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How to invest without knowing the future
- davidw 5y agoStill pretty happy with VTSAX.
- nly 5y agoInteresting that the author assumes that US equity dominance will continue. The US has about 60% of the global investable public equity market by market cap but only 25% of global GDP. The US public stock market is also at the highest valuation, by any measure you can come up with, since 1929. I personally wouldn't be undiversified
- jwmerrill 5y ago> Interesting that the author assumes that US equity dominance will continue. The author does not assume this—rather this is held up as an assumption that might be wrong. The article is structured as a list of 5 assumptions that would be tempting to make but could be incorrect, and this is one of them.
- victor106 5y agoThanks. I was a little confused what kind of argument the author was trying to make.
- counternotions 5y agoVanguard PAS (Personal Advisory Service) lately recommends 60/40 diversification on equities, where domestic represents 60% and international 40%. VTIAX is a low-cost fund to hold.
- eatbitseveryday 5y agoI believe their advice is (under agreement with their clients) is not supposed to be shared. At least how I’ve understood it.
- counternotions 5y agoNot a “black box” advisory service from my experiences, which cause some to underrate Vanguard’s professional services. Recommendations are publicly in whitepapers like this: https://personal.vanguard.com/pdf/ISGGEB_042021_Online.pdf https://personal.vanguard.com/pdf/ISGGEB_042021_Online.pdf
- nly 5y agoWell that split in inline with most world/global market cap weighted stock indices so is hardly Earth shattering.
- vasilipupkin 5y agoyeah, that's vanguard standard recommendation, which has been underperforming US markets for years
- nly 5y agoEmerging markets outperformed US markets in the periods between 1988-1994, 2003-2007, and 2009-2011
- vineyardmike 5y agoBut if you just bought+held, even with that those periods (which are the minority of time), you'd lose. https://bit.ly/3n6dE6t https://bit.ly/3n6dE6t (Citation to PV)
- nly 5y agoSure, but if you look at the chart the 60/40 US/non-US portfolio has only really outperformed significantly since around 2011. That's the last 10 years out of the last 35 in the bottom graph. The question now is "what happens next?" given rising rates and crazy high US valuations
- vineyardmike 5y ago> The question now is "what happens next?" Historically, the rest of the world handles recessions terribly. Japan, once an economic engine, is stalled... still. Europe is aging and they're still stuttering after 08. Don't expect them to make any surprise economic growth jumping past the US anytime soon. China + other emerging seem like good promises, but china specifically is a huge regulation risk since those companies operate at whim of a government scared of big co's. Also with Evergrande as example, their economy is real estate driven and highly over-leveraged which seems like a major risk to me. All in all, i'm personally keeping investments in america unless i see real ex-us promising growth. So i think "what happens next" is the global rich keep their money in US assets while they slosh around desperate for returns and speculative investments trying to beat inflation. So... imo more of the same but more stressed this time :)
- pirate787 5y agoI'm interested in the source/methodology on these ratios. US equity markets have deep global participation -- for example, 67% of Apple's revenue is overseas but it is a US stock.
- mrfusion 5y agoI think by at forward PE It’s not nearly as bad.
- prewett 5y agoBut forward PE is making a bunch of assumptions of the type the article warns about, namely that the future will be like the past. So by using forward PE you are implicitly making the those questionable assumptions. If you want something to justify high valuations, forward PE is a good measure. If you want a margin of safety, trailing PE and trailing dividend yield are better measures. Margin of safety is thin on the ground these days, sadly.
- mrfusion 5y agoFair points. On the other hand in a high growth environment, current or past PE might be too pessimistic.
- nickatnight49 5y ago"The US public stock market is also at the highest valuation, by any measure you can come up with, since 1929." How are you defining valuation? And highest valuation relative to what (other markets, itself...some other benchmark)? This is definitely not a true statement.
- nly 5y agoAll of the above
- senkora 5y agoI don’t disagree with the wider point, but I want to point out that those numbers aren’t comparable. US GDP is entirely domestic, but US equities are just US-listed companies, and many of those are multinationals with lots of foreign exposure. GNP is similar in spirit, but it’s still not right because foreigners hold a ton of US equities. https://seekingalpha.com/article/4146992-how-global-is-s-and-p-500 https://seekingalpha.com/article/4146992-how-global-is-s-and...
- reducesuffering 5y ago> The US has about 60% of the global investable public equity market by market cap but only 25% of global GDP. GDP doesn't matter for equity valuations, excess profits captured by a company do. If 99% of companies are in intense competition and make no profit, only enough income to pay their expenses, but one company comes up with a new product no one else can make, they can charge whatever maximizes profit and that's where equity value comes from.
- csomar 5y agoApples and Oranges. You are also assuming that other countries have the same level of participation in the stock market as the USA; which is far from it. Especially in emerging markets where the stock market is really insignificant.
- roenxi 5y agoThe only important thing is to buy assets that are likely to benefit from central bank money printing (ie, any assets). Asset owners have been reaping a totally unreasonable return for at least a decade, where the actual performance of their assets is independent of their returns. There are a terrifying number of large companies with allegedly high valuations that are making no profits or substantial losses. As this article points out, the US share market is behaving unpredictably. There is also an argument that when GDP and energy consumption diverged that was the end of GDP as a useful measure of economic prosperity. This is a very easy investment environment - if you own assets you make money. Gold has allegedly been making long-term real returns for years now, which is nonsense.
- xibalba 5y ago> There is also an argument that when GDP and energy consumption diverged I've not encountered this concept before, but it sounds very interesting. Can you share a good resource for reading about it?
- roenxi 5y agoI don't know, when I say there is an argument I mean that I would argue it to be true. But it is a fairly easy position to follow - the real GDP/capita in the US has roughly doubled since the 1980s. A typical family doesn't have 2x as much stuff. The next generation doesn't even have enough money to consistently form a family, maybe, depending on what the stats are telling us. If anything, there are signs of political stress that would be easy to justify if people were treading water rather than seeing their lives drastically improve. It looks like people fighting over a fixed pie rather than there being enough for everyone to get more. The counterargument is probably computers and smartphones - which are a big deal, but have a relatively minor impact compared to doubling the energy supply which is what that GDP would have historically indicated.
- pirate787 5y agoAs someone who was alive in the 1980s, I'd say the typical middle class American family does have 2x more stuff. Food, electronics, and clothes in particular are dramatically cheaper. Homes outside of key urban markets are larger. Cars are a magnitude safer and more reliable.
- mercy_dude 5y agoOK I give in. The talk of inflation being sustained is everywhere. I didn’t feel the burn of the “transitory” inflation that we are going through as much but obviously this is happening. Numbers say so, even Ray Dalio and Michael Burry have warned this may end up being sustained inflation and only the start. So assuming this is the start of a sustained inflation, how do I protect my portfolio? Most of my money is in index funds and FAANG companies.
- kkwteh 5y agoOne direct way to hedge against inflation is to buy a house with a fixed rate mortgage. Any inflation will directly decrease the real amount of your mortgage debt.
- belval 5y agoThat sword could have two edges though, if the fed increases the interest rates to curb the inflation, you will end up with an asset that depreciate regardless of your fixed mortgage because a significant number of people will default on their mortgage payment driving down the cost of housing as the banks do repossessions. Also banks are already increasing their fixed rate significantly to make sure that they don't end up holding the bag.
- dragonwriter 5y ago> the fed increases the interest rates to curb the inflation, you will end up with an asset that depreciate regardless of your fixed mortgage Only if it is stagflation (inflation without underlying strong economic activity), which is rather exceptional in the US. If it is (more normal for the US) activity-driven inflation, Fed tight money policy to constrain it isn't going to do more to reduce real home prices than the underlying activity is to drive them.
- belval 5y agoThat's fair, but it assumes that a lot of people who took mortgages that only "worked" because of the low rates won't go bankrupt once the rates increase. Strong economic activity and inflation simply does not translate to higher wages for a significant proportion of the population. In other words, if you want to shelter your money from inflation the best approach might not be to tangle your money with assets that are currently overpriced because of the low interest rates.
- jifii3 5y agoTLDR; Diversify, no one knows what will happen, best thing we can do is learn from stock market history.
- GDC7 5y agoI read the thing but what the author describes just pushes the problem one step down the road, it doesn't solve it. At some point you got to assign a probability to the events that the author mentions. You can't just assign equal probability to all the scenarios , otherwise it's not like you have solved anything.
- huhtenberg 5y agoThe question is if it's to be better to sit in cash (and have it eaten away by the inflation) waiting for the correction or to invest now and miss the potential upsides if the correction happens.
- ivanche 5y agoInvest now. Buying the dip is a terrible investment strategy. [0] [0] https://ofdollarsanddata.com/why-buying-the-dip-is-a-terrible-investment-strategy/ https://ofdollarsanddata.com/why-buying-the-dip-is-a-terribl...
- Specie33 5y agoThis is where I am at. Watching savings from a liquidity event get eaten away. At the same time not trusting to dump into a very highly valued market. GLD, Crypto, Land, Oil, Food. Odd thing i have been buying is old steel body trucks, 1990 to 1998 - Single cab, 8' bed. My wife is not happy with this, but i see it as a great way to park 5 to 30k in a physically investment. Problem is, I don't want to store 100-300 of these. Anybody have any other ideas?
- llampx 5y agoWhy so bearish?
- OneTimePetes 5y agoThe trick is to overcome the "just one scenario" bug in our brains, that is there to prevent group-fracturing and civil war. This is why we prefer binary worldviews (black/white). So, you are ready for parallel exploration- now a working capitalism can do that for you, when its not self-sabotaging by becoming monopolistic. There is no real parallel exploration in a big cooperation. Finally, the last sub-optimal part that has to go, is the attachment to enterprises and humans. What is important is not the company or the CEO, but the technology. A company can go bust and all you retain as shareholder is the IP - and this can become the foundation of a whole micro-cosmos. Individual Products are nothing, but the capability to produce something within resource reach- is everything.
- somewhat_drunk 5y agoStartup investing is going to be the most profitable form of investing over the next decade. Park your money with people who have a good product and a good team. It's easier (and more likely to be profitable) now than ever with the rise of crowdfunded equity sites like StartEngine. In the age of Kickstarter and RobinHood, these sites are going to explode in popularity.
- taneq 5y ago1) YOLO 2) HODL
- ivanche 5y agoBy coincidence, Nick Maggiuli wrote yesterday about it in a text titled "How to Invest Your Money When Inflation is High" [0] [0] https://ofdollarsanddata.com/how-to-invest-your-money-when-inflation-is-high/ https://ofdollarsanddata.com/how-to-invest-your-money-when-i...
- dgm885 5y agoI’ve got a decent sized portfolio, have been investing since the early 1980s and today is very different from the late 1970s. I’ve replaced bonds with crypto (80% BTC, 20% altcoins like ETH, SOL, LINK, and a few others). These represent around 10% of my holdings. I’m increasing that to 20% over the next year.