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Paul Merriman: How Much Of Your Retirement Portfolio Belongs In Bonds?
I'd argue that bonds are like the fuel in the tank and the oil in the engine. The liquidity that keeps the economic machine from seizing up and keeps the cylinders firing. Without bonds the economic system would come to a halt.
Interesting quotes from Article:
"I have spent years studying this table, which I update annually. For readers who like numbers, here are a few things I've learned:
Adding 10 percentage points of equities (and subtracting 10 points of bonds) adds about 0.55% to the long-term return. Each additional 10 percentage points of equities increases a portfolio's volatility by 10% to 20%. Each additional 10 percentage points of stock exposure increases losses by 4% to 6%.
Finally, a few notes about this particular 45-year period of market history.
This was a tough period for bonds, including sharp increases and prolonged, deep decreases in interest rates. In the early 1980s, interest rates were so high that banks were offering 16.5% on 2.5-year certificates of deposit. Many conservative investors thought they would never need to own stocks again. Wrong!
During this period, investors in the 100% diversified equity portfolio experienced 15 consecutive years (1975-1989) of positive returns and a 25-year period (1975-1999) with only one losing calendar year (1990)."
Paul Merriman is predictable with his workmanlike analyses of the marketplace. The current article is no exception.
The red meat in the article is the reference he makes to his “fine-tuning table”. The table provides equity/bond mix returns data starting in 1970. The second part of his table shows several summary Bear market drawdown measures to help assess market risk.
Here is a direct Link to this useful data presentation:
The Merriman tables are very comprehensive. They even degrade annual returns by subtracting an assumed 1% management fee. However, I find one major shortcoming in the presentations that is easily rectified.
The summary data shows annual returns and standard deviations, but does not include Compound (geometric) returns. Compound Annual Growth Rate (CAGR) measures actual integrated investment returns over the long haul.
Volatility (standard deviation) subtracts from average annual returns in terms of determining end wealth. Given equal average annual returns, the portfolio that accomplishes this with lower volatility rewards the portfolio holder with a higher end wealth.
If annual returns and standard deviations are accessible, it is an easy task to calculate CAGR. Here is the equation:
CAGR + 1 equals the square root of the entire two terms (1 + AR) squared minus SD squared.
The AR is the average annual return and the SD is the annual standard deviation. The Merriman data presentation permits the calculation to be made.
If you don’t like using the full 45 years of data incorporated into the Merriman summary stats, the tables are sufficiently complete that a user can select his favored timeframe, and do his own summary statistics.
I calculated the CAGR for the Merriman equity/bond mix tables. Not surprisingly, the portfolio CAGR end wealth rewards are not quite so bushytailed, but they still monotonically increase as the equity percentage increases. The Wall Street axiom that ties reward and risk together remains intact.
The simple equation that couples the more pertinent CAGR to annual returns and its standard deviation is a useful addition to your toolkit. I hope you are or become familiar with it. It will make you a better informed investor and/or better able to challenge your financial advisor.
You asked if the risk-reward curve has a distinctive character such that it attracts special financial attention. The simple answer is No.
The marketplace risk-reward curve rises in a continuous well-behaved manner as the equity fraction increases; higher risk, higher rewards. There are no outstanding features.
Note that I did not answer the title question in the original post; “How Much Of Your Retirement Portfolio Belongs In Bonds?” One size does not fit all; there is no single overarching reply. Each investor has a logical different answer to that question for very disparate logical reasons. The answers lead to the complete spectrum of the equity-bond tradeoff.
One historical standing rule is that younger folks should have a portfolio that heavily favors equity positions, while older folks should be more conservative with a portfolio weighted towards bond products.
Today, some industry experts are challenging that wisdom. In the end, it depends on the individual investor, his wealth, his plans, his risk aversion. One size definitely does not fit all.
To help answer your question, I input the annual returns (AR) data and the cumulative annual growth rate (CAGR) data into a curve fitting program available on the Internet. The program automatically “best fits” the data sets to Linear, Exponential, Power, and Logarithmic equation formats.
This statistical curve fitting was done on the following mathematical website:
Goodness of fit values (correlation coefficients) were high for all the tested equations. The Logarithmic form was slightly superior for all cases examined. However, the Linear modeling did an excellent job also. For simplicity, I’ll report the Linear modeling. Here are the equations:
AR = 0.452 X SD +6.41 Correlation Coefficient = 0.972
The percentage signs were just ignored in these correlations (use 5 for 5%). You get to choose whatever volatility (Standard Deviation) you find comfortable, and the equations provide an estimate of returns using the historical data sets.
For every unit that you move up the risk curve, estimated AR increases by 0.452 units and the CAGR increases by 0.369 units. If the more complex Logarithmic formulation were deployed, a slightly more refined estimate would be predicted that is not constant over the entire range of Standard Deviations.
This submittal might be a little more than folks wanted, but it puts the trends and relationships into a rigorous statistical framework that uses historical data. I hope you find this first-order analysis of some utility.
I found review of the chart most interesting as my asset allocation range for stocks is a low of 40% to a high of 60%. From the chart, the 40/60 mix returned 8.8% with a worst drawdown of 25% while the 60/40 mix returned 9.9% with a worst drawdown of 38%. Since, 2009 the 40/60 mix has returned an average of 7.4% per year while the 60/40 mix returned 10.0% ... and, Old_Skeet's asset allocation ranged for the most part somewhere in between these two mixes; but, with moving in and out of some special equity positions (spiffs) averaged 15.7% for the same time frame. And, folks that is a lot of added alpha being generated from using those spiffs. From my recollection, I believe there were a few times that my asset allocation did work its way, from capital appreciation, on my equities upwards to around 65% before being trimmed back.
In troubling market times my portfolio's asset allocation would allow for a mix of cash (30%), bonds (30%) stocks(40%). Currently, I am at about cash 20%, bonds 20%, stocks 50% and other 10% as reflected in my most recent portfolio's Instant Xray review.
As Flo states in those Progressive Insurance commercials ... "Feeling Kinda Good" ... and, "lucky" after this brief study.
Now off to the beach ... and, hoping you have a pleasant summer weekend.
Have a great time at the beach. I always enjoy it too.
Congratulations on the success of your portfolio. That's like being on the beach full time. Your Alpha is especially impressive. It's like a plus 3 sigma positive returns. I wish everyone similar success, but that's highly unlikely.
What fraction of your outperformance came from the spiffs? Whoever guided you to them did an outstanding job. What organization or individual ( a specific name is not necessary) provided these profitable investment insights over such an extended timeframe?
I have always hesitated to act on spiffs because of the conflictive incentives that come with them.
The person that I learned the most from regarding special investment strategies was my late father. I have commented on some of these in prior post. A few I most often use are noted below.
One that has been a family favorite, for a good number years, is a seasonal strategy often referred to as “Sell in May and Stay Away to St. Leger’s Day. Seems to work more times than not. Naturally, I don’t sell out of the markets; but, I do reduce my allocation to equities during the summer months and then scale back upwards towards fall, through the winter months and usually through spring. If things began to fall apart I exit the special position(s).
Another one is to make sure I have a good weighting towards oversold sectors. I strive to maintain at least a five percent weighting in minor sectors of materials, real estate, communication services and utilities. And, in the major sectors of consumer cyclical, financial services, energy, industrials, technology, consumer defensive and healthcare, I strive to maintain at least a nine percent weighting in these (even if they are out of favor). In doing the math this adds up to 83%. This leaves 17% that can be move to sectors where opportunity is perceived to knock. I start with an asset compass to track the assets that I have chosen to follow and invest in. In addition, I use some simple technical analysis indicators such as money flow, relative strength, MACD, slow stochastic and simple moving averages (50 & 200) plus the price action itself along with P/E Ratios and a couple of other things.
Nothing really fancy to write about just some old fashion down home research and deployment of capital when deemed warranted. Think back to my writings as to how I use to bet the dogs many years ago. It was a simple system that worked more times than not. That was to bet three dogs in each race to win, place or show and especially if they were running in lanes two through seven. Often times the dog running in lane one gets pinched into the rail. After doing statistical analysis on which lanes win more often than the others and betting strong dogs when running in them … Well it develops into a clever system type approach.
And, last but not least I feel my investment sleeve system that I have written about in the past has been most beneficial along with selecting quality funds to invest in that have a history of good performance has also played a part to this success.
This is probably not the response you were seeking … but, it is what it is. And, that is a good number of times it comes down to nothing more than “A Scientific Wild Ass Guess.”
Thank you so very much for your reply. It is much more than I expected. It informs me and I suspect it informs many MFO regulars.
My number one takeaway from your post is not the specific techniques and rules that you deploy; it is the consistency and the commitment that you have made for your system. You anticipate some losers, but statistically expect that the winners will overwhelm the lesser losers. And you persist. I suspect that your loyalty to your methods are as important as the methods themselves.
You've had success in the past. I wish you even more investment success in the future as you stick to your guns. Keep firing!
Thanks davidrmoran, I'll take a look and study the fund.
But, back to what MJG had to say about loses ... They come with investing just in most sporting events a loss is part of the game. And, this leads me to talk about a spiff I made last fall that did not work to my expectations so I closed it out. And, that was a spiff in commodities. In the past, I have several times opened a position in commodities and did very well with it. I thought the world economy was stronger than it perhaps really is. After all we need commodities to make things and they are a big part of consumption used by most producers. Commodities recently have been flat to down so that speaks volumes about the "real" economy in my book. Want a good read on the economy ... look to commodities. Sure, supply vs. demand plays a big part and so does the value of the Dollar ... but, overall as a group they have been in decline. So, if things really begin to improve in the economy demand for commodities will increase even with/against a strong Dollar which will have some effect on their price for sure. So, I am watching them as one of my indicators to get a read on the overall global economy. Some say, you only need to watch copper.
Now, how many of you have been to the dog tracks and observed the dog running in lane one often gets pinched into the rail during the course of the race? With this, betting the dog in lane one, I have found, is a hard win. So, watch the action in commodities for a read on the health of the global economy. Also, as I write, it seems to be a global central bank's strategy is to print money thus inflating asset prices. So, where will this take us? Most all of us on the board have good brains and can think through this stuff. Over long periods of time it is hard to beat the returns found in the stock market. And, when is the best time to buy? When prices are soft! Are prices soft now? Absolutely not! And, this thinking goes for bonds as they to are kinda pricey at the moment too.
You have now been exposed to some of Old_Skeet's thinking.
If I keep going ... I'll talk myself into raising my cash allocation even higher.
So, I am going to get off the soap box ... for now ... and, its back to the beach.
Sorry, I can't even relate to this question - as posed by Merreman. ... Problem is this: The past 35 years have been decidedly atypical for interest rates (and by association bonds) which, except for only brief respites, have trended continually downward since around 1980 when Fed Chair Paul Volker burst the inflation bubble by ratcheting-up the overnight lending rate to 20%. Making investment allocation decisions at/near market highs is risky. That's true not only for bonds, but for stocks, gold, oil, emerging markets and real estate. So, a healthy dose of skepticism regarding bonds is warranted.
I'd be much more comfortable if Merriman had asked what percentage of one's retirement savings should be in "fixed-income". That's a broader compendium of the (albeit bond) market and would allow, perhaps, greater consideration of short-term bonds, ultra-shorts, cash, foreign currencies, high yield and the like. Certainly, retirees should be in some of these fixed-income assets. For the most part, I'll defer to the fixed-income/allocation people at T. Rowe Price. I suspect their mathematicians and analysists are at least as capable as the good people here at MFO. Unless you have humongous quantities of money to invest, let folks like that make the decision for you under the umbrella of one or more of their allocation funds. They're very good at it. I like TRRIX and RPSIX. On the more aggressive end there's PRWCX which continues to elicit favorable reactions from MFO board participants.
As an aside, I like John Bogle's rule of thumb - but only as a starting point for one's own analysis. He has long advocated having a percentage equivalent to one's age invested in bonds (I'd expand that to the broader "fixed-income" category). And, if my read is correct, Bogle has modified the advice somewhat in recent years, faced with the harsh realities of historically low interest rates. One acquiescence of reality has been his advocating of moving to shorter and shorter bond maturities as rates declined; and the other is his more recent advice to include one's anticipated Social Security income as part of one's bond holdings (effectively reducing one's actual allocation to bonds). The fellow may at times appear rigid and stubborn - but he's not dumb. ---
Footnote: While I don't consider my own allocation decisions necessarily pertinent to the discussion or instructive to others, in the interest of full disclosure here's my latest M* X-Ray (age 70).
Cash 17% Bonds 28% U.S. Stocks 31% Foreign Stocks 12% Not Classified 13%
I believe Hank is spot on-target when he recommends that a broadly defined two category portfolio would be more precisely classified equities/fixed income over the equities/bonds designation.
After my initial postings here, I recognized that the “Bonds” descriptor should be expanded to the more comprehensive “Fixed Income” descriptor. To avoid subsequent exchange confusion, I elected not to make that adjustment. That was a mistake; sorry about that.
Portfolio asset allocation is a very nuanced, personal decision. Not only is it personal, it changes over time. One size definitely does not fit all. And, in the investment universe, getting it right is an elusive goal. It is hard to find experts who consistently get it right more often than a fair coin toss.
The CXO Advisory Group tested the accuracy of 68 experts over an extended timeframe. Results were less than impressive. Here is the Link to CXO’s final Guru Grades report:
The cumulative expert accuracy hovered around the uninspired 47% level for most of the study. Very few of the experts were able to score correct predictions two-thirds of the forecasts. In general, experts are overrated.
Experts continue to disappoint in terms of their financial insights. I recently read a book titled “Wrong” by David H. Freedman. You guys might find it useful. The subtitle of the book is “Why experts keep failing us-And how to know not to trust them”. You might want to give it a try.
H. L. Menchen said: “There is always a well known solution to every human problem-neat, plausible, and wrong”. Far too often, the Gurus tout this wrong pathway.
These days, I prefer investment solutions that feature simple mutual fund portfolios that are Index product heavy. Leonardo da Vinci said it best: “Simplicity is the ultimate sophistication”.
MFOer Hank observed that John Bogle has recently recommended adding Social Security benefits to the fixed income segment of a portfolio’s asset allocation. I agree. I’ve been doing that for many years. I also consider both my and my wife’s corporate retirement benefits as an integral part of our fixed income asset allocation. Given that philosophy, these are substantial additions to our Fixed Income holdings.
Well, the Merriman article triggered some stimulating exchanges from the MFO Board. It was fun and illuminating. Thank you all for participating. I’ve said all I want to say on this matter.
I get your point, but this sentence is self-contradicting, whether for interest rates, inflation, various infections, batting averages, mpg, human height, anything.
As for the general Bogle / age / bonds thing, anyone who does so might want to dig deeper into it instead of simply parroting hoary bromides. Was not technically true back when, is not so now, was not so in between.
You are not getting the point, facts-man. Think about it. Meaning datasets. What does it mean to insist that the last 3.5 decades of anything are or have been 'atypical'? Maybe if you are speaking of global temperatures. (For some, not.) But not this. Would you assert that that last period of stock trading has been 'atypical' because commissions are so very much lower than they were before 1980? How about AIDS treatments? Dental health in Asia? GOP centrism, or actually its opposite? Asian youth classical chops? NBA skin color? American female assertiveness in the workforce? Youngster coddling / self-esteem movement? I mean, think thoughtfully about the wording. What constitutes historical inertia and typicality / atypicality for you?
How long a chart? Tell us your time period, then we can discuss atypical.
Dictionary samples: - the postal service delivered the package with atypical speed - since that's an atypical response for an infant, you might want to have her hearing tested - atypical menstruation
If you still do not get it, that's cool; I got nothing further.
It was the second definition I had in mind while writing. I can't say whether the 1980-2015 period displayed on Kevin's linked CHART http://www.ritholtz.com/blog/wp-content/uploads/2010/08/1790-Present.gif is "irregular" compared to other periods, but it certainly appears "unusual" to me. We've fallen from around 18-20% on the 10-year to as low as 2%. No other period displayed comes close to that decline in magnitude.
DavidM - You are entitled to your own interpretation of word/words. However, that should not blind you to the broader message of the writer - nor lead you to attempt to cast another in the role of villege idiot as you seem prone to do. You know all too well that words often convey a wide range of meanings and it is context which further clarifies author's intent.
FYI: Some words synonymous with or related to "atypical" - from Thesaurus.com
Added: DavidM - No need to attack Kevin. The burden of proof is on you to produce a contradictory chart. Generally, unless otherwise specified, I assume our discussions of stocks, bonds, interest rates, mutual funds, etc. post-date the Civil War Period (from around 1865 on). However, you can toss-out anything you want. Go clear back to the Dark Ages if you can find it!
It seems people are nitpicking over the meaning of a word (a sport I too enjoy), while ignoring what I think is a pretty shared understanding of the nature of rates over the past 35 years vs. other time periods.
Another word that people seem to have problems with is "cyclical". With that in mind, take another look at the graph, or sit back and enjoy Blood, Sweat, and Tears take on rates (Spinning Wheel):
Comments
I'd argue that bonds are like the fuel in the tank and the oil in the engine. The liquidity that keeps the economic machine from seizing up and keeps the cylinders firing. Without bonds the economic system would come to a halt.
Interesting quotes from Article:
"I have spent years studying this table, which I update annually. For readers who like numbers, here are a few things I've learned:
Adding 10 percentage points of equities (and subtracting 10 points of bonds) adds about 0.55% to the long-term return.
Each additional 10 percentage points of equities increases a portfolio's volatility by 10% to 20%.
Each additional 10 percentage points of stock exposure increases losses by 4% to 6%.
Finally, a few notes about this particular 45-year period of market history.
This was a tough period for bonds, including sharp increases and prolonged, deep decreases in interest rates. In the early 1980s, interest rates were so high that banks were offering 16.5% on 2.5-year certificates of deposit. Many conservative investors thought they would never need to own stocks again. Wrong!
During this period, investors in the 100% diversified equity portfolio experienced 15 consecutive years (1975-1989) of positive returns and a 25-year period (1975-1999) with only one losing calendar year (1990)."
Paul Merriman is predictable with his workmanlike analyses of the marketplace. The current article is no exception.
The red meat in the article is the reference he makes to his “fine-tuning table”. The table provides equity/bond mix returns data starting in 1970. The second part of his table shows several summary Bear market drawdown measures to help assess market risk.
Here is a direct Link to this useful data presentation:
http://paulmerriman.com/fine-tuning-asset-allocation-2015/
The Merriman tables are very comprehensive. They even degrade annual returns by subtracting an assumed 1% management fee. However, I find one major shortcoming in the presentations that is easily rectified.
The summary data shows annual returns and standard deviations, but does not include Compound (geometric) returns. Compound Annual Growth Rate (CAGR) measures actual integrated investment returns over the long haul.
Volatility (standard deviation) subtracts from average annual returns in terms of determining end wealth. Given equal average annual returns, the portfolio that accomplishes this with lower volatility rewards the portfolio holder with a higher end wealth.
If annual returns and standard deviations are accessible, it is an easy task to calculate CAGR. Here is the equation:
CAGR + 1 equals the square root of the entire two terms (1 + AR) squared minus SD squared.
The AR is the average annual return and the SD is the annual standard deviation. The Merriman data presentation permits the calculation to be made.
If you don’t like using the full 45 years of data incorporated into the Merriman summary stats, the tables are sufficiently complete that a user can select his favored timeframe, and do his own summary statistics.
I calculated the CAGR for the Merriman equity/bond mix tables. Not surprisingly, the portfolio CAGR end wealth rewards are not quite so bushytailed, but they still monotonically increase as the equity percentage increases. The Wall Street axiom that ties reward and risk together remains intact.
The simple equation that couples the more pertinent CAGR to annual returns and its standard deviation is a useful addition to your toolkit. I hope you are or become familiar with it. It will make you a better informed investor and/or better able to challenge your financial advisor.
Best Wishes.
You asked if the risk-reward curve has a distinctive character such that it attracts special financial attention. The simple answer is No.
The marketplace risk-reward curve rises in a continuous well-behaved manner as the equity fraction increases; higher risk, higher rewards. There are no outstanding features.
Note that I did not answer the title question in the original post; “How Much Of Your Retirement Portfolio Belongs In Bonds?” One size does not fit all; there is no single overarching reply. Each investor has a logical different answer to that question for very disparate logical reasons. The answers lead to the complete spectrum of the equity-bond tradeoff.
One historical standing rule is that younger folks should have a portfolio that heavily favors equity positions, while older folks should be more conservative with a portfolio weighted towards bond products.
Today, some industry experts are challenging that wisdom. In the end, it depends on the individual investor, his wealth, his plans, his risk aversion. One size definitely does not fit all.
To help answer your question, I input the annual returns (AR) data and the cumulative annual growth rate (CAGR) data into a curve fitting program available on the Internet. The program automatically “best fits” the data sets to Linear, Exponential, Power, and Logarithmic equation formats.
This statistical curve fitting was done on the following mathematical website:
http://www.had2know.com/academics/regression-calculator-statistics-best-fit.html
Goodness of fit values (correlation coefficients) were high for all the tested equations. The Logarithmic form was slightly superior for all cases examined. However, the Linear modeling did an excellent job also. For simplicity, I’ll report the Linear modeling. Here are the equations:
AR = 0.452 X SD +6.41 Correlation Coefficient = 0.972
CAGR = 0.369 X SD + 6.71 Correlation Coefficient = 0.950
The percentage signs were just ignored in these correlations (use 5 for 5%). You get to choose whatever volatility (Standard Deviation) you find comfortable, and the equations provide an estimate of returns using the historical data sets.
For every unit that you move up the risk curve, estimated AR increases by 0.452 units and the CAGR increases by 0.369 units. If the more complex Logarithmic formulation were deployed, a slightly more refined estimate would be predicted that is not constant over the entire range of Standard Deviations.
This submittal might be a little more than folks wanted, but it puts the trends and relationships into a rigorous statistical framework that uses historical data. I hope you find this first-order analysis of some utility.
Best Wishes.
I found review of the chart most interesting as my asset allocation range for stocks is a low of 40% to a high of 60%. From the chart, the 40/60 mix returned 8.8% with a worst drawdown of 25% while the 60/40 mix returned 9.9% with a worst drawdown of 38%. Since, 2009 the 40/60 mix has returned an average of 7.4% per year while the 60/40 mix returned 10.0% ... and, Old_Skeet's asset allocation ranged for the most part somewhere in between these two mixes; but, with moving in and out of some special equity positions (spiffs) averaged 15.7% for the same time frame. And, folks that is a lot of added alpha being generated from using those spiffs. From my recollection, I believe there were a few times that my asset allocation did work its way, from capital appreciation, on my equities upwards to around 65% before being trimmed back.
In troubling market times my portfolio's asset allocation would allow for a mix of cash (30%), bonds (30%) stocks(40%). Currently, I am at about cash 20%, bonds 20%, stocks 50% and other 10% as reflected in my most recent portfolio's Instant Xray review.
As Flo states in those Progressive Insurance commercials ... "Feeling Kinda Good" ... and, "lucky" after this brief study.
Now off to the beach ... and, hoping you have a pleasant summer weekend.
Old_Skeet
Have a great time at the beach. I always enjoy it too.
Congratulations on the success of your portfolio. That's like being on the beach full time. Your Alpha is especially impressive. It's like a plus 3 sigma positive returns. I wish everyone similar success, but that's highly unlikely.
What fraction of your outperformance came from the spiffs? Whoever guided you to them did an outstanding job. What organization or individual ( a specific name is not necessary) provided these profitable investment insights over such an extended timeframe?
I have always hesitated to act on spiffs because of the conflictive incentives that come with them.
Best Wishes.
Thanks for the compliment and the inquiry.
The person that I learned the most from regarding special investment strategies was my late father. I have commented on some of these in prior post. A few I most often use are noted below.
One that has been a family favorite, for a good number years, is a seasonal strategy often referred to as “Sell in May and Stay Away to St. Leger’s Day. Seems to work more times than not. Naturally, I don’t sell out of the markets; but, I do reduce my allocation to equities during the summer months and then scale back upwards towards fall, through the winter months and usually through spring. If things began to fall apart I exit the special position(s).
Another one is to make sure I have a good weighting towards oversold sectors. I strive to maintain at least a five percent weighting in minor sectors of materials, real estate, communication services and utilities. And, in the major sectors of consumer cyclical, financial services, energy, industrials, technology, consumer defensive and healthcare, I strive to maintain at least a nine percent weighting in these (even if they are out of favor). In doing the math this adds up to 83%. This leaves 17% that can be move to sectors where opportunity is perceived to knock. I start with an asset compass to track the assets that I have chosen to follow and invest in. In addition, I use some simple technical analysis indicators such as money flow, relative strength, MACD, slow stochastic and simple moving averages (50 & 200) plus the price action itself along with P/E Ratios and a couple of other things.
Nothing really fancy to write about just some old fashion down home research and deployment of capital when deemed warranted. Think back to my writings as to how I use to bet the dogs many years ago. It was a simple system that worked more times than not. That was to bet three dogs in each race to win, place or show and especially if they were running in lanes two through seven. Often times the dog running in lane one gets pinched into the rail. After doing statistical analysis on which lanes win more often than the others and betting strong dogs when running in them … Well it develops into a clever system type approach.
And, last but not least I feel my investment sleeve system that I have written about in the past has been most beneficial along with selecting quality funds to invest in that have a history of good performance has also played a part to this success.
This is probably not the response you were seeking … but, it is what it is. And, that is a good number of times it comes down to nothing more than “A Scientific Wild Ass Guess.”
Respectfully,
Old_Skeet
Thank you so very much for your reply. It is much more than I expected. It informs me and I suspect it informs many MFO regulars.
My number one takeaway from your post is not the specific techniques and rules that you deploy; it is the consistency and the commitment that you have made for your system. You anticipate some losers, but statistically expect that the winners will overwhelm the lesser losers. And you persist. I suspect that your loyalty to your methods are as important as the methods themselves.
You've had success in the past. I wish you even more investment success in the future as you stick to your guns. Keep firing!
Best Regards.
But, back to what MJG had to say about loses ... They come with investing just in most sporting events a loss is part of the game. And, this leads me to talk about a spiff I made last fall that did not work to my expectations so I closed it out. And, that was a spiff in commodities. In the past, I have several times opened a position in commodities and did very well with it. I thought the world economy was stronger than it perhaps really is. After all we need commodities to make things and they are a big part of consumption used by most producers. Commodities recently have been flat to down so that speaks volumes about the "real" economy in my book. Want a good read on the economy ... look to commodities. Sure, supply vs. demand plays a big part and so does the value of the Dollar ... but, overall as a group they have been in decline. So, if things really begin to improve in the economy demand for commodities will increase even with/against a strong Dollar which will have some effect on their price for sure. So, I am watching them as one of my indicators to get a read on the overall global economy. Some say, you only need to watch copper.
Now, how many of you have been to the dog tracks and observed the dog running in lane one often gets pinched into the rail during the course of the race? With this, betting the dog in lane one, I have found, is a hard win. So, watch the action in commodities for a read on the health of the global economy. Also, as I write, it seems to be a global central bank's strategy is to print money thus inflating asset prices. So, where will this take us? Most all of us on the board have good brains and can think through this stuff. Over long periods of time it is hard to beat the returns found in the stock market. And, when is the best time to buy? When prices are soft! Are prices soft now? Absolutely not! And, this thinking goes for bonds as they to are kinda pricey at the moment too.
You have now been exposed to some of Old_Skeet's thinking.
If I keep going ... I'll talk myself into raising my cash allocation even higher.
So, I am going to get off the soap box ... for now ... and, its back to the beach.
Enjoy your summer ...
I really enjoy your insights on this subject. I had a good chuckle regarding the "Scientific Wild Ass Guess".
I have always felt that a bit of luck has a hand in our triumphs.
I'd be much more comfortable if Merriman had asked what percentage of one's retirement savings should be in "fixed-income". That's a broader compendium of the (albeit bond) market and would allow, perhaps, greater consideration of short-term bonds, ultra-shorts, cash, foreign currencies, high yield and the like. Certainly, retirees should be in some of these fixed-income assets. For the most part, I'll defer to the fixed-income/allocation people at T. Rowe Price. I suspect their mathematicians and analysists are at least as capable as the good people here at MFO. Unless you have humongous quantities of money to invest, let folks like that make the decision for you under the umbrella of one or more of their allocation funds. They're very good at it. I like TRRIX and RPSIX. On the more aggressive end there's PRWCX which continues to elicit favorable reactions from MFO board participants.
As an aside, I like John Bogle's rule of thumb - but only as a starting point for one's own analysis. He has long advocated having a percentage equivalent to one's age invested in bonds (I'd expand that to the broader "fixed-income" category). And, if my read is correct, Bogle has modified the advice somewhat in recent years, faced with the harsh realities of historically low interest rates. One acquiescence of reality has been his advocating of moving to shorter and shorter bond maturities as rates declined; and the other is his more recent advice to include one's anticipated Social Security income as part of one's bond holdings (effectively reducing one's actual allocation to bonds). The fellow may at times appear rigid and stubborn - but he's not dumb.
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Footnote: While I don't consider my own allocation decisions necessarily pertinent to the discussion or instructive to others, in the interest of full disclosure here's my latest M* X-Ray (age 70).
Cash 17%
Bonds 28%
U.S. Stocks 31%
Foreign Stocks 12%
Not Classified 13%
I believe Hank is spot on-target when he recommends that a broadly defined two category portfolio would be more precisely classified equities/fixed income over the equities/bonds designation.
After my initial postings here, I recognized that the “Bonds” descriptor should be expanded to the more comprehensive “Fixed Income” descriptor. To avoid subsequent exchange confusion, I elected not to make that adjustment. That was a mistake; sorry about that.
Portfolio asset allocation is a very nuanced, personal decision. Not only is it personal, it changes over time. One size definitely does not fit all. And, in the investment universe, getting it right is an elusive goal. It is hard to find experts who consistently get it right more often than a fair coin toss.
The CXO Advisory Group tested the accuracy of 68 experts over an extended timeframe. Results were less than impressive. Here is the Link to CXO’s final Guru Grades report:
http://www.cxoadvisory.com/gurus/
The cumulative expert accuracy hovered around the uninspired 47% level for most of the study. Very few of the experts were able to score correct predictions two-thirds of the forecasts. In general, experts are overrated.
Experts continue to disappoint in terms of their financial insights. I recently read a book titled “Wrong” by David H. Freedman. You guys might find it useful. The subtitle of the book is “Why experts keep failing us-And how to know not to trust them”. You might want to give it a try.
H. L. Menchen said: “There is always a well known solution to every human problem-neat, plausible, and wrong”. Far too often, the Gurus tout this wrong pathway.
These days, I prefer investment solutions that feature simple mutual fund portfolios that are Index product heavy. Leonardo da Vinci said it best: “Simplicity is the ultimate sophistication”.
MFOer Hank observed that John Bogle has recently recommended adding Social Security benefits to the fixed income segment of a portfolio’s asset allocation. I agree. I’ve been doing that for many years. I also consider both my and my wife’s corporate retirement benefits as an integral part of our fixed income asset allocation. Given that philosophy, these are substantial additions to our Fixed Income holdings.
Well, the Merriman article triggered some stimulating exchanges from the MFO Board. It was fun and illuminating. Thank you all for participating. I’ve said all I want to say on this matter.
Best Regards.
I get your point, but this sentence is self-contradicting, whether for interest rates, inflation, various infections, batting averages, mpg, human height, anything.
As for the general Bogle / age / bonds thing, anyone who does so might want to dig deeper into it instead of simply parroting hoary bromides. Was not technically true back when, is not so now, was not so in between.
CHART
Kevin
Dictionary samples:
- the postal service delivered the package with atypical speed
- since that's an atypical response for an infant, you might want to have her hearing tested
- atypical menstruation
If you still do not get it, that's cool; I got nothing further.
Typical of tunnel thinking, your preconceived concept of the meaning of "atypical" has led you to consider only one meaning of the term.
Webster's two primary definitions are (1) IRREGULAR, (2) UNUSUAL.
http://www.merriam-webster.com/dictionary/atypical
It was the second definition I had in mind while writing. I can't say whether the 1980-2015 period displayed on Kevin's linked CHART http://www.ritholtz.com/blog/wp-content/uploads/2010/08/1790-Present.gif is "irregular" compared to other periods, but it certainly appears "unusual" to me. We've fallen from around 18-20% on the 10-year to as low as 2%. No other period displayed comes close to that decline in magnitude.
DavidM - You are entitled to your own interpretation of word/words. However, that should not blind you to the broader message of the writer - nor lead you to attempt to cast another in the role of villege idiot as you seem prone to do. You know all too well that words often convey a wide range of meanings and it is context which further clarifies author's intent.
FYI: Some words synonymous with or related to "atypical" - from Thesaurus.com
abnormal
bizarre
deviant
different
flaky
odd
peculiar
strange
unusual
weird
aberrant
anomalistic
anomalous
curious
eccentric
exceptional
extraordinary
strange
uncommon
unexpected
unnatural
unorthodox
anomalous
devious
divergent
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Added: DavidM - No need to attack Kevin. The burden of proof is on you to produce a contradictory chart. Generally, unless otherwise specified, I assume our discussions of stocks, bonds, interest rates, mutual funds, etc. post-date the Civil War Period (from around 1865 on). However, you can toss-out anything you want. Go clear back to the Dark Ages if you can find it!
Another chart of interest rates since the Constitution was adopted, highlighting max/min points:
http://finance.yahoo.com/blogs/talking-numbers/222-years-interest-history-one-chart-173358843.html
It seems people are nitpicking over the meaning of a word (a sport I too enjoy), while ignoring what I think is a pretty shared understanding of the nature of rates over the past 35 years vs. other time periods.
Another word that people seem to have problems with is "cyclical". With that in mind, take another look at the graph, or sit back and enjoy Blood, Sweat, and Tears take on rates (Spinning Wheel):