5 ms·

Ever since John Bogle created the first index fund about 50 years ago, the advice of simply put your money in, don't try to time the market, and divide between

Ever since John Bogle created the first index fund about 50 years ago, the advice of simply put your money in, don't try to time the market, and divide between an allocation of stocks and bonds based on your risk tolerance has performed far better than anything else. This includes periods where the market has been very over-inflated. If you had the worst possible timing and put your money in around the absolute peak before the 2008 recession, held throughout the crash, and left it in for a while, you would have more than doubled it a little over a decade later. It may be hard to realize, especially at times like this when the market doesn't seem to reflect reality, but when investing on a long time frame the best advice is always simply to put your money in and to not try to time the market. On a long enough time frame, it will all come out in the wash. The key, of course, is "on a long enough time frame". If you think there's a reasonable chance you might need the cash in two or five years, then you should either significantly reduce your exposure to equities like the S&P 500 or eliminate it entirely. The question then, of course, is what do you put your money into? Well, there are plenty of options. While the S&P 500 returns around 9% before inflation, you have a number of options that are lower returns, lower risk. For that, you have the entire spread from a savings account (1% right now) to short term Treasuries (2%ish right now) to various kinds of bonds. The simplest way to get, say, 50% of the reward for 50% of the risk is to have (for example) 50% in SPY and 50% in Treasuries. Whatever you do, good luck, and I highly recommend the Bogleheads forum for good advice on any situation.

throw0101a 6y ago
> The key, of course, is "on a long enough time frame". If you think there's a reasonable chance you might need the cash in two or five years, then you should either significantly reduce your exposure to equities like the S&P 500 or eliminate it entirely. The shorter the timeframe that the money is needed, the higher the allocation to bonds. Vanguard has (in Canada) a bunch of 'all-in-one' ETFs that have as their holdings other ETFs in various asset groups: Canadian equity, US equity, international equity, bonds. Shortly after they were announced, someone back-tested their returns to determine which of the offerings a person should get: > I analyzed hypothetical Vanguard asset allocation ETF performance over the past 20 years ending June 2019, and here’s what I found: > The worst 1- and 2-year periods were negative for all five ETFs.* [i.e., put it in term deposit to at least try to keep up with inflation] > The worst 3-year period was negative for all ETFs except the Conservative Income ETF Portfolio (VCIP), which holds 80% in bonds; even still, VCIP only returned 1%. > The worst 4-year period was negative for all ETFs except VCIP and the Conservative ETF Portfolio (VCNS) [60% bonds]. But these only returned 2.2% and 0.2% respectively. > Looking further out: > If you need the cash in 5–9 years, VCIP or VCNS should be the only Vanguard asset allocation ETFs on your radar. Even the Balanced ETF Portfolio (VBAL) [40% bonds], which allocates 60% to stocks, returned only 0.3% over its worst 9-year period. > If you won’t need the cash for 10–14 years, VBAL could be an appropriate choice, as even its worst 10-year return during this period was around 2%. > If you don’t need the cash for 15–19 years, you could look at a more aggressive ETF, like the Growth ETF Portfolio (VGRO). [20% bonds] > If you’re investing for 20 years or more (and you are comfortable dialing up your portfolio risk to eleven), the All-Equity ETF Portfolio (VEQT) might be right up your alley. [0% bonds, 100% equities] * https://www.canadianportfoliomanagerblog.com/choosing-your-ideal-vanguard-asset-allocation-etf/ https://www.canadianportfoliomanagerblog.com/choosing-your-i... Note: if you're looking at long time-horizons (e.g., retirement in 20 years), and you can take higher risks, does not mean you have to: you need to first determine what your goal is (e.g., how big of a pot of money you need), and then work backwards from there to determine what kind of returns are needed to get there. If you need 'only' 3% returns, it probably is not necessary to take on extra risk to chase after 6%.
- hydroreadsstuff 6y ago
  We are in unprecedented times (Lowest bond yields, highest debt, Crazy P/Es). Back-testing is only so useful. And only 20 years even less. We just had a GDP drop which is the largest since WW2 for some, or since 1929 for the U.S. Look at Japan's stock market index e.g. for what the future could look like. Historically low bond yields: The room for rates to go lower is low. I would suggest to be careful with investing in them. If a rate hike comes eventually, both bonds (depending on maturity) and stocks (see december 2019 S&P 500) will fall. With negative real yields (bond yields - inflation), precious metals and related companies are lot more interesting. Perhaps REITs or some blend of solid dividen-paying companies. Anything that is somewhat inflation resistant. Did you adjust your calculations for inflation? For the S&P 500, the absolute worst-case is 58 years of not being up, I believe. 1929 - 1987. Edit: This ignores dividend reinvestment. It seems to be 1929-1944.
  - throw0101a 6y ago
    > And only 20 years even less. I'm guessing you're in the US. I'm sure you can find papers and articles doing back-testing to the 1920s, which would include the Great Depression. If you can wait long enough, things have always recovered and earned a return. > Did you adjust your calculations for inflation? For the S&P 500, the absolute worst-case is 58 years of not being up, I believe. 1929 - 1987. Not my calculations. That's also assuming that one has zero bonds: for most people, who are saving for retirement, the component of the portfolio that goes into fixed income rises as age approaches 65. What were bonds during that time? Most average people don't have the stomach for 'raw' 100% equity holdings, and so bonds are often present; bonds also allow for having 'dry powder' available for rebalancing. Scenarios like these are why portfolio theory can be complicated: * https://www.investopedia.com/managing-wealth/modern-portfolio-theory-why-its-still-hip/ https://www.investopedia.com/managing-wealth/modern-portfoli... * https://en.wikipedia.org/wiki/Modern_portfolio_theory https://en.wikipedia.org/wiki/Modern_portfolio_theory For good layman treatments on the subject I recommend the works of William J. Bernstein, The Intelligent Asset Allocator, The Four Pillars of Investing, and Rational Expectations: * https://en.wikipedia.org/wiki/William_J._Bernstein https://en.wikipedia.org/wiki/William_J._Bernstein Recent interviews: * https://rationalreminder.ca/podcast/108 https://rationalreminder.ca/podcast/108 (podcast) * https://www.youtube.com/watch?v=haLGx8KlFvk https://www.youtube.com/watch?v=haLGx8KlFvk (same, but video) * https://www.youtube.com/watch?v=3GzkxkOEcWc https://www.youtube.com/watch?v=3GzkxkOEcWc > Historically low bond yields: The room for rates to go lower is low. One does not necessarily buy bonds for returns, but also (perhaps) to manage volatility (which is often used as a proxy to measure risk). And low bonds are not anything new: * https://awealthofcommonsense.com/2020/05/low-bond-returns-are-nothing-new/ https://awealthofcommonsense.com/2020/05/low-bond-returns-ar... And one has to look at the real return of bonds over the decades: yes nominal numbers are low now and were high in the past, but inflation was high in the past as well (e.g., 1980s).
actuator 6y ago
This has been true for the US markets till now but I am always scared to think of a scenario where they go the way of UK markets have done in the last decade. Look at one[1] of the FTSE 100's Index fund returns. They stand at 3.58% annualised, i.e your money is now 1.4x of the original amount. This is considering the fact that we are looking at returns from Aug 2010 levels when the FTSE index was already 20% down from the 2008 peak. So the peaks I see now in Nasdaq actually look very scary to me. Anyway, I think if they decide to go ahead with equity, they should spread it out over a period. [1] https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR06I23&tab=1 https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.asp...
- jefftk 6y ago
  > They stand at 3.58% annualised, i.e your money is now 1.4x of the original amount. Do you have a typo?
  - guenthert 6y ago
    CL-USER> (expt 1.0358 10) 1.4215397
  - mdpye 6y ago
    Annualised so ten years of 3.58% increase, 1.0358^10 = 1.4215
    - jefftk 6y ago
      Thanks! I had missed the reference to "decade" on initial reading.
- owenversteeg 6y ago
  Hmm, is that with dividends reinvested? UK firms tend to pay out higher dividends for various reasons. It seems that with dividends reinvested, you would have made approximately double your money before the crash [0], which took the value down by around 19% today, so you'd end with around 1.62x today in 10 years, nearly exactly 5% annualized including the effects of Corona. That said, I would not make the UK stock market any significant part of my portfolio. It's an island of 0.06 billion people trying to go it alone in the world, under delusions of being a grand colonial power, while its economy has shrank since 2007. If I was trying to _grow_ my money I'd put it elsewhere. While I'm upset with recent US leadership as well, the US has a massive advantage in that it is the world's largest economy and enjoys the results of innovation that you won't see in the UK. [0] https://www.ig.com/en/trading-strategies/what-are-the-average-returns-of-the-ftse-100--200529 https://www.ig.com/en/trading-strategies/what-are-the-averag...
mariojv 6y ago
Aren't short-term treasuries more at 0.2% right now? Looking at yield to maturity here: https://investor.vanguard.com/mutual-funds/profile/VFISX https://investor.vanguard.com/mutual-funds/profile/VFISX

throw0101a 6y ago

> The key, of course, is "on a long enough time frame". If you think there's a reasonable chance you might need the cash in two or five years, then you should either significantly reduce your exposure to equities like the S&P 500 or eliminate it entirely. The shorter the timeframe that the money is needed, the higher the allocation to bonds. Vanguard has (in Canada) a bunch of 'all-in-one' ETFs that have as their holdings other ETFs in various asset groups: Canadian equity, US equity, international equity, bonds. Shortly after they were announced, someone back-tested their returns to determine which of the offerings a person should get: > I analyzed hypothetical Vanguard asset allocation ETF performance over the past 20 years ending June 2019, and here’s what I found: > The worst 1- and 2-year periods were negative for all five ETFs.* [i.e., put it in term deposit to at least try to keep up with inflation] > The worst 3-year period was negative for all ETFs except the Conservative Income ETF Portfolio (VCIP), which holds 80% in bonds; even still, VCIP only returned 1%. > The worst 4-year period was negative for all ETFs except VCIP and the Conservative ETF Portfolio (VCNS) [60% bonds]. But these only returned 2.2% and 0.2% respectively. > Looking further out: > If you need the cash in 5–9 years, VCIP or VCNS should be the only Vanguard asset allocation ETFs on your radar. Even the Balanced ETF Portfolio (VBAL) [40% bonds], which allocates 60% to stocks, returned only 0.3% over its worst 9-year period. > If you won’t need the cash for 10–14 years, VBAL could be an appropriate choice, as even its worst 10-year return during this period was around 2%. > If you don’t need the cash for 15–19 years, you could look at a more aggressive ETF, like the Growth ETF Portfolio (VGRO). [20% bonds] > If you’re investing for 20 years or more (and you are comfortable dialing up your portfolio risk to eleven), the All-Equity ETF Portfolio (VEQT) might be right up your alley. [0% bonds, 100% equities] * https://www.canadianportfoliomanagerblog.com/choosing-your-ideal-vanguard-asset-allocation-etf/ https://www.canadianportfoliomanagerblog.com/choosing-your-i... Note: if you're looking at long time-horizons (e.g., retirement in 20 years), and you can take higher risks, does not mean you have to: you need to first determine what your goal is (e.g., how big of a pot of money you need), and then work backwards from there to determine what kind of returns are needed to get there. If you need 'only' 3% returns, it probably is not necessary to take on extra risk to chase after 6%.

hydroreadsstuff 6y ago
We are in unprecedented times (Lowest bond yields, highest debt, Crazy P/Es). Back-testing is only so useful. And only 20 years even less. We just had a GDP drop which is the largest since WW2 for some, or since 1929 for the U.S. Look at Japan's stock market index e.g. for what the future could look like. Historically low bond yields: The room for rates to go lower is low. I would suggest to be careful with investing in them. If a rate hike comes eventually, both bonds (depending on maturity) and stocks (see december 2019 S&P 500) will fall. With negative real yields (bond yields - inflation), precious metals and related companies are lot more interesting. Perhaps REITs or some blend of solid dividen-paying companies. Anything that is somewhat inflation resistant. Did you adjust your calculations for inflation? For the S&P 500, the absolute worst-case is 58 years of not being up, I believe. 1929 - 1987. Edit: This ignores dividend reinvestment. It seems to be 1929-1944.
- throw0101a 6y ago
  > And only 20 years even less. I'm guessing you're in the US. I'm sure you can find papers and articles doing back-testing to the 1920s, which would include the Great Depression. If you can wait long enough, things have always recovered and earned a return. > Did you adjust your calculations for inflation? For the S&P 500, the absolute worst-case is 58 years of not being up, I believe. 1929 - 1987. Not my calculations. That's also assuming that one has zero bonds: for most people, who are saving for retirement, the component of the portfolio that goes into fixed income rises as age approaches 65. What were bonds during that time? Most average people don't have the stomach for 'raw' 100% equity holdings, and so bonds are often present; bonds also allow for having 'dry powder' available for rebalancing. Scenarios like these are why portfolio theory can be complicated: * https://www.investopedia.com/managing-wealth/modern-portfolio-theory-why-its-still-hip/ https://www.investopedia.com/managing-wealth/modern-portfoli... * https://en.wikipedia.org/wiki/Modern_portfolio_theory https://en.wikipedia.org/wiki/Modern_portfolio_theory For good layman treatments on the subject I recommend the works of William J. Bernstein, The Intelligent Asset Allocator, The Four Pillars of Investing, and Rational Expectations: * https://en.wikipedia.org/wiki/William_J._Bernstein https://en.wikipedia.org/wiki/William_J._Bernstein Recent interviews: * https://rationalreminder.ca/podcast/108 https://rationalreminder.ca/podcast/108 (podcast) * https://www.youtube.com/watch?v=haLGx8KlFvk https://www.youtube.com/watch?v=haLGx8KlFvk (same, but video) * https://www.youtube.com/watch?v=3GzkxkOEcWc https://www.youtube.com/watch?v=3GzkxkOEcWc > Historically low bond yields: The room for rates to go lower is low. One does not necessarily buy bonds for returns, but also (perhaps) to manage volatility (which is often used as a proxy to measure risk). And low bonds are not anything new: * https://awealthofcommonsense.com/2020/05/low-bond-returns-are-nothing-new/ https://awealthofcommonsense.com/2020/05/low-bond-returns-ar... And one has to look at the real return of bonds over the decades: yes nominal numbers are low now and were high in the past, but inflation was high in the past as well (e.g., 1980s).

actuator 6y ago

This has been true for the US markets till now but I am always scared to think of a scenario where they go the way of UK markets have done in the last decade. Look at one[1] of the FTSE 100's Index fund returns. They stand at 3.58% annualised, i.e your money is now 1.4x of the original amount. This is considering the fact that we are looking at returns from Aug 2010 levels when the FTSE index was already 20% down from the 2008 peak. So the peaks I see now in Nasdaq actually look very scary to me. Anyway, I think if they decide to go ahead with equity, they should spread it out over a period. [1] https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR06I23&tab=1 https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.asp...

jefftk 6y ago
> They stand at 3.58% annualised, i.e your money is now 1.4x of the original amount. Do you have a typo?
- guenthert 6y ago
  CL-USER> (expt 1.0358 10) 1.4215397
- mdpye 6y ago
  Annualised so ten years of 3.58% increase, 1.0358^10 = 1.4215
  - jefftk 6y ago
    Thanks! I had missed the reference to "decade" on initial reading.
owenversteeg 6y ago
Hmm, is that with dividends reinvested? UK firms tend to pay out higher dividends for various reasons. It seems that with dividends reinvested, you would have made approximately double your money before the crash [0], which took the value down by around 19% today, so you'd end with around 1.62x today in 10 years, nearly exactly 5% annualized including the effects of Corona. That said, I would not make the UK stock market any significant part of my portfolio. It's an island of 0.06 billion people trying to go it alone in the world, under delusions of being a grand colonial power, while its economy has shrank since 2007. If I was trying to _grow_ my money I'd put it elsewhere. While I'm upset with recent US leadership as well, the US has a massive advantage in that it is the world's largest economy and enjoys the results of innovation that you won't see in the UK. [0] https://www.ig.com/en/trading-strategies/what-are-the-average-returns-of-the-ftse-100--200529 https://www.ig.com/en/trading-strategies/what-are-the-averag...

mariojv 6y ago

Aren't short-term treasuries more at 0.2% right now? Looking at yield to maturity here: https://investor.vanguard.com/mutual-funds/profile/VFISX https://investor.vanguard.com/mutual-funds/profile/VFISX