Author Topic: little reminder just how gross the valuation of equities is  (Read 6573 times)

zoro

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little reminder just how gross the valuation of equities is
« on: November 13, 2020, 07:52:48 PM »
Looking at the Buffett indicator (valuation/gdp) shows just how high equity prices are.

celerystalks

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Re: little reminder just how gross the valuation of equities is
« Reply #1 on: November 13, 2020, 09:56:31 PM »
The ten year treasury is yielding less than 1%. Buffet has also said that these bonds currently donít offer risk free return, but return free risk.

zoro

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Re: little reminder just how gross the valuation of equities is
« Reply #2 on: November 14, 2020, 03:53:45 AM »
exactly. just wait until stocka and bonds go down at the same time, and this risk parity strategy that Bridgewater et al have been selling to everyone implodes. It will become really interesting, really quickly

Imanuels

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Re: little reminder just how gross the valuation of equities is
« Reply #3 on: November 14, 2020, 07:33:49 AM »
Not sure what do mean by that. Ray Dalio himself has said at multiple occasions that 'You'd Be Pretty Crazy' to Hold Bonds Right Now or that bonds are too volatile relative to the tiny yields they offer ó 'one dayís price change is greater than one yearís yield'.

PDXTabs

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Re: little reminder just how gross the valuation of equities is
« Reply #4 on: November 14, 2020, 08:39:37 AM »
Yup. We used to talk about the Everything Bubble but it went on for so long that people got used to it.

I still can't find a better place to put my money than VT.

mistymoney

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Re: little reminder just how gross the valuation of equities is
« Reply #5 on: November 14, 2020, 08:59:46 AM »
The ten year treasury is yielding less than 1%. Buffet has also said that these bonds currently donít offer risk free return, but return free risk.

do bonds offer anything above money market funds currently? would money market be safer with somewhat equal returns?


waltworks

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Re: little reminder just how gross the valuation of equities is
« Reply #6 on: November 14, 2020, 10:16:20 AM »
Valuations have been nutso for years and years. But sitting in cash has risks too. Might as well just keep plugging along.

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Re: little reminder just how gross the valuation of equities is
« Reply #7 on: November 14, 2020, 10:43:33 AM »
In this environment, you do not hold bonds for gains. But there are other reasons to hold them.

reeshau

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Re: little reminder just how gross the valuation of equities is
« Reply #8 on: November 14, 2020, 11:36:30 AM »
The other thing you have to keep in mind with a chart that long is how the markets have changed.  There are a large number of foreign equities who have listed on US markets, but won't contribute to GDP.  (e.g. Alibaba $716B, Tencent $743B, etc.)

I don't say this negates the observation, but it is skewed vs. the 20th century.

celerystalks

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Re: little reminder just how gross the valuation of equities is
« Reply #9 on: November 14, 2020, 02:49:40 PM »
The other thing you have to keep in mind with a chart that long is how the markets have changed.  There are a large number of foreign equities who have listed on US markets, but won't contribute to GDP.  (e.g. Alibaba $716B, Tencent $743B, etc.)

I don't say this negates the observation, but it is skewed vs. the 20th century.
This is an excellent point.

celerystalks

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Re: little reminder just how gross the valuation of equities is
« Reply #10 on: November 14, 2020, 03:16:21 PM »
The ten year treasury is yielding less than 1%. Buffet has also said that these bonds currently donít offer risk free return, but return free risk.

do bonds offer anything above money market funds currently? would money market be safer with somewhat equal returns?

What do you mean by ďsafeĒ? Low volatility? Or likelihood to keep up with inflation over a long holding period?

lowroller4111

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Re: little reminder just how gross the valuation of equities is
« Reply #11 on: November 14, 2020, 03:50:19 PM »
This is due to earnings being artificially low due to Covid, so the current PE should not be taken seriously.. Covid is a temporary phenomenon and earnings will skyrocket after it is over bringing valuations drastically down.

Paul der Krake

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Re: little reminder just how gross the valuation of equities is
« Reply #12 on: November 14, 2020, 04:23:02 PM »
Wait until you look at real estate...

Low rates mean everything is expensive.

MustacheAndaHalf

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Re: little reminder just how gross the valuation of equities is
« Reply #13 on: November 16, 2020, 08:10:27 AM »
How is that chart supposed to be used?

If you take the years up to 2000 (the dot com boom/bust), you see an average measurement of 60%.  So would 50% be a buy signal?

After 2000, I don't see it ever hitting 50%... sounds like by this measure, there should be no investing in equities for the past 20 years.  And yet Buffet hasn't stopped buying, so I'm not even clear who uses this chart, let alone how they use it.

SuperSecretName

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Re: little reminder just how gross the valuation of equities is
« Reply #14 on: November 16, 2020, 08:40:53 AM »
don't forget the role that buybacks play in skewing pre-90 data


AdrianC

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Re: little reminder just how gross the valuation of equities is
« Reply #15 on: November 18, 2020, 07:32:05 AM »
Looking at the Buffett indicator (valuation/gdp) shows just how high equity prices are.
Buffett has $245 billion in equities. That's 44% of Berkshire's market cap. I don't think he's particularly bearish on equities.

reeshau

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Re: little reminder just how gross the valuation of equities is
« Reply #16 on: November 18, 2020, 07:50:38 AM »
Looking at the Buffett indicator (valuation/gdp) shows just how high equity prices are.
Buffett has $245 billion in equities. That's 44% of Berkshire's market cap. I don't think he's particularly bearish on equities.

I would balance that fact with the fact they $142B in cash and T-Bills.  They have no dividend to support--he would spend it if he found worthy targets.

RWD

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Re: little reminder just how gross the valuation of equities is
« Reply #17 on: November 18, 2020, 08:39:27 AM »
Looking at the Buffett indicator (valuation/gdp) shows just how high equity prices are.

I'll add it to the list.

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ChpBstrd

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Re: little reminder just how gross the valuation of equities is
« Reply #18 on: November 18, 2020, 09:45:51 AM »
Value stocks have a weighted average P/E of about 18.6, judging by the Vanguard Value Index mutual fund or the Vanguard value ETF.

https://ycharts.com/mutual_funds/M:VIVIX
https://ycharts.com/companies/VTV

Emerging markets (measured as VWO) have a weighted average PE of 16.48.

https://ycharts.com/companies/VWO

Beneath the tech mega-caps that occupy the headlines, there is another stock market with valuations close to normal. Of course, this observation only strengthens the case that we are heading for another tech bubble like in 2000 (value stocks were hit hard as collateral damage back then too!).

zoro

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Re: little reminder just how gross the valuation of equities is
« Reply #19 on: November 18, 2020, 10:23:40 AM »
as this site is an early retirement site - maybe you guys are younger than me, perhaps I could share a cautionary story of one of my friends. In 1998 I sold all my stocks as the valuation was crazy, cashflows discounted back didn't match the prices. I put my money in ibonds which had just been issued - you could buy them with a points credit card at the time - and they yielded 6% tax free.  My friend mocked me mercilessly as he doubled his money in NASDAQ stocks over the next two years.  When Nasdaq crashed he easily lost at least 90% of his net worth.  No fear though in 2001 he moved to Miami, and started flipping houses. He again doubled his money as prices went crazy.  At the same time I was a seller of my rental properties as the cash flow from rent discounted back broke my 200x monthly rent rule. I sold my last one in Aug 2005.  He lost everything in the crash that followed.  He is now 67, his wife still works as a nurse to help supplement their income - that isnt coming from the hundreds of thousands of dollars he lost buying over priced assets.  We are still friends, but there is a coldness there.
I still have my I bonds and the 6% they are kicking off will pay my kids through college - after I retire - it will all be tax free as I will be using it for childrens education.  I have been a net buyer of distressed real estate since 2010 - in one case buying the same house I sold for 4x the price in 2005.  I would strongly urge you to critically review the expected cashflows from your stock investments discounted back to the present, and not assert that prices will always go up. We are in a bubble.

waltworks

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Re: little reminder just how gross the valuation of equities is
« Reply #20 on: November 18, 2020, 10:37:58 AM »
as this site is an early retirement site - maybe you guys are younger than me, perhaps I could share a cautionary story of one of my friends. In 1998 I sold all my stocks as the valuation was crazy, cashflows discounted back didn't match the prices. I put my money in ibonds which had just been issued - you could buy them with a points credit card at the time - and they yielded 6% tax free.  My friend mocked me mercilessly as he doubled his money in NASDAQ stocks over the next two years.  When Nasdaq crashed he easily lost at least 90% of his net worth.  No fear though in 2001 he moved to Miami, and started flipping houses. He again doubled his money as prices went crazy.  At the same time I was a seller of my rental properties as the cash flow from rent discounted back broke my 200x monthly rent rule. I sold my last one in Aug 2005.  He lost everything in the crash that followed.  He is now 67, his wife still works as a nurse to help supplement their income - that isnt coming from the hundreds of thousands of dollars he lost buying over priced assets.  We are still friends, but there is a coldness there.
I still have my I bonds and the 6% they are kicking off will pay my kids through college - after I retire - it will all be tax free as I will be using it for childrens education.  I have been a net buyer of distressed real estate since 2010 - in one case buying the same house I sold for 4x the price in 2005.  I would strongly urge you to critically review the expected cashflows from your stock investments discounted back to the present, and not assert that prices will always go up. We are in a bubble.

You're aware that you would have done better (by a couple percent as of today) to just hold your stocks, right? That would have earned you something around 8% annualized (assuming you sold in January 1998, if it was December you would have made 7% annualized).

If your point is that panic selling/loads of leverage/spending more than your make like your buddy is bad, I agree.

-W
« Last Edit: November 18, 2020, 10:44:43 AM by waltworks »

zoro

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Re: little reminder just how gross the valuation of equities is
« Reply #21 on: November 18, 2020, 10:43:42 AM »
6% tax free compounding on something I bought for 98c on the dollar is better than 8%. Im pretty happy with the choice

waltworks

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Re: little reminder just how gross the valuation of equities is
« Reply #22 on: November 18, 2020, 10:47:06 AM »
6% tax free compounding on something I bought for 98c on the dollar is better than 8%. Im pretty happy with the choice

ERm, no, 6% is not better than 8%. Taxes aren't going to close that gap unless you're doing something truly weird, since you're only going to be paying on the dividends (a few percent of a few percent ain't much).

What did you pay in capital gains when you sold all your holdings in one year? Yeah...

-W
« Last Edit: November 18, 2020, 10:48:43 AM by waltworks »

RWD

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Re: little reminder just how gross the valuation of equities is
« Reply #23 on: November 18, 2020, 11:42:46 AM »
[...] as he doubled his money in NASDAQ stocks over the next two years.  When Nasdaq crashed he easily lost at least 90% of his net worth.
Sounds like he was stock picking instead of indexing? The NASDAQ did not lose 90% in the dot-com crash.

I sleep well by investing in broad market index funds, both domestic and international, and 15% bonds.

AdrianC

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Re: little reminder just how gross the valuation of equities is
« Reply #24 on: November 18, 2020, 11:42:51 AM »
Looking at the Buffett indicator (valuation/gdp) shows just how high equity prices are.
Buffett has $245 billion in equities. That's 44% of Berkshire's market cap. I don't think he's particularly bearish on equities.

I would balance that fact with the fact they $142B in cash and T-Bills.  They have no dividend to support--he would spend it if he found worthy targets.
Only some of it. There's a liability of $131 billion covered by the cash and T-Bills - the insurance float. For the last 20 years he's kept enough in cash and bonds to cover the float, except for a couple of brief periods when he went down to 80% of float. He says they'd never get below $20 billion. In practice, they don't go below 80% of float, currently about $100 billion.

zoro

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Re: little reminder just how gross the valuation of equities is
« Reply #25 on: November 18, 2020, 11:47:59 AM »
Its actually pretty close. Each dollar invested at 98c/100c at 6% gives $3.47 tax free for kids education over last 21 years. Each dollar invested at 8% would give $5.47 but given my long term cap gains tax in NJ would only result in $3.43 when i sell for their education. (giving you the benefit of no tax on the dividends as its too hard to calculate)
I dont remember paying cap gains tax selling in 1998 as my portfolio was quite small age 26 and i would have loss harvested if i had anything significant.


6% tax free compounding on something I bought for 98c on the dollar is better than 8%. Im pretty happy with the choice

ERm, no, 6% is not better than 8%. Taxes aren't going to close that gap unless you're doing something truly weird, since you're only going to be paying on the dividends (a few percent of a few percent ain't much).

What did you pay in capital gains when you sold all your holdings in one year? Yeah...

-W

zoro

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Re: little reminder just how gross the valuation of equities is
« Reply #26 on: November 18, 2020, 11:50:19 AM »
yes you are correct. he was in all the junky go go stuff.

[...] as he doubled his money in NASDAQ stocks over the next two years.  When Nasdaq crashed he easily lost at least 90% of his net worth.
Sounds like he was stock picking instead of indexing? The NASDAQ did not lose 90% in the dot-com crash.

I sleep well by investing in broad market index funds, both domestic and international, and 15% bonds.

waltworks

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Re: little reminder just how gross the valuation of equities is
« Reply #27 on: November 18, 2020, 11:58:25 AM »
I dont remember paying cap gains tax selling in 1998 as my portfolio was quite small age 26 and i would have loss harvested if i had anything significant.

Um, what? It was too small an amount to pay any capital gains on, but it's funding your kids college?

Unless you were making basically no money, and were selling some tiny amount of shares that had barely appreciated (not likely in 1998, but whatever) you paid significant taxes on that sale at the Federal level. No idea on state, though if you're in NJ then you'd have paid that too.

-W

PDXTabs

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Re: little reminder just how gross the valuation of equities is
« Reply #28 on: November 18, 2020, 12:02:55 PM »
don't forget the role that buybacks play in skewing pre-90 data

How so? I don't understand why share buybacks would skew the data.

With that said, the Buffett Indicator is the total US stock market to GDP ratio. So the more companies you take private, the lower it gets. Conversely the more companies that go public the higher it gets. For this reason, although interesting, it seems a tiny bit arbitrary.

zoro

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Re: little reminder just how gross the valuation of equities is
« Reply #29 on: November 18, 2020, 12:13:09 PM »
I just looked back at my 1998 tax return I had a capital loss of $161. not sure what i did  it was likely a combination of not much money and harvesting i guess. I bought $30k of I bonds in 1998 as i think that was the max and $30k for the next four years. It was before i discovered a neat trick to beat index funds tax free so i was in bonds all that time.
I dont remember paying cap gains tax selling in 1998 as my portfolio was quite small age 26 and i would have loss harvested if i had anything significant.

Um, what? It was too small an amount to pay any capital gains on, but it's funding your kids college?

Unless you were making basically no money, and were selling some tiny amount of shares that had barely appreciated (not likely in 1998, but whatever) you paid significant taxes on that sale at the Federal level. No idea on state, though if you're in NJ then you'd have paid that too.

-W

waltworks

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Re: little reminder just how gross the valuation of equities is
« Reply #30 on: November 18, 2020, 12:22:56 PM »
So you had $120k sitting in cash the first year, $90k the next, etc? That hurts your return calculation too.

IMO, your story is a great lesson about why market timing doesn't work. Even getting out at the "right" time (close to ideal, really), you're at best no better off than you would have been (and really only because the amount was so small, there would have been significant costs involved in selling a large stock portfolio) just holding onto your stocks and doing absolutely nothing, even though the market returned a bit under it's historical average over that time period.

Agree with other posters that this specific metric seems pretty useless unless you're controlling for companies entering/leaving (ie foreign entities listing in the US, companies going public/private, etc), even if you do want to use it to market time.

-W
« Last Edit: November 18, 2020, 12:28:10 PM by waltworks »

zoro

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Re: little reminder just how gross the valuation of equities is
« Reply #31 on: November 18, 2020, 12:30:16 PM »
no sold stocks in first year and put new money in as i earned.
I still think value timing is a valid approach rather than mindless buying of over priced assets.
Good luck though.
So you had $120k sitting in cash the first year, $90k the next, etc? That hurts your return calculation too.

IMO, your story is a great lesson about why market timing doesn't work. Even getting out at the "right" time (close to ideal, really), you're at best no better off than you would have been (and really only because the amount was so small, there would have been significant costs involved in selling a large stock portfolio) just holding onto your stocks and doing absolutely nothing, even though the market returned a bit under it's historical average over that time period.

Agree with other posters that this specific metric seems pretty useless unless you're controlling for companies entering/leaving (ie foreign entities listing in the US, companies going public/private, etc), even if you do want to use it to market time.

-W

waltworks

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Re: little reminder just how gross the valuation of equities is
« Reply #32 on: November 18, 2020, 12:39:12 PM »
no sold stocks in first year and put new money in as i earned.
I still think value timing is a valid approach rather than mindless buying of over priced assets.
Good luck though.

Yes, it's worked great (FI) for me, starting around the same time as you though with much less money/income at the beginning. When your time horizon is long, it's not really a luck issue (unless you're worried about the end of capitalism/civilization... but iBonds won't do much for you there either).

What are you going to invest in when your bonds mature in a few years?

-W

EliteZags

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Re: little reminder just how gross the valuation of equities is
« Reply #33 on: November 18, 2020, 12:42:17 PM »
have you're "ibonds" been available to continue contributing to continuously over the past 20 years with steady 6% return? then why compare that to putting money into the market which people do to invest their savings continuously to grow their net worth consistently long term
« Last Edit: November 18, 2020, 12:44:20 PM by EliteZags »

zoro

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Re: little reminder just how gross the valuation of equities is
« Reply #34 on: November 18, 2020, 01:00:53 PM »
no of course not that was just an example from twenty years ago. i am a value investor and have been able to find things to invest in with a margin of safety backed up by strong cashflows.  There are many ways to FI I guess. I have been able to do it without ever owning a Vanguard fund for example.
have you're "ibonds" been available to continue contributing to continuously over the past 20 years with steady 6% return? then why compare that to putting money into the market which people do to invest their savings continuously to grow their net worth consistently long term

LoanShark

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Re: little reminder just how gross the valuation of equities is
« Reply #35 on: November 18, 2020, 01:05:10 PM »
TINA = There Is No Alternative

PDXTabs

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Re: little reminder just how gross the valuation of equities is
« Reply #36 on: November 18, 2020, 01:09:25 PM »
TINA = There Is No Alternative

I'm 100% equities, but real estate would be one alternative.

EliteZags

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Re: little reminder just how gross the valuation of equities is
« Reply #37 on: November 18, 2020, 02:21:09 PM »
no of course not that was just an example from twenty years ago. i am a value investor and have been able to find things to invest in with a margin of safety backed up by strong cashflows.  There are many ways to FI I guess. I have been able to do it without ever owning a Vanguard fund for example.
have you're "ibonds" been available to continue contributing to continuously over the past 20 years with steady 6% return? then why compare that to putting money into the market which people do to invest their savings continuously to grow their net worth consistently long term

so have you actually beaten the market gains over the past 20 something years?

zoro

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Re: little reminder just how gross the valuation of equities is
« Reply #38 on: November 18, 2020, 04:03:16 PM »
Yes pretty significantly. You can see my case study. I think I also wrote up at least one technique to beat the Vanguard S&P 500 fund by quite a few percentage points.

waltworks

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Re: little reminder just how gross the valuation of equities is
« Reply #39 on: November 18, 2020, 04:11:07 PM »
I'll stick with going mountain biking and doing nothing but the occasional rebalance. My time is too valuable for more than that.

-W

dividendman

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Re: little reminder just how gross the valuation of equities is
« Reply #40 on: November 18, 2020, 04:27:56 PM »
Top is in

zoro

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waltworks

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Re: little reminder just how gross the valuation of equities is
« Reply #42 on: November 18, 2020, 08:19:50 PM »
Yep
Top is in

You may want to go read that thread... if you have all day.

-W

MustacheAndaHalf

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Re: little reminder just how gross the valuation of equities is
« Reply #43 on: November 19, 2020, 07:19:12 AM »
Setting aside that hindsight is 20/20 for a moment, according to Portfolio Visualizer, two portfolios running from 1998-2007 earned:
US Total Stock Market: 6.25% CAGR, 15.19% stddev
Intermediate Term Treasury: 6.26% CAGR, 4.79% stddev

That's a much better risk-adjusted return for treasuries, which are backed by the full faith and credit of the U.S. government.  I'm not sure why we're trying to retroactively pick a winner in 1998, but someone could reasonably defend the choice of treasuries even using the benefit of hindsight.

waltworks

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Re: little reminder just how gross the valuation of equities is
« Reply #44 on: November 19, 2020, 07:48:27 AM »
Setting aside that hindsight is 20/20 for a moment, according to Portfolio Visualizer, two portfolios running from 1998-2007 earned:
US Total Stock Market: 6.25% CAGR, 15.19% stddev
Intermediate Term Treasury: 6.26% CAGR, 4.79% stddev

That's a much better risk-adjusted return for treasuries, which are backed by the full faith and credit of the U.S. government.  I'm not sure why we're trying to retroactively pick a winner in 1998, but someone could reasonably defend the choice of treasuries even using the benefit of hindsight.

We were discussing it because OP was bragging about going all into treasuries (after selling his stock holdings, though it now sounds like they were negligible) in 1998, and how that money is now paying for his kids college. I merely wanted to point out that someone who didn't sell their stocks and just did nothing would have done a little bit better as of now, even though OP sold at the "right" time.

Treasuries did great against stocks if you pick a stock peak and then trough as start/end points, sure. Why did you pick 2007?

-W

MustacheAndaHalf

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Re: little reminder just how gross the valuation of equities is
« Reply #45 on: November 19, 2020, 08:28:21 AM »
Setting aside that hindsight is 20/20 for a moment, according to Portfolio Visualizer, two portfolios running from 1998-2007 earned:
US Total Stock Market: 6.25% CAGR, 15.19% stddev
Intermediate Term Treasury: 6.26% CAGR, 4.79% stddev

That's a much better risk-adjusted return for treasuries, which are backed by the full faith and credit of the U.S. government.  I'm not sure why we're trying to retroactively pick a winner in 1998, but someone could reasonably defend the choice of treasuries even using the benefit of hindsight.

We were discussing it because OP was bragging about going all into treasuries (after selling his stock holdings, though it now sounds like they were negligible) in 1998, and how that money is now paying for his kids college. I merely wanted to point out that someone who didn't sell their stocks and just did nothing would have done a little bit better as of now, even though OP sold at the "right" time.

Treasuries did great against stocks if you pick a stock peak and then trough as start/end points, sure. Why did you pick 2007?
I picked 10 years (1998-2007) as a round number, which isn't a good reason.  I actually think you asked a good question, there.  But 2007 wasn't the low point, nor was 1998 the peak.

If I wanted the real trough, that would be 2009.  From 1998-2009 stocks earned 3.35% annualized, while intermediate treasuries earned 6.1%.  And picking the real peak and the real trough gives you what's called "the lost decade" for stocks, 2000-2009.  Under that scenario, stocks were -0.27% annualized while intermediate treasuries earned 6.72%.  In the actual peak-trough scenario, treasuries beat stocks by 7% per year for a decade.

To me the OP sounds lucky, and they point out some friend who was greedy.  But neither of them mention diversification.  Would a 50% stock / 50% bond portfolio have beaten both of them?  Probably.

OP didn't cite a specific valuation number, but a common value measure is Schiller P/E ratio (aka "CAPE 10"), which uses 10 years of earnings to smooth out ups and downs.
https://www.multpl.com/shiller-pe
I see about a 30 p/e ratio (10 yr) in 1995, and about 35 p/e in 1998.  If the OP used CAPE 10, that suggests selling somewhere around 30-35.  But stocks dropped back below that level in 2002... but OP didn't mention getting back into stocks.

If there's a valuation criteria that suggests getting out in 1998, does it suggest staying out for the 20 years after that?

ChpBstrd

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Re: little reminder just how gross the valuation of equities is
« Reply #46 on: November 19, 2020, 08:36:58 AM »
Setting aside that hindsight is 20/20 for a moment, according to Portfolio Visualizer, two portfolios running from 1998-2007 earned:
US Total Stock Market: 6.25% CAGR, 15.19% stddev
Intermediate Term Treasury: 6.26% CAGR, 4.79% stddev

That's a much better risk-adjusted return for treasuries, which are backed by the full faith and credit of the U.S. government.  I'm not sure why we're trying to retroactively pick a winner in 1998, but someone could reasonably defend the choice of treasuries even using the benefit of hindsight.

We were discussing it because OP was bragging about going all into treasuries (after selling his stock holdings, though it now sounds like they were negligible) in 1998, and how that money is now paying for his kids college. I merely wanted to point out that someone who didn't sell their stocks and just did nothing would have done a little bit better as of now, even though OP sold at the "right" time.

Treasuries did great against stocks if you pick a stock peak and then trough as start/end points, sure. Why did you pick 2007?

-W

@MustacheAndaHalf was certainly being generous by not picking 2009 or 10.

I'll add that looking at CAGR alone does not fully model the outcome of a portfolio where withdraws were occurring (not the case above, but relevant to this board). A WR of 6% from a risk-free bond portfolio that yields a steady 6% would result in no nominal loss of principal. A WR of 6% from an all-stock portfolio would have involved some selling shares low around the bear market of 2000-2003, steadily diminishing the share count compared to buy-and-hold, and limiting the potential for recovery (share prices returning to old highs does not recover the portfolio if any shares were sold). For a new retiree in 1998, going with treasuries instead of stocks would have been the correct move in hindsight because of SORR and a dozen years of sleeping soundly through all the volatility that was to come.

I suspect the late 90's will end up being a failure case for the 4% rule, but we'll have to wait a few more years to find out. CAPE in '98 was 60% higher than in 1967, a year when the 4% rule almost failed (Michael Kitches found CAPE and SWR were correlated at 0.77). Oh yea, and today the CAPE is even higher than that.

Too bad we don't have treasuries yielding 6% anymore! I'd be all over them. Making due with REITs, covered calls, and crossed fingers.

waltworks

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Re: little reminder just how gross the valuation of equities is
« Reply #47 on: November 19, 2020, 08:45:46 AM »
Agreed, I'd be all over 6% treasuries too. I fantasize about going back to the early 80s and getting those 15%+ bond rates.

It will be interesting to see about 4% rule starting in the late 90s for sure. CAPE is all screwy for a variety of reasons when comparing back to the 60s but it's certainly still real high.

-W

maizefolk

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Re: little reminder just how gross the valuation of equities is
« Reply #48 on: November 19, 2020, 08:55:52 AM »
I'm still more optimistic about the outcome for the 2000 retiree. It will almost certainly prove to be a year where a real person pursuing FIRE would have had to deviate from the 4% rule, but I think there is a reasonable chance that simulated retirees will arrive in 2030 with a non-negative final net worth, which would make it a success by the standards 30 year intervals are judged by.

The most recent breakdown I could find is from Go Curry Cracker almost a year ago:
https://www.gocurrycracker.com/how-are-the-2000-and-2008-retirees-doing-4-percent-rule/

But we're one year further and the S&P 500 is up roughly 15% from where it stood when GCC posted those numbers.

zoro

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Re: little reminder just how gross the valuation of equities is
« Reply #49 on: November 20, 2020, 07:21:52 AM »
i've been thinking about the capital gains issue you bring up for people who stick with indexes etc. i guess this is a problem for people outside of ira's and tax protected envelopes. 
One thing I have done over the last decade that gives me a better return than the vanguard s&p index fund for about the same risk is to maintain a long term short in the n x leveraged inverse short  in 1/n dollar value. The advantage of this is you can then put your money in bonds. the advantage I have found is 1)it gives a better return than vanguard,  these inverse etfs are shitty ETFs - but as you are short them you earn fees instead of paying them 2)you benefit from the friction of the compound leverage effect. I have maintained a basket of these shorts since I discovered them and at my brokerage it has been a source of free capital.  The irs rule is that you pay tax when you close the position or it becomes substantially worthless - which as it is exponentially decaying to 0 I will never have to do. It has worked well so far.