Paltry returns ahead

[ochotona]

FYI, the GEM portfolio cited is an application of Dual Momentum (per Gary Antonacci or Meb Faber, both work similarly).

[dutchtraffic]

FYI, the GEM portfolio cited is an application of Dual Momentum (per Gary Antonacci or Meb Faber, both work similarly).

Whoever here has any problems following a PP will absolutely get slaughtered trying to follow any momentum strategy when being whipsawed 14 times in a row. (it looks great on paper...but when getting whipsawed....not so much)

[dutchtraffic]

And the reason we are here today, is simply because the market is no more, there is just the govt left who is trying to decide what prices should be, that's not a market.



Stocks shouldn't be where they are today, and the same goes for bonds.
And gold? It's a fact central banks like to keep gold "under control" (admitted), so the question that remains is: can the PP still function without a market?

[ochotona]

Another good article on this topic:

Today’s investors may have drawn the proverbial “short straw.” From an investment perspective, they are confronting what might be considered a “perfect storm” creating strong head winds against higher expected returns.

http://www.etf.com/sections/index-inves ... nopaging=1

4.5% for a 60/40 is really skinny. If stocks go down 30%-50% within the next few years, and you get in near the bottom of that mess, then the return seen in retrospect 10 years from now will be closer to "normal". That's the hope of trend-followers; to side step this stock bubble, this too-high valuation, and wait for better times.

The problem for the PP is that it has even less growth asset than the 60/40, so 4.5% is going to be even less, especially since cash is ~0%, and the 10 year return for gold is ?

Bad times for all investors.

[Reub]

What's the best portfolio for economic conditions pointing towards paltry returns?

[Pointedstick]

What's the best portfolio for economic conditions pointing towards paltry returns?

Short everything?

[ochotona]

Shorting cash = take out a mortgage

[dualstow]

Shorting cash = take out a mortgage

Does a home equity loan count? 3.5x%
I'm still eager to get rid of it.

[ochotona]

Hard to answer the HELOC question out of context. But paying it is 3.5% return risk free. Better than 30 year Treasury.

[dualstow]

Hard to answer the HELOC question out of context. But paying it is 3.5% return risk free. Better than 30 year Treasury.

Not sure how to calculate the "return" of getting 100K up front.  It's worth something.
But of course, paying it is minus 3.5%.

[ochotona]

That's the problem with our society. People view cash flows due to debt as "getting something. It is not.

[dualstow]

That's the problem with our society. People view cash flows due to debt as "getting something. It is not.

Ok, but when you wrote

But paying it is 3.5% return risk free. Better than 30 year Treasury.

Maybe you could amplify that, because I'm paying it, not receiving it. Why is paying it 3.5% return?

[ochotona]

Debt is negative savings. If you pay off a debt with a 3.5% interest rate, that's mathematically equivalent to putting your debt payments into a zero-risk investment vehicle with a 3.5% return. Well, except for the asymmetrical tax treatment if you don't claim the interest payment on your income taxes.

The $100k cash you received up-front when you took out the loan the loan? That's not "worth" anything. Now, if you were to invest it, and make gains, those gains you could count as your own.

[dualstow]

If you pay off a debt with a 3.5% interest rate, that's mathematically equivalent to putting your debt payments into a zero-risk investment vehicle with a 3.5% return.

Ok.
I don't get it.
Now "mathematically equivalent" has been added to the statement. That hasn't really cleared things up, but that's ok.
Maybe I'll do some googling tomorrow.

The $100k cash you received up-front when you took out the loan the loan? That's not "worth" anything. Now, if you were to invest it, and make gains, those gains you could count as your own.

Sure, I agree. It's just "worth" something (perhaps the wrong term) in the sense that I didn't have to sell 100K worth of investments to renovate my house. (Actually, I did sell some, but here's 100K that I didn't have to sell when I didn't want to sell.

If interest rates go up while I hold this loan, it will have been worth something in another sense.

[ochotona]

Just remember that debt is un-saving. All of the (+) signs flip to (-) signs.

The $100k you received to renovate your house without selling your investments would only be "worth something" is you had a 100% guarantee of more than a 3.5% return. Because sure as shootin' there is a 100% chance you will have to pay back the loan, or else bad things will happen.

3.5% percent is way more than today's risk-free interest rate, so taking out a loan to renovate your house it's not "worth something" in a financial sense... unless maybe also the loan preps your house for a much better sale price, or prevents more costly repair if you were to defer work, or keeps the house habitable and it would not be usable otherwise.

[rickb]

If you pay off a debt with a 3.5% interest rate, that's mathematically equivalent to putting your debt payments into a zero-risk investment vehicle with a 3.5% return.

Ok.
I don't get it.
Now "mathematically equivalent" has been added to the statement. That hasn't really cleared things up, but that's ok.
Maybe I'll do some googling tomorrow.

You have some amount of loan, let's say $100,000, and some amount you're considering either investing or using to pay off part of the loan, say $10,000.  If the loan rate is 3.5% and you can find a 3.5% investment (and to make things simple we only do one payment after a year)

• your net at the end of the year investing as opposed to paying off the loan is $103,500 negative (in the loan) plus $10,350 positive (in the investment), so $93,150 negative.
• your net if you pay toward the loan rather than invest is $90,000 + 3.5% negative, which is also $93,150 negative.

If the interest is the same,

(LOAN * INTEREST) - (INVESTMENT * INTEREST)

is the same as

(LOAN - INVESTMENT) * INTEREST (by the distributive property of multiplication)

So, you can view

(LOAN - PAYMENT) * INTEREST

as 

(LOAN * INTEREST) - (INVESTMENT * INTEREST)

with PAYMENT = INVESTMENT.

[dualstow]

Thanks, rick. I think I'm getting closer.

I'm hijacking, but although I have considered the likelihood of "paltry returns ahead", it's a ten-year loan. I figure when the time comes that I need to buy a bunch of new 30-year bonds, the rate will be at least the rate of my loan. The cash portion will still be under that, but hey- got to have cash.

[frommi]

If all investment returns are paltry, i am sure that your house belongs to that category, too. Buying a deprecating asset with leverage is not a good idea.
Rent and accumulate cash. That way you get richer while everybody else gets poorer. Or just rent and stick to the PP, just in case. Look at the depression in the thirties or japan, i am sure the PP real returns were not that bad.

[dualstow]

If all investment returns are paltry, i am sure that your house belongs to that category, too. Buying a deprecating asset with leverage is not a good idea.
Rent and accumulate cash. ~~

Hi Frommi

I own my home free & clear. Always have. The home equity loan was a choice I made since rates were low, but I probably could have muddled through the renovation without it. I would have had to sell investments and/or borrow from relatives, though.
As I mentioned, I have the cash to pay off the loan anytime, but it'll dent my ppCash. Still thinking on that.

The house thing is a wild card. We found the last great contractor on earth and my wife finally loves the house, so...

[Fred]

http://www.bloomberg.com/news/articles/ ... re-in-2015

It's the worst year for asset allocation funds since 1937

And if you add in Gold, it was even worse as everyone here knows.

[Cortopassi]

Sorry, guys, I caused all this.  I brought down the Internet Bubble, and gold, and of course the poor returns of the PP.  Once I get in "a sure thing" it is bound to go nowhere or down. 

I bet a lot of people feel that way right about now.  You think you've finally settled down and found something that makes sense, and Blammo, it goes nowhere!

Happy New Year!

Mike

[Reub]

It was the year of the FANG.

[Fred]

Sorry, guys, I caused all this.  I brought down the Internet Bubble, and gold, and of course the poor returns of the PP.  Once I get in "a sure thing" it is bound to go nowhere or down. 

And I thought it was me. I was planning on retiring next year and all I needed was one more year like last year. Unfortunately, God hates me.

But this might be good news...

http://www.marketwatch.com/story/wall-s ... 2015-12-28

Because I think He might hate Wall Street analysts who think they can predict the future even more than me.

[ochotona]

But this might be good news...

http://www.marketwatch.com/story/wall-s ... 2015-12-28

Because I think He might hate Wall Street analysts who think they can predict the future even more than me.

2200 median consensus forecast for end of 2016 for the S&P500? Wow, that sucks. Why bother? Even if it does peg 2200, everyone's guts are going to be scattered over the roadway as it visits 1800 and 2500 on the way to 2200!

[MachineGhost]

What's the best portfolio for economic conditions pointing towards paltry returns?

It's not economic conditions, its overvalued stocks.  Diversify, diversify, diversify.  There's always a bull market somewhere.