Author Topic: simple system of Vanguard ETF investing - thoughts?  (Read 7107 times)

Keith123

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simple system of Vanguard ETF investing - thoughts?
« on: February 04, 2016, 07:31:50 AM »
Pretty simple idea:

Buy VTI when the overall market is under-valued by historical measures.  I like the Buffet Indicator (http://www.gurufocus.com/stock-market-valuations.php) and the Shiller P/E (http://www.multpl.com/shiller-pe/) for determining this.  Right now its seems like the overall market is still over-valued.  I would be buying VTI when the Buffett Indicator is 75% or lower.  We are currently at 108.6%.  The Shiller P/E is at 24.2.  Historical mean is 16.6.  Basically it is not time to buy something like VTI when valuations are this high. 

However, when the overall market is over-valued, I think we can still find safe, diversified opportunities by buying sector specific Vanguard ETFs (https://personal.vanguard.com/us/funds/etf/all?assetclass=ss&assetclass=ss#upperTB=pyldTBI&lowerTB=dailyTBI).  You just have to value the sectors the same way you would the overall market.  Here are the sector specific Shiller P/Es for the S&P - http://www.gurufocus.com/sector_shiller_pe.php.  This shows a large opportunity in the energy sector.  So...buy VDE, the Vanguard energy sector ETF.  I'd say it's a much better investment right now than VTI.  It has a low expense ratio and holds 146  energy stocks, granted the concentration of the top 10 holdings are high at 66%.  What I like about this is that I can find opportunity in an over-valued market.  Since most of us are armchair investors, it's much easier to see macro-trends and larger opportunities than it is to judge individual equities, at least in my opinion.  I will simply invest in the most under-valued sectors in an over-valued market and rebalance once or twice a year when these sector valuations change.  What do you guys think?

AdrianC

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #1 on: February 04, 2016, 08:36:43 AM »
VTI won't drop 30% for no reason. The financial world and/or economy will be in serious trouble.

I think the first question you have to ask yourself is what's my edge? Why do I think I can do it better than the pro's?

The edge we have as individual investors is time. We don't have to sell. We don't have to explain to investors why we had a bad quarter, or year, or five years.

NoStacheOhio

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #2 on: February 04, 2016, 12:30:30 PM »
Shiller P/E has been <16 for one short period of time since like 1991.

Meanwhile, consistently investing over 25 years would've still gotten you some nice returns.

Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #3 on: February 04, 2016, 01:13:24 PM »
Shiller P/E has been <16 for one short period of time since like 1991.

Meanwhile, consistently investing over 25 years would've still gotten you some nice returns.

While what you say is true, from 1970 to 1991, the shiller pe didn't get above 20.  It looks like it averaged around 12 or 13 for that 21 year span.  All I'm saying is there can be multi-decade long periods of serious over-valuation and serious under-valuation of the market as a whole.  This one has been going on since about 1990, largely due to falling interest rates during the entire span - http://www.multpl.com/10-year-treasury-rate.  Interest rates are at rock bottom, even with the quarter point hike recently, and now possibly going negative (Bank of Japan just did) if unemployment starts to rise.  I don't think this is sustainable for much longer.  While I have no idea how the whole thing will play out, or when it will happen, reversion to the mean is likely in my opinion.  Debt is what drives all of these economies.  We have been able to add debt by lowering interest rates over and over again.  There is nowhere left to go now though.  Once a debt ceiling is reached with interest rates at these levels, I believe a crash is inevitable. Hopefully it will bring the overall market back to its historical averages or lower and provide a great entry point for buying something like VTI.  For over-valued times like right now though, I think you have to be more selective and buy ETFs of sectors that are out of favor for added safety. 

Eric

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #4 on: February 04, 2016, 01:38:23 PM »
Are you aware that comparing the PE10 from today to past numbers is an apples to oranges comparison?  How earnings are calculated today are not how they've always been calculated due to accounting standard improvements.  There are a few other issues too, but that one is the biggest to me.

http://www.aaii.com/journal/article/a-cautionary-note-about-robert-shillers-cape.touch


faramund

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #5 on: February 04, 2016, 01:42:30 PM »
If I think that qualitatively we are in a bubble, I don't buy, but in general outside of that - whenever I get money I put it 100% into stocks, I also tend to buy stocks with PEs of 15 or less. I don't think the 'western' world is currently in a 2000/2008 class bubble.

In spite of all that, its very hard to be consistently good at avoiding bubbles. And fundamentally, if you invest for the long term, it doesn't really matter. I think looking at market PEs can be a good guide, but I wouldn't try to finesse it too much. When you're out of the market, you are probably missing out on capital gains, and you are certainly missing out on dividends.

I generally look at historical market PEs, and maybe if they're in the top 20% of their historical ranges - I'd stop buying. But I wouldn't sell out - but maybe that's my blind spot - I practically never sell my shares - a combination of, I really don't know the future, and I don't want to pay capital gains tax.

Telecaster

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #6 on: February 04, 2016, 02:03:04 PM »
While what you say is true, from 1970 to 1991, the shiller pe didn't get above 20.  It looks like it averaged around 12 or 13 for that 21 year span.  All I'm saying is there can be multi-decade long periods of serious over-valuation and serious under-valuation of the market as a whole.  This one has been going on since about 1990, largely due to falling interest rates during the entire span - http://www.multpl.com/10-year-treasury-rate.  Interest rates are at rock bottom, even with the quarter point hike recently, and now possibly going negative (Bank of Japan just did) if unemployment starts to rise.  I don't think this is sustainable for much longer.  While I have no idea how the whole thing will play out, or when it will happen, reversion to the mean is likely in my opinion.  Debt is what drives all of these economies.  We have been able to add debt by lowering interest rates over and over again.  There is nowhere left to go now though.  Once a debt ceiling is reached with interest rates at these levels, I believe a crash is inevitable. Hopefully it will bring the overall market back to its historical averages or lower and provide a great entry point for buying something like VTI.  For over-valued times like right now though, I think you have to be more selective and buy ETFs of sectors that are out of favor for added safety.

Probably be wise to do a backtest of your ETF switching plan.   I don't think the PE of the whole market is directly comparable to sectors.  Some sectors have had traditionally higher or lower PEs than the broader market in general.

A word about interest rates:  For a variety of reasons, in the 1970s inflation took off, and interest rates with it.   That got sorted out eventually, but interest rates didn't start to fall until long after inflation did.   But interest rates before that time historically, like 150 years, were pretty low.  Like 3%-ish.   Not much different than today. 


NoStacheOhio

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #7 on: February 04, 2016, 02:05:18 PM »
While what you say is true, from 1970 to 1991, the shiller pe didn't get above 20.  It looks like it averaged around 12 or 13 for that 21 year span.  All I'm saying is there can be multi-decade long periods of serious over-valuation and serious under-valuation of the market as a whole.  This one has been going on since about 1990, largely due to falling interest rates during the entire span - http://www.multpl.com/10-year-treasury-rate.  Interest rates are at rock bottom, even with the quarter point hike recently, and now possibly going negative (Bank of Japan just did) if unemployment starts to rise.  I don't think this is sustainable for much longer.  While I have no idea how the whole thing will play out, or when it will happen, reversion to the mean is likely in my opinion.  Debt is what drives all of these economies.  We have been able to add debt by lowering interest rates over and over again.  There is nowhere left to go now though.  Once a debt ceiling is reached with interest rates at these levels, I believe a crash is inevitable. Hopefully it will bring the overall market back to its historical averages or lower and provide a great entry point for buying something like VTI.  For over-valued times like right now though, I think you have to be more selective and buy ETFs of sectors that are out of favor for added safety.

So market timing and sector picking then?

faramund

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #8 on: February 04, 2016, 02:17:40 PM »
While what you say is true, from 1970 to 1991, the shiller pe didn't get above 20.  It looks like it averaged around 12 or 13 for that 21 year span.  All I'm saying is there can be multi-decade long periods of serious over-valuation and serious under-valuation of the market as a whole.  This one has been going on since about 1990, largely due to falling interest rates during the entire span - http://www.multpl.com/10-year-treasury-rate.  Interest rates are at rock bottom, even with the quarter point hike recently, and now possibly going negative (Bank of Japan just did) if unemployment starts to rise.  I don't think this is sustainable for much longer.  While I have no idea how the whole thing will play out, or when it will happen, reversion to the mean is likely in my opinion.  Debt is what drives all of these economies.  We have been able to add debt by lowering interest rates over and over again.  There is nowhere left to go now though.  Once a debt ceiling is reached with interest rates at these levels, I believe a crash is inevitable. Hopefully it will bring the overall market back to its historical averages or lower and provide a great entry point for buying something like VTI.  For over-valued times like right now though, I think you have to be more selective and buy ETFs of sectors that are out of favor for added safety.

So market timing and sector picking then?

Market timing is a too vague word. There are two things market timing gets applied to.

1) technical analysis, i.e. trying to buy a stock just as it starts to rise, and then sell it just before it falls. I've seen several studies that say its almost impossible to do this successfully, and I'm not aware of any that show that it can be done successfully

2) avoiding buying when stocks are overvalued by some measure. I think this is an open question - several people seem to show approaches that do work, I don't know of anyone who claims this is impossible (or even just difficult).

So I think people often see instances of (2) and say aha you are market timing, and they think because of (1) its impossible. But really, they are two different things. My 'bubble sense' tingled in the couple of years before 2008, and so I didn't buy shares, and after the crash in 2008, I invested a large sum of money. That's type 2 market timing, does anyone thing that was a stupid thing to do?

Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #9 on: February 04, 2016, 02:54:43 PM »
While what you say is true, from 1970 to 1991, the shiller pe didn't get above 20.  It looks like it averaged around 12 or 13 for that 21 year span.  All I'm saying is there can be multi-decade long periods of serious over-valuation and serious under-valuation of the market as a whole.  This one has been going on since about 1990, largely due to falling interest rates during the entire span - http://www.multpl.com/10-year-treasury-rate.  Interest rates are at rock bottom, even with the quarter point hike recently, and now possibly going negative (Bank of Japan just did) if unemployment starts to rise.  I don't think this is sustainable for much longer.  While I have no idea how the whole thing will play out, or when it will happen, reversion to the mean is likely in my opinion.  Debt is what drives all of these economies.  We have been able to add debt by lowering interest rates over and over again.  There is nowhere left to go now though.  Once a debt ceiling is reached with interest rates at these levels, I believe a crash is inevitable. Hopefully it will bring the overall market back to its historical averages or lower and provide a great entry point for buying something like VTI.  For over-valued times like right now though, I think you have to be more selective and buy ETFs of sectors that are out of favor for added safety.

So market timing and sector picking then?

Market timing is a too vague word. There are two things market timing gets applied to.

1) technical analysis, i.e. trying to buy a stock just as it starts to rise, and then sell it just before it falls. I've seen several studies that say its almost impossible to do this successfully, and I'm not aware of any that show that it can be done successfully

2) avoiding buying when stocks are overvalued by some measure. I think this is an open question - several people seem to show approaches that do work, I don't know of anyone who claims this is impossible (or even just difficult).

So I think people often see instances of (2) and say aha you are market timing, and they think because of (1) its impossible. But really, they are two different things. My 'bubble sense' tingled in the couple of years before 2008, and so I didn't buy shares, and after the crash in 2008, I invested a large sum of money. That's type 2 market timing, does anyone thing that was a stupid thing to do?

#2 is exactly what I am trying to accomplish.  Glad to hear your "bubble sense" worked so well in 2008.  This "bubble sense" is kind of how I feel right now when I read about low or negative interest rates, the amount of income inequality, the political environment, the housing market, etc.  There's just no catalysts, that I see, for the market to go higher, and plenty of reasons for it to go down.  Anyone else feel like that?  I am well aware that market timing in the sense of #1 is impossible.  If anyone could do it they would be a trillionaire.  Nobel prize winning economists have tried and failed.  I do believe #2 is possible and will create much higher returns over the long term however. 

« Last Edit: February 04, 2016, 02:57:20 PM by keithcustodio »

Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #10 on: February 04, 2016, 02:56:17 PM »
Are you aware that comparing the PE10 from today to past numbers is an apples to oranges comparison?  How earnings are calculated today are not how they've always been calculated due to accounting standard improvements.  There are a few other issues too, but that one is the biggest to me.

http://www.aaii.com/journal/article/a-cautionary-note-about-robert-shillers-cape.touch

I was not aware of this.  Thank you for the info.  I will read this asap.

Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #11 on: February 04, 2016, 03:08:23 PM »
While what you say is true, from 1970 to 1991, the shiller pe didn't get above 20.  It looks like it averaged around 12 or 13 for that 21 year span.  All I'm saying is there can be multi-decade long periods of serious over-valuation and serious under-valuation of the market as a whole.  This one has been going on since about 1990, largely due to falling interest rates during the entire span - http://www.multpl.com/10-year-treasury-rate.  Interest rates are at rock bottom, even with the quarter point hike recently, and now possibly going negative (Bank of Japan just did) if unemployment starts to rise.  I don't think this is sustainable for much longer.  While I have no idea how the whole thing will play out, or when it will happen, reversion to the mean is likely in my opinion.  Debt is what drives all of these economies.  We have been able to add debt by lowering interest rates over and over again.  There is nowhere left to go now though.  Once a debt ceiling is reached with interest rates at these levels, I believe a crash is inevitable. Hopefully it will bring the overall market back to its historical averages or lower and provide a great entry point for buying something like VTI.  For over-valued times like right now though, I think you have to be more selective and buy ETFs of sectors that are out of favor for added safety.

So market timing and sector picking then?

I wouldn't say market timing.  I'm not saying go in and out, in and out.  Just...in an over-valued market, buy ETF's of beaten down sectors for extra safety and potentially better returns.  In a fair or under-valued market, buy the whole market ETF.  That's all. 

faramund

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #12 on: February 04, 2016, 03:10:54 PM »

Market timing is a too vague word. There are two things market timing gets applied to.

1) technical analysis, i.e. trying to buy a stock just as it starts to rise, and then sell it just before it falls. I've seen several studies that say its almost impossible to do this successfully, and I'm not aware of any that show that it can be done successfully

2) avoiding buying when stocks are overvalued by some measure. I think this is an open question - several people seem to show approaches that do work, I don't know of anyone who claims this is impossible (or even just difficult).

So I think people often see instances of (2) and say aha you are market timing, and they think because of (1) its impossible. But really, they are two different things. My 'bubble sense' tingled in the couple of years before 2008, and so I didn't buy shares, and after the crash in 2008, I invested a large sum of money. That's type 2 market timing, does anyone thing that was a stupid thing to do?

#2 is exactly what I am trying to accomplish.  Glad to hear your "bubble sense" worked so well in 2008.  This "bubble sense" is kind of how I feel right now when I read about low or negative interest rates, the amount of income inequality, the political environment, the housing market, etc.  There's just no catalysts, that I see, for the market to go higher, and plenty of reasons for it to go down.  Anyone else feel like that?  I am well aware that market timing in the sense of #1 is impossible.  If anyone could do it they would be a trillionaire.  Nobel prize winning economists have tried and failed.  I do believe #2 is possible and will create much higher returns over the long term however.
I don't think the world is in a bubble now, I think this could be like the 1930s there was a big debt build up, and then a period of stagnation, and then, eventually after WW2, there was almost the mother of all booms. So, even though it might look bleak at the moment, I think at some time, things will pick up.

I'm innately against speculative/tech stocks (although one that my wife wanted is my best performing stock - go figure), most of my investments are now in things like utilities, banks, supermarket chains, insurance companies, construction-related companies. This is because, I think even if the market doesn't grow too much, these sorts of things will just go on year in, year out paying dividends (especially down here in Australia (currently 5%+)), and their dividends should go up with both inflation and the general growth of the economy. That's enough for my financial plans to work out.

Scandium

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #13 on: February 04, 2016, 03:24:47 PM »
So without actually checking the numbers, wouldn't this have had you  buy nothing but utilities since like 2011?

Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #14 on: February 04, 2016, 03:39:21 PM »
So without actually checking the numbers, wouldn't this have had you  buy nothing but utilities since like 2011?

In terms of the whole market, there was a 1 yr period from 3rd qtr 2008 to 3rd qtr 2009 that would have been a total market buying period according to the buffett indicator.  This would have been an incredibly rewarding period to buy an index fund like VTI.  Ideally, I would have averaged in during that period and simply held until about now.  Right now, the buffett indicator is saying sell in terms of the whole market.  It may go higher, even much higher, but its dangerous territory from a historical perspective.  The only sector I have the stomach to buy right now is energy because it is so utterly beat up.

Outside of that 1 year period, I would have been buying ETFs of the most beat up sectors.  If there is no beat up sectors, I wouldn't buy anything at all.  Just sit on cash until another undervalued sector shows itself or the market as a whole becomes undervalued.  Sometimes you have to be patient for a while. 



Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #15 on: February 04, 2016, 04:02:50 PM »

Market timing is a too vague word. There are two things market timing gets applied to.

1) technical analysis, i.e. trying to buy a stock just as it starts to rise, and then sell it just before it falls. I've seen several studies that say its almost impossible to do this successfully, and I'm not aware of any that show that it can be done successfully

2) avoiding buying when stocks are overvalued by some measure. I think this is an open question - several people seem to show approaches that do work, I don't know of anyone who claims this is impossible (or even just difficult).

So I think people often see instances of (2) and say aha you are market timing, and they think because of (1) its impossible. But really, they are two different things. My 'bubble sense' tingled in the couple of years before 2008, and so I didn't buy shares, and after the crash in 2008, I invested a large sum of money. That's type 2 market timing, does anyone thing that was a stupid thing to do?

#2 is exactly what I am trying to accomplish.  Glad to hear your "bubble sense" worked so well in 2008.  This "bubble sense" is kind of how I feel right now when I read about low or negative interest rates, the amount of income inequality, the political environment, the housing market, etc.  There's just no catalysts, that I see, for the market to go higher, and plenty of reasons for it to go down.  Anyone else feel like that?  I am well aware that market timing in the sense of #1 is impossible.  If anyone could do it they would be a trillionaire.  Nobel prize winning economists have tried and failed.  I do believe #2 is possible and will create much higher returns over the long term however.
I don't think the world is in a bubble now, I think this could be like the 1930s there was a big debt build up, and then a period of stagnation, and then, eventually after WW2, there was almost the mother of all booms. So, even though it might look bleak at the moment, I think at some time, things will pick up.

I'm innately against speculative/tech stocks (although one that my wife wanted is my best performing stock - go figure), most of my investments are now in things like utilities, banks, supermarket chains, insurance companies, construction-related companies. This is because, I think even if the market doesn't grow too much, these sorts of things will just go on year in, year out paying dividends (especially down here in Australia (currently 5%+)), and their dividends should go up with both inflation and the general growth of the economy. That's enough for my financial plans to work out.

I agree there could be a period of stagnation from here that last many years instead of a crash.  However, I wouldn't expect the mother of all booms again, or any boom.  WW2 created immense opportunity for the US because of the destruction caused throughout Europe and the world.  The US was untouched except for Pearl Harbor.  We had our entire infrastructure intact while Europe was in shambles.  We also had large population growth afterward aka the baby boom.  Then came the computer age.  What's the catalyst for growth now or for the foreseeable future?  Maybe there's one right around the corner that we just can't see.  I dunno.  I can't invest in hope though. 

You do seem to have a solid strategy for a sideways market though.  Good luck.

Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #16 on: February 04, 2016, 04:10:44 PM »
While what you say is true, from 1970 to 1991, the shiller pe didn't get above 20.  It looks like it averaged around 12 or 13 for that 21 year span.  All I'm saying is there can be multi-decade long periods of serious over-valuation and serious under-valuation of the market as a whole.  This one has been going on since about 1990, largely due to falling interest rates during the entire span - http://www.multpl.com/10-year-treasury-rate.  Interest rates are at rock bottom, even with the quarter point hike recently, and now possibly going negative (Bank of Japan just did) if unemployment starts to rise.  I don't think this is sustainable for much longer.  While I have no idea how the whole thing will play out, or when it will happen, reversion to the mean is likely in my opinion.  Debt is what drives all of these economies.  We have been able to add debt by lowering interest rates over and over again.  There is nowhere left to go now though.  Once a debt ceiling is reached with interest rates at these levels, I believe a crash is inevitable. Hopefully it will bring the overall market back to its historical averages or lower and provide a great entry point for buying something like VTI.  For over-valued times like right now though, I think you have to be more selective and buy ETFs of sectors that are out of favor for added safety.

Probably be wise to do a backtest of your ETF switching plan.   I don't think the PE of the whole market is directly comparable to sectors.  Some sectors have had traditionally higher or lower PEs than the broader market in general.

A word about interest rates:  For a variety of reasons, in the 1970s inflation took off, and interest rates with it.   That got sorted out eventually, but interest rates didn't start to fall until long after inflation did.   But interest rates before that time historically, like 150 years, were pretty low.  Like 3%-ish.   Not much different than today.

I've been trying to find historical data on specific sectors.  I'd love to find the Buffett Indicator for each sector for the past 50 or so years and see how the performance would have been using it an a buy and sell signal.  I'll post the info if I find it.

MustacheAndaHalf

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #17 on: February 04, 2016, 08:38:36 PM »
Larry Swedroe quoted a study that compared buy & hold to varying stock/bond percentages based on the CAPE10 ratio.  You might poke around for that comparison, to see how that worked.  Different rebalancing periods had different effects.

Your phrase "I would have been buying" is speculation.  You need to see it realistically - you can't look back at arbitrary times and decide how you would have acted.  You have perfect hindsight, so of course you would buy all the companies about to go bankrupt, that didn't.  It also ignores a key fact: why do you have money sitting around in 2008 to buy?  Any money you keep waiting for a crisis is not in the market, and earns below market returns.

faramund

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #18 on: February 05, 2016, 12:27:50 AM »
Larry Swedroe quoted a study that compared buy & hold to varying stock/bond percentages based on the CAPE10 ratio.  You might poke around for that comparison, to see how that worked.  Different rebalancing periods had different effects.

Your phrase "I would have been buying" is speculation.  You need to see it realistically - you can't look back at arbitrary times and decide how you would have acted.  You have perfect hindsight, so of course you would buy all the companies about to go bankrupt, that didn't.  It also ignores a key fact: why do you have money sitting around in 2008 to buy?  Any money you keep waiting for a crisis is not in the market, and earns below market returns.
Well back before 2008, interest rates were around 8% in Australia. So all I did, was reduce my home loan balance. Although, I know what I did, doesn't work in the USA. In Australia, when you make extra payments into your home loan, you can usually take it out again whenever you want to.

So in the time before 2008, I was effectively making an 8% return, instead of being in stocks which dropped around 50%, although over 3 years, I probably missed out on about 6-9% of dividends.

Its one of the things about bubbles (which is another reason why I don't think we're currently in one), usually when there's a bubble huge numbers of people want to invest, and interest rates are usually high. So when there's a bubble, rather than putting money in the stock market, there are opportunities in terms of paying back loans, and if there's none of those, its usually a good time to buy bonds. Why bonds? Well, when the bubble pops, interest rates go down, and the bonds all increase in value, and then you can profitably sell them and buy stocks cheaply after the crash.

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #19 on: February 05, 2016, 06:57:36 AM »
So without actually checking the numbers, wouldn't this have had you  buy nothing but utilities since like 2011?

In terms of the whole market, there was a 1 yr period from 3rd qtr 2008 to 3rd qtr 2009 that would have been a total market buying period according to the buffett indicator.  This would have been an incredibly rewarding period to buy an index fund like VTI.  Ideally, I would have averaged in during that period and simply held until about now.  Right now, the buffett indicator is saying sell in terms of the whole market.  It may go higher, even much higher, but its dangerous territory from a historical perspective.  The only sector I have the stomach to buy right now is energy because it is so utterly beat up.

Outside of that 1 year period, I would have been buying ETFs of the most beat up sectors.  If there is no beat up sectors, I wouldn't buy anything at all.  Just sit on cash until another undervalued sector shows itself or the market as a whole becomes undervalued.  Sometimes you have to be patient for a while.

Well that was my point. I 2013 alone the market went up by 30%+, but you would (probably) have been sitting on cash, and same every year since. Maybe you'd put some into some dead money utilities and made ~2%. That's an expensive strategy! Like you many have been crying that the market it overvalued, a crash is coming since about 2011. As they have been sitting on their cash they've missed out on 50% gains. Basically a repeat of late 90s. That ended in a crash, but jumping out in 1996 would only have made it worse.

Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #20 on: February 05, 2016, 07:28:15 AM »
So without actually checking the numbers, wouldn't this have had you  buy nothing but utilities since like 2011?

In terms of the whole market, there was a 1 yr period from 3rd qtr 2008 to 3rd qtr 2009 that would have been a total market buying period according to the buffett indicator.  This would have been an incredibly rewarding period to buy an index fund like VTI.  Ideally, I would have averaged in during that period and simply held until about now.  Right now, the buffett indicator is saying sell in terms of the whole market.  It may go higher, even much higher, but its dangerous territory from a historical perspective.  The only sector I have the stomach to buy right now is energy because it is so utterly beat up.

Outside of that 1 year period, I would have been buying ETFs of the most beat up sectors.  If there is no beat up sectors, I wouldn't buy anything at all.  Just sit on cash until another undervalued sector shows itself or the market as a whole becomes undervalued.  Sometimes you have to be patient for a while.

Well that was my point. I 2013 alone the market went up by 30%+, but you would (probably) have been sitting on cash, and same every year since. Maybe you'd put some into some dead money utilities and made ~2%. That's an expensive strategy! Like you many have been crying that the market it overvalued, a crash is coming since about 2011. As they have been sitting on their cash they've missed out on 50% gains. Basically a repeat of late 90s. That ended in a crash, but jumping out in 1996 would only have made it worse.

"In the 1990s, every dip in the stock market was hailed as a "buying opportunity," because the prevailing wisdom was that stocks always do well over the long haul.

And stocks usually do do well over the long haul, especially relative to bonds and cash. But there's one major exception to this: Stocks don't do well over the long haul when they're bought at extremely high prices.

When have we had extremely high prices for stocks?

Well, in the late 1920s, for example, just before the Great Crash and Great Depression. Stocks crashed nearly 80% and then moved sideways for more than two decades.  Note that it also took 18 years to recover from the malaise market of 1966-1982.

We also saw extremely high prices in Japan in the late 1980s. Stocks crashed there and are still falling nearly three decades later.

We had extremely high prices in the US in the late 1990s.

During all of those peak periods, stocks hit extreme prices relative to earnings. And in all of those periods so far, the "long run" required to do well if you bought stocks near the peak has been shockingly long." - http://www.businessinsider.com/stocks-for-the-long-run-dow-japan-2012-6

This is another one of those "near-peak" periods in my opinion and at least according to some measures.  So yeah, looking at it right now, I missed some big gains from not buying in over-valued market that got even more over-valued.  But if reversion to the mean happens, those gains will be erased.  You would have had a 0% inflation adjusted return if you bought in 2000 and held to now.  15 years!  Don't buy during over-valued times.  Markets can be high and go much higher for long periods of time.  No one can really call it.  I just don't want to be a buyer during these periods as they have proven to give very low returns over the long term.  Whatever I have in the market stays in the market, but I can't stomach putting new money in during over-valued periods. 

Scandium

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #21 on: February 05, 2016, 07:36:05 AM »
You would have had a 0% inflation adjusted return if you bought in 2000 and held to now.  15 years!  Don't buy during over-valued times.  Markets can be high and go much higher for long periods of time.  No one can really call it.  I just don't want to be a buyer during these periods as they have proven to give very low returns over the long term.  Whatever I have in the market stays in the market, but I can't stomach putting new money in during over-valued periods.

yeah, duh. If you dumped all your money in at the absolute peak your return would have sucked. But most people don't buy in one huge lump sum. What would my return look like if I DCA in from 1996 till now? Compared to sitting in cash for most of that time? What about my investments from 2009 to now vs you sitting in cash from 2011?

maizefolk

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #22 on: February 05, 2016, 07:53:47 AM »
You would have had a 0% inflation adjusted return if you bought in 2000 and held to now.  15 years!

No, you would have a 34% total inflation-adjusted return from Jan 1st 2000 to the end of 2015 (or a CAGR of 1.83%/year). Which is still crummy, but a lot better than nothing.

I suspect the source you're using neglected to factor in the effect of dividends over the past 15 years.

Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #23 on: February 05, 2016, 08:03:20 AM »
You would have had a 0% inflation adjusted return if you bought in 2000 and held to now.  15 years!

No, you would have a 34% total inflation-adjusted return from Jan 1st 2000 to the end of 2015 (or a CAGR of 1.83%/year). Which is still crummy, but a lot better than nothing.

I suspect the source you're using neglected to factor in the effect of dividends over the past 15 years.

You're correct.  My source is this - http://dqydj.net/sp-500-return-calculator/.  I wasn't referring to dividends included but I should have.  The point is pretty much the same though.  Horrible returns for 15 years.

Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #24 on: February 05, 2016, 09:00:39 AM »
You would have had a 0% inflation adjusted return if you bought in 2000 and held to now.  15 years!  Don't buy during over-valued times.  Markets can be high and go much higher for long periods of time.  No one can really call it.  I just don't want to be a buyer during these periods as they have proven to give very low returns over the long term.  Whatever I have in the market stays in the market, but I can't stomach putting new money in during over-valued periods.

yeah, duh. If you dumped all your money in at the absolute peak your return would have sucked. But most people don't buy in one huge lump sum. What would my return look like if I DCA in from 1996 till now? Compared to sitting in cash for most of that time? What about my investments from 2009 to now vs you sitting in cash from 2011?

I don't know what the return would be for DCA from 1996 to now - probably very good is my guess.  It's been a great 20 year period for the market.  Your investments from 2009 to now probably look fantastic right now...because you are looking at them from a peak. 

By the way, do you realize you picked 2 (1996, and 2009) out of the 3 (2003 was the other one)  times in the past 20 years when the Buffett Indicator was finally around the historical mean, indicating a buying window?  I believe you reinforced my point.  Start buying when the market is under-valued and keep buying until it becomes over-valued.  Then ride out what you have invested and wait until the next buying window happens.  This can take many years and can definitely test one's patience but I think it will reward those that can wait it out.  Please just keep in mind that we right now we are still at a peak.  Your returns look great right now, until reversion to the mean happens again. 

My whole strategy boils down to this:  Buy during under-valued periods, then hold forever.  Don't average into an over-valued market.  Never sell.

Scandium

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #25 on: February 05, 2016, 09:13:08 AM »
You would have had a 0% inflation adjusted return if you bought in 2000 and held to now.  15 years!  Don't buy during over-valued times.  Markets can be high and go much higher for long periods of time.  No one can really call it.  I just don't want to be a buyer during these periods as they have proven to give very low returns over the long term.  Whatever I have in the market stays in the market, but I can't stomach putting new money in during over-valued periods.

yeah, duh. If you dumped all your money in at the absolute peak your return would have sucked. But most people don't buy in one huge lump sum. What would my return look like if I DCA in from 1996 till now? Compared to sitting in cash for most of that time? What about my investments from 2009 to now vs you sitting in cash from 2011?

I don't know what the return would be for DCA from 1996 to now - probably very good is my guess.  It's been a great 20 year period for the market.  Your investments from 2009 to now probably look fantastic right now...because you are looking at them from a peak. 

By the way, do you realize you picked 2 (1996, and 2009) out of the 3 (2003 was the other one)  times in the past 20 years when the Buffett Indicator was finally around the historical mean, indicating a buying window?  I believe you reinforced my point.  Start buying when the market is under-valued and keep buying until it becomes over-valued.  Then ride out what you have invested and wait until the next buying window happens.  This can take many years and can definitely test one's patience but I think it will reward those that can wait it out.  Please just keep in mind that we right now we are still at a peak.  Your returns look great right now, until reversion to the mean happens again. 

My whole strategy boils down to this:  Buy during under-valued periods, then hold forever.  Don't average into an over-valued market.  Never sell.
Yes, those start times match yours, but you would have bought for <2 years then stopped. I'm still buying now. Start in 1998 then, you buy nothing vs max out. Every dollar I invested in 2012 made 30% in a year, your cash made 1%. That cash drag will be very hard to overcome, no matter how many crashes you can avoid

Heckler

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #26 on: February 05, 2016, 09:26:12 AM »
If I understand you correctly, you are describing the main principle of a globally diversified couch potato investing strategy, which I fully agree with.  What I don't agree with is your (and many others on this site) perpensity to stick to US stocks. 

I'm globally diversified, and will buy the asset class (bonds, Canada, US, EAFE or EM) that is furthest down off my target allocation with new contributions on a regular basis. 

No sitting on cash for me!  Simple analysis, and my overall account value has increased 33% since 2014.  I don't worry about performance, PE or Shiller wtf? - it is what it is.

Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #27 on: February 05, 2016, 09:39:30 AM »
If I understand you correctly, you are describing the main principle of a globally diversified couch potato investing strategy, which I fully agree with.  What I don't agree with is your (and many others on this site) perpensity to stick to US stocks. 

I'm globally diversified, and will buy the asset class (bonds, Canada, US, EAFE or EM) that is furthest down off my target allocation with new contributions on a regular basis. 

No sitting on cash for me!  Simple analysis, and my overall account value has increased 33% since 2014.  I don't worry about performance, PE or Shiller wtf? - it is what it is.

Gotcha.  The reason I stick to the US is because I am worried about investing in areas with little transparency and rampant corruption.  US equities have tons of global exposure anyways.  47% of revenue for the S&P 500 comes from outside the US.  http://www.marketwatch.com/story/sp-500-companies-generate-barely-over-half-their-revenue-at-home-2015-08-19

Telecaster

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #28 on: February 05, 2016, 10:47:10 AM »

When have we had extremely high prices for stocks?

Well, in the late 1920s, for example, just before the Great Crash and Great Depression. Stocks crashed nearly 80% and then moved sideways for more than two decades.  Note that it also took 18 years to recover from the malaise market of 1966-1982.


I think you are looking at just the price returns.  If you include dividends (which used to be a larger portion of stock market returns) then the recovery times are much shorter.   

One thing to keep in mind is that higher than average stock market valuations imply lower than average returns in future--but that's not the same as no returns.   During the 20 year period 1929 when stocks mostly went sideways, they still returned about 4%/year including dividends.   I don't know what interest rates were back then, but I'm pretty certain 4% would have beat bonds.






Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #29 on: February 05, 2016, 11:12:58 AM »

When have we had extremely high prices for stocks?

Well, in the late 1920s, for example, just before the Great Crash and Great Depression. Stocks crashed nearly 80% and then moved sideways for more than two decades.  Note that it also took 18 years to recover from the malaise market of 1966-1982.


I think you are looking at just the price returns.  If you include dividends (which used to be a larger portion of stock market returns) then the recovery times are much shorter.   

One thing to keep in mind is that higher than average stock market valuations imply lower than average returns in future--but that's not the same as no returns.   During the 20 year period 1929 when stocks mostly went sideways, they still returned about 4%/year including dividends.   I don't know what interest rates were back then, but I'm pretty certain 4% would have beat bonds.

Annualized S&P 500 Return (Dividends Reinvested) from January 1929 to January 1949 is 1.34%.  Pretty horrible stuff.  http://dqydj.net/sp-500-return-calculator/
10 year Treasuries during the same time period offered better yields throughout, never below 2% - http://www.multpl.com/10-year-treasury-rate

Tyler

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #30 on: February 05, 2016, 11:44:21 AM »
Here's my favorite chart for this topic.  Yes, it includes dividends:

http://www.crestmontresearch.com/docs/Stock-Matrix-Tax-Exempt-Real3-11x17.pdf

The source site also has other versions with various assumptions.

Keith123

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Re: simple system of Vanguard ETF investing - thoughts?
« Reply #31 on: February 05, 2016, 12:16:54 PM »
Here's my favorite chart for this topic.  Yes, it includes dividends:

http://www.crestmontresearch.com/docs/Stock-Matrix-Tax-Exempt-Real3-11x17.pdf

The source site also has other versions with various assumptions.

That is a fantastic chart.  Thanks.