Jeremy Grantham’s Bubble Predictions

BananaRepublic

Sailtheworld said:

Asset allocation comes after assessing appetite for risk. 

Lars Kroijer has a good set of videos which accompany his Investing Demystified book at Lars Kroijer. I revisit these videos whenever I start to think I know what I'm doing to remind myself I don't - especially after a good year like 2020.

I don't think most people would go far wrong by buying a global equity fund and doing nothing else other than offsetting the risk with cash or cash like investments at a level appropriate to the risk they're willing to take.

This does seem to be the forum mantra preached by most people here. Newcomers might do well to look at historical data such as:

https://en.wikipedia.org/wiki/S&P_500#/media/File:S_and_P_500_chart_1950_to_2016_with_averages.png

I assume the ~2000 crash corresponded to the dot com boom, and of course the next one was the Great Financial Crash. And before someone points it out, the charts ignore reinvested dividends.

itwasntme001

MaxiRobriguez said:

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.

It's not just that they should not be seen as bond substitutes.  It is the risk that so many have seen them as bond substitutes and when interest rates rise, you will suddenly find these "bond proxies" being comparatively more expensive than a risk free bond - because value in investing is a relative game.  Unless earnings have pricing power due to the presumably higher inflation that had led to higher rates, you will find these same stocks could perform badly.

I recently read a transcript of an interview with Terry Smith back in 2016.  It seemed he openly admitted the stocks he chooses were in fact bond proxies.  He seems to be assuming the "Japanification" of the western world and thus interest rates will stay low for a very very long time - exactly the environment where his fund will do well in.

When I hear things like that I get very scared.  It is also a humbling reminder that tracker funds should be the superior investment for any long term investor.

itwasntme001

Reflexivity is another very important concept in investing to understand - a term coined by George Soros.  An example is the tech stock boom we are going through.  These companies have seen their valuations sky rocket - their risk premium is being driven lower and lower and therefore their cost of equity capital is going down also.  They typically don't have any debt.  So as their equity cost of of capital goes down, they should be priced even higher - reflexivity in action.

So it is not necessarily just the higher earnings growth far into the future (and made more valuable by lower long term rates).  It is also the fact that their stock is valued higher that makes it even more attractive as an investment.  Perhaps that is one of the causes of bubbles forming, as eventually things get priced too rich.

Maybe Tesla is a classic example of that now.

ChilliBob

I think I follow, but not 100%.. As a tangent to the above, I was considering buying stock in Snowflake around the IPO time, it's a product I've used hands on myself and I'm familiar with the competitors and landscape, I think it's an awesome product!... But the when I looked in more detail there were a lot of blogs suggesting the P/E ratio was a bit mental and the valuation was equally mental - so perhaps it wasn't such a good investment at those prices... so I have held off. 

I sense this is similar to what you're saying but not quite the same. 

bowlhead99

ChilliBob said:

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!) 

No, it wouldn't be a disastrous move to put 1% into pretty much anything, because if you lost half of it - or even all of it, if an individual stock or piece of cryptocurrency - it's only half a percent.

But it doesn't teach you anything much about coping with swings and roundabouts of volatile markets, because if it doubles or halves your 'overall portfolio' of 99% cash is not going to change and the doubling of the equity fund is not giving you a meaningful overall return, just like the halving of the equity fund is not giving you a meaningful overall loss.  As it won't give you that 'practical experience' of knowing how you feel when faced with a loss on a much bigger part of your portfolio, there is limited value in doing it. You could get a similar effect by just watching a virtual portfolio, or simply download the factsheet for the index fund every month, and imagine it was real money.

In other words there's not a great deal to be learned from investing 1% for a couple of months and watching your 'portfolio' of one fund as its chart haphazardly moves up and down, just to see what happens (knowing it is not giving you any significant risk) and then piling in the remaining 99% after some arbitrary short period of 'watching'. You could instead just invest 0% for a couple of months and watch the chart go up and down - knowing it is not giving you any significant risk, because you're not actually invested

While it's true that DIYing your investments competently can save costs and fees, and you can pick up tips and tricks for making the most of tax wrappers etc on here - if you do already have a 'enough to retire on' portfolio at a young age, it may be worthwhile buying some initial advice from an IFA to help you understand what you are getting into.  That would generally help to ensure you were invested sensibly and you could always 'take over' that investment to monitor or change yourself, later once you understand more about how it all works.

DairyQueen

Alexland said:

I think you would still do fine over the long term with a global tracker but a few weeks ago before the brexit deal was announced I moved to having some home value bias due to concerns over unattractive valuations of some US growth companies compared to the relative cheapness and style diversity being offered by the UK market. I also expect to see the pound continuing to creep up against the dollar this year.

I have also home-biased my portfolio but began two years ago (alas), and for the same reasons as you. An(other) good lesson for me about market timing - i.e. don't try it. Fortunately, I maintained a very low UK allocation on OH's (much racier) portfolio and this has balanced our consolidated returns. DIY-investing means always learning. Would you care to share your current regional/class/type allocations? I would be interested to see how they compare to mine as we seem to be going against the general flow of anti-home bias. I am also quite anti-bond at the mo. I am happy to reciprocate.

Whilst our sub-portfolios hold global passives as core funds (also the best option for new investors IMO), our actively-managed (high risk) satellites have been recent star performers. OP may wish to consider the core/satellite strategy as his/her knowledge level increases.

This time last year who would have thought that my China (up 72%) or Japanese small caps (up 48%) ITs would hit the heights after some time in the doldrums. Not me, that's for sure. So, just as well that I had adequate exposure courtesy of a strategy that diversifies across regions and market caps. It was another example (for non-experts like me) of both the downside of investing - i.e. why trying to identify the next out-performer is best left to the experienced or the lucky, and the upside - i.e. why an investment strategy is key to success. Markets are cyclical so likely that each region/class will out/underperform at some point.

I have now been DIY-ing on-and-off for the best part of 25 years so I know my limits, and my limits exclude single-share investing or attempting to time the market. For this reason I invest when I have the cash regardless of how big a lump sum, and I don't hold cash as dry powder - only as a proxy for bonds and/or because I intend to spend it within 5 years.

OP: Spend as much time as you need researching before you jump. This means going through a process that begins with identifying your aims and ends in fund selection. Along the way you will discover your attitude to risk and your strategy. Both will be refined over time. Your enemies are ignorance and overconfidence. Most of us have had our fingers burned by one or the other; it's part of the learning curve. Very few of us ever reach the level of expertise of notable forum members but with sufficient research, and guidance from the notable-ones, it's possible to DIY manage a 6/7-figure portfolio without losing sleep.

ChilliBob

bowlhead99 said:

ChilliBob said:

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!) 

No, it wouldn't be a disastrous move to put 1% into pretty much anything, because if you lost half of it - or even all of it, if an individual stock or piece of cryptocurrency - it's only half a percent.

But it doesn't teach you anything much about coping with swings and roundabouts of volatile markets, because if it doubles or halves your 'overall portfolio' of 99% cash is not going to change and the doubling of the equity fund is not giving you a meaningful overall return, just like the halving of the equity fund is not giving you a meaningful overall loss.  As it won't give you that 'practical experience' of knowing how you feel when faced with a loss on a much bigger part of your portfolio, there is limited value in doing it. You could get a similar effect by just watching a virtual portfolio, or simply download the factsheet for the index fund every month, and imagine it was real money.

In other words there's not a great deal to be learned from investing 1% for a couple of months and watching your 'portfolio' of one fund as its chart haphazardly moves up and down, just to see what happens (knowing it is not giving you any significant risk) and then piling in the remaining 99% after some arbitrary short period of 'watching'. You could instead just invest 0% for a couple of months and watch the chart go up and down - knowing it is not giving you any significant risk, because you're not actually invested

While it's true that DIYing your investments competently can save costs and fees, and you can pick up tips and tricks for making the most of tax wrappers etc on here - if you do already have a 'enough to retire on' portfolio at a young age, it may be worthwhile buying some initial advice from an IFA to help you understand what you are getting into.  That would generally help to ensure you were invested sensibly and you could always 'take over' that investment to monitor or change yourself, later once you understand more about how it all works.

Yep, I totally get where you are coming from. I guess I was more thinking a step back, I can see how iweb or ii of whatever actually work, understanding how to put money in, take it out, read the charts and analytics properly etc. I do appreciate what I've just written might take about 5 minutes!

Regarding an ifa, very much so, I intend to see what they reckon, when I have more of an idea myself. Indeed you may recall of have seen a thread I started on this very matter which got quite lenghtly (ironically I didn't participate much!).

MaxiRobriguez

BananaRepublic said:

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.

Define "does not work" - is it the most efficient way to make gains? Possibly not, but that wasn't what the OP was seeking, the OP was seemingly seeking dipping toes into investing world but not wanting racy volatile investments. As per previously stated, having cash allocation will hold back a portfolio in gain times but limit losses in bad times. That is the natural result of holding a non-capital-at-risk asset in a portfolio. 

Michael121

itwasntme001 said:

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.

What does optimally allocated look like? 

Sailtheworld

BananaRepublic said:

Sailtheworld said:

Asset allocation comes after assessing appetite for risk. 

Lars Kroijer has a good set of videos which accompany his Investing Demystified book at Lars Kroijer. I revisit these videos whenever I start to think I know what I'm doing to remind myself I don't - especially after a good year like 2020.

I don't think most people would go far wrong by buying a global equity fund and doing nothing else other than offsetting the risk with cash or cash like investments at a level appropriate to the risk they're willing to take.

This does seem to be the forum mantra preached by most people here. Newcomers might do well to look at historical data such as:

https://en.wikipedia.org/wiki/S&P_500#/media/File:S_and_P_500_chart_1950_to_2016_with_averages.png

I assume the ~2000 crash corresponded to the dot com boom, and of course the next one was the Great Financial Crash. And before someone points it out, the charts ignore reinvested dividends.

If newcomers (or anyone else) can predict those peaks and troughs ahead of time they'd be foolish to use trackers as their equity allocation.