Why not invest in US stocks?

jamesd

hutman wrote: »

Expect the unexpected.

Oh, I expect it but this is based on US markets vs the same US markets over time so there aren't any international cultural differences involved. I'll go with betting in the way the odds favour winning overall, not losing. Which in part means not being overweight when a well respected measure that helped to get someone his Nobel prize is telling me that I can expect negative returns for a while.

AnotherJoe

jamesd wrote: »

Oh, I expect it but this is based on US markets vs the same US markets over time so there aren't any international cultural differences involved. I'll go with betting in the way the odds favour winning overall, not losing. Which in part means not being overweight when a well respected measure that helped to get someone his Nobel prize is telling me that I can expect negative returns for a while.

Didnt the guys who industrialized black scholes and then founded a hedge fund based on it, which lost billions in a few weeks, get a nobel prize?

masonic

AnotherJoe wrote: »

I don't think it was luck. Had Brexit not happened (in terms of the vote) the pound would not have gone in the reverse direction, so it was pretty much a one way bet. It was good foresight.

True, although the performance of a US tracker is not dependent on the USD:GBP exchange rate alone.

jamesd

AnotherJoe wrote: »

Didnt the guys who industrialized black scholes ... get a nobel prize?

Yes, in 1997, the two of the three who were still alive at the time and it's been a huge success being extremely even ubiquitously used for options pricing even with its known limitations. Fischer Black and Myron Scholes originally wrote it and Robert C. Merton promoted it, with Merton and Scholes getting the Nobel and deceased by then Black being mentioned.

AnotherJoe wrote: »

then founded a hedge fund based on it, which lost billions in a few weeks

Nope, they didn't found Long-Term Capital Management, they were some of the advisers it was using. John W. Meriwether was the founder. the pricing model doesn't seem to have been a leading contributor to all of the things that went wrong there, that seems to have been more a lack of liquidity that forced the firm to trade at bad prices, coupled with acting in a new area, equities, that it had relatively little experience in.

By way of contrast, I essentially repeated the cautions that Shiller himself makes routinely about the PE10, namely that it has been found to reliably project returns, but not when the changes will happen, so markets can continue to go up long after it is suggesting that future returns will be negative for those investing today.

mozza78

masonic wrote: »

You can't rely on high standard deviation investments to deliver high returns. There are plenty of investments that provide a sub-optimal return for the amount of volatility observed. The UK market is less diversified than that of the US, which is another aspect to risk.

Oh sure there are high risk low return investments but you can't say risk and return are not correlated in some way. If you have two asset classes A and B and A has a higher volatility than B one would expect investors who are generally by nature risk averse to pick A only if it demonstrated a long history of greater average return than B ?? If the US stock market had a 100 year historical return higher than the UK with a lower standard deviation then the OP might have a point.. why wouldn't you invest in it... and you have a point that diversification might be one of those reasons

mozza78

jamesd wrote: »

Yes, in 1997, the two of the three who were still alive at the time and it's been a huge success being extremely even ubiquitously used for options pricing even with its known limitations. Fischer Black and Myron Scholes originally wrote it and Robert C. Merton promoted it, with Merton and Scholes getting the Nobel and deceased by then Black being mentioned.

Nope, they didn't found Long-Term Capital Management, they were some of the advisers it was using. John W. Meriwether was the founder. the pricing model doesn't seem to have been a leading contributor to all of the things that went wrong there, that seems to have been more a lack of liquidity that forced the firm to trade at bad prices, coupled with acting in a new area, equities, that it had relatively little experience in.

By way of contrast, I essentially repeated the cautions that Shiller himself makes routinely about the PE10, namely that it has been found to reliably project returns, but not when the changes will happen, so markets can continue to go up long after it is suggesting that future returns will be negative for those investing today.

The LCTM debacle was a classic example of the old Keynes adage 'the market can stay irrational longer than you can stay solvent'

jamesd

Yes and we're a long way from the record high for PE10 in the US, markets still have room to double and more. The drop will happen, but when ... that's not knowable.

jamesd

That's odd, this discussion about sustainable withdrawal rates in retirement has ended up moved to savings and investments when it's a retirement issue.

masonic

mozza78 wrote: »

Oh sure there are high risk low return investments but you can't say risk and return are not correlated in some way. If you have two asset classes A and B and A has a higher volatility than B one would expect investors who are generally by nature risk averse to pick A only if it demonstrated a long history of greater average return than B ?? If the US stock market had a 100 year historical return higher than the UK with a lower standard deviation then the OP might have a point.. why wouldn't you invest in it... and you have a point that diversification might be one of those reasons

I'll caveat this by saying I haven't done this experiment, but if you take the universe or available investment funds and plot volatility against 5 or 10 year returns, I don't think the correlation would be very strong. There are other metrics, such as the PE10 jamesd mentioned, that are far better predictors of future returns, but even those are somewhat flawed. Long term historical returns, which you mention, are a much better indicator than volatility.

masonic

jamesd wrote: »

That's odd, this discussion about sustainable withdrawal rates in retirement has ended up moved to savings and investments when it's a retirement issue.

I don't think it was moved.