Timing the market

JohnWinder

Let me see if I can put you out of your misery. 'which market?' is the whole of, or close to, whichever market you have in mind. It's a generic term, like 'cats': 'I like cats', you don't have to worry about which cat.

BritishInvestor

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

Everything you are saying especially about diversification relates to the long term.  Yes for long term growth WP funds are not appropriate except possibly for someone with strongh risk aversion where perceived safety is more important than total return.

However in retirement the short and medium term are equally important.  One has to eat whilst awaiting for the markets to return to their long term trends.  The short term can satisfactorily be managed with cash.  The difficult one is the medium term, say time-frames of  5-10 or possibly a bit more years.  In this medium term cash becomes more of a risk because of inflation whilst medium term timeframes are too short for equity volatility not to be a concern.  Safe UK Bonds are currently out of the picture.  It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

I've just created a rough and ready example - 30 year retirement, zero fees

50% equity - 3.3% SWR
100% - 3.7%

Holding a 100% equity portfolio has (historically) provided a higher SWR than 50% equity. Of course, not many would be happy with a 100% equity portfolio, but equities do tend to give long term inflation protection. I'm not really sure how wealth preservation funds fit into the picture, or why you need to manage short or medium term?

I am not reassured by SWRs.  Never mind the dubious assumption that the future will be similar to the past, nor the fact that their values are completely determined by a very small number of very large effectively random events. More importantly they are based on historic zero total failures over 30 or so years .  I would have worried myself to an early grave long before my investments had dropped to zero.

The advantage I find with short and medium term portfolios is that severe drops in the long term investments can be completely ignored in the knowledge that they dont need to be touched for at least 10 years and probably much longer.  This has the resultant effect that the long term investments can be at a much higher risk level than would otherwise be the case.

So overall the broad % equity vs non-equity allocation may not be very different to say the traditional 60/40 portfolio.  Separating them means that one can set up the detailed allocations to meet the very different objectives and so hopefully achieve a financially stress-free retirement.

My comment wasn't really about SWRs. it was more about equities have been the only real option for long term inflation-beating returns. 

The return from equities has been generated progressively by a smaller and smaller pool of companies. Vast majority don't beat inflation in the long run. I'm reminded of the quote. 

“Successful investing is only common sense. Each system for investing will eventually become obsolete.”

Maybe, but if you are buying the market, you're going to capture those returns?

The eternal question I love to pose. Which market?   

Developed and emerging markets, large medium and small-cap.

Diplodicus

Deleted_User said:

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

You know what they say ..

1. Maximize diversification. Free lunch. Have it.

A common misconception. The overall effect of diversification is zero.

[Deleted User]

Diplodicus said:

Deleted_User said:

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

You know what they say ..

1. Maximize diversification. Free lunch. Have it.

A common misconception. The overall effect of diversification is zero.

How come the author of the quote (Harry Markowitz)  has a Nobel in economics and you don’t?  

[Deleted User]

At a high level investment asset allocation is about risk/return and efficient frontier.  That’s why diversification is a free lunch.  Basics. 

Diplodicus

I wondered where you had read it. 

You can self-apply any level to your investment strategy but diversification won’t make an iota of difference on the +/- score and it is illustrated as easily as this: If you combine your investments with whoever reads this, it won’t make any difference to the overall value of pooled investment. 

There are other outcomes, it brings you closer to the average and it may make you feel safer but that is not a free lunch.

Linton

Deleted_User said:

At a high level investment asset allocation is about risk/return and efficient frontier.  That’s why diversification is a free lunch.  Basics. 

Risk/return is key.  Diversification is an easy to implement generally applicable way of reducing some risks.  Efficient Frontier in my view is an academic concept of little use to practical investors.  It links "expected return" and "risk" of portfolios. Some of the problems  I see with it 

a) It cannot be derived in advance unless you have knowledge of the "expected return" of the portfolio components in terms of values and likelihood of achieving them.  Life would be so much easier were that knowledge to be available to any meaningful degree of accuracy for say the next 10-20 years.
b) The definition of risk is the standard deviation of returns - short/medium term volatility.  What you really would like to know is some measure of the likelihood of not achieving your objective but that is something else entirely and very difficult to quantify.  

However it is very useful for producing nice graphs in dense academic papers.

[Deleted User]

Linton said:

Deleted_User said:

At a high level investment asset allocation is about risk/return and efficient frontier.  That’s why diversification is a free lunch.  Basics. 

Risk/return is key.  Diversification is an easy to implement generally applicable way of reducing some risks.  Efficient Frontier in my view is an academic concept of little use to practical investors.  It links "expected return" and "risk" of portfolios. Some of the problems  I see with it 

a) It cannot be derived in advance unless you have knowledge of the "expected return" of the portfolio components in terms of values and likelihood of achieving them.  Life would be so much easier were that knowledge to be available to any meaningful degree of accuracy for say the next 10-20 years.
b) The definition of risk is the standard deviation of returns - short/medium term volatility.  What you really would like to know is some measure of the likelihood of not achieving your objective but that is something else entirely and very difficult to quantify.  

However it is very useful for producing nice graphs in dense academic papers.

I find it really useful. The concept of efficient frontier explains where I want to be. Yes, we don’t know in advance where it is exactly but it illustrates the relationship.  And many (all?) good works on asset allocation use this concept.  

Its a little bit like building a house. People have done it for thousands of years without having any idea of Hooke’s law. Their stress analysis was “the gut feel” and practical experience.  Yet knowing the law is very helpful to doing it right.  

Without knowledge of basic concepts, investments and asset allocation become 100% opinion.  And there isn’t even a framework to evaluate alternatives.  That’s conducive to jumping into celebrity funds because the name sounds good and someone on the web said yo go for it.   And you conclude that diversification has no benefit because “the net effect on return is zero”. 

cfw1994

https://theirrelevantinvestor.com/2021/11/08/you-dont-live-in-the-world-you-were-born-into
An interesting perspective, for those who are wedded to "safe withdrawal rates" based on the history of the past 100 years!

BritishInvestor

cfw1994 said:

https://theirrelevantinvestor.com/2021/11/08/you-dont-live-in-the-world-you-were-born-into
An interesting perspective, for those who are wedded to "safe withdrawal rates" based on the history of the past 100 years!

I'm not sure I see the link between the two, unless you are saying this is a bigger bubble than the 90s and therefore we're going to endure a hell of a hangover?