Mathjak's Market Calls

[MachineGhost]

It does hold way more cash then i would and i am retired and living off cash.

We hold 10% at the peak , that is 2 years withdrawals and an emergency fund and it goes lower and lower as it spent down until refilled and the process of spending starts over.

I added 10% cash portfolios to table.

[MachineGhost]

what i like is they have tight connections at fidelity . they know about all manager changes and major portfolio changes or  shifts in allocation .

they just swapped a fund out in the growth and income model for two other funds where new very successful managers are taking over  and utilizing the same criteria that  they did with the other funds they had handled  that did quite well .

these two funds were not so hot under the old managers and were a sell  prior .

no way would i on my own had known any of this .

But I think a better question is, does it matter?  Managers rarely beat their benchmark consistently.  From what I can see from the track record, there's only a 1% CAGR outperformance vs the S&P 500 in Growth portfolio and once you account for transaction costs and taxes (as well as risk), it will have underperformed!

I do think you are ultimately paying for discipline so they have to do or offer something for show.

[mathjak107]

What transaction costs ? The growth model results are the bottom line.
Taxes can be anything from zero on up so we can't project a thing about taxes.
Roths, zero capital gains brackets , the fact up to 42k a year can be pulled out of ira's at less then 5% or 22k tax free  make taxes to broad a subject.

The fact is the growth model is 428k ahead.  That ain't 1%. If anything the s&p results include no fund expenses. Actual results would have been even better.

[mathjak107]

It does hold way more cash then i would and i am retired and living off cash.

We hold 10% at the peak , that is 2 years withdrawals and an emergency fund and it goes lower and lower as it spent down until refilled and the process of spending starts over.

I added 10% cash portfolios to table.

realistically our cash levels vary and spending down cash varies  the levels from about 6% to 10% . it isn't one fixed allocation since it would be dynamic.    we would be at about 6% before refilling and starting to spend again  but part of that is made up of bond interest coming in live .

dividends get reinvested ..  predicting cash levels is like predicting the shape of snow flakes . it will be unique to all of us unless it is a fixed allocation as part of a defined portfolio .

certainly nothing you can throw in a spread sheet trying to compare results .

[MachineGhost]

What transaction costs ? The growth model results are the bottom line.
Taxes can be anything from zero on up so we can't project a thing about taxes.
Roths, zero capital gains brackets , the fact up to 42k a year can be pulled out of ira's at less then 5% or 22k tax free  make taxes to broad a subject.

The fact is the growth model is 428k ahead.  That ain't 1%. If anything the s&p results include no fund expenses. Actual results would have been even better.

Trading commissions, or did the Fidelity network not have 'em back in the day?  Taxes could be compared by using the same historical capital gains rate.  Taxes would be higher for the fund swaps vs buy and hold.  Everything was way more costly in terms of everything then now.  Note that Hulbert accounts for trading commissions using real time historical rates which I've since adopted into my own backtests for an extra dose of realism.  Trading was laughably improbable before the late 90's except on futures contracts.

I think 1% CAGR is certainly enough for a 425K outperformance over 25 years.  Small amounts compound over time, which is why transaction costs, fees and taxes eat away at gains.  But from a risk-adjusted basis, i.e. de/leveraging up the Growth portfolio back to a beta 1.0, it underperformed the S&P500 after accounting for commissions.  In other words, the unit of risk you took on was more or less the explanation for the small outperformance.  This is why passive indexing is so hard to beat as any Boglehead would point out.

Did we know stuff like this in 1987?  Seriously doubtful.  Was it even actionable advice at the time?  Hardly.

[mathjak107]

the fidelity funds we used had no trading fees or commissions , not in the 27 years i have been using them ,performance numbers are the whole deal  .
They use only the fidelity fund family , nothing off funds net which are funds from other company's.

most of the years we were actually around a .80 beta ,. less than the s&p 500 because the growth model held some  bond funds . once yields fell to low beta was increased and bond funds went bye bye .  .  i  started in the growth model in 1987 , one year after it started , so yep certainly actionable .  started with them right after the crash in 1987 .

i don't mind a bit of volatility  , certainly the trade off from .80 or so to 1.09 was well worth 426k . Even 1% compounded for  29 years can be huge . The difference between 10% and 11% is a 10% difference.

i do not consider the normal cycles of the market  risky . they only become risky when you mis-match short term money to long term assets .  they are for the most part  just volatility ..

[MachineGhost]

i do not consider the normal cycles of the market  risky . they only become risky when you mis-match short term money to long term assets .  they are for the most part  just volatility ..

You've got brass balls.  Most of us here would consider any capital loss to be emotionally difficult to deal with.  After all, its our hard earned money that's being pissed away!  It's the living embodient of our retirement dreams going up in smoke!  It's realer than real!

Did you know the PP had a 25% maximum drawdown in real terms in 1981?  I really doubt anyone here can deal with that other than shutting their eyes and not wanting to know.

[mathjak107]

again ,  volatility is not he same as risk . 

riding the market cycles is not a lot of risk . in fact at no time over a typical 30-40 year  accumulation stage or  30 year retirement time frame would you have lost a penny .

it is only  poor investor  behavior or lack of planning that made them lose money .

but that does not mean i want that much volatility in retirement  since i am no longer that interested in growing money , 50% equity is just fine .

that 1% difference in return turned in to a 23% difference in balance at the end of those years .  at the end of the day was a barely perceptible increase in volatility worth almost 1/2 a million bucks  ?  you bet it was .

everyone has their comfort level but being afraid of volatility has always been costly in the end  and volatility does not have to mean riskier .

i do believe at the moment the pp is still negative for the year and all the models above  are positive so losing money does not always mean lower volatility insulates you ..

http://www.businessinsider.com/warren-b ... ity-2015-4

[mathjak107]

if you want to talk about risk vs volatility think about this .

stocks sell at 20x earnings now , the mean is 15x earnings  as an s&p average .  the 10 year treasury at only 2% is 50x earnings if you compare it to earnings from a business . .

there is a whole lot more risk in bonds blowing up than stocks at these levels .

since the low of 2009 only  8.60 billion dollars went in to domestic stock funds and etf's s .  1.3 trillion went in to bond funds and etfs  and 587 billion in to foreign stock funds and etf's  .

the s&p 500 since 2009 is up 226%, 20% cagr  , the barclay bond index is up  35%  or 4.65% cagr .

folks have been using bond funds as proxy's for cash and they are taking on a huge amount of risk even though low volatility .

75 s&p 500 company's pay less to insure there debt on the credit default swap markets then japan , 54 have lower rates then france . many company's today have better balance sheets then the bonds issued by  many developed country's .

high yield bonds today are lower volatility then stocks but much higher risk because of the energy sector debt .

most of the time we say risk , but really mean only volatility .

[dutchtraffic]

if you want to talk about risk vs volatility think about this .

stocks sell at 16x earnings now as an s&p average .

Ehm, ever heared of buybacks....?

Besides, PE is not 16.. it's nearly 21 for the s&p 500.
And the more important one, the shiller PE is around 26, gl with that.

[dutchtraffic]

the 10 year treasury at only 2% is 50x earnings .

there is a whole lot more risk in bonds blowing up than stocks at these levels .

Earnings? Do you even know what bonds are?

[mathjak107]

bonds can be valued too  the same as earnings from a business .

  buffett brought this point  up at his shareholder meeting  when talking about the risk of bonds VS stock and where the real risk is ..


BUFFETT:

" 4.3% interest annually tax-free would be needed from bond investments since 1965 to just maintain purchasing power.

Of course, for most of us, interest is certainly not tax-free.

These days, many are willing to accept a 2% yield on 10-Year U.S. Treasury notes and, somehow for them, that's enough interest income to compensate for the risks.

Now, think of that interest income the same way you'd think about the earnings produced by a good business.

In effect, these investors are paying a price to "earnings" ratio of 50x (inverse of the 2% yield) for an investment that, unlike shares of a good business, has no possibility of any growth in the stream of income.

At 2%, the interest income is likely to prove inadequate when it comes to maintaining purchasing power in the long run. Inadequate compensation considering the risks.

In contrast, it's not hard to find businesses with shares selling at a price to earnings ratio of 12-14x and, in some cases, even less. With the better businesses, there's a more than a reasonable probability they'll produce returns that maintain purchasing power and then some.
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shiller is hard to  compare , the accounting it uses was changed a few years back and by old standards are much higher  then what they would have been under the old rules . .

the mean for the s&p 500 is 15x earnings , at the moment it is 20x .  i have to correct what i posted .

[MachineGhost]

You can't compare "earnings yield" to bond yields; they're not comparable.  It's what the Fed Model does and it has never worked historically except in the decade after 1980.  Anyway, the proper comparison is duration, though I don't know what the average duration on the S&P 500 would be, probably around 25 years if I had to guess.  Currently, T-Bonds are at 17 years and stocks are nearly double at 52.  So clearly, stocks have much more duration risk.  This is a useful concept to structure portfolio risk around, i.e. a 50%/50% mix would be 25 + 8.5 = 33.5 years, currently appropriate for anyone 33.5 years old and under.

I think we really ought to expand the working definiton of risk.  There's many risks that should be dealt with that volatility does not capture.  But I'm going to argue that loss of capital is the primary risk that should be avoided.

As to what Buffet said, here's the catch:  "For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities." (emphasis mine)

So he's indirectly acknowledging that stock valuation matters.  Why is this important?  Well, we've been chronically overvalued ever since 401(k)'s rose to prominence back in 1990-1992.  We only once came to a slight undervaluation for less than a week in 2009.  This length is simply unprecedented and you cannot make any projections about the future because this scenario does not exist in history.  So Buffet in his usual slick way is indirectly acknowledging that when chronically overvalued stocks become volatile as investors panic-end their risk-seeking behavior, the risk becomes that stock valuations mean revert to a chronic undervaluation as has happened many times historically, hence you better buy on the way down to lower your nose-bleeding high average cost basis.  Either way, it will be a devestating blow to capital that is not easy to recover from and may not even be possible on an inflation-adjusted basis if you only have 20 years or less left to retirement.  It is going to kill a lot of Baby Boomers.  Again, there is no historical precedent, so erring on the side of caution rather than adopting what history suggests feels good seems extra prudent to me. 

Personally, I am unclear if the PP concept is an effective way to be extra prudent not.  My gut feel says no because it lacks the flexibility to deal with many facets of risk, such as duration and convexity what with long-term interest rates being at 5,000 year lows.

[mathjak107]

find us anytime no matter what valuations were when you bought that over a 20-40 year accumulation period you were  not up .

there are none , so even if you bought at the worst time , at the end of the day there is still no loss . you just might have done better .

that is the point , there has been no risk to date , only volatility and bad investor behavior .

in fact a 50/50 mix has never lost money over even 10 year periods .


folks get to mixed up between volatility and risk . a lot of money has been given up because of the confusion .


diversified equity funds have always been volatile and had little risk over the long term and like the 50/50 mix over the shorter 10 year time frame too .

[MachineGhost]

find us anytime no matter what valuations were when you bought that over a 20-40 year accumulation period you were  not up .

there are none , so even if you bought at the worst time , at the end of the day there is still no loss . you just might have done better .

that is the point , there has been no risk to date , only volatility and bad investor behavior .

in fact a 50/50 mix has never lost money over even 10 year periods .

Is this in real terms?

[mathjak107]

find us anytime no matter what valuations were when you bought that over a 20-40 year accumulation period you were  not up .

there are none , so even if you bought at the worst time , at the end of the day there is still no loss . you just might have done better .

that is the point , there has been no risk to date , only volatility and bad investor behavior .

in fact a 50/50 mix has never lost money over even 10 year periods .

Is this in real terms?

NOMINAL .  i never researched the real returns on it . feel free  if you like .

[mathjak107]

weekly update

growth model up  1.50% ytd

growth and income model  up .80%

capital preservation and income model up .70% ytd

no changes in any funds .

[MachineGhost]

weekly update

growth model up  1.50% ytd

growth and income model  up .80%

capital preservation and income model up .70% ytd

no changes in any funds .

you should provide context:

S&P 500 Growth IVW +3.51% ytd
Russell 1000 Growth IWF +3.60% ytd

[mathjak107]

It wouldn't mean much since these are not 100% equity portfolio's. These are portfolio's made up of multiple diversified funds and include bonds .

It would be like me pulling out just one fund from the models like fidelity contra which is up 5.6 ytd.

[MachineGhost]

It wouldn't mean much since these are not 100% equity portfolio's. These are portfolio's made up of multiple diversified funds and include bonds .

It would be like me pulling out just one fund from the models like fidelity contra which is up 5.6 ytd.

Even the growth one?  Why do they add bonds to that?

[mathjak107]

To balance volatility out to the point they want it and to provide money for buying equity's if prices tumble. It can vary from zero  to 20% at times and usually not a total bond fund  but something more aggressive

[mathjak107]

fridays update .

no changes in the portfolio's .

growth model up 2.50% ytd

growth and income model  up 2.00%

income model up 1.10%

i show pp  about flat  and total stock market index up 1.72% representing 100% equity's  which none of the  more aggressive models above are yet they are ahead ..

the income model has 40% in a balanced fund which when dissected along  with all the other bond funds it uses, actual equity's are only 26%. it uses  various  short term bond funds  and intermediate term bond funds  for the bond section  so as not to impede  the weak gains in stocks with excessive  interest rate sensitivity  .  beta compared to the s&p 500 is 67% less .

the last 7 years fidelity's managed large cap  funds have been beating indexing 6 out of the 7 years .  looks like the value in equity's is appearing every where but the index's  as the more people who index the more money goes in to the same exact stocks .

[Reub]

Thank you for your input, mathjak! We appreciate it greatly.

[Xan]

the last 7 years fidelity's managed large cap  funds have been beating indexing 6 out of the 7 years .  looks like the value in equity's is appearing every where but the index's  as the more people who index the more money goes in to the same exact stock s .

Do you think a total market index combat this effectively?

[mathjak107]

not at all .  there is so little difference between an s&p 500 fund  and a total market fund in return . in fact  even when small and mid caps were running 5-6% ahead of the s&p 500  the last few years there is typically less than 1% difference between them .

75% of the return  of the 5000 stocks in a total market fund is determined by the s&p 500 which itself is determined by the outcome of only the top 50 stocks .

in effect you have 4950 stocks  influenced by just 50 large caps  because of weighting . a total market fund really isn't a total market fund because of the way the market capitalization weights the index's .

lately not owning the poor performers in the index alone has had many managed funds doing better the last few years then the index . all a manager had to do was go light on energy  or take profits in bio tech and they did great .

while the s&p 500 is up 1.79%  , fidelity contra is up  7.00% ytd ,  fidelity blue chip growth up 5.68% , , fidelity growth company is up  almost 6% , the list goes on and on . ,