Is 100% stocks ALWAYS good for accumulation because the most volatility possible gives you the highest likelihood of buying low dips over a 10 year period?
Is 100% stocks ALWAYS good for accumulation because the most volatility possible gives you the highest likelihood of buying low dips over a 10 year period?
I don't have time to find the source now, but I've read that an 80/20 allocation (with rebalancing) actually produces the best returns over the long run. I think that was in Bernstein's "The Four Pillars of Investing." I may have seen that on jcollinsnh's blog as well. Bernstein's book is not geared to FIRE, but rather the needs of conventional spendy-pants folks. It is, however, a truly excellent book on personal finance.
I would bet the answer to this from most would be yes, given it always performs best over very long periods of time. But then that begs the question on how far to go with this? Should one go 100% Small-cap Value stocks given their pretty consistent out-performance over long time periods? This is even more volatile than just 100% stocks. I'm not sure I can wrap my head enough around it to have a strong opinion, but to me considering this more extreme option would help in the analysis of the original question.
I don't have time to find the source now, but I've read that an 80/20 allocation (with rebalancing) actually
produces the best returns over the long run. I think that was in Bernstein's "The Four Pillars of Investing."
I may have seen that on jcollinsnh's blog as well.
Is 100% stocks ALWAYS good for accumulation because the most volatility possible gives you the highest likelihood of buying low dips over a 10 year period?Always? No.
This is a bit different of a topic than the title might come off as. I get reasons why lower volatility helps ER due to "sequence risk" but this isn't about that.
I have noticed this year that my returns have beaten the market. In fact, over the last 2 years I have beaten the market with basically 100% VTSAX. Obviously, this peaked my interest.
The effect is caused by three reasons that I can figure out.
A. The market has been somewhat "flat" going up and down but overall not advancing hugely in any direction.
B. I invest like a robot
C. I am somewhat early in my accumulation. (230K / 1.5M) (Year 3 of 11ish)
Ultimately, over the last two years, I have bought stocks when they were low in dips, and high in peaks. So when the market is at a "high" I beat the market pretty good. This effect should diminish as my invested amount goes up, but not completely disappear.
Is 100% stocks ALWAYS good for accumulation because the most volatility possible gives you the highest likelihood of buying low dips over a 10 year period?
This seemed like a topic not discussed.
How do you beat the market with all VTSAX? Wouldn't that exactly match the market? (sorry if I'm missing something so simple here)
How do you beat the market with all VTSAX? Wouldn't that exactly match the market? (sorry if I'm missing something so simple here)
I believe the OP is defining "the market" as the point return from exactly two years ago until today (or some similar two year period). In contrast, "VTSAX" stands for his dollar cost averaging approach of buying VTSAX (yes, the US stock market) every month.
In http://www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work, Ashley Action would be "the market" and Matthew Monthly would be "VTSAX".
I don't have time to find the source now, but I've read that an 80/20 allocation (with rebalancing) actually
produces the best returns over the long run. I think that was in Bernstein's "The Four Pillars of Investing."
I may have seen that on jcollinsnh's blog as well.
Actually, JL Collins advised just the opposite (emphasis mine):
"The difference in projected results between 100% stocks and an 80/20 mix is
tiny. How those results actually unfold over the decades is likely to be equally
close and the ultimate winner is basically unpredictable. For this reason, and
favoring simplicity, I recommend 100% stocks using VTSAX."
http://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
As he says, however, the difference is tiny and many investors might feel
better about lower volatility.
FWIW, I was 100% stocks in my accumulation phase -- with a brief exception
of some GM bonds in the early 90's. It was a wild ride, but I never had any
regrets.
This is a bit different of a topic than the title might come off as. I get reasons why lower volatility helps ER due to "sequence risk" but this isn't about that.
I have noticed this year that my returns have beaten the market. In fact, over the last 2 years I have beaten the market with basically 100% VTSAX. Obviously, this peaked my interest.
The effect is caused by three reasons that I can figure out.
A. The market has been somewhat "flat" going up and down but overall not advancing hugely in any direction.
B. I invest like a robot
C. I am somewhat early in my accumulation. (230K / 1.5M) (Year 3 of 11ish)
Ultimately, over the last two years, I have bought stocks when they were low in dips, and high in peaks. So when the market is at a "high" I beat the market pretty good. This effect should diminish as my invested amount goes up, but not completely disappear.
Is 100% stocks ALWAYS good for accumulation because the most volatility possible gives you the highest likelihood of buying low dips over a 10 year period?
This seemed like a topic not discussed.
How do you beat the market with all VTSAX? Wouldn't that exactly match the market? (sorry if I'm missing something so simple here)
Bonds are near historically low interest rates. There is a small chance they could go a little lower in interest, in which case the bond price would go up.I don't have time to find the source now, but I've read that an 80/20 allocation (with rebalancing) actually
produces the best returns over the long run. I think that was in Bernstein's "The Four Pillars of Investing."
I may have seen that on jcollinsnh's blog as well.
Actually, JL Collins advised just the opposite (emphasis mine):
"The difference in projected results between 100% stocks and an 80/20 mix is
tiny. How those results actually unfold over the decades is likely to be equally
close and the ultimate winner is basically unpredictable. For this reason, and
favoring simplicity, I recommend 100% stocks using VTSAX."
...it would be to your benefit to be in a situation where the market tanked and recovered every other day vs. staying flat(or up 5% yearly) for 10 years.Yes, if you were buying every day.
...it would be to your benefit to be in a situation where the market tanked and recovered every other day vs. staying flat(or up 5% yearly) for 10 years.Yes, if you were buying every day.
What if the opposite happened: the market "surged and reverted" every other day?
...it would be to your benefit to be in a situation where the market tanked and recovered every other day vs. staying flat(or up 5% yearly) for 10 years.Yes, if you were buying every day.
What if the opposite happened: the market "surged and reverted" every other day?
Technically, isn't that the same thing? Your just arbitrarily counting the "baseline" at the 'bottom' instead of the 'top'
There's also the quesiton of rebalancing. While you don't need bonds to rebalance (you could just have different classes of equities), having an 80/20 portfolio with rebalancing ensures that you sell high and buy low. Lots of info out there how a portfolio with rebalancing outpreforms one that is never rebalanced (but I'm unaware of one comparing 100/0 to 80/20 or similar).
That said, I'm 95/5...
Technically, isn't that the same thing? Your just arbitrarily counting the "baseline" at the 'bottom' instead of the 'top'What matters in the end is the price difference between what you buy and what you sell.
There's also the quesiton of rebalancing. While you don't need bonds to rebalance (you could just have different classes of equities), having an 80/20 portfolio with rebalancing ensures that you sell high and buy low. Lots of info out there how a portfolio with rebalancing outpreforms one that is never rebalanced (but I'm unaware of one comparing 100/0 to 80/20 or similar).
That said, I'm 95/5...
No according to this
https://www.kitces.com/blog/how-rebalancing-usually-reduces-long-term-returns-but-is-good-risk-management-anyway/
(https://www.kitces.com/wp-content/uploads/2015/12/Graphics_52.png)
Bonds are for risk management (i.e. being an irrational dumbass), not enhancing returns.
Thanks for sharing - that's an article I need to study a bit more.There's also the quesiton of rebalancing. While you don't need bonds to rebalance (you could just have different classes of equities), having an 80/20 portfolio with rebalancing ensures that you sell high and buy low. Lots of info out there how a portfolio with rebalancing outpreforms one that is never rebalanced (but I'm unaware of one comparing 100/0 to 80/20 or similar).
That said, I'm 95/5...
No according to this
https://www.kitces.com/blog/how-rebalancing-usually-reduces-long-term-returns-but-is-good-risk-management-anyway/
Bonds are for risk management (i.e. being an irrational dumbass), not enhancing returns.
Thanks for sharing - that's an article I need to study a bit more.There's also the quesiton of rebalancing. While you don't need bonds to rebalance (you could just have different classes of equities), having an 80/20 portfolio with rebalancing ensures that you sell high and buy low. Lots of info out there how a portfolio with rebalancing outpreforms one that is never rebalanced (but I'm unaware of one comparing 100/0 to 80/20 or similar).
That said, I'm 95/5...
No according to this
https://www.kitces.com/blog/how-rebalancing-usually-reduces-long-term-returns-but-is-good-risk-management-anyway/
Bonds are for risk management (i.e. being an irrational dumbass), not enhancing returns.
However, on first read I find his argument to be a bit circular; rebalancing tends to reduce long term returns because it keeps your portfolio from drifting more towards equities, which tend to outperform stocks, which explains why a non-rebalanced portfolio beats a rebalanced one.
In other words - it isn't the rebalancing, it's the higher average % of stocks.
Yes, but isn't the argument that the rebalancing (sell high, buy low) will increase returns enough to make up for that?
Granted, the latter portfolio only grew to greater wealth because it allowed equity exposure to drift higher and higher, potentially beyond the client’s tolerance
The way I intend to lower volatility is to sell all my equity if it drops too much from the peak and have a buy order at the sold price in case the market recovers, if the trend to seem to change I can of course buy back at a lower price.Would a Flash crash (https://en.wikipedia.org/wiki/Flash_crash), or less severe but still significant volatility, cause you to sell and repurchase the same day? Perhaps that's a loss due to "managing volatility" you mention...?
I may loose some of my capital managing volatility this way but I see it as the price to pay for the added insurance.
The way I intend to lower volatility is to sell all my equity if it drops too much from the peak and have a buy order at the sold price in case the market recovers, if the trend to seem to change I can of course buy back at a lower price.
I may loose some of my capital managing volatility this way but I see it as the price to pay for the added insurance.
It do change everything, I can sleep soundly without worries. One do not need to make money all the time. From what I learned by reading advice from good asset managers around the world is that bear markets are to be respected. It is far more important to not loose money than to make a few additional percent per year. The stock market of USA has been lucky for the last century and people who only focuses on its market is suffering from a survival bias. Markets around the world does not always goes up in the long run. Some markets never recovers, like the sad state of Japan.The way I intend to lower volatility is to sell all my equity if it drops too much from the peak and have a buy order at the sold price in case the market recovers, if the trend to seem to change I can of course buy back at a lower price.
I may loose some of my capital managing volatility this way but I see it as the price to pay for the added insurance.
I don't see how this would change anything at all except:
1) You lose out on dividends between the time you sell and buy
2) You are charged transaction fees for the buying and selling
A flash crash would just be noise and I wouldn't have acted on it. I do not have a standing order in the market. I will simply liquidate if the trend shows historically unfavorable risks. There have of course been instances when a total market melt-down with a 100% loss has occurred in a single day. For example in communist China and Russia when they ceased all equity or in Germany during WW2.The way I intend to lower volatility is to sell all my equity if it drops too much from the peak and have a buy order at the sold price in case the market recovers, if the trend to seem to change I can of course buy back at a lower price.Would a Flash crash (https://en.wikipedia.org/wiki/Flash_crash), or less severe but still significant volatility, cause you to sell and repurchase the same day? Perhaps that's a loss due to "managing volatility" you mention...?
I may loose some of my capital managing volatility this way but I see it as the price to pay for the added insurance.
Again, I think this topic went "off topic"(http://i395.photobucket.com/albums/pp37/Qmavam/Attention_zps27yjzcjd.png) (http://s395.photobucket.com/user/Qmavam/media/Attention_zps27yjzcjd.png.html)
How do you beat the market with all VTSAX? Wouldn't that exactly match the market? (sorry if I'm missing something so simple here)
I believe the OP is defining "the market" as the point return from exactly two years ago until today (or some similar two year period). In contrast, "VTSAX" stands for his dollar cost averaging approach of buying VTSAX (yes, the US stock market) every month.
In http://www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work, Ashley Action would be "the market" and Matthew Monthly would be "VTSAX".
Indeed, from Jan 1 2015 to now (nearly 2 years later) VTSAX is only up 3-4% yet I am up 10-12% because my monthly purchases have bought during the low dips. (think jan 2016)
Qmavam
I think my post was on topic. Sequence of returns and your OP are exactly the area I posted about. Posting giant letters is pretty off putting so happy to stop trying to educate and let the thread die.
More or less volatility is a moot question with respect to long term returns (if you are buying or selling consistently to a plan). The market volatility is what it is. One can't predict the future level of volatility any more than you can predict the future sequence of returns. We can only look backwards.Random price fluctuations generate a small bonus for people who are buying regularly, and a small onus (?) for people who are selling regularly. The sequence isn't important, only that the variations happen and that you are continuously buying. It doesn't have to be DCA, randomly spaced purchases would work just as well. The fact that riskier assets tend to have higher returns is an additional bonus.
When you buy only matters in the sense that if you are making a behavioral error, as I said (ones that have you in and out of the market by buying and selling large chunks at a time). Your long term expected returns will be impacted, and your actual returns. What they are will depend on the actual returns while in each actual asset class.
So, yes, 100% stocks has a good expected return, probably the 'best expected return', but returns are not guaranteed, so it may not have the best actual return.
Yes, in volatile markets one can get lucky or unlucky about when they bought, and get good or poor returns as a result, different from the published averages.. but it is random, not an inevitable result of specific factors.
So I think people aren't responding because to OP's premise is flawed. Volatility during accumulation does not mean 'buying on sale' it means buying at more variable prices.
Below is another simplistic demonstration. One investor places $100 per month in a volatile asset with 0 return that fluctuates between $7, $10, and $13. The other does the same in an investment that fluctuates between $9, $10, and $11 and additionally returns 1% compounded per month. The more volatile asset with 0 return still comes out fractionally ahead of the compounding less-volatile asset! And that is with 0 returns. Now as Sol just said, volatility more generally tends to go together with higher returns. In conclusion, volatility is the friend of an investor who is dollar cost averaging from a starting point of 0. It is the enemy of a person selling a fixed dollar amount every month. That is (I assume) why the glide path concept exists, and also why I say emerging markets could be a good investment to start with (behavioral considerations aside).
Volatile No Return
Investment $/share # Purchased Accumlated $
$100.00 $7.00 14.29 $142.86
$100.00 $10.00 10.00 $242.86
$100.00 $13.00 7.69 $319.78
$100.00 $7.00 14.29 $462.64
$100.00 $10.00 10.00 $562.64
$100.00 $13.00 7.69 $639.56
$100.00 $7.00 14.29 $782.42
$100.00 $10.00 10.00 $882.42
$100.00 $13.00 7.69 $959.34
$100.00 $7.00 14.29 $1,102.20
$100.00 $10.00 10.00 $1,202.20
$100.00 $13.00 7.69 $1,279.12
Ending Shares 127.91
Ending Value $1,279.12
Less Volatile, but 1% Return Per Month
Investment $/share # Purchased Accumlated $
$100.00 $9.00 11.11 $111.11
$100.00 $10.00 10.00 $212.22
$100.00 $11.00 9.09 $305.25
$100.00 $9.00 11.11 $419.42
$100.00 $10.00 10.00 $523.61
$100.00 $11.00 9.09 $619.76
$100.00 $9.00 11.11 $737.07
$100.00 $10.00 10.00 $844.44
$100.00 $11.00 9.09 $943.79
$100.00 $9.00 11.11 $1,064.34
$100.00 $10.00 10.00 $1,174.98
$100.00 $11.00 9.09 $1,277.64
Ending Shares 120.81
Ending Value $1,277.64
My perspective on this enormous bias toward equities and general disregard for the diversification value of bonds and other fixed income investments stems from two places:
1. Jeremy Siegel's book, Stocks for the Long Run.
I agree with what Radagast wrote, but will add... Time required for accumulation is an important consideration. This is generally directly related to savings rate. Therefore, an investor with a very high SR will receive less benefit from volatility in two ways.I agree. Once you are within say 10 years and 50% of your goal you are no longer an early accumulator and need to start considering the possible effects of consecutive bad years.
First, an entire more volatile sector(ex emerging markets) can be depressed and underperform through the entire short accumulation period, if the investor switches to a lower volatility option at FIRE, advantage lost.
Second, high volatility can significantly alter a FIRE timeline. A potential Early retiree with a 80%SR can pretty safely FIRE in 5 years +/- months with a more stable lower yielding investment portfolio. All bets are off with high yield and high volatility portfolio because only the last couple of years of returns will really matter. Is the potential of adding 2-3 years of work (40-60%) because of bad timing worth the probability of beating market returns for a few years? Maybe, maybe not. IMO much less worth it than if accumulation period is longer.
The way I intend to lower volatility is to sell all my equity if it drops too much from the peak and have a buy order at the sold price in case the market recovers, if the trend to seem to change I can of course buy back at a lower price.This is exactly a description of the type of behavioral error I discussed above. Moving in and out of the market does not lower the volatility of an expected return for an asset class (whether leveraged Swedish mutual funds, VTI or junk bonds). The sequence of returns are inherently unpredictable. It is like a roulette system that relies on doubling your bet+1 until your color comes up. It can be mathematically proven to have a specific loss over time.
I may loose some of my capital managing volatility this way but I see it as the price to pay for the added insurance.
There appears to be a false assumption about the sequence of market returns being predicable based on the past, which is not supportable.
What will happen is that this strategy will receive market returns and market risks for the time when in the market and conservative returns and risks when out. The volatility will be exactly the weighted average, so yes volatility is reduced as are returns, in theory.
Anything else posted is an argument that the person can time the market via limit orders or other strategies that improve results, which is demonstrably false.
I am not that confident that the stock market will always go up:
https://www.youtube.com/watch?v=1yJWABvUXiU
Agreed. In fact I am 100% confident that markets will not always go up. The problem is that we don't know, in advance, when they will go up and when they will go down. We don't know if we will be 1995 Japan or 2005 China.
Sadly, there are not many good alternatives out there for holders of capital who are hoping to FIRE on investments. Companies at least have a hope of creating wealth by making/selling/extracting goods for profit.
In another thread I have expressed worries that we are entering an era where capital will be cheap and plentiful, resulting in relatively poor returns for the wealthy. If capitalists can't use political power to hold onto the current system, the ubiquitous availability of skilled human capital,ever increasingly available and well distributed information-based capital, relatively cheap financial capital (money), and increasingly efficient ways to obtain materials (recycling, new tech materials, 3-D printing, asteroid mining,etc.), I feel that the future wealthy will be those who are actively working and producing, not those who hoarded money. A smaller and smaller percentage of wealth will be needed for food, housing, transport, etc (I hope, or we are in for a much worse world).
25 years from now I would not be shocked if young people think the idea of saving for the future to retire on earnings is considered quaint and unnecessary.
That said, there is no other game in town I can bet on. Pretty much everything else has a worse risk profile than stocks. I gotta hope that the strongly established cultural habit of living the way we do persists for 4 more decades or so. I am getting old, so I better hope capitalist, socialism stays the social norm and my money can work at least until my wife and I croak. The alternative may be to end up like the old guy in Logan's Run, running away to avoid getting vaporized for my uselessness or having young kids stroke my guy hair with looks of wonder on their face at how I survived the purging process.