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You say you don't like hold inflation and then suggest 20% cash levels...hold no cash. Also, and this is something that I have say every time these days: hold

You say you don't like hold inflation and then suggest 20% cash levels...hold no cash. Also, and this is something that I have say every time these days: hold more quality stocks, and diversify geographically. The mistake with not holding quality stocks is a weird one. I worked in financial advice (research, not an adviser), and there was this adviser who was 20-30% in EM stocks...the logic being back then (in ~2012, before EMs really started underperforming) that you want to own volatile stuff because volatile stuff outperforms in the LT. Now this isn't true, I knew this wasn't true then but people automatically think that volatility=returns. It doesn't, the opposite is true. Volatile, high-beta stuff will underperform. The point of my example is that even people who should know better don't know this. Everyone owns too much US tech. If you are 100% equity and leverage constrained then geographic diversification is a genuine free lunch. Maybe we are seeing some secular change in equity ownership akin to the financialisation of savings in the 80/90s...we are not...and even if we are, you can own other countries going through the same change, no reduction in upside, more diversification. Also, you should consider options. No need to do anything crazy like selling options but volatility is, generally, pretty cheap and a way to reduce your downside without reducing upside (in fact, you have actually been paid to reduce risk...people really love picking up quarters in front of steamrollers...let's assume this won't continue though). This isn't for everyone though, some people don't care about volatility, and this strategy is only very profitable if you can lever up your beta (although I know a fund that finished the year up 20% unlevered, running zero market risk because they had a put-buying strategy). There are very few ways to reduce risk in this environment, options is one (bonds are another, you need to go quite far out to hedge out equity properly though). Also, the long-term real return from stocks is ~300bps. I think you say 6-7%, that is really best-case imo (it is not self-evident, to me at least, that the US just hockey-sticks forever).

omgwtfbyobbq 6y ago
It seems like a real 6+% has been possible over the past half century. https://thume.ca/indexView/ https://thume.ca/indexView/ Granted, it could be that the SP500 or the US over the past half century is not representative of equities over a longer time period, like a century, but in that case I don't know what is.
- hogFeast 6y ago
  Yes, all of those things aren't representative. I have no idea why people use the last fifty years, that is roughly your investing life-time, and you are using that as your only sample. That isn't investing, that is rolling the dice and hoping to get lucky. Dimson, Marsh, Staunton is the only representative long-term study of global returns. One, that sample still has selection bias (a couple of years ago, they found an issue with calculations for a market that went to zero, that knocked 10% off their estimates). Two, very bad events happen infrequently so you have a sample of a few thousand years across many countries: German hyperinflation is one year, Austro-Hungary is two years, China is a few years, etc. So there isn't a huge sample of very bad things given that capital markets have existed inconsistently for two centuries only. Three, there is a discontinuity between how finance professors look at the past, how investors today percieve the past, and how the past actually was. As an example, after WW2 equities did very well...one problem, the US had to issue a tons of govt debt, and forced everyone to own bonds. The sample doesn't really show that most people couldn't own equities. Equally, transaction costs are often not well understood (i.e. the assumption is that you can produce a market-cap weighted portfolio, and these effects are correlated to returns: when you can't produce a cap-weighted portfolio, returns are high because participation is low). But yes, their number is ~300bps real...I would emphasize though that you should actually read about market history, and understand the risks.
  - omgwtfbyobbq 6y ago
    Are you sure about that? Summary Edition Credit Suisse Global Investment Returns Yearbook 2020, by Dimson, Marsh, and Staunton have (page 23) world mean real returns from 1900 to 2019 for equities at either 5.2% or 6.6%, depending on whether you look geometric or arithmetic mean. I could see 300bps real for a mix of equities and bonds, but equities alone appear to be much higher.
    - hogFeast 6y ago
      I would Google Equity Risk Premium. I believe your estimate is correct but that assumes a risk-free rate of more than zero. The risk-free rate is close to zero, which is why DSM forecast ERP of 350bps (and I believe their data still has survivorship bias). Also, remember that we are quite near the top in a market that is 50-60% of world share, so I would be conservative about projections when the end year is favourable (as an example, Stocks for the Long Run had a very big estimate of long-term returns in the late 90s...that fell in the subsequent years).

omgwtfbyobbq 6y ago

It seems like a real 6+% has been possible over the past half century. https://thume.ca/indexView/ https://thume.ca/indexView/ Granted, it could be that the SP500 or the US over the past half century is not representative of equities over a longer time period, like a century, but in that case I don't know what is.

hogFeast 6y ago
Yes, all of those things aren't representative. I have no idea why people use the last fifty years, that is roughly your investing life-time, and you are using that as your only sample. That isn't investing, that is rolling the dice and hoping to get lucky. Dimson, Marsh, Staunton is the only representative long-term study of global returns. One, that sample still has selection bias (a couple of years ago, they found an issue with calculations for a market that went to zero, that knocked 10% off their estimates). Two, very bad events happen infrequently so you have a sample of a few thousand years across many countries: German hyperinflation is one year, Austro-Hungary is two years, China is a few years, etc. So there isn't a huge sample of very bad things given that capital markets have existed inconsistently for two centuries only. Three, there is a discontinuity between how finance professors look at the past, how investors today percieve the past, and how the past actually was. As an example, after WW2 equities did very well...one problem, the US had to issue a tons of govt debt, and forced everyone to own bonds. The sample doesn't really show that most people couldn't own equities. Equally, transaction costs are often not well understood (i.e. the assumption is that you can produce a market-cap weighted portfolio, and these effects are correlated to returns: when you can't produce a cap-weighted portfolio, returns are high because participation is low). But yes, their number is ~300bps real...I would emphasize though that you should actually read about market history, and understand the risks.
- omgwtfbyobbq 6y ago
  Are you sure about that? Summary Edition Credit Suisse Global Investment Returns Yearbook 2020, by Dimson, Marsh, and Staunton have (page 23) world mean real returns from 1900 to 2019 for equities at either 5.2% or 6.6%, depending on whether you look geometric or arithmetic mean. I could see 300bps real for a mix of equities and bonds, but equities alone appear to be much higher.
  - hogFeast 6y ago
    I would Google Equity Risk Premium. I believe your estimate is correct but that assumes a risk-free rate of more than zero. The risk-free rate is close to zero, which is why DSM forecast ERP of 350bps (and I believe their data still has survivorship bias). Also, remember that we are quite near the top in a market that is 50-60% of world share, so I would be conservative about projections when the end year is favourable (as an example, Stocks for the Long Run had a very big estimate of long-term returns in the late 90s...that fell in the subsequent years).