What's happened to my portfolio in the last 2 weeks?!

Ryan_Futuristics

bowlhead99 wrote: »

What you seem to be saying is that although people have quadrupled their money on investing a lump sum when CAPE went over 20 in 1994 to today, it is not because markets are positive or that companies are fundamentally making profits and breaking new ground through innovation, technology and efficiency and unprecedented infrastructure (cheap flights everywhere, alternative energy, internet everywhere you turn), but it's just simple dumb luck that if you speculate on something it might come good even though all shares ought to be cheaper in terms of earnings multiple.

Basically you are saying that CAPE (a measure acknowledged as flawed by a whole range of commentators, as are all measures of value) is the one true way of judging something. If you get good results despite what CAPE tells you, then the results are a fluke and are only there because people still believe in buying companies in the developed world, which should be decried as speculation so long as your flawed measure is above some hundred year average.

I find that difficult to take on board. You acknowledge that Japan had a huge 30 year cycle and therefore anyone waiting for growth might wait a long time. That is surely the same both ways. Anyone waiting for US long term decline, might wait a long time.

You also say that the US will decline as a proportion of world GDP. That is inevitable as the people in developing world come out of their caves and start generating new GDP alongside the old GDP. It doesn't mean all the old GDP gets killed off. There are new Asian and African customers for Americans to sell to and there are new Asian and African suppliers for Americans to buy from, and the Asians and Africans will find plenty of domestic customers to keep them busy in a domestic consumption rather than cheap export led economy. That doesn't mean all US companies halve in value overnight when the billions of new customers start to exist, merely that the economies may work in different ways and some companies die, some survive, and others positively thrive.

Well I'd question: do you expect the next 20 years to resemble the past 20?

That graph above shows the difference between buying shares that have had a bad run, vs buying shares that have had a good run ... Essentially: the better the past looks, the more negative you should be

With valuations, regardless of technology, you're still talking about what people are prepared to pay measured against a company's worth (whether it's earnings, assets, or how much it would cost to build the company yourself)

The dot com bubble proved our expectations of technology tend to run far out of proportion with reality ... If nothing else, a CAPE or a P/B ratio tells you how positive or negative people feel about something (and history tells you that's always running at an exaggeration)

That is one reason why waiting for mean reversion may be an exercise in futility, surely.

You are saying on the one hand that we don't know quite what will drive the US economy or the world economy but opportunities and investment attitudes will certainly be far far different to what they were in the last century. OK, I agree.

And then you are saying that the long term average CAPE
- which you derived by including data from 1885 when we were all running around in the Old West like in the Michael J Fox classic Back to The Future Part III,
- or when the CAPE was 5 at the end of The Great War,
- or in the whole of the first seven decades of CAPE data points when transistors didn't even exist,
should be the mean that everything reverts to.

Sorry but that is laughable. The world has moved on. People may no longer think that 20x a company's average earnings is too high, given growth prospects for the company and the economy, and the fact that the '10 year average' earnings you're using is inherently on average 5 years out of date.

In Russia there is conflict and low GDP growth prospects acknowledged by most including themselves and the IMF. So their CAPE is lower. It's up to you whether you buy into a high growth area with solid companies (US) or a low growth area with shaky political system and undeveloped markets (Russia). One will cost more than the other but it doesn't mean it is bad value for money. It is a higher price for a different product. Maybe the cheap product will remain a cheap product for the next 3 decades just like the lost decades in Japan's markets.

As it happens I have a number of investments that include Russia and Eastern Europe and I have trimmed back some US exposure over the last year or so after performance had taken my weighting quite high. But I would not be so steadfastly opposed to other points of view that I keep coming back to the historic CAPE from the 1800s to 'prove' that everything in strong economies is priced wrong and offers limited growth and that everyone should get their US exposure down to below 2% because it's destined to go down. It will go down when it wants.

CAPE is a single perspective out of many and even if it were a 100% non-flawed perfect measure, there is truth in the comment from Keynes: "Markets can remain irrational a lot longer than you and I can remain solvent.".

Investing in a dog market because every dog has its day, or avoiding a bull market because what goes up must come down, severely limits opportunities. That is why your previous graph of the last 20 years shows your 'returns from investing all in SP500 equities when CAPE is <20 and bonds otherwise' give a relatively smooth path. Because it's mostly been following bonds and hardly any of the equities opportunities were taken even though a lot of growth was available from that source from time to time.

Meanwhile a multi asset portfolio heavier in equities could have given a lot of good returns to rebalance into bonds after enjoying the growth. And the bond-heavy portfolio only performed well because the bonds performed great as they moved to unprecedented all time highs, from which such growth is no longer available.

Relative to bonds, equities do not seem so expensive, and ultimately a US investor may not feel the equities are overpriced regardless of CAPE, because he doesn't think a Russian index is a remotely comparable product. Therefore US equities could be sustained at similar 'high CAPE' valuations for a long time before Russian 'value' delivers on its potential.

Well CAPE is a very crude measure (but any measure gives you the ability to peer at something through the murk of general consensus) ... And low valuations have correlated with future returns far better than market consensus ever has

Would I rather invest in the US, with good growth outlook and high valuations, or Eastern Europe, with uncertain growth and low valuations?

Paradox Of Growth: The Fastest-Growing Economies Don't Have The Highest Stock Market Returns
http://www.forbes.com/sites/jamescahn/2014/04/07/paradox-of-growth/

"In fact, the professors identified that “The correlation between equity returns and economic growth per person since 1900 has been negative.” That’s a shocking conclusion! For example, Ireland’s superior per capita growth of 2.8% yielded real equity returns of just 4.1% and was trumped by South Africa, which had a lower per capita GDP growth of 1.1% but long-term equity returns of 7.4% [over the same 1900-2013 period]."


The problem is that to buy these extremely low value assets (these assets which return 1000% vs 50%) you need all consensus going against you ... You need wars and uncertainty and risk to scare investors off (as soon as you start looking for reassurance, you'll either scare yourself off or find it priced in)

But I do agree bonds are looking very expensive and unappealing now (but therein lies how drastically things can change ... bonds and gold used to be your 'safe' bets)

gadgetmind

Ryan_Futuristics wrote: »

A real return of 2 or 3% over 30 years is a disaster in my books - it's the bulk of your investing window out the window ... How much better to have avoided buying equities when valuations were that high?

How much better to have drip-fed money into the pot over that period rather than putting it all in on day one?

Ryan_Futuristics

gadgetmind wrote: »

How much better to have drip-fed money into the pot over that period rather than putting it all in on day one?

That would depend on other factors - such as the length of time you're measuring, whether compound interest from dividends starts to catch up, how long you're drip-feeding vs how much you'd be lump summing, and exactly how the dip behaves ...

But drip-feeding would certainly produce more consistent returns, and more consistently protect you from a loss of capital at any one point

And a modified drip-feed (where you're buying more on dips) would still lose you a certain amount in lost dividends (vs the lump sum), but should also push the average price you're paying for shares below average ... So it would all come down to whether you'd put your lump sum in the market at a particularly good point, or at an average point ... You can't beat a lump sum invested at the bottom of a market

Glen_Clark

Ryan_Futuristics wrote: »

. You can't beat a lump sum invested at the bottom of a market

Tell us something we don't know - like how you can tell when the market is at the bottom

masonic

Ryan_Futuristics wrote: »

Well what I'm really getting at is that it's very easy to invest retroactively

My personal feeling is that Vanguard are partly responsible for a climate of unrealistic expectations through aggressively marketing their trackers

The idea that markets act one particular way over long periods isn't quite true ... Every major phase markets have gone through has been uncharted territory ... Of course that doesn't inspire people to go out and buy-and-hold index funds

Well I would certainly agree with all of that.

Tactical asset allocation doesn't generally involve market timing ... You wouldn't move out of US equities because you expect a crash: you'd move out because they're overvalued

"Market timing is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis."
http://en.wikipedia.org/wiki/Market_timing

It seems like tactical asset allocation fits the bill quite well.

Stable assets in a portfolio (even with real returns of 0%) can be valuable in any situation that doesn't involve having 100% of your portfolio in equities (which I'd call either gambling or naive faith)

If you ask me which trend I've got more faith in: the continuing growth of the global economy or the fact that the herd has always been wrong, I'd go with the latter (and with the herd piling into buy-and-hold passive indexes, I don't expect this trend to reverse)

I wouldn't say being 100% in equities is gambling or naive faith in some situations. For example, if you are investing monthly from income over a few decades, starting out with 100% in equities for the first few years before gradually building up defensive assets seems like a fine strategy (Edit: of course I am not including a suitable emergency fund in cash, which everyone should have).

In terms of "the herd", I think the vast majority of people are still investing in active management strategies based on trying to value individual companies (or doing so via managed funds), so I don't quite get your last comment.

edinburgher

beancurd wrote: »

So called dollar cost averaging for benefit is generally considered a myth. There are online calculators that show it historically if you need proof. If there is any advantage it's probably offset by time out of market downsides. Let the arrows begin...

Well, surely you'll provide an example for the sake of argument?

El_Selb

adindas wrote: »

Nobody like loosing their money. But everybody like to gain over 25% (say) much more then the best available saving interest rate.

But when people are losing £200+ on 6k portfolio and start worrying then they probably have a severe problem with taking risk ?. In the future you might be loosing a few grands more but similarly you could also gain or even double your money.

With your current attitude, you will probably be better off to keep your money in saving or high interest current account. It is guranteed you will never loose your money again .....

Kind of getting the message now thanks Adindas!

To clarify, it was £400 of a £6k investment. Measly in the great scheme of things I appreciate - why I even gave it a passing thought I don't know.

Maybe because it was the first dip I'd been through as new investor finding their way.

Anyway who cares - I've got £330 of the £400 back now anyway! and I'm well up (well at least vs inflation) since I started investing at the end of Feb. So what to invest in next! JPM India is on my mind again, up about 15% since I started looking at it. As I know now though 1) 15% up means it's probably a bad time to buy and 2) I need to build up some cash savings. So got to resist!

(or is it just because a stag do to NYC is taking all my immediate spare money )

It's a learning experience. I'll get there.

Thrugelmir

El_Selb wrote: »

JPM India is on my mind again,

And you are worrying about losing money. :eek:

Glen_Clark

Thrugelmir wrote: »

So is the amount of money that's slushing around looking for a home.

True, and the money supply is still increasing, currently from Japan..
To reduce the supply they would have to sell bonds and burn the cash, and I see no sign of that yet, if at all.

Ryan_Futuristics

Glen_Clark wrote: »

Tell us something we don't know - like how you can tell when the market is at the bottom

Well that's the point I'm making

But valuation can tell you how cheap a market is ... So using tactical asset allocation, when the FTSE's CAPE (or M/GDP, or P/B, P/S, P/E, P/C, etc) is as low as 8, it could tell you you need to be 75% in equities

If it had dropped lower at your next rebalance, to 6, it could tell you you need to be 80% equities