ER check-up by intercst

[brewer12345]

At http://www.retireearlyhomepage.com/reallife06.html intercst has updated his annual review of how you would have done with various portfolios if you retired when he did (1994?) and at the peak of the US equity market (Jan 2000). For the 2000 retiree, it is very interesting to see that if you stuck with a well diversified portfolio (intercst calls it the "MPT portfolio") you did almost as well as Warren Buffet and you would have more now than you started with even after withdrawals.

 

[HFWR]

Does that include the all TIPs portfolio?

 

[veritasophia]

Thanks for the link brewer.

A well diversified portfolio does seem to reduce volatility, but this study demonstrates that it might also decrease returns in the long run (see the 1994 retiree). Maybe this is because of the 40% FI?

 

[wabmester]

It looks like his MPT portfolio did worse (return-wise) than any other strategies other than pure fixed income.

Starting with $100K in 1994, here are the 2005 ending values.

Harry Dent: $361K
Buffett: $283K
75/25: $218K
60/40: $207K
MPT: $192K
short-term bonds: $119K

 

[Nords]

A well diversified portfolio does seem to reduce volatility, but this study demonstrates that it might also decrease returns in the long run (see the 1994 retiree).  Maybe this is because of the 40% FI?

Uh, yeah.

Higher volatility, higher returns. Lower volatility, lower returns. You don't get the higher returns, lower volatility choice.

 

[brewer12345]

It looks like his MPT portfolio did worse (return-wise) than any other strategies other than pure fixed income.

Starting with $100K in 1994, here are the 2005 ending values.

Harry Dent: $361K
Buffett: $283K
75/25: $218K
60/40: $207K
MPT: $192K
short-term bonds: $119K

True, but A) MPT more than kept up with inflation and B) I care a lot more about what the portfolio does in the down years vs. the up years, so long as it also beats inflation.  MPT did a lot better than the gut wrenching slide of the 75/25 port during the bear, for example.  It also does not include some worthwhile asset classes (foreign bonds, commodities, etc.).

 

[wabmester]

Higher volatility, higher returns.  Lower volatility, lower returns.  You don't get the higher returns, lower volatility choice.

Where are you guys getting the volatility stuff?   Looks like Buffett's volatility was almost as low as pure bonds.

The only thing higher volatility guarantees is ... high volatility.    You can certainly get high volatility and low returns. And recently, stocks have provided low volatility and high returns.

 

[Dawg52]

Now, if the financial markets could some how tell us what the next 10 years will bring.  

 

[wabmester]

Now, if the financial markets could some how tell us what the next 10 years will bring.  

Harry Dent knows.

 

[Dawg52]

Harry Dent knows. 

I hope hes right at least through 2008. 

 

[preben]

I also find it interesting that the SUPER lazy 1-fund guy buying VBINX with $1M and FIRE in year 2000 still has close to 900k in the nest egg despite the 2000-2002 hit. Not too shabby. Cheers!

 

[Nords]

Where are you guys getting the volatility stuff?   Looks like Buffett's volatility was almost as low as pure bonds.
The only thing higher volatility guarantees is ... high volatility.    You can certainly get high volatility and low returns.   And recently, stocks have provided low volatility and high returns.

Well, I'm just going by the efficient frontier discussions in Bernstein's books & website.

But, sure, "recently" covers a lot of different volatility situations. For example, "recently" our high-equity portfolio went through a 40% fluctuation in value between early 2000 and late 2001, and the returns were certainly what I'd call "low". However it still turned out better than during the Great Depression or 1966-1982 so perhaps our "recent" returns qualify as relatively low volatility with relatively high returns. It just didn't feel that way at the time.

Personally I'm interested in a low-volatility high-return portfolio with a 60-year performance record. Got any examples?

 

[wabmester]

Personally I'm interested in a low-volatility high-return portfolio with a 60-year performance record.  Got any examples?

How about a job as an MD?

I've read that apartment buildings have consistently had good returns (around 10% pa) and low volatility over the long term. I'll see if I can dig up some data.

 

[brewer12345]

How about a job as an MD?   

I've read that apartment buildings have consistently had good returns (around 10% pa) and low volatility over the long term.   I'll see if I can dig up some data.

I think cap rates have come down a lot in the past few years. I'd also suggest that the volatility would not be directly comparable to an exchange-traded portfolio due to the difference in the frequency and quality of any seres of apartment building data you are likely to find.

 

[wabmester]

I'd also suggest that the volatility would not be directly comparable to an exchange-traded portfolio due to the difference in the frequency and quality of any seres of apartment building data you are likely to find.

Yeah, that's where the conventional ideas of volatility = reward comes from.    The only "good" data we have is stock and bond data.   Stocks have done well over the long-term while experiencing mind-numbing volatility, so we make that simple association.

But ask anybody who owns assets with consistently high demand and low supply characteristics (like Microsoft monopolies, doctors, waterfront homes, etc), and they'll tell you that it's possible to get high returns with relatively low volatility.

 

[brewer12345]

Yeah, that's where the conventional ideas of volatility = reward comes from.    The only "good" data we have is stock and bond data.   Stocks have done well over the long-term while experiences mind-numbing volatility, so we make that simple association.

But ask anybody who owns assets with consistently high demand and low supply characteristics (like Microsoft monopolies, doctors, waterfront homes, etc), and they'll tell you that it's possible to get high returns with relatively low volatility.

Funny, I didn't state that volatility = return.

Yes, it is possible to get high returns with low volatility for a while, but usually the market seeks these out (ever more quickly, it appears) and either the returns drop or volatility increases. I think that is what happened to apartment buildings and other small commercial real estate (returns dropped as properties got bid up).

Oh, and just because we have no good data on something doesn't mean it isn't a good investment. It just means you should tread carefully and make sure you understand what you are getting into.

 

[cute fuzzy bunny]

Funny, I didn't state that volatility = return.

Thats just semantics.

 

[Cut-Throat]

Harry Dent knows.

I saw one of Dent's books a few years ago. He was predicting that the DJIA would be 30,000 by 2010. I think it was supposed to be over 20,000 by now!

 

[free4now]

I remember during the dotcom bubble when one of my coworkers was spouting off about how "The market handsomely rewards people who accept volatility and take risks". A wise coworker responded "There's one thing the market likes even more: Suckers".

Nothing wrong with accepting volatility, just don't become a sucker.

 

[veritasophia]

Higher volatility, higher returns. Lower volatility, lower returns. You don't get the higher returns, lower volatility choice.

I thought that the purpose of Asset Allocation is to increase returns while decreasing volatility. For example, according to this article, from 1975 - 1995, a well diversified portfolio (portfolio 5) had significantly higher returns with lower volatility compared to a 60%S&P500/40%Lehman bond Index portfolio (portfolio 1).

 

[wabmester]

I thought that the purpose of Asset Allocation is to increase returns while decreasing volatility.

Well, that's sort of the holy grail of asset allocation.   Get yourself a mean-variance optimizer, and find the sweet spot on the efficient frontier.   But in the real world, asset covariance changes with time, so what may have given you improved returns and lower volatility in the past may do the opposite in the future. Looks like that's what happened in intercst's real-world study.

 

[justin]

Looks like that's what happened in intercst's real-world study.

Unless you look at the 2000-2006 data which shows the MPT portfolio doing pretty good.

 

[cute fuzzy bunny]

I'm always leery when someone makes a point and includes just specific ranges of years. Why 1975-1995, cutting off the greatest bull market in history? Oh yeah, because it renders the point invalid if you include the next 10 years.

I've yet to see much significance in attempts to show correlation (or lack thereof) in historic asset class allocation attempts. Almost anything that seems to correlate or show a negative correlation fails at some point, usually spectacularly. Sometimes because the correlation wasnt there. Sometimes because it was and people realized it, bought to suit, and therefore changed the dynamic.

I think even looking at it and reporting what you see causes change...

 

[justin]

I think even looking at it and reporting what you see causes change...

Like the Heisenberg uncertainty principle, to borrow a concept from quantum mechanics?

 

[cute fuzzy bunny]

Who said stock market investing (or at least the analysis of it) is as easy as quantum mechanics?

Something between heisenbergs uncertainty and schrodingers cat.

There are only two solutions I suppose: do not play, or play with everything at the same time, then wait 2-3 decades and see if that was correct...

Had a sort of chunk of this conversation on a long walk with gabe and the wife yesterday. She mentioned that everyone at work was really excited about oil stocks and precious metals and were jumping in. I explained the inverse emotional reaction people have to investing, where they want to buy stuff thats been run up and run screaming from things that have gone on sale. We dumped our energy and precious metals stocks, as they had done what I wanted them to: make us lots of money. As diversifiers? I dont think they're any more useful than internet stocks, the nifty 50 or tulip bulbs. They might keep making money, but we made ours and sold too soon. Which is way better than too late.

As far as slice and dice? I think its had its day. People who were going to do it did it, either through mechanical means of individual asset buying and rebalancing, purchase and rebalancing of mutual funds or purchase of a canned multiple asset balanced fund. If they didnt already do it, they soon will. Then it'll be "so much for any historic correlation/uncorrelation" and any sector that outperforms will most likely be accidental or through happenstance, not predictive.

Bearing in mind that "not playing" isnt an option for me, or most, and that I really dont care much about volatility given a 40+ year horizon and ability to live off the dividends alone, I'll just "put everything into play", go with broad equity holdings and @#%$@ bonds and excessive cash.