Gyroscopic Investing

http://www.ritholtz.com/blog/2015/01/as ... um=twitter

I doubt there is much hope for the average investor.  Their emotions (and reason) will continue to place them in the wrong assets at the wrong time.

Over the same time period the 4x25% PP had a nominal CAGR of 7.0% (plus with lower drawdowns and volatility).

Ouch! But that concurs with data that I have found elsewhere on the subject... that during a time frame that the stock market was delivering 10% a year or so, the median individual investor was making about 4%.

As I have said before, I'd put my crappy results up against anyone's on this forum. I am confident that my mediocre track record will lose out to any of you!

With all the good investment options over that timeframe, it's interesting to see how the average investor did so poorly.  Maybe instead of talking about the rebalancing bonus, we should talk about the rejiggering penalty.  Buy and hold any set from this chart and you did alright.  But following your emotions leads you to buy high and sell low, making worse returns than any individual holding. 

There is definitely a "rejiggering penalty" (I love it!). Before I found the PP, my last statement showed something like a 3% CAGR over multiple years of a huge stock boom. Since I really had no idea what I was doing, I was constantly rejiggering my portfolio to include basically random funds that seemed like they looked good.

My constantly rejiggered portfolio (CRP) for the last 12 years shows a annualized return of 4.77%. That includes one year plus of PP returns. I just have to click a tab and Fidelity is happy to show me my lagging quotient (LQ) as well as my rejiggering losses.

Gosso wrote: Over the same time period the 4x25% PP had a nominal CAGR of 7.0% (plus with lower drawdowns and volatility).

On the plus side, they did beat inflation!

Putting on my Liberal hat, I'm not sure its really their fault though as much as the constant marketing fiction from Wall Street with its emphasis on trailing short-term returns.  No one wants to be or feel like a loser.

You know what would be really fun?  Watch Jim Cramer's "Mad Money" show regularly for a few years and take all of his advice using imaginary trades.  What would you bet the CAGR would be?

Back in my stock-picking days, I watched a few shows, bought a couple of stocks, and put others on a watch list.  Inevitably, prices went up right after the stocks were mentioned on the show, then dropped again after a few weeks.

Does the "average investor" really rejigger his or her portfolio all that often, though? I suspect not. The people on this forum are a largely self-selected group of detail-oriented analytical thinkers who like to tinker (and have to consciously avoid doing it!).

Yes, some of the "average investors" buy high and sell low because of emotions and tinkering, but I suspect far more of them consistently lose money simply because they buy and hold funds with high expense ratios and high turnover.

Tortoise wrote: Does the "average investor" really rejigger his or her portfolio all that often, though? I suspect not. The people on this forum are a largely self-selected group of detail-oriented analytical thinkers who like to tinker (and have to consciously avoid doing it!).

Yes, some of the "average investors" buy high and sell low because of emotions and tinkering, but I suspect far more of them consistently lose money simply because they buy and hold funds with high expense ratios and high turnover.

I was helping my parents go over their finances a few weeks ago and discovered that they had a substantial amount of money in a cash-like short-term bond fund with a 1.3% expense ratio that charged an additional $125 a year above the expense ratio simply to hold the fund! To add insult to injury, the fund was held in an account with no online trading, so you had to call a broker to do anything, for an additional fee, of course. Some of this stuff is just highway robbery!

Tortoise wrote: Does the "average investor" really rejigger his or her portfolio all that often, though?

I think the typical 401k investor just puts money in and forgets about it, which really isn't so bad.  But they can get eaten alive by fees, for sure.

When it comes to non-retirement accounts, I think most people believe trading is the way to get rich.  The confident ones compare stock tips, brag about buying Apple, watch investing shows, have the stock ticker on their monitor at work, and fawn over IPOs.  They usually lose more than they make.  The insecure ones turn over responsibility to an active manager of some sort and lose tons of money in fees and churn, but would probably fire their guy if they saw him standing pat for more than a year.  Both believe rejiggering is how you maximize returns, and only differ on who they expect to stir the pot.  Active mutual fund investors are somewhere in between. They are perhaps more influenced by recency bias in fund performance than anyone else and are happy to move all their money around to the hot manager. 

I also have a personal hypothesis that the average Boglehead doesn't follow his own advice for more than a few years at a time.  Eventually they get overconfident and fall into group 1 above, or sell everything when the markets tank and take years to get back in.  Perhaps they tinker with elaborate index funds or options trading rather than individual stocks, but the end result is eventually the same. 

The person with significant investments who truly has a long-term passive strategy that they stick with for a decade or more is exceedingly rare, IMHO.

More words of wisdom from Tyler!  I bet he's exactly correct.

I used to read the Boglehead forum but got so overwhelmed with all the finely sliced and diced portfolios...there's always something out there that's "better".  Which must inevitably lead to lots of churning funds and impulse buying/selling.  If I weren't already committed to the PP, I might be falling into the same trap.

sophie wrote: You know what would be really fun?  Watch Jim Cramer's "Mad Money" show regularly for a few years and take all of his advice using imaginary trades.  What would you bet the CAGR would be?

http://www.pundittracker.com/pundits/profile/Jim-Cramer

Tyler wrote: When it comes to non-retirement accounts, I think most people believe trading is the way to get rich.  The confident ones compare stock tips, brag about buying Apple, watch investing shows, have the stock ticker on their monitor at work, and fawn over IPOs.  They usually lose more than they make.  The insecure ones turn over responsibility to an active manager of some sort and lose tons of money in fees and churn, but would probably fire their guy if they saw him standing pat for more than a year.  Both believe rejiggering is how you maximize returns, and only differ on who they expect to stir the pot.  Active mutual fund investors are somewhere in between. They are perhaps more influenced by recency bias in fund performance than anyone else and are happy to move all their money around to the hot manager.

They're not exactly wrong, though.  Compounding IS the most powerful force in the known multiverse.  They're just ill-equipped to be successful traders.  You don't know what you don't know.  And Wall Street and the media exploits that mercilessly.

MachineGhost wrote: You don't know what you don't know. And Wall Street and the media exploits that mercilessly.

Amen.  On a related note, the fees in PS's example are painful to read.  The average investor is up against an entire industry out to milk them no matter which way they turn.  It's a jungle out there. 

According to Blackrock, the average American’s portfolio is:

63% in cash
18% in stocks
6% in bonds
5% in real estate.

Wealthy American's ($5+ million):

30% to 40% in stocks
10% or less in cash
10% or more in bonds
Variety of other assets

And 80% of Americans feel the above asset allocations are correct and 45% of Americans are pessimistic about their financial future.

The average Social Security check is $1300 per month.

The average length of retirement (now) is 18 years (but increasing every year).

The average savings of a 50-year old is $43,797.

78% of retirees have less than $100K in savings.

MachineGhost wrote: According to Blackrock, the average American’s portfolio is:

63% in cash
18% in stocks
6% in bonds
5% in real estate.

Wealthy American's ($5+ million):

30% to 40% in stocks
10% or less in cash
10% or more in bonds
Variety of other assets

And 80% of Americans feel the above asset allocations are correct and 45% of Americans are pessimistic about their financial future.

5% in real estate and 63% in cash? I can't believe that. According to http://www.census.gov/people/wealth/fil ... _2011.xlsx, the median household in 2011 had a net worth of approximately $69K, but only approximately $17K "Excluding Equity in Own Home". Even those 65 and over have a net worth of about $194K but only about $27K "Excluding Equity in Own Home".

I wish things like this would factor in personal property and your home, as well as showing your mortgage and other debt as a negative bond position.

It maybe would look a little ridiculous, but I think it would better illustrate the economic reality of people's situations.

moda0306 wrote: I wish things like this would factor in personal property and your home, as well as showing your mortgage and other debt as a negative bond position.

It maybe would look a little ridiculous, but I think it would better illustrate the economic reality of people's situations.

The economic reality of most people's situations is that they have no significant financial assets and would be much better off selling their houses and renting.

Are they going to do that? No way, because renting is "throwing your money away". Furthermore, if any significant proportion of the population tried to do that, that "home equity" would vanish like the dew on a warm spring morning.

Libertarian666 wrote: The economic reality of most people's situations is that they have no significant financial assets and would be much better off selling their houses and renting.

Are they going to do that? No way, because renting is "throwing your money away". Furthermore, if any significant proportion of the population tried to do that, that "home equity" would vanish like the dew on a warm spring morning.

I think these people need the forced savings...