Articles Like This Are Why I Like Vanguard

[matchewed]

https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-emotion

Part of a four section overview on "investing truths."

https://personal.vanguard.com/us/insights/investingtruths

Nothing new for the veteran Mustachian but a good thing for people to read either way.

[Jamesqf]

I dunno...  It seems to ignore, or perhaps deliberately conceal, the obvious: what if the owner of that 60/40 portfolio had done (what I think would be) the sensible thing in late '08/early '09, and moved all that bond money into stocks?

[matchewed]

I guess that's a criticism that they're not showing what happens if you happen to guess correctly. But the point they're trying to make is to pay attention to your chosen asset allocation and balance accordingly. Turning around and saying in hindsight "but what if someone did guess correctly?" is to miss the point about asset allocations and balancing at specific intervals.

[swiper]

I dunno...  It seems to ignore, or perhaps deliberately conceal, the obvious: what if the owner of that 60/40 portfolio had done (what I think would be) the sensible thing in late '08/early '09, and moved all that bond money into stocks?

Yeah, or if he had "sensibly" put all his money in the google IPO he'd be even further ahead ... I think the point is to remove your irrational self from chasing winners (and more often than not getting losers).

[Jamesqf]

I guess that's a criticism that they're not showing what happens if you happen to guess correctly.

It's not a guess, nor is it irrational behavior.  It's a rational decision based on market behavior: if there has been a crash, buy, because it will eventually rise.  You're not "chasing winners", except in the sense that you expect the stock market to rise in the long term.

Personally, I'd say having a fixed percentage of your portfolio in bonds is irrational behavior (just as selling stock in a crash is irrational), especially given the returns these last few years.  Why would you rationally choose to invest in something that yields near-zero returns?

[grantmeaname]

It's not a guess, nor is it irrational behavior.  It's a rational decision based on market behavior: if there has been a crash, buy, because it will eventually rise.  You're not "chasing winners", except in the sense that you expect the stock market to rise in the long term.

It's called rebalancing. Other market timing does not work. /thread

[Jamesqf]

I'm perfectly well aware of what it's called.  As for your claim that market timing does not work, I call bullshit.  True, it doesn't work in the short term, or in many situations, but there are conditions - such as buying in the depths of a crash - where it does.  If you had bought an index fund (or other broad-based fund) in the depths of the crash (or any crash/steep downturn) going back to 1987, you would have profited handsomely within a few years.  If you had kept rebalancing that 60/40 portfolio at yearly or semi-yearly intervals, as the article suggests, you would have exchanged a lot of appreciating stock for bonds that - how should I put it? - did not perform all that well.

Trouble is, you've taken a couple of pretty good rules of thumb - rebalancing and non-market timing - and turned them into religious principles. 

[grantmeaname]

As for your claim that market timing does not work, I call bullshit.  True, it doesn't work in the short term, or in many situations, but there are conditions - such as buying in the depths of a crash - where it does.  If you had bought an index fund (or other broad-based fund) in the depths of the crash (or any crash/steep downturn) going back to 1987, you would have profited handsomely within a few years.

If you know which way the market is going to go and when, market timing is perfectly viable. But it's never clear when the market has peaked until the peak has passed, and it's never clear where the low-water mark was, exactly, until far afterwards. Your strategy presupposes that investors can know these things, and they can't, which is why market timing fails. Otherwise I'm sure you would have risen to the challenge by now and shared a link showing that investors following your "buy when you think the market has gone down but will go up" strategy outperform buy-and-hold investors.

If you had kept rebalancing that 60/40 portfolio at yearly or semi-yearly intervals, as the article suggests, you would have exchanged a lot of appreciating stock for bonds that - how should I put it? - did not perform all that well.

Selling high and buying low is bad in your world?

[Joet]

Well I guess you're the value prognosticator with the crystal ball. The rest of us realize that markets can stay irrational longer than we can stay solvent. Tell you what, next time there's a crash go ahead and abandon your AA when your crystal ball tells you the market has turned bullish. I hope it works out for you, truly I do.

Personally I make a few market-timing calls and started focusing on new investments with a higher equity tilt all the way down (lol) but the only thing truly irrational in this thread was the suggestion to abandon bonds entirely, IMO.

[swiper]

I guess that's a criticism that they're not showing what happens if you happen to guess correctly.

It's not a guess, nor is it irrational behavior.  It's a rational decision based on market behavior: if there has been a crash, buy, because it will eventually rise.  You're not "chasing winners", except in the sense that you expect the stock market to rise in the long term.

Personally, I'd say having a fixed percentage of your portfolio in bonds is irrational behavior (just as selling stock in a crash is irrational), especially given the returns these last few years.  Why would you rationally choose to invest in something that yields near-zero returns?

Having a fixed percentage is what allows you to re-balance in the first place. Your scenario of starting with 40/60 split and in your words "moved all that bond money into stocks" would end up with 0/100. That is not a re-balance of your 40/60, it is an entirely new strategy, based on your assessment that the market is undervalued. If you were wrong and the market stays down for a few years, you could be SOL

You mix asset classes based on a combination of risk versus return for your time horizon. For some, a 40/60 makes sense for others not so much. I took the online Shiller course and he had a nice graph which demonstrated the benefits of diversification  (i don't have a reference, but I attached an approximation).

And its not a religion, its just our opinion ;)

 




 

[matchewed]

James, I think you're missing the forest from the trees here, and also ignoring the rest of the articles within that group. In particular the one covering AA. Are there studies which you can cite that refute the studies that they site? This isn't religion, it's data and analysis which takes an overall view of how AA's actually provide most of the movement rather than timing the big dips/peaks.

How does promoting sound financial behaviors equate to religious principles? You can make up any fake scenario you want to show a more advantageous outcome but it's just a straw man argument. Do you have anything to back up your position other than that?

[fiveoclockshadow]

That's a brilliant idea James!  Just move 100% into equities after the crash.



Hey, that looks great!  Of course, then this happened:



But that's OK, because the clever person who went 100% equities at the start of 1930 to reap the maximum rewards of the recovery and ended up losing over 75% was a long term investor. And after waiting until 1950 would finally be back to where they started with that obvious money making move of buying after the crash in Jan 1930...



Can't lose!  What fool wouldn't try market timing?

[Jamesqf]

If you know which way the market is going to go and when, market timing is perfectly viable. But it's never clear when the market has peaked until the peak has passed, and it's never clear where the low-water mark was, exactly, until far afterwards.

But you don't have to know exactly where the peaks and bottoms are.  All you need to know is that irrational behavior has driven something outside sensible valuations.  Thus it was easy to see, along about 2005 or so, that the housing market was irrationally high, or that somewhat later the stock market was entering bubble territory.   

And isn't it strange that some people here, who claim that it's not possible to time markets, were (and maybe still are) suggesting buying rental houses because they're at bargain prices?  Now that sure looks like market timing to me :-)

Selling high and buying low is bad in your world?

Seems to me that what that article is suggesting is to sell (stocks) low, and buy bonds with a historically low yield.

 

How does promoting sound financial behaviors equate to religious principles?

It becomes a religious principle when you insist that it should be followed even in instances where it pretty obviously isn't sound.  Now if you could explain exactly why anyone investing for the long term would want to hold ~40% of their portfolio in bonds in the current environment, I'm willing to listen.  But if you look at the S&P 500, dividends alone are yielding more than short to medium term bonds, e.g. here http://money.cnn.com/data/bonds/ and here http://www.multpl.com/s-p-500-dividend-yield/

[matchewed]

How does promoting sound financial behaviors equate to religious principles?

It becomes a religious principle when you insist that it should be followed even in instances where it pretty obviously isn't sound.  Now if you could explain exactly why anyone investing for the long term would want to hold ~40% of their portfolio in bonds in the current environment, I'm willing to listen.  But if you look at the S&P 500, dividends alone are yielding more than short to medium term bonds, e.g. here http://money.cnn.com/data/bonds/ and here http://www.multpl.com/s-p-500-dividend-yield/

I don't personally promote a 40% bond position for myself. I think you're highlighting the 60/40 scenario and blowing it out of proportion to score internet points. Even looking at an extremely narrow investing time frame like you're proposing to refute the article (which is ridiculous when the investing advice is for 40-60 year time frames) the 60/40 scenario still performed quite well.

How do you know when it is or isn't sound? It's just great that you can point to the past and say it isn't sound. The reason why someone would want to hold 60/40 for the long term is because it is long term investing. If that person has decided it is their asset allocation and is comfortable with the risks associated with that, then rebalancing annually over the long term will make the current environment a blip in their timeline.

[Joet]

also it's probably worth noting that the yield is not a first-order reason to hold bonds

[tpozywio]

The normal rebalancing act would have shifted a large portion of the funds into stocks....so James is kinda right.  No need to pile on