Timing the market

MK62

.....but then, collectively, they haven't diversified anything.....collectively they still hold the same investments, so how could they get a better collective return?

Audaxer

Diplodicus said:

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.

If in that example V100 is 100% equities, it may given the best long term returns, but carries the biggest risk as it could fall by 50% in an equity crash.

Diplodicus

MK62 said:

.....but then, collectively, they haven't diversified anything.....collectively they still hold the same investments, so how could they get a better collective return?

They cannot, by any sample. Even if every investment were diversified through every investor, it would not improve the collective return. No free lunch.

BritishInvestor

cfw1994 said:

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" 😉

As you say, none of us knows what the future holds. 

I wonder whether Batnick, providing daily commentary from a US standpoint, might have the same viewpoint as a global investor looking over the longer term.

Swedroe has a different take

https://www.evidenceinvestor.com/is-small-cap-value-dead/


1. Outside of the U.S large-cap growth space (which to be fair is now a large part of global market cap), valuations aren't nearly as stretched.
2. Outside of the U.S large-cap growth space, returns have been (very broadly) in line with long term returns
3. U.S large-cap growth earnings haven't kept up with their share price growth.


"Instead, the outperformance is fully explained by a change in valuations — the price investors are willing to pay for a dollar of earnings, which John Bogle called the “speculative return.”



As an aside, the rise of passive investing may be contributing to the rises in the biggest names.

https://www.bogleheads.org/forum/viewtopic.php?t=336429

"Flows into funds tracking the S&P 500 index raise disproportionately the prices of large-capitalization stocks in the index relative to the prices of the index’s small stock"



Regarding the world changing faster now than ever (from the Swedroe article)

"When I ask investors why they believe large growth has outperformed, the answer typically revolves around the notion that “this time it’s different” because technology is moving faster than ever and network effects lead to large growth outperforming even more. As a result, large growth company earnings have been rising much faster. I point out that expected faster growth in earnings is an insufficient reason to believe that large growth stocks will outperform because higher expected earnings growth is already built into prices. Thus, the differential in earnings growth needs to be greater than was already expected to get that outperformance."



I don't see this as being too dissimilar to the late 90s, but as long as you aren't basing your SWR calcs on a portfolio of US large-cap growth stocks, is this really going to be worse than the 1970s?

SouthCoastBoy

BritishInvestor said:

cfw1994 said:

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" 😉

As you say, none of us knows what the future holds. 

I wonder whether Batnick, providing daily commentary from a US standpoint, might have the same viewpoint as a global investor looking over the longer term.

Swedroe has a different take

https://www.evidenceinvestor.com/is-small-cap-value-dead/


1. Outside of the U.S large-cap growth space (which to be fair is now a large part of global market cap), valuations aren't nearly as stretched.
2. Outside of the U.S large-cap growth space, returns have been (very broadly) in line with long term returns
3. U.S large-cap growth earnings haven't kept up with their share price growth.


"Instead, the outperformance is fully explained by a change in valuations — the price investors are willing to pay for a dollar of earnings, which John Bogle called the “speculative return.”



As an aside, the rise of passive investing may be contributing to the rises in the biggest names.

https://www.bogleheads.org/forum/viewtopic.php?t=336429

"Flows into funds tracking the S&P 500 index raise disproportionately the prices of large-capitalization stocks in the index relative to the prices of the index’s small stock"



Regarding the world changing faster now than ever (from the Swedroe article)

"When I ask investors why they believe large growth has outperformed, the answer typically revolves around the notion that “this time it’s different” because technology is moving faster than ever and network effects lead to large growth outperforming even more. As a result, large growth company earnings have been rising much faster. I point out that expected faster growth in earnings is an insufficient reason to believe that large growth stocks will outperform because higher expected earnings growth is already built into prices. Thus, the differential in earnings growth needs to be greater than was already expected to get that outperformance."



I don't see this as being too dissimilar to the late 90s, but as long as you aren't basing your SWR calcs on a portfolio of US large-cap growth stocks, is this really going to be worse than the 1970s?

I have a similar opinion but nobody really knows time will tell. I'm 40% cash, which means I ve missed out on some great returns over the last 18 mths. I think the next 5 years are going to be interesting. 

Thrugelmir

Deleted_User said:

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. 

That's precisely why some investors are better suited to use passively managed portfolios. If neccessary with the aid of external advisors. A little knowledge and understanding is a dangerous thing.  P/E ratios can be engineered. A foresenic investigation of a company's accounts by a trained analyst can paint a very picture of a company's financial performance.

Bubbles are very much predictable. The fall of the Hut Group by 70% being a very recent example of a realisation by investors. Fortunately the UK markets are far better and tighter regulated than the US ones. Hence why P/E ratios have generally remained at sensible levels. 

jamesd

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!

For a perspective over 800 years you might try This Time Is Different: Eight Centuries of Financial Folly . Arguing that it's different this time isn't very persuasive when there's such a long history of that argument being wrong. There are always differences, but they are seldom significant in the end.

It's still entirely possible to live through conditions worse than a couple of world wars, a major depression and high inflation lasting years. Someone who does may well need to adjust beyond the limits of what was historically sufficient. Though little would have helped them if they stayed in their country of origin and that country was Russia, Germany, China, Japan or a number of others at various times where all domestic investments went to nil value or close to it and escaping was hard.

Cyclically adjusted P/E ratios are high in some markets. The solution I adopt isn't leaving all markets, it's diversifying away from those particular markets, so I'm right to some degree whichever way things go. It's not free, costing me some returns whatever the outcome, but my job isn't being perfect and getting every trend exactly right, it's avoiding being too far wrong in any direction.

[Deleted User]

"When I ask investors why they believe large growth has outperformed, the answer typically revolves around the notion that “this time it’s different” because technology is moving faster

I think its more to do with the moat that S&P500 companies have.  Red tape has been proliferating.  Governments make it difficult for new entrants to jump in and outcompete.  The regulations require huge pockets, not to mention connections. 

 And technology.  Massive corporations are hard to compete with as up front technology investment is so high.  And the largest US companies are sitting on so much cash they can and buy any new entrant before they become a threat.  And they can scoop up the best brains by paying them off.  You don’t need a lot of employees if you are Google, Microsoft or Facebook, so they can afford to buy the best brains. 

And accountants. And lawyers. They can buy better ones than the  government.  China can and has attacked big tech when the latter didn’t follow government priorities. US governments can’t - not for the lack of trying.

As a result of all this top companies have stayed dominant, profitable and immune from competition  for far longer than has been usual historically.  And because of this moat the risk is seen to be lower  which pushes valuations up.  

Not to say it won’t change but betting against Mr Market is usually bad for your pocket. In that respect nothing’s different. 

And forward P&E ratios are not particularly high at around 21 (I think).  Not as high as they have been by any means.  Profits have been growing very fast. 

Schiller’s ratio has been telling us stocks are overvalued for as long as it existed.  As a result the author has been fiddling with the ratio.  Its the kind of academic work which looked great but has been debunked by reality and is basically useless. 

daz378

In terms of shock to the market...how will it play out    its rising at the moment...but with all the QE  going on and  challenged supply chains   adding inflationary pressures...  will the bubble  burst    and if it does  to what extent? Will  be it as bad 2008   but will eventually recover ?   People are talking about    government backed  bitcoin  may be needed... just worried about my pension  as  I will be thinking of drawing it within 5..to 7 years

Prism

Diplodicus said:

MK62 said:

.....but then, collectively, they haven't diversified anything.....collectively they still hold the same investments, so how could they get a better collective return?

They cannot, by any sample. Even if every investment were diversified through every investor, it would not improve the collective return. No free lunch.

You seem focused on return. Overall return is not the most important factor for many people. Diversification reduces the risk by bringing the return closer to the average.