We'd like to remind Forumites to please avoid political debate on the Forum. This is to keep it a safe and useful space for MoneySaving discussions. Threads that are - or become - political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.
VLS80% plus what (if anything)?
Comments
-
Ryan_Futuristics wrote: »I'm not sure the asset allocation decisions in VLS don't simply represent the state of the markets over the past 10 years ... If we'd just had 10 years of Chinese growth and US stagnation, how would the VLS funds look then? ... Hindsight isn't what I'd want my asset allocation strategy based on
I read your posts with interest and you are clearly an intelligent, articulate, and passionate person. But I do wonder if you don't exactly "get" the principles that vanguard and other passive portfolio proponents follow.
Modern Portfolio Theory, as these vanguard and l&g funds are trying to exploit, is based on hindsight but importantly it is based on all the hindsight that has ever existed. From that whole lifetime history of markets, contemporarily weighted, and underpinned by mountains of research, comes the science of using Efficient Frontier analysis (risk v reward) and historical correlation coefficients (diversification) to optimise asset allocation for any given risk appetite.
If we'd just had 10 years of Chinese growth and 10 years of US stagnation, or if we had that for the next 10 years, or if we had the reverse for the next 10 years, then I would not expect the VLS funds to have different makeup than they do today. (Changes may occur for other reasons, in 2014 they changed Domestic vs World weightings, which I would think represents analysis of buyers of their fund rather than market analysis). Emerging Markets become Developed World (the US was once EM, China will one day be Developed World), Small Caps become Large Caps, and vice versa, and individual countries (eg US) represent a fluctuating percentage of the asset sector they sit in.
Should new research lead to better ways of valuing companies, and investing in those valuable companies, such as the CAPE analysis you like to espouse, and should these prove accurate, then they'll be reflected in investors buying those companies and making a more efficient market. All the while funds like VLS will track those improvements rather than trying to discover them. The area I'd like to see improved is market inefficiency through behavioural analysis (prevention of irrational exuberance). Rather than trying to identify funds poorly valued for this reason, or doing PHDs on it, I'll trust others will continue to refine models of efficiency and those funds will become successful because of it.
Inordinate attention is given to AMCs in the "passive" vs "active" debate and it leads some readers to think "passive investing" is all about buying low cost index trackers. No, it is fundamentally about weighing up risk/reward/diversification in the most efficient manner. If you can scientifically demonstrate to me in a peer reviewed journal that I can do that better with Active Management I'll bite your hand off. But with todays information, notice how you know longer need an active manager reading tea leaves, and therefore you can take investment positions cheaply.
You call it a "marketing drive [that] has created a sense of religious-like devotion to certain investing principles".
I call it an "information drive that has created a science-driven devotion to certain investing principles".
What could cause a VLS-like strategy from failing forward? Well, it can happen if markets behave differently for an extended period (decades). That could be from a rebalancing of risk versus reward, which I personally doubt could happen drastically, but if it did significantly would be factored back into portfolio balancing models. Or it could be from coefficients converging, which I personally believe is likely over time, that would lead to a volatility/risk profile that exceeds an appetite today, once again that could be factored back into ratios (todays 60/40 portfolio may be tomorrows 50/50).
Now you may think you Know Better Than Others, Know Who Knows How To Know Better Than Others, or can Market Time, and if you can then you'll be very successful. I sincerely wish you the greatest of luck.0 -
TheTracker wrote: »........
Inordinate attention is given to AMCs in the "passive" vs "active" debate and it leads some readers to think "passive investing" is all about buying low cost index trackers. No, it is fundamentally about weighing up risk/reward/diversification in the most efficient manner. If you can scientifically demonstrate to me in a peer reviewed journal that I can do that better with Active Management I'll bite your hand off. .......
.
I agree with you completely that investment should be based on risk/reward/diversification and would add "timescale". Most advocates of passive investing on this forum seem focused on identifying the cheapest index trackers, with shaving the odd 0.1% off the charges seen as a major triumph.
"Passive investing" as I understand it covers two different techniques. One is a buy and hold strategy with possible rebalancing, the other is the use of index tracker funds for the great majority of one's investments. The first is good advice in my view, but restricting oneself to index trackers is like fighting with one arm tied behind one's back. It simply isnt possible in general to get a good balance using them as the primary investment vehicle - look at the problems with the FTSE 100 or Allshare as a solution to one's UK needs. Try and invest in the US with trackers without getting an excess (in my view) load of Apple/Facebook/Google/Twitter etc.0 -
Try and invest in the US with trackers without getting an excess (in my view) load of Apple/Facebook/Google/Twitter etc.
These don't seem like overweights to me and even if you believe they are, it doesn't look like they are easily avoided by picking an actively managed fund.
On the other hand, the FTSE 100 / All share are a bit more of a problem.0 -
@masonic:
I don't use historical averages - I use absolute valuation ... Valuation is a principle which has always worked, rather than a condition or assumption ... It may stop working when computers are making all investment decisions for us (because presumably we'd arrive at a perfectly efficient market), but we'd spot that it had stopped working because the numbers would all get very boring
@the tracker:
I say Vanguard have done a number on people because they're selective with the research they let clients see, and perhaps because they create this impression they're somehow less money-driven than any other fund management firm out there (of course they're not)
The fact they're getting people to buy extremely expensive, low-yielding bond funds - as we go into a prolonged rising rates environment - (through their VLS funds) makes me think of monks waking calming into a furnace
Portfolio theory changes - a generation ago, instead of 60:40, the no-brainer portfolio included 25% gold - no one would recommend that today ... We know we've got severe slowdown in developed market growth and an environment which makes people very nervous about holding bonds - VLS is a very retrospective-looking fund to me
Interesting article here from someone who writes a Vanguard investors' newsletter:
Why Vanguard's Actively Managed Funds Are a Better Bet
http://m.kiplinger.com/article/investing/T041-C009-S002-dan-wiener-likes-vanguard-actively-managed-funds.html0 -
Ryan_Futuristics wrote: »I don't use historical averages - I use absolute valuation ... Valuation is a principle which has always worked, rather than a condition or assumption ... It may stop working when computers are making all investment decisions for us (because presumably we'd arrive at a perfectly efficient market), but we'd spot that it had stopped working because the numbers would all get very boring
Presuming that I am mistaken about your approach, just how do you value markets in absolute terms? 'Expensive' and 'cheap' are relative terms. I assume you are making some kind of comparison?0 -
I gather a CAPE of 20 is considered to be the "absolute value", but since the value of 20 was only chosen because prices tended to go up or down from this point in the past decade then it remains based on hindsight. I'd be interested in any research that showed this was an optimal value from first principles.0
-
Perhaps I'm mistaken, but I thought you were a proponent of Meb Faber's CAPE-based strategy as described here. In a nutshell this involved picking out from the many fundamental analysis strategies out there one that worked well between 1980-2013 and then launching an ETF in 2014 using that strategy - the very definition of an allocation strategy based on hindsight (of course that's not to say it will or won't continue to work).
Presuming that I am mistaken about your approach, just how do you value markets in absolute terms? 'Expensive' and 'cheap' are relative terms. I assume you are making some kind of comparison?
That article conflates relative and absolute CAPE - Faber uses absolute CAPE
In fact in Faber's fund, he just holds the cheapest half-dozen or so regions available (there's no cut-off point in place)
The reason for holding more than one region is simply because it smooths inherent volatility in individual markets (interestingly one of the few cases where diversification isn't diworsification: when fundamentals are stacked in your favour)
Faber himself says it probably makes little difference which metric you use - just as long as you're using something to steer you away from buying expensive regions
- One thing all market data is consistent on is that the price you buy at is the greatest predictor of returns
Because Faber's running an ETF, he uses a simple rule that can be easily backtested and tracked - it's effectively an index based on something other than market weight (the cap-weighted index was a basic investment strategy of Benjamin Graham, which we've adopted into something that now seems universal)
When I look at the fundamentals of a VLS100 fund, they're not terrible ... But like the interview says: you could be doing a lot better0 -
Ryan_Futuristics wrote: »That article conflates relative and absolute CAPE - Faber uses absolute CAPEIn fact in Faber's fund, he just holds the cheapest half-dozen or so regions available (there's no cut-off point in place)Faber himself says it probably makes little difference which metric you use - just as long as you're using something to steer you away from buying expensive regions- One thing all market data is consistent on is that the price you buy at is the greatest predictor of returnsBecause Faber's running an ETF, he uses a simple rule that can be easily backtested and tracked - it's effectively an index based on something other than market weight (the cap-weighted index was a basic investment strategy of Benjamin Graham, which we've adopted into something that now seems universal)
When I look at the fundamentals of a VLS100 fund, they're not terrible ... But like the interview says: you could be doing a lot better0 -
Absolute CAPE is just a number. It gives you no information about value unless you compare it with something else.
In that case, CAPE is being used to value markets relative to one another. It might appear on the surface that this isn't based on history, but of course this technique was selected on the basis of performance in Faber's backtest model using data since 1980 and the ETF was only launched this year. In other words there is no evidence that it can be used predictively and at this point it is purely based on hindsight.
That's interesting, because his "US Stocks when CAPE <20, Bonds" performance looks no better than a typical static stocks and bonds portfolio - but perhaps it is unfair to compare this with his global CAPE portfolio or perhaps moving into bonds is the wrong thing to do when markets look overvalued by this metric?
That's a mathematical certainty. Returns are proportional to the difference between your buy and sell price (minus costs). The difficulty is knowing when investments are cheap relative to their price in the future. All of the valuation methods we have draw on data from the past, either directly or indirectly.
For what it's worth, if a cheap ETF that did the same thing was listed in the UK, I'd probably buy it. However, I'd allocate it against the speculative part of my portfolio.
Absolute CAPE could be a number, colour, whatever you want ... The only quantitative function it fulfils is spreading your investment across cheap regions relative to the rest of the world (but not necessarily relative to history)
Buying 'cheap' simply means each £ you're spending buys more business (measured by its ability to generate earnings)
So when you compare the US and Russia in absolute terms (CAPE of 25 vs 5) you're paying 5x more for the same cut of the same hypothetical business just because it's in the US (of course you're moving up the risk/reward ladder, but if you stay in overvalued equities, you can't avoid risk creeping up with you)
The distinction I'm making between past and future is that absolute valuations are agnostic to where markets have been ... They have to be backtested, but the principle you're looking for isn't dependent on any assumptions (such as continued developed growth or the US being the world's largest economy)
When Faber plotted US shares switching into bonds at a CAPE 20, it was just a demonstration to show that despite US equities surging on overvaluation for two decades, even in such freak markets, valuation principles wouldn't have let you down0 -
Ryan_Futuristics wrote: »Absolute CAPE could be a number, colour, whatever you want ... The only quantitative function it fulfils is spreading your investment across cheap regions relative to the rest of the world (but not necessarily relative to history)
What % of your portfolio is allocated to this strategy? He says hoping there is no "religious like devotion".0
This discussion has been closed.
Confirm your email address to Create Threads and Reply

Categories
- All Categories
- 348.2K Banking & Borrowing
- 252.1K Reduce Debt & Boost Income
- 452.4K Spending & Discounts
- 240.8K Work, Benefits & Business
- 617K Mortgages, Homes & Bills
- 175.6K Life & Family
- 254K Travel & Transport
- 1.5M Hobbies & Leisure
- 16K Discuss & Feedback
- 15.1K Coronavirus Support Boards