to validate. But at a glance, they don't look like they are missing data - no dead flat lines or jumps to zero.

FIRECalc: A different kind of retirement calculator

And by the way, the numbers I presented earlier were not averages, but specific to the periods 1/1980-1/2000, and then 1/2000 to 1/2012. They are not averages of 20 years periods starting from 1980, 1981, 1982, etc...

Just to let you know, in case you see any discrepancies.

Right, I was just reporting what I could get from FIRECalc. It doesn't allow (AFAIK) me to enter a single year to get that data for a 20 year cycle, so this is a blend.

I think it's interesting, probably tells us something, but I don't expect the numbers to align perfectly with yours.

-ERD50

 

[ERD50]

The purpose of rebalancing in not to attempt to increase gains by selling high and buying low. Rather, its purpose it to keep the portfolio from straying beyond one's risk tolerance.

There is some emotional value to maintaining an AA in line with your risk tolerance. And that may have a real effect if it helps you 'stay the course'. But I think you will find that many investors do expect it to help boost returns a bit. They will say you are selling high and buying low.

You are, but sometimes you are also selling on the way up, and missing gains.

Personally, I'm fine with a pretty wide range of AA - sleep like a baby. So if rebalancing does not boost gains over the long haul, I'm inclined to not bother. Though if I need to sell anything, I'd probably look into selling in a manner to get back to some target AA. But I might not actively pursue that otherwise.

-ERD50

 

[ERD50]

Well, I told it to start the market data in 2000 ("Your Portfolio Tab"), and a portfolio length of 12 years. It spit out a graph with two sequences, 12 years each. Whether those numbers are accurate or not, I have not yet tried to validate. But at a glance, they don't look like they are missing data - no dead flat lines or jumps to zero.

FIRECalc: A different kind of retirement calculator

-ERD50

Wait a minute - I just told it to do a 30 year plan with data starting in 2000. And the graphs look like 'real' data. Either FIRECalc is predicting the future (shhhhhh!), or this is a bug, or I'm misunderstanding what this following excerpt means:

Include performance since [ I entered "2000" ] (must be after 1870 and early enough to show a full cycle and preferably many cycles).

-ERD50