Proud Member Of
Random Roger
© 2009 | Gadget Theme Blogger Template
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
14 comments:
Roger: Technical: The audio seemed out of synch.
The following study has been resonating with me. I've referenced it here before, but in light of the conversation about "expected returns" and "long haul investing" I wanted to refresh it as a topic.
I'm placing the abstract here, as well as a link for any who wish to view it. I think that it would make a great blog conversation should you wish to tackle it.
Reading the study causes me to question the assumption about long term horizons and expected performance. I don't offer this up to be curmudgeonly--not in the least--but rather to invite conversation.
http://tinyurl.com/35mwe
Abstract:
We address the tendency of many investors to overestimate the rewards and underestimate the risks of investing in stocks over the long term - that is, investors' irrational optimism. In particular, we examine the widely held belief that stocks are a "safe" investment for the long run. The probability of experiencing a real loss on equities depends on the expected real return and standard deviation of stocks. Judgments about the future magnitude of these two parameters typically involve extrapolating from history. We use a global database of real equity returns from 16 countries during the 103-year period from 1900 through 2002 to confront the optimism of investors with the reality of history.
Since 1900, the worldwide real return on equities averaged close to 5 percent a year (before costs, fees, and taxes). This is appreciably lower than is frequently quoted from historical averages, a difference that arises because we use a longer time frame than other studies and adopt a global focus. Prior views on the long-run safety of equities have been overly influenced by the experience of the United States. Furthermore, the US evidence that, over the long haul, stocks have beaten inflation over all 20-year periods is based on relatively few nonoverlapping observations and is hence subject to large sampling error.
To counteract this dependency on projections of the US experience, we examine the histories of other countries. We find only three non-US equity markets (with a fourth on the borderline) that never experienced a shortfall in real returns over a 20-year period. The worst 20-year real returns of 11 countries were negative. Historically, in 6 of the 16 countries, investors would need to have waited more than 50 years to be assured of a positive return.
We also analyze the future shortfall risk of an equity portfolio. The base case for the projections is a worldwide historical volatility level of 20 percent and mean real return of 5 percent, and we also examine a lower return of 4 percent. The projected shortfall risk exceeds the historical risk of shortfall - partly because of the lower assumed real returns, and partly because, even though volatility was projected to be the same as in the past, the shortfall analysis focuses on the full range of possible future returns rather than a single historical outcome. By construction, historical returns converged on long-term realized performance, but the forward-looking analysis shows that there is always risk from investing in volatile securities.
Although the probable rewards from equity investment are attractive, stocks did not and cannot offer a guaranteed superior performance over the investment horizon of most investors. Furthermore, their prospective returns are lower than many investors project, whereas their risk is higher than many investors appreciate. Investors who assume that favorable equity returns can be relied on in the long term or that stocks are safe so long as they are held for 20 years are optimists. Their optimism is irrational.
Roger,
I am sure you have recently answered this question, But I do not remember it, so please answer again. Are you up for this year?? I beleive most of the experts would say they are at B/E point now? What do YOU see the Dow and Nasdaq ending 2007 at and what do YOU see for the 1st 1/2 of 2008 for the Dow and Nasdaq??
Roger,
I use various software including Vector Vest and High Growth Stock Investing to analyze the market. VV appears to be near a buy signal on the market as the lows based upon its three technical indicators (Market timing, Relative Timing and Buy/Sell Ratio of its 8000 stock universe) have coincided with prior lows over the past ten years. These indicators are near a turning point which could come any day if the market rises.
My point being that you indicated that you added to your short position on the 23rd. You probably are getting in at just the wrong time, so be very careful here. I have been investing for over 45 years and have written a few books and articles for financial/technical magazines as well as authored "All About Market Timing." I wish you the best.
lesmasonson@yahoo.com
We have been talking about benchmarking a couple times. If we are realistic we probably should use a world index(75% CWI 25% SPY for example) to reflect that US economy is only about 1/4 of the world economy). However, I do see one problem and that is huge one. Most investors and professionals are likely to be below par using this new benchmark!
Leisa, that would be a good talking point.
Anon 8:31, are you the same person who has asked twice in the last few days? It seems like it. click here for the last time I answered this.
Les, any decision anyone makes could turn out to be right or wrong. As far the indicator you cite, for every indicator that says we are at a low there is another that says a bear has started. I'm not crystal clear on your point.
The benchmarking debate has come up more times that one could shake a stick at. There are plenty of justification for all sorts of different benchmarks.
Good video Roger.
Here's the URL for anyone who wants check out weekly updates of my models.
http://www.regimenia.com/
10% is a widely accepted long-term, nominal equity return but Crestmont Research's tables are a bit closer to the article Leisa cites, showing nominal (non-inflation, non-tax adjusted) equity returns more commonly in the range of 6-8% over the past century (http://tinyurl.com/yzzot6): Definitely more up periods than down but a 'super-sized' up period such as 1984-2000 during which most of us 'grew up' is not common.
Note: tax adjusted, real (inflation adjusted) equity returns are typically in the 2-4% range over the past century according to the Crestmont tables.
The time period over which a person invests with consequence, that is with a significant impact on ending portfolio size, is obviously not as long as the total investing project overall so how and when one goes about diversifying clearly requires some serious thought: Possibly not much point in worrying about it early on in many cases but the issue must become increasingly pressing over time. For example, someone who develops the habit of saving and dollar cost averages into a couple low-cost index funds (domestic and international say) is certainly doing the right thing but putting that process on automatic pilot carries some risk even if the investor is lucky enough to be doing that during a super-sized up move; e.g., as time goes on their DCA contribution becomes an increasingly small percentage of the total pie invested and eventually has little appreciable impact (unless increased proportionally) and a single bad period late in the game can take the much larger accumulated portfolio down sufficiently to effectively wipe out a decade or more of saving earlier in the game.
As both a tactical and strategic matter I could not, for example, accept Roger's hypothesized 25-30% draw-down because the risk I would have to take on in order to gain the 33-42% necessary to return my portfolio to break even would be too great over the time span in which I would have to accomplish that task; i.e., I would have to accept the loss as effectively 'permanent.' I do not refer to market benchmarks any more, my touchstone is positive, real total return.
We've talked a lot about diversification -- how broadly the notion can be construed beyond financial assets and their correlations -- and time has always been implicit in those discussions but never, I think, fully addressed; perhaps in part because it invokes the shibboleth of 'timing' and the entirely artificial and misleading separation between trading and investing that frequently follows that invocation. Whatever one feels about the subject of timing (I believe every investor engages in timing even if they only DCA when they contribute to their 401k and then reverse DCA those contributions during retirement) it's just another aspect of diversification: Just as an investor may seek an asset class not correlated with another so also may they wish to increase or reduce exposure to that asset class (or classes) over time. There are probably nearly as many ways to do that as there are individual investors if one only looks at the trees.
TomK, thanks for setting that up; now I can gain some comfort when I see a well thought-out system agree with my own conclusions and, probably even more usefully, become uncomfortable when it doesn't agree.
Roger, thank you for addressing my comment about "riding it out" in such great detail.
The only thing I would add is a reminder to people that there is so, so much more than the S&P 500, which, along with the NASDAQ, is what everyone seems to fixate on when discussing the 2000 crash.
A common tendency is to automatically allocate the vast majority of your money to US assets. This makes little sense to me, since such a portfolio is not hedged against US recession or inflation - for such an investor, events that hurt your investments will also directly impact your wages, home prices, or cost of living at the same time.
Forget decoupling... as long as all gobal stock, bond, real estate and commodities markets don't go down at the same time and to the same extent as the S&P 500, a globally diversified buy-and-holder will still probably do better than S&P 500 even during a worst-case US bear market.
One consequence of selecting a benchmark based on the entire world is that sector weighings of world index will be different from the S&P 500. I would assume the materials will be higher in world vs US, just to name one. If you are a bottom-up kind of investor your world allocation will be different from a US allocation. Another consequence of a world allocation wiil be better returns for the past 1,3 and 5 years. My back of the envelop calculations show world allocation(75& VGTSX/25% VFINX) generated returns: 12, 16.1 18.3 and 20 (TYD,1, 3, 5 yr, in %)vs 3,4.3, 9, and 11% for the S&P 500.
jag, you are now moving the conversation toward the issue of homeward bias.
This becomes important for more than just during a bear market.
I am reacting like a deer in headlights with a few of these ever-so-long posts.
When the stock market does not go your way, it is time again to assess a 100% equity strategy. I do not think that is diversified regardless of allocation.
I gave up on verbose authors and proclaimed "experts" on the stock market years ago, unless it is for humorous reading of their proclamations years after they had been proven wrong. I have two Master's Degrees, but my view is that direct observation and common sense trumps the intellectual. That view has served me well over several decades.
Save 20% of what you earn, marry correctly the first time, worship a God other than yourself and invest in a holistic variety of investments you understand. I prefer income producing real estate along with stocks and bonds. You may prefer palm oil plantations - it matters not if you understand what you are investing in.
Money should not dictate your emotions. Get a life, if it does.
Roger: I enjoy your blog, and I appreciate the time and effort you spend to provide interesting topics while working ~75 hours a week.
Part of the reason I keep returning to the blog is the comments sections. Thanks to Leisa, Tom K, RW and T, to name a few, for the many insightful and thought provoking comments. The comments posted this weekend were exceptional.
Finally, I am glad to see the hecklers have left. Not sure if they left voluntarily or were politely excluded, but either way, good riddance.
Roger,
Great video post this week. Also insightful comments.
Anyone new to investing has to understand the time period of Jan 1966 to Oct 1982. Too many people focus on what happened after that.
The longer your time horizon, the better...
Post a Comment