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Word of caution to anybody reading this, GMO has been saying this for years...and they will be right eventually of course...but it doesn’t mean you should do an

Word of caution to anybody reading this, GMO has been saying this for years...and they will be right eventually of course...but it doesn’t mean you should do anything different with your money. A tale of the worlds worst market timer: https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market...

dash2 6y ago
The problem with the story is it works if you invest in stocks and don't use margin. Lots of people are playing options and using margin. They risk getting called, and at that point they don't have the ability to buy-and-hold.
- pembrook 6y ago
  So maybe don’t buy speculative zero-sum option contracts on margin then? Play stupid games, win stupid prizes.
  - emteycz 6y ago
    There's nothing zero sum about it.
    - pembrook 6y ago
      If used as part of a holistic risk-hedging strategy, they aren’t necessarily zero sum from a portfolio theory perspective. But purchased on their own as a stand-alone bet, all options and futures contracts are by definition zero-sum games. So 99.999% of the retail investors (robinhood et al.) trading options are playing a zero sum game. Hence why I didn’t feel the need to elaborate.
      - seibelj 6y ago
        It isn’t like a coin flip though. You can sell the option before expiration. And the seller of the option is harvesting premiums for their own reasons. The whole game is much more complex. I haven’t thought about whether it’s zero sum in super great detail but my gut says it isn’t.
      - emteycz 6y ago
        Not at all. There is much more to capital markets than just betting on a number without any meaning. There is something under that number. Maybe you're confusing options and "binary options"?
        pembrook 6y ago
        Again, all options are a zero sum game. No value is created or destroyed (outside of trading fees), just transferred between parties. I think you might be confused by the name "binary options." The word "binary" doesn't refer to the fact that they are specifically zero sum. This doesn't need to be called out, because again, all options and futures are zero sum. The "binary" qualifier refers to the fact that they result in "yes/no" outcome. Did the thing you bet on happen? Yes? You win. No? you lose everything.
        emteycz 6y ago
        I know what options are, and I know what binary options are. It's not true that no value is created or destroyed on transfer. Transferring or obtaining the asset might be extremely valuable to someone. Market conditions change. And so on.
        pgwhalen 6y ago
        I’m not the first person on HN to say it, but I’ll say it here - by this definition of zero sum, are not all economic transactions zero sum?
        pembrook 6y ago
        No. The simple fact that you can create value for others without stealing that value from someone else means the economy is positive sum. If all economic transactions were zero sum, then growth would be impossible. Things like GDP, the stock market, etc grow every single year on average because they are positive sum. That’s why it’s most smart to just buy-and-hold boring index funds. You’re taking advantage of the positive sum nature of all business in aggregate, instead of playing the zero-sum game of short term trading against other market participants.
  - quickthrowman 6y ago
    Most brokers don’t let you use margin to buy options. IB has portfolio margin for options, but most retail brokers don’t.
DennisP 6y ago
The article actually talks about their record: > in late 1997, as the S&P 500 passed its previous 1929 peak of 21x earnings, we rapidly sold down our discretionary U.S. equity positions then watched in horror as the market went to 35x on rising earnings. We lost half our Asset Allocation book of business but in the ensuing decline we much more than made up our losses. For the average investor it might be overly bold to step out of the stock market entirely in times like these. However, there's nothing wrong with moving to a more conservative allocation that will do better in crashes, but still perform reasonably well if you hold it that way forever. A great place to start is the sample portfolios at portfoliocharts.com. If you're 25 and saving to retire at 65 then maybe don't worry about it, but if you're 50 that's another matter.
- throw0101a 6y ago
  > However, there's nothing wrong with moving to a more conservative allocation that will do better in crashes, but still perform reasonably well if you hold it that way forever. Rates of return are not the only reason to hold an particular type of asset, which is why bonds may be worth having even if yields are low: * https://awealthofcommonsense.com/2020/08/why-would-anyone-own-bonds-right-now/ https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...
  - DennisP 6y ago
    Yep exactly. More bonds, more foreign stocks, even gold can help smooth out returns.
- ProjectArcturis 6y ago
  The article that GMO wrote puts the best spin on their record. The actual performance can be seen here: https://finance.yahoo.com/quote/GMWAX?p=GMWAX https://finance.yahoo.com/quote/GMWAX?p=GMWAX Going back to its inception in 1996, their global allocation mutual fund has returned roughly 15%. Not annualized, 15% TOTAL during a period when the S&P tripled. GMO are worthless as advisors.
  - gruez 6y ago
itsoktocry 6y ago
>A tale of the worlds worst market timer: https://awealthofcommonsense.com/2014/02/worlds-worst-market https://awealthofcommonsense.com/2014/02/worlds-worst-market... I see this posted from time to time, but the assumptions are kind of silly. A huge portion of the "miraculous" returns come from the fact that this fictional person was able to put an entire year's worth of salary into the market in one go, 50 years ago. In 1970 the average salary was about $6,000, but he managed to save one third each year to invest? So, sure it demonstrates the power of compounding. But, to me, an alternative lesson is that you can be an incredibly diligent saver and, through sheer bad luck, have barely enough to retire. I mean, it's not like $1MM in retirement money means "set for life" anymore.
- Closi 6y ago
  > It's not like $1MM in retirement money means "set for life" anymore. It absolutely does, unless you are planning on living in a mansion eating nothing but caviar.
  - hcknwscommenter 6y ago
    ??? I think that is highly dependent on housing costs and how early you retire. If you have kids who are not in college (and live where college is not free) and have not paid off your house, 1MM in retirement is a woefully small amount of money (I think?). At 5% withdrawal (risky), you are living on 50K a year, 30K post-tax. That's not even going to cover your mortgage in many cases, much less other living costs.
    - valuearb 6y ago
      Uh, if you have kids not yet in college, how are you retiring?
    - Closi 6y ago
      1 million is a woefully small amount of money to retire with? HN needs to live in the real world and learn what most people retire with
throw0101a 6y ago
The best thing to do, given that most people's largest saving goal in life is retirement, is to put away a little away every month. Sitting on the sidelines will give you absolutely abysmal long-term returns, even if you were omniscient and knew ahead of time when the crash(es) would come: * https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co... If you know when the peak and the trough will be, then you can jump in an out. The thing is by missing the worst days you tend to miss the best days: * https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-days-miss-the-best-days/ https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...

dash2 6y ago

The problem with the story is it works if you invest in stocks and don't use margin. Lots of people are playing options and using margin. They risk getting called, and at that point they don't have the ability to buy-and-hold.

pembrook 6y ago
So maybe don’t buy speculative zero-sum option contracts on margin then? Play stupid games, win stupid prizes.
- emteycz 6y ago
  There's nothing zero sum about it.
  - pembrook 6y ago
    If used as part of a holistic risk-hedging strategy, they aren’t necessarily zero sum from a portfolio theory perspective. But purchased on their own as a stand-alone bet, all options and futures contracts are by definition zero-sum games. So 99.999% of the retail investors (robinhood et al.) trading options are playing a zero sum game. Hence why I didn’t feel the need to elaborate.
    - seibelj 6y ago
      It isn’t like a coin flip though. You can sell the option before expiration. And the seller of the option is harvesting premiums for their own reasons. The whole game is much more complex. I haven’t thought about whether it’s zero sum in super great detail but my gut says it isn’t.
    - emteycz 6y ago
      Not at all. There is much more to capital markets than just betting on a number without any meaning. There is something under that number. Maybe you're confusing options and "binary options"?
      - pembrook 6y ago
        Again, all options are a zero sum game. No value is created or destroyed (outside of trading fees), just transferred between parties. I think you might be confused by the name "binary options." The word "binary" doesn't refer to the fact that they are specifically zero sum. This doesn't need to be called out, because again, all options and futures are zero sum. The "binary" qualifier refers to the fact that they result in "yes/no" outcome. Did the thing you bet on happen? Yes? You win. No? you lose everything.
        emteycz 6y ago
        I know what options are, and I know what binary options are. It's not true that no value is created or destroyed on transfer. Transferring or obtaining the asset might be extremely valuable to someone. Market conditions change. And so on.
        pgwhalen 6y ago
        I’m not the first person on HN to say it, but I’ll say it here - by this definition of zero sum, are not all economic transactions zero sum?
        pembrook 6y ago
        No. The simple fact that you can create value for others without stealing that value from someone else means the economy is positive sum. If all economic transactions were zero sum, then growth would be impossible. Things like GDP, the stock market, etc grow every single year on average because they are positive sum. That’s why it’s most smart to just buy-and-hold boring index funds. You’re taking advantage of the positive sum nature of all business in aggregate, instead of playing the zero-sum game of short term trading against other market participants.
- quickthrowman 6y ago
  Most brokers don’t let you use margin to buy options. IB has portfolio margin for options, but most retail brokers don’t.

DennisP 6y ago

The article actually talks about their record: > in late 1997, as the S&P 500 passed its previous 1929 peak of 21x earnings, we rapidly sold down our discretionary U.S. equity positions then watched in horror as the market went to 35x on rising earnings. We lost half our Asset Allocation book of business but in the ensuing decline we much more than made up our losses. For the average investor it might be overly bold to step out of the stock market entirely in times like these. However, there's nothing wrong with moving to a more conservative allocation that will do better in crashes, but still perform reasonably well if you hold it that way forever. A great place to start is the sample portfolios at portfoliocharts.com. If you're 25 and saving to retire at 65 then maybe don't worry about it, but if you're 50 that's another matter.

throw0101a 6y ago
> However, there's nothing wrong with moving to a more conservative allocation that will do better in crashes, but still perform reasonably well if you hold it that way forever. Rates of return are not the only reason to hold an particular type of asset, which is why bonds may be worth having even if yields are low: * https://awealthofcommonsense.com/2020/08/why-would-anyone-own-bonds-right-now/ https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...
- DennisP 6y ago
  Yep exactly. More bonds, more foreign stocks, even gold can help smooth out returns.
ProjectArcturis 6y ago
The article that GMO wrote puts the best spin on their record. The actual performance can be seen here: https://finance.yahoo.com/quote/GMWAX?p=GMWAX https://finance.yahoo.com/quote/GMWAX?p=GMWAX Going back to its inception in 1996, their global allocation mutual fund has returned roughly 15%. Not annualized, 15% TOTAL during a period when the S&P tripled. GMO are worthless as advisors.
- gruez 6y ago

itsoktocry 6y ago

>A tale of the worlds worst market timer: https://awealthofcommonsense.com/2014/02/worlds-worst-market https://awealthofcommonsense.com/2014/02/worlds-worst-market... I see this posted from time to time, but the assumptions are kind of silly. A huge portion of the "miraculous" returns come from the fact that this fictional person was able to put an entire year's worth of salary into the market in one go, 50 years ago. In 1970 the average salary was about $6,000, but he managed to save one third each year to invest? So, sure it demonstrates the power of compounding. But, to me, an alternative lesson is that you can be an incredibly diligent saver and, through sheer bad luck, have barely enough to retire. I mean, it's not like $1MM in retirement money means "set for life" anymore.

Closi 6y ago
> It's not like $1MM in retirement money means "set for life" anymore. It absolutely does, unless you are planning on living in a mansion eating nothing but caviar.
- hcknwscommenter 6y ago
  ??? I think that is highly dependent on housing costs and how early you retire. If you have kids who are not in college (and live where college is not free) and have not paid off your house, 1MM in retirement is a woefully small amount of money (I think?). At 5% withdrawal (risky), you are living on 50K a year, 30K post-tax. That's not even going to cover your mortgage in many cases, much less other living costs.
  - valuearb 6y ago
    Uh, if you have kids not yet in college, how are you retiring?
  - Closi 6y ago
    1 million is a woefully small amount of money to retire with? HN needs to live in the real world and learn what most people retire with

throw0101a 6y ago

The best thing to do, given that most people's largest saving goal in life is retirement, is to put away a little away every month. Sitting on the sidelines will give you absolutely abysmal long-term returns, even if you were omniscient and knew ahead of time when the crash(es) would come: * https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co... If you know when the peak and the trough will be, then you can jump in an out. The thing is by missing the worst days you tend to miss the best days: * https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-days-miss-the-best-days/ https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...