Hi Guys,
Admittedly, I am an optimistic person. During the latter years of my other life, I was a major organizer and contributor to an endless number of aggressive, challenging engineering work proposals. I believed each would be rewarded the contract; in fact, only a small fraction of our team proposals won the contracts. Even with those disappointing outcomes, I retained my enthusiasm and confidence until retirement.
Over the last week or so, a bunch of MFO regulars have posted worrisome submittals with regard to a potential market meltdown. Presently, I am not in that camp.
I do not worry much over any looming equity Bear market bust. Surely, It might happen. However, I will survive and so will all of you with just some conservative planning, and more importantly, a little cash reserve to cover any plunge and its recovery period. Trying to time the downward thrust is hazardous duty and could deepen the impact of the market cycle’s reversals if not adroitly handled.
As Nobel Laureate economist Gene Fama said: “Your money is like soap. The more you handle it, the less you’ll have”.
As you’re all aware, I love statistics. You’re also familiar with the fact that investment markets are awash with useful and reliable statistics. I certainly deploy this vast statistical database when making my broad market decisions.
These statistics strongly demonstrate the asymmetric upward bias to positive market rewards. The short term statistics are chaotic in character and do resemble a random walk. However, as time expands, so do the odds for positive rewards. Historical data shows that equity market returns are random with roughly a 10% annual upward slope. That’s a confidence builder.
Here are a few of the stats that I find particularly compelling.
On a daily basis, the markets yield positive returns about 53 % of the time. When the time horizon expands to monthly, quarterly, and annual timeframes, the positive outcomes progressively increase to 58%, 63%, and 73%, respectively. Time has a healing influence.
Over 5-year and 10-year rolling periods, the positive outcome odds increase again to the 76% and 88% levels. Wall Street wounds heal more persuasively over longer time horizons.
It is troublesome that so many MFOers have expressed high anxiety over the possibilities of a sharp market downturn. Indeed, it is a certainty that a Bear market will occur. Over the last 8 decades, equity markets have sacrificed 20 % of its value on 4 separate occasions. In the last 113 years, the stock market has suffered Bear reversals 32 times. That record shows a 20 % downward thrust every 3.5 years on average.
Main Street pays the same penalty as Wall Street during these dark episodes since active mutual fund managers have not displayed any talent to really soften the blows.
The good news is that Bear market cycles have a short average duration; their average length is only slightly longer than a single year. The recoveries are rather dramatic with a major portion of that recovery happening near the beginning of the process. Therein is the dilemma for an investor trying to time the reversal. He needs a sharp criteria and speedy reflexes to respond to this rapid turnaround.
The other good news part of the market bull/bear cycle is the duration and magnitude of the bull segment. Its duration is over three times the Bear periodicity, and the magnitude of the gains wipe away the losses during the Bear segment. According to InvesTech’s Jim Stack, over the last century, the average duration of a market recovery is about 3.8 years.
These statistical observations form the basis for my optimism.
Those who flee to cash too early, or reenter too late pay opportunity costs in addition to trading costs. That cost is exacerbated if an investor patiently waits for the confirmatory signal of a Bull market (a 20% gain from the market’s low water marker).
Most folks agree that reversals are impossible to predict. So, why worry that problem? Perhaps we should focus our attention on things we can control. Things like building a cash, or near-cash (short term corporate bonds) reserve of a year or two to outlast any Bear market scenario. Also we could be flexible in our buying habits during stressful periods. A Toyota Camry is not a bad compromise over a Lexus when the road is rough.
Even if an investor fears an impending market meltdown, one viable option that is universally available is to do nothing; stay the course.
I am not quite so brave. If my fears are supported by numerous signal data (like inflation rate changes, super high P/E ratios, low consumer confidence, unhealthy ISM raw order index values), I would be inclined to take some action. However, that action would be both limited and incremental in character.
I believe in the 20/80 rule. In a business, 20% of the workforce does 80% of the productive work. In investing, I tend to keep 80% of my equity holdings as permanent positions. If motivated by Bear horror stories, I might incrementally shift 20% of my equity holdings into less volatile products. The changes would be made incrementally as Bear evidence accumulated and the odds shifted to favor a downward movement.
The overarching purpose of this post is to caution MFOers against acting too precipitously. All investors behaviorally tend to be overconfident and overactive prone.
I certainly welcome your perspectives on this matter. I’m not an expert, and even the experts often fail to identify market tipping points. Jesse Livermore made and lost fortunes several times during his turbulent career. Even the baseball great Babe Ruth once led his league in strikeouts.
Best Regards,
Comments
But when the market breaks past say -15...-20%, it starts to get very painful. Very scary.
Sure, it corrects often, like you note. But will this time be different? Will it go -30...-40...-50%? Worse?
Stocks can go to zero.
Markets can go to (near) zero.
Just about every asset class in every sector in every country has proven it can draw down -70...-80...-90%.
Takes a long, long time to recover from drawdowns of that magnitude.
Fortunately, as you say, they do. It may take 30 years or more, but eventually, thanks to human productivity they do.
In the long run, markets of all kinds tend to go up. But in between, they are subject to extremes...or "vulgarities," as I heard an asset manager recently describe.
Just not sure most investors, even institutional investors, are really prepared to endure the extremes, despite the well-intended call to "do nothing" from you and great investors, like Mr. Buffett.
But forgive me, I've been reading and listening a lot to Mebane Faber lately. He writes almost as well as you
Hope all is well.
With respect to: "Perhaps we should focus our attention on things we can control. Things like building a cash, or near-cash (short term corporate bonds) reserve of a year or two to outlast any Bear market scenario."
An issue of importance is how much of a near-cash reserve to build. The objective is to not have to sell equities during a bear market. The time period stated, "reserve of a year or two" would not "outlast any Bear market scenario". Consider the bear market that began approximately January 15, 2000, and resulted in a drawdown of roughly 45%. The goal is not to sell equities until their prices have recovered. Did it not take until 2007 for stocks to recover their losses? You would have needed a 7 year near-cash reserve to not have to sell stocks while they were down (assuming no current income).
Consider the bear market of 1973-1974. Equities peaked in late 1972. The low was reached in December 1974. Stocks did not recover for 8-10 years.
You mentioned, "According to InvesTech’s Jim Stack, over the last century, the average duration of a market recovery is about 3.8 years."
That 3.8 year average figure sounds about right. One would not be wise to just plan for the 'average' bear market recovery.
Thank you for your discerning and kind commentary.
Indeed, the duration and magnitude of both Bull and Bear markets depend upon definitions. The simple plus or minus 20% rule is very common and is the one that I used in my post. In that rule, the 20% is measured from either the high or low water marks immediately before the reversal.
Your astute comments are more market secular cycle in character. They are based on penetrating these previous high or low records. Since the two most recent Bear slides both exceeded -40%, the 20% reversals were only partial by the secular definition, and obviously produced a different duration measurement. Nothing wrong with any of this record keeping as long as we are all familiar with the operative ground-rules.
Cash reserves are costly since they automatically tradeoff investment opportunity for mental comfort. How far we each commit to that tradeoff is a personal balancing matter. Some financial wags are satisfied with a 6 month reserve. I am not so sanguine. That’s why I proposed the one to two year cash reserve. In the end, it’s your decision.
My own decision is that a reserve that covers all potential outliers, that is really deep into protecting against Black Swan events, is far too costly. I’m mentally prepared to accept some low probability cash flow shortfalls so that I can capture more of the higher likelihood investment opportunity paydays. Again the tradeoff is in your camp.
I consider some retirement income as a dead certainty; Social Security and corporate retirement commitments are in that category. Many financial planners recommend assessing these sources as guaranteed fixed income. For many retirees, these constant cash inflows represent a high fraction of the retiree’s daily needs. I suggest that in a market meltdown situation, any income shortfalls might well be accommodated by modest changes in spending habits.
Early in my retirement, I was challenged by this exact scenario. Spending changes are a workable option. Delaying the purchase of an automobile, eating out less frequently, skipping a vacation cruise holiday, and even making the kids initiate a low interest rate college loan do miracles for the financial balance sheet in short order. And they were only temporary anyway.
From my perspective, measuring a market against an earlier peak level is unattractive and inappropriate. It is a false standard for an individual investor because almost nobody entirely entered the marketplace at that precise, unfortunate time. Admittedly, it is a positive signal for a continuing Bull market overall when these high water resistance markers are penetrated. But an individual’s portfolio and his adjustment decisions should not be exclusively tied to historical landmarks.
I’m an enthusiastic and happy Vanguard client. These days, I basically do my banking with them through their short-term corporate bond mutual fund. I do so irregularly and infrequently. I do not sweat small price changes in that fund; it’s noise level stuff at the fraction of a penny level.
And note that “a penny saved will depreciate rapidly”.
Rjb112, you seem to be a highly motivated investor and a financially focused person. That’s goodness unless you allow these positive attributes to squeeze out other important living functions. I guarantee that you will make bad investment decisions. Remember, for every trade there is a successful side, but, also someone was on the wrong side.
I surely have been on that wrong side more than I like to acknowledge. However, I have managed to reduce my error rate over the years. I attribute that reduction to the formulation of my earlier Super Six ( S6), or now Superior Seven (S7), rule discipline.
The original S6 components in general are (1) savings, (2) simplicity, (3) statistics, (4) stability, (5) selectivity, and (6) strategy. Recently I added John Bogle’s stay the course admonishment as the Number (7) “stay” component to form S7.
For example, in the savings component, it took me awhile to recognize that by decreasing my spending only a small percentage, I could double my savings rate. That’s a nice little piece of wisdom.
You are fully aware of my addiction to statistics as a workhorse to guide investment planning and decisions. It is an important element in my list, but I do not permit it to function in isolation to other factors. That admission might shock a few FMOers.
By stability I mean behavioral emotional stability, by selectivity I mean the active and/or passive mutual fund management decision, and by strategy I default to my asset allocation decisions which do morph over time.
I hope you found this reply at least a little informative and useful for your investment purposes.
Best Wishes.
How old are you?
Do you have dependents?
Do you have a defined pension plan?
Will you be receiving Social Security?
If you will be receiving Social Security and/or pension; What percentage of you expenses it be when you collect both?
If, you were 60 today without a job Social Security and a pension how would you invest, let's say, $1,000,000 today - all you have, currently in cash? And, you had to live off it from today at age 60 until 90?
As, an aside, a person born in 1990 is now 24. In there lifetime they have seen:
2 major stock market downturns
3 USA wars
Major intervention by the Federal Reserve
If, they went to college they might have significant debt.
In the current employment market their chances of a defined pension plan is slim to none.
Health benefits have been cut, eliminated, or they have to pay for Obamacare with their after tax dollars.
Gov't debt is approaching 18T and an European style VAT is likely.
The chances of this generation amassing the wealth of those born between 1947-1955, is slim.
So, I'm guessing these people will not be as optimistic about their financial picture.
I need to amend my original post. I am guilty of an overgeneralization.
In my original submittal I said: “……during these dark episodes since active mutual fund managers have not displayed any talent to really soften the blows.”
After submitting that assertion, I doubted its validity. There’s a common saying that “All generalizations are false, including this one”. That dash of folk wisdom is definitely right in this instance. It took just a little research to establish that I misfired. My assertion was wrong.
There is ample evidence from recent mutual fund performance studies that demonstrate that, on average, active fund managers do offer downside protection during Bear market plunges. Some research by the Meketa Investment Group organization clearly established that important finding for the two most recent Bear market downturns.
I apologize for my intemperate and inaccurate generalization.
Best Wishes.
For the postwar period and especially for the last 30-35 years, I do not think your other assertions really hold and should be counted on to inevitably happen:
>> Sure, it corrects often, like you note. But will this time be different? Will it go -30...-40...-50%? Worse?
no
>> Stocks can go to zero.
no!
>> Markets can go to (near) zero.
nah
>> Just about every asset class in every sector in every country has proven it can draw down -70...-80...-90%.
Some specific examples since 1945 would be helpful, but there are none, in the way described.
>> In the long run, markets of all kinds tend to go up. But in between, they are subject to extremes...
In any case, this all seems very strange to me coming from a researcher like you. And what would you propose one do instead, or do keeping in mind these statements of yours as if true? Keep many decades' worth of bonds/CDs and invest whatever rest is left? I don't think so.
But, very hard to do during dark times.
And, it is not necessary to achieve healthy returns.
So, personally and generally, I no longer practice it.
No more riding retractions down below my comfort zone.
In any asset class.
Even if history says all will be well in time.
Better to have an exit plan that protects capital and state of mind.
Employ drawdown protection, as much as practical, to live another day.
Legitimate edges are likely rare, elusive, and fleeting.
So, better to get out of the way to invest another day.
As market recovers, ample opportunity to get back in.
Just do not need to swing at every pitch.
OK?
I believe I fully appreciate the primary thrust of your personal questions.
Who is this MJG guy? Does he really know anything about which he writes? Is he fair and honest in his market viewpoints and analyses? Is he trustworthy?
The Internet is a terrific resource; it is a world of information within almost everyone’s grasp. But that ease of access also encourages charlatans and swindlers with their false representations. Credibility is a daunting hurdle that is difficult to jump with these brief exchanges.
On MFO, I have tried to satisfy that natural skepticism by carefully documenting my posts with applicable data, reliable references and elongated explanations. A few MFO members complain about the length of my posts.
I try very hard not to make unsupported assertions. As my earlier correction testifies, I do not always succeed. I have been posting on MFO since its inception, and for many years on its FundAlarm forerunner. I will stand on that record and its consistency.
I’m not 60 years old; I am 80. I have been investing since the mid-1950s and actually attended Columbia University while Benjamin Graham taught there. Our paths never crossed.
Our family income must only support myself and my wife of 53 years. She was a military bride. Our kids have been on their own dollar for a long time, and they are all doing quite well. Although money was very tight earlier in life, we have no financial issues or worries presently. I make no smart investment claims. Our family has been prudent savers, conservative, and lucky. Like most others, our family has shared both lucky and unlucky experiences. We lost a son to cancer.
Every generation experiences a similar set of good fortune and hard obstacles. The world will always be a dangerous place. I vividly remember many more challenging wars with greater sacrifice demands than the current conflicts. I remember double digit inflation in the 1970s and long, exasperating gasoline lines.
I don’t find the current world situation to be particularly threatening. That’s especially true if one contrasts the present miniscule nuclear threat against that which existed in the 1960s. In that decade, the USSR targeted tens of missiles against every major US city.
I too share some of your concerns about today’s political dysfunction, but that is something that I can’t control. Therefore I will adjust and survive.
Both my wife and I collect social security benefits and have separate company pensions. With just a little spending adjustments we could likely live on that income alone.
If I had one million dollars today, my portfolio would depend on my age and my risk profile. If I were 30, something like 75% of that million would be in equities and hard assets. If I were 50, about 60% of my holdings would be in equities and hard assets. Diversification works.
These are grand generalizations and need refinement based of specific preferences. Other MFO members are much better qualified at assembling detailed portfolios, so I defer to their superior talents.
I still believe that the US has a bright future. Be patient and persevere. You will win the battle; we will win the battle.
Best Wishes.
You have conflated my postings with the one generated by MFOer Charles.
Please review the authors. I’m much more optimistic than Charles concerning the magnitudes of any market meltdowns. He might be on-target, but I believe his scenario odds belong in the remote classification.
Best Wishes.
I appreciate your postings regardless of their length. You are another example of why MFO is a great destination on the web.
Congrats on 53 years of marriage. A wonderful feat.
Oh, dear, sorry. I know your work and stuck my scribbles in the wrong spot. You also are more polite than I am. I was and am surprised; his scenario odds are not only remote, and at least some of his assertions are not on target by any definition, which goes against his solid scholarship elsewhere. Again, apologies.
"That’s why I proposed the one to two year cash reserve"........"I’m mentally prepared to accept some low probability cash flow shortfalls"........"I suggest that in a market meltdown situation, any income shortfalls might well be accommodated by modest changes in spending habits"
Let's take a specific scenario for a retiree where 'any income shortfalls' cannot be accommodated by further changes in spending habits, because the expenses are already quite lean. And let's define 'income shortfall' as necessary living expenses minus (social security income plus unpredictable distributions from mutual funds), for a person without a company pension.
Under this scenario, we are no longer in a 'low probability' for cash flow shortfalls situation, as bear markets are high probability events.
In this scenario, I cannot see how a near-cash reserve of 1-2 years to cover income shortfall would be sufficient, if the objective is to not sell equity mutual funds during a bear market for stocks. One would be meeting all living expenses from the near-cash reserve until the equities bear market was over and some reasonable recovery of equities had taken place.
I fully agree with you that few investors would have lump summed into equities at the peak before the bear started, and that having a requirement to recover equity prices to the prior peak level is too stringent for determining when one should tap equity mutual funds to start paying living expenses again.
Under this new scenario, do you still think only a 1-2 year near-cash reserve could be prudent for the average investor? I think those reserves have to be able to last a lot longer than 1-2 years, else the investor is risking having to sell equities when their prices are significantly down. I would think Jim Stack's figure of 3.8 years would be a bare minimum number under this scenario, and probably much longer.
Off the top of my head, I think that after the bear market started in January 2000, by March 2003, equities were still down 45%. So our (above scenario) investor had already lived off his shortfall reserves for 3 years, and equity price recovery was nowhere close to where equities should be tapped to pay for living expenses.
Human beings are greatly influenced by our genetics and life experiences.
We can not really discuss you genetic optimism - if you have it from there.
Your optimism from life experience is one we can generalize about. You were born in the USA at a time in world history where a baby bust provided a fertile period for success. A person of your generation almost had to try to fail. They were sucked up by the growth. That you went to college in the 50s speaks to the opportunities you had.
Re-read the example I gave above. They do not have such opportunities. Their future is more similar to what we see in Europe now. In addition, the population growth from 7B in 2000 to 10B in 2050s will put pressure on wages and increase commodity prices.
Will stock market prices be up by 2050? Yes, will the person in my example have money to put into the market - probably NO. They will be living paycheck to paycheck.
Even today, you and your wife are an a abnormality - defined pensions (with health benefits?) - very few people have that. I think your perspective would be different if you had to live off your savings alone.
So I can see how you are optimistic - you can live off your pension and SS income. You really do not need your savings to live.
In a way, you do not have any 'skin in the game'.
Please do not take any of this as an insult. It is not intended to be at all. It is a different perspective. A great deal of investing is emotion. With your situation - 2 defined pensions (health ins?), social security, no children to provide for, no chance of losing your job - the emotional aspect of investing is minimal.
Wow, you’re a bulldog on fixed income issues and doubts. That’s meant as a compliment, an attaboy.
You pose a delicately balanced retiree scenario. Under the conditions that you postulated, the imaginary retiree is always on the cusp of a cash shortfall since he is tightly coupled to annual market returns.
That retiree has failed to plan well before his retirement years. He should have deployed Monte Carlo simulators to test the sensitivity of his estimated retirement drawdown requirements to market vicissitudes and his portfolio asset allocation design. A parametric Monte Carlo analysis would have identified the relationship between his candidate drawdown schedules and his portfolio survival probabilities. Parametric exploration is always needed because of the uncertain future market performance in all broad investment buckets.
In general, these analyses usually project that a 3% to 4% annual portfolio withdrawal rate will permit that portfolio to survive for 30 plus years with a 95% likelihood of success. A 100% guaranteed survival rate is rare except for an extremely well endowed portfolio or a near-zero drawdown schedule.
Certainly, particularly during the early retirement years, a run of bad luck, of consecutive negative annual performance, can destroy even the most conservative planning. I suppose that’s what you fear. Yes it can happen. Under such a scenario, additional savings must be identified to balance the necessary adjustment to the portfolio’s withdrawal schedule.
Before retiring, I completed these types of Monte Carlo perturbation calculations. It is amazing how flexible route correction rules can improve survival likelihoods in the positive direction. For example, most Monte Carlo simulations assume that withdrawal dollars will be adjusted for inflation. If the marketplace goes south for a year or two, simply not giving yourself that inflation increase will have a profound impact on the portfolio’s survival probabilities. Again this puts pressure on the retiree to tighten his belt. That surely is not pleasant, but it is reality.
This problem with our imaginary retiree has its roots in his pre-retirement working years if he was too risk adverse. If his risk tolerance was very low, he positioned too much of his savings in short-term fixed income products. Historical data suggests that equity real (minus inflation) returns are of order 6.5% with a standard deviation of say 15%. Short-term fixed income real returns are about 0.5% with near-zero variability.
The annual compound return for equities is reduced to 5.3% because of its annual variability; the compound return for the fixed income component remains at 0.5%. Over a 35 year nest-egg accumulation period, the end wealth differential is huge if the saver puts 10% or 20% into fixed income components.
The end wealth multiplier for the 10% fixed income portfolio is 5.19; the multiplier for the 20% fixed income weighting is only 4.42. For this example, the more aggressive portfolio delivers a 17.4% higher retirement starting end wealth.
The takeaway lesson is that during their accumulation phase, folks would benefit by emphasizing equity commitments over fixed income products. Over the long haul, an equity heavy portfolio is less risky than a fixed income portfolio if retirement inflation adjusted end wealth is the goal.
Based on your closing paragraph, I still feel that you are placing far to much emphasis on recovery percentages from a nearby market peak value. The actionable measures are the health of the retiree’s current portfolio, its projected survival time, the estimated future returns, and the necessary drawdown rate to maintain a lifestyle. Where the equity markets peaked is history, and not really meaningful given the current circumstances of the retiree.
For your 2000 meltdown example, the immediate negative market period exceeded one year, but was starting to recover before the downturn reached its second anniversary. If the retiree had properly done his retirement planning, he might well have not accepted an inflation increase for one or maybe two years. Yes, he would have been forced to sell some additional holdings in a down market (he always sells to reach his needed withdrawal rate). He could limit the damage by only selling fixed income units.
I hesitate to invade your personal decision making. That’s your job alone. However, I do hope that my stories do influence some of your thinking on the matter. Except perhaps for a reversion-to-the-mean propensity, ironclad forever rules do not exist in the investment universe. Flexibility in action and flexibility in thinking are mandatory assets for an individual investor.
Only you are responsible for your actions. I trust I contributed to your flexibility in thinking.
Best Wishes.
I do not take umbrage with any of your comments, but I don’t agree with many of them.
I do concur that our worldviews are primarily formed from our life experiences. Where you “jump the shark” is assuming my generation had a nearly 100% guaranteed success pathway. I daresay that no generation ever enjoyed such a privileged golden road.
My wife and I were born in the depth of the great depression. Until WWII, I lived in a house without running water; yes we had an outhouse facility. My Dad had a ship blown out from under him during the war. Both my future wife and I fully paid our own way through college with combined scholarship awards and part time work throughout the year. I never experienced a Spring break.
My generation lost a lot of good men in Korea. By the time I made that scene, the shooting war had ended. I never fired a shot in anger, but I did vigilantly watch the oversized military forces just across the border. While in the military reserves, our unit prepared for action during the Cuban Missile Crisis. Uncertainties and anxieties were high during these eventful periods.
I reject your assertion that success was an absolute given for my generation. That’s just plain wrongheaded thinking that lacks an historic perspective. If success was the outcome, it was achieved by hard work, sacrifice, and a little luck.
Yes, my wife and I crossed the wealth critical mass tipping point a few years back. But that was surely not the case a decade or so ago. We vividly remember the many hard times.
I like stories to illustrate a point.
I fondly (only in retrospect) recall moving across the Country in a 10-year old car, 100 dollars in our pocket, and all our possessions packed in the Chevy’s trunk and its backseat. We broke down near Flagstaff. To this day, I appreciate the kindness that the Babbitt family showed us that scary day. At that time, the Babbitt family ran the state of Arizona and owned the garage that repaired our vehicle. Understanding our financial situation, they significantly undercharged us for the work. I still believe this kindness exists in the US.
Things are not as dire as you project them. We’re living longer and better. Current problems should not be linearly projected into the future. Corrective feedback loops limit dislocations. Corrections and corrective actions get implemented by nature and by man’s design.
I’m optimistic; you’re pessimistic. That dichotomy is honest, is very acceptable, and is likely not to change. That’s okay. Let’s agree on that.
By the way, hard assets represents a fourth investment category in addition to equities, bonds, and cash. It is an investment with intrinsic value. Typically, that bucket includes holdings like precious metals, oil, natural gas, timber, farmland, and commercial real estate.
Take Care and Best Wishes.
Except for my comment about you and college I was writing about your generation and how it differs from the economic opportunities of other generations. My comments reflect the historical records.
What did I write that is pessimistic? So, I'm not agreeing with you on that I am pessimistic.
We all have our stories. I was able to work through & pay for myself college in the 70's working minimum wage jobs - school in the days; work at night. Now that school is $60,000/year plus other expenses. That is the historical and current reality people are facing these days.
I appreciate the time and place I was born into. And I know if I were born just 5-10 years latter my life would have been drastically different - for the worse because of the economic differences in time.
Thanks for the 'hard asset' definition. Why no bonds - high yield or US Gov't in your allocation?
Regards
Just a note to let you know that I completely agree with your evaluation of the opportunities that our generation enjoyed (I'm 75) vs the terribly diminished prospects ("current reality", as you put it) that today's younger folks face.
Like MJG, we also have dual SS and defined pension benefits, and are able to fund our living expenses from those sources without needing to draw down our savings and investment reserves. It's true that we were always very conservative in our expenses and discretionary spending, with an eye towards retirement, and we did manage our financial affairs wisely as it turns out. But in today's environment even doing all of that stuff won't be all that much help. Some folks tend to look down from their mountaintops and assume that everyone has the same opportunities and plain good luck that they did. It simply ain't so.
Regards-
for the rest of us, who no longer have the "defined benefit" pension plan, the allocation to fixed income is a must.
I do have an embedded bond allocation. Sorry that I was not clear on that matter.
When suggesting the portfolio asset allocation, I divided the portfolio into only 2 groupings for simplicity. Instead of the usual stocks, bonds, cash diversification, I mentally lumped the bonds and the cash into one grouping and call it Fixed Income.
In my earlier post, the 75% and 60% levels that I would assign to equities and hard assets would be complemented with 25% and 40%, respectively, fixed income segments to finish the mandatory 100% portfolio allocation.
As noted by MFOer Fundalarm, an investor might want to consider his SS and pension incomes as part of his overall bond asset allocation. From my perspective, that is an optional judgment on the part of each investor. I have no strong feelings one way or the other.
Remember that the portfolio that I suggested was purely hypothetical for an investor who had 1 million dollars to invest now. It does not represent my current holdings or asset allocation. I currently do own bonds, but mostly the short-term and a few intermediate-term varieties.
Best Wishes.
Joe,
I'm 59.
It saddens me to see how this great country that has given opportunity to many has followed the path to ruin as show in history.
If we would have followed the advise of the founding fathers and stayed out of foreign entanglements, I think, it could have all been avoided.
- you might be interested in this:
The fate of empires:
http://www.nairaland.com/1494266/fate-empires-sir-john-glubb
Thank, in the question, I asked if he didn't have a defined pension plan or SS.
But, I appreciate your insight about a pension and SS being considered in the bond allocation.
With respect to (a different reply): "By the way, hard assets represents a fourth investment category in addition to equities, bonds, and cash. It is an investment with intrinsic value. Typically, that bucket includes holdings like precious metals, oil, natural gas, timber, farmland, and commercial real estate."
Appreciate if you would throw out some general ideas of what might be considered sensible investment approaches or vehicles for these. (The more details, the better, with respect to an investing approach toward hard assets!). For precious metals, well at least gold bullion, one could go into GLD or IAU. Or a precious metals and mining fund, such as VGPMX or others. Oil and natural gas are a bit more difficult, although I'm sure there are exchange traded funds to tap into oil or natural gas indexes, and lots of energy funds out there, such as VGENX. Timber and farmland are very much more difficult. Commercial real estate could be invested in via REITS, domestic and foreign, e.g., VGSLX or VNQ for a domestic REIT index, and VGRLX for foreign real estate.
A diversified commodities index ETF? I have zero experience with this sort of an investment.
I don't know how to value REITS, but they sure have very high P/E ratios now. VNQ has a price to forward earnings ratio of 38.34 per Morningstar. I'm a Ben Graham fan and strongly prefer investing when valuations are reasonable. Perhaps P/E ratios are not a good way to value REITS....don't know.
What are your general feelings about a portfolio weighting to the above hard assets, for example, are you somewhere in the neighborhood of 5% of a portfolio for hard assets?
Some of the "good guys", like David Swensen, favor large allocations to REITS; 20% of a portfolio per Swensen's 2005 book. Seems like Rick Ferri, don't quote me on this, but I believe he may recommend 10% of a portfolio be in REITS alone.
Brother Dave.
Certainly do not want to disappoint you, just the opposite. And, I do not want to come off bearish.
I remain cautiously optimistic near term. More optimistic longer term.
It's just that I feel the downside of investing does not get talked about as much as it should.
Not the alarmist predictions. There are plenty of those everyday. But the more factual realities just based on history.
Like, most fund houses do not publish max drawdown metrics. Why?
Probably because they do not want potential clients spooked by downside potential. Highly respected funds can and do fall -60%...-70%...-80%.
Prime examples in Feb 2009: DODGX -59.2%, WAIOX -65.5%, LMOPX -78.1%.
That's heavy stuff, no? And these are/were all top rated funds. DODGX remains a M* darling. I own it. My family owns it. WAIOX was launched by Blake Walker, who went on to co-found Grandeur Peaks with Robert Gardiner. And, LMOPX was/is managed by the great Bill Miller.
Buy-and-hold investors just need to be prepared for such falls. During the turn-downs, they need to hold-on...not fret each monthly statement...for years, perhaps many years.
In M*'s words: "...investors who have investment horizons longer than 10 years, need high returns, and are comfortable with a high level of risk." I think they are seriously correct.
If investors can not handle these low points, allocations need to be made accordingly. Or, there needs to be an active drawdown protection plan...in place, defined, reconciled beforehand. Otherwise, we invariably make the worse mistakes...buy high and sell low.
And those are just examples from the last bear.
Ray Dalio of Bridgewater advocates the study of all markets across history to better understand correlations and realm of the possible.
So, let's take a look back at some other market extremes ("vulgarities")...
US. I believe equity market drew down -83% in May, 1932.
Here's what it looked like:
Recovery did not happen quickly as in recent years. It took 13 years for the market to hit a new high, forget cost of money or lost opportunity cost.
I know safe-guards were instituted to help prevent a repeat, but it always seems like each crisis is triggered by something different.
Here's NASDAQ...not really that long ago:
NASDAQ drew down -75% and has still not recovered nearly 12 years later!
We suffered through the Savings & Loan fiasco in '80s/'90s only to repeat it enforce with Sub Prime Mortgage fiasco in late 00's. Credit markets froze. Just like during the Great Depression. And, if the Fed had not stepped-up to back money market funds, we could very well have had a repeat of 1932. Don't you think?
OK. Let's agree that 2008 was an outlier. But still, outliers happen...and probably more often than we like to acknowledge, especially when we are in the midst of a bull market...and, like MJG and Seth Klarman and others observe, markets usually goes up...in fact, they are predisposed to go up.
So, we'll acknowledge the Internet Bubble was an outlier.
The -23% drawdown on a single day in Oct 1987 was an outlier.
The Great Depression was an outlier.
The folks at Long Term Capital Management thought that bond spread behavior was an outlier in 1998 after Russia defaulted. Here's how that went down:
Hmmm, gold? Twenty years of drawdown...
I really don't need to plot the endgame on Enron, Bear Stearns, Kodak...do I?
Japan. I believe it is still recovering from asset collapse in the 90's, despite the healthy run-up last year. Folks in that market remain underwater.
And then there's are the classic bubbles in history: Dutch Tulips, South Sea Company, Mississippi Company...
Call them all outliers. OK. But recognize they can happen.
So, be prepared.
Enough fun.
Hoping all the above helps get me back in your good graces...if just a little.
Charles
What I posed to you was
>> For the postwar period and especially for the last 30-35 years, I do not think your other assertions really hold and should be counted on to inevitably happen:
\\\... will this time be different? Will it go -30...-40...-50%? Worse?
>> no
\\\ Stocks can go to zero.
>> no!
\\\ Markets can go to (near) zero.
>> nah
\\\ Just about every asset class in every sector in every country has proven it can draw down -70...-80...-90%.
>>> Some specific examples ***since 1945*** would be helpful, but there are none, in the way described.
This is a way of something that, actually, a great many things are different now.
Your citing of three funds is trivial and unresponsive. It is like tracking the great Heebner and saying Boo!! Or citing tulips and gold and silver panics.
Moreover, you and many still hold DODGX, and what does that tell you?
So I am wondering what such a scholar and researcher as you actually *learns* from his work! Meaning concludes, acts upon. Fearmongering is just so different from prudence. I am trying very hard not to come to a new conclusion of intellectual disrespect.
Finally, what concretely do you mean by 'be prepared'? What steps to counter your 'stocks can go to zero and markets too'?
Or would you say I simply overread you, and you were talking **only** about individual sectors and individual companies --- which only an idiot would put all of his moneys into? Is that what you were saying? I misunderstood? Well, this is a forum about funds, not individual holdings and Japanlike bubbles. It is as though you do not know what the Fed does and how it works. And we know that that supposition is not true of you and your work.
Perhaps in your attempts to convince those who refuse to even listen you would be wise to heed the words of George Bernard Shaw: "I learned long ago, never to wrestle with a pig. You get dirty, and besides, the pig likes it."
Regards,
Mark