Please critique this passive portfolio

dunstonh

nicknameless wrote: »

If the L & G funds use management decisions to adjust allocations how are they truly passive investments?

There are no passive investments when it comes to asset allocation. Vanguard LS have 20,40,60,80,100 to dictate equity content but they decide the allocations. That is a management decision.

Vanguard is rigid. It changes allocations less frequently on their VLS funds but they can change. L&G use passives, although more of them and include property but their selection is less rigid and they react to market conditions quicker. Again, a management decision. Sometimes those decisions will be right. Sometimes not.

Anyone that builds a portfolio of single sector passive funds is making management decisions as they are deciding how much to place in each sector or to disregard sectors altogether.

TheTracker

Ryan_Futuristics wrote: »

1) You're not forced to buy expensive assets (buy Vanguard LS today, and you're buying a lot of overvalued US equities ... whereas if you built your own version, you could wait for a better entry point into US equities, and build up your emerging now ... Your money could go a lot further)

If you are confident these are overvalued, are you shorting them?

bowlhead99

TheTracker wrote: »

If you are confident these are overvalued, are you shorting them?

Thinking something is relatively overvalued does not necessarily mean you can effectively make money from shorting it. Merely, you suspect it will give an inferior return over the next 5/10/15 years.

If it were true that the positive economic indicators coming out of U.S. did not justify the valuations there, and it would definitely go down soon, there would be money to be made by backing up that assertion with cash and opening a short. But market timing is tricky and we all know that markets will generally rise in the longer term so shorting is not a long term sensible option.

If RF's contention is just that the US market will only give a 3% annualised return over the next decade while rest of the world gives 8%, he might want virtually nothing invested in the US, but a short would lose money over that decade so he wouldn't want that either. The short on U.S. may have a less-worse loss than a short on another part of the world but you don't want to invest in a lossmaker.

Also, it is pretty difficult to effectively short a whole market over an extended period of time. You can short individual companies by borrowing their stocks and selling them short, but it is hard to borrow the whole market without large costs.

TheTracker

bowlhead99 wrote: »

Thinking something is relatively overvalued does not necessarily mean you can effectively make money from shorting it. Merely, you suspect it will give an inferior return over the next 5/10/15 years.

If it were true that the positive economic indicators coming out of U.S. did not justify the valuations there, and it would definitely go down soon, there would be money to be made by backing up that assertion with cash and opening a short. But market timing is tricky and we all know that markets will generally rise in the longer term so shorting is not a long term sensible option.

If RF's contention is just that the US market will only give a 3% annualised return over the next decade while rest of the world gives 8%, he might want virtually nothing invested in the US, but a short would lose money over that decade so he wouldn't want that either. The short on U.S. may have a less-worse loss than a short on another part of the world but you don't want to invest in a lossmaker.

Also, it is pretty difficult to effectively short a whole market over an extended period of time. You can short individual companies by borrowing their stocks and selling them short, but it is hard to borrow the whole market without large costs.

"I'm still holding out for a 30-40% dip as a real buying opportunity"

"If you buy now, or even when the market's another 5% down, you could be a long way off realising the gains of buying when it actually hits the bottom

Basically: it needs to go down a lot further before the markets will be fairly valued - so don't jump the gun"

Perhaps he expects to make 30-40 elsewhere

bowlhead99

TheTracker wrote: »

"I'm still holding out for a 30-40% dip as a real buying opportunity"

"If you buy now, or even when the market's another 5% down, you could be a long way off realising the gains of buying when it actually hits the bottom

Basically: it needs to go down a lot further before the markets will be fairly valued - so don't jump the gun"

Perhaps he expects to make 30-40 elsewhere

Not really my place to respond but, if I've understood his many posts on various threads...

Each of those three comments show a strong conviction and mean that he thinks it is the wrong time to buy now and he would prefer to buy at a lower price, so he'll hold off and not worry that he might be missing out, because there are relatively better opportunities around.

None of the three comments should be taken to imply that shorting is a good strategy, because the timing of when the "30% off, buying opportunity"is going to come around, is unknown.

The indicators being used to call the market as being "expensive" were saying it was expensive a couple of years back. They are not an indicator that things will fall overnight, merely an indicator that the prospective gains over the next [insert a medium time horizon here] years are unlikely to be as good as you can find in another international market now or in that particular market by waiting.

If you don't have an indicator that the market will fall overnight, it's risky to short because if the market goes up or sideways you stand to lose money for a period of what may be a couple years before you make money. The "market volatile but generally sideways" is expensive for shorters while it is not for people who are long only . So, it's quite reasonable to take a strategy to be out of an expensive market like the US and take a long position in a cheaper market like Russia, without going the extra mile of actually shorting the US.

Personally I don't live my life by CAPE and I do have some U.S. exposure along with Russia and the others. But I can see that if I was following that particular strategy I wouldn't necessarily be shorting, just selective where I was going long. It takes a high conviction to exit a market that's half the world's market cap and experiencing better economic indicators and GDP forecasts than the rest of the developed world, but one man's meat is another's poison, etc.