Author Topic: Portfolio Design: Idiots v. Gurus  (Read 6008 times)

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #50 on: October 14, 2019, 07:54:19 PM »
Before I lay down a six-figure sum buying an "investment" from someone else (who has reasons they would rather have the cash), I would like to at least have a rationale for why it will earn money or appreciate over time. For example:

"This diversified stock portfolio is expected to return 6% over a decade because earnings will grow with inflation and the economy, because of stock buybacks, because the companies can make leveraged investments and earn a higher ROI than their interest, and because this has been the pattern for decades."

"This rental property is expected to yield an increasing return of 6% to 12% over a decade because [pulls out spreadsheet] expenses will be this much, rents will be this much, and appreciation will be this much assuming a vacancy rate of 15%, rent inflation of 3%, and property and property tax appreciation of 2%."

"This bond portfolio is expected to have a nominal YTM of 4% assuming a coupon of 5% and defaults/write-offs of 1% per year."


What exactly am I supposed to say about gold, or potentially worse, cash?

The best I can think of is:

"I will start by selling monthly at-the-money puts for GLD shares worth half my allocation until I am assigned. Upon assignment of half my allocation, I will sell at-the-money puts for the other half of my allocation, while writing at-the-money covered calls for the shares that have been assigned to me. If my 2nd set of puts are assigned, I will write far-ITM calls for half my allocation until assigned, and then resume the strategy of writing cash-secured puts for half my allocation and covered calls for the other half. If my covered call is assigned, I will write far-ITM puts for half my allocation until assigned, and then resume the strategy. I will make money while doing this because premium received each month will partially offset losses from large moves and because historically the options market's implied volatility has been slightly higher than actual volatility."

...which is pure gambling, but has a stronger rationale than the gambling strategy of buying and holding commodities in the hopes of them appreciating faster than treasuries.

I don't understand either the rationale of why the naive portfolios would often have cash and gold, yet do so well. But I would like my investing rationale to adequately explain the past before I would expect it to predict the future. Even in the average returns table, it looks like the naive portfolios as a group beat the expert ones.

In the period covered by the data, was the value of the uncorrelated variances so large that it produced more return than was lost by the underlying disadvantage of the low-return asset classes?

If so, is it reasonable to think that the value of the uncorrelated variances would continue? That's an investing rationale in itself, right?
Yup, that is the entire point, to demonstrate that knowledge may not is probably not beneficial to the investing game. The real big points seem to be
1) Buy and hold
2) Be broadly diversified
3) Keep costs as low as reasonably possibly given 2)
And those all seem equally important. My take is, if you have some other theory it will almost certainly be wrong at some point, so try to avoid having as many as you can. Even the "total market is the most efficient" theory does not look to be correct, at least not using data during the period when experts made that hypothesis, which seems to give it bad odds for the future as well. Or at least it is not correct with respect to outcomes, I understand it is the minimum effort portfolio no matter what.

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #51 on: October 14, 2019, 07:56:26 PM »
Man,what a great thread. Thanks for doing all that work and sharing with us, @Radagast !

I was a TSM guy for a long long time, but reading the Permanent Portfolio blog posts and playing with the data eventually changed my mind (it still took years of doing that). Now I happily slice and dice a bit, confident my portfolio is all the better for it.
Thanks ARS! I know that a few long time posters, including yourself, intuited these results a long time ago and are already using portfolios that resemble the naive portfolios.

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #52 on: October 14, 2019, 08:02:33 PM »
People who say that they don't see how a multi-asset portfolio can hold up going forward "given the current price of X/Y/Z" should study the components of the Permanent Portfolio:

- A quarter is made up of gold, which got crushed for 20 years between 1980-2000
- another quarter from cash which has been dismal for almost just as long
- another quarter from stocks which had a lost decade from 2010
- another quarter in long term bonds, which people have been trying to call the bottom on for most of the last 20 years

and yet the portfolio's 40 year record still holds up...

1980-2019, $10K initial, annual rebalance.
Final Balance:
Permanent Portfolio $172,324
60/40 (Intermediate Treasuries) $456,621

https://www.portfoliovisualizer.com/backtest-asset-class-allocation

Does anyone remember that old Little Caesar's commercial "One banana or two bananas... he seems to prefer two"?
https://www.youtube.com/watch?v=J47o4YZ_yrM&list=PLXUmNlnWp46X18xtT4wjIXjcfTfYuLTb-&index=35

(Note that I'm the orangutan here).
Although I agree with disagreeing with Vand on this, I try to use years that end in "5" as starting points for backtesting, as for some reason those seem to give the least biased results. 1970 nearly worst case for stocks and bonds and best case for gold, 1980 inverse of 1970, 1990 peak of Japan bubble, 2000 peak of tech bubble, 2010 bottom of financial crisis... 5's are the way to go IMO.

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #53 on: October 14, 2019, 08:06:13 PM »
Just posting to say "thanks"! This is quite some food for thought.
I find it also interesting how relatively poorly the "simple" Total Stock or Classic 60:40 have been performing.

My portfolio is regionally diversified, but so far I have not included my home property or REITs in it.
I should say that is optional. Or at least, if you already have home equity or real estate then there may be no compelling reason for additional real assets. However, if you do not have a home or other direct real estate, then adding some type of real assets seems unlikely to hurt and may very likely improve your odds, based on 1970-2018.

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #54 on: October 14, 2019, 08:07:08 PM »
0th Naive in the USA-Perpetual column isn't ordered correctly.
Thanks, fixed. I caught so many before posting I expected to see another.

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #55 on: October 14, 2019, 08:12:52 PM »
There's a lot to unpack here.

If you weren't in the US, buying "international" in the 1970-90s meant buying US. That could explain the good showing of the Ivy portfolio for non-US based portfolios, which has 20% in international stocks and 20% in international bonds (i.e., "international" is majority US for many of the time periods).

F&F might explain why some of the value portfolios do well in other countries. The 3rd does ok to great in most countries, where "international" means US for most of the time periods.

Great chart, Radagast!
Yup, it is really hard to untangle. I guess the point is more "everybody is clueless" and not so much "do this." I do think Fama-French would explain a lot of this, although I am not sure if it is for the reasons they give. In other words, "naive diversification is the best diversification" is something I am leaning towards. Although I do like the general weightings of 36:36:16:12 that result from this experiment, plus or minus about 10 in any direction.

arebelspy

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Re: Portfolio Design: Idiots v. Gurus
« Reply #56 on: October 14, 2019, 08:56:48 PM »
if you already have home equity or real estate then there may be no compelling reason for additional real assets.

I donno. I hold plenty of real estate (so don't use REITS, but also wouldn't for other reasons), but still like holding gold in my portfolio.

Much easier to rebalance into/out of IAU than a rental property.
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Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #57 on: October 14, 2019, 10:42:37 PM »
if you already have home equity or real estate then there may be no compelling reason for additional real assets.

I donno. I hold plenty of real estate (so don't use REITS, but also wouldn't for other reasons), but still like holding gold in my portfolio.

Much easier to rebalance into/out of IAU than a rental property.
Yeah but for you it is less necessary. You would have plenty of options for selling a bit of the real estate empire, raising rent, or others in the event of one of the bigger financial events. You might argue IAU is easier but even without it you would have options that somebody with neither real estate nor IAU would have. So if someone has a house and doesn’t want gold I’d say great! Personally we only buy houses we can live in and rent out other parts easily. That gives lots of options, live in the big part rent out the small, live in the small rent out the big part, live in a room rent out the house, cash out refi, lump sum mortgage payoff, there are lots of options there to respond to changing circumstances. What matters is knowing we don’t know the future and giving ourselves options.

dragoncar

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Re: Portfolio Design: Idiots v. Gurus
« Reply #58 on: October 14, 2019, 10:58:35 PM »

What exactly am I supposed to say about gold, or potentially worse, cash?


Gold has historically been volatile and relatively uncorrelated to negatively correlated with stocks, thereby allowing a portfolio incorporating gold to have a higher SWR despite gold having a lower total return than stocks (same can be said for any number of non-stock assets).  Isn't it on you to make a story about why that behavior would change in the future?  Will investors suddenly treat gold differently?  If so, it's a valid reason to reconsider.

Cash can be used to buy goods and services when I need them, and I expect that to be true in the future.  Good enough for me (it's my least favorite portfolio asset)

ChpBstrd

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Re: Portfolio Design: Idiots v. Gurus
« Reply #59 on: October 15, 2019, 11:26:48 AM »

What exactly am I supposed to say about gold, or potentially worse, cash?


Gold has historically been volatile and relatively uncorrelated to negatively correlated with stocks, thereby allowing a portfolio incorporating gold to have a higher SWR despite gold having a lower total return than stocks (same can be said for any number of non-stock assets).  Isn't it on you to make a story about why that behavior would change in the future?  Will investors suddenly treat gold differently?  If so, it's a valid reason to reconsider.

Cash can be used to buy goods and services when I need them, and I expect that to be true in the future.  Good enough for me (it's my least favorite portfolio asset)

I suppose the rationale for holding a weakly-correlated, low or zero return asset is something like this:

I plan for my cash/gold allocation to dramatically underperform stocks, bonds, and RE in the long term (expected real ROI = 0%), but function as an emergency fund during bear markets, allowing me to avoid selling productive assets low. By not selling productive assets or by rebalancing to purchase more productive assets,I plan for these nonproductive assets to allow me to reduce portfolio beta. Assuming a significant but typical bear market (say a 40% drop over 5 years) occurs during my retirement, I will pivot out of my cash/gold allocation through rebalancing toward a more aggressive AA and taking withdrawals from the cash/gold position. When the market again reaches its previous high, I will return to my previous allocation of cash/gold. The underlying assumption is that such bear markets could be common enough in the future, or returns on productive assets low enough in the future, that the net benefit of reallocating during these occasional events will exceed the foregone gains one could have received by investing in productive assets.   

I set up a spreadsheet model to understand the dynamics of that last assumption. For simplicity, I started with $1M and a flat $40k annual withdrawal for 40 years. The return on nonproductive assets is 0% and the return on productive assets is 6%, except in a “crash year” when the return on productive assets is -30%. Two portfolios were set up: a 100% productive asset portfolio and a 70/30 productive to nonproductive portfolio. Allocations were assumed constant (I.e. continually rebalanced) I tried different sequences of flipping various years to being a “crash year”.

The 70/30 outperforms in some sequences and underperforms in others. If the crashes occur in years one and ten, for example, the 100% portfolio is exhausted in year 26 while the 70/30 lasts partway into year 27. If crashes occur in years 5 and 15, however, the 100% portfolio lasts 36 years and the 70/30 dies 5 years earlier.

TLDR: Big nonproductive asset allocations are a bet on a big correction occurring sooner rather than later. In other words, it’s market timing.

Interesting note: The expected real returns of nonproductive assets have always been zero, but the collapse in bond yields and stock E/P ratios means the spread between asset types is smaller than ever. Thus, the expected “cost” of sitting in cash, for example, is lower than ever before. One’s mattress cash is only missing out on that fat 1.8% ten year treasury yield (just a few years back that would have been 4-5%). In other words, having a conservative/hedged portfolio has never been cheaper, so maybe in these anomalous times the gamble on low-correlation assets makes more sense than ever.

Buffalo Chip

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Re: Portfolio Design: Idiots v. Gurus
« Reply #60 on: October 15, 2019, 01:40:34 PM »
Interesting. Max diversification looks like the most consistent winner.

“diversifying well is the most important thing you need to do in order to invest well.”

Ray Dalio

Buffalo Chip

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Re: Portfolio Design: Idiots v. Gurus
« Reply #61 on: October 15, 2019, 02:10:01 PM »
I don't have it open right now, but doesn't portfoliocharts show the highest SWRs with something like a 2:1 ratio of US small cap value to international small cap/small cap value with a smidge (5-10%) of gold?

That was about the same conclusion I came to when I ran the numbers a few months ago. With a big, huge, monstrous caveat: these are historical numbers. Future returns are not necessarily predicted by historical results. I’ve seen some folks postulate that the small cap advantage has been arbitraged away. Personally I don’t think it has, but it’s definitely possible.

arebelspy

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Re: Portfolio Design: Idiots v. Gurus
« Reply #62 on: October 15, 2019, 05:43:17 PM »
TLDR: Big nonproductive asset allocations are a bet on a big correction occurring sooner rather than later. In other words, it’s market timing.

I'd take the opposite conclusion: I don't know when the market will crash, only that it will at some point (this everyone agrees on). So I hold a diversified portfolio consistently that I can stick with. I expect it to perform better in the long run in terms of both SWR and CAGR.

I am not holding this due to expecting an impending crash, or changing my AA based on what the current market is doing.

In fact, I'd flip your statement I quoted above:
Spoiler: show
TLDR: Not holding a diversified asset allocation is a bet on a lack of correction occurring sooner rather than later as well as a very specific bet on the particular asset class you're holding performing well in the short and medium term. In other words, it’s market timing.


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Buffalo Chip

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Re: Portfolio Design: Idiots v. Gurus
« Reply #63 on: October 15, 2019, 06:57:31 PM »

TLDR: Big nonproductive asset allocations are a bet on a big correction occurring sooner rather than later. In other words, it’s market timing.

Interesting note: The expected real returns of nonproductive assets have always been zero, but the collapse in bond yields and stock E/P ratios means the spread between asset types is smaller than ever. Thus, the expected “cost” of sitting in cash, for example, is lower than ever before. One’s mattress cash is only missing out on that fat 1.8% ten year treasury yield (just a few years back that would have been 4-5%). In other words, having a conservative/hedged portfolio has never been cheaper, so maybe in these anomalous times the gamble on low-correlation assets makes more sense than ever.

That’s an interesting way of looking at it. So given that bonds are not really negatively correlated with equities (and offer crap returns in the long run anyways), what else is there in the way or negatively correlated assets other than cash and some durable commodities like gold? 

ChpBstrd

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Re: Portfolio Design: Idiots v. Gurus
« Reply #64 on: October 15, 2019, 09:22:35 PM »
TLDR: Big nonproductive asset allocations are a bet on a big correction occurring sooner rather than later. In other words, it’s market timing.

I'd take the opposite conclusion: I don't know when the market will crash, only that it will at some point (this everyone agrees on). So I hold a diversified portfolio consistently that I can stick with. I expect it to perform better in the long run in terms of both SWR and CAGR.

I am not holding this due to expecting an impending crash, or changing my AA based on what the current market is doing.

In fact, I'd flip your statement I quoted above:
Spoiler: show
TLDR: Not holding a diversified asset allocation is a bet on a lack of correction occurring sooner rather than later as well as a very specific bet on the particular asset class you're holding performing well in the short and medium term. In other words, it’s market timing.


Diversification among productive assets is a very good thing, but adding in double-digit allocations of nonproductive assets is, IMO, pretty darn close to market timing.

I'm defining productive assets as things that have earnings or yield something, such as equities, bonds, real estate, mortgage payoff, etc. I'm defining nonproductive assets as things that earn/yield nothing or have negative expected returns, such as cash, precious metals, collectibles, lotto tickets, and cryptocurrencies.

In my simple spreadsheet described above, I assumed a 6% expected ROI on the productive assets in a portfolio and 0% on the nonproductive. The 100% productive portfolio earns 6% per year except when markets crash, and the 70/30 productive/nonproductive portfolio earns 0.7(.06)+0.3(0)=4.2% per year, except when markets crash. For the 70/30 portfolio to outlast the 100% productive portfolio, a crash must occur soon enough that the outperformance of the 100% portfolio in normal years does not exceed the difference in performance between the two portfolios in the crash year.

Example: If one year productive assets drop 30% and nonproductive assets drop 0%, the all-productive portfolio loses 30% and the 70/30 portfolio only loses (.7*.3=) 21%. However, for each year up until this market crash, the all-productive portfolio has been earning (6-4.2=) 1.8% more than the 70/30 portfolio. If the all-productive portfolio has been out-earning the 70/30 portfolio by 1.8% for 5 years (1.8*5=9), the market crash only sets it back to where the 70/30 portfolio already is. So one's selection of portfolios in this simplified example would be a bet on whether one foresees a 30% market crash occurring in less than 5 years, or more than 5 years. If less than 5 years, the 70/30 outperforms, if more than 5 years, the all-productive outperforms.

The market timer who says "I read in the financial press that a crash is coming next year so I'm moving 30% of my portfolio into cash and gold", and does this every year, is making the exact same decision as someone who calls it their long term AA.
Spoiler: show
Their rationales do not affect their returns. Only their AA matters.


I don't agree the reverse statement is also market timing, when we are talking about productive vs. nonproductive assets. Market timing implies a temporary move out of or into risky assets on the hopes that one can profitably reverse the move later. This differs from setting an AA and rebalancing, where the goal is to maintain the percentage of a portfolio in each asset class for the long term.

An investment in nonproductive assets is a bet on negative returns for productive assets, which is a relatively rare thing. One would have to get their "timing" just right to make such a strategy work, whereas productive assets are all but certain to outperform nonproductive assets in the long term so no timing is required, just consistency.



dragoncar

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Re: Portfolio Design: Idiots v. Gurus
« Reply #65 on: October 15, 2019, 10:14:53 PM »
You:

Big nonproductive asset allocations are a bet on a big correction occurring sooner rather than later. In other words, it’s market timing.

Also you:

Market timing implies a temporary move out of or into risky assets on the hopes that one can profitably reverse the move later. This differs from setting an AA and rebalancing, where the goal is to maintain the percentage of a portfolio in each asset class for the long term.


So by your second statement, a consistent AA with “nonproductive assets” is NOT market timing.  This is what we are discussing here.  Nobody is saying anything like “cash out, buy gold for the next crash and then jump back in”

It’s nice that you can change the definition of your own words when they are used against you
« Last Edit: October 15, 2019, 10:18:37 PM by dragoncar »

dragoncar

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Re: Portfolio Design: Idiots v. Gurus
« Reply #66 on: October 15, 2019, 10:57:32 PM »

An investment in nonproductive assets is a bet on negative returns for productive assets, which is a relatively rare thing.

No, it’s a bet (in the broadest use of the term) on underperformance by productive assets. A gold allocation can be net benefit if it outperforms stocks on the right timeframe.  Stocks do not have to go negative.

Life insurance may also be a “bet” that you will die before you save enough money to support your heirs, but that doesn’t mean it’s a bad choice due to “death timing” (it May be a bad choice For other reasons)

Btw, I’m using your term “nonproductive asset” for convenience, but that doesn’t mean I agree it’s apt.  Cash in particular is rarely nonproductive (does anyone really have a significant allocation to mattress stash?).  Short term treasuries have historically done surprisingly well vs inflation and there are even better options available (ibonds)
« Last Edit: October 15, 2019, 10:59:45 PM by dragoncar »

BicycleB

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Re: Portfolio Design: Idiots v. Gurus
« Reply #67 on: October 16, 2019, 12:09:32 AM »

In my simple spreadsheet described above, I assumed a 6% expected ROI on the productive assets in a portfolio and 0% on the nonproductive. The 100% productive portfolio earns 6% per year except when markets crash, and the 70/30 productive/nonproductive portfolio earns 0.7(.06)+0.3(0)=4.2% per year, except when markets crash. For the 70/30 portfolio to outlast the 100% productive portfolio, a crash must occur soon enough that the outperformance of the 100% portfolio in normal years does not exceed the difference in performance between the two portfolios in the crash year.

Example: If one year productive assets drop 30% and nonproductive assets drop 0%, the all-productive portfolio loses 30% and the 70/30 portfolio only loses (.7*.3=) 21%. However, for each year up until this market crash, the all-productive portfolio has been earning (6-4.2=) 1.8% more than the 70/30 portfolio. If the all-productive portfolio has been out-earning the 70/30 portfolio by 1.8% for 5 years (1.8*5=9), the market crash only sets it back to where the 70/30 portfolio already is. So one's selection of portfolios in this simplified example would be a bet on whether one foresees a 30% market crash occurring in less than 5 years, or more than 5 years. If less than 5 years, the 70/30 outperforms, if more than 5 years, the all-productive outperforms.


This model might have a key assumption incorrect: namely, that the assets you are calling "nonproductive" are essentially fixed. If the nonproductive assets fluctuate, they could produce results different from the fixed assumption.

For example, we can stipulate that gold will have a long term return of zero, but still agree that it could fluctuate quite a bit year to year. Suppose that the unproductive asset in the example is gold, which in this case drops 4%/year for five years, then rises 25% during the stock crash to end at its original value. Then initial return on 70/30 drops to 3%/year (is reduced by .04 x 30% = 1.2% reduction), so after 5 years, about 15% gain before compounding...spitballing, maybe 16.2%. The crash produces 21% stock drop (.3 x .7) but 7.5% gold gain (.25 x .3), so 13.5% drop from a base of 116.2; I guess a drop of 15.1 or so, final result maybe 101.1% of original investment, a slight gain.

If gold never fluctuated during these 6 years, the quoted model would be accurate, but would produce a loss. The 4.2% return would 21% before compounding, maybe 23.2 after, so peak value 123.2; loss in crash 21% x 123.2 or roughly 25.9, final result about 97.3, several percent lower than the fluctuation case.

IRL, gold doesn't fluctuate exactly opposite to stock. Maybe that's why these assets are described sometimes as "uncorrelated" - their fluctuations don't exactly match (or linearly diverge from) stocks. The difference could provide gains during ordinary years sometimes, not just crash years.  The fluctuations in the "nonproductive" assets can actually be productive. I think the results of the naive portfolios are showing that such variances can produce higher gains than we'd expect.

« Last Edit: October 16, 2019, 12:18:21 AM by BicycleB »

ChpBstrd

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Re: Portfolio Design: Idiots v. Gurus
« Reply #68 on: October 16, 2019, 07:33:44 AM »
You:

Big nonproductive asset allocations are a bet on a big correction occurring sooner rather than later. In other words, it’s market timing.

Also you:

Market timing implies a temporary move out of or into risky assets on the hopes that one can profitably reverse the move later. This differs from setting an AA and rebalancing, where the goal is to maintain the percentage of a portfolio in each asset class for the long term.


So by your second statement, a consistent AA with “nonproductive assets” is NOT market timing.  This is what we are discussing here.  Nobody is saying anything like “cash out, buy gold for the next crash and then jump back in”

It’s nice that you can change the definition of your own words when they are used against you

Frequent changes to an “asset allocation” are generally market timing, regardless of what the person calls it. Can we agree there?

My next assumption is anyone putting a big chunk of their wealth into an asset that has no real earnings (cash, PMs, cryptocurrency, Beanie Babies) has a plan to trade out of those assets when their exchange rates are favorable (I.e. they predict a time in the future when prices will be favorable). Because nonproductive assets will never grow in size or increase earnings/dividends/buybacks, this is a bet on market sentiment, also known as greater fool theory. Can we agree on this?

If we agree on #1 and #2, then maybe the question is how long out can a market timer make predictions and still remain a market timer?

One day trade - market timer for sure
One month trade - market timer for sure
One year trade - probably market timing?
Five year trade - market timer or long term investor?

IMO, any plan to trade assets for a profit based on market predictions / greater fool theory is market timing, regardless of the timeframe. Investments in productive assets (businesses, bonds, real estate) have a different rationale- the value will go up because earnings are this or the yield is that. It is the reasoning process that makes a market timer or a long term investor.

Tyler

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Re: Portfolio Design: Idiots v. Gurus
« Reply #69 on: October 16, 2019, 09:40:28 AM »
Investments in productive assets (businesses, bonds, real estate) have a different rationale- the value will go up because earnings are this or the yield is that.

Once you realize that cash in a portfolio is a type of bond you may think of it differently.  It's how interest rates work, and it's why cash really is a productive asset.

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #70 on: October 16, 2019, 09:44:07 AM »
You:

Big nonproductive asset allocations are a bet on a big correction occurring sooner rather than later. In other words, it’s market timing.

Also you:

Market timing implies a temporary move out of or into risky assets on the hopes that one can profitably reverse the move later. This differs from setting an AA and rebalancing, where the goal is to maintain the percentage of a portfolio in each asset class for the long term.


So by your second statement, a consistent AA with “nonproductive assets” is NOT market timing.  This is what we are discussing here.  Nobody is saying anything like “cash out, buy gold for the next crash and then jump back in”

It’s nice that you can change the definition of your own words when they are used against you

Frequent changes to an “asset allocation” are generally market timing, regardless of what the person calls it. Can we agree there?

My next assumption is anyone putting a big chunk of their wealth into an asset that has no real earnings (cash, PMs, cryptocurrency, Beanie Babies) has a plan to trade out of those assets when their exchange rates are favorable (I.e. they predict a time in the future when prices will be favorable). Because nonproductive assets will never grow in size or increase earnings/dividends/buybacks, this is a bet on market sentiment, also known as greater fool theory. Can we agree on this?

If we agree on #1 and #2, then maybe the question is how long out can a market timer make predictions and still remain a market timer?

One day trade - market timer for sure
One month trade - market timer for sure
One year trade - probably market timing?
Five year trade - market timer or long term investor?

IMO, any plan to trade assets for a profit based on market predictions / greater fool theory is market timing, regardless of the timeframe. Investments in productive assets (businesses, bonds, real estate) have a different rationale- the value will go up because earnings are this or the yield is that. It is the reasoning process that makes a market timer or a long term investor.
This thread is not about market timing, and none of the portfolios makes any market timing assumptions. Withdrawal rates are for 30 year holding periods or extrapolated 30 year holding periods, while average returns were averages of every year of 1970-2018.

It is also not about gold, the methodology randomly assigns gold allocations to some portfolios for an average of 3-4% allocation, but that is a pretty minor point. If it makes you feel better just ignore the naive portfolios which have gold, the results are essentially the same (although you would only have 6 naive portfolios to consider rather than 10).

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Re: Portfolio Design: Idiots v. Gurus
« Reply #71 on: October 16, 2019, 10:06:26 AM »
This thread is not about market timing, and none of the portfolios makes any market timing assumptions. Withdrawal rates are for 30 year holding periods or extrapolated 30 year holding periods, while average returns were averages of every year of 1970-2018.

Quibble: all portfolios are rebalanced annually at years end, are they not?

Why is that the correct time to rebalance?
What happens if  they're rebalanced on some other date, or some other reasonable time period?
Should it be a concern?

Tyler

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Re: Portfolio Design: Idiots v. Gurus
« Reply #72 on: October 16, 2019, 10:36:03 AM »

Quibble: all portfolios are rebalanced annually at years end, are they not?

Why is that the correct time to rebalance?
What happens if  they're rebalanced on some other date, or some other reasonable time period?
Should it be a concern?

Yes, all portfolios are rebalanced annually at the end of the year.  There's nothing special about that date except for the fact that it's when the annual returns data is reported.  Rebalancing on another date might change the numbers a bit, but relatively speaking I would not expect it to make a huge difference in the order of either of Radagast's lists.

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Re: Portfolio Design: Idiots v. Gurus
« Reply #73 on: October 16, 2019, 11:58:17 AM »
This thread is not about market timing, and none of the portfolios makes any market timing assumptions. Withdrawal rates are for 30 year holding periods or extrapolated 30 year holding periods, while average returns were averages of every year of 1970-2018.

Quibble: all portfolios are rebalanced annually at years end, are they not?

Why is that the correct time to rebalance?
What happens if  they're rebalanced on some other date, or some other reasonable time period?
Should it be a concern?

Somewhere I read an article where, supposedly, someone studied the question of "some other reasonable time period" by backtesting many instances of rebalancing on the basis of timeframes of different length. Their conclusion was that the best results from rebalancing occurred between a quarterly basis and an annual basis. In other words, if you balanced more often than quarterly, it was too often and you lost money, relatively. Same thing if you rebalanced less than once year - you left money on the table. The authors felt either quarterly or annually would produce maximum results. I suppose a period between them, such as every six months, would be similarly effective but the article didn't specify that. Sorry I don't know the actual study.

Googling, the closest I found was the article below, in which some person did a similar study, but not on a formal basis. This author concluded the same thing.
https://seekingalpha.com/article/4077399-often-rebalance-portfolio
« Last Edit: October 16, 2019, 12:03:28 PM by BicycleB »

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Re: Portfolio Design: Idiots v. Gurus
« Reply #74 on: October 16, 2019, 01:06:59 PM »
This thread is not about market timing, and none of the portfolios makes any market timing assumptions. Withdrawal rates are for 30 year holding periods or extrapolated 30 year holding periods, while average returns were averages of every year of 1970-2018.

Quibble: all portfolios are rebalanced annually at years end, are they not?

Why is that the correct time to rebalance?
What happens if  they're rebalanced on some other date, or some other reasonable time period?
Should it be a concern?

Somewhere I read an article where, supposedly, someone studied the question of "some other reasonable time period" by backtesting many instances of rebalancing on the basis of timeframes of different length. Their conclusion was that the best results from rebalancing occurred between a quarterly basis and an annual basis. In other words, if you balanced more often than quarterly, it was too often and you lost money, relatively. Same thing if you rebalanced less than once year - you left money on the table. The authors felt either quarterly or annually would produce maximum results. I suppose a period between them, such as every six months, would be similarly effective but the article didn't specify that. Sorry I don't know the actual study.

Googling, the closest I found was the article below, in which some person did a similar study, but not on a formal basis. This author concluded the same thing.
https://seekingalpha.com/article/4077399-often-rebalance-portfolio

There are two goals of rebalancing.... one is to obtain a “bonus” return and the other is to keep your risk in line with your original AA.  As far as the bonus goes, any rebalancing is a “bet” that volatility will be high on the timescale of your rebalancing period.  You can of course data mine a historically “best” rebalancing period for and specific collection of assets, but then you are betting that the past will look like the future.  So much betting in this thread!  For some collections of assets, the highest return comes from NEVER rebalancing.  It’s been a free lunch historically but could hurt you in the future

I’m sure you guys all know this but seemed relevant to mention.

Also don’t forget “rules based” rebalancing where you only rebalance when some assets get too high or low relative to your original AA.  You can also data mine the best rebalancing bands for your assets and a specific time period, but again maybe it will be different in the future
« Last Edit: October 16, 2019, 01:09:59 PM by dragoncar »

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Re: Portfolio Design: Idiots v. Gurus
« Reply #75 on: October 16, 2019, 01:08:01 PM »
Somewhere I read an article where, supposedly, someone studied the question of "some other reasonable time period" by backtesting many instances of rebalancing on the basis of timeframes of different length. Their conclusion was that the best results from rebalancing occurred between a quarterly basis and an annual basis. In other words, if you balanced more often than quarterly, it was too often and you lost money, relatively. Same thing if you rebalanced less than once year - you left money on the table. The authors felt either quarterly or annually would produce maximum results. I suppose a period between them, such as every six months, would be similarly effective but the article didn't specify that. Sorry I don't know the actual study.

Googling, the closest I found was the article below, in which some person did a similar study, but not on a formal basis. This author concluded the same thing.
https://seekingalpha.com/article/4077399-often-rebalance-portfolio

Vanguard? https://www.vanguard.com/pdf/ISGPORE.pdf

I remember reading a study where it claimed that rebalancing less frequently (~5-7 years) was better than annually in order to allow maximum growth. I'll have to search for that paper.

talltexan

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Re: Portfolio Design: Idiots v. Gurus
« Reply #76 on: October 16, 2019, 02:14:56 PM »
If you're young, your contributions are so large relative to existing investments that rebalancing wouldn't really change much.

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Re: Portfolio Design: Idiots v. Gurus
« Reply #77 on: October 16, 2019, 02:22:49 PM »
In my simple spreadsheet described above

If only there were some site that had historical data that we could model a portfolio with a mix of "productive" and "nonproductive" assets versus one of just "productive" assets... maybe even a random mix of the former, we could call "Naive" and specific mixes of the latter we could call "Guru" and then post a thread to discuss them.

Alas, we'll probably have to go with the overly generic spreadsheet that returns 6% every year.

;)
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Re: Portfolio Design: Idiots v. Gurus
« Reply #78 on: October 16, 2019, 04:58:38 PM »
Investments in productive assets (businesses, bonds, real estate) have a different rationale- the value will go up because earnings are this or the yield is that.

Once you realize that cash in a portfolio is a type of bond you may think of it differently.  It's how interest rates work, and it's why cash really is a productive asset.

I agree. Unless cash is buried in a jar in the backyard, it is like a short term bond with a relatively low return.

A completely unrelated question for you. For the TSP, how would one back test the “S” fund on portfoliocharts? Seems like it would be a combination of US SCB and MCB. But what proportion? Something else completely?

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Re: Portfolio Design: Idiots v. Gurus
« Reply #79 on: October 16, 2019, 04:59:06 PM »
This thread is not about market timing, and none of the portfolios makes any market timing assumptions. Withdrawal rates are for 30 year holding periods or extrapolated 30 year holding periods, while average returns were averages of every year of 1970-2018.

Quibble: all portfolios are rebalanced annually at years end, are they not?

Why is that the correct time to rebalance?
What happens if  they're rebalanced on some other date, or some other reasonable time period?
Should it be a concern?

I don't know if it is a concern but it masks the result of different withdrawal strategies. If you read McClungs living off your money his idea is to withdraw from your bond portfolio unless the market is up 20% since your FIRE date. So it's not a straight rebalancing. Bonds/Cash are used to cater for SORR or just a down market.

I like this approach a lot more than having gold in my portfolio for instance. I figure stocks have to be the driver of your long term portfolio longevity and I just need to be diversified enough to be able to handle market down turns.

If I become really rich I might consider gold and commodities in my portfolio but I think I am still more comfortable with a 100% stock portfolio and a low WR than bothering with having gold and/or commodities.

I also own my home which to me means I have more than enough in real estate.

Tyler

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Re: Portfolio Design: Idiots v. Gurus
« Reply #80 on: October 16, 2019, 07:06:30 PM »
A completely unrelated question for you. For the TSP, how would one back test the “S” fund on portfoliocharts? Seems like it would be a combination of US SCB and MCB. But what proportion? Something else completely?

While the percentages may change a little over time, as of December 2018 the S fund covered the smallest 13% of the market.  For reference, SCB on Portfolio Charts covers the bottom 15%.  That's a very good match well within the normal margin of error for how funds are managed, so I would use SCB.
« Last Edit: October 16, 2019, 07:09:08 PM by Tyler »

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Re: Portfolio Design: Idiots v. Gurus
« Reply #81 on: October 16, 2019, 07:31:08 PM »
In my simple spreadsheet described above

If only there were some site that had historical data that we could model a portfolio with a mix of "productive" and "nonproductive" assets versus one of just "productive" assets... maybe even a random mix of the former, we could call "Naive" and specific mixes of the latter we could call "Guru" and then post a thread to discuss them.

Alas, we'll probably have to go with the overly generic spreadsheet that returns 6% every year.

;)

The point of the spreadsheet being, had the sequence of returns been very slightly different or had the starting point been different, the list of best performing funds would have been different too. For example, a study starting in 1982 would have ranked anything with gold in it near the bottom.

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Re: Portfolio Design: Idiots v. Gurus
« Reply #82 on: October 16, 2019, 07:52:17 PM »
This thread is not about market timing, and none of the portfolios makes any market timing assumptions. Withdrawal rates are for 30 year holding periods or extrapolated 30 year holding periods, while average returns were averages of every year of 1970-2018.

Quibble: all portfolios are rebalanced annually at years end, are they not?

Why is that the correct time to rebalance?
What happens if  they're rebalanced on some other date, or some other reasonable time period?
Should it be a concern?
I'd say no. I have seen a crazy number of rebalancing interval ideas including continuously, daily, weekly, monthly, quarterly, twice annually, annually, the day before the two year US election, only through new money and withdrawals for spending, and letting your winners run and never rebalancing. Plus dozens of "bands" strategies. They pretty much all had very intelligent people behind them and great rationales and usually backtesting, and given variability in backtesting there is often not a consistent winner especially depending on your reason. Ultimately my opinion is that any rebalancing back to a consistent predetermined allocation is never market timing, and neither is never rebalancing.

It seems like there is a lot of evidence that 1-3 years is a good frequency. However, since more naive is apparently more better, I endorse "annually on your birthday" as the official strategy of naive or would-be-naive investors everywhere. Which I have no reason to believe is better or worse than annually at year end.

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Re: Portfolio Design: Idiots v. Gurus
« Reply #83 on: October 16, 2019, 07:55:01 PM »
If you're young, your contributions are so large relative to existing investments that rebalancing wouldn't really change much.
#mustachianproblems

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Re: Portfolio Design: Idiots v. Gurus
« Reply #84 on: October 16, 2019, 08:04:30 PM »
Btw, I’m using your term “nonproductive asset” for convenience, but that doesn’t mean I agree it’s apt.  Cash in particular is rarely nonproductive (does anyone really have a significant allocation to mattress stash?).  Short term treasuries have historically done surprisingly well vs inflation and there are even better options available (ibonds)
Savings bonds started as a way to pay the government to bomb the shit out of evil foreign countries. Waaaayyyyy more productive (and socially and environmentally conscious!) than layabout gold.

But more seriously, in someway or another ibonds are part of my best-practice bond allocation ever since I knew about them. Equal split ZROZ, LTPZ, ibonds FTW!

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Re: Portfolio Design: Idiots v. Gurus
« Reply #85 on: October 16, 2019, 08:13:14 PM »
I figure stocks have to be the driver of your long term portfolio longevity and I just need to be diversified enough to be able to handle market down turns.
I agree completely with that, and add "or income real estate, or your own business" to the list. However I can't agree with 100% stocks (well, I can if you are still at the start of your earning/saving journey). In the short term markets can do very crazy things like lose 27% in a single day, or 90% in just a few years. And that is in normal times. So you need something to get you through those trough times, even with VPW.

20% S&P500
20% US Small Value
20% International
20% Bonds (see above)
20% Your House
Rebalance on your birthday

Seems like a naively winning strategy to me!

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Re: Portfolio Design: Idiots v. Gurus
« Reply #86 on: October 16, 2019, 08:14:17 PM »
In my simple spreadsheet described above

If only there were some site that had historical data that we could model a portfolio with a mix of "productive" and "nonproductive" assets versus one of just "productive" assets... maybe even a random mix of the former, we could call "Naive" and specific mixes of the latter we could call "Guru" and then post a thread to discuss them.

Alas, we'll probably have to go with the overly generic spreadsheet that returns 6% every year.

;)

The point of the spreadsheet being, had the sequence of returns been very slightly different or had the starting point been different, the list of best performing funds would have been different too. For example, a study starting in 1982 would have ranked anything with gold in it near the bottom.
Yup, that's why you should look carefully at Japan, the only truly independent data point.

arebelspy

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Re: Portfolio Design: Idiots v. Gurus
« Reply #87 on: October 16, 2019, 08:57:52 PM »
In my simple spreadsheet described above

If only there were some site that had historical data that we could model a portfolio with a mix of "productive" and "nonproductive" assets versus one of just "productive" assets... maybe even a random mix of the former, we could call "Naive" and specific mixes of the latter we could call "Guru" and then post a thread to discuss them.

Alas, we'll probably have to go with the overly generic spreadsheet that returns 6% every year.

;)

The point of the spreadsheet being, had the sequence of returns been very slightly different or had the starting point been different, the list of best performing funds would have been different too. For example, a study starting in 1982 would have ranked anything with gold in it near the bottom.

But what if we could test many different starting points?
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Re: Portfolio Design: Idiots v. Gurus
« Reply #88 on: October 16, 2019, 10:19:49 PM »
In my simple spreadsheet described above

If only there were some site that had historical data that we could model a portfolio with a mix of "productive" and "nonproductive" assets versus one of just "productive" assets... maybe even a random mix of the former, we could call "Naive" and specific mixes of the latter we could call "Guru" and then post a thread to discuss them.

Alas, we'll probably have to go with the overly generic spreadsheet that returns 6% every year.

;)

The point of the spreadsheet being, had the sequence of returns been very slightly different or had the starting point been different, the list of best performing funds would have been different too. For example, a study starting in 1982 would have ranked anything with gold in it near the bottom.

But what if we could test many different starting points?

Would be useless without some kind of visualization to go with it

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Re: Portfolio Design: Idiots v. Gurus
« Reply #89 on: October 17, 2019, 12:07:59 AM »
In my simple spreadsheet described above

If only there were some site that had historical data that we could model a portfolio with a mix of "productive" and "nonproductive" assets versus one of just "productive" assets... maybe even a random mix of the former, we could call "Naive" and specific mixes of the latter we could call "Guru" and then post a thread to discuss them.

Alas, we'll probably have to go with the overly generic spreadsheet that returns 6% every year.

;)

The point of the spreadsheet being, had the sequence of returns been very slightly different or had the starting point been different, the list of best performing funds would have been different too. For example, a study starting in 1982 would have ranked anything with gold in it near the bottom.

But what if we could test many different starting points?

Would be useless without some kind of visualization to go with it

Hmm, good point. Or maybe Charts, instead.
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Re: Portfolio Design: Idiots v. Gurus
« Reply #90 on: October 17, 2019, 12:10:18 AM »
What I'm getting at, ChpBstrd, is that holding diversified assets (even "nonproductive" ones, for the purposes of non-correlated rebalancing for lower volatility and thus higher SWR and sometimes even higher CAGR) isn't "market timing," it's more the similar idea to most investing: that the future won't look substantially different than the past.

I think Portfolio Charts has shown via its blog posts and available data (such as was demonstrated in the OP) that these type of portfolios, held consistently and rebalanced into (e.g. not "I'm going to go into X asset now, and out of it later" as some of your posts implied via the market timing comments) will result in improved performance over many standard portfolios like TSM or 60/40.

A spreadsheet with overly simple assumptions seems very lacking compared to what you can actually see in the data, especially with regards to SWR/PWR, IMO.
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Re: Portfolio Design: Idiots v. Gurus
« Reply #91 on: October 17, 2019, 12:52:21 AM »
I figure stocks have to be the driver of your long term portfolio longevity and I just need to be diversified enough to be able to handle market down turns.
I agree completely with that, and add "or income real estate, or your own business" to the list. However I can't agree with 100% stocks (well, I can if you are still at the start of your earning/saving journey). In the short term markets can do very crazy things like lose 27% in a single day, or 90% in just a few years. And that is in normal times. So you need something to get you through those trough times, even with VPW.

20% S&P500
20% US Small Value
20% International
20% Bonds (see above)
20% Your House
Rebalance on your birthday

Seems like a naively winning strategy to me!

I get that stocks can crash. I expect to see a couple of 50% drops in my post FIRE life. I think I'd personally be okay with it if I was at a really low WR. That is though a personal preference. I'd love to have 100% TSM  in one fund just for simplicity.

I bet that portfolio you've listed would do extremely well over time.

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Re: Portfolio Design: Idiots v. Gurus
« Reply #92 on: October 17, 2019, 04:17:11 AM »
Just to throw something else into the discussion...

https://www.marketwatch.com/story/bank-of-america-declares-the-end-of-the-60-40-standard-portfolio-2019-10-15?mod=MW_story_top_stories

I have been aware that Bonds and Stocks have not always been historically negatively correlated, but I was rather stunned at how the relationship has changed over time:



A return to pre-1995 sort of relationship would change the current paradigm of mainstream investing.

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Re: Portfolio Design: Idiots v. Gurus
« Reply #93 on: October 17, 2019, 08:58:32 AM »
The hidden variable that you don't see on that graph: inflation!

I'd be more interested in a 12-month correlation than in a 2-year correlation.

Despite my complaints, I still think it's a really interesting graph.

ChpBstrd

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Re: Portfolio Design: Idiots v. Gurus
« Reply #94 on: October 17, 2019, 09:48:38 AM »
What I'm getting at, ChpBstrd, is that holding diversified assets (even "nonproductive" ones, for the purposes of non-correlated rebalancing for lower volatility and thus higher SWR and sometimes even higher CAGR) isn't "market timing," it's more the similar idea to most investing: that the future won't look substantially different than the past.

I think Portfolio Charts has shown via its blog posts and available data (such as was demonstrated in the OP) that these type of portfolios, held consistently and rebalanced into (e.g. not "I'm going to go into X asset now, and out of it later" as some of your posts implied via the market timing comments) will result in improved performance over many standard portfolios like TSM or 60/40.

A spreadsheet with overly simple assumptions seems very lacking compared to what you can actually see in the data, especially with regards to SWR/PWR, IMO.

Not to discount the hard work that went into understanding the last 50 years of investing, but I think it is important to keep in mind that we are studying history. This is not a scientific endeavor to uncover the physical laws of the universe that will apply everywhere and always in the future. If the future does not exactly resemble the past, then the precise mix of assets that did best in the past will not do best in the future. Some drivers of asset performance over the last 50 years can never happen again at this point. The US can never go off the gold standard again and treasury yields (presumably) cannot fall by 10% from here over the next 40 years. Why pick the portfolio that did best under those specific conditions? Similarity, the next five decades will be full of events that never happened before.

Second, there are a near-infinite number of nonproductive assets for sale, and if we adopt the mantra that more diversification = always good, we will end up buying things like vacant land, futures contracts on foreign currencies, art, carbon credits, patents, URLs, antiques, lotto tickets, mineral rights, futures on silver, platinum, cobalt, copper, steel, pork bellies, cotton, corn, timber, wheat, and several grades of crude and refined oils, and of course the old standby ammo and canned goods. I’m sure some of these gambles will pay off big, but the losses from others will likely offset the winners. In a nutshell, the expected return of this whole nonproductive pile is between zero and negative. Buying and selling them is generally a zero sum game. Perhaps in 30 years people will look back with the benefit of hindsight and realize that a portfolio with 64% emerging markets stocks, 12% lithium futures, 2% the cryptocurrency that comes out next year, 2% URLs, and the rest in condo timeshares was the ideal mixture, conveniently forgetting the rest of the nonproductive choices a person faced back in 2019, such as the 5,000 cryptocurrencies that would go defunct.

Last, if we are using nonproductive assets to hedge against SORR events to protect our portfolios, why buy assets like gold whose weak counter-correlation with stocks varies from year to year and is subject to influences like jewelry demand in India or semiconductor production? Why not hedge with put options, which have a precisely known and a mathematically certain payout in the event of a correction or lack thereof, require a much smaller allocation, and if LEAPS are bought on a low volatility day they can suffer less annual decay than the amount of underperformance one is likely to suffer with a large allocation to gold (avg 5% worse than stocks over the past 45 years* but that’s history of course :).

* https://seekingalpha.com/article/4296091-gold-vs-stocks?_gl=1*ar01en*_ga*YW1wLTVOM2FUVm9ZeHQ3a3R4ZE5DSFhhVXc.




Tyler

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Re: Portfolio Design: Idiots v. Gurus
« Reply #95 on: October 17, 2019, 10:26:39 AM »
Not to discount the hard work that went into understanding the last 50 years of investing, but I think it is important to keep in mind that we are studying history. This is not a scientific endeavor to uncover the physical laws of the universe that will apply everywhere and always in the future. If the future does not exactly resemble the past, then the precise mix of assets that did best in the past will not do best in the future.

That's true.  But while the future is never perfectly predictable, not all portfolios are equally unpredictable.  By studying the past beyond simple averages -- the best times, the worst times, and everything in between -- we can learn a lot about portfolio consistency even in wildly changing markets.  Thanks to diversification, some portfolios are more trustworthy than others and can help us plan for an uncertain future with confidence.

That's why I like Radagast's use of SWRs in his analysis.  Because they're defined by the worst-case scenarios, the portfolios with high SWRs are usually impressively consistent in all economic conditions.  I'd actually expect the spread of SWRs to get even wider on the list over time, as by definition SWRs can only go down with more data and never go up.  And the volatile portfolios at the bottom of the list are more likely to set new lows than the consistent ones at the top.
« Last Edit: October 17, 2019, 12:20:29 PM by Tyler »

dragoncar

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Re: Portfolio Design: Idiots v. Gurus
« Reply #96 on: October 17, 2019, 12:29:17 PM »
Woah, was that list supposed to all be nonproductive assets?  If so, I think you’re going off the deep end there.

I do think if there was a cheap way to hold everything you listed, store it, and rebalance, the result might be surprisingly good.  Gold is often chosen specifically because it’s relatively easy to hold and transact.  Of course by holding stocks you probably get a good proxy ownership of all the things you listed.

Tyler

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Re: Portfolio Design: Idiots v. Gurus
« Reply #97 on: October 17, 2019, 01:15:38 PM »
Second, there are a near-infinite number of nonproductive assets for sale, and if we adopt the mantra that more diversification = always good, we will end up buying things like ... futures on silver, platinum, cobalt, copper, steel, pork bellies, cotton, corn, timber, wheat, and several grades of crude and refined oils

Luckily all of these futures contracts are already included in the commodities data, allowing us to compare portfolios that include such naive "nonproductive" diversification to ones that don’t.  Radagast's analysis shows that several portfolios including commodities did quite well.
« Last Edit: October 18, 2019, 06:58:47 AM by Tyler »

BicycleB

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Re: Portfolio Design: Idiots v. Gurus
« Reply #98 on: October 17, 2019, 02:47:28 PM »
I would like to acknowledge the @ChpBstrd has put his finger on a really important question. How do you know which unloved items for sale are assets are worth investing in, and which unloved items for sale are unloved because they truly are useless piles of junk?

Some of the things we see on portfoliocharts.com were probably very small scale options or relatively new in 1970. Buying them then wasn't quite like buying them now. How do we know what today's equivalents are? Is there a selection bias in being on portfoliocharts.com that makes us miss something important? (No offense re portfoliocharts.com... I use it here as a best-in-class example of conventional wisdom).

Somewhere I saw a wonderful set of graphs that compared stocks, bonds and real estate in France, Germany, and the US (I think) from something like 1917 to 2016. If the data underlying the graphs was accurate, real estate in France right after WWI was super cheap. But "real estate in France after WWI" probably included a lot of land with burned out buildings, and a huge % of men who might buy property had been killed, and prices for what you could produce from land (food, rent) were probably quite low, so low prices were rational. Also, if you lived near a large country that had invaded you twice in living memory, the fact that a house is not mobile could be viewed as a significant drawback. Which  it indeed turned out to be just 20 years later!

That was only an example. These three major asset classes apparently performed quite differently from country to country, and differently from each other within a country. It seemed to make a good argument for diversification for sure. I just wonder how to know what the right categories are to diversify in.

Part of me worries about this thing I read once about British bonds. Some were issued in the 1700s and paid until 2016 or so, when they were retired. As a class, British bonds apparently paid about 2%/year after tax from 1700 or so until 1930s IIRC. But then they lost a mind boggling 80% of value. How do we tell which beacon of eternal strength is set for a permanent fall?

How do we tell which assets really are flaky and useless, and should be excluded from even a very diverse portfolio? Crypto seems like a bad "investment" to me, but... well, where is the line?  "The answer is stocks" seems too glib. Even "the ones Tyler wisely chose because of a bunch of data" just seems...well, probably good, but I feel like we're missing something. Even if the categories on portfoliocharts.com are the "right" ones historically, it seems likely to me that they probably include something (stocks?) that are ready for a permanent fall, and exclude something with a shorter history or other exclusion reason that will perform much better. Is diversifying amoung Things That Did Well Up To Now really our best option?

Sorry if I'm rambling. This part seems really confusing to me.
« Last Edit: October 17, 2019, 02:49:47 PM by BicycleB »

Tyler

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Re: Portfolio Design: Idiots v. Gurus
« Reply #99 on: October 17, 2019, 03:22:28 PM »
Is there a selection bias in being on portfoliocharts.com that makes us miss something important?

That's a fair question.  Without sidetracking this discussion, the short story is that one of my goals is to fight the data availability bias very common in investing analysis by offering a wide variety of modern asset options both at home and abroad.  But it's an ongoing project, and the current list of assets is definitely not all-inclusive of everything I think might be useful.  For example, I think TIPS are nice products and would love to include them on the site if I can find an accurate method to simulate their performance prior to their introduction in 1997. It's a difficult problem to solve, and I'm still researching models behind the scenes. So I encourage people to use the data to expand their thinking rather than artificially limit it.

How do we tell which assets really are flaky and useless, and should be excluded from even a very diverse portfolio?

Since there's no single portfolio suitable for all people, to a large extent I think the answer is personal.  If you really hate a specific asset like gold, then choose a portfolio that doesn't have it!  There are lots of good options.  My one overarching piece of advice, however, is to try to stop tasting each portfolio ingredient in isolation and instead think about its important contribution to the overall recipe.  Nobody thinks baking soda tastes good, but there's a reason it's in the cookies.
« Last Edit: October 17, 2019, 08:00:33 PM by Tyler »