RA 10-Year Expected Returns​

[AdrianC]

Research Affiliates 10-Year Expected Returns​ as of 9/30/16

https://www.researchaffiliates.com/en_us/asset-allocation.html

[fattest_foot]

They can't predict what these markets will do in 10 weeks, but now I'm going to believe they can predict 10 years into the future?

[MustacheAndaHalf]

They can't predict what these markets will do in 10 weeks, but now I'm going to believe they can predict 10 years into the future?

Returns correlate to P/E over decades, but that is a tendancy rather than a prediction.
https://personal.vanguard.com/pdf/s338.pdf

[AdrianC]

Um, ok.  Nothing surprising here is there? 

No. Just thought it was interesting, and educational.

Their 5% challenge is interesting:
https://www.researchaffiliates.com/en_us/asset-allocation/five-percent-challenge.html

I got 3.1%. But I think I'll do better because I'm one of those delusional investors who thinks he can pick market beating investments :-)

[AdrianC]

I'm just guessing that based on their numbers--do they explicitly state their assumption on ten year forward PEs somewhere?

https://www.researchaffiliates.com/en_us/asset-allocation/resources.html

From
https://www.researchaffiliates.com/documents/AA-Equity.pdf

The final step in deriving the expected change in valuation comes from choosing the time horizon over which the
current CAPE ratio will revert to its long-term target. Because the implied predictability of returns from valuation
ratios is higher at longer forecast horizons, the reversion to the target CAPE ratio is assumed to be halfway
accomplished over 10 years. Said another way, the current CAPE ratio is assumed to fully revert to its long-term
target over 20 years.

[AdrianC]

Got any hot tips?  :)

BRK.b is fairly cheap right now. Not a recommendation, though it has worked well for me so far.

But seriously, I'd be interested: why do you think you can beat the market?  how do you go about doing that?  and where does that put you right now?  something like where RA would push you or somewhere else?

Value investing. Buying things that look cheap(er). Not buying things that seem to be overvalued.

Currently
60% US: BRK.b, some other individual stocks, some actively managed funds.
20% International: VXUS, VWO, VTRIX (this is the RA type influence).
20% cash/short term bonds.

I'm sold on indexing but I can't bring myself to buy into US index funds at current prices. It's quite possible I will regret that. I think there is a likelihood of a better price sometime in the future. I don't recommend anyone else following this obviously market-timing foolery.

[AdrianC]

Interesting.  You have a very high domestic allocation if you give credence to the RA work--you must think you can add quite a lot with market skill.  And I'm surprised you use actively managed funds given they typically have high fees.  What actively managed funds do you use and why do you expect them to win? 

It’s a work in progress. I don’t believe I have superior investing skill as such; rather it is belief in the process used by the people I partner with and patience to see it through. If the process is good the outcomes should be good over long periods. Also, I believe the US markets are quite clearly overvalued. PE, CAPE, profit margins; they're all in nose-bleed territory, and I don’t want to own them.

We have three main US Equity holdings:
Berkshire: Excellent holding for the taxable accounts. Diversified. Currently relatively cheap (certainly not overvalued). Has a soft “floor” with buyback at 1.2 book. Single stock risk. Buffett demise risk (built into the price?). Too big to fail risk (government intervention). We are sitting on a large cap-gain. Will have to unwind slowly – ideally over many years.

Longleaf Partners Fund: Good, honest people. Large investors in the funds themselves – they eat their own cooking. Good investment process. Focus on best ideas. Wrong energy bets in 2015 make it look very bad. Huge volatility. 30% international.

Gotham Absolute Return: Buy cheapest stocks/short most expensive stocks, wait for good results. Interesting process, ought to work. Will it work long term? Very high expenses to overcome.

Will my alternative selections do any better than a Total Market index fund? Possibly. It’s a gamble.

I've been struggling to get small cap exposure given lofty valuations.  So I'd be particularly interested if you think you've cracked the code on that...

No. The only small cap fund I've studied is the Longleaf one, and it's closed to new investors.

So what's your AA look like?

[Mr. Green]

I celebrate articles like this, because no portfolio of 100% equities has ever failed over 30 years when a 3% or more average return has been achieved during the first 10 year period of retirement. So if you're inclined to give weight to articles like this and want to retire now, you're golden.

[AdrianC]

I celebrate articles like this, because no portfolio of 100% equities has ever failed over 30 years when a 3% or more average return has been achieved during the first 10 year period of retirement. So if you're inclined to give weight to articles like this and want to retire now, you're golden.

Sure, though according to RA, to get 3% you're going need a substantial allocation to international stocks.

Here's a recent article by Larry Swedroe touting the benefits of international diversification:

http://www.etf.com/sections/index-investor-corner/swedroe-16?nopaging=1

Many investors are questioning the benefits of international diversification at a time when U.S. equity valuations are now quite a bit higher than international valuations. And because current valuations are the best predictor we have of future returns, international investments now have higher expected returns.
...
Using this metric [adjusted CAPE], we see that U.S. stocks should be expected to underperform developed markets stocks by 3.3 percentage points and emerging markets stocks by 3.9 percentage points.

[AdrianC]

You get the gist... my overall returns have been lower than the S&P 500 over the last five years primarily because of my international exposure.   

Thanks. Interesting. You're quite a bit more active than me. I generally just buy Berkshire when it's close to book and never sell it. So we too are sitting on a gain of 100%+. Got a few other individual stocks. Nothing exciting. I like Markel. My wife had a bunch of DRIP stocks when we got married. It makes her happy so we keep them.

I've let others do the active investing heavy lifting for me, with some limited success. I extricated us from several active value funds in the last few years following a Bogle/Bernstein-inspired index fund epiphany.

Sometimes I think it would be nice to just put the lot into Vanguard LifeStrategy Growth Fund, but what fun would that be? That's my plan for when I'm too old :-)

[Seppia]

I like RAs work, and I use it as a vague guidance.
There are reasons why, for example, Europe is cheap, but my thinking is, it's been relevant for centuries, I would bet it will continue to be regardless of the momentary issues.

It's funny how consistently the same people that manage to handle their finances better than 99% of the rest of the population are dogmatically sure nobody can beat the market.

The market does a lot of stupid things that can be avoided, it overreacts to quarterly earnings, it is prone to excessive enthusiasm and panic, it trades way too much, etc.

I have 50% of what I save automatically go into index investing, because I think it's good and healthy, but the rest I manage personally.

I don't have a bar to measure myself against prior to 2013 (I'm from Italy and indexing is still unknown to this day, as it is in most of Europe), but I've done much better than the S&P500 since then.
Mostly luck maybe