Timing the market

Thrugelmir

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. 

Assumption that all investors are rational is flawed. Behavourial finance exposes these limitations. Not least that some investors are risk takers. Others may not make rational decisions. Retail investors generally follow the herd. 

SouthCoastBoy

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!

As soon as people say things are different this time, the paradigm has changed I think it points to the fact we're in a bubble.

[Deleted User]

SouthCoastBoy said:

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!

As soon as people say things are different this time, the paradigm has changed I think it points to the fact we're in a bubble.

People say it all the time.  Others say “we are in a bubble” all the time.   Yet P/E ratios have steadily increased over the last 100 years.  We have no idea what happens next and we don’t know its a bubble until after one pops. 

Linton

Deleted_User said:

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.  

1) 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.  2) That’s conducive to jumping into celebrity funds because the name sounds good and someone on the web said yo go for it.  3)  And you conclude that diversification has no benefit because “the net effect on return is zero”. 

1) Arguable comparison since Hooke's Law relates two meaningful, measurable and relevent  quantities - ie stress and strain.  Efficient Frontier doesnt.  I agree it does give something to consider though I would be wary about taking the applicability beyond what is directly justifiable - eg conflating the multiple possible definitions of "risk".

2) Yes I agree the dangers are there.  And would include unquestioning reliance on the gurus alongside the celebrity funds.  You can avoid the dangers if you have your own clear conceptual framework, but it has to be one you can justify to yourself and if appropriate explain to others.

3) Wasn't me who concluded diversification of zero benefit!  Diversification may not do much for average return and may be inefficient if applied blindly,  but it will certainly reduce risk in meeting an apparently viable objective.  It is fundamental to my investment approach.

cfw1994

BritishInvestor said:

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?

The article, as I read it, could be suggesting that basing future SWR and investments in general on how things have worked for the past X decades (where X is between 3 and 10!) might not be the best and most accurate thing in the world 🤷🏼‍♂️

I assume you read the article?   Interesting quote: “I, for one, no longer think what I learned in the 1980s and 1990s about economics and markets has really any value whatsoever, other than as a historical backdrop”


Many (me included!) are expecting a broad market correction - prices on equity feels....frothy - & perhaps have been for some months or even years now....yet (& I also agree with this), the world is changing faster now than at any time before.   It was only 14 years ago that the 'smart phone' was really introduced.  Information access is now ubiquitous.   

As Paul Gascoigne once put it: "I never predict anything, and I never will" 😉

[Deleted User]

Wasn't me who concluded diversification of zero benefit!  

Yes, I know it wasn’t you who rubbished diversification. Was referring to someone else’s words to provide an example of what may happen if you don’t bother to understand the meaning of things you are discussing. Sorry; wasn’t clear that 
i didnt mean you. 

Diplodicus

If diversification produces quantifiable gains - a free lunch - how is the formula expressed? 

[Deleted User]

It improves returns for a given level of risk.  Particularly long term.  Kinda said it a couple of times above.  If you want to understand and have basic maths skills then read the reference I gave. 

Diplodicus

Show an example, Mordko.

X being any amount of investments, any risk level. Not measuring comfort but performance, how does diversification improve X?

Diplodicus

Deleted_User said:

It improves returns for a given level of risk.  Particularly long term.  Kinda said it a couple of times above.  If you want to understand and have basic maths skills then read the reference I gave. 

Say an investment house offered 5 funds with different levels of risk: V100, V80, V60, V40, V20. I would have thought the best returns -particularly long term - would belong to the fund with the highest correlation so, kind of the opposite of diversification. 
But that aside, if 5 individuals invested in different funds diversified their holdings with each other, it would not improve the collective return. The net effect would be zero.