Hi Guys,
A pair of articles recently published by Forbes yields both conventional and unconventional investing and portfolio advice.
The conventional advice was provided in an article by Laura Shin. She erroneously titles the article “10 Investing Tricks That Will Help You Outperform Most Investors”. Her list is really not “Tricks”; they are conventional wisdom. Here is the Link to the Forbes piece:
http://www.forbes.com/sites/laurashin/2013/10/29/10-investing-tricks-that-will-help-you-outperform-most-investors/The list was generated by the Boglehead group and directly represents John Bogle’s world financial views. They are all common sense and commonplace. The list truly does not contain any Eureka moments. Given the huge size of the Boglehead organization, it does however reflect the wisdom of the crowd.
I particularly like the cautions to “Don’t look at past returns to gauge future performance” and “Never try to time the market”. How we do asset allocation is within our control; future returns reside in the realm of fog uncertainty and are not in our control. Market timing requires both an exit and an entry timing decision to generate positive excess returns. Since market direction is not within our control, if the decision odds have roughly a 50/50 success probability, the likelihood that both components of the decision cycle are correct is only 25 %.
To expropriate an ancient market axiom, it is time in the marketplace, and not market timing that generates a healthy retirement portfolio. Consideration of the retirement portfolio leads to the unconventional advice.
This Shin article appeared in Forbes about a week ago. I believe it has been discussed on MFO earlier, but it does warrant another visit given its unconventional recommendation. Here is the Link to the Forbes article:
http://www.forbes.com/sites/laurashin/2013/10/21/the-counterintuitive-investing-trick-that-could-make-or-break-your-retirement/The short piece references the research completed by Wade Pfau. His insights are based on Monte Carlo computer simulations. They explore the significance of the sequence of market returns during retirement, not simply the average return value, in terms of portfolio survival odds.
Pfau concludes that a downward thrust of returns immediately following retirement can destroy retirement plans since recovery is a daunting challenge. An upward thrust of equity rewards during the early retirement years makes the long-term portfolio survival prospects almost bulletproof.
Based on his findings, Pfau recommends a shift to a heavy fixed income portfolio asset allocation during the early retirement years as a defensive measure, with a gradual shift to a more aggressive equity position as retirement progresses to protect against the erosive impact of inflation.
Please visit the referenced articles. One does not offer any Eureka moments, the other does. Both are worth the minor reading time commitment, and cost nothing more. Enjoy, learn, and prosper.
Best Regards.
Comments
I think you have found your tag line ... Enjoy, learn and prosper.
Skeeter
When will this hoary bromide be given a rest? Never, I suppose.
1) What good are past returns --- none? Useless? Seriously? You might as well say as much about the market as a whole, or an individual company. What idiocy.
2) If not past returns, then on what basis do you select a fund or any investment? Nice mix? Promise of good outcomes? Manager prose? Sales pitch? Venerability of company? Explanation of method?
If I had paid attention to such, I woulda put mucho into VTSMX 21+ years ago instead of FLPSX, with the difference of 10k turning into ~60k instead of ~160k.
Hi Davidrmoran,
I hear your frustrations loud and clear with respect to the investment golden rule that “Don’t look at past returns to gauge future performance” is a bit overdone. It is.
I do it all the time. Financial and investment decisions are awash in an endless array of statistical data. Statistics is the mother’s milk of investing. Typically I use the past history to establish an expected base return rate as an evaluation point of departure. Next, I adjust this base rate based on more refined analysis and conditions.
When considering active fund candidates, we are seeking positive excess returns, Alpha, from the fund’s management team. So, when reviewing the manager’s performance record, past returns are an integral portion of the assessment. Surely it is not the sole evaluation component. Low cost, low portfolio turnover rates, manager tenure, and the depth of the firm’s research bench are also vital assessment factors.
Also, when considering a fund purchase, the overall market state, bull or bear, is another critical factor when judging an entry time. Again, statistical considerations are an important part of the decision choice. The market’s 200-day moving average status, the market’s Price-to-Earnings ratio relative position (Bob Shiller’s format), and the various forms of the equity high-low Logic Index (Norm Fosback’s formulation) aid in that judgment. All these statistical assemblies are compared to historical standards.
I was sloppy when I endorsed the Boglehead’s version of the Past Returns axiom. The version that I really accept is “Don’t look at past returns to GUARANTEE future performance”. Nobody can guarantee future outcomes. Past managerial performance does provide some guidance in that regard. If an auto manufacturer has a superior car reliability record, it is highly likely that it will continue that distinguished tradition; but it is never a full-proof guarantee.
Congratulations on your long-standing FLPSX decision. I too purchased that fund in the mid-1990s. It has proven to be a rewarding ride. Our choice, however, is only prescient in hindsight. Hindsight bias is always right. When I selected FLPSX, I was impressed by Joel Tillinghast’s credentials, but I never anticipated that he would be at the fund’s helm for this extended timeframe or that he would become a superstar within the Fidelity ranks. I suspect I was more lucky than prescient at that stage of my investment career.
Given Tillinghast’s other Fidelity assignments, the FLPSX fund is now team managed. I’m not sure that I’m comfortable with that change in terms of future fund prospects.
Thank you for your commentary. It allowed me to more precisely outline my position on the cloudy and maddening “future performance” restriction in all fund literature.
Best Wishes.