Gyroscopic Investing

I'm absolutely shocked to read on another forum that will remain nameless that 100 per cent stocks is a good idea. 100 per cent in any asset class is lunacy. The biggest flaw with most investor philosophies, indexed or otherwise, is the overweighting of stocks. It seems that people cannot get their head around the fact that past performance means absolutely nothing. There is no guarantee at all that stocks will give us healthy returns in the future. None. If the stock market closed tomorrow because of a black swan event and remained closed for years, what role would past equity returns have played in predicting that event? There is an enormous likelihood that every developed country is going to have a Japanese economy future with bonds being a far better investment than stocks.

In the UK most occupational pension funds have a massive allocation to stocks. The one that my employer has justifies that by saying that volatility doesn't matter because they have a long investment horizon??? As far as I can see, stocks could double and halve every four years for the forseeable and so a 100% stock portfolio would loose all the potential rebalancing benefits and get just the sub-inflation dividends. Do the people who work at those pension funds actually save their own money in that way?

I think there is a big disconnect between risk and reward.

Many people recognize that positive rewards compound over time. However, they dismiss the notion that risk compounds over time. I strongly feel that attempting to forecast returns over a longer period of time is harder, not easier.

Also, when talking about a 40 year horizon, the difference between a 10% CAGR, and 7% CAGR is huge. Like, dog food vs. caviar huge.

In an interview once Nassim Taleb said the following:

The stock market is the opiate of the middle class.

I thought that was a great observation.

MediumTex wrote: In an interview once Nassim Taleb said the following:

The stock market is the opiate of the middle class.

I thought that was a great observation.

Similarly, the lottery is the opiate of the lower-class. I never understood why gambling is illegal because it's "bad" for people, but lottery is legal because the government gets to keep the proceeds.

Wondering what the opiate of the upper class would be.

Liz L. wrote: Wondering what the opiate of the upper class would be.

Probably cocaine.

melveyr wrote:

Liz L. wrote: Wondering what the opiate of the upper class would be.

Probably cocaine.

Or...maybe...opium?

Wondering what the opiate of the upper class would be.

How about taking money from the middle class in the form of inflation, taxes, and crooked markets?

Clive "others see volatility as providing higher rewards"

I can see that if rebalanced out, then holding very volatile assets within a portfolio that has low portfolio volatility makes sense. I really can't see how volatility of the over-all portfolio could ever help returns. Lets say you made a genius timing choice and went 100% stocks in 1982- you would still have been better off switching partly to other assets soon after. Going 100%  silver in 2009 would have given lower returns than a rebalanced 80% silver 20% LTT (or whatever) portfolio wouldn't it? Don't Goldman Sachs etc have months and months of trading without a single down day. Isn't that a case of very very careful balancing of very volatile leveraged assets?

Clive, I totally get your point that wacky volatility acts as an unattractive feature (or at any rate used to) that leads to an asset being undervalued and so offering better growth prospects. One caveat is that nowadays a larger proportion of the market possibly sees volatility as being a positive feature and so that might be less true now than it was. I take it we agree that the more volatility your assets have, the greater the scope for rebalancing to give a bonus??

Late to this post, but a 100% stock portfolio is a bad idea for the following reason:

- If you can find a lower-returning noncorrelating asset, even if you buy a little bit of it (say 5% LTT's and 5% gold to a 90% stock portfolio), you'll still beat stocks, most likely, in the long-run.

This is the beauty of modern portfolio theory when combined with some softened principles of the PP... you can IMPROVE return while LOWERING volitility.  Maybe 4x25 is too conservative for some, or they think the PP party is over...

...but a 100% stock portfolio implies some incredible knowledge about future events that nobody has.

As luck would have it, there there's a new Permanent Portfolio thread over at Bogleheads, and there's an individual who is demanding "quality research" that stocks tend to do well during good times and tend to go down during times of economic distress.

http://www.bogleheads.org/forum/viewtop ... 95#1145195

It's difficult to argue against a wall.

If anyone wants to explain how stocks tend to react to the four economic environments to this guy, please feel free.

Gumby wrote: As luck would have it, there there's a new Permanent Portfolio thread over at Bogleheads, and there's an individual who is demanding "quality research" that stocks tend to do well during good times and tend to go down during times of economic distress.

http://www.bogleheads.org/forum/viewtop ... 95#1145195

It's difficult to argue against a wall.

If anyone wants to explain how stocks tend to react to the four economic environments to this guy, please feel free.

I would let such a person come to the PP realizations on his own (even if it means it is going to take a long time).

It sounds like explaining the concept of the PP to this guy might be like explaining the concept of color to a blind person.

The PP is not for everyone.

In that thread someone told me that gold doesn't go up in inflation. Because of that comment I snotted milk all over my new laptop.

I think the Bogleheads are a bit defensive right now. Their portfolios are likely taking a hit and they are deep in their stay-the-course mode. That's the only way they know how to survive this kind of market.

Gumby wrote: I think the Bogleheads are a bit defensive right now. Their portfolios are likely taking a hit and they are deep in their stay-the-course mode. That's the only way they know how to survive this kind of market.

The problem is that a stock heavy portfolio with gradual transition to a bond heavy portfolio isn't "stay the course". It's market timing. You expect stocks to rise throughout your life time. There's no evidence that will occur in the future. At all.

I created that thread. One of those internet moments where lots of arguing but neither side changes their mind 

I should probably just find something productive and/or fun to do. It doesn't really affect me if strangers take on a lot of risk.

I don't go to the BH board much.  I will check in on the big PP thread, but that's about it.

I get everything I need here.