William Sharpe: How to Invest In a Turbulent Market

[mickeyd]

Sharpe talks about all of the things we discuss here on a daily basis. But it's Sharpe discussing why he likes index funds. The second link is the better one.

In an interview published on the Web site for the Stanford Graduate School of Business, Sharpe, a professor emeritus at the school, shows how much more money retirees would have if they had saved for retirement using lower-cost index funds rather than higher-cost actively managed funds.

Investments in stocks can be very risky and the individual investor needs to understand that with investment risk comes uncertainty about retirement income, says Sharpe. He adds that it is misleading to assume a 7 percent or 8 percent return on stocks for the next 20 years, as some software models will do.

He also was critical of the 4 percent rule

William Sharpe: Savers Can Increase Living Standards 20% In Retirement

William Sharpe: How to Invest In a Turbulent Market | Stanford Graduate School of Business

 

[Free To Canoe]

A good article. Kind of a 50,000 feet flyover view of personal finance. A good template for discussing personal finance strategies.

"What about the other pillar: Contextualize?

Simply put, when you think about securities markets, remember that the prices of securities are set by human beings trying to assess the range of future prospects for companies, governments, and other issuers. In a sense, the price of a security reflects the average opinion of investors about its future. You may think your opinion is superior, but it pays to be humble, investing in the market rather than trying to beat it."

 

[Spanky]

He asserts that 4 percent rule is deficient but does not offer a better approach.

 

[Free To Canoe]

He asserts that 4 percent rule is deficient but does not offer a better approach.

True.
Maybe the article should have been titled: How NOT to Invest in a Turbulent Market. Maybe it really isn't a good article. However, his point is that successful solutions will involve the true nature of the markets in that they do not behave as normally distributed and the are fairly random in nature. Solutions that involve averages will by nature disappoint the user.

 

[dtbach]

Sharpe talks about all of the things we discuss here on a daily basis. But it's Sharpe discussing why he likes index funds.

/QUOTE]

I'm not sure Index funds are always the best choice. I looked at my Vanguard Wellington and Wellesley funds and both did better than the S&P500 over the last 5 and 10 year periods

5year 10year
S&P 500 1.66 7.10
Wellington 6.53 9.31
Wellesley 8.13 7.78

These are at the end of 2012. And both probably had a less volatile ride.

 

[Brooks Saddle]

There is a reason Wellington & Wellesey beat the indexes these last few years and that is because they are balanced funds. Stocks tanked and had lousy past returns the past decade while bonds have had a bull market. Will that continue? How much lower can the Fed drive interest rates? What happens to both Wellington and Wellesey when the fund inevitably starts to raise interest rates and the bonds in their mix take a hit?

I'm not saying that there is anything wrong with either fund but merely pointing out the reason that they beat the stock indexes and I wonder if that outperformance will continue in the future.

 

[Animorph]

VBINX is a 60/40 balanced index fund tracking most US stocks and bonds. Wellington and Wellesley beat it handily as well. (VBINX 5yr 6.08%, 10yr 7.45%).

 

[Brooks Saddle]

Animorph, I'm not saying Wellington or Wellesey are bad choices. In fact, I am considering putting some of my money into Wellington. All I am saying is if Wellington outperformed the stock index that part of the reason is the allocation to bonds. Will this continue going forward when the Fed starts moving interest rates up? I have no idea.