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18 comments:
Great stuff from John Bogle. He covers most of the subjects frequently discussed on this blog. His views on international investing will certainly not go over well with the regulars on this blog, but it seems ill-advised to ignore anything Bogle has to say.
http://www.indexuniverse.com/sections/in-the-spotlight/6246-focusing-on-investing-not-speculation.html?Itemid=163
Roger,
Is your portfolio in one of these wacky 90%/10% investment plans?
Are any of your clients portfoilio's in one of these wacky 90%/10% investment plans?
They may be intellectually interesting to some, but until I see this more widely adopted and successful I am going to assume it is an interesting topic and a good way to sell books.
You seem to want a game over steady portfolio. Don't we all. The market does not lend itself to easy passive riches IMO.
anon 6:51,
my portfolio is quite ordinary. the way i view things, one great way to learn something practical is to study things that are very extreme, impractical. I find there is much utility in studying very extreme veiwpoitns in the process of forming my own viewpoint.
not everyone has the time or interest for this, apparently i do.
Capital appreciation and capital preservation are not necessarily mutually exclusive – both can in principle be pursued even with the same assets – but most risk management regimes place theses values and their associated asset classes in a continuum regulated by some risk metric(s).
All Taleb really does IMO is ask the question: To which risk metric(s) would you entrust your life? Since he does not believe market returns are distributed normally and virtually all risk management regimes assume they are his answer from a practical standpoint basically comes down to none.
If you accept that as probably true then might as well put a wall in between the two domains and navigate them separately leaving the key decisions to how that is best done given your most likely future requirements: Taleb offers one way, Harry Browne another; doubtless other models exist or could since personal preference and ability is clearly a factor in the larger equation.
Thanks for the thoughtful piece today Roger,
Finding oneself in the fortunate position you describe 5 or 10 years down the road, to what extent would you look beyond financial assets altogether, such as rental property or private business investment? Also, heavily weighting bonds at that point seems risky for any number of reasons. I can see keeping a decent chunk of assets in equities (+-40%?) even after achieving my retirement target, as a means to hedge against inflation and/or periods of low bond yields.
Don't even question it Roger, it's absolutely logical to take money off the table if you can and it fits your lifestyle.
I've two very close examples; one a 55 year old man decides he has enough money in savings to be comfortable (with his frugal yet comfortable lifestyle), goes mostly to CD's, some stocks / some real estate for decades, misses bulls and bears, and yet finds himself extremely well off and comfortable in his later years. Nothing wrong with that at all from what I see.
The second example is a 40 ish year old that made a killing in the bull run of the 90's, kept it all on the line and basically got halved in 2001 crash, and halved again. Rich in his 40's, and still rich in his mid 50's by most accounts, he's stressed and miserable with memories of lost profits. He can potentially make up a lot of ground in the next bull cycle, but taking money off the table (or protecting oneself properly) ought to be core strategy at some point in the life cycle.
"I find there is much utility in studying very extreme veiwpoitns in the process of forming my own viewpoint."
Excellent counter point and I am glad you are interested so we can all learn from it. My concern is some one at home may try to use these extreme concepts. I knew you didn't actually implement these strategies and made a counter point arguement.
I am not always tactful in my comments (we all have our failings)
the notion of studying extremes to find the "correct middle" is an ongoing thread on the site. i certainly hope no one adds 1+1 to get eleven but i know it happens occasionally.
Roger,
The long term expected return of various asset classes are fairly predictable. In equities, it is dividends plus earnings growth. Deviations from that is simply expansion or contraction of P/E. The 1990s saw an expansion of the P/E to over 40 and now we have reverted back to the mean.
In my personal situation, I allocate to achieve the expected return that I need to fulfill my personal requirements. As you mentioned, you can do that several ways, low percentage of high expected returns mixed with low risk fixed income etc. I am striving for about 3.5% real return in perpetuity, 2.25% for to live off of and the rest for legacy building. This is where a buy/hold/rebalance portfolio really shines. There comes a point where reducing investment expenses and increasing tax-efficiency becomes very important and can in fact cover the major living costs in a modest lifestyle, thereby futher reducing the need to take risk.
By the way, the line of reasoning you presented today is very similar to that of Swedroe.
See Bogle interview referenced above.
I would love to hear from Roger and the regular cast of characters here (esp. BillB & RW) on the subject of how much is enough? How do you know when you have acquired enough?
how much is enough is in many ways philosophical and makes for a could post
How much is enough is a complex, multi-variate problem with a solution that tends to be unique for every individual (surprise, surprise, eh?). If you are inclined to do it yourself -- an exploratory and independent stance provides an edge even if professional counsel is sought later IMO -- then Analyze Now! at http://analyzenow.com/ is a good place to start IMO; e.g., even the free stuff (and there is quite a bit of it) takes the problem seriously and applies some industrial strength rigor to it.
As Roger points out, the problem possesses significant philosophical implications and, because there are cold equations, hard numbers and sheer luck in that mix, I personally recommend Stoicism: Makes it less painful to adapt when, after all your planning, the fickle finger of fate taps you on the shoulder and your plan predicated on living 25 years after retirement with $998K saved to give you $50K of yearly income in today's dollars fails because you: Live longer and/or inflation is higher than expected and/or an account is mismanaged and/or medical expenses are higher than expected, etc.
Roger,
A successful investor must understand where we are in the current economic cycle and adjust their portfolio accordingly.
First, one must comprehend that we are in a long term secular bear market which began in 2000. Yes, a secular bear will have cyclical bulls like the one we are currently experiencing today however do not get caught in the bull trap as it is important to understand the secular bear trend.
Second, and this is the most critical element for every investor. Are we in a deflationary or inflationary environment? Those that invest the wrong way here will not perform well. There is no doubt that deflation is real and one should invest accordingly. Bill Gross is right. The 10 year zero coupon treasuries at 3.75% are awfully attractive at the moment.
Bottom line is that it is not WISE to invest in any risky assets (equity, credit or commodities). There will be a time for buy and hold again however now is not one of them.
Roger, I don't find your hypothesis at all outrageous and, in fact, wish I had done as much. I'm akin to guy #2 in anon 9:27's comment.
When you refer to foreign sovereigns, are you referring to ADR's or debt instruments? Sorry for being uninformed. For what it's worth, I've been tryng to define a portfolio like your post, since I'm kind of where I need to be on the time line with less return and less risk. It 's not that easy to figure out. The post referring to inflation versus deflation is a pivotal question when looking out two to seven years. You reference TIP's, but they have been a stacked deck, not reflecting the real inflation during the past decade.
Thanks for an insightful post. It's not wacky to want to preserve gains later in your personal investment cycle.
Sam
excellent post roger, sounds like you are getting to grips with some big concepts. You might want to read the recent Howard Marks / Oaktree paper on So Much thats False & Nutty in Investing. Marks talks about the choice between offence and defence and the concept of good enough returns. I made that move well over a year ago - my portfolio currently looks similar to the 70% TIPS / 30% equities portfolio you highlighted a few weeks ago. If I have a benchmark its the 50/50 equity/tips mix highlighted in the Geoff Considine paper you recently linked to. Perhaps a future blog might consider if this should be the default benchmark for most portfolios.
Roger:
I like your "Game Over" concept. As one gets older, and thus market exposure time gets shorter...one should begin to reduce their risks and maybe begin to enjoy the gains they have accrued. Sindicated radio host Bob Brinker (Money Talk) speaks of reaching, what he calls, 'critical mass'...a point at which one can live out their life in comfort from the combined incomes of pensions,SS,IRA-401ks,etc, plus income producing SAFE investment vehicles of various types.
For those whom have achieved that point financially, I see little reason to having any exposure at all to the equity markets. (primarily stocks) What a shame it would be to have amassed a comfortable nest-egg for the future, only to see it dwindle away because the markets decide to roll over.
If one has enough money/income to live the life they want to live...than,indeed..."game's Over"
Thanks!
How about this radical thought:
Instead of thinking in terms of 4-6 year bull/bear market cycles, why not think in terms of 4-6 month cycles?
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