The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: ChpBstrd on December 14, 2016, 03:45:44 PM
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I have 200k in investments to manage (excluding wife's retirement funds and checking) and a family net worth of 520k. To FIRE on my self-imposed schedule in a few years, I need to earn at least an average 7% annual ROI.
As an investor, I've lived through the dot-com crash and the 2007-8 financial crisis, which sets my fear baseline. I've also lived through the massive bull markets of 2003-7 and 2009-16, which sets my greed baseline. Finding sufficient yields within those baselines is hard.
In a normal market, the data would lead me to just put it all into A or B rated bonds yielding 7%, set my retirement date, focus on frugality, and patiently wait years for a correction. I'm this market, however, bonds yielding 7% are by companies on the verge of bankruptcy. Plus, rates are almost certainly rising, which could wipe out the gains of bondholders with even 5-7 year durations while also weakening the highly leveraged (e.g. 7x and above) companies that dominate offerings in this price range.
Meanwhile, the S&P500 has a ridiculous non-recession-year PE of 26 and the Schiller PE is 27. An earnings yield (inverse of PE) of 4% is awfully close to my risk-free rate of 3.67% (paying off the mortgage). Growth isn't going anywhere if it hasn't already at sub-5% unemployment and record low borrowing costs. But then again, investing in my mortgage will tie up funds at a low rate and extend my career.
In a nutshell, my problem is that 7% returns are not for sale at a reasonable level of risk, IMO.
Ideas:
I wish I had the time to get into physical real estate. I've watched some great deals float by in my low-cost-of-living area. But I don't have the time to invest in rehabs, rental management, etc. Turnkey rentals near me yield about 5-6% after expenses such as management and remod budget.
REITs are tempting, especially in healthcare where they yield 7-9%, but rising rates and the possible repeal of the ACA makes them a gamble too. Plus they are at least as volatile as the S&P.
Preferred stocks are yielding about 6% and are less volatile than the S&P. But dropping my expectations for returns would add a year of labor to my life. A year? Ow.
I've considered hedging strategies using options that would reduce the risk/returns of a stock portfolio. But even options are expensive, after the latest volatility. Zero returns are very possible, even as max returns are capped.
Personal lending sites are appealing, but I understand that fraud and default are starting to take a toll on returns.
If all investments are over-priced, the correct move is to not buy anything. However, I also remember being way too cautious from 2009 till now and missing literally hundreds of thousands in hindsight gains. I'm still mostly invested, but unsure what to do next. We've already maximized our personal education and energy efficiency investing options.
I'm looking for:
1) fresh ideas
2) motivation to pick a path
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Schiller CAPE is a useless ratio... see Jeremy Siegel's analysis. If reading in detail about changes in FASB accounting standards and their effects on valuation metrics doesn't interest you, and if you don't have a strong grasp of how inflation and interest rates influence relative valuation across time periods, I'd suggest that market timing is not going to work out well for you. Invest at a risk tolerance that your comfortable with and ignore what you might perceive as an overpriced market.
http://www.cfapubs.org/doi/pdf/10.2469/faj.v72.n3.1
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The broad stock market might not be a great investment right now, but it sure as heck beats all of the other options you list. If another 2007-2008 downturn would cause you to panic and bail out of the market, then add a healthy sum of bonds to your AA to stabilize the ride. Anything else though will guarantee you low returns and extra years of work, even greater volatility and risk via some exotic investment vehicle, or more physical work and time via something like real estate than you sounds willing to do. I vote for holding your nose, dumping your money into the stock market, and then choosing to not look at the balances or performance for the next X years you think it will take you to get to FIRE.
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Schiller CAPE is a useless ratio... see Jeremy Siegel's analysis. If reading in detail about changes in FASB accounting standards and their effects on valuation metrics doesn't interest you, and if you don't have a strong grasp of how inflation and interest rates influence relative valuation across time periods, I'd suggest that market timing is not going to work out well for you. Invest at a risk tolerance that your comfortable with and ignore what you might perceive as an overpriced market.
http://www.cfapubs.org/doi/pdf/10.2469/faj.v72.n3.1
Great article, and thanks for sharing it. The article does not claim CAPE is a useless ratio. It concludes: "The CAPE ratio is a very powerful predictor of long- term real stock returns." The quibble seems to be about a 2-3% difference in predictions depending on whether you allow one-time charges and massive losses by a few companies which are overrepresented in an index into the denominator.
Things look much better if you pretend those didn't happen. Then again, CAPE will shift quite a bit around 2019 when the financial crisis drops out of the 10y numbers!
I didn't see anything to make me think the ratios were lying and that stocks are actually reasonably priced. If anything, the similarity between the 1 year PE ratio and the CAPE confirms the view that stock earnings are expensive right now.
The price to sales ratio tells the same story, and this metric depends a lot less on accounting rules: http://www.marketwatch.com/story/by-this-measure-us-stocks-are-more-expensive-than-ever-2016-05-27
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If all investments are over-priced, the correct move is to not buy anything. However, I also remember being way too cautious from 2009 till now and missing literally hundreds of thousands in hindsight gains. I'm still mostly invested, but unsure what to do next. We've already maximized our personal education and energy efficiency investing options.
I'm looking for:
1) fresh ideas
2) motivation to pick a path
3) Accept a lower rate of return for a few years.
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The broad stock market might not be a great investment right now, but it sure as heck beats all of the other options you list. If another 2007-2008 downturn would cause you to panic and bail out of the market, then add a healthy sum of bonds to your AA to stabilize the ride. Anything else though will guarantee you low returns and extra years of work, even greater volatility and risk via some exotic investment vehicle, or more physical work and time via something like real estate than you sounds willing to do. I vote for holding your nose, dumping your money into the stock market, and then choosing to not look at the balances or performance for the next X years you think it will take you to get to FIRE.
Yes, it will probably work out over the course of 5-7 years. But historically, there has always been a reason for stocks to rise. What's that reason today? Productivity due to computers? Freer trade? A young, productive population? Quality of government? A low baseline price? Falling interest rates and inflation? All these narratives are in reverse now.
The risk goes both ways. If I play permabear for 7 years or so, it'll mean I'll probably underperform and end up still working. If I jump in and the market returns exactly what the Schiller PE says it will return, 2-4% or less, I'm back to work for that reason.
In terms of bailing on a downturn, I guess what I'd like to do is have room to increase my beta as stocks fall. E.g. start at 0.5, shift to 1 when stocks fall 10%, and shift to 2 when stocks fall 20%. However, if I sit at beta=0.5 for a few years, or in bonds, I might as well redecorate the cubicle. All the other investors face this dilemma too, so prices could continue to go up. The world has a lot more capital than it has investable opportunities.
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If all investments are over-priced, the correct move is to not buy anything. However, I also remember being way too cautious from 2009 till now and missing literally hundreds of thousands in hindsight gains. I'm still mostly invested, but unsure what to do next. We've already maximized our personal education and energy efficiency investing options.
I'm looking for:
1) fresh ideas
2) motivation to pick a path
3) Accept a lower rate of return for a few years.
3a) Focus on the AA that supports your long-term strategy while ignoring current market conditions.
But your thoughts about AA do seem like market timing in disguise... I would suggest reconciling that conflict. Yes, this is difficult to do, and I struggle with it too. I've watched the market rally ~5% with cash sitting idle on the sidelines! I'm going to kick myself and reread Jim Collins' stock series. I hope the folly of market timing is drilled into the rest of you to the point that citation is unnecessary as it's common knowledge :)
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There's a ton of money invested in everything, so everything is yielding pretty meh returns.
C'est la vie, you're not going to outsmart the market and there's no secret idea that's going to make you rich. You already said you're not interested in real estate, and that's probably your only/best bet for what you're going for.
Cutting your expenses, on the other hand, could get you FIRED much quicker than chasing a few bucks of returns. Finding a side gig you love that covers $15k of annual expenses can move your date up too.
-W
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what about closed end funds? Many are high yield. They tend to be well diversified and multiple asset classes are available. I'm a big fan of CEFs purchased at a discount to NAV.
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what about closed end funds? Many are high yield. They tend to be well diversified and multiple asset classes are available. I'm a big fan of CEFs purchased at a discount to NAV.
Hey! I actually follow your blog!
I'll be looking into CEFs, but I'm also considering just selling OTM puts every 30d. That'll eventually get me fully invested, but at least with some kind of discount. And if I somehow never get put the shares, I could theoretically earn a double digit return on my sidelined cash while the market goes sideways or slowly down.
The only problem with this plan is... one of my accounts is taxable.
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Schiller CAPE is a useless ratio... see Jeremy Siegel's analysis. If reading in detail about changes in FASB accounting standards and their effects on valuation metrics doesn't interest you, and if you don't have a strong grasp of how inflation and interest rates influence relative valuation across time periods, I'd suggest that market timing is not going to work out well for you. Invest at a risk tolerance that your comfortable with and ignore what you might perceive as an overpriced market.
http://www.cfapubs.org/doi/pdf/10.2469/faj.v72.n3.1
Great article, and thanks for sharing it. The article does not claim CAPE is a useless ratio. It concludes: "The CAPE ratio is a very powerful predictor of long- term real stock returns." The quibble seems to be about a 2-3% difference in predictions depending on whether you allow one-time charges and massive losses by a few companies which are overrepresented in an index into the denominator.
Things look much better if you pretend those didn't happen. Then again, CAPE will shift quite a bit around 2019 when the financial crisis drops out of the 10y numbers!
I didn't see anything to make me think the ratios were lying and that stocks are actually reasonably priced. If anything, the similarity between the 1 year PE ratio and the CAPE confirms the view that stock earnings are expensive right now.
The price to sales ratio tells the same story, and this metric depends a lot less on accounting rules: http://www.marketwatch.com/story/by-this-measure-us-stocks-are-more-expensive-than-ever-2016-05-27
Correct, the ratio is not useless...using historical averages of the ratio with reported earnings to interpret the current reading is useless. Using consistent earnings measurements, like operating earnings or NIPA profits, we see the market is slightly above long term averages as a valuation metric. This should be expected in an environment of low interest rates. Anyone using traditional CAPE as a metric to determine their asset allocation will be permanently expecting lower equity returns, just as they have for the past 5 years.
Real returns (inflation adjusted) are all that matter. There's no difference between earning 18% in an environment where inflation is 16%, or earning 4% in an environment where inflation is 2%. Real returns are going to continue to support the dynamic of risk and return. Nominal returns may be lower, due to the natural tie between market valuations and interest rates/inflation, but so is inflation. You'll be better off investing if you ignore those that try to time markets by telling you equities are low return/high risk at the moment.
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Hey! I actually follow your blog!
Thanks for reading!
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I think perhaps you are putting artificial pressure on yourself and your investment strategy to say that you have to earn at least 7% ROI over the next 5-7 years. My understanding of one of the tenets of this site is that calculate your projected expenses in retirement and when your investments reach 25 times that amount then according to the 4% rule you are FI. You should come up with an investment strategy that works for you to invest your savings and not just chase ROI. I think it is good to try to set reasonable goals but remember to be flexible.
Also, you should be investing with long term goals not just short term, so I don't think you should discount real estate if that is something that you would like as part of your portfolio.
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The market is going to return what the market is going to return, and I'm not talking about just the stock market. Whether it's bonds, real estate, stocks, or whatever, it's all interrelated since everybody like you is shifting money around to whatever they think is going to do the best. If you go chasing a specific return you'll probably just find some higher risk. Do yourself a favor by diversifying and accepting whatever the market returns whether that be 1% or 20%.
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If you haven't yet, read "A random walk down wallstreet.". It's a very easy to read, modern book that will help cut down the investment chaff and focus on what's actually relevant.
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http://www.ci.com/orderform/pdf/general_marketing/idontwant_poster_e.pdf
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I wouldn't characterize myself as a market timer. And I know you probably hear that a lot. Instead I'm looking at the numbers to come up with an expected/likely yield and asking "do I want to buy the risk-adjusted yield of product X or Y?" I'm examining the rationale for buying financial products at their current price.
Basically, I am coming up short on macro explanations why almost any investment will do well. All the reasons of the past seem not to apply. It's not like I'm awaiting a Eurozone breakup or a Chinese financial crisis. Rather, I'm asking if current E/P earnings yields and growth rates will get me to my goals 7-8 years out.
Barring some productivity breakthrough, baby boom, increased international trade, etc, why will real economic growth exceed the 1-2% we've seen in our current era of dirt-cheap loans, on-target inflation, and sub-5% unemployment?
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Sounds like you'll be working longer, then. TANSTAAFL.
-W
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I wouldn't characterize myself as a market timer. And I know you probably hear that a lot. Instead I'm looking at the numbers to come up with an expected/likely yield and asking "do I want to buy the risk-adjusted yield of product X or Y?" I'm examining the rationale for buying financial products at their current price.
Basically, I am coming up short on macro explanations why almost any investment will do well. All the reasons of the past seem not to apply. It's not like I'm awaiting a Eurozone breakup or a Chinese financial crisis. Rather, I'm asking if current E/P earnings yields and growth rates will get me to my goals 7-8 years out.
Barring some productivity breakthrough, baby boom, increased international trade, etc, why will real economic growth exceed the 1-2% we've seen in our current era of dirt-cheap loans, on-target inflation, and sub-5% unemployment?
You don't need economic growth to make a return. As long as companies are making a profit, debt is collecting interest, and tenants are paying rent, there will be a return. Of course you generally need economic growth to recoup the money that companies are retaining and reinvesting. If that doesn't pay off, though, after a while the market will demand more go to dividends, so you'll get the money growth or no growth.
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You can spin yourself around until your dizzy trying to become comfortable with the reasons why you should invest. Just know that these things will always remain true in the long run:
Cash will earn a negative real rate of return. If inflation is 2%, you'll lose 2% of your purchasing power every year you hold cash.
Bonds will outperform cash, and credit and duration risk will determine that outperformance.
The equity risk premium will exist and be variable, but will produce returns that are superior to bonds.
These are all true in the long run but may not be in the short run. This is the purpose of diversification. Still if you want higher returns, you must be comfortable with higher risk. The actual return you recieve is entirely out of your control. All you can do is determine your risk tolerance, understand that market timing doesn't work for the majority of professionals let alone the average joe on the street, and accept that what happens from there is out of your control.
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http://www.ci.com/orderform/pdf/general_marketing/idontwant_poster_e.pdf
This is wonderful.
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I feel this same way also. I am nearing 50, and plan to retire in 5-6 years. I generally have 95% of my investments kept in Index funds, and have done really well over the years. However, the recent rise in the market, coupled with political uncertainty has given me the jitters, pushing me to reduce my holdings in Index Funds down to 70%. Part of this is due to my risk tolerance reducing as I age, but I have to fully admit that another part of this is related to record market highs, along with concerns about the lack of a steady hand at the helm. These are uncharted waters that nearly no one had predicted, and although I realize that I may miss out on some gains, I am not prepared to witness staggering losses on nearly 100% of my portfolio based upon a 3:00am twitter rant. For now, knowing that some of this money is held out of the market allows me to sleep better at night on the odd chance that I hear Lester Holt broadcast the latest top stories.
My issue is similar to that of the OP, in that I don't want to leave 30% of my portfolio eroding due to inflation, yet, I am also not sure exactly where to put it. I too have been looking at bonds, but I am concerned about the effects of inflation of these types of investments also. That said, I will probably lurk in the background to see what others are saying.
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These are uncharted waters that nearly no one had predicted
I believe this has been said about literally every period of every country in the history of the human race.
In fact you are making a critical mistake which is a common dumb investor behavior, per Swedroe:
http://www.etf.com/sections/index-investor-corner/swedroe-politics-can-sway-investing?nopaging=1
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I wouldn't characterize myself as a market timer. And I know you probably hear that a lot. Instead I'm looking at the numbers to come up with an expected/likely yield and asking "do I want to buy the risk-adjusted yield of product X or Y?" I'm examining the rationale for buying financial products at their current price.
Basically, I am coming up short on macro explanations why almost any investment will do well. All the reasons of the past seem not to apply. It's not like I'm awaiting a Eurozone breakup or a Chinese financial crisis. Rather, I'm asking if current E/P earnings yields and growth rates will get me to my goals 7-8 years out.
Barring some productivity breakthrough, baby boom, increased international trade, etc, why will real economic growth exceed the 1-2% we've seen in our current era of dirt-cheap loans, on-target inflation, and sub-5% unemployment?
People have been saying the same thing since 2013 - "I'm not a market timer, but I think the market is not going to be able to keep trending up."
Eventually, one year, someone will be right, and the market will drop some amount that makes them feel vindicated and validated. However, so far, most people have been wrong about this.
Also, keep in mind that even if you buy 100% into the idea that PE ratio is a strong correlation with stock prices, high PE ratios doesn't necessarily mean a market crash, it might just mean lower or flatter expected returns for a while (ignoring dividend reinvestment).
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I feel this same way also. I am nearing 50, and plan to retire in 5-6 years. I generally have 95% of my investments kept in Index funds, and have done really well over the years. However, the recent rise in the market, coupled with political uncertainty has given me the jitters, pushing me to reduce my holdings in Index Funds down to 70%. Part of this is due to my risk tolerance reducing as I age, but I have to fully admit that another part of this is related to record market highs, along with concerns about the lack of a steady hand at the helm. These are uncharted waters that nearly no one had predicted, and although I realize that I may miss out on some gains, I am not prepared to witness staggering losses on nearly 100% of my portfolio based upon a 3:00am twitter rant. For now, knowing that some of this money is held out of the market allows me to sleep better at night on the odd chance that I hear Lester Holt broadcast the latest top stories.
My issue is similar to that of the OP, in that I don't want to leave 30% of my portfolio eroding due to inflation, yet, I am also not sure exactly where to put it. I too have been looking at bonds, but I am concerned about the effects of inflation of these types of investments also. That said, I will probably lurk in the background to see what others are saying.
If Trump were to turns out to be the end of the world, cash and bonds could very well be more dangerous than stocks. If the fed were forced to keep interest rates low during run-away inflation (he's hinted at this), cash would be the last thing you'd want. Then what if there were a doubt as to whether or not the US might default on its debt? I am NOT trying to get into a Trump/Anti-Trump flame war. I'm just trying to point out that a lot of worst case scenarios would be even more devastating to cash and bonds than to stocks.
If you're worried about politics, maybe throw your cold feet 30% into international stocks. It's not completely insulated from anything crazy going on the US, but it definitely is more than dollars or bonds.
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These are uncharted waters that nearly no one had predicted
I believe this has been said about literally every period of every country in the history of the human race.
In fact you are making a critical mistake which is a common dumb investor behavior, per Swedroe:
http://www.etf.com/sections/index-investor-corner/swedroe-politics-can-sway-investing?nopaging=1
My concerns are not based on the party in office, but rather the recent record gains coupled with issues in the world economy, along with the unstable temperament of the incoming president. Also, in reducing my equities while the market is at record highs definitely fits the 'sell high' mantra. It is not as if I am selling off equities post crash, and I still have 70% of my portfolio able to experience long term equity growth. However, I now have a layer of insulation from market hiccups. Lastly, I know that this forum is big on 100% equities, but this is a textbook example of putting all of your eggs in one basket - not quite diversified holdings.
I have simply reached an age and net worth where I am no longer comfortable watching dramatic reductions in my portfolio, and although I have done very well over the last many years, these recent events have helped me to reevaluate my risk tolerance, and readjust my portfolio accordingly, which it not a bad thing. Being that I am looking to retire in the next 5-6 years, I am no longer willing to risk my entire savings to squeeze out every last available percentage of growth.
Lastly, even your buddy Swedroe recommends keeping only 60 % in equities.....
http://www.kiplinger.com/article/investing/T041-C009-S001-three-simple-portfolios.html
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I bit the bullet and bought some index funds, and entered a limit order for more.
Yet, I'm still interested in the debate between a) "just keep buying investments no matter what" and b) "buy value." Both are arguably mustachian concepts, but they're contradictory, or at least tend to be applied to different things.
Why not treat expected investment yields (real estate, stocks, bonds) like anything else you purchase? If I'm more inclined to buy apples at $0.99/lb than at $2.49/lb, then why wouldn't I be more inclined to buy investments when the earnings which make them valuable are cheap rather than expensive? Are we saying every day that investment yields will never be this cheap again?
If it's reasonable to have a rule to not buy apples for more than $2/lb, would it be irrational to have a rule to not buy stocks for less than X% expected yield?
Normally, one could rotate out of expensive investments and into inexpensive investments, but when stocks, bonds, real estate, and everything else is priced sky-high all together, what does that mean one should do? I also recall the late 90's when I knew the dot-com bubble was likely to pop, so I held Wal Mart stock, thinking I was safe. Turns out I wasn't. Turns out, markets were more animal passions than efficient.
Of course, the "just keep buying investments no matter what" behavioral rule has been the right thing to do 90% of years. Judging expected yield distributions for investments is a lot harder than pricing apples. Yet, just as with apples, it would seem that in some years we would get a "don't buy" signal. How could we amend the rule so that we wouldn't automatically buy/hold the Nasdaq in December 1999 and also that we don't panic and sell on bad news?
Should we invent a "bubble warning light", based on specified valuation metrics, that would make the "always buy" rule a bit more value-sensitive? When, if ever, would "always buy" not apply?
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These are uncharted waters that nearly no one had predicted
I believe this has been said about literally every period of every country in the history of the human race.
In fact you are making a critical mistake which is a common dumb investor behavior, per Swedroe:
http://www.etf.com/sections/index-investor-corner/swedroe-politics-can-sway-investing?nopaging=1
My concerns are not based on the party in office, but rather the recent record gains coupled with issues in the world economy, along with the unstable temperament of the incoming president. Also, in reducing my equities while the market is at record highs definitely fits the 'sell high' mantra. It is not as if I am selling off equities post crash, and I still have 70% of my portfolio able to experience long term equity growth. However, I now have a layer of insulation from market hiccups. Lastly, I know that this forum is big on 100% equities, but this is a textbook example of putting all of your eggs in one basket - not quite diversified holdings.
I have simply reached an age and net worth where I am no longer comfortable watching dramatic reductions in my portfolio, and although I have done very well over the last many years, these recent events have helped me to reevaluate my risk tolerance, and readjust my portfolio accordingly, which it not a bad thing. Being that I am looking to retire in the next 5-6 years, I am no longer willing to risk my entire savings to squeeze out every last available percentage of growth.
Lastly, even your buddy Swedroe recommends keeping only 60 % in equities.....
http://www.kiplinger.com/article/investing/T041-C009-S001-three-simple-portfolios.html
To clarify I see nothing wrong with owning bonds, in fact it looks like right now 19% of my liquid net worth is in bonds and cash. In fact I even agree with market timing into bonds based on rapidly approaching your goals after the stock market goes through several consecutive years of record highs. It is changing the plan because of who was elected that I am questioning, and pointing out that on average it has led to worse outcomes more often than not. Who knows, maybe this time you will be right. Personally I am carrying on like normal. However my investments are already pretty "diverse" relative to most here.
Larry Swedroe is most famous for the "Larry portfolio" which invests 70% in short term treasury bonds.
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I bit the bullet and bought some index funds, and entered a limit order for more.
Yet, I'm still interested in the debate between a) "just keep buying investments no matter what" and b) "buy value." Both are arguably mustachian concepts, but they're contradictory, or at least tend to be applied to different things.
Why not treat expected investment yields (real estate, stocks, bonds) like anything else you purchase? If I'm more inclined to buy apples at $0.99/lb than at $2.49/lb, then why wouldn't I be more inclined to buy investments when the earnings which make them valuable are cheap rather than expensive? Are we saying every day that investment yields will never be this cheap again?
If it's reasonable to have a rule to not buy apples for more than $2/lb, would it be irrational to have a rule to not buy stocks for less than X% expected yield?
Normally, one could rotate out of expensive investments and into inexpensive investments, but when stocks, bonds, real estate, and everything else is priced sky-high all together, what does that mean one should do? I also recall the late 90's when I knew the dot-com bubble was likely to pop, so I held Wal Mart stock, thinking I was safe. Turns out I wasn't. Turns out, markets were more animal passions than efficient.
Of course, the "just keep buying investments no matter what" behavioral rule has been the right thing to do 90% of years. Judging expected yield distributions for investments is a lot harder than pricing apples. Yet, just as with apples, it would seem that in some years we would get a "don't buy" signal. How could we amend the rule so that we wouldn't automatically buy/hold the Nasdaq in December 1999 and also that we don't panic and sell on bad news?
Should we invent a "bubble warning light", based on specified valuation metrics, that would make the "always buy" rule a bit more value-sensitive? When, if ever, would "always buy" not apply?
I agree with this statement that always buying vs value buying tend to be applied to different things. In my opinion, always buying works best when looking at buying mutual funds/ETF's as they are baskets of stocks. The stocks held will then be spread between those with a low valuation, high valuation, or fair valuation. The value approach works best when buying individual stocks because then you can buy only the ones who are undervalued. However taking the value approach requires a lot of work and assumptions on the sector the company operates in that are extremely difficult if not impossible to predict.
As far as your original statement, yes the PE of 26 and Schiller PE of 27 are high, especially when looking at historical averages but how do we know these valuations are not going to be the new normal? And a high PE does not mean you will not get returns, they just won't be as high as if you bought in at a lower PE. Either way it is still better than not investing and losing each year to inflation.
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I bit the bullet and bought some index funds, and entered a limit order for more.
Yet, I'm still interested in the debate between a) "just keep buying investments no matter what" and b) "buy value." Both are arguably mustachian concepts, but they're contradictory, or at least tend to be applied to different things.
Why not treat expected investment yields (real estate, stocks, bonds) like anything else you purchase? If I'm more inclined to buy apples at $0.99/lb than at $2.49/lb, then why wouldn't I be more inclined to buy investments when the earnings which make them valuable are cheap rather than expensive? Are we saying every day that investment yields will never be this cheap again?
If it's reasonable to have a rule to not buy apples for more than $2/lb, would it be irrational to have a rule to not buy stocks for less than X% expected yield?
Normally, one could rotate out of expensive investments and into inexpensive investments, but when stocks, bonds, real estate, and everything else is priced sky-high all together, what does that mean one should do? I also recall the late 90's when I knew the dot-com bubble was likely to pop, so I held Wal Mart stock, thinking I was safe. Turns out I wasn't. Turns out, markets were more animal passions than efficient.
Of course, the "just keep buying investments no matter what" behavioral rule has been the right thing to do 90% of years. Judging expected yield distributions for investments is a lot harder than pricing apples. Yet, just as with apples, it would seem that in some years we would get a "don't buy" signal. How could we amend the rule so that we wouldn't automatically buy/hold the Nasdaq in December 1999 and also that we don't panic and sell on bad news?
Should we invent a "bubble warning light", based on specified valuation metrics, that would make the "always buy" rule a bit more value-sensitive? When, if ever, would "always buy" not apply?
Yield is a poor function of value. Your just asking the same question under a different way of asking it...either way your comment assumes that valuations change because prices change. That is only one way... remember, valuations are made up of two components... P/E for example relies on price and earnings. If we hold price constant, and earnings rise, the valuation becomes more attractive. The opposite is true as well. This is why valuations on P/E ratios haven't skyrocketed over the past two months, because earnings season was good and the energy industry has stopped seeing Y/Y declines in earnings. You could get out of 'overvalued' stocks, watch the market rise slowly while earnings rise, and next thing you know you've missed out on a rally AND the market looks better valued than it did when you got out. And yields wouldn't change during this time...
The vast majority, and by that I mean 99.999% of investors, only know enough about valuations to be dangerous to themselves and their clients. Many more people have been hurt by dabbling in it than have helped themselves. We only hear about the guys who called it after the market crashes...but go check out funds run by smart guys like John Hussman. HSTRX has awful returns, you haven't made anything investing with him over the past 5 years. Yet John's blog would have you believe that the crash is just around the corner. He's a smart guy, but you can pick any day in the last 10 years, find his blog post, and you would have believed that was the market top.
Finally...value investing is very mustachian and a very smart way to invest, as long as you remain diversified.
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I bit the bullet and bought some index funds, and entered a limit order for more.
Yet, I'm still interested in the debate between a) "just keep buying investments no matter what" and b) "buy value." Both are arguably mustachian concepts, but they're contradictory, or at least tend to be applied to different things.
Why not treat expected investment yields (real estate, stocks, bonds) like anything else you purchase? If I'm more inclined to buy apples at $0.99/lb than at $2.49/lb, then why wouldn't I be more inclined to buy investments when the earnings which make them valuable are cheap rather than expensive? Are we saying every day that investment yields will never be this cheap again?
If it's reasonable to have a rule to not buy apples for more than $2/lb, would it be irrational to have a rule to not buy stocks for less than X% expected yield?
Normally, one could rotate out of expensive investments and into inexpensive investments, but when stocks, bonds, real estate, and everything else is priced sky-high all together, what does that mean one should do? I also recall the late 90's when I knew the dot-com bubble was likely to pop, so I held Wal Mart stock, thinking I was safe. Turns out I wasn't. Turns out, markets were more animal passions than efficient.
Of course, the "just keep buying investments no matter what" behavioral rule has been the right thing to do 90% of years. Judging expected yield distributions for investments is a lot harder than pricing apples. Yet, just as with apples, it would seem that in some years we would get a "don't buy" signal. How could we amend the rule so that we wouldn't automatically buy/hold the Nasdaq in December 1999 and also that we don't panic and sell on bad news?
Should we invent a "bubble warning light", based on specified valuation metrics, that would make the "always buy" rule a bit more value-sensitive? When, if ever, would "always buy" not apply?
There's an acronym, TINA, there is no alternative. Apples for more than $2/lb are expensive. If the prices of oranges, bananas, and peaches go to $5/lb, though, you're probably going to be eating apples.
Back in 2000 you could have potentially made a case for moving to bonds since, if I remember correctly, earnings yields actually went below bond yields. Bonds are way lower now, and earnings yields are not quite as ridiculous. People that moved to cash when the market got inflated again have been missing dividends and losing to inflation for a few years now. Who knows how long the market will take to right itself, and it may very well happen by inflation or even a jump in earnings. Earnings going up is quite possible since, just like you guys, companies are sitting on cash they could invest.
My point is stocks are bad right now, but everything else could be worse, cash included.
I bit the bullet and bought some index funds, and entered a limit order for more.
Yet, I'm still interested in the debate between a) "just keep buying investments no matter what" and b) "buy value." Both are arguably mustachian concepts, but they're contradictory, or at least tend to be applied to different things.
Why not treat expected investment yields (real estate, stocks, bonds) like anything else you purchase? If I'm more inclined to buy apples at $0.99/lb than at $2.49/lb, then why wouldn't I be more inclined to buy investments when the earnings which make them valuable are cheap rather than expensive? Are we saying every day that investment yields will never be this cheap again?
If it's reasonable to have a rule to not buy apples for more than $2/lb, would it be irrational to have a rule to not buy stocks for less than X% expected yield?
Normally, one could rotate out of expensive investments and into inexpensive investments, but when stocks, bonds, real estate, and everything else is priced sky-high all together, what does that mean one should do? I also recall the late 90's when I knew the dot-com bubble was likely to pop, so I held Wal Mart stock, thinking I was safe. Turns out I wasn't. Turns out, markets were more animal passions than efficient.
Of course, the "just keep buying investments no matter what" behavioral rule has been the right thing to do 90% of years. Judging expected yield distributions for investments is a lot harder than pricing apples. Yet, just as with apples, it would seem that in some years we would get a "don't buy" signal. How could we amend the rule so that we wouldn't automatically buy/hold the Nasdaq in December 1999 and also that we don't panic and sell on bad news?
Should we invent a "bubble warning light", based on specified valuation metrics, that would make the "always buy" rule a bit more value-sensitive? When, if ever, would "always buy" not apply?
Yield is a poor function of value. Your just asking the same question under a different way of asking it...either way your comment assumes that valuations change because prices change. That is only one way... remember, valuations are made up of two components... P/E for example relies on price and earnings. If we hold price constant, and earnings rise, the valuation becomes more attractive. The opposite is true as well. This is why valuations on P/E ratios haven't skyrocketed over the past two months, because earnings season was good and the energy industry has stopped seeing Y/Y declines in earnings. You could get out of 'overvalued' stocks, watch the market rise slowly while earnings rise, and next thing you know you've missed out on a rally AND the market looks better valued than it did when you got out. And yields wouldn't change during this time...
The vast majority, and by that I mean 99.999% of investors, only know enough about valuations to be dangerous to themselves and their clients. Many more people have been hurt by dabbling in it than have helped themselves. We only hear about the guys who called it after the market crashes...but go check out funds run by smart guys like John Hussman. HSTRX has awful returns, you haven't made anything investing with him over the past 5 years. Yet John's blog would have you believe that the crash is just around the corner. He's a smart guy, but you can pick any day in the last 10 years, find his blog post, and you would have believed that was the market top.
Finally...value investing is very mustachian and a very smart way to invest, as long as you remain diversified.
Warren Buffett shows value investing can work, but I don't think most of us are up for it. Going back to the whole apple analogy, imagine if instead of buying a bag of apples, you're going to spend most of your net worth on these apples. Then because buying stocks is buying future earnings, you're buying apple futures instead of apples that have already been picked. You're probably going to want to hire some experienced apple experts, fly to the orchards, and meet the farmers. What's the climate like in the area? How much are those farmers leveraged on their mortgage? How much experience to those farmers have? Are they using pesticides or are the apples organic? How have the harvests been in previous years, and are there worms or blight in the area? Then you need to compare those apples to the other fruit available.
I don't think most people are willing to do all the homework for value investing or individually pay for somebody that would.
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Sure... but you can buy a vanguard value index fund for extremely cheap and do no homework
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The problem with value investing is that it only gains in the short term, and then only sometimes. And it ALL regresses to the mean over time. So you're taking extra risk in the short term for exactly zero long term gain. Maybe you'll get lucky in the short term. But then again maybe you won't. Value investing is higher risk than just dumping into broad index funds. If you like risk, go ahead.
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The problem with value investing is that it only gains in the short term, and then only sometimes. And it ALL regresses to the mean over time. So you're taking extra risk in the short term for exactly zero long term gain. Maybe you'll get lucky in the short term. But then again maybe you won't. Value investing is higher risk than just dumping into broad index funds. If you like risk, go ahead.
Value investing does work long term. It's the fundamental principal behind Fama/French's 3 factor model. They won the nobel prize for, among other things, identifying that characteristics such as value and size lead to higher returns. This has been proven to be true throughout history and around the world.
To your point, yes, value does not always outperform. You can go through long periods of time where growth > value. For the 10 years ending 2000, growth outperformed value by over 4% per year. These long periods do exist. But over the past 100 years value has outperformed growth more frequently (more years where value > growth) as well as cumulatively (roughly 5% per year). As with anything in investing, patience pays off.
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To your point, yes, value does not always outperform. You can go through long periods of time where growth > value. For the 10 years ending 2000, growth outperformed value by over 4% per year. These long periods do exist. But over the past 100 years value has outperformed growth more frequently (more years where value > growth) as well as cumulatively (roughly 5% per year). As with anything in investing, patience pays off.
Are you aware of what 5%/year over 100 years comes out to? I'm just curious, because there's certainly not a broad class of stocks (or anything else) that outperformed the broad stock market by 5%/year for the last century. If there were, the entire market would now be comprised of that group of stocks...
-W
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Are you aware of what 5%/year over 100 years comes out to? I'm just curious, because there's certainly not a broad class of stocks (or anything else) that outperformed the broad stock market by 5%/year for the last century. If there were, the entire market would now be comprised of that group of stocks...
The term value stock defines a subset of companies based on a set of criteria. If that criteria was say, price to book, then we could say the lowest 50% of stocks are value stocks and the upper 50% are growth stocks. Morningstar chooses to split them into thirds, hence their value, blend and growth categories which you see in their classic 9 style box.
These stocks are not static. So, as you allude to, there has not been one specific group of stocks that has outperformed by 5% per year over 100 years. Stocks frequently jump from one category to another. An under-priced value company can see it's shares rally and quickly become an over-priced growth stock. Since these are not static, there is not a specific group of companies that have existed over the past 100 years and collectively rallied 5%. Instead, the group turns over constantly based on their fundamentals. A value index will be consistently turning over, selling the stocks that have become growth like, and buying ones that have drifted into value territory.
This group, the value stocks, have outperformed by roughly 5% per year over the past 100 years. Read fama/french's 3 factor model white paper if you want the cold hard evidence.
And yes, I'm aware of what 5% per year over 100 years comes out to. I've spent my career in portfolio management and hold the CFA designation.
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Sure, but those are *retroactive* designations. Morningstar (or anyone else) did not figure out which companies fit into each category each year and then invest in them - they just looked back through 100 years of stock results and essentially cherrypicked. You can do all kinds of crazy stuff like this with all kinds of odd categories and come up with a "strategy", but if it was that easy...mutual fund managers (and smaller scale stock pickers) wouldn't underperform the index so horribly and consistently, right?
-W
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Sure, but those are *retroactive* designations. Morningstar (or anyone else) did not figure out which companies fit into each category each year and then invest in them - they just looked back through 100 years of stock results and essentially cherrypicked. You can do all kinds of crazy stuff like this with all kinds of odd categories and come up with a "strategy", but if it was that easy...mutual fund managers (and smaller scale stock pickers) wouldn't underperform the index so horribly and consistently, right?
I'll start out by saying that active managers consistently underperform consistently. Stock pickers suck, they charge too much and the ones that outperform can't do it consistently. Investors are much better off sticking to a globally diversified portfolio that aligns with their risk tolerance.
However, that does not mean investors should be ignorant to facts. It is a fact that equities outperform fixed income over long periods of time, just as it is a fact that value companies outperform growth over time. This is why value funds outperform the broad indexes over long periods of time. Take a fund from one of the major providers, say vanguard or DFA, and look at performance over 20+ years, they'll all tell the same story. Large, small, international, emerging markets...wherever you'd like to analyze...value outperforms. If you consider value investing a crazy cherrypicked strategy, then we'll have to agree to disagree. Personally, I'd rather pay less for future earnings and dividends, and do it in a broadly diversified manner.
Feel free to do your own research, here's the data...http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#Research
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Are you aware of what 5%/year over 100 years comes out to? I'm just curious, because there's certainly not a broad class of stocks (or anything else) that outperformed the broad stock market by 5%/year for the last century. If there were, the entire market would now be comprised of that group of stocks...
This group, the value stocks, have outperformed by roughly 5% per year over the past 100 years. Read fama/french's 3 factor model white paper if you want the cold hard evidence.
And yes, I'm aware of what 5% per year over 100 years comes out to. I've spent my career in portfolio management and hold the CFA designation.
Comparing vanguard value fund (VIVAX) to S&P 500 I don't see your 5%.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=12%2F20%2F2016&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VIVAX&allocation1_1=100&symbol2=VFINX&allocation2_2=100 (https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=12%2F20%2F2016&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VIVAX&allocation1_1=100&symbol2=VFINX&allocation2_2=100)
Since 1993 the CAGR of VIVAX is 0.25% higher. So for 23 years I would have seen no difference. The 5% p.a. outperfomance will have to start to show itself soon to catch up..
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Since 1993 the CAGR of VIVAX is 0.25% higher. So for 23 years I would have seen no difference. The 5% p.a. outperfomance will have to start to show itself soon to catch up..
Sure, so a few things I'd point out.
One, 93-99 was the tech bubble, which was basically the best time in history to be investing in growth stocks, especially ones with a dot com in their name. If you recall, this was a time where value guys like buffett were being dismissed as out of touch. I think I referenced before that growth significantly outperfomed for the 10 years ending 2000. I would guess that if you ran the same numbers starting in 2000, you'd get a different story. We can change the dates around and get different numbers all day, but I'd point out that even starting at the early days of the tech bubble, value still outperformed.
Two, you're analyzing large cap stocks, in which correlations are higher and valuations are less extreme. The 5% number I reference includes large cap stocks, but also includes small cap, international and emerging markets. You'll find the value premium works in all of these areas, but the differences in companies is more extreme as their size falls. Try the same on VISVX and compare to small blend or a similar small benchmark version of the S&P 500, say the Russell 2000.
Three, vanguard plays it safe when it comes to any of their products. As such, they place a lot of value in sticking with benchmarks. Perfectly reasonable and not a bad thing. If you look at a fund family that holds similar values as Vanguard, such as dimenional, which keeps fees low, believes in diversification, etc. But is more willing to deviate from a benchmark, you'll find that returns are more appealing. Check out DFLVX instead of VIVAX as an example.
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Since 1993 the CAGR of VIVAX is 0.25% higher. So for 23 years I would have seen no difference. The 5% p.a. outperfomance will have to start to show itself soon to catch up..
Sure, so a few things I'd point out.
One, 93-99 was the tech bubble, which was basically the best time in history to be investing in growth stocks, especially ones with a dot com in their name. If you recall, this was a time where value guys like buffett were being dismissed as out of touch. I think I referenced before that growth significantly outperfomed for the 10 years ending 2000. I would guess that if you ran the same numbers starting in 2000, you'd get a different story. We can change the dates around and get different numbers all day, but I'd point out that even starting at the early days of the tech bubble, value still outperformed.
Two, you're analyzing large cap stocks, in which correlations are higher and valuations are less extreme. The 5% number I reference includes large cap stocks, but also includes small cap, international and emerging markets. You'll find the value premium works in all of these areas, but the differences in companies is more extreme as their size falls. Try the same on VISVX and compare to small blend or a similar small benchmark version of the S&P 500, say the Russell 2000.
Three, vanguard plays it safe when it comes to any of their products. As such, they place a lot of value in sticking with benchmarks. Perfectly reasonable and not a bad thing. If you look at a fund family that holds similar values as Vanguard, such as dimenional, which keeps fees low, believes in diversification, etc. But is more willing to deviate from a benchmark, you'll find that returns are more appealing. Check out DFLVX instead of VIVAX as an example.
So if I pick a certain group of stocks with certain characteristics in a certain fund from a certain company, starting and ending at certain years...? Then I can show that these have outperformed in the past. Got it!
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facts are facts. Sometimes they might not fit the story you 'know' in your head. Again, I've provided the data and encourage you to learn for yourself.
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Regarding the comment about TINA (There Is No Alternative, to buying stocks or bonds), I have to disagree. There are always alternatives to the securities markets. I could:
1) buy & rent out residential real estate
2) invest in home improvements such as insulation
3) buy precious metals (essentially random return)
4) sell options spreads and harvest time decay
5) buy art / collectibles
6) personal lending
7) direct real estate investment sites
8) flip assets bought at a cash discount
9) buy or build a small business
10) buy education, e.g. programming
11) invest in timberland
12) subdivide semi-rural property
13) patent some ideas
14) buy mineral rights
15) short the market
16) sit in cash, avoid a crash
17) build / lease a billboard
18) illegally subsidize a family member's term life insurance
19) buy TIPS
20) buy a parking lot
21) buy a commercial building
22) preventative maintenance on household systems, car
23) buy LASIK eye surgery
24) Pay down the mortgage
Etc...
Note that almost all these options are unavailable to institutional investors or billionaires. They really don't have an alternative. They are destined to bid up every bubble because they have a mandate and mechanistic rules, or because their scale is too big to pursue small, high-yielding projects.
Yes, some of these ideas have a lower expected value than the stock market's long-term past performance and some are illiquid. The point is there is always an alternative.
If anything, the time when people are reluctantly buying because they see no alternative is a sell signal. People wept about PE ratios in 1999 too, and were told valuation doesn't matter, just buy.
As we now know, instead of NASDAQ funds, they should have bought coastal real estate, education, or long-duration put options.
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If anything, the time when people are reluctantly buying because they see no alternative is a sell signal. People wept about PE ratios in 1999 too, and were told valuation doesn't matter, just buy.
I wish I had put a bunch of money into the market in 99. I'd have a lot more $$ right now. Because over time the market always goes up. It might drop or go flat temporarily, but life would be boring if resets never happened ;)
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facts are facts. Sometimes they might not fit the story you 'know' in your head. Again, I've provided the data and encourage you to learn for yourself.
But it's not a clear cut "fact". If so why would anyone buy anything other than value stocks?! I don't just know these things from the gut either. Read "the telltale chart" speech by Bogle.
https://www.vanguard.com/bogle_site/sp20020626.html (https://www.vanguard.com/bogle_site/sp20020626.html)
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Regarding the comment about TINA (There Is No Alternative, to buying stocks or bonds), I have to disagree. There are always alternatives to the securities markets. I could:
[see below]
Note that almost all these options are unavailable to institutional investors or billionaires. They really don't have an alternative. They are destined to bid up every bubble because they have a mandate and mechanistic rules, or because their scale is too big to pursue small, high-yielding projects.
Yes, some of these ideas have a lower expected value than the stock market's long-term past performance and some are illiquid. The point is there is always an alternative.
If anything, the time when people are reluctantly buying because they see no alternative is a sell signal. People wept about PE ratios in 1999 too, and were told valuation doesn't matter, just buy.
As we now know, instead of NASDAQ funds, they should have bought coastal real estate, education, or long-duration put options.
What I meant by "no alternative" is that there's no alternative that's not affected by an efficient market distributing low returns across all options. By "market" I don't mean just stocks but anything that produces a return on capital. People are chasing returns wherever they can get them, and it drives up the prices on pretty much everything sooner or later. Some of your options are good investments, but it's kind of hubristic to think you're going to use them to beat the system.
1) buy & rent out residential real estate
Rental property is definitely affected by low interest rates. If you search for "home prices" it looks like prices are already
overheating like stocks. And if it's high, rental property could just as easily have a correction as stocks like everybody
found out in 2007. Don't get me wrong, rental property can be a great investment or diversification. I own a rental house.
But if you believe in market efficiency, you can't use real estate to beat the market instead of just be the market.
2) invest in home improvements such as insulation
This can definitely produce good returns (A penny saved is a penny earned for sure). You can't put 30% of
your stash into it, though. It's also one of those things that's generally good no matter what the market is doing.
3) buy precious metals (essentially random return)
Buying metal is not an actual investment. Metals don't produce anything. Without an actual return it's just speculation.
4) sell options spreads and harvest time decay
Fancy, but still subject to the same market forces as everything else.
5) buy art / collectibles
Same as 3)
6) personal lending
Also another option but low interest rates are going to affect this as much as anything else. Plus I'd think you'd want a
good risk premium.
7) direct real estate investment sites
Essentially the same as 1) with a little more diversification
8) flip assets bought at a cash discount
This could be three things
- Investing time and/or money to fix it up.
- Charging what is basically a finder's fee.
- Speculating that somebody else will pay more than you will.
9) buy or build a small business
Yes, this is a really good alternative in a sense, and it's implicitly what the fed is trying to encourage you to do.
It's risky, though. There's a good chance your small business will flop. You need a pretty good chance of being wildly
successful to get your risk premium.
10) buy education, e.g. programming
Kind of, but it's more of a force multiplier on your labor than an investment. It also is probably not worth it from a strictly
financial sense if you're at or close to FIRE.
11) invest in timberland
Probably also good, but pretty similar to 1). Low mortgage rates and low returns elsewhere can drive this up.
12) subdivide semi-rural property
You can do well here, but also subject to the same market forces as 1). I'm also guessing it's pretty capital intensive, too.
13) patent some ideas
If you're putting any significant money/time into patenting the idea, you're risking the chance that nobody wants to pay to use it.
If you don't have to put much money/time in, you're selling the idea as a product. Definitely something worth doing, but not a way
to make money pay a return.
14) buy mineral rights
Same as 11)
15) short the market
I think most people would want a pretty good risk premium for this one. I'm definitely not going to consider this one an
alternative for me.
16) sit in cash, avoid a crash
I don't feel like rehashing this one. Sit in cash, erode your stash.
17) build / lease a billboard
Another form of real estate rental. See 1)
18) illegally subsidize a family member's term life insurance
Once again back to risk premiums.
19) buy TIPS
What's the interest rate on those right now?
20) buy a parking lot
huh? If you mean buying a pay lot, that's one more form of real estate rental. Same as 1)
21) buy a commercial building
Same as 1)
22) preventative maintenance on household systems, car
Same as 2)
23) buy LASIK eye surgery
This one's probably worth it, but it's not really a financial investment unless better vision makes you money somehow.
24) Pay down the mortgage
Depends on your rate or whether you even have one any more :)
Etc...
Shoot!
Some of those options aren't available to institional investors and billionaires, but a lot of them are. Then the ones that aren't probably are not going to work for a large chunk of stash.
With the 2000 crash, hindsight is 20/20. The market was already overheated years before 2000. If you had pulled out in 1995 for cash, you would have long missed the boat by the time the crash actually came. On top of that, a big difference between 2000 and now is, once again, risk premiums. If I remember correctly, stock yields went below bond yields in 2000. Bonds aren't giving 6% now, and real estate is quite a bit more expensive than then.
You might be able to find something better, but thinking so would be implying you had some advantage over several million people.
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Regarding the comment about TINA (There Is No Alternative, to buying stocks or bonds), I have to disagree. There are always alternatives to the securities markets. I could:
1) buy & rent out residential real estate
2) invest in home improvements such as insulation
3) buy precious metals (essentially random return)
4) sell options spreads and harvest time decay
5) buy art / collectibles
6) personal lending
7) direct real estate investment sites
8) flip assets bought at a cash discount
9) buy or build a small business
10) buy education, e.g. programming
11) invest in timberland
12) subdivide semi-rural property
13) patent some ideas
14) buy mineral rights
15) short the market
16) sit in cash, avoid a crash
17) build / lease a billboard
18) illegally subsidize a family member's term life insurance
19) buy TIPS
20) buy a parking lot
21) buy a commercial building
22) preventative maintenance on household systems, car
23) buy LASIK eye surgery
24) Pay down the mortgage
Etc...
Note that almost all these options are unavailable to institutional investors or billionaires. They really don't have an alternative. They are destined to bid up every bubble because they have a mandate and mechanistic rules, or because their scale is too big to pursue small, high-yielding projects.
Yes, some of these ideas have a lower expected value than the stock market's long-term past performance and some are illiquid. The point is there is always an alternative.
If anything, the time when people are reluctantly buying because they see no alternative is a sell signal. People wept about PE ratios in 1999 too, and were told valuation doesn't matter, just buy.
As we now know, instead of NASDAQ funds, they should have bought coastal real estate, education, or long-duration put options.
I think your list includes alternative asset classes which actually some institutional investors (e.g., the big endowment funds) have been very successful with.
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... there's no alternative that's not affected by an efficient market distributing low returns across all options...
My own personal investment strategy is to go passive as much as possible. And I've thought this for decades. (I was recommending the cheap index funds then available 25 years ago in the computer how-to books I was writing...)
But while passive works really well for most of us, it sure seems like the rules and landscape change once you get into alternative asset categories like absolute return investments, real assets (like oil, timber, real estate) and private equity. In those categories, the market is not very efficient at least according to some of the good data available.
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There's a ton of money invested in everything, so everything is yielding pretty meh returns.
C'est la vie, you're not going to outsmart the market and there's no secret idea that's going to make you rich. You already said you're not interested in real estate, and that's probably your only/best bet for what you're going for.
Cutting your expenses, on the other hand, could get you FIRED much quicker than chasing a few bucks of returns. Finding a side gig you love that covers $15k of annual expenses can move your date up too.
-W
This. I'm going to keep going with my 80/20 AA and not pretend i can predict much of anything, and instead work more on reducing expenses and increasing income.
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Even if you could figure out a way to get a little bit better of a return, it still is too much like WORK. I'm trying to get away from work, not add more crap to my plate.
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Even if you could figure out a way to get a little bit better of a return, it still is too much like WORK. I'm trying to get away from work, not add more crap to my plate.
True. Spending my Saturdays at a part-time gig would yield a lot more than investment research. There is a point of minimum-level-of-awareness-to-invest and another point of diminishing returns.
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There's a ton of money invested in everything, so everything is yielding pretty meh returns.
C'est la vie, you're not going to outsmart the market and there's no secret idea that's going to make you rich. You already said you're not interested in real estate, and that's probably your only/best bet for what you're going for.
I'm actually a fan of efficient markets theory. I've seen the research that passive investing wins the highest yields. I've tried making predictions and performed worse than coin flips. Yet, the markets can be shown not to be "efficient" or even "markets" in the sense that investors have a choice to buy or not buy.
First of all, not all dollars are invested based on the choices of individuals with incentives to earn high returns. Pension plans, ETFs, some sovereign wealth funds, and individual 401(k) plans must make regular purchases no matter what the price. Thus, there is a steady buying pressure that is maintained no matter how high the market goes. Furthermore, the managers making or automating these buys are doing so on behalf of others (or thousands of others) and have no skin in the game themselves. Thus the "market" is not a "marketplace" at all. It's kind of an automated buying machine that doesn't stop at any commonsense level. How does price discovery work when almost everyone is passive? This market is very different than a few decades ago, when the theory was proposed.
Second, there is evidence indicating that the vast majority of the S&P 500's post-crisis growth was due to government stimulus. If this is true, an assumption of efficient markets theory doesn't hold in the real world case. Price is not based on information, but on price supports. http://finance.yahoo.com/news/the-fed-caused-93--of-the-entire-stock-market-s-move-since-2008--analysis-194426366.html
Perhaps at any given timeframe it is impossible to predict which investment option will outperform. However, if an offensive game is impossible because the markets are efficient, I wonder if a defensive game is still a possibility. Maybe 1999 and 2007 were good times to turn off autopilot and play it safe, because multi-trillion dollar bubbles could be seen. Maybe the hyperbolic arc in Chinese stocks in early 2016 could have been recognized by a human as a sell signal.
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Perhaps at any given timeframe it is impossible to predict which investment option will outperform. However, if an offensive game is impossible because the markets are efficient, I wonder if a defensive game is still a possibility. Maybe 1999 and 2007 were good times to turn off autopilot and play it safe, because multi-trillion dollar bubbles could be seen. Maybe the hyperbolic arc in Chinese stocks in early 2016 could have been recognized by a human as a sell signal.
I am reluctant to call that thing they have in Shanghai a "stockmarket".
At least in a casino they let you cash your chips when you want to.
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Self-contradictory rambing...
You are not going to outsmart the market by being "defensive" either. Because sometimes the market spikes way up... and stays there until earnings catch up. You sold? Too bad.
It's a random fucking process that trends up. Act accordingly.
-W
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Schiller CAPE is a useless ratio... see Jeremy Siegel's analysis. If reading in detail about changes in FASB accounting standards and their effects on valuation metrics doesn't interest you, and if you don't have a strong grasp of how inflation and interest rates influence relative valuation across time periods, I'd suggest that market timing is not going to work out well for you. Invest at a risk tolerance that your comfortable with and ignore what you might perceive as an overpriced market.
http://www.cfapubs.org/doi/pdf/10.2469/faj.v72.n3.1
Agree. You are letting your brain get in the way of doing the right thing. Consider that all your thinking and market analysis is most likely useless in determining your best investment strategy.
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As an investor, I've lived through the dot-com crash and the 2007-8 financial crisis, which sets my fear baseline.
Have you ever heard of bonds? http://investingadvicewatchdog.com/diversification.html
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... there's no alternative that's not affected by an efficient market distributing low returns across all options...
My own personal investment strategy is to go passive as much as possible. And I've thought this for decades. (I was recommending the cheap index funds then available 25 years ago in the computer how-to books I was writing...)
But while passive works really well for most of us, it sure seems like the rules and landscape change once you get into alternative asset categories like absolute return investments, real assets (like oil, timber, real estate) and private equity. In those categories, the market is not very efficient at least according to some of the good data available.
Interesting. Is it possible for me and the mere mortals reading this to take advantage of that, though? And how risky is it?
Even if you could figure out a way to get a little bit better of a return, it still is too much like WORK. I'm trying to get away from work, not add more crap to my plate.
+1
There's a ton of money invested in everything, so everything is yielding pretty meh returns.
C'est la vie, you're not going to outsmart the market and there's no secret idea that's going to make you rich. You already said you're not interested in real estate, and that's probably your only/best bet for what you're going for.
I'm actually a fan of efficient markets theory. I've seen the research that passive investing wins the highest yields. I've tried making predictions and performed worse than coin flips. Yet, the markets can be shown not to be "efficient" or even "markets" in the sense that investors have a choice to buy or not buy.
Honestly I don't see market efficiency as an absolute. It's more that the market is more efficient than me, and I'm pretty sure it's more efficient than everybody reading this thread.
First of all, not all dollars are invested based on the choices of individuals with incentives to earn high returns. Pension plans, ETFs, some sovereign wealth funds, and individual 401(k) plans must make regular purchases no matter what the price. Thus, there is a steady buying pressure that is maintained no matter how high the market goes. Furthermore, the managers making or automating these buys are doing so on behalf of others (or thousands of others) and have no skin in the game themselves. Thus the "market" is not a "marketplace" at all. It's kind of an automated buying machine that doesn't stop at any commonsense level. How does price discovery work when almost everyone is passive? This market is very different than a few decades ago, when the theory was proposed.
Is it, though? It's possible that passive investing is leaving price discovery more and more to people that are making choices based on homework instead of hunches. I've kind of been curious about this idea, though. There have to be some economists that are performing empirical research on how massive passive investment affects prices.
Making money isn't about buying and selling, anyway, as much as it is about owning a chunk of the economy and collecting slow steady returns.
Perhaps at any given timeframe it is impossible to predict which investment option will outperform. However, if an offensive game is impossible because the markets are efficient, I wonder if a defensive game is still a possibility. Maybe 1999 and 2007 were good times to turn off autopilot and play it safe, because multi-trillion dollar bubbles could be seen. Maybe the hyperbolic arc in Chinese stocks in early 2016 could have been recognized by a human as a sell signal.
I am reluctant to call that thing they have in Shanghai a "stockmarket".
At least in a casino they let you cash your chips when you want to.
Hence the reason China still only has 2% of the world's market cap.
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http://www.ci.com/orderform/pdf/general_marketing/idontwant_poster_e.pdf
I count 7 "market too high" reasons. Plus "Irrational Exuberance," which probably counts as the same thing. Of those, only 2 were followed by lower numbers the next year.
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Regarding the comment about TINA (There Is No Alternative, to buying stocks or bonds), I have to disagree. There are always alternatives to the securities markets. I could:
1) buy & rent out residential real estate
2) invest in home improvements such as insulation
3) buy precious metals (essentially random return)
4) sell options spreads and harvest time decay
5) buy art / collectibles
6) personal lending
7) direct real estate investment sites
8) flip assets bought at a cash discount
9) buy or build a small business
10) buy education, e.g. programming
11) invest in timberland
12) subdivide semi-rural property
13) patent some ideas
14) buy mineral rights
15) short the market
16) sit in cash, avoid a crash
17) build / lease a billboard
18) illegally subsidize a family member's term life insurance
19) buy TIPS
20) buy a parking lot
21) buy a commercial building
22) preventative maintenance on household systems, car
23) buy LASIK eye surgery
24) Pay down the mortgage
Etc...
Though maybe good ideas, with a few exceptions those are more JOBS than passive investments. I want to invest the proceeds from my current job, not find another to replace this one.