Jeremy Grantham’s Bubble Predictions

MaxiRobriguez

Albermarle said:

Asset allocation comes after assessing appetite for risk.

Yes and I do not see in the OPs comments what this appetite might be, or any indication of what their objectives are and what is the end goal for their impending investments of hundreds of thousands of Pounds ?

But don't kid yourself that a global tracker is solid and stable and low volatility just because it covers a lot of countries.

Often in this forum , people sometimes do give the impression that they are lowish risk.

I think really what they mean is that if you are in it long term and you can put up with the volatility , then they are lower risk than individual shares or highly focused managed funds etc but they are still well above average risk for most people. 

People get the answers that are right for them. If a majority of new posters are seeking advice on relatively uncomplicated investments for their retirement then there isn't a better default answer than a global index tracker in a pension wrapper.

People who come on here looking for ways to make 10% gains in a year before they buy their new house are rightly told investing isn't suitable for them.

itwasntme001

Albermarle said:

Asset allocation comes after assessing appetite for risk.

Yes and I do not see in the OPs comments what this appetite might be, or any indication of what their objectives are and what is the end goal for their impending investments of hundreds of thousands of Pounds ?

But don't kid yourself that a global tracker is solid and stable and low volatility just because it covers a lot of countries.

Often in this forum , people sometimes do give the impression that they are lowish risk.

I think really what they mean is that if you are in it long term and you can put up with the volatility , then they are lower risk than individual shares or highly focused managed funds etc but they are still well above average risk for most people. 

Yes and I have seen countless times that being close to 100% invested in a global tracker whilst you are young is a "no-brainer" - completely disregards risk tolerance, objectives and crucially, 100% public equities is not even close to being optimally allocated from a risk adjusted perspective.

itwasntme001

MaxiRobriguez said:

ChilliBob said:

MaxiRobriguez said:

ChilliBob said:

2. If I should hold off for a few weeks before doing so really

Markets can be irrational for long periods of time. Even if we are in a bubble, it's unlikely to be weeks until a crash, more likely will be months, maybe years. People were calling the housing bubble in 2004 for example. This time round there's not many alternatives to get good returns and with interest rates low people can leverage to invest. Valuations are stretched for a reason - that doesn't mean immediate impending doom.

You have choices if you want to proceed but want to reduce volatility: Multi-asset investment funds, equities which have low volatility and pay consistent enough dividends, holding a large cash allocation that you can use to buy any big dips in your equity allocations...

That all makes sense, except I don't follow your last part (sorry, not really with it today). Are you suggesting using cash reserves if you see a dip in equities and expect them to then rise? - i.e. have cash on hand to take advantage of opportunities you perceive?  - e.g. hospitality focused funds must be awful now but they'll get better in time etc.

Also what would your definition of low volatility equities be?  I'm sure my reading will tell me in time, but I don't get why a global tracker wouldn't be classed as lower risk than it is

Yes you've got it. If you keep a cash allocation rather than going 100% invested, then if stocks (or bonds, or whatever) do fall in value then you can use the cash, which never goes up or down, to buy more of the investment at the lower price. Not only is this good over the long term as you're buying more units than previously for the same overall cost, it is also likely to reduce impact of emotions on your investing. For example, I had a small investment in MnG going into this year and it went down 60% in March. With the cash in my portfolio I used it to buy 2x as many shares as I already had, which immediately reduced my net overall loss to 20%, and rightly or wrongly probably made me less likely to panic about it, or sell too quickly if there was a quick rebound. I still hold all those shares and I'm back in the green now and getting decent dividend yields with them. Having cash on hand is a nice easy way to artificially reduce losses by buying more at the lower price. The drawback of carrying the cash allocation is that in growth years your portfolio isn't doing as well as it could have been (as your cash could have been invested).

And in regards to low volatility equities - think of a company whose business model never changes and never is impacted by any world events. My favourite is Unilever, I will likely own their shares until I die. They're not particularly exciting but you can expect small single digit % price rises every year and currently a dividend yield of 3% or so - so total returns of 5% every year, and as far as equities go, very small chance of being disrupted.

Some shares can be though of low risk/volatility.  But I would be a bit wary to assume that will last for a long time as things can very well change, industry being disrupted, "bond proxies" not acting as such in higher rate environment etc.  Nothing wrong with holding he shares of course, but they do need to be assessed on a regular basis and how much growth/risk has been priced in etc.

ChilliBob

Sailtheworld said:

ChilliBob said:

Yeah I have those concerns, as they are heavily US weighted and also heavily weighted to MS/AWS/Google/Facebook too.

A global tracker is US weighted and further weighted towards MS / AWS etc. because those weights are a function of the World's investors putting their money where their mouth is.

If you choose a different US weighting you're very clearly saying you have better foresight than the average investor. This is possible but the chances are you're a better investor than average in the same way you're a better driver than average.

Which flies in the face of Lars' book which is on the top of my 'to read' list! So yeah good point 

ChilliBob

Albermarle said:

Asset allocation comes after assessing appetite for risk.

Yes and I do not see in the OPs comments what this appetite might be, or any indication of what their objectives are and what is the end goal for their impending investments of hundreds of thousands of Pounds ?

But don't kid yourself that a global tracker is solid and stable and low volatility just because it covers a lot of countries.

Often in this forum , people sometimes do give the impression that they are lowish risk.

I think really what they mean is that if you are in it long term and you can put up with the volatility , then they are lower risk than individual shares or highly focused managed funds etc but they are still well above average risk for most people. 

I'll be honest, I haven't worked that out yet, my risk appetite. The point of the thread was a more general discussion really as opposed to my specific situation. 
To answer in brief, and not be a tease though, the aim (I'm 38) is to be able to rely on the cash I have now without having to work again (that doesn't mean I won't, of course). At the moment the first priority is safely spreading it, then thinking how to inflation protect it, then going from there. 

ChilliBob

MaxiRobriguez said:

ChilliBob said:

MaxiRobriguez said:

ChilliBob said:

2. If I should hold off for a few weeks before doing so really

Markets can be irrational for long periods of time. Even if we are in a bubble, it's unlikely to be weeks until a crash, more likely will be months, maybe years. People were calling the housing bubble in 2004 for example. This time round there's not many alternatives to get good returns and with interest rates low people can leverage to invest. Valuations are stretched for a reason - that doesn't mean immediate impending doom.

You have choices if you want to proceed but want to reduce volatility: Multi-asset investment funds, equities which have low volatility and pay consistent enough dividends, holding a large cash allocation that you can use to buy any big dips in your equity allocations...

That all makes sense, except I don't follow your last part (sorry, not really with it today). Are you suggesting using cash reserves if you see a dip in equities and expect them to then rise? - i.e. have cash on hand to take advantage of opportunities you perceive?  - e.g. hospitality focused funds must be awful now but they'll get better in time etc.

Also what would your definition of low volatility equities be?  I'm sure my reading will tell me in time, but I don't get why a global tracker wouldn't be classed as lower risk than it is

Yes you've got it. If you keep a cash allocation rather than going 100% invested, then if stocks (or bonds, or whatever) do fall in value then you can use the cash, which never goes up or down, to buy more of the investment at the lower price. Not only is this good over the long term as you're buying more units than previously for the same overall cost, it is also likely to reduce impact of emotions on your investing. For example, I had a small investment in MnG going into this year and it went down 60% in March. With the cash in my portfolio I used it to buy 2x as many shares as I already had, which immediately reduced my net overall loss to 20%, and rightly or wrongly probably made me less likely to panic about it, or sell too quickly if there was a quick rebound. I still hold all those shares and I'm back in the green now and getting decent dividend yields with them. Having cash on hand is a nice easy way to artificially reduce losses by buying more at the lower price. The drawback of carrying the cash allocation is that in growth years your portfolio isn't doing as well as it could have been (as your cash could have been invested).

And in regards to low volatility equities - think of a company whose business model never changes and never is impacted by any world events. My favourite is Unilever, I will likely own their shares until I die. They're not particularly exciting but you can expect small single digit % price rises every year and currently a dividend yield of 3% or so - so total returns of 5% every year, and as far as equities go, very small chance of being disrupted.

Very interesting reading, thanks for that. I guess you need to have the belief it'll increase in that circumstance, which I guess you either have that confidence from the off or build it up.

I get you, would this be similar to the 'moat' idea I have read about? 

ChilliBob

bowlhead99 said:

ChilliBob said:

I'd intended to dip my toes into equities via a global tracker, still with some research to do first mind, so not next week. I guess this sort of thing just made me think if:
1. That was the right choice, or if I should choose something different
2. If I should hold off for a few weeks before doing so really

The global equities index has had a good last decade or so, with lots of growth and the corona-induced crash last March only being a peak-to-trough drawdown of about 34% for the FTSE All-World.  But don't kid yourself that a global tracker is solid and stable and low volatility just because it covers a lot of countries.

Between late 2007 and spring 2009, in the global financial crisis / credit crunch, the FTSE All-World Index dropped 57.9% when measured in USD. You can see that by pulling old factsheets from FTSE archives:
(https://research.ftserussell.com/Analytics/FactSheets/Home/DownloadSingleIssueByDate?IssueName=AWORLDS&IssueDate=20170929&IsManual=false ) whose data tables cover a ten year period including the GFC. Near the bottom of the page you can see the maximum peak to trough 'drawdown' in the 10yr column showing as 57.9% for the 'All World', with 57.4% for 'FTSE Developed' and 64.5% for FTSE Emerging'.  

To me it seems a bit ludicrous to 'dip your toe' into something that has the potential to be exceedingly volatile while holding everything else in cash. Why not invest in something less volatile - a mixed asset portfolio of funds? This would make more sense than gradually moving chunks of money from cash at one end of the risk spectrum to international equities at the other.

So yes, for (1) I would suggest something different.

For (2) on timing, there's usually not a lot to gain by deferring the start of an investment by a few weeks, because the investment market has already priced in what it knows about what might happen (good or bad) in the next few weeks with a 'fair' price for the probabilities. And in a few weeks there will be some more uncertainties anyway. However if you are trying to avoid a 'cliff edge' of investing all the money at once then splitting into a few big chunks and spreading over a few months may be easier psychologically than simply delaying the start date which could end up dragging indefinitely.

Thanks that's very interesting reading. I guess by dipping my toe in I meant if I was to put say 1% of my portfolio into a global tracker from say Vanguard, it's not like it would be a disastrous move. I could use if to understand things a bit more before investing the rest of the pot (somewhere, somehow, tbc!) 

MaxiRobriguez

ChilliBob said:

MaxiRobriguez said:

ChilliBob said:

MaxiRobriguez said:

ChilliBob said:

2. If I should hold off for a few weeks before doing so really

Markets can be irrational for long periods of time. Even if we are in a bubble, it's unlikely to be weeks until a crash, more likely will be months, maybe years. People were calling the housing bubble in 2004 for example. This time round there's not many alternatives to get good returns and with interest rates low people can leverage to invest. Valuations are stretched for a reason - that doesn't mean immediate impending doom.

You have choices if you want to proceed but want to reduce volatility: Multi-asset investment funds, equities which have low volatility and pay consistent enough dividends, holding a large cash allocation that you can use to buy any big dips in your equity allocations...

That all makes sense, except I don't follow your last part (sorry, not really with it today). Are you suggesting using cash reserves if you see a dip in equities and expect them to then rise? - i.e. have cash on hand to take advantage of opportunities you perceive?  - e.g. hospitality focused funds must be awful now but they'll get better in time etc.

Also what would your definition of low volatility equities be?  I'm sure my reading will tell me in time, but I don't get why a global tracker wouldn't be classed as lower risk than it is

Yes you've got it. If you keep a cash allocation rather than going 100% invested, then if stocks (or bonds, or whatever) do fall in value then you can use the cash, which never goes up or down, to buy more of the investment at the lower price. Not only is this good over the long term as you're buying more units than previously for the same overall cost, it is also likely to reduce impact of emotions on your investing. For example, I had a small investment in MnG going into this year and it went down 60% in March. With the cash in my portfolio I used it to buy 2x as many shares as I already had, which immediately reduced my net overall loss to 20%, and rightly or wrongly probably made me less likely to panic about it, or sell too quickly if there was a quick rebound. I still hold all those shares and I'm back in the green now and getting decent dividend yields with them. Having cash on hand is a nice easy way to artificially reduce losses by buying more at the lower price. The drawback of carrying the cash allocation is that in growth years your portfolio isn't doing as well as it could have been (as your cash could have been invested).

And in regards to low volatility equities - think of a company whose business model never changes and never is impacted by any world events. My favourite is Unilever, I will likely own their shares until I die. They're not particularly exciting but you can expect small single digit % price rises every year and currently a dividend yield of 3% or so - so total returns of 5% every year, and as far as equities go, very small chance of being disrupted.

Very interesting reading, thanks for that. I guess you need to have the belief it'll increase in that circumstance, which I guess you either have that confidence from the off or build it up.

I get you, would this be similar to the 'moat' idea I have read about? 

Yes you have to believe it'll go back up of course! I was too slow to expunge my SAGA shares so I'm holding those with a 65% loss but not buying any more for what should be fairly obvious reasons! But if you have a broad portfolio then there should be some which sell off in market panics but still have good future prospects which are ripe for further investment.

Moat idea - yes, sort of. The idea of a moat is that a competitor will struggle to take the market share from that big company. For Unilever it's a combination of brand power and scale with high cost to entry. It would take you a significant amount of investment if you started a new consumer goods company tomorrow with the plan to be bigger than Unilever. As itwasntme said though, such investments aren't proxies for bonds - they are still equities and they are still subject to more volatility, whether that's through disruption that wasn't anticipated or mundane things like investors just selling it because market is panicking. Unilever will be in every FTSE100 tracker as well so if people are flogging their FTSE100 index trackers then Unilever will be impacted. That said, I still think Unilever will exhibit lower volatility than other companies and you will find your forecast annual gains from a company like it much easier to predict than something else, if that is what you want, at the expense of potentially making bigger, more volatile gains.

ChilliBob

Thanks the the reply, yeah that reminds me or the most article mentioning FedEx /Ups etc type thing.
As I've mentioned above, I need do a lot more research, so this thread was more meant to just get people's views on this whole bubble vibe and to learn from more experienced people their views /approach etc.

I've got some sort of unrelated but really interesting replies though so thanks to you, and to others  

BananaRepublic

MaxiRobriguez said:

Yes you've got it. If you keep a cash allocation rather than going 100% invested, then if stocks (or bonds, or whatever) do fall in value then you can use the cash, which never goes up or down, to buy more of the investment at the lower price. Not only is this good over the long term as you're buying more units than previously for the same overall cost, it is also likely to reduce impact of emotions on your investing. For example, I had a small investment in MnG going into this year and it went down 60% in March. With the cash in my portfolio I used it to buy 2x as many shares as I already had, which immediately reduced my net overall loss to 20%, and rightly or wrongly probably made me less likely to panic about it, or sell too quickly if there was a quick rebound. I still hold all those shares and I'm back in the green now and getting decent dividend yields with them. Having cash on hand is a nice easy way to artificially reduce losses by buying more at the lower price. The drawback of carrying the cash allocation is that in growth years your portfolio isn't doing as well as it could have been (as your cash could have been invested).

What you are suggesting is timing the market, and studies have shown that it does not work. You can't predict when the gains occur, and the act of being out of the market means you lose out. So overall you are better off in the market. Of course one reason to have cash is to allow for unexpected circumstances such as redundancy, and if the market does crash, then you might decide to invest that cash assuming you can survive without it for a year or so.