Expected returns: The myth

[Indices]

I think one of the biggest eye openers of adopting the permanent portfolio is the fact that it turns on its head a lot of the standard advice. One piece of advice that is commonly bandied about in the investing world is expected return. For me, expected return is absurd. If a black swan event closed the stock market, where is the expected return for stocks? What if we have a decades long bear market? What then? Expected returns is completely reliant on past performance, and as we should all know, past performance is no guarantee of future returns.

I'm venting from reading a thread at Bogleheads. I think I need a break from that forum for a month or two. Of course that will mean more posting here and more high fiving in agreement most of the posters here. Should help my blood pressure.

[Wonk]

LOL, I know the feeling.  I limit my B'head access and whenever I go back it's like I'm voluntarily beating my head against a brick wall.  You can't convince most of the folks over there of anything because their mind is already made up.  Dialogue is largely useless.

The good news is that without stock-heavy investors, no one would suffer the losses during secular bear markets lasting 10-20 years.  I especially appreciate the 200 year charts declaring stocks the winner.  I have yet to meet anyone with a retirement span lasting 200 years.  20-year bear markets can be devastating and happen quite frequently. 

[moda0306]

I especially appreciate the 200 year charts declaring stocks the winner.  I have yet to meet anyone with a retirement span lasting 200 years.  20-year bear markets can be devastating and happen quite frequently. 

This is incredibly important.  Most people don't earn/save that much between ages 0-25 and 65 on... (and even a lot of 25 year olds aren't saving that much until their career wheels are spinning and their college loans are paid off)...

So really, you're kindof  stuck with this 40 year window of saving in a lifetime, most of which will occur later in that period, closer to when you'll need the money, and with an even smaller window of that 200-year ride available.

Even moreso, in my opinion, if a recession is tough on anyone it's on young people, so even in your 25-35 year period, should one be really loading up on stocks at a 80-90% ratio?  Do you really want 80-90% of your wealth tied up in an asset that will plummet about 3 months before you get laid off? 

This is another reason I like the PP, to be sure.

[Gumby]

Are all Bogleheads into stock heavy allocations? I thought the Boglehead concept was to hold a bunch of low cost funds namely Vanguard in an asset allocation blend appropriate to each investors needs/objectives.

I think many of them start off with stock heavy portfolios and transition to a percentage of bonds that match their age (i.e. a 65-year-old would have a 35/65 portfolio).

[Pkg Man]

I was looking for an way to compare the PP against a conventional stock-bond blend and saw the Vanguard Target Retirement 2020 fund (I have about 11 years until I can retire so I thought this would be close enough).  I noticed that this fund is 65% equities -- seems way too high for someone with that short a time frame until retirement. 

While this is only a guide, I suspect a lot of folks don't really give it much thought and take that recommendation.  Things might work out fine with such an allocation, but I am not willing to take that risk.

[clacy]

I was looking for an way to compare the PP against a conventional stock-bond blend and saw the Vanguard Target Retirement 2020 fund (I have about 11 years until I can retire so I thought this would be close enough).  I noticed that this fund is 65% equities

That is pretty scary indeed.

[Storm]

I was looking for an way to compare the PP against a conventional stock-bond blend and saw the Vanguard Target Retirement 2020 fund (I have about 11 years until I can retire so I thought this would be close enough). I noticed that this fund is 65% equities

That is pretty scary indeed.

My company, which is a Fortune 15 large US company with about 100,000 employees, recently changed the default 401k option to the Vanguard Target Retirement funds based on your age.  For me it was Vanguard Target Retirement 2040.  These funds are supposed to protect investors from making stupid decisions like having all your 401k in equities in 2008, the year before you retire.  They seem to have way more aggressive allocations than most traditional "your age in bonds" portfolios.

For example, target date 2040 fund's current allocation is:

1 Vanguard Total Stock Market Index Fund Investor Shares 62.5%
2 Vanguard Total International Stock Index Fund Investor Shares 27.2%
3 Vanguard Total Bond Market II Index Fund Investor Shares† 10.3%
Total — 100.0%

Wow, 79.7% equity exposure - that is way too aggressive.  The expense ratio is not bad, only 0.19%, but the allocation is just terrible.

Luckily, when this change was announced, I took advantage of the BrokerageLink option and promptly switched out of this fund.

[rickb]

For example, target date 2040 fund's current allocation is:

1 Vanguard Total Stock Market Index Fund Investor Shares 62.5%
2 Vanguard Total International Stock Index Fund Investor Shares 27.2%
3 Vanguard Total Bond Market II Index Fund Investor Shares† 10.3%
Total — 100.0%

Wow, 79.7% equity exposure - that is way too aggressive.

It's more aggressive than that.  62.5+27.2=89.7

[Storm]

For example, target date 2040 fund's current allocation is:

1 Vanguard Total Stock Market Index Fund Investor Shares 62.5%
2 Vanguard Total International Stock Index Fund Investor Shares 27.2%
3 Vanguard Total Bond Market II Index Fund Investor Shares† 10.3%
Total — 100.0%

Wow, 79.7% equity exposure - that is way too aggressive.

It's more aggressive than that.  62.5+27.2=89.7

Heh... too early in the morning and not enough coffee to do math yet...  You're right, 89.7%

[MediumTex]

Target date funds are the investing equivalent of the doctors back in the 1950s who told people to smoke to ease their nerves.

[Indices]

Target date funds are awful. Even the Vanguard ones.

1. They are actively managed. So they are guaranteed to underperform passively managed funds.

2. They incur higher tax penalties because of all the selling they do, so they are not good for a taxable account.

3. They are under the misguided belief that more stocks is for younger people and that more stocks equals "aggressiveness" and higher guaranteed (expected) returns.

4. They can randomly add new asset classes if the fund manager wants it. If REITS do well for several years, you can bet the funds will add them to try and improve returns, even if you don't want them.

[moda0306]

1. They are actively managed. So they are guaranteed to underperform passively managed funds.

I don't think "guaranteed to underperform" is the correct phrase.... "unlikely to underperform, expense-ratio-adjusted" might be more appropriate.

I totally agree with you overall, though.

[Indices]

You're right, guaranteed is harsh. I should have said "almost certain". 

[Pkg Man]

I was looking for an way to compare the PP against a conventional stock-bond blend and saw the Vanguard Target Retirement 2020 fund (I have about 11 years until I can retire so I thought this would be close enough). I noticed that this fund is 65% equities

That is pretty scary indeed.

My company, which is a Fortune 15 large US company with about 100,000 employees, recently changed the default 401k option to the Vanguard Target Retirement funds based on your age.  For me it was Vanguard Target Retirement 2040.  These funds are supposed to protect investors from making stupid decisions like having all your 401k in equities in 2008, the year before you retire.  They seem to have way more aggressive allocations than most traditional "your age in bonds" portfolios.

For example, target date 2040 fund's current allocation is:

1 Vanguard Total Stock Market Index Fund Investor Shares 62.5%
2 Vanguard Total International Stock Index Fund Investor Shares 27.2%
3 Vanguard Total Bond Market II Index Fund Investor Shares† 10.3%
Total — 100.0%

Wow, 79.7% equity exposure - that is way too aggressive.  The expense ratio is not bad, only 0.19%, but the allocation is just terrible.

Luckily, when this change was announced, I took advantage of the BrokerageLink option and promptly switched out of this fund.

I was expecting to see something more like the "own your age in bonds" rule of thumb as well. 

I think that these funds are better than someone who stays 100% in stocks throughout their working years, but they still leave a lot to be desired.  I've seen at least half a dozen portfolios from Clive that would be much more appropriate for the average investor than these target funds.