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Thanks. It sounds like you flipped the script and basically endorsed market timing based on the CAPE in that scenario. Maybe I’m misreading.

by sfblah 6y ago

throw0101a 6y ago
Asset allocation and portfolio management is about managing risk for the returns that are desired and/or needed. If I can achieve my (retirement) goals with only 4% returns, then why would I take on extra risk to get 6%? If I have 60% equities and 40% bonds to achieve my 4% returns, and equities go crazy, such that I've earned a pile of money in that portion of the portfolio such that they now make up (e.g.) 70%, then selling some off to rebalance is not about market timing, but rather about managing risk and not having too many financial eggs in a particular basket. The Nikkei 225 was 6700 in January 1980: * https://fred.stlouisfed.org/series/NIKKEI225 https://fred.stlouisfed.org/series/NIKKEI225 It had doubled by February 1986: you should have been taking money off the table as it went up. Take your profits and put it in other places: bonds, international. Further, as the valuations/CAPE went up, you should be expecting future returns to go down. By the time the Nikkei hit a CAPE of 50, that means expected returns would be 2%: is there any place where one could have put one's money that earned >2%? When the Nikkei hit a CAPE of 94, that means expected returns were ~1%. Japan 10-year bond were making 5% at the same time: * https://fred.stlouisfed.org/series/IRLTLT01JPM156N https://fred.stlouisfed.org/series/IRLTLT01JPM156N A bunch of money invested in Japan, in 1990, with a 30% JP equity allocation, a 40% JP bond allocation, and a 30% international equity allocation, would have funded a thirty year retirement using the 4% rule just fine: * https://www.gocurrycracker.com/lessons-from-japans-lost-decades/ https://www.gocurrycracker.com/lessons-from-japans-lost-deca... Why would anyone be investing 100% anywhere? Regardless of it being the Japan, US (S&P 500, NASDAQ, Russell 3000, etc), or any other other area/country? Harry Markowitz, who won the Economics Nobel for portfolio theory, said that diversification is the only free lunch in finance. * https://en.wikipedia.org/wiki/Harry_Markowitz https://en.wikipedia.org/wiki/Harry_Markowitz And answer to the "but Japan" quip is: diversification.

Thanks. It sounds like you flipped the script and basically endorsed market timing based on the CAPE in that scenario. Maybe I’m misreading.

by sfblah 6y ago

Thanks. It sounds like you flipped the script and basically endorsed market timing based on the CAPE in that scenario. Maybe I’m misreading.

throw0101a 6y ago

Asset allocation and portfolio management is about managing risk for the returns that are desired and/or needed. If I can achieve my (retirement) goals with only 4% returns, then why would I take on extra risk to get 6%? If I have 60% equities and 40% bonds to achieve my 4% returns, and equities go crazy, such that I've earned a pile of money in that portion of the portfolio such that they now make up (e.g.) 70%, then selling some off to rebalance is not about market timing, but rather about managing risk and not having too many financial eggs in a particular basket. The Nikkei 225 was 6700 in January 1980: * https://fred.stlouisfed.org/series/NIKKEI225 https://fred.stlouisfed.org/series/NIKKEI225 It had doubled by February 1986: you should have been taking money off the table as it went up. Take your profits and put it in other places: bonds, international. Further, as the valuations/CAPE went up, you should be expecting future returns to go down. By the time the Nikkei hit a CAPE of 50, that means expected returns would be 2%: is there any place where one could have put one's money that earned >2%? When the Nikkei hit a CAPE of 94, that means expected returns were ~1%. Japan 10-year bond were making 5% at the same time: * https://fred.stlouisfed.org/series/IRLTLT01JPM156N https://fred.stlouisfed.org/series/IRLTLT01JPM156N A bunch of money invested in Japan, in 1990, with a 30% JP equity allocation, a 40% JP bond allocation, and a 30% international equity allocation, would have funded a thirty year retirement using the 4% rule just fine: * https://www.gocurrycracker.com/lessons-from-japans-lost-decades/ https://www.gocurrycracker.com/lessons-from-japans-lost-deca... Why would anyone be investing 100% anywhere? Regardless of it being the Japan, US (S&P 500, NASDAQ, Russell 3000, etc), or any other other area/country? Harry Markowitz, who won the Economics Nobel for portfolio theory, said that diversification is the only free lunch in finance. * https://en.wikipedia.org/wiki/Harry_Markowitz https://en.wikipedia.org/wiki/Harry_Markowitz And answer to the "but Japan" quip is: diversification.