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That's not what the article says. It says you have to deliberately move your eggs around according to the business cycle. A pure cash investing strategy (money

That's not what the article says. It says you have to deliberately move your eggs around according to the business cycle. A pure cash investing strategy (money market, CD, T-Bill/Bond) now has a track record as good as the US stock market over 30 year periods. Except the much lower volatility of cash makes it superior. Plowing money into stock indexes is for suckers. To get any decent returns one is forced to analyze macro economic conditions and allocate accordingly between cash, equities, and inflation/currency hedges. The article makes this point in different words.

gaius 17y ago
Selling your stock at the top of the market then sitting on cash until the bottom before piling back in is hardly the insight of the century.
- kingkongreveng_ 17y ago
  You will not get reasonable inflation adjusted returns unless you do this to some extent. You cannot get returns without periodically re-balancing between equities, cash, and commodities, and different currencies. There is no free lunch. You can't plow money into a simple "diversified" portfolio and do OK. Yet inflation forces you to play the game or lose.
  - btilly 17y ago
    Do you have evidence for that assertion? Because decades of financial research on the efficient market hypothesis has uncovered evidence that a simple diversified portfolio does very well. A classic incident was a case where a finance professor testified to Congress that if you took all of the stocks, put them on a board, then threw darts to make your selection, with very high likelyhood you'd beat most professional investment funds. (They typically get better returns than the market, but their costs for doing so exceed their advantage, so investor returns come out worse.) One senator couldn't believe this, and so did the experiment with a random selection of stocks listed a decade earlier. He threw the darts, computed the numbers, and his picks beat most professionally managed funds over the same time period! After this was reported he was offered a job on Wall St. You can find the research explained and further details of that incident in A Random Walk Down Wall St.
    - kingkongreveng_ 17y ago
      Thanks for CAPM 101. Alpha is hard to get. No kidding. But nobody here is talking about stock picking. I'm talking about diversifying well outside of equities, as harry browne described in Fail Safe Investing, and slightly overweighting asset classes in accordance with macro conditions. > a simple diversified portfolio does very well. It does not, if by simple you mean S&P. A naive equities dominated portfolio does not do well against inflation over any given 30 year period. Please also remember that stock markets did not begin in the "post war era." There's a lot more history. The efficient market hypothesis is the rallying cry of the lazy. It did not take a genius to a be a little overweight commodities this decade. It did not take a genius to re-weight some out of stocks after parabolic moves up in the late 90s. That's all I'm talking about.
btilly 17y ago
I've seen the claims that a pure cash investing strategy has a track record as good as the US stock market over very long periods of time. I've looked into them. They are wrong. The basis of the claim is the stock market index. You look at where it was at one time, look at where it was another, then figure out the effective interest rate between them. And lo and behold, at the bottom of the crash that interest rate was not very good! The problem with this claim is that the indexes just aggregate stock prices. But companies frequently pay dividends. When a company pays a dividend, the stock price drops by the value of the dividend. This money is not lost though, it is returned to the investor for cash and is free to be reinvested. When you add back the dividends, stocks perform much better than they do when you don't. As an extreme illustration, look at the DOW through the Great Depression. Before the crash the DOW hit a peak of 381.17. It then crashed and did not return to that peak until November 23, 1954. So it looks like you lost money for decades. But the classic How to Buy Stocks looked at how investments would do if you reinvested dividends. That story is very different. Over many decades they could not find a 5 year period in which the stock market lost money, or a 10 year period in which you made less than 7%/year, compounding annually. (The worst period was actually the early 70s.) Now how realistic is that analysis? If the money is in a tax sheltered retirement plan, very. If the money is not tax sheltered, then you're going to be taxed on your dividends, and your returns are going to suffer. (But you're also going to be taxed on returns in a money only strategy.) Working out the full details is very complex. But no matter how you look at it, there is no lengthy period of time in the USA in the last century in which cash only strategies have been competitive with the stock market. None. And if you find a study that says otherwise, then look at how they computed the numbers. I guarantee that they got that result by ignoring dividends. Now this is not to say that there isn't a role for cash in your investment strategy. Of course there is. There is real value in limiting volatility, and there are times when it makes sense to adjust how exposed you are to the market.
- kingkongreveng_ 17y ago
  http://econompicdata.blogspot.com/2009/03/inflation-adjusted-w-dividend-s-500.html http://econompicdata.blogspot.com/2009/03/inflation-adjusted... This chart (last one on the page) indicates to me that during the greatest bull market in history, rolling ten year inflation and dividend adjusted returns on the sp500 only rarely touched 8%; usually much less. This excludes transaction costs, I'm sure. I'd have to look into it more. http://www.itulip.com/realdow.htm http://www.itulip.com/realdow.htm

gaius 17y ago

Selling your stock at the top of the market then sitting on cash until the bottom before piling back in is hardly the insight of the century.

kingkongreveng_ 17y ago
You will not get reasonable inflation adjusted returns unless you do this to some extent. You cannot get returns without periodically re-balancing between equities, cash, and commodities, and different currencies. There is no free lunch. You can't plow money into a simple "diversified" portfolio and do OK. Yet inflation forces you to play the game or lose.
- btilly 17y ago
  Do you have evidence for that assertion? Because decades of financial research on the efficient market hypothesis has uncovered evidence that a simple diversified portfolio does very well. A classic incident was a case where a finance professor testified to Congress that if you took all of the stocks, put them on a board, then threw darts to make your selection, with very high likelyhood you'd beat most professional investment funds. (They typically get better returns than the market, but their costs for doing so exceed their advantage, so investor returns come out worse.) One senator couldn't believe this, and so did the experiment with a random selection of stocks listed a decade earlier. He threw the darts, computed the numbers, and his picks beat most professionally managed funds over the same time period! After this was reported he was offered a job on Wall St. You can find the research explained and further details of that incident in A Random Walk Down Wall St.
  - kingkongreveng_ 17y ago
    Thanks for CAPM 101. Alpha is hard to get. No kidding. But nobody here is talking about stock picking. I'm talking about diversifying well outside of equities, as harry browne described in Fail Safe Investing, and slightly overweighting asset classes in accordance with macro conditions. > a simple diversified portfolio does very well. It does not, if by simple you mean S&P. A naive equities dominated portfolio does not do well against inflation over any given 30 year period. Please also remember that stock markets did not begin in the "post war era." There's a lot more history. The efficient market hypothesis is the rallying cry of the lazy. It did not take a genius to a be a little overweight commodities this decade. It did not take a genius to re-weight some out of stocks after parabolic moves up in the late 90s. That's all I'm talking about.

btilly 17y ago

I've seen the claims that a pure cash investing strategy has a track record as good as the US stock market over very long periods of time. I've looked into them. They are wrong. The basis of the claim is the stock market index. You look at where it was at one time, look at where it was another, then figure out the effective interest rate between them. And lo and behold, at the bottom of the crash that interest rate was not very good! The problem with this claim is that the indexes just aggregate stock prices. But companies frequently pay dividends. When a company pays a dividend, the stock price drops by the value of the dividend. This money is not lost though, it is returned to the investor for cash and is free to be reinvested. When you add back the dividends, stocks perform much better than they do when you don't. As an extreme illustration, look at the DOW through the Great Depression. Before the crash the DOW hit a peak of 381.17. It then crashed and did not return to that peak until November 23, 1954. So it looks like you lost money for decades. But the classic How to Buy Stocks looked at how investments would do if you reinvested dividends. That story is very different. Over many decades they could not find a 5 year period in which the stock market lost money, or a 10 year period in which you made less than 7%/year, compounding annually. (The worst period was actually the early 70s.) Now how realistic is that analysis? If the money is in a tax sheltered retirement plan, very. If the money is not tax sheltered, then you're going to be taxed on your dividends, and your returns are going to suffer. (But you're also going to be taxed on returns in a money only strategy.) Working out the full details is very complex. But no matter how you look at it, there is no lengthy period of time in the USA in the last century in which cash only strategies have been competitive with the stock market. None. And if you find a study that says otherwise, then look at how they computed the numbers. I guarantee that they got that result by ignoring dividends. Now this is not to say that there isn't a role for cash in your investment strategy. Of course there is. There is real value in limiting volatility, and there are times when it makes sense to adjust how exposed you are to the market.

kingkongreveng_ 17y ago
http://econompicdata.blogspot.com/2009/03/inflation-adjusted-w-dividend-s-500.html http://econompicdata.blogspot.com/2009/03/inflation-adjusted... This chart (last one on the page) indicates to me that during the greatest bull market in history, rolling ten year inflation and dividend adjusted returns on the sp500 only rarely touched 8%; usually much less. This excludes transaction costs, I'm sure. I'd have to look into it more. http://www.itulip.com/realdow.htm http://www.itulip.com/realdow.htm