Author Topic: Is 100% stocks always the best for early accumulation?  (Read 12884 times)

TheAnonOne

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Is 100% stocks always the best for early accumulation?
« on: October 19, 2016, 10:51:58 AM »
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.

PizzaSteve

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Re: Is 100% stocks always the best for early accumulation?
« Reply #1 on: October 19, 2016, 11:08:47 AM »
There have been lots of studies that suggest it is impossible for an ordinary person to time the market's dips and peaks with consistency.

You rightly point out that consistent investing according to a plan allows some of your shares to be bought cheaply during dips.  This illustrates a behavioral problem that can reduce performance...the fact that people tend to get greedy when the market is high and scared when it drops, creating the reverse effect.  People without a plan often underperform by buying and selling poorly.  It is still hard for them to guess right or wrong for that matter, though.  Mostly of their underperformance is usually not because they guessed wrong about peaks or dips, it is actually because their scared behavior had them out of the market for significant periods of time.  These jumpy investors often miss the common bounce back rally after a dip, resulting in inferior overall returns.

So staying in 100% stock 100% of the time has the highest expected return.

Whether it is the best return depends on the fates.  It is still the best bet, but if you are conservative and risk adverse, many are served well by conservative investments like CDs or savings bonds.  Those will grow more slowly, but will grow with certainty. 
« Last Edit: October 19, 2016, 11:13:19 AM by PizzaSteve »


DA

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Re: Is 100% stocks always the best for early accumulation?
« Reply #3 on: October 19, 2016, 11:58:19 AM »

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. 

Jack

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Re: Is 100% stocks always the best for early accumulation?
« Reply #4 on: October 19, 2016, 12:12:05 PM »

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.

Find that source, please! I want to read it!

nereo

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Re: Is 100% stocks always the best for early accumulation?
« Reply #5 on: October 19, 2016, 12:17:03 PM »
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...

Much Fishing to Do

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Re: Is 100% stocks always the best for early accumulation?
« Reply #6 on: October 19, 2016, 12:44:10 PM »
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.

TheAnonOne

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Re: Is 100% stocks always the best for early accumulation?
« Reply #7 on: October 19, 2016, 01:01:48 PM »
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 think if 100% emerging markets would be the highest volatility.

My question is NOT based around asset allocation for the entire FIRE process, ONLY around accumulation, due to volatility. It does seem like a few didn't read the OP very well.

Rubic

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Re: Is 100% stocks always the best for early accumulation?
« Reply #8 on: October 19, 2016, 02:14:53 PM »
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.

MDM

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Re: Is 100% stocks always the best for early accumulation?
« Reply #9 on: October 19, 2016, 04:14:02 PM »
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.

E.g., see https://www.bogleheads.org/wiki/Callan_periodic_table_of_investment_returns and http://allfinancialmatters.com/wp-content/uploads/2013/08/SandP500_10-Year_Rolling_Returns_with-CPI_calendar_year.pdf.

But the odds are in your favor....

Metric Mouse

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Re: Is 100% stocks always the best for early accumulation?
« Reply #10 on: October 19, 2016, 04:29:11 PM »
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)

MDM

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Re: Is 100% stocks always the best for early accumulation?
« Reply #11 on: October 19, 2016, 05:09:26 PM »
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".

TheAnonOne

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Re: Is 100% stocks always the best for early accumulation?
« Reply #12 on: October 19, 2016, 08:00:38 PM »
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)

DA

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Re: Is 100% stocks always the best for early accumulation?
« Reply #13 on: October 19, 2016, 09:41:29 PM »
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.

But I did remember correctly:  "Some studies suggest that adding a small percentage of bonds, say 10-20%, actually outperforms 100% stocks. . . .  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."

http://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
« Last Edit: October 19, 2016, 09:43:41 PM by DA »

beltim

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Re: Is 100% stocks always the best for early accumulation?
« Reply #14 on: October 19, 2016, 11:25:59 PM »
Always? No.  Most often true? Yes.  Adding an asset with lower long term returns (such as bonds) to a portfolio usually lowers the returns.

http://forum.mrmoneymustache.com/investor-alley/if-you-can-handle-volatility-and-a-15-year-timeline-invest-in-100-stocks/msg964647/#msg964647

Grizzly Dad

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Re: Is 100% stocks always the best for early accumulation?
« Reply #15 on: October 19, 2016, 11:35:42 PM »
Here is an excellent study by Vanguard laying out some of the details of diversification within portfolios.

http://www.vanguard.com/pdf/s130.pdf

The real gem is on page 5, figure 1.

https://drive.google.com/file/d/0BxIS4j2LOLgzTUJSM01aZXNBakE/view?usp=sharing

It lays out the historic return vs. volatility of various portfolio composed of stocks and bonds. The key takeaway is that you can achieve significant reductions in volatility while sacrificing a very negligible return by adding a few bonds to a stock-only portfolio. Returns don't really start to drop off until you get above a 60/40 split.

I love most of what JL Collins is dishing out, but adding a bond fund even when accumulating is simply a very good way to lower your overall volatility without giving up any returns. Anyone should want to take that deal, and yes the differences over the VERY long term are negligible, but we live in the real world and sometimes it's nice not to have half your portfolio disappear in one year.

Additionally, and I would never advocate market timing, but there is one and only one select time when it might make some sense - in the midst of true market panics when it is almost always quite lucrative to bet against the crowd. At those points, it can help to have assets stored in less volatile areas.
« Last Edit: October 19, 2016, 11:56:16 PM by Grizzly Dad »

BTDretire

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Re: Is 100% stocks always the best for early accumulation?
« Reply #16 on: October 20, 2016, 05:11:52 AM »
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)

  The question is, what market?
Is VTSAX exactly weighted as the "market"?
Exactly reconciled everyday?
 I see there are 3613 stocks in the VTSAX.
And the portfolio industry composition matches the
CRSP US Total Market Index as of 9-30-16. (whatever that is)
But I don't know if the stocks within the composition matches.
You can see the composition here.
https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT
 At one time, I thought it should match the Nasdaq pretty close, but I was corrected.

BTDretire

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Re: Is 100% stocks always the best for early accumulation?
« Reply #17 on: October 20, 2016, 06:46:01 AM »
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."


  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.
There is much more chance that interest rates will rise and bond prices will go down.
Lots of downside with bonds, not much upside.
 So, over history, it may be a close call, but I think we are in a historical time
when 20% bonds may be a poor choice.
Just my opinion and worth every penny you paid for it.

TheAnonOne

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Re: Is 100% stocks always the best for early accumulation?
« Reply #18 on: October 20, 2016, 09:26:33 AM »
Again, I think this topic went "off topic"

This isn't about stocks being higher returns, its about the more volatility during accumulation is a net positive. When you "FIRE" switch to 60/40 or whatever floats your boat but from what I am seeing 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.

Alternate, on-topic question (same question but from the other side) why would anyone want to LOWER volatility during accumulation? Why would people willingly give up the ability to buy on a sale?

MDM

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Re: Is 100% stocks always the best for early accumulation?
« Reply #19 on: October 20, 2016, 09:49:14 AM »
...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?

TheAnonOne

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Re: Is 100% stocks always the best for early accumulation?
« Reply #20 on: October 20, 2016, 09:52:58 AM »
...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'

Barben

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Re: Is 100% stocks always the best for early accumulation?
« Reply #21 on: October 20, 2016, 10:14:47 AM »
...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'

It is, but I think the intent of the post is to say that it depends when you purchase.  If the market moved randomly but stayed within a set minimum (say 0) and maximum (say 100) forever, then the volatility wouldn't have a positive or a negative effect on your return, as periodic purchase would cost the amount at the center of the range (50).

I don't see why you wouldn't get a greater return from 100% stocks due to the volatility though, because the long-term trend for stocks is upward, where you get increasing maximum values of the market.  If that wasn't the case, we wouldn't throw all our extra money at investing. 

I think calculators/studies like the Vanguard stock/bond allocation that show a similar return with less volatility for, say, an 80/20 portfolio can be misleading.  While they're accurate, they're representing what happens if you invest a lump sum and nothing else.  More often during accumulation, you're investing periodically, so the volatility of 100% stocks would begin to influence your IRR.

Scandium

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Re: Is 100% stocks always the best for early accumulation?
« Reply #22 on: October 20, 2016, 10:21:43 AM »
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.

MDM

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Re: Is 100% stocks always the best for early accumulation?
« Reply #23 on: October 20, 2016, 10:29:10 AM »
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. 

"Buying the dips" implies that the long term trend (i.e., what you will sell at) is the high value. 

"Buying the surges" implies that the long term trend (i.e., what you will sell at) is the low value. 

Jack

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Re: Is 100% stocks always the best for early accumulation?
« Reply #24 on: October 20, 2016, 10:42:09 AM »
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.

The second part of the article (under the heading "Enhancing Returns By Rebalancing Amongst Equities (Or Other Similar-Return Asset Classes)") is really interesting!

nereo

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Re: Is 100% stocks always the best for early accumulation?
« Reply #25 on: October 20, 2016, 11:37:12 AM »
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.
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.

Scandium

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Re: Is 100% stocks always the best for early accumulation?
« Reply #26 on: October 20, 2016, 01:17:18 PM »
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.
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?

nereo

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Re: Is 100% stocks always the best for early accumulation?
« Reply #27 on: October 20, 2016, 01:27:56 PM »
Yes, but isn't the argument that the rebalancing (sell high, buy low) will increase returns enough to make up for that?

Sure - the argument for rebalancing is you sell high and buy low.  Here the argument seems to be (for portfolios of 20-50% bonds) not rebalancing is superior because the allocation shifts.  It's appears it isn't the rebalancing that casues the lower returns, it's the allocation.  The rebalancing seems not to make a difference, but is rather a just another corresponding factor (correlated to the AA but not responsible for the difference in returns).  The author even says as much:
Quote
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

Perhaps better to compare a portfolio with >90% equities, or one with similar expected returns (as the author does with the section labeled: Enhancing Returns By Rebalancing Amongst Equities).

Interesting data - wrong conclusion.

Tyler

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Re: Is 100% stocks always the best for early accumulation?
« Reply #28 on: October 20, 2016, 01:29:59 PM »
IMHO, selecting the best portfolio for accumulation requires more than simply looking at the long-term averages.  There are lots of good ways to meet your personal financial goals, and some methods are more dependable, efficient, and sustainable than others.

https://portfoliocharts.com/2016/07/25/thinking-beyond-stocks-can-fortify-your-accumulation-plan/

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Re: Is 100% stocks always the best for early accumulation?
« Reply #29 on: October 20, 2016, 02:32:10 PM »
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.

MDM

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Re: Is 100% stocks always the best for early accumulation?
« Reply #30 on: October 20, 2016, 02:51:19 PM »
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.
Would a 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...?

dividendman

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Re: Is 100% stocks always the best for early accumulation?
« Reply #31 on: October 20, 2016, 03:14:22 PM »
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

lordmetroid

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Re: Is 100% stocks always the best for early accumulation?
« Reply #32 on: October 20, 2016, 04:00:13 PM »
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
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.

True, I may loose out on some dividends and it will cost me transactions fees, however I may also be able to buy back into equities on a far cheaper price levels and the transaction fees will be negligibly at worst.

lordmetroid

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Re: Is 100% stocks always the best for early accumulation?
« Reply #33 on: October 20, 2016, 04:03:47 PM »
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.
Would a 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...?
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.

Currently I got everything invested in my local Swedish index mutual fund because of good interest rates on my leverage. However, in the future, when my assets has increased significantly to the point where I no longer need to have the initial leveraged position. I would want to avoid such a risk by buying a global index instead.
« Last Edit: October 20, 2016, 04:15:17 PM by lordmetroid »

BTDretire

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Re: Is 100% stocks always the best for early accumulation?
« Reply #34 on: October 21, 2016, 03:55:25 PM »
Again, I think this topic went "off topic"

mathjak107

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Re: Is 100% stocks always the best for early accumulation?
« Reply #35 on: October 21, 2016, 06:01:51 PM »
if you are a long term investor spanning decades  there is zero logic in using bonds or hedging to mitigate temporary drops in the short term  that mean nothing ,and permanently reduce long term gains .

unless you are so risk adverse a good stock diversified portfolio is likely the best way to go .

« Last Edit: October 21, 2016, 06:08:42 PM by mathjak107 »

Metric Mouse

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Re: Is 100% stocks always the best for early accumulation?
« Reply #36 on: October 21, 2016, 06:04:08 PM »
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)

Ah. Thank you both for explaining!

BTDretire

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Re: Is 100% stocks always the best for early accumulation?
« Reply #37 on: October 21, 2016, 08:28:59 PM »
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.

 Don't be off put by me, I was responding to TheAnonOne's response in big letters about going off topic.
 Just letting him know I saw his note.
At least I said it in happy colors, with stars even. :-)
btw, I had not even read you post yet, I responded to a post 16 posts before yours.
 Carry on!

Radagast

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Re: Is 100% stocks always the best for early accumulation?
« Reply #38 on: October 21, 2016, 10:36:18 PM »
I have an on topic post! I arrived late! You are exactly correct that volatility and volatile assets are best for people making regular contributions. I posted quite a bit on this in the past. Here is one of my old posts:

Now this may sound simplistic, however I am currently looking at "The Four Pillars of Investing" by William Bernstein, page 283. An investment fluctuates between $5, $10, and $15 over the course of three months. An investor purchases $100 every month, thus buying 20, 10, and 6.67 shares at those prices, and ending with 36.67 shares at an average value of $10 each. However, they were purchased at an average price of $8.18 ($300 invested divided by 36.67 shares, $300/36.67). The investor ends with $366.67 (36.67 shares purchased at an average of $8.18, but valued at $10 at average prices), whereas the same amount invested into a perfectly non-volatile investment at the same $10 average price comes out to only $300 (30 shares purchased at $10 each and worth $10 each).

Increasing the monthly fluctuation to $1, 10, and $19 results in the volatile asset investor owning 115.26 shares, purchased at an average price of $2.60, and worth an average of $1,152.63. Compare this to $300 for the investor in the non-volatile asset.

So clearly volatility is beneficial for the purchaser.

Edited old post for clarity.
« Last Edit: October 21, 2016, 11:39:06 PM by Radagast »

Radagast

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Re: Is 100% stocks always the best for early accumulation?
« Reply #39 on: October 21, 2016, 10:39:31 PM »
From this thread: http://forum.mrmoneymustache.com/investor-alley/100-stocks-in-the-accumulation-phase/msg1170548/#msg1170548

I feel that for anyone who can stand to watch large losses on a computer screen, 100% equities is appropriate for accumulation. I have a little double standard here because I keep 8% of my tax sheltered accounts in very long duration treasury bonds (<-- edit to note: more volatile than US stocks!), but I admit there is only about a 50% chance of them being useful. In fact I will take it a step farther and say that 100% Total US stock market is not risky enough for an accumulator. Ideally I would suggest the most volatile corners of the stock market, which not by coincidence frequently have the highest returns. Small cap stocks, small cap value, international small cap, emerging markets, all of these are appropriate additions. After eliminating unacceptable funds I might even recommend sorting your available funds by standard deviation, eliminating the remaining unacceptable funds, and invest in the funds which are most volatile. <-- Use this with caution. My reasoning for thinking this is as follows:

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=07%2F29%2F2016&initialAmount=1000&annualOperation=0&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=4&showYield=false&reinvestDividends=true&symbol1=VFITX&allocation1_1=100&symbol2=VEIEX&allocation2_2=100
Above is a comparison of Vanguard's emerging market (VEIEX) and intermediate term treasury bond (VFITX) funds from 1995 (inception of VEIEX) to 2016 (present). Over this time period VEIEX had a CAGR of 5.82% and standard deviation of 24.23%. The bond fund returned 6.07% annualized and had a standard deviation of 4.77%. Emerging market stocks were an absolutely bad investment, while US treasury bonds made all other investments seem stupid over this period. Clearly the bond fund was a terrible choice for an accumulator, but EM was a good one. Why?

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=07%2F29%2F2016&initialAmount=1000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=4&showYield=false&reinvestDividends=true&symbol1=VFITX&allocation1_1=100&symbol2=VEIEX&allocation2_2=100
Above is a comparison of VEIEX and VFITX for a person who contributed $1,000 per month throughout that period. The emerging markets investor ended with $697,000, but the bond investor ended with only $584,000! The higher returning asset did worse by a wide margin! This is possible because VEIEX's repeated fire sales allowed the frequent purchaser to acquire a huge number of shares, which later turned in huge capital gains. Not only does volatility often denote asset classes with higher expected returns, but the mere existence of volatility is a benefit to accumulators in itself. Even if the volatile fund does not give the returns you hoped for, there is a substantial margin for error because of the volatility. It's a double whammy. Don't use this if you can't hold on.

It works in reverse if you are regularly selling.
« Last Edit: October 21, 2016, 11:45:25 PM by Radagast »

Radagast

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Re: Is 100% stocks always the best for early accumulation?
« Reply #40 on: October 21, 2016, 11:09:43 PM »
Also see Bernstein's "Ages of the Investor" booklet page 19, where he shows that dollar cost averaging into small cap stocks beat dollar cost averaging into the S&P500 by 0.64% even if he assigned the same return to both of them. That is because buying into ups and downs gives you a lower than average cost basis, meaning at the end you have more shares and thus more capital gains and more money. He ends up recommending that ideally young investors should be invested entirely in a global portfolio of small cap value stocks (with 50% bonds for mental reasons). Not only because they have a higher expected return, but because even if they have the same return the extra volatility will make you come out ahead. Double whammy.

Especially when you first start, the effects of buying into volatility tend to have a stronger effect than market performance on your returns. It can even be a way of making the weaker investment defeat the stronger, as I showed above. The problem is that as your contributions become a small percentage of your portfolio eventually the price changes start to overwhelm the additions. At that point the benefits of volatility are still the same on a dollar basis but small on a percentage basis. And of course as you get close to FIRE sequence of returns also becomes an issue.


Radagast

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Re: Is 100% stocks always the best for early accumulation?
« Reply #41 on: October 21, 2016, 11:18:41 PM »
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.

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.
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.

Radagast

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Re: Is 100% stocks always the best for early accumulation?
« Reply #42 on: October 21, 2016, 11:29:39 PM »
Another old slightly more complex simplified example.

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    
« Last Edit: October 21, 2016, 11:49:56 PM by Radagast »

mathjak107

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Re: Is 100% stocks always the best for early accumulation?
« Reply #43 on: October 22, 2016, 01:47:07 AM »
unless you are a very  good market timer dca'ing  or even rebalancing  over long periods of time are not the best way to get ahead . markets are up 70% of  the time and down only 1/3 .

if dca'ing in any fashion worked we would all hit our desired allocation over the years , sell everything and start from zero again . you can see that would rarly if ever be a good idea .

dca'ing and rebalancing may cut volatility but more often than not it cuts gains too .

kitces looked in to this :

https://www.kitces.com/blog/how-rebalancing-usually-reduces-long-term-returns-but-is-good-risk-management-anyway/
« Last Edit: October 22, 2016, 01:49:53 AM by mathjak107 »

w@nker

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Re: Is 100% stocks always the best for early accumulation?
« Reply #44 on: October 22, 2016, 09:25:50 AM »
I think about asset allocation very simplistically. I personally have been invested in 95-100% stocks at every stage of my lifecycle thus far and will maintain this asset allocation until I die.  Within that equity slice, I have a value and small/mid cap tilt, with balanced domestic/international exposure (including EM).  All indexed.  Some individual stocks, but just for fun (although, I have dramatically outperformed the market with my individual holdings).  The remaining <5% is cash and physical bullion - so that I can keep some assets out of the financial system (for a variety of reasons, some crazy and some not so)...and a little dab of inflation-protected fixed income (TIPS, etc.).

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.  This book looks at various asset classes through the lens of real returns (after adjusting for the destructive effect of inflation) over the course of 200+years and convincingly concludes that stocks are actually...wait for it...LESS RISKY than bonds over almost any reasonable period of time...after accounting for inflation.  This is particularly important for the mustachian crowd, as we are concerned with maintaining sufficient purchasing power with our 'stache for the rest of our lives while FIREd (real dollars)...and not the nominal dollars.  The reason for this inflation advantage of stocks is simple.  Companies have the ability to keep up with inflation through price increases, etc. over time.  This rising pricing tide passes through to shareholders, but not bondholders.

  2.  My investing "Bible," The Intelligent Investor, by Ben Graham.  There are a few key points in this book, but the most critical is the recognition that volatility is not your enemy, but is instead your friend.  I am thus dismissive of the academic definitions of risk (beta, standard deviation, etc.).  I love volatility, as (just as some others have mentioned in this thread) it creates opportunities to buy when stocks are "on sale" (when the drunkard Mr. Market is willing to sell you his holdings at bargain prices...only to change his mind when he is sober in ensuing days).  So, because I don't care about volatility, I have no interest in diluting my long-term real return expectations just to reduce the volatility of the nominal value of my portfolio.  I care about long-term real value.

So, for me, given my own circumstances and investing philosophy, my response to the OP's initial question is "yes!"
« Last Edit: October 21, 2021, 09:20:19 PM by w@nker »

Rubic

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Re: Is 100% stocks always the best for early accumulation?
« Reply #45 on: October 22, 2016, 10:17:26 AM »
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

During the 2008 market, I was giving away copies of this book to friends
and family in an attempt to convince them to invest in equities, specifically
Vanguard index funds.  Three people now think I'm brilliant (maybe the only
3 people in the world?) due to the subsequent bull market.

These days I'd recommend JL Collins' "The Simple Path to Wealth".  It
summarizes more succinctly anything I could offer, with less hand waving. ;-)
 

Classical_Liberal

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Re: Is 100% stocks always the best for early accumulation?
« Reply #46 on: October 22, 2016, 11:36:17 AM »
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. 

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.

Radagast

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Re: Is 100% stocks always the best for early accumulation?
« Reply #47 on: October 22, 2016, 12:13:53 PM »
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. 

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.
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.

mathjak107

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Re: Is 100% stocks always the best for early accumulation?
« Reply #48 on: October 22, 2016, 01:18:37 PM »
that is why i run two models . one to eat in the shorter term and one to eat 25-30 years from now . that is all still long term money

lordmetroid

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Re: Is 100% stocks always the best for early accumulation?
« Reply #49 on: October 22, 2016, 03:57:50 PM »
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.
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.

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
« Last Edit: October 22, 2016, 04:02:30 PM by lordmetroid »