The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: StashDaddy on June 10, 2015, 06:25:40 AM
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Interesting:
His math is elegantly simple: the current dividend yield of about 2.0 percent plus projected earnings growth of around 5.0 percent produces a 7.0 percent return.
Bogle sees potential for the market’s price to earnings ratio (P/E), which is currently around 20, to revert to as low as 15 in coming years. That 25 percent drop equates to about a 3.0 percent annual negative speculative return.
When this negative return is subtracted from the 7.0 percent dividend and earnings return, it yields a projected overall return of about 4.0 percent.
http://www.benzinga.com/analyst-ratings/analyst-color/15/06/5579993/exclusive-vanguard-founder-john-bogle-projects-nominal-t (http://www.benzinga.com/analyst-ratings/analyst-color/15/06/5579993/exclusive-vanguard-founder-john-bogle-projects-nominal-t)
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Isn't that the guy people quote when talking about not timing the market and buying index funds?
I just don't see a P/E of 15 back with such low yield on bonds, so unless the interest rates were to creep back up to average levels, I don't see a PE of 15 happening.
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Isn't that the guy people quote when talking about not timing the market and buying index funds?
Yup, but he also believes in reversion to the mean.
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Isn't that the guy people quote when talking about not timing the market and buying index funds?
Yup, but he also believes in reversion to the mean.
Also just stating that ignores all the reasons why he advocates not market timing and buying index funds; those reasons have little or nothing to do with making a prediction.
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Us humans can't stop ourselves from making predictions, even when we believe they are less than worthless.
Not to mention, financial news media lives and dies on predictions. So they probably ask him and he gives it, but doesn't act on his opinions.
Remember, an opinion is not a position.
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Question:
For people still in early accumulation phase less than average returns is usually good when building your nest egg right?
Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...
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Question:
For people still in early accumulation phase less than average returns is usually good when building your nest egg right?
Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...
Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.
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This ignores reinvestment of the 2% back into the total return of 7%, at the 15x price, as well the effect that DCA would have as you are buying "underpriced" assets. I think Bogle's comments are more related to the "if you invested $10k today and did nothing..." scenario
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I think Bogle's comments are more related to the "if you invested $10k today and did nothing..." scenario
Yeah, well, that's exactly the situation someone who retires today will be in (except the retiree is doing worse than nothing - he or she is actively drawing down on the portfolio). Subpar market returns are necessarily good for accumulators (except to the extent they are correlated with other events that are bad for accumulators, like job layoffs), and necessarily bad for retiree-withdrawers.
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Question:
For people still in early accumulation phase less than average returns is usually good when building your nest egg right?
Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...
Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.
But it is still better than having your accumulation phase during a long bull market. It would be nice if I could continue buying at today's prices for the next 10 years, then have a raging bull market right as I retire.
Bear > flat > bull for accumulation.
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Question:
For people still in early accumulation phase less than average returns is usually good when building your nest egg right?
Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...
Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.
But it is still better than having your accumulation phase during a long bull market. It would be nice if I could continue buying at today's prices for the next 10 years, then have a raging bull market right as I retire.
Bear > flat > bull for accumulation.
I don't disagree at all w/ that. But these are things I don't worry about while in the accumulation. As I near my number I'll evaluate the environment around me and crunch some (conservative) numbers for future projections. What happened during my accumulation phase is outside of my control and therefore is only useful in a pure academic sense. It has no practical application for my actions in my life.
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Question:
For people still in early accumulation phase less than average returns is usually good when building your nest egg right?
Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...
Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.
But it is still better than having your accumulation phase during a long bull market. It would be nice if I could continue buying at today's prices for the next 10 years, then have a raging bull market right as I retire.
Bear > flat > bull for accumulation.
I don't disagree at all w/ that. But these are things I don't worry about while in the accumulation. As I near my number I'll evaluate the environment around me and crunch some (conservative) numbers for future projections. What happened during my accumulation phase is outside of my control and therefore is only useful in a pure academic sense. It has no practical application for my actions in my life.
I don't worry about them either I was just addressing the original question you quoted.
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Question:
For people still in early accumulation phase less than average returns is usually good when building your nest egg right?
Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...
Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.
So the accumulators in Japan must be loving it. They have had a down turn/flat returns for 20 years now. People make the assumption that if you have low returns now that you will get higher ones in the future. That may or may not turn out to be true. The downturn might be a result in a fundamental change in the system that will last for a good chunk of your lifetime.
For fun lets look at 2 time periods
1985-1999. 15 years of high growth
2000-2014 15 years where you had 10 years of flat growth and 5 years of good growth
How much money does the person who is investing 20k/yr end up with?
1985: 1.7 million
2000: 752k
I know which number I prefer:) Now obviously 15 years is a blink of an eye in investment terms and we are comparing the best 15 year period to one of the worst.
The thing to remember is that a stock price going up is not the same as it getting expensive. They are to some extent unrelated. If the stock price is going up due to PE expansion, you might consider that getting more expensive. If the stock price is going up due to profit increases, it might be viewed as getting cheaper.
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Question:
For people still in early accumulation phase less than average returns is usually good when building your nest egg right?
Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...
Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.
But it is still better than having your accumulation phase during a long bull market. It would be nice if I could continue buying at today's prices for the next 10 years, then have a raging bull market right as I retire.
Bear > flat > bull for accumulation.
I don't disagree at all w/ that. But these are things I don't worry about while in the accumulation. As I near my number I'll evaluate the environment around me and crunch some (conservative) numbers for future projections. What happened during my accumulation phase is outside of my control and therefore is only useful in a pure academic sense. It has no practical application for my actions in my life.
I don't worry about them either I was just addressing the original question you quoted.
Fair enough :)
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So the accumulators in Japan must be loving it.
For as long as they choose to remain accumulators, they should be. The problem is that, as you alluded to, at some point every accumulator wants to stop being an accumulator and start being a withdrawer. But it's still true that, for as long someone does choose to remain an accumulator, low prices are necessarily better than high prices.
Your comparison of the two historical time periods is really illustrating a different (but related) point--namely, that you want prices to be high when you're ready to stop being an accumulator (and, again, the problem is that, if you're waiting for your portfolio to cross a predetermined threshold value as your trigger for transitioning from accumulator into non-accumulator, as most of us are indeed doing, then poor returns are a problem in the sense that they could delay that transition point (i.e., delay your retirement)). But if you're going to retire on date X, and on that date the market is going to have a value of Y, then the longer and the farther the market remains below Y between now and date X (i.e., the period during which you're doing your accumulating), the better.
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So the accumulators in Japan must be loving it.
For as long as they choose to remain accumulators, they should be. The problem is that, as you alluded to, at some point every accumulator wants to stop being an accumulator and start being a withdrawer. But it's still true that, for as long someone does choose to remain an accumulator, low prices are necessarily better than high prices.
Your comparison of the two historical time periods is really illustrating a different (but related) point--namely, that you want prices to be high when you're ready to stop being an accumulator (and, again, the problem is that, if you're waiting for your portfolio to cross a predetermined threshold value as your trigger for transitioning from accumulator into non-accumulator, as most of us are indeed doing, then poor returns are a problem in the sense that they could delay that transition point (i.e., delay your retirement)). But if you're going to retire on date X, and on that date the market is going to have a value of Y, then the longer and the farther the market remains below Y between now and date X (i.e., the period during which you're doing your accumulating), the better.
Actually comparision just shows how much luck rules:) The assumption that 5 years of 0% return will result in higher returns in the future is borderline at best. Buying off dips (things like 2000-2002, 2008-2009) when the market over reacts is one thing but prolonged periods of no growth often are driven by some underlying economic problems. Instead of getting delayed growth, you can end up with just lost growth. Think about it like the underemployed college graduated. Those 3 years spent waiting instead of working on the career don't result in higher earnings later in life. They just result in lost opportunity cause.
In reality you can't time any of this. You have to play the game with the hand your dealt. A decade of 0% returns so soon after 2000-2010 would set us up for one of the worst 30 year periods in US history. Could happen. But it seems pretty unlikely to me. On the other hand contining the pace of the last 5 years also seems unlikely.
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In reality you can't time any of this. You have to play the game with the hand your dealt.
Yep. If you're going to dream about best case scenarios, might as well wish for the market to fall to near zero during accumulation and shoot to infinity upon retirement, but since it's all beyond our control there's not really any point in indulging our hopes and desires about future returns.
A decade of 0% returns so soon after 2000-2010 would set us up for one of the worst 30 year periods in US history. Could happen.
If I'm being honest with myself, it scares me that a not insignificant number of very smart people whose opinions I generally trust are predicting exactly that. But I try to remind myself that long term economic forecasting is pretty much a fool's errand, no matter how many very smart people are willing to engage in it.
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That's a solid and simple prediction on what might happen to returns on a fixed term (a specific 10 yr period), since reversion to the mean is at least loosely something to keep in mind.
I think many have said that stocks today are not expensive as the market currently stands. However, if interest rates rise, and do so materially, then stocks will certainly be more expensive in relation to the higher return in another asset class. Valuations would need to compress a bit in order to justify the risk in equities.
No one really knows accurately how that will play out, but I suppose we'll see. In the interim, I'm still adding full steam ahead. I'd love valuations to compress.. whether prices go up or down, we just need earnings to increase relatively faster or decrease relatively slower to prices and we could see that.
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I predict that gumdrops are going to rain from the sky and I'm going to get my own unicorn to ride to work everyday. Now give me all your money to invest for you.
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Adjusted for current risk free rates, stocks are pretty fairly valued (maybe even slightly undervalued) even at these P/Es, which is really the crux of bogles opinion. If interest rates rise however it would have to require an adjustment in valuations absent growing faster than we currently are. This is the basis of the Fed - lower rates to inflate asset prices => make everyone feel good => borrower money to invest/build stuff/hire people => raise rates to normalize/slow things.
But there are two ways to revert to the mean:
1. stocks fall when rates rise
2. stocks stay flat and earnings grow into the lower PE.
There may be some mix of the two, but it will inevitably happen, which is ok. A P/E of 20 is a 5% return, which if invested in the broad market should move in step with inflationary aspects of the economy and thus it will be a real 5% return - 2% of the 5% will be paid to you via dividend. This ignores any economies of scale/growing market share/etc, which is included in bogels 5% earnings growth estimate.
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And to me this underscores why I'm glad I have some international stock exposure, because the Vanguard International Index is doing better than the domestic market.
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Bogle has a wonderful mind. But he's wrong an awful lot.
He advises against international diversification.
He discounts proven factors associated with increased returns (momentum, value, size).
He is anti ETF, despite the fact that they are often cheaper than their equivalent mutual funds.
He is right about the most important take home message though: costs matter. And for that I will forever be grateful.
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I do not know whether or not it will happen, but I am confident that if it does happen, a lot of the current bravado displayed around here and elsewhere will disappear.
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I do not know whether or not it will happen, but I am confident that if it does happen, a lot of the current bravado displayed around here and elsewhere will disappear.
As someone who has never been invested during a bear market, risk tolerance is one of my big unknowns...
I don't quite yet have the resolve to be ready to stare at paper losses of 30 - 50 %, so i will be revisiting my equity allocation every couple of years as time moves on.
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I don't quite yet have the resolve to be ready to stare at paper losses of 30 - 50 %, so i will be revisiting my equity allocation every couple of years as time moves on.
The tendency to focus exclusively on the risk of a sharp and sudden market crash is a form of recency bias, which has become so prevalent that it is the scenario some people envision even in the context of a discussion centered on the possibility of 10 years of flat returns. The behavior of the market over the past decade is not necessarily indicative of its performance in the coming decade. Historically, the greater long-term threat to portfolios was not quick and extreme market drops but extended periods of high inflation coupled with subpar returns, but that's still not to say that the greatest threat facing retirees today will follow any pattern that can be observed by looking backwards at history. This thread had some great discussion on those types of issues: http://forum.mrmoneymustache.com/investor-alley/what-will-the-next-10-correction-look-like/
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Question:
For people still in early accumulation phase less than average returns is usually good when building your nest egg right?
Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...
Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.
So the accumulators in Japan must be loving it. They have had a down turn/flat returns for 20 years now.
Where's that graph of the Japan market showing actual portfolio growth assuming reinvested dividends?
Quick google search showed this:
http://indexes.nikkei.co.jp/en/nkave/index/profile?cid=7&idx=nk225tr
It looks similar (goes up till late '07, then the dark times until '12, and then takin' off again) to a bunch of other graphs of that time period.
When evaluating how particular strategies worked, looking at just the historical price is going to be misleading. Taxes and distributions are important factors.
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I don't quite yet have the resolve to be ready to stare at paper losses of 30 - 50 %, so i will be revisiting my equity allocation every couple of years as time moves on.
The tendency to focus exclusively on the risk of a sharp and sudden market crash is a form of recency bias, which has become so prevalent that it is the scenario some people envision even in the context of a discussion centered on the possibility of 10 years of flat returns. The behavior of the market over the past decade is not necessarily indicative of its performance in the coming decade. Historically, the greater long-term threat to portfolios was not quick and extreme market drops but extended periods of high inflation coupled with subpar returns, but that's still not to say that the greatest threat facing retirees today will follow any pattern that can be observed by looking backwards at history. This thread had some great discussion on those types of issues: http://forum.mrmoneymustache.com/investor-alley/what-will-the-next-10-correction-look-like/
Yes and no Brooklyn.
I would argue that the greatest risk facing any investor is behavioral, and it is the risk of abandoning your strategy in light of recent negative results.
This is much more likely in the context of a big dramatic loss of market value as in the Great depression or the financial crisis.
So considering these dramatic recession/depression scenarios is actually pretty smart, regardless of what the next bear market actually looks like.
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This is much more likely in the context of a big dramatic loss of market value as in the Great depression or the financial crisis.
Maybe, though (as discussed at length in the linked thread's fun explorations into hypothetical investors' psychological mindsets) a long, drawn-out period of poor market returns may arguably be an even harder psychological hurdle than a sharp correction that quickly reverses itself -- the confident investor who witnesses her portfolio shrink in half only to redouble again all in the space of five years in a Great Recession style market meltdown may be able to stay the course (and emerge on the other side patting herself on the back for her smart financial decision) more easily than the confident investor who witnesses her portfolio slowly erode over the course of a decade in a '70's style stagflation environment and finally loses her nerve and throws in the towel on this "stay the course" bullshit that failed to deliver its promised benefits after ten excruciating years of unrewarded patience.
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For a mustachian, I still don't see this as a major problem. It still means that your money is safe (i.e. not decreasing in real value) and ultimately for an extreme MMMer, our early retirement is made possible by our high savings rate, not by our high investment return. I am only counting on 4% real rate of return, but even if I drop it to 2% I'm still able to retire just a few years later because my total savings will be so high compared to my expenses and life expectancy and the fact I'll be even closer to Social Security payouts by delaying retirement a few more years.
Honestly, if anything, low real returns simply make the case for a higher rate of savings as a percentage of your total income in order for everything to still balance out just fine.
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For a mustachian, I still don't see this as a major problem.
It's certainly better for a MMM than sombody hoping for a company pension paying 90% of their regular salary.
But if you only get a 2% SWR rather than a 4% then you need twice the stash - which isn't exactly minor
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But if you only get a 2% SWR rather than a 4% then you need twice the stash - which isn't exactly minor
Nothing lasts forever. No bull, bear, nor sideways market. If we're in for 10 years of sideways trade, then chances are after 10 years there will be a disruptive event and investments will take off again, as has happened in the past when there's been extended periods of bear/sideways trading. Starting off with a few extra years of work to build the 'stache should be enough that it all works out in the end, similar to how starting retirement in the worst year of cFIREsim still results in good returns after that period of poor returns is over.
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Just for fun -- Let's say the US market is at a peak and that for the next 15 years it goes down and average of 3% per year. (yes, it does happen in markets all the time)
I wonder how many so called buy and hold long term fund holders could stomach that? I'm guessing less than 2% of you could. Remember the best investors are the dead and those who forgot they had an account.
So what to do?
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This is much more likely in the context of a big dramatic loss of market value as in the Great depression or the financial crisis.
Maybe, though (as discussed at length in the linked thread's fun explorations into hypothetical investors' psychological mindsets) a long, drawn-out period of poor market returns may arguably be an even harder psychological hurdle than a sharp correction that quickly reverses itself -- the confident investor who witnesses her portfolio shrink in half only to redouble again all in the space of five years in a Great Recession style market meltdown may be able to stay the course (and emerge on the other side patting herself on the back for her smart financial decision) more easily than the confident investor who witnesses her portfolio slowly erode over the course of a decade in a '70's style stagflation environment and finally loses her nerve and throws in the towel on this "stay the course" bullshit that failed to deliver its promised benefits after ten excruciating years of unrewarded patience.
Behaviorally a slow loss over time is barely perceptible. This is why people happily stay the course with their money in savings accounts and safes.
Logically the damage of slow loss is identical to volatile rapid and intermittent loss, but the perceived damage is totally different.
So the risk of not staying the course is orders of magnitude greater for a buy and holder with large rapid drawdowns.
Coming to terms with this fact is a worthwhile exercise.
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You nailed it with the behavioral aspect to investing. The perception factor is huge as well.
For our purposes here, to be conservative, I would suggest that one assume that their investments will accrue an average loss of 3% over a long term period. (not including inflation) For planning purposes that is prudent. Yes, I know that people don't want to hear that and it may be a bit pessimistic. So the formula might be something like -- "how much do I need invested at an annual loss of 7% to last 50 years?"
It messes up the 4% rule totally and would require another decade or more of work and savings in many cases. The assumption that the US market will continue to go up is just an assumption.
This makes focusing on the spending and expenses side of the equation all that more important. A person living on 5K per year with a paid off house is in pretty good shape regardless of market turns or inflation headwinds. Especially if they have 1 million plus in investments.
A possible future budget one might adopt could look like this -
Home ins/taxes -- 1,400 annual
Utilities --- 1,500
Phone --- 240
Food -- 1,200
Bike - 100
Misc -- 1,000
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Just for fun -- Let's say the US market is at a peak and that for the next 15 years it goes down and average of 3% per year. (yes, it does happen in markets all the time)
So what to do?
My strategy is to have a side gig that will compensate for a possible gap in the downturn. When I FIRE, 40000 is all we need for a life style we are comfortable with. I will just need to withdraw 3% and cover the rest with my side gig, which should be very easy. I could be a Walmart Greeter.. Hello sir, how are you? Good by Sir... that is all it takes. No stress..
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I'm just going to copy my reply from the other thread on this topic.
Well first he isn't really making a prediction. He is saying that if valuations return to their historic norms we would have low to zero returns. Shiller is also projecting low to zero returns if that happens.
Shiller & Bogle's math are almost identical. Both say that 0% returns are possible if valuations returned to their historic averages. CAPE and PE are both high. If they return to historic norms and if growth continues at this fairly slow pace then we would have no returns over the next 10 years.
Note that is a HUGE 'if.' CAPE and PE have both stayed above their historic averages for most of the past 2 1/2 decades. It coincides almost perfectly with the time frame in which 401ks and discount brokers have become more popular. More people are investing than at any point in history. So you could build a pretty good argument that PE and CAPE ratios 10 years from now will likely still be above the historic averages. I try not to make predictions. I'm just pointing out you could argue it either way.
Now Vanguard and other investment firms have warned that with valuations being on the high end(but not bubble territory) returns over the next 10 years might be closer to the 5-8% range rather than the 10% historic average.
http://vanguard.com/pdf/ISGVEMO.pdf
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Yeah, a hypothetical is great, but the bottom line is that you can bet on humanity solving problems and coming up with new and awesome stuff, or not. If you really believe not, stock up on fertile land/ammo/etc. Otherwise just stop reading the financial news and stick to your AA.
-W
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Yeah, a hypothetical is great, but the bottom line is that you can bet on humanity solving problems and coming up with new and awesome stuff, or not. If you really believe not, stock up on fertile land/ammo/etc. Otherwise just stop reading the financial news and stick to your AA.
-W
You can both believe in the ingenuity of mankind, not believe in a coming collapse of society, and believe that real returns are likely to be poor for the coming 10-20 years. These beliefs are in no way mutually exclusive.
I think Bogle's real myopia here is that he sees the world economy as equivalent to the S&P 500. There are plenty of stock markets in the world with low to average valuations. Why then he would advocate against international diversification at the same time that he argues that high valuations are predictive of lower future returns?
Either you believe in reversion to the mean or you don't.
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Wouldn't the hypothetical investor seeing 1970's -1980's stock market performance ALSO see the historically low valuations of the S&P 500 and feel comfortable that they were in good shape? Or see the historically high federal bond rate and put some money into that?
I think index investing is great, but I also think it is a good idea to take a look at what you are buying and have an idea of what the future will hold eventually.
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The assumption that the US market will continue to go up is just an assumption.
Yeah, I seem to recall an assumption about housing prices never decreasing and it was actually built into models. That didn't end very well.
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The assumption that the US market will continue to go up is just an assumption.
Yeah, I seem to recall an assumption about housing prices never decreasing and it was actually built into models. That didn't end very well.
"didn't end well" if you count the end as a short period over 2-3 years. At least around here housing prices have more than recovered. I think that's true across much of the US.
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The assumption that the US market will continue to go up is just an assumption.
Yeah, I seem to recall an assumption about housing prices never decreasing and it was actually built into models. That didn't end very well.
"didn't end well" if you count the end as a short period over 2-3 years. At least around here housing prices have more than recovered. I think that's true across much of the US.
So the financial collapse worked out well?
Tell that to the long term unemployed. There's more to life than asset prices.
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There was one article which came out at the same time (probably from the same interview?) where he sort of settles around 4% returns. But we all know his long-term advice would stay the same: "Just keep doing what you're doing and forget about it."
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The assumption that the US market will continue to go up is just an assumption.
Yeah, I seem to recall an assumption about housing prices never decreasing and it was actually built into models. That didn't end very well.
"didn't end well" if you count the end as a short period over 2-3 years. At least around here housing prices have more than recovered. I think that's true across much of the US.
So the financial collapse worked out well?
Tell that to the long term unemployed. There's more to life than asset prices.
Interesting interpretation about a comment on housing prices. I think you're reading a little too much into three short sentences.
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"Just keep doing what you're doing and forget about it."
This is good advice for people in the accumulation phase, but not for most early retirees. Anecdotally, the early retirement rate seems to be hitting an inflection point (at least among members of this forum), and it is no doubt not a coincidence that we've also been experiencing a huge market run-up. If it does turn out to be true that the market produces zero returns over the next decade, then today's crop of retirees better not "keep doing what they're doing and forget about it" if they want their retirements to be successful (unless they've grossly oversaved to deal with that exact type of contingency). But if they keep their finger on the pulse of the market and adapt their plans accordingly, they should be fine even if that scenario did come to pass.
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The original contention was that the assumption that housing prices only went up "didn't end well."
You argued that this was not the case since housing prices recovered eventually. (Although they still have not recovered to their precrisis levels even before inflation adjustment).
My point was that the original comment was correct, and that your argument was fatally flawed. I stand by that.
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The assumption that the US market will continue to go up is just an assumption.
Yeah, I seem to recall an assumption about housing prices never decreasing and it was actually built into models. That didn't end very well.
"didn't end well" if you count the end as a short period over 2-3 years. At least around here housing prices have more than recovered. I think that's true across much of the US.
As milesdividendmd surmised, I was thinking more about the root cause of 2008, Lehman Bros, AIG, etc. and all the attendant pain that followed.
Lehman Bros was leveraged 31:1 in real estate investments in 2007. So, just on the back of an envelope, a decrease in real estate prices of about 3.2% makes their investment vaporize. It seems that they never thought real estate prices would go down.
I still wonder if some manager told his quants to add a rate limiting block in their Simulink models of the housing market so that the results would come out the way he needed it. Hey, boss! My simulation is diverging! I'm getting price decreases! Ah, don't worry about it. Just throw in a rate limiting block right there. See there, all fixed! That's why they pay me the big bucks! :-D
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Isn't that the guy people quote when talking about not timing the market and buying index funds?
I just don't see a P/E of 15 back with such low yield on bonds, so unless the interest rates were to creep back up to average levels, I don't see a PE of 15 happening.
I don't think the idea of interest rates inching up is too far fetched. They've been a historically low levels for a while and the Fed made it clear they're going to raise rates barring unexpected economic weakness.
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"Just keep doing what you're doing and forget about it."
This is good advice for people in the accumulation phase, but not for most early retirees. Anecdotally, the early retirement rate seems to be hitting an inflection point (at least among members of this forum), and it is no doubt not a coincidence that we've also been experiencing a huge market run-up. If it does turn out to be true that the market produces zero returns over the next decade, then today's crop of retirees better not "keep doing what they're doing and forget about it" if they want their retirements to be successful (unless they've grossly oversaved to deal with that exact type of contingency). But if they keep their finger on the pulse of the market and adapt their plans accordingly, they should be fine even if that scenario did come to pass.
That's a good point, however, also the primary reason that 90% (or something) of investors have failed to match the indexes. ...Because they change tracks mid-course based on a supposition. "Adapting" investing plans to changing markets has proved fatal to most people who attempted it. (e.g., "market's goin' down, better move some of money into gold/real estate/bitcoin/etc." ) I think a diversified index portfolio with a decent chunk of bonds is really the only game in town for the small investor. (With the exception of maybe dividend investing--a plan which also seems to work out half-decently in the long-run.) So, given that the majority of us suck at "stock picking" what are the adaptation alternatives as you see them?
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So, given that the majority of us suck at "stock picking" what are the adaptation alternatives as you see them?
I didn't mean to suggest that anyone should engage in market timing, which is a fool's errand for accumulators and retirees alike. I was just pointing out that the "keep doing what you're doing and forget about it" advice is targeted at accumulators (who would be well served by plowing cash into their investments according to their investment policy statement and totally ignoring what the market is doing), not people in the drawdown phase, who generally do need to keep an eye on market performance -- not because it should necessarily alter their investment strategy, but to monitor for signs that their retirement might not be on a successful trajectory. The "adaptation alternatives" one could take include cutting expenses, seeking out alternative income sources, etc., which would probably be a good idea for someone retiring today on a 4% SWR retirement plan if the next decade witnesses 0% market returns.
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The "adaptation alternatives" one could take include cutting expenses, seeking out alternative income sources, etc., which would probably be a good idea for someone retiring today on a 4% SWR retirement plan if the next decade witnesses 0% market returns.
Got it, thanks! Part-time taxi driver in an off year isn't a bad plan for a Mustachian if things get shaky. Recognizing that you might need a little padding once your plan has been implemented is definitely prudent.
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The "adaptation alternatives" one could take include cutting expenses, seeking out alternative income sources, etc., which would probably be a good idea for someone retiring today on a 4% SWR retirement plan if the next decade witnesses 0% market returns.
Got it, thanks! Part-time taxi driver in an off year isn't a bad plan for a Mustachian if things get shaky. Recognizing that you might need a little padding once your plan has been implemented is definitely prudent.
Jumping in here, this is why I'm not a fan of FIRE = 25x annual expenses. As brooklynguy stated a few posts back, none of us really know what the future will hold for the market. Instead of skirting by on 25x expenses, I think it's more prudent to go for 30 or 40x expenses. Because if your adaptation alternative is going back to work, you aren't FIRE anymore.
When I worked hospitality for a couple of summers, we'd figure out how many guests were in a party, and then reserve +10% the amount of rooms, just in case they had last-minute adjustments. That's how I envision FIRE: get what you think you need, then get a little more to buffer any adjustments.
Also, finding work in an off year, aka a recession, may prove to be more challenging than you think.
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this is why I'm not a fan of FIRE = 25x annual expenses. As
Keep in mind that the 25x rule and 4% rule already account for 95 percent of scenarios, so you would only have a one in 20 chance of needing to ever reduce your expenses.
To extend your hotel analogy, the correct plan would be to take the average expectation, which in this case is a 6% withdrawal rate (has a 50/50 chance of success over 30 years) and then add a 10% safety buffer (another 0.6%) and still plan on a withdrawal rate over 5 percent. Your plan of going with 40x expenses is like planning for every party that makes a reservation to need the entire hotel, just to be safe, even though that has never happened before in all of history.
Yes, it is safer. No, it's not a very efficient way to make plans.
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Jumping in here, this is why I'm not a fan of FIRE = 25x annual expenses. As brooklynguy stated a few posts back, none of us really know what the future will hold for the market. Instead of skirting by on 25x expenses, I think it's more prudent to go for 30 or 40x expenses. Because if your adaptation alternative is going back to work, you aren't FIRE anymore.
That's totally cool if that's your comfort level, but realize the trade off. You're talking many extra years of guaranteed work, probably 5-10 years to get to 40x, versus a possible but unlikely part time work here and there if your 25x takes a big hit initially (and you choose to do that instead of implement other safety margins). So if you go back to work "you aren't FIRE anymore", that still sounds better to a lot of us than never being FIRE to begin with until many years after 25x.
Sol touched on it above, but that 4% is already a pretty worse case scenario. To add some numbers, the average portfolio balance at the end of 30 years using the 4% rule is over twice of what you started with (in real terms, not nominal).
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To second (third?) Sol's and Eric's point, take a look at this excellent recent post by Nords (http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg700740/#msg700740) highlighting the ridiculous amount of safety built into the 4% rule (in that, besides having an excessively high historical success rate to begin with, it deliberately ignores various external levels of safety margin which, in reality, will inure to the benefit of most retirees) -- and he's one of our more conservative early retirement planners!
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Those last 3 posts (counting Nords' post as part of BG's) are a blowout.
Someone clip them to post to a "Stop worrying about the 4% rule" sticky.
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To second (third?) Sol's and Eric's point, take a look at this excellent recent post by Nords (http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg700740/#msg700740) highlighting the ridiculous amount of safety built into the 4% rule (in that, besides having an excessively high historical success rate to begin with, it deliberately ignores various external levels of safety margin which, in reality, will inure to the benefit of most retirees) -- and he's one of our more conservative early retirement planners!
I too agree with the sentiment provide your willing to be flexible as noted above and in Nords post. If not then a lower SWR may be more prudent given the current valuations, lower interest rates, slow growth prospects.
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To second (third?) Sol's and Eric's point, take a look at this excellent recent post by Nords (http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg700740/#msg700740) highlighting the ridiculous amount of safety built into the 4% rule (in that, besides having an excessively high historical success rate to begin with, it deliberately ignores various external levels of safety margin which, in reality, will inure to the benefit of most retirees) -- and he's one of our more conservative early retirement planners!
I too agree with the sentiment provide your willing to be flexible as noted above and in Nords post. If not then a lower SWR may be more prudent given the current valuations, lower interest rates, slow growth prospects.
I complete agree about not worrying about the 4% rule if we were talking about people retiring in their 60s. But according to this calculator http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html (http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html), I as a 55 year old, have a 25% change of living another 34 years (same age as my mom) and if I was a woman a 50% chance. So anybody planning on retiring before 50 should be looking at 40 year retirement (especially a couple) . At 40 years a 4% WR only gives 81% success rate according to CFiresim. Plus life expectancy is increasing at >1.2 year/decade in the US so a 25 year old today is likely to have a life expectancy at age 50 that is 3 years longer than a 50 year old today. In order to get to a 95% success rate you need to dial the withdrawal rate down to 3.5%.
For somebody looking to retire in their early 40s or before, who has already slashed their lifestyle expenditures to Mustachian levels, I don't think you are being too conservative to move the SWR rate to 3.0%. Social security for a 40 year old is 22 years away and conceivably that age maybe raised by a couple of year.
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I just posted this elsewhere, but Clif - I think your financial conservatism is a little extreme. Here's why:
I'd just like to point out that the 4% SWR assumes:
-That you live for 30+ years. You might not.
-That no cataclysmic natural disaster befalls the earth in that time. One might.
-That no social upheaval/revolution/political change makes your earnings and savings valueless.
-Etc - the world is unpredictable.
So, when you say you want a 2% withdrawal rate because it's safer, you're ignoring the fact that it's arguably impossible to be "safer" than, say, 85-90% with any long term plan, because the world may have other plans for you and running out of money in a future that looks just like the present isn't the biggest concern anymore.
-W
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I just posted this elsewhere, but Clif - I think your financial conservatism is a little extreme. Here's why:
I'd just like to point out that the 4% SWR assumes:
-That you live for 30+ years. You might not.
-That no cataclysmic natural disaster befalls the earth in that time. One might.
-That no social upheaval/revolution/political change makes your earnings and savings valueless.
-Etc - the world is unpredictable.
So, when you say you want a 2% withdrawal rate because it's safer, you're ignoring the fact that it's arguably impossible to be "safer" than, say, 85-90% with any long term plan, because the world may have other plans for you and running out of money in a future that looks just like the present isn't the biggest concern anymore.
-W
First of all I didn't say 2%, I said 3%. That's the difference between a 33x vs 25x stash not a 50x vs 25x stash.
A 40 year old female has about 90% chance of living another 30 year to age 70, and that is assuming no big medical breakthroughs. Folks on this forum can be expected to have a longer than average life time.
In 3.5 billion years life has been on earth how many cataclysmic disaster have we experienced a dozen a 100? what are the odds one will occur in the next 50 years lets say (100 x50)/3,500,000,000 =.000146% close enough to zero to ignore IMO.
In the last 250 year among the dozens or so countries settled primarily by English speaking people with tradition of law, how many times has the political system change such that elite lost the majority of their wealth? I can think of 3 or 4 to be pessimistic lets call it 10% that in the next 50 years the poor will revolt and they'll take all of us "rich folks" money. For example taking 50% of all assets over $1,000,000.
ignoring the fact that it's arguably impossible to be "safer" than, say, 85-90%"
Let's be clear that isn't a fact, it's someone opinion (probably William Bernstein, a man who I respect). Yes you can argue there is 10% or so chance you die before you hit 30 years,and 10% chance the economy changes and that works out to be 80 odd percent. But minimizing your chances of running out of money for that 80% of the time things go as expected isn't being overly conservative.
I'll also say that I'm one of the least conservative investors on the forum: individual securities, microcap stocks, peer to peer lending, hard money loans, real estate, angel investment, VC funds, margin loans, shorting stocks, leverage closed end funds, structured investments, junk bonds, virtually every type of option. Other than day trading, and buying options on VIX futures, there is pretty much nothing that I haven't bought or sold over the decades. I am also much closer to a perma bull than perma bear.
I retired at a pretty awful time, 2000. I have seen more than few folks who also retired young because they believe that their paper wealth they accumulated during the internet bubble was real and after terrific bull market in the 1990 they thought 5-8% returns were pretty much their birthright. Many of them went back to work by 2005, most of the rest stop posting on forums.
IMO (like Bogle's) the market is no where near as overvalued as it was back then. Although many tech stocks are getting close. But an important difference back then was you could put money in bonds at get 3.5+ inflation protected return or a 5% on Muni bonds. A reasonable 25%+ bond allocation made a big difference in retirees portfolio.
There is no place to hide (other than some of the alternative investment I listed) this time around. In addition to the 25-30% correction that Jack Bogle talks about, a 3% rise in interest rates over the next say 3 years would result in roughly a -10% loss to a bond portfolio (~-18% price drop + ~8% interest payments). That is a huge change from the decade long bull market we had in bonds during the 2000s.
Now just to be clear I have zero problem with 60 year old saying I'm going to plan on spending 4% of my stash to supplement my social security.
A 40 year old planning the same thing (today) I think is risky. Back in 2010 it was slightly risky.
It seems like a case of selective hearing that when St. Jack talks about index funds, everybody treats as the word of God. When he advise caution on future returns, he is some old guy who is often wrong.
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Worst case, the market drags while inflation ramps up and we get stagflation for a decade and all the recent retirees are stuck with "only" 4%.
Remember, if the market does well the first decade of your retirement, you can easily crank that up to 5% or more. Those who retired in 2003 or so have seen great returns (9%) and are all set to crank up spending if they so desire.
I guess in 5-10 years we'll all be using fully automated, customized investing and withdrawals so we won't have to argue about any of this - the computer will figure it all out and just make a deposit in our bank account every month.
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Worst case, the market drags while inflation ramps up and we get stagflation for a decade and all the recent retirees are stuck with "only" 4%.
Remember, if the market does well the first decade of your retirement, you can easily crank that up to 5% or more. Those who retired in 2003 or so have seen great returns (9%) and are all set to crank up spending if they so desire.
I guess in 5-10 years we'll all be using fully automated, customized investing and withdrawals so we won't have to argue about any of this - the computer will figure it all out and just make a deposit in our bank account every month.
If it gets this easy, it will be seen as less risky, so everyone will be doing it, and so our returns will drop.
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ignoring the fact that it's arguably impossible to be "safer" than, say, 85-90%"
Let's be clear that isn't a fact, it's someone opinion (probably William Bernstein, a man who I respect). Yes you can argue there is 10% or so chance you die before you hit 30 years,and 10% chance the economy changes and that works out to be 80 odd percent. But minimizing your chances of running out of money for that 80% of the time things go as expected isn't being overly conservative.
I agree with this and have noted before the irony in how Bernstein's 80% concept of false precision has itself become an example of false precision.
If this thread's purpose is to serve as a compilation of arguments about the 4% Rule and SWRs, we might as well add a link to the full thread where I made that observation, which had some good discussion on these matters in general:
http://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-success-rate/
EDIT: Oops, just realized this is not the "Stop worrying about the 4% Rule thread." But, for posterity's sake, clifp, maybe you want to respond to walt's identical post in that thread with the same response, and I'll do likewise to yours? :)
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If it gets this easy, it will be seen as less risky, so everyone will be doing it, and so our returns will drop.
So the reason people buy expensive cars with expensive loans rather than saving is the complexity of buying Vanguard ETFs? ;-)
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Worst case, the market drags while inflation ramps up and we get stagflation for a decade and all the recent retirees are stuck with "only" 4%.
Remember, if the market does well the first decade of your retirement, you can easily crank that up to 5% or more. Those who retired in 2003 or so have seen great returns (9%) and are all set to crank up spending if they so desire.
I guess in 5-10 years we'll all be using fully automated, customized investing and withdrawals so we won't have to argue about any of this - the computer will figure it all out and just make a deposit in our bank account every month.
It's already available. My personal allocation:
TIAA Traditional 35% (fixed/participating)
TIAA Real Estate Account 25% (variable)
TIAA-CREF 67/33 (domestic/international) 40% (variable)
All annuitized with a twenty year guaranteed period and 2/3 to the survivor.
Payout is 5.25% with starting age of 53.
No worries with SS starting towards the end of the twenty year guaranteed period.
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If it gets this easy, it will be seen as less risky, so everyone will be doing it, and so our returns will drop.
So the reason people buy expensive cars with expensive loans rather than saving is the complexity of buying Vanguard ETFs? ;-)
I see the winking, but this is probably true to a very small extent. The much bigger change would be when investing in the stock market is widely seen as being "what you do" and "not risky" and is super easy and you don't even know it's happening. Research shows that when something is the default, people go with it. When your employer sets you up with a default contribution to the 401k, participation rates shoot up. People go with autopilot and what everyone else is doing.
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Worst case, the market drags while inflation ramps up and we get stagflation for a decade and all the recent retirees are stuck with "only" 4%.
Remember, if the market does well the first decade of your retirement, you can easily crank that up to 5% or more. Those who retired in 2003 or so have seen great returns (9%) and are all set to crank up spending if they so desire.
I guess in 5-10 years we'll all be using fully automated, customized investing and withdrawals so we won't have to argue about any of this - the computer will figure it all out and just make a deposit in our bank account every month.
That's not the worst case scenario. Not even close.
Stock markets can go to zero. Assets can be seized by the government or foreign invaders.
Hyerinflation, deflation, depression, famine, the possibilities are endless!
The smart money still invests at least partially in equites, for the most probable outcome is that that will continue to offer the best long term outcome.
I would argue that smart money also would disregard saint jacks advice not to internationally diversify.
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I would argue that smart money also would disregard saint jacks advice not to internationally diversify.
It's interesting that he says not to diversify internationally but Vanguard recommends a 60/40 US/Intl AA for stocks and 70/30 US/Intl AA for bonds. Vanguard announced raising the international allocation on both stocks and bonds by 10% in February of this year and said they would be complete by the end of the year.
Vanguard enhances diversification for target date funds and other all-in-one funds (https://personal.vanguard.com/us/insights/article/fund-announcement-02262015)
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I would argue that smart money also would disregard saint jacks advice not to internationally diversify.
It's interesting that he says not to diversify internationally but Vanguard recommends a 60/40 US/Intl AA for stocks and 70/30 US/Intl AA for bonds. Vanguard announced raising the international allocation on both stocks and bonds by 10% in February of this year and said they would be complete by the end of the year.
Vanguard enhances diversification for target date funds and other all-in-one funds (https://personal.vanguard.com/us/insights/article/fund-announcement-02262015)
Since he left, Vanguard has done a lot of things that Bogle doesn't like. Like ETFs. I think Bogle is wrong on this one.
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It sounds like Bill Gross is in general agreement with Bogle in A Sense of an Ending (https://www.janus.com/bill-gross-investment-outlook/may), his May monthly investment outlook to Janus investors. Here are some snippets.
He mentions others of the same opinion (my emphasis):
Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date.
Here is a wonderful comment on fees:
Active asset managers as well, conveniently forget that their (my) industry has failed to reduce fees as a percentage of assets which have multiplied by at least a factor of 20 since 1981. They believe therefore, that they and their industry deserve to be 20 times richer because of their skill or better yet, their introduction of confusing and sometimes destructive quantitative technologies and derivatives that led to Lehman and the Great Recession.
And here is his final paragraph looking forward:
Hogwash. This is all ending. The successful portfolio manager for the next 35 years will be one that refocuses on the possibility of periodic negative annual returns and miniscule Sharpe ratios and who employs defensive choices that can be mildly levered to exceed cash returns, if only by 300 to 400 basis points. My recent view of a German Bund short is one such example. At 0%, the cost of carry is just that, and the inevitable return to 1 or 2% yields becomes a high probability, which will lead to a 15% “capital gain” over an uncertain period of time. I wish to still be active in say 2020 to see how this ends. As it is, in 2015, I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang. But if so, like death, only the timing is in doubt. Because of this sense, however, I have unrest, increasingly a great unrest. You should as well.
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Just to remake a point that I have been hammering away on.
If current high U.S. equity valuations predict lower future returns in the U.S. Stock market. (And I agree with Bogle, they probably do. )
And if current US bond yields are vanishingly small, guaranteeing low future performance (and they are.)
...Then isn't the smart play to make sure your portfolio does not overweight high priced US stocks?
The take home for me is obvious. Buy and holders should not invest more than 50% of their equities in U.S. Stocks. (50% being the cap weighting of the U.S. Relative to the world economy.) and if you go by global GDP, even less should be allocated to US equites.
In other words instead of whining about low expected future returns, why not save more and allocate more intelligently (ie diversify more.)
Worry about that which you have the power to effect, and forget the rest.
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Just to remake a point that I have been hammering away on.
If current high U.S. equity valuations predict lower future returns in the U.S. Stock market. (And I agree with Bogle, they probably do. )
And if current US bond yields are vanishingly small, guaranteeing low future performance (and they are.)
...Then isn't the smart play to make sure your portfolio does not overweight high priced US stocks?
The take home for me is obvious. Buy and holders should not invest more than 50% of their equities in U.S. Stocks. (50% being the cap weighting of the U.S. Relative to the world economy.) and if you go by global GDP, even less should be allocated to US equites.
In other words instead of whining about low expected future returns, why not save more and allocate more intelligently (ie diversify more.)
Worry about that which you have the power to effect, and forget the rest.
Yes this make sense but there aren't a lot "approved" alternatives. International equity is reasonable alternative but correlation between international stocks and the US market has been so high over the last 7 years that diversification doesn't buy you much. Bonds I think are an even worse investment. A 5% increase in interest rates over the next 3 years will result in -20% loss for total bond market and heck of a lot worse for long bonds. As expensive and potentially risky as US equities are there is still a reasonable chance of 25-40% return in the next 3 year, the upside for bonds is probably no more than 10-12% period.
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I disagree with the whole premise that there is limited diversification benefit between international and domestic equities.
While when there is a global crisis, there is near perfect correlation between all risky assets, during bull markets this is simply not so.
Since 2008 US equities have vastly outperformed the rest of the world. And the proof is in the pudding, U.S. CAPE IS 27, the rest of the worlds is what, 17??
So if you are like Bogle, and you argue that valuations matter (the basis of his "nominal to zero" argument) and that assets will mean revert over the long term, then there is truly no credible argument for overweighting US equities.
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Those last 3 posts (counting Nords' post as part of BG's) are a blowout.
Someone clip them to post to a "Stop worrying about the 4% rule" sticky.
Yup.
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Since 2008 US equities have vastly outperformed the rest of the world. And the proof is in the pudding, U.S. CAPE IS 27, the rest of the worlds is what, 17??
I think this very much depends where you're coming from? And what pudding you're eating? You sure you're looking at the whole picture? (See attached.)
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That's totally cool if that's your comfort level, but realize the trade off. You're talking many extra years of guaranteed work, probably 5-10 years to get to 40x, versus a possible but unlikely part time work here and there if your 25x takes a big hit initially (and you choose to do that instead of implement other safety margins). So if you go back to work "you aren't FIRE anymore", that still sounds better to a lot of us than never being FIRE to begin with until many years after 25x.
Right on! I think the chances of any of us doing FIRE dicking around doing *nothing* involving money for the rest of our lives is very slim. Hell, it allows you to do what you want. Fun, low-paying job? Once FIRE I won't care, I'll take it. ...'Until it gets boring or stupid, then I'm off. I certainly plan on lazing around a year or two travelling, but the rest of my life doing nothing ever for cash? That's probably not going to happen. I'll easily take the 25x over the extra full years to get 40x.
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Since 2008 US equities have vastly outperformed the rest of the world. And the proof is in the pudding, U.S. CAPE IS 27, the rest of the worlds is what, 17??
I think this very much depends where you're coming from? And what pudding you're eating? You sure you're looking at the whole picture? (See attached.)
Your chart is a clever retort to the statement "US Equities have been the number 1 asset class in the world every year since 2008."
Unfortunately no one made any such statement.
What I did say was...
"Since 2008 US equities have vastly outperformed the rest of the world" so let's examine that statement specifically. Lets compare US equities to all world ex-us equities since 2008, shall we?
(see attachment)
For those keeping score at home thats a CAGR of 8.1 for the US vs 0.8 for the rest of the world, with a higher sharpe ratio and lesser volatility, so it's not really close...
I guess the pudding is simply pudding after all. It turns out that PE expansion for equities in one region relative to another does cause an increase in relative CAPE value. Who knew?
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Since 2008 US equities have vastly outperformed the rest of the world. And the proof is in the pudding, U.S. CAPE IS 27, the rest of the worlds is what, 17??
Depends on the company.
Apple, Nokia and Blackberry are all in the same international markets - which would you rather own?
Of course the same also applies to Toyota, Volkswagon and GM ;-)
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I disagree with the whole premise that there is limited diversification benefit between international and domestic equities.
While when there is a global crisis, there is near perfect correlation between all risky assets, during bull markets this is simply not so.
Since 2008 US equities have vastly outperformed the rest of the world. And the proof is in the pudding, U.S. CAPE IS 27, the rest of the worlds is what, 17??
So if you are like Bogle, and you argue that valuations matter (the basis of his "nominal to zero" argument) and that assets will mean revert over the long term, then there is truly no credible argument for overweighting US equities.
I'd suggest that you read William Bernstein's E-book "Skating where the puck was: The correlation Game in a flat world".
He provides compelling data that while formerly buying international equities was a a good diversification strategy it is no longer true the first chart. (I can't seem to figure out how to cut and paste from the Kindle app on the PC), is interesting. Back in 1992 the 3 year rolling correlation for international REITS was .1 by 2012 it was over .8. The correlation between the MCSI EAFE (the European equivalent of the S&P 500) and the S&P 500 from 1975-2000 varied between .4 and .6. It spiked up dramatically during the 2000s and by 2012 reached .9. It fact is is now higher than the correlation between small cap and large cap stocks.
If you want to do a bit of market speculation and think that buying international stocks are good deal right now be my guest, but don't kid yourself that you are helping created a diversified portfolio. That's 20th century investing.
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I'm happy I have my international and emerging ETF's. Here's today's results:
VTI - +0.61%
VWO - +1.30%
VXUS - +1.72%
So, today emerging markets is 2.1X better, intl is 2.8X better.
Ok, ok, I can already hear the complaining about looking at one day of results. So, here are the YTD results:
VTI - +3.61%
VWO - +5.98% 1.7X better
VXUS - +8.51% 2.4X better
The multipliers are similar.
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Do you base all your investing decisions on the last 6 months of returns? If not, I'm not sure why those numbers are relevant.
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Do you base all your investing decisions on the last 6 months of returns?
Sure, why not? I'm pretty sure there are a handful of people here who call that a "lookback period".
And if you don't like six months, why not try a year? They tell me it will give you a similar result. Or maybe a totally different result, I'm not really clear on that part.
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I disagree with the whole premise that there is limited diversification benefit between international and domestic equities.
While when there is a global crisis, there is near perfect correlation between all risky assets, during bull markets this is simply not so.
Since 2008 US equities have vastly outperformed the rest of the world. And the proof is in the pudding, U.S. CAPE IS 27, the rest of the worlds is what, 17??
So if you are like Bogle, and you argue that valuations matter (the basis of his "nominal to zero" argument) and that assets will mean revert over the long term, then there is truly no credible argument for overweighting US equities.
I'd suggest that you read William Bernstein's E-book "Skating where the puck was: The correlation Game in a flat world".
He provides compelling data that while formerly buying international equities was a a good diversification strategy it is no longer true the first chart. (I can't seem to figure out how to cut and paste from the Kindle app on the PC), is interesting. Back in 1992 the 3 year rolling correlation for international REITS was .1 by 2012 it was over .8. The correlation between the MCSI EAFE (the European equivalent of the S&P 500) and the S&P 500 from 1975-2000 varied between .4 and .6. It spiked up dramatically during the 2000s and by 2012 reached .9. It fact is is now higher than the correlation between small cap and large cap stocks.
If you want to do a bit of market speculation and think that buying international stocks are good deal right now be my guest, but don't kid yourself that you are helping created a diversified portfolio. That's 20th century investing.
You are missing the point. I've read "Skating where the puck was," as well as most of Bernstein's library. Love the man.
Bernstein's observation, as I read it, was not that one should not diversify internationally (a la Bogle) because of increasing market correlations, its that today's ideal portfolio must necessarily have a different efficient frontier from yesterday's because the world is constantly changing and yesterday is not the same as tomorrow.
The point that I am making here is really one of internal consistency.
What I am pointing out is that if you think you can estimate future returns based on current equity valuations, (which is the basis for Bogle's whole argument about future equity returns here, after all) then it makes no sense to also advocate a portfolio that overweights the expensive domestic market.
I know that I am guilty of having diverted this topic into a different one here which is whether or not international diversification is wise for buy and hold investors, but the purpose of my comment was simply to point out the logical inconsistency of Bogle's argument.
I am a firm believer of diversifying internationally as much as possible in buy and hold portfolios, (even though I am personally not a passive investor and am horribly under diversified with my own holdings) regardless of current relevant valuations, but surely that is an argument for another day.
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The point that I am making here is really one of internal consistency.
What I am pointing out is that if you think you can estimate future returns based on current equity valuations, (which is the basis for Bogle's whole argument about future equity returns here, after all) then it makes no sense to also advocate a portfolio that overweights the expensive domestic market.
I know that I am guilty of having diverted this topic into a different one here which is whether or not international diversification is wise for buy and hold investors, but the purpose of my comment was simply to point out the logical inconsistency of Bogle's argument.
There is no logical inconsistency in Bogle's argument. Now, I'm not saying I agree with it (because I don't - I think it's a smart idea to diversify internationally), but there are a host of reasons why one could believe (with logical consistency) that it makes sense to passively invest in the U.S. to the exclusion of foreign markets (some of which I find more compelling than others), including, but not limited to, the following:
- it costs less
- the U.S. has the world's most robust and transparent equity markets
- the U.S. has more established governmental and legal institutions
- U.S. investments will expose U.S.-resident investors to less currency risk
Bogle advocates for an active investment approach when it comes to selecting the jurisdiction in which to invest even though he advocates for a totally passive investing approach when it comes to investing within that selected jurisdiction. As I said, I don't completely buy his argument (because in doing so you're basically betting that the reasons for preferring the U.S. will persist into the future), but there is no logical inconsistency in holding both opinions simultaneously.
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The point that I am making here is really one of internal consistency.
What I am pointing out is that if you think you can estimate future returns based on current equity valuations, (which is the basis for Bogle's whole argument about future equity returns here, after all) then it makes no sense to also advocate a portfolio that overweights the expensive domestic market.
I know that I am guilty of having diverted this topic into a different one here which is whether or not international diversification is wise for buy and hold investors, but the purpose of my comment was simply to point out the logical inconsistency of Bogle's argument.
There is no logical inconsistency in Bogle's argument. Now, I'm not saying I agree with it (because I don't - I think it's a smart idea to diversify internationally), but there are a host of reasons why one could believe (with logical consistency) that it makes sense to passively invest in the U.S. to the exclusion of foreign markets (some of which I find more compelling than others), including, but not limited to, the following:
- it costs less
- the U.S. has the world's most robust and transparent equity markets
- the U.S. has more established governmental and legal institutions
- U.S. investments will expose U.S.-resident investors to less currency risk
Bogle advocates for an active investment approach when it comes to selecting the jurisdiction in which to invest even though he advocates for a totally passive investing approach when it comes to investing within that selected jurisdiction. As I said, I don't completely buy his argument (because in doing so you're basically betting that the reasons for preferring the U.S. will persist into the future), but there is no logical inconsistency in holding both opinions simultaneously.
Again, one can credibly argue that international investing is wise or not for all of the reasons that you give and more, (whether you are American or not.)
Happy to engage on that on another thread.
I will simply point out that exactly one of the arguments that you provide is quantitative; The question of cost.
And cost is easy to measure.
VTI has an expense ratio of 0.05 whereas VT has an expense ratio 0.17. So the cost to diversify is 12 basis points a year.
But what Bogle is saying when he predicts nominal to zero returns going forward, is of an entirely different order of magnitude. He is saying that current valuations will have a negative effect on the order of 700 basis points a year!
So he is saying that valuations matter A LOT. but ignore valuations when it comes to geographical asset allocation. This is the logical inconsistency.
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So he is saying that valuations matter A LOT. but ignore valuations when it comes to geographical asset allocation. This is the logical inconsistency.
No, there's still no logical inconsistency. If he were saying "the US market is overvalued, foreign markets are undervalued, and all else is equal," then his argument to stick to the US would be logically inconsistent. But he's not saying all else is equal -- he's saying all else is not equal, and the other things constituting "all else" should lead US investors to stick to the US. I'm not sure whether or not he's ever stated his opinion about the relative expensiveness of foreign markets, but even if he does believe they are undervalued, his argument is still not logically inconsistent -- in that case, the argument is that those other things should lead US investors to stick to the US even though the US is more expensive than foreign markets, because those other things justify the premium. Or, said differently, foreign markets are not cheaper relative to the US on a risk-adjusted basis.
Again, I don't agree with this - I'm just pointing out that it is not a logically inconsistent position to take.
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Get a room, you two. I can't stand the sexual tension in this thread.
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So he is saying that valuations matter A LOT. but ignore valuations when it comes to geographical asset allocation. This is the logical inconsistency.
No, there's still no logical inconsistency. If he were saying "the US market is overvalued, foreign markets are undervalued, and all else is equal," then his argument to stick to the US would be logically inconsistent. But he's not saying all else is equal -- he's saying all else is not equal, and the other things constituting "all else" should lead US investors to stick to the US. I'm not sure whether or not he's ever stated his opinion about the relative expensiveness of foreign markets, but even if he does believe they are undervalued, his argument is still not logically inconsistent -- in that case, the argument is that those other things should lead US investors to stick to the US even though the US is more expensive than foreign markets, because those other things justify the premium. Or, said differently, foreign markets are not cheaper relative to the US on a risk-adjusted basis.
Again, I don't agree with this - I'm just pointing out that it is not a logically inconsistent position to take.
Whether he is explicitly saying it or not, U.S. Equity Valuation is high right now relative to the rest of the world. This is not debatable. This is a simple fact.
You can't name one method for market valuation that contradicts this observation. CAPE or otherwise. It's not really worth discussing further.
Now one can argue that valuations don't matter. But Bogle is making precisely the opposite argument. He argues That valuations do matter to the tune of 700 basis points in future returns a year!
If you find this to be internally consistent on St Jack's behalf, fair enough, but it's certainly not so on the basis of any rules of logic that I am aware of.
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Get a room, you two. I can't stand the sexual tension in this thread.
Sol,
You big perv.
One can have a rational disagreement without sexual arousal.
(Even when the subject is as titillating as Grandpa Jack's logical transgressions.)
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If you find this to be internally consistent on St Jack's behalf, fair enough, but it's certainly not so on the basis of any rules of logic that I am aware of.
That's because you are mischaracterizing his argument. Again, Bogle is arguing that valid reasons exist to avoid international diversification (which, again, I happen to disagree with), and those reasons are independent of valuation. So, with complete logical coherence, he can argue that US investors should avoid investing in foreign markets even while recognizing that those markets are undervalued relative to the US using identical valuation methodologies.
To see why this is true, consider the following extreme hypothetical situation: Congress enacts a law imposing a universal 99% tax on all foreign investment gains by any American citizen. In that circumstance, do you see how you would (quite logically) conclude that you should avoid investing in foreign markets, no matter what their relative valuation is, even if you generally consider valuation to be of fundamental importance? Bogle's argument is no different, except in degree.
Get a room, you two. I can't stand the sexual tension in this thread.
If you can't stand the heat, get out of the kitchen. Like Miles said, this is titillating subject matter.
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If you find this to be internally consistent on St Jack's behalf, fair enough, but it's certainly not so on the basis of any rules of logic that I am aware of.
That's because you are mischaracterizing his argument. Again, Bogle is arguing that valid reasons exist to avoid international diversification (which, again, I happen to disagree with), and those reasons are independent of valuation. So, with complete logical coherence, he can argue that US investors should avoid investing in foreign markets even while recognizing that those markets are undervalued relative to the US using identical valuation methodologies.
To see why this is true, consider the following extreme hypothetical situation: Congress enacts a law imposing a universal 99% tax on all foreign investment gains by any American citizen. In that circumstance, do you see how you would (quite logically) conclude that you should avoid investing in foreign markets, no matter what their relative valuation is, even if you generally consider valuation to be of fundamental importance? Bogle's argument is no different, except in degree.
Get a room, you two. I can't stand the sexual tension in this thread.
If you can't stand the heat, get out of the kitchen. Like Miles said, this is titillating subject matter.
Great point!
In such a world where foreign equities were taxed at 99% Bogle's reasoning would be sound.
In the actual reality based world, though, it is not.
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(The point is that all of the arguments taken together for not internationally diversifying can under no reasonable assumption argue for a decrease expected returns of 700 basis points per annum, relative to a global portfolio.
And yet Bogle argues that we should expect zero to nominal returns going forward based on current domestic equity valuation.)
It's kind of an obvious example of logical inconsistency.
And if you still disagree, please detail how any combination of arguments against international diversification could be reasonably expected to decrease future returns by 700 basis points per annum relative to a global portfolio.
The math simply becomes too ridiculous.
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Great point!
In such a world where foreign equities were taxed at 99% Bogle's reasoning would be sound.
In the actual reality based world, though, it is not.
For the reasons I laid out, his reasoning issound - it's his premises that (in both your view and my own) are faulty.
I've been disagreeing only with the single, narrow aspect of your posts stating that Bogle is exercising inconsistent logic, which simply isn't true (as a matter of fact, not opinion). We can reduce Bogle's argument to representative symbols and construct a formal proof to show there's no error in the logic.
It is not logically inconsistent to argue that external factors beyond valuation make foreign investment a bad idea even if you believe valuation matters, whether those external factors are imaginary 99% tax rates or the more realistic factors of the type I listed in my post above. You and I both disagree with the premises of Bogle's argument, but his logic is sound. That's all.
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Can't you guys start throwing around more equations and variables? The 401k loan epic nerd-off thread was much more exciting.
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Can't you guys start throwing around more equations and variables? The 401k loan epic nerd-off thread was much more exciting.
That nerd-off was in a different league: it was an actual substantive debate. This one is more like a contest between two equally stubborn old goats who agree in substance yet insist on seeing who can split the semantic hair the finest. Though I must say, Miles, I was quite impressed with your deflection of sol's mischievous attempt to restart the entire dual momentum debate :)
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I see your point Miles, on a relative basis US stocks do appear to be more over valued than international, but I don't find his argument to be particularly inconsistent.
First I said in my previous post the diversification benefits of International equity are significantly smaller now than in the past. It makes no sense for Jack to change his mind about international investing now having been a skeptic all his life.
But I think you are placing too much weight on things like the relative P/E between the US and rest of the world.
ALL E AREN"T EQUAL.
I have friend who used to be the CFO of a medium sized Turkish company, she moved to the US with husband several years ago and is working on getting her CPA license in the US. In talking with her I found that in countries like Turkey and Russia and many other countries there multiple sets of books kept one for tax reasons, one for the public, and then the true sets of books.
So it is entirely possible that even though a US and foreign company both have earnings of a $1 the US company is properly valued at $25 and the foreign company at $15 because of the higher quality of the earnings of the US company.
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There are substantive differences between the compositions of the US and EU markets. The US market has a ton more (by percentage) tech companies and other firms that tend to have higher PEs, where the EU markets have a lot more (by percentage) firms like banks and utilities and telecomms that tend to have lower PEs. So the US PE should be > than the EU PE all else equal. I don't know exactly how much.
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ALL E AREN"T EQUAL.
...many other countries there multiple sets of books kept one for tax reasons, one for the public, and then the true sets of books....
< cough > enron < /cough >
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It's kind of an obvious example of logical inconsistency.
If you agree with the 99% tax example, you agree there's no logical inconsistency. You don't disagree with the logic of the argument, just the premise (and therefore conclusion).
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Though I must say, Miles, I was quite impressed with your deflection of sol's mischievous attempt to restart the entire dual momentum debate :)
I missed miles' deflection, I just saw him ignore it. But it did make me laugh. And ban sol for trolling.
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It's kind of an obvious example of logical inconsistency.
If you agree with the 99% tax example, you agree there's no logical inconsistency. You don't disagree with the logic of the argument, just the premise (and therefore conclusion).
I've already conceded that it is a theoretical possibility that a world could exist where the magnitude of negatives surrounding international investment could outweigh a 700 basis point disadvantage for domestic stocks based on valuation.
Practically, however, in the real world there is no way to make a credible argument for Bogle's 2 contentions that are consistent.
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Do you base all your investing decisions on the last 6 months of returns? If not, I'm not sure why those numbers are relevant.
No.
I do vary my US/Intl AA since as we've discussed the efficient frontier for US/Intl varies with time. Right now, I have made the same change that Vanguard has made this year: 60/40 for stocks, 70/30 for bonds. Since I recently made the change I have been looking at it on a shorter term basis than usual. I do keep an eye on US vs Intl performance and also look at efficient frontier to make slowly time varying changes to my US/Intl AA.
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I've done everything "wrong" to date so that I can do one thing right--not time the market.
I sold a bunch of stock in 2013 to make a large down-payment to buy a house. That cost me well over $100,000 in lost market gains.
I paid off that house in 2 years despite the fact that the interest rate was 3%. That probably cost me another $50,000 in lost market gains.
I borrowed from my TSP account the maximum amount to finish paying off the house, then paid that off in May. That cost me about $5000 in lost market gains.
I got a large HELOC and drained all my emergency savings. The checking and savings accounts went to their lowest balance since high school.
Why?
Because now ever excess dollar goes to my Vanguard total market index fund account. I don't think about whether the timing is good--indeed, I suspect the timing is not good. But since I have no other place for my money to go, it goes to the market. Extra money? To the market. Really? Yes, to the market. What about Greece? I don't care--to the market. 20% drop coming? Probably, but to the market. Every single paycheck from now until retirement--all excess to the market.
I know behavioral economics is my--and most people's--weakness. By paying off my house to address the one psychological concern I knew would really bug me--not being able to afford a place to live, I now feel like every dollar is non-essential. Of course I'd like to retire early, and I'm aiming to do so. But deep down, I know that if my investments collapse, I still earn way more than I spend, and I'm still debt free.
That allows me finally to invest without caring too much. And I'm optimistic that will make me a much better investor. Because I won't time the market!
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I've already conceded that it is a theoretical possibility that a world could exist where the magnitude of negatives surrounding international investment could outweigh a 700 basis point disadvantage for domestic stocks based on valuation.
Practically, however, in the real world there is no way to make a credible argument for Bogle's 2 contentions that are consistent.
I feel like we're back to the a priori confusion--we must be using terms differently. :)
You may think that there is no practical way to make an argument based on the world today that Bogle's two contentions are consistent, but that isn't a logical inconsistency.
A logical inconsistency is something like:
If A&B, then C
A&B, therefore penguin.
This case is more like if A&B, then C. A&B, therefore C. And you dispute A&B as being accurate (or saying both don't exist in the world today), and therefore saying it's logically/internally inconsistent. It's not.
The point that I am making here is really one of internal consistency.
This is the logical inconsistency.
If you find this to be internally consistent on St Jack's behalf, fair enough, but it's certainly not so on the basis of any rules of logic that I am aware of.
In such a world ... Bogle's reasoning would be sound.
In the actual reality based world, though, it is not.
It's kind of an obvious example of logical inconsistency.
That's what brooklynguy was pointing out. Again, it may be a definition problem, like the a priori confusion from earlier. But there is no logical or internal inconsistency. Even if you disagree that his premises are true, Jack's reasoning is sound.
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I've already conceded that it is a theoretical possibility that a world could exist where the magnitude of negatives surrounding international investment could outweigh a 700 basis point disadvantage for domestic stocks based on valuation.
Practically, however, in the real world there is no way to make a credible argument for Bogle's 2 contentions that are consistent.
I feel like we're back to the a priori confusion--we must be using terms differently. :)
You may think that there is no practical way to make an argument based on the world today that Bogle's two contentions are consistent, but that isn't a logical inconsistency.
A logical inconsistency is something like:
If A&B, then C
A&B, therefore penguin.
This case is more like if A&B, then C. A&B, therefore C. And you dispute A&B as being accurate (or saying both don't exist in the world today), and therefore saying it's logically/internally inconsistent. It's not.
The point that I am making here is really one of internal consistency.
This is the logical inconsistency.
If you find this to be internally consistent on St Jack's behalf, fair enough, but it's certainly not so on the basis of any rules of logic that I am aware of.
In such a world ... Bogle's reasoning would be sound.
In the actual reality based world, though, it is not.
It's kind of an obvious example of logical inconsistency.
That's what brooklynguy was pointing out. Again, it may be a definition problem, like the a priori confusion from earlier. But there is no logical or internal inconsistency. Even if you disagree that his premises are true, Jack's reasoning is sound.
You were correct until your last sentence. Then you overreached.
There may be no logical inconsistency in philosophical terms, but jack's reasoning is far from sound. It's about 688 basis points from being sound.
And if you disagree with that premise, then try to make the case. Not based on a theoretical world in which there are different tax rates for foreign and domestic equities, but on the actual world we live in.
I've conceded the abstract point. That ship has sailed. Now please, try to make a practical one.
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A logical inconsistency is something like:
If A&B, then C
A&B, therefore penguin.
Not enough data presented to determine whether consistent or not.
If C=penguin then it is consistent! :-)
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A logical inconsistency is something like:
If A&B, then C
A&B, therefore penguin.
Not enough data presented to determine whether consistent or not.
If C=penguin then it is consistent! :-)
Good point!
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You were correct until your last sentence. Then you overreached.
There may be no logical inconsistency in philosophical terms, but jack's reasoning is far from sound. It's about 688 basis points from being sound.
And if you disagree with that premise, then try to make the case. Not based on a theoretical world in which there are different tax rates for foreign and domestic equities, but on the actual world we live in.
I've conceded the abstract point. That ship has sailed. Now please, try to make a practical one.
lol. It's like talking to a brick wall. It's okay to admit you're wrong sometimes. :)
Especially because I think you two are in agreement with everything except semantics, but you don't want to be wrong about your use of "sound logic"/"logical inconsistency" so you refuse to admit it and try to change the point. But I think you both agree that Jack's in error in his analysis.
Never mind. Have a good day miles. Feel free to post again if you have to have the last word, as seems to be the case. I'm done. :)
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You were correct until your last sentence. Then you overreached.
There may be no logical inconsistency in philosophical terms, but jack's reasoning is far from sound. It's about 688 basis points from being sound.
And if you disagree with that premise, then try to make the case. Not based on a theoretical world in which there are different tax rates for foreign and domestic equities, but on the actual world we live in.
I've conceded the abstract point. That ship has sailed. Now please, try to make a practical one.
lol. It's like talking to a brick wall. It's okay to admit you're wrong sometimes. :)
Especially because I think you two are in agreement with everything except semantics, but you don't want to be wrong about your use of "sound logic"/"logical inconsistency" so you refuse to admit it and try to change the point. But I think you both agree that Jack's in error in his analysis.
Never mind. Have a good day miles. Feel free to post again if you have to have the last word, as seems to be the case. I'm done. :)
ARS
Whatevs dude.
I've already conceded the semantic point. Feel free to read the thread again. Sadly, neither you, Brooklyn, nor anyone else has been able to come up with a real world scenario in which Bogle's 2 contentions are in any way consistent. My honest belief is that there's a good reason for this: They aren't.
So for those keeping score at home here it is.
1. I have admitted that Bogles arguments are not technically "logically inconsistent." Mea culpa. Case closed.
2. No one has stepped up to the plate and even imagined a real world scenario in which his 2 claims are in any way consistent. But since the absence of proof is not the proof of absence, I will concede, the case remains open.
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You were correct until your last sentence. Then you overreached.
There may be no logical inconsistency in philosophical terms, but jack's reasoning is far from sound.
Uh, the last sentence was just another way of saying the same thing as the sentences before it. "His reasoning is sound" means the same thing as "there are no errors in his logic" (which is true even if there are errors in his premises).
Sadly, neither you, Brooklyn, nor anyone else has been able to come up with a real world scenario in which Bogle's 2 contentions are in any way consistent.
That's because, as I've said with every post, I agree with you that Bogle is wrong! (Though I still wouldn't chose to characterize his opinions as not being consistent - I just think they are not both correct.) As I said multiple times, I was merely making the limited point that his argument is not "logically inconsistent." That's all. You can't seem to take yes for an answer :)
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You were correct until your last sentence. Then you overreached.
There may be no logical inconsistency in philosophical terms, but jack's reasoning is far from sound.
Uh, the last sentence was just another way of saying the same thing as the sentences before it. "His reasoning is sound" means the same thing as "there are no errors in his logic" (which is true even if there are errors in his premises).
Sadly, neither you, Brooklyn, nor anyone else has been able to come up with a real world scenario in which Bogle's 2 contentions are in any way consistent.
That's because, as I've said with every post, I agree with you that Bogle is wrong! (Though I still wouldn't chose to characterize his opinions as not being consistent - I just think they are not both correct.) As I said multiple times, I was merely making the limited point that his argument is not "logically inconsistent." That's all. You can't seem to take yes for an answer :)
This is beyond frustrating and we are obviously just talking past each-other despite both of our best efforts.
I don't know how else to say it.
I have conceded that I was not semantically accurate when I said Bogle was logically inconsistent, because one can Imagine a scenario such as your 99% tax scenario in which his logic makes perfect sense.
The point that I have always been making is that in the world as it actually exists it is indefensible to argue the valuations matter to the tune of 700 basis points a year, and then to argue that it is also unwise to diversify internationally because it costs 12 basis points a year when international equities are at their long-term average valuation, and thus should be expected to have average returns going forward long-term. (I.e. using Bogle's logic, they should be expected to outperform domestic stocks by about 700 basis points a year based on valuation alone.)
Ie Where is the missing 700 basis point disadvantage to international diversification?
Whether or not you agree with me about international diversification is immaterial. The question is whether or not anyone can come up with a credible scenario in which Bogle's logic makes sense numerically.
It is an open question.
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This is beyond frustrating and we are obviously just talking past each-other despite both of our best efforts.
I don't know how else to say it.
I have conceded that I was not semantically accurate when I said Bogle was logically inconsistent, because one can Imagine a scenario such as your 99% tax scenario in which his logic makes perfect sense.
The point that I have always been making is that in the world as it actually exists it is indefensible to argue the valuations matter to the tune of 700 basis points a year, and then to argue that it is also unwise to diversify internationally because it costs 12 basis points a year when international equities are at their long-term average valuation, and thus should be expected to have average returns going forward long-term. (I.e. using Bogle's logic, they should be expected to outperform domestic stocks by about 700 basis points a year based on valuation alone.)
Ie Where is the missing 700 basis point disadvantage to international diversification?
Whether or not you agree with me about international diversification is immaterial. The question is whether or not anyone can come up with a credible scenario in which Bogle's logic makes sense numerically.
It is an open question.
Ok, I will try again, because my point was that Bogle’s opinions are logically consistent (even though I disagree with them) in the real world as it actually exists, and the fantasy hypothetical was only intended to illustrate why that is so.
These are Bogle’s contentions, as I understand them:
- The US equity markets are currently highly valued, such that they will return little to nothing over the next decade.
- Using the same valuation methodology used to reach the above conclusion, foreign equity markets are relatively undervalued (again, I don’t think I’ve ever read Bogle make this point, but I’m sure he would agree with it, because it is indisputable on its face).
- Nevertheless, US investors should avoid investing in foreign markets, because [insert host of reasons] (I inserted some illustrative examples of these reasons in my first post, including cost, but as you point out, cost cannot be the primary reason, or even all that important of a reason, because the cost differential is relatively small. So the other (mostly qualitative) reasons must be more important – e.g., better governmental stability, more efficient and transparent capital markets, superior legal, regulatory and accounting regimes, etc. - and they collectively outweigh the potential outsized returns that valuations would suggest foreign markets have to offer. Or, said differently, the expected risk-adjusted return of foreign markets is not higher than the US.)
The argument in bullet # 3 (which is based on reality, not hypotheticals) is not inconsistent with the arguments in bullets 1 and 2. That was the only point I was making.
Now, again, I disagree with the argument in bullet # 3. I think Bogle is wrong to take an “active” investment approach in the selection of geographic markets to invest in, for the same reasons that he advocates taking a passive investment approach in the selection of stocks within the selected market – it is extremely difficult to know which ones will prove to be the best picks in the future. Bogle’s argument is betting that the US will continue to outperform in the future based on circumstances that exist today. Someone taking the same approach a century ago would have avoided investing in the US and put all their eggs in the British Empire. So, for the same reasons that Bogle advocates “buying the market” instead of trying to pick winners among individual stocks, I believe it makes sense to diversify internationally instead of trying to pick winners among geographic markets. So I agree with you, and disagree with Bogle, but not because I see an inconsistency in the three bullet points above – instead, it’s because I disagree with the argument being made in bullet # 3. Make sense?
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What does not make sense is where the 688 basis point per annum deficit in performance comes from.
Is better government stability worth 500 basis points a year, and if so why has the U.S. outperformed more stable governments with longer histories like Britain?
I'm asking you to make a specific credible case for where this performance deficit is to be made up.
Try to make the case. It ain't easy. (Which is my point precisely)
Make sense?
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https://www.youtube.com/watch?v=ZjibEkDoXQc
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What does not make sense is where the 688 basis point per annum deficit in performance comes from.
Is better government stability worth 500 basis points a year, and if so why has the U.S. outperformed more stable governments with longer histories like Britain?
I'm asking you to make a specific credible case for where this performance deficit is to be made up.
Try to make the case. It ain't easy. (Which is my point precisely)
Make sense?
Well, I think Bogle's answer would have to be either that (i) you can't use the same valuation methodology to predict future returns in the U.S. and in other markets on an apples-to-apples basis (because of reasons like the accounting discrepancies referenced earlier in this thread, or some other reason) or (ii) yes, governmental stability plus the sum total of all the other reasons Bogle has for preferring the U.S. (whatever those are) are worth at least 688 basis points a year. If the valuation methodology of choice alone indicated enormous expected returns in the Republic of Wadiya, for instance, that wouldn't necessarily be a good reason to invest in that market, because the expected risk-adjusted return (reflecting all the known risks) is still low.
But this is all devil's advocacy, because, again, I disagree with Bogle on the foreign investment point, and I also disagree that ten-year-forward returns can necessarily be predicted with any reasonable certainty based on any valuation methodology.
https://www.youtube.com/watch?v=ZjibEkDoXQc
Which one am I: the Dude, or John Goodman?
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What does not make sense is where the 688 basis point per annum deficit in performance comes from.
Is better government stability worth 500 basis points a year, and if so why has the U.S. outperformed more stable governments with longer histories like Britain?
I'm asking you to make a specific credible case for where this performance deficit is to be made up.
Try to make the case. It ain't easy. (Which is my point precisely)
Make sense?
Well, I think Bogle's answer would have to be either that (i) you can't use the same valuation methodology to predict future returns in the U.S. and in other markets on an apples-to-apples basis (because of reasons like the accounting discrepancies referenced earlier in this thread, or some other reason) or (ii) yes, governmental stability plus the sum total of all the other reasons Bogle has for preferring the U.S. (whatever those are) are worth at least 688 basis points a year. If the valuation methodology of choice alone indicated enormous expected returns in the Republic of Wadiya, for instance, that wouldn't necessarily be a good reason to invest in that market, because the expected risk-adjusted return (reflecting all the known risks) is still low.
But this is all devil's advocacy, because, again, I disagree with Bogle on the foreign investment point, and I also disagree that ten-year-forward returns can necessarily be predicted with any reasonable certainty based on any valuation methodology.
https://www.youtube.com/watch?v=ZjibEkDoXQc
Which one am I: the Dude, or John Goodman?
Fair enough.
And I will just posit that Bogle doesn't really believe that accounting discrepancies, governmental variability and currency risk constitute a 688 basis point per annum advantage in expected returns for domestic over foreign equities.
Impossible to prove that to be the case though.
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https://www.youtube.com/watch?v=ZjibEkDoXQc
I thought of that one, but this seemed more fitting to me by this point:
(https://31.media.tumblr.com/tumblr_m7sd65inms1rsd9coo1_500.gif)
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Cycling Stache, that was a great post. I basically made all the same "mistakes" that you made, and now have a paid-off house with everything going "to the market!" on blindfolded autopilot. Oh well, at least its a lot less stressful this way :)
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https://www.youtube.com/watch?v=ZjibEkDoXQc
Which one am I: the Dude, or John Goodman?
I'm flexible. :) Whatever tickles your fancy. This exchange just reminded me of that scene.
Although it's tough to beat Reb's gif.
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...., and then to argue that it is also unwise to diversify internationally because it costs 12 basis points a year when international equities are at their long-term average valuation, ....
Actually, it only costs 9 additional basis points a year to invest in international equities.
VTI - 0.05% ER
VT - 0.17% ER which gives you 12 basis points. However, VT is 51.2% US stocks; 9 of the top 10 holdings are US. Only Nestle is in the top 10.
VXUS - 0.14% ER gives you a 9 basis point difference. It is 100% international.
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...., and then to argue that it is also unwise to diversify internationally because it costs 12 basis points a year when international equities are at their long-term average valuation, ....
Actually, it only costs 9 additional basis points a year to invest in international equities.
VTI - 0.05% ER
VT - 0.17% ER which gives you 12 basis points. However, VT is 51.2% US stocks; 9 of the top 10 holdings are US. Only Nestle is in the top 10.
VXUS - 0.14% ER gives you a 9 basis point difference. It is 100% international.
I would argue that VT is the only of those 3 that is internationally diverified. VTI has no non US equities, and VXUS has no US equities. Diversifying internationally does not mean divesting from the US entirely.
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Couldn't you do 50% VTI and 50% VXUS and thus average the ERs to get a 0.095% overall ER, which is only costing you 4.5 basis points above the domestic only?
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...., and then to argue that it is also unwise to diversify internationally because it costs 12 basis points a year when international equities are at their long-term average valuation, ....
Actually, it only costs 9 additional basis points a year to invest in international equities.
VTI - 0.05% ER
VT - 0.17% ER which gives you 12 basis points. However, VT is 51.2% US stocks; 9 of the top 10 holdings are US. Only Nestle is in the top 10.
VXUS - 0.14% ER gives you a 9 basis point difference. It is 100% international.
I would argue that VT is the only of those 3 that is internationally diverified. VTI has no non US equities, and VXUS has no US equities. Diversifying internationally does not mean divesting from the US entirely.
It is the only one of the three that is diversified on its own. I use VTI and VXUS to diversify; that way I can choose the US/Intl AA that I desire. Right now, I am using 60/40 US/Intl, same as Vanguard.
So, my effective ER is (0.6)(0.05%) + (0.4)(0.14%) = 0.086%. Therefore, as mentioned, it costs 9 additional basis points a year to invest in international equities. To invest in a diversified portfolio with the US/Intl AA I want only costs an additional 3.6 basis points.
In fact, using VTI and VXUS you can create an equivalent VT that has lower expense ratio. VTI has 51.2% US. So, if you buy 51.2% VTI and 48.8% VXUS you only pay 0.094% which saves you 7.6 basis points of expense ratio.
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Couldn't you do 50% VTI and 50% VXUS and thus average the ERs to get a 0.095% overall ER, which is only costing you 4.5 basis points above the domestic only?
We cross-posted. Great idea, eh? :-)
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Couldn't you do 50% VTI and 50% VXUS and thus average the ERs to get a 0.095% overall ER, which is only costing you 4.5 basis points above the domestic only?
Sure you could, And I don't understand off hand why VT is more expensive than VXUS at all. Since VT is > 50 % US equities (the cheaper side of the equation) shouldn't it be cheaper than VXUS?
Either way, it only makes Bogle's argument all the harder to defend!
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Regarding VXUS, 19 countries make up >90% of the portfolio. I am comfortable investing in all of these countries.
With respect to the previous comment regarding Turkey's accounting, Turkey only makes up 0.3% of VXUS so I am not concerned.
| Country | Allocation | Cumulative |
| Japan | 17.0% | 17.0% |
| United Kingdom | 14.8% | 31.8% |
| Canada | 6.6% | 38.4% |
| Switzerland | 6.2% | 44.6% |
| France | 6.1% | 50.7% |
| Germany | 5.9% | 56.6% |
| China | 5.2% | 61.8% |
| Australia | 4.9% | 66.7% |
| Korea | 3.1% | 69.8% |
| Taiwan | 3.1% | 72.9% |
| Hong Kong | 2.7% | 75.6% |
| India | 2.2% | 77.8% |
| Spain | 2.2% | 80.0% |
| Sweden | 2.1% | 82.1% |
| Netherlands | 2.0% | 84.1% |
| Italy | 1.8% | 85.9% |
| South Africa | 1.6% | 87.5% |
| Brazil | 1.5% | 89.0% |
| Denmark | 1.2% | 90.2% |
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Regarding VXUS, 19 countries make up >90% of the portfolio. I am comfortable investing in all of these countries.
With respect to the previous comment regarding Turkey's accounting, Turkey only makes up 0.3% of VXUS so I am not concerned.
| Country | Allocation | Cumulative |
| Japan | 17.0% | 17.0% |
| United Kingdom | 14.8% | 31.8% |
| Canada | 6.6% | 38.4% |
| Switzerland | 6.2% | 44.6% |
| France | 6.1% | 50.7% |
| Germany | 5.9% | 56.6% |
| China | 5.2% | 61.8% |
| Australia | 4.9% | 66.7% |
| Korea | 3.1% | 69.8% |
| Taiwan | 3.1% | 72.9% |
| Hong Kong | 2.7% | 75.6% |
| India | 2.2% | 77.8% |
| Spain | 2.2% | 80.0% |
| Sweden | 2.1% | 82.1% |
| Netherlands | 2.0% | 84.1% |
| Italy | 1.8% | 85.9% |
| South Africa | 1.6% | 87.5% |
| Brazil | 1.5% | 89.0% |
| Denmark | 1.2% | 90.2% |
I think your confidence maybe misplaced. I'd say that only the Scandinavian countries, Germany, and the Commonwealth countries, have level of financial reporting that is standard for US companies. Obviously, Enron, many banks, and variety of other companies show that that isn't a guarantee. The higher level of transparency and credibility lowers the risk of investing in US equities and justifies a higher P/E for US companies. This is in addition to the ofter higher growth prospect of US (especially tech) companies compared to their European counterparts.
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Sure you could, And I don't understand off hand why VT is more expensive than VXUS at all. Since VT is > 50 % US equities (the cheaper side of the equation) shouldn't it be cheaper than VXUS?
A fund's expense ratio (at least at Vanguard) isn't just some number plucked out of the air based on what the fund managers think they can get away with. It's the expenses of running the fund divided by the assets within the fund. Many fund expenses are fixed, and do not scale linearly with the growth of the fund. Thus, bigger funds will tend to have lower ERs because of the basic mathematical truth that occurs when the denominator in a fraction grows.
Total fund assets:
VTI: $410.8B
VXUS: $166.8B
VT: $7.3B
Since VT is still just a little baby, it suffers from a higher ER. As it grows, its ER should come down.
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Sure you could, And I don't understand off hand why VT is more expensive than VXUS at all. Since VT is > 50 % US equities (the cheaper side of the equation) shouldn't it be cheaper than VXUS?
A fund's expense ratio (at least at Vanguard) isn't just some number plucked out of the air based on what the fund managers think they can get away with. It's the expenses of running the fund divided by the assets within the fund. Many fund expenses are fixed, and do not scale linearly with the growth of the fund. Thus, bigger funds will tend to have lower ERs because of the basic mathematical truth that occurs when the denominator in a fraction grows.
Total fund assets:
VTI: $410.8B
VXUS: $166.8B
VT: $7.3B
Since VT is still just a little baby, it suffers from a higher ER. As it grows, its ER should come down.
Great explanation. Makes perfect sense. Thanks.
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Regarding VXUS, 19 countries make up >90% of the portfolio. I am comfortable investing in all of these countries.
With respect to the previous comment regarding Turkey's accounting, Turkey only makes up 0.3% of VXUS so I am not concerned.
| Country | Allocation | Cumulative |
| Japan | 17.0% | 17.0% |
| United Kingdom | 14.8% | 31.8% |
| Canada | 6.6% | 38.4% |
| Switzerland | 6.2% | 44.6% |
| France | 6.1% | 50.7% |
| Germany | 5.9% | 56.6% |
| China | 5.2% | 61.8% |
| Australia | 4.9% | 66.7% |
| Korea | 3.1% | 69.8% |
| Taiwan | 3.1% | 72.9% |
| Hong Kong | 2.7% | 75.6% |
| India | 2.2% | 77.8% |
| Spain | 2.2% | 80.0% |
| Sweden | 2.1% | 82.1% |
| Netherlands | 2.0% | 84.1% |
| Italy | 1.8% | 85.9% |
| South Africa | 1.6% | 87.5% |
| Brazil | 1.5% | 89.0% |
| Denmark | 1.2% | 90.2% |
I think your confidence maybe misplaced. I'd say that only the Scandinavian countries, Germany, and the Commonwealth countries, have level of financial reporting that is standard for US companies. Obviously, Enron, many banks, and variety of other companies show that that isn't a guarantee. The higher level of transparency and credibility lowers the risk of investing in US equities and justifies a higher P/E for US companies. This is in addition to the ofter higher growth prospect of US (especially tech) companies compared to their European counterparts.
Let me add a little more detail to my statement - I am comfortable investing with Vanguard in all of these countries since I believe they have people familiar with all of the vagaries of investing in the countries the fund owns stock in.
I removed the countries you listed and these remain: Japan, Switzerland, France, China, Korea, Taiwan, Hong Kong, Spain, Netherlands, Italy, Brazil.
Looking at one of your previous posts . . .
I'll also say that I'm one of the least conservative investors on the forum: individual securities, microcap stocks, peer to peer lending, hard money loans, real estate, angel investment, VC funds, margin loans, shorting stocks, leverage closed end funds, structured investments, junk bonds, virtually every type of option. Other than day trading, and buying options on VIX futures, there is pretty much nothing that I haven't bought or sold over the decades. I am also much closer to a perma bull than perma bear.
Do you think that all of these types of investing in the US are less risky than passive investing in the foreign countries that remain? I agree that some of the remaining countries have growing pains (especially China) but Japan, Switzerland, France?
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Regarding VXUS, 19 countries make up >90% of the portfolio. I am comfortable investing in all of these countries.
With respect to the previous comment regarding Turkey's accounting, Turkey only makes up 0.3% of VXUS so I am not concerned.
| Country | Allocation | Cumulative |
| Japan | 17.0% | 17.0% |
| United Kingdom | 14.8% | 31.8% |
| Canada | 6.6% | 38.4% |
| Switzerland | 6.2% | 44.6% |
| France | 6.1% | 50.7% |
| Germany | 5.9% | 56.6% |
| China | 5.2% | 61.8% |
| Australia | 4.9% | 66.7% |
| Korea | 3.1% | 69.8% |
| Taiwan | 3.1% | 72.9% |
| Hong Kong | 2.7% | 75.6% |
| India | 2.2% | 77.8% |
| Spain | 2.2% | 80.0% |
| Sweden | 2.1% | 82.1% |
| Netherlands | 2.0% | 84.1% |
| Italy | 1.8% | 85.9% |
| South Africa | 1.6% | 87.5% |
| Brazil | 1.5% | 89.0% |
| Denmark | 1.2% | 90.2% |
I think your confidence maybe misplaced. I'd say that only the Scandinavian countries, Germany, and the Commonwealth countries, have level of financial reporting that is standard for US companies. Obviously, Enron, many banks, and variety of other companies show that that isn't a guarantee. The higher level of transparency and credibility lowers the risk of investing in US equities and justifies a higher P/E for US companies. This is in addition to the ofter higher growth prospect of US (especially tech) companies compared to their European counterparts.
Let me add a little more detail to my statement - I am comfortable investing with Vanguard in all of these countries since I believe they have people familiar with all of the vagaries of investing in the countries the fund owns stock in.
I removed the countries you listed and these remain: Japan, Switzerland, France, China, Korea, Taiwan, Hong Kong, Spain, Netherlands, Italy, Brazil.
Looking at one of your previous posts . . .
I'll also say that I'm one of the least conservative investors on the forum: individual securities, microcap stocks, peer to peer lending, hard money loans, real estate, angel investment, VC funds, margin loans, shorting stocks, leverage closed end funds, structured investments, junk bonds, virtually every type of option. Other than day trading, and buying options on VIX futures, there is pretty much nothing that I haven't bought or sold over the decades. I am also much closer to a perma bull than perma bear.
Do you think that all of these types of investing in the US are less risky than passive investing in the foreign countries that remain? I agree that some of the remaining countries have growing pains (especially China) but Japan, Switzerland, France?
I think it's hilarious that any of us would imagine that we have the ability to judge the health of other countries capital systems/accounting practices enough to pick winners and losers.
Have at it boys!
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I think it's hilarious that any of us would imagine that we have the ability to judge the health of other countries capital systems/accounting practices enough to pick winners and losers.
Have at it boys!
That's exactly why I'm perfectly happy letting VXUS do it for me; I don't have the inclination, time, experience, or resources to do international investing myself and be adequately diversified.
And, if some of the companies go belly up VXUS is invested in 5888 stocks so the impact should be minimal.
Vanguard Total International Stock ETF (VXUS) - Portfolio & Management (https://personal.vanguard.com/us/funds/snapshot?FundId=3369&FundIntExt=INT#tab=2)
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If you are comfortable investing in Brazil at the moment you are either a) a crazed maniac, b) a genius, or c) not paying attention.
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If you are comfortable investing in Brazil at the moment you are either a) a crazed maniac, b) a genius, or c) not paying attention.
If you think you can successfully predict the future performance of a cap weighted Brazil index you are either;
1. Overconfident
2. Foolish
3. All of the above
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Not sure if this has been posted elsewhere or not but felt this was an appropriate thread to resurrect.
Video of Christine Benz discussing this topic with Jack Bogle last week.
http://www.morningstar.com/cover/videocenter.aspx?id=718639
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Not sure if this has been posted elsewhere or not but felt this was an appropriate thread to resurrect.
Video of Christine Benz discussing this topic with Jack Bogle last week.
http://www.morningstar.com/cover/videocenter.aspx?id=718639
Thanks for posting that video. So in Bogles own word's he feels that international markets are not worth investing in because there are less investor protections, Foreign contrie's have unique risks, and the US is more innovative. Essentially he's pedaling US exceptionalism. Which is funny because in Japan all of the home field bias investor's believe in Japanese exceptionalism, and Germans believe in German exceptionalism, etc...
So on one hand he calculates forward US returns using Dividend yield, expected earnings growth, and valuation, but he discounts the role of valuation in international markets because of all or these gestalt feelings about non US economies that are completely non quantitative.
It just strikes me as an obvious example of one man's cognitive bias. We all have them, even Jack.
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It just strikes me as an obvious example of one man's cognitive bias.
At the risk of triggering an infinite loop of semantical debate, I don't see how this is an example of cognitive bias, which Wikipedia defines as follows:
A cognitive bias refers to a systematic pattern of deviation from norm or rationality in judgment, whereby inferences about other people and situations may be drawn in an illogical fashion.
As I said in response to your first post in this thread claiming that Bogle is irrational for concurrently believing that the U.S. equity market is overvalued and that investors should not diversify outside the U.S.:
There is no logical inconsistency in Bogle's argument. Now, I'm not saying I agree with it (because I don't - I think it's a smart idea to diversify internationally), but there are a host of reasons why one could believe (with logical consistency) that it makes sense to passively invest in the U.S. to the exclusion of foreign markets (some of which I find more compelling than others), including, but not limited to, the following:
- it costs less
- the U.S. has the world's most robust and transparent equity markets
- the U.S. has more established governmental and legal institutions
- U.S. investments will expose U.S.-resident investors to less currency risk
Bogle advocates for an active investment approach when it comes to selecting the jurisdiction in which to invest even though he advocates for a totally passive investing approach when it comes to investing within that selected jurisdiction. As I said, I don't completely buy his argument (because in doing so you're basically betting that the reasons for preferring the U.S. will persist into the future), but there is no logical inconsistency in holding both opinions simultaneously.
You and I may both disagree with Bogle about the advisability of taking a strictly active investment approach in the selection of one's universe of investment jurisdictions, but there is nothing irrational or illogical about (and therefore no cognitive bias in) believing that one should take such an approach even if you simultaneously believe that one should take a strictly passive investment approach when selecting investments within that universe.
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Brooklyn, as fun as it was to debate the semantics of "logical inconsistency" I don't think I have it in me to go for pages on the accuracy of my use of cognitive bias.
Needless to say I believe my use was accurate.
Home field bias fits very neatly into the category of cognitive biases, based on the definition you have shared.
In my view Bogle's argument is a text book example of homefield bias as it is practiced all over the world.
It is striking how he completely ignores his own model for expected returns as soon as he moves from us to international equities.
He doesn't argue that earnings growth will be less internationally, or that PE multiples are any less likely to revert to the mean, or that expenses are different. He just completely ignores his own model.
And this observation has nothing to do with whether you or I disagree with Bogle about international diversification. This has to do with Bogle's own internal inconsistency.