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  • #31




    Interesting discussion. I just finished Bernstein’s Four Pillars of Investing however and he makes some great points about long term stock returns perhaps not having the advantage over bond returns that they’ve enjoyed over the past 30 years. Basically, the high current valuation of stocks means that the expected return over the next few decades is likely to be lower than in the past. He recommends no more than 75% equity positions, no matter what stage of accumulation we are in.

    As an aside, foreign equities are currently not at such lofty prices, and thus according to Bernstein’s logic would have a higher expected return over the next few decades. I am personally planning to put the Vanguard admiral international stock index in to my taxable soon, as well as devoting a larger space to foreign equities in my deferred accounts….

     

     
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    While CAPE does point to lessened returns, unless of course earnings grow (which they should even if only a tax cut is passed, of course dollar has opposite effects), etc...I have no clue how one could propose bonds will do even better over the long term though as they are set up to do poorly. Bonds are really for volatility smoothing, aka diversification. In theory you should be able to do better with internantional funds, especially with the dollar being nice and high, but those markets are simply not our market.

    CAPE has been a couple standard deviations above the "mean" for 3 decades now, so that may say something more structural than forecastable, though it does have a decent track record. But its just a general feel and never tells you within even several years whence the pain trade will occur.

    Good theory article on article on the 60/40 going forward http://econompicdata.blogspot.com/2016/11/predicting-forward-6040-returns.html and quick thoughts on bonds in general.

    Another interesting look at bond returns. http://theirrelevantinvestor.com/2016/12/07/dont-fear-the-reaper/

    If you were going to attempt to time the market, at these valuations assuming nothing changes some sort of tactical asset/momentum trade wouldnt be out of the question as they do fairly well in this sort of environment (assuming you think a bear market is coming relatively soon).

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    • #32
      Johanna I think if you read a little Bernstein you'll find he is actually quite the opposite of a market timer.

      This was the sentinel book that WCI mentions as giving him the basis for his investment philosophy and I found it to be quite informative

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      • #33







        Be aware if you hire Johanna, the recommended plan won’t have any bonds in it. If you hire somebody else, it probably will.
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        Not true. As I’ve written about (ad nauseum ? ), our clients who have planned cash needs within the next 5 years all “own” high quality corporate bonds timed to mature at date of need. We simply don’t speculate on bonds but use them for their intended purpose – not as an investment but as a way to guarantee liquidity when you need it with a higher return that our clients would get from MM accounts.

        I have yet to hear anyone successfully defend the counter to my position, which always includes a financial plan in place before determining short-term (next 5 year) needs to be kept liquid and long-term (over 5 year) needs to be invested in an appropriately-diversified portfolio of equity funds. If you do not need to liquidate your investments for at least 5 years and you are working with a planner who understands these principles of investing, why the heck would you panic in a downturn? Our clients don’t because we constantly reinforce the plan, not the returns (which do quite well, btw). I am a financial planner first. We use investments as tools to meet the client’s goals, as dictated by the plan in place.

        I can assure you that any fees our clients pay us for planning (which include all investment management) are far outstripped by their long-term returns which result from having a relationship with an engaged, year-round planner.
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        Fair enough, I should have said no bonds in the long-term portfolio. A successful defense can only be determined by the jury (the reader), not by the plaintiff's attorney (you.) The defense attorney doesn't have to convince the plaintiff's attorney he is correct.
        Helping those who wear the white coat get a fair shake on Wall Street since 2011

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        • #34
          How about using some of the cash to convert some of that 1,000,000 in your retirement account into a Roth, filling up your tax bracket.

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          • #35
            Traveldoc -  I'm currently in the 39.6% tax bracket, I think it doesn't make sense to convert any tax-deferred money at that rate, but please correct me if I'm wrong.


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            • #36







              Interesting discussion. I just finished Bernstein’s Four Pillars of Investing however and he makes some great points about long term stock returns perhaps not having the advantage over bond returns that they’ve enjoyed over the past 30 years. Basically, the high current valuation of stocks means that the expected return over the next few decades is likely to be lower than in the past. He recommends no more than 75% equity positions, no matter what stage of accumulation we are in.

              As an aside, foreign equities are currently not at such lofty prices, and thus according to Bernstein’s logic would have a higher expected return over the next few decades. I am personally planning to put the Vanguard admiral international stock index in to my taxable soon, as well as devoting a larger space to foreign equities in my deferred accounts….
              Click to expand…


              And in 30 years, maybe I’ll add him to my (nonexistent) list of perrenially successful market forecasters.
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              Bernstein is not a market forecaster. He's the opposite of a market forecaster (whatever that is).

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              • #37
                Personally, you need more in the 529's, so I would definitely add some there. Secondly, you are sitting pretty solidly in the buy and hold world, but you have no exposure to alternative investments outside of the broad market. As one of my mentors always said- "diversify by source of return". Perhaps consider getting into some commercial real estate ( not REIT's) , or consider managed futures.

                 

                 

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                • #38
                  Or this:

                   

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                  • #39




                    Johanna I think if you read a little Bernstein you’ll find he is actually quite the opposite of a market timer.

                    This was the sentinel book that WCI mentions as giving him the basis for his investment philosophy and I found it to be quite informative
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                    I actually agree with that. My comment was actually meant for the poster and readers about market forecasting in general. (One of my favorite quotes from Warren Buffett: We've long felt that the only value of stock forecasters is to make fortune tellers look good.)
                    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                    • #40



                      Traveldoc –  I’m currently in the 39.6% tax bracket, I think it doesn’t make sense to convert any tax-deferred money at that rate, but please correct me if I’m wrong.



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                      Would definitely wait until the next correction or bear before doing that, but it's a good idea. See this article I wrote for PMD.
                      Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                      • #41
                        Johanna - I guess I don't understand how doing a Roth conversion at a marginal tax rate of almost 50% would EVER make sense? I can't imagine a scenario in which my effective tax rate in retirement would come close to approaching that level. I read your article, which is frankly a little disingenuous in that you don't mention the lost potential gain from investing the taxes paid on the Roth conversion.

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                        • #42




                          Johanna – I guess I don’t understand how doing a Roth conversion at a marginal tax rate of almost 50% would EVER make sense? I can’t imagine a scenario in which my effective tax rate in retirement would come close to approaching that level. I read your article, which is frankly a little disingenuous in that you don’t mention the lost potential gain from investing the taxes paid on the Roth conversion.
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                          Really? If, in a bear market, you are paying taxes on 1/2 the value, your marginal tax rate is actually 25%. Retirement rates are an unknown - nobody can imagine higher rates using today's tax reg's. But I can imagine higher taxes on SS, higher Medicare premiums, retiring to a state that taxes retirement income, and an extra tax on RMDs based on the size of the IRA for the "1%". I came up with that in 30 seconds. Stretch your imagination. There are no guarantees when it comes to taxes except for the present (not even that when laws are made retroactive). The unknowns multiply the further you are from retirement. Neither one of us knows what we don't know.

                          You are correct that I chose not to deduct the lost potential from investing the taxes in a taxable account (which would then be subject to taxes on the Roth and income). That assumes, of course, that the typical taxpayer would do so (few will) whitch would then be reduced by the tax effect of income and growth on the portfolio. There are always other factors. I was simply attempting to dispute the conventional wisdom that it is always better not to convert if you are in a high tax bracket.
                          Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                          • #43
                            Zaphod what do you mean by tactical asset/momentum? Not sure if I'd entertain anything too crazy but just curious what you think some good moves would be in this realm. Thanks for posting those bond articles above..

                            Comment


                            • #44
                              Tactical asset allocation and momentum are related and usually involving switching assets based upon prior performance, trend, etc...The simplest would be something like SPY for risk on and cash or bonds for risk off (TLT).

                              The timetables change, the factors you choose to view change, etc..everyone has their favorite mix of how to do it. There is an article about factor/momentum timing recently on Econompic that may be helpful as well. However, the basic premise is you have a look back period 3, 6, 12 months and assess each of your systems components (SPY vs. TLT in our case), and then allocate capital according to your plan to the one indicated by the result, which is usually the best performing based on price action +/- volatility over the look back period and held for 1 month before looking again. Sounds very active but most of the time the switches are relatively few.

                              Here are the results from the above scenario (usually caveats), 2003-now (based on etf availability). You can see the usual momentum tracking, not as good as just stocks during bull markets but excellent in bear ones. There are several different versions to dry run on the linked site so give it a whirl. Again this has worked best in bear markets, and in the past (aka, before the average everyday doc knew about them) and who knows what future performance will be.

                              People get very excited with these models and tend to curve fit, but fail to follow through in reality. I mean would you have stuck with this fancy model through the first 5 painful years of marked under performance? Probably not. Always good to recognize our humanity and how that will effect even the best system.

                               

                              https://www.portfoliovisualizer.com/test-market-timing-model#analysisResults

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                              • #45


                                Good theory article on article on the 60/40 going forward http://econompicdata.blogspot.com/2016/11/predicting-forward-6040-returns.html and quick thoughts on bonds in general.
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                                I have read numerous comments on this topic from several different sources including a couple I have shared on this blog, most notably from Doug Short at advisorperspectives.com, that in essence say that going forward 60/40 is "dead money". As mentioned by Zaphod above there are alternative ways to invest that tend to get very negative comments on this blog and others, i.e.) momentum and TAA. All approaches have inherent weaknesses, including buy and hold, so I use a combination of methods. Tax efficient buy and hold in the taxable account and active management using momentum, and other methodologies in the tax deferred accounts. In addition, I think there is value in alternative investments, such as real estate and some may be comfortable with managed futures, although I tend to shy away from their high volatility and in my case inefficient taxable gains.

                                I think it's hard for some folks to understand how crushing a bad bear market can be, especially the younger investors out there who haven't lived through it yet.  I was straight buy and hold through the last two bear markets and will never expose myself to such massive downside risk again. Risk management needs to be more than simple diversification in a buy and hold portfolio...IMHO.

                                 

                                 

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