tag:blogger.com,1999:blog-5465015914589377788.post3856800398486153097..comments2024-03-20T09:32:16.592-04:00Comments on Michael James on Money: Seeking a Reason to Own Bonds for the Long RunMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger35125tag:blogger.com,1999:blog-5465015914589377788.post-58100274008523875572020-11-04T14:46:07.504-05:002020-11-04T14:46:07.504-05:00The following exchange is reproduced to remove bro...The following exchange is reproduced to remove broken links:<br /><br />----- Gail Bebee December 22, 2014 at 3:01 PM<br /><br />Taking a look at more realistic and Canadian portfolio returns data that Justin Bender has put together http://www.canadianportfoliomanagerblog.com/model-etf-portfolios/ provides another perspective. May be 20 years of data is too short, but it certainly makes the case for including some bonds in a portfolio.<br />Any comments on this data? <br /><br />----- Michael James December 22, 2014 at 3:31 PM<br /><br />@Gail: Interest rates have been dropping steadily for 30 years now. This has made bonds look abnormally good. That said, Justin's portfolios look very reasonable to me. But he is in the business of creating portfolios that clients can handle. If he tries to force clients to take on more risk than they can handle, they will sell out at the worst possible times.<br /><br />I am primarily concerned with my own portfolio. I slept fine through 2000 and 2008, and I'll sleep fine through the next market crash. If Justin could get good return data for the past 60 years instead of only 20, the bonds in his model portfolios would look worse. But this doesn't mean he should remove bonds. He has to consider what's best for clients.<br /><br />Bonds reduce volatility. There will always be some years when bonds outperform stocks, but I never know in advance which years these will be. I expect that over the long term stocks will beat bonds. So, I put long-term savings in stocks and tune out the market noise.<br /><br />I try to be clear as often as possible that I don't recommend that others follow my lead. Living in fear and being unable to sleep at night is no way to live. For some reason, many smart people who need the safety of bonds can't admit to themselves that safety is the reason. They need to believe that somehow owning bonds will make them richer in the long run. This is unlikely.<br /><br />There is no shame in seeking safety. I stopped riding my bicycle because I don't like the risk of riding near cars. Others think I'm being ridiculous. In this area of life, I prefer safety. When it comes to money, I try to look ahead a decade or more and tune out the short-term. To each his or her own.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-33182961872286408002014-12-20T22:42:40.028-05:002014-12-20T22:42:40.028-05:00@Mr. Captain Cash: To have an all-stock portfolio...@Mr. Captain Cash: To have an all-stock portfolio means you have to maintain a long-term view. Examine your needs carefully to see if any are shorter term.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-37039672030893897842014-12-20T17:39:41.616-05:002014-12-20T17:39:41.616-05:00Michael,
I really enjoyed this post because curre...Michael,<br /><br />I really enjoyed this post because currently my investment portfolio is all-stocks. It was interesting to see the different results. I started investing at the beginning of 2008 so I have only invested through nothing but good times. I guess only time well tell how I react to another stock market crash.<br /><br />Happy Holidays!<br /><br />Mr. Captain CashMr. Captain Cashhttp://www.mrcaptaincash.comnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-45859734581137648172014-12-20T12:41:45.019-05:002014-12-20T12:41:45.019-05:00Dreman's conclusions are based on historical r...Dreman's conclusions are based on historical returns. What's different about his analysis is that he focuses on the fiat money era. In the gold standard era, deflation was common. Prices went down 30% in the Depression. Deflation makes fixed income more attractive. But with fiat money, deflation is much less of an issue. Analysis using data from the prefiat money era is less relevant to present investors, and will make bonds look like a better investment. He also takes into accounts taxes, which is not commonly done.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-51582885676755384892014-12-20T11:40:40.000-05:002014-12-20T11:40:40.000-05:00@Anonymous: My library seems to have nothing at a...@Anonymous: My library seems to have nothing at all written by Dreman. I've read several justifications for choosing stocks over bonds. The most common themes are historical returns, "it's better to own than loan" and "it's better to own a slice of human ingenuity and work than to lend money to governments." If Dreman's argument doesn't fit into one of these categories, then I'm still interested.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-43754488721971177672014-12-20T11:17:56.960-05:002014-12-20T11:17:56.960-05:00About stocks versus bonds, you only have to read p...About stocks versus bonds, you only have to read p. 361-374. And your library may have an older edition, which gives the same message.<br /><br />About Dreman's goal to beat the market, he advocates using price ratios to value invest. That's not significantly different than the strategy used by small cap value ETFs. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-52947804404038980722014-12-20T08:50:24.917-05:002014-12-20T08:50:24.917-05:00@Anonymous: Most people will never use all their ...@Anonymous: Most people will never use all their room in tax-sheltered accounts. But you're right that the analysis changes for those with significant non-registered assets. I took a quick look at the preview for Dreman's book. I'm not optimistic about a book that promises to help me beat the market. However, I would have read it anyway if my library had a copy. In any case, I'm already convinced that as I head into retirement, I'll use a threshold of 5 years to split my portfolio between stocks and safe assets.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-6137318795753376832014-12-20T01:01:01.364-05:002014-12-20T01:01:01.364-05:00You've ignored taxes and included data from th...You've ignored taxes and included data from the prefiat money era. That makes bonds look better. I'd suggest reading Contrarian Investment Strategies by David Dreman. After reading that, I came to the conclusion tha any money I didn't need within 5 years should be in stocks. And a good case could be made for 3 years.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-79321538089942617432014-12-17T18:16:20.164-05:002014-12-17T18:16:20.164-05:00@BetCrooks: I remember reading story about a surg...@BetCrooks: I remember reading story about a surgeon whose skills were in high demand. He said "money is the most easily renewed resource." It seems that the fact that your husband is "well paid" could be influencing you in this way as well, but I don't trust my ability to make such determinations.<br /><br />If we need someone to say that dividends don't count in a comparison of stocks and GICs, maybe Trahair can help :-)Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-12959176138817491152014-12-17T16:51:23.847-05:002014-12-17T16:51:23.847-05:00Hey. I never said I was easy to figure out!
I car...Hey. I never said I was easy to figure out!<br /><br />I care how our money is invested because I try to do a good job at whatever I'm working at. And since we do have money it should be doing something to stay ahead of inflation.<br /><br />And I don't consider most of it "my" money (good thing, too, since most of it isn't.) <br /><br />I don't particularly care about what I believe you are calling "volatility", although it makes me uncomfortable. I don't know if volatility is the reason I am averse to stocks. (I believe you've told me a few times it is, but I'm not sure if that's the right word/explanation.) <br /><br />What bothers me about stocks is that if I want to pull all of my money out in cash at a given moment I cannot control or predict what that amount will be at that moment. The fact that logically I shouldn't want or need that money for X years isn't enough to remove that feeling of unease because of the non-fixed value. I prefer the feeling the comes with knowing the exact worth of my savings at any given point in the very near future (e.g. during the term to maturity. Obviously I haven't any way of predicting future interest rates.) It's an emotional thing, not a logical thing.<br /><br />I do mostly work for free nowadays.<br /><br />My husband, by the way, does like money and would be upset if we lost all of it. He does some work for free and a lot of work that is well paid.<br /><br />I don't owe my children anything so if I lost all my money before any of it could go to our children it would be unfortunate but it wouldn't be the end of the world. It would be extremely difficult to lose all of my money if it was invested in fixed income assets within Canada, although it could be done.<br /><br />As my husband could warn you, Watch out for Geminis, they're often self-contradictory.<br /><br />Anyway, this is all way off topic about bonds vs stocks. I'll be curious to see if any other fixed income investors weigh in with another view. I wonder if David Trahair is reading any of this?Bet Crooksnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-34993774639211027252014-12-17T14:09:27.506-05:002014-12-17T14:09:27.506-05:00My point was not to suggest market timing, but rat...My point was not to suggest market timing, but rather that to settle on an appropriate long term asset allocation, you will be most concerned on how stocks behave versus fixed income over the same identical time periods (ideally the specific period of your holding), rather than relative performance comparing different 20 year intervals. <br /><br />I didn’t spend time to figure out correct compound return formulas, but I looked at that data, and did simple mean return averages over rolling 10 and 20 year periods, of 0% and 100% equity holdings, not factoring in CPI. Although overly simplistic numbers, the results / conclusions were not that dissimilar to yours: Over 10 year periods, the fixed income out performed in a not insignificant 10% of cases (the largest year of fixed income outperformance being a considerable 6% in 2008). But over 20 year periods, equities always outperformed fixed income.<br /><br />So next to mull over specifically what this means, in the context of an uncertain future... <br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-23670026494973862092014-12-17T13:45:51.854-05:002014-12-17T13:45:51.854-05:00@Bet Crooks: If you wouldn't mind if your mone...@Bet Crooks: If you wouldn't mind if your money disappeared, why do you care at all how it is invested? Why do you care about volatility? If you or your spouse work, I assume you would continue to work for free if your employers stopped paying. How can you simultaneously care about giving money to your children but not care if you lost all your money? Your explanation gave me a little more insight into your thinking, but it still seems filled with contradictions.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-54798958473873836012014-12-17T13:38:13.258-05:002014-12-17T13:38:13.258-05:00I think I just killed my last reply. If not, apolo...I think I just killed my last reply. If not, apologies for submitting it twice!<br /><br />I am one of the weird few who wouldn't mind if my money disappeared. You'll more commonly find my type in convents, monasteries and working voluntarily in third world countries or rough situations in Canada. We're certainly not in the majority.<br /><br />And yes, we have enough now that we could fund our lifestyle with GICs. Our children, though, are still young and we've decided to try to grow our savings to help them get started in life. So we're investing in some equities to try to speed that up a bit. <br /><br />I don't like short-term volatility but it's never made me sell any assets. I invested a very small amount back in one of the first index funds (back when they were mutuals and it cost over $300 to make a single trade and was only possible through a broker). Back then, index funds were new and novel. I suspect I got the idea from the Wealthy Barber but I'm not sure. Anyway, it promptly lost a huge amount of its book value. But I didn't sell in fact I only got rid of it a couple of years ago. (I just didn't read the statements for about 15+ years. Scary eh?) Despite the various MER increases and rearrangements of the fund over the years, it averaged about 7% a year over that term so it wasn't a total loss.<br /><br />We're probably polar opposites: you'd prefer to invest 100% in stocks to maximize returns; I'd prefer to invest 100% in fixed income and am almost willing to accept the limited returns.Bet Crookshttp://financialcrooks.comnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-42521089768421938182014-12-17T11:48:46.179-05:002014-12-17T11:48:46.179-05:00@Anonymous: You can get all the returns and CPI da...@Anonymous: You can get all the returns and CPI data from the links in the article. I used the mixed portfolios to cover off unexpected correlations between stock and bond returns. For example, if they had strong negative correlation, you'd expect very good performance from the mixed portfolios. A reason to compare returns from the same time period is if you believe you can somehow discern from one year to the next what mix of stocks and bonds would be best. This is a form of market timing. I just don't think I can do this successfully. If I'm going to pick an asset allocation and keep it fixed for all the money I won't touch for 20 years, the analysis that I did makes sense rather than comparing data in like time periods.<br /><br />If you can figure out something new with your approach that proves me wrong, I'm interested. Glad you found my post thought-provoking.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-84241019950335816392014-12-17T11:40:03.094-05:002014-12-17T11:40:03.094-05:00@Bet Crooks: I'm not sure of exactly what you...@Bet Crooks: I'm not sure of exactly what you mean when you say that "money isn't one of my prime motivators." Taken literally, it seems to mean that you wouldn't mind if your money disappeared. But I'm pretty sure that's not what you mean. There are some people who have greater savings than they need and can fund their lifestyle with minimal risk by investing only in GICs. But I'm guessing that you are not in this boat. The only interpretation I'm left with is that you don't like short-term volatility, which makes you very similar to many other investors.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-16144384347482722652014-12-17T10:55:21.973-05:002014-12-17T10:55:21.973-05:00Great blog and great topic. Regarding asset alloc...Great blog and great topic. Regarding asset allocation, I have settled on an equal target weighting of Canadian, USA, and international equities, but I continue to struggle with the more important question of fixed income allocation (I have previously been lower over the last 20 years, but over recent years have been adding fixed income and was thinking of gradually moving up towards somewhere around 25%). <br /><br />I get your conclusions based on the historical data as presented. However what jumped out at me was: “… didn’t necessarily occur during the same time periods”, which I think means looking at those charts that the best case 20 year bond return of about 7% could have potentially occurred during the same period as the worst case equity return of just over 0%. To understand the probability of this, I think it would be useful to compare performance during identical time periods: ie the x axis showing the year where the time period begins or ends, and the y axis showing the difference between the 100% equity and 100% bond return. Depending upon what that shows, you could add all the mixed portfolios performance difference also versus a baseline of either 0% or 100% stocks. I’m thinking that would give an idea of how often, if ever, where fixed income outperforms equities over a longer period and thus if fixed income is a useful part of a balanced portfolio. Hopefully that makes sense; if preferable for you, I’m happy to take a crack at this if you send me the data.<br /><br />Many thanks for your thought provoking blog!<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-40030541734059053432014-12-17T10:47:21.961-05:002014-12-17T10:47:21.961-05:00Another reason that some of us don't invest so...Another reason that some of us don't invest solely in stocks is because we are not after the highest total return. I had almost no stocks for a long time because I could get a sufficiently acceptable return off fixed income alone. If those days return I will switch out of stocks again. If my core holdings increase enough that even at today's depressed rates I can get what I need I will also switch out. I frankly don't like stocks much and money isn't one of my prime motivators.<br /><br />It's like jobs. I could work for a much higher salary. I don't because the money doesn't matter that much to me.<br /><br />I also agree that investing only in 10-year treasuries doesn't particularly ring true. I've never heard of any fixed income investor who would do that. Your comparison is a bit like comparing a good blend of bonds with investing only in one blue-chip, no-growth, steady dividend stock, rather than in a market-wide index. Perhaps it would be better not to make any comparison if there is no good data available?<br /><br />It was interesting to read though and see the world through a different lens. You definitely provide a site with depth and detail and information to stretch the financial mind!BetCrookshttp://financialcrooks.comnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-56268239790744504462014-12-16T17:17:23.591-05:002014-12-16T17:17:23.591-05:00Maybe I am wrong, but I will point you to: http://...Maybe I am wrong, but I will point you to: http://www.bogleheads.org/forum/viewtopic.php?t=46813Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-33975047845298452702014-12-16T17:03:42.678-05:002014-12-16T17:03:42.678-05:00@Anonymous: Your reasoning explains why 67 rollin...@Anonymous: Your reasoning explains why 67 rolling periods contain less information than 67 independent periods. However, you're not right in saying that non-independent periods add nothing. Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-18010039292707027442014-12-16T16:58:44.914-05:002014-12-16T16:58:44.914-05:00One gets the illusion of getting more information,...One gets the illusion of getting more information, but the non-independent periods do not add information. Actually, that is the biggest problem: one exceptional year of stock returns inflates the returns of 20 different periods. When you have 67 periods, that means that you propagate this exceptional one-time return to 20 of 67 periods. This skews overall results in that direction.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-83725671930845042322014-12-16T16:29:07.013-05:002014-12-16T16:29:07.013-05:00@Anonymous: Avoiding concentration is certainly a...@Anonymous: Avoiding concentration is certainly a good principle. While limited to stocks, my own portfolio is spread across the whole world. I judge this to be sufficiently broad. Others may differ.<br /><br />On the subject of correlation among rolling samples, it's certainly true that they are not independent. However, when looking for what has happened to past investors who bought and held for 20 years, rolling periods provides somewhat more information than just using the few independent samples. Of course, my 67 rolling samples of 20-year returns contain much less information than 67 independent samples would, but I don't have that much data.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-46952765143611878752014-12-16T16:16:00.143-05:002014-12-16T16:16:00.143-05:00@Michael: Sorry, if I offended you.
I have no sol...@Michael: Sorry, if I offended you.<br /><br />I have no solution to offer you for predicting the future. Not knowing the future, a prudent investor would probably refrain from betting 100% of his holdings on a single type of investment.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-43947017549283372212014-12-16T15:54:24.150-05:002014-12-16T15:54:24.150-05:00@Anonymous: You can rest assured that I did not m...@Anonymous: You can rest assured that I did not miss comment with the word independent in bold. Nor did I miss "biased", "disturbing", and "foolish". <br /><br />I'm well aware that we have a limited set of data. I'd love to have 100 centuries of solid data, but that doesn't exist. If we follow Bernstein in using the Gordon equation, stocks look much better than bonds today. How you think we should be looking at this question?Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-86300008195647678122014-12-16T15:32:43.524-05:002014-12-16T15:32:43.524-05:00I think that you missed my point about having very...I think that you missed my point about having very few independent data points (even when including unreliable data).<br /><br />Let me say it in other words:<br />1990-2009 is one 20-year data point<br />1991-2010 is NOT independent from 1990-2009, it shares 19 out of 20 years of identical returns.<br /><br />1970-1989 IS independent from 1990-2009 (not a single year of returns in common). We have very few such independent data points to make a proper statistical analysis. In order to come to any plausible conclusion on what returns we could expect, if the future was like the past, we would need a lot more independent data points, AND we would need to know the shape of their distribution. We have neither.<br /><br />You are drawing conclusions based on insufficient data. I do sincerely wish you good luck with your bet on stocks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-14576704267231800072014-12-16T14:23:43.173-05:002014-12-16T14:23:43.173-05:00@Anonymous: Thanks. I haven't seen Mebane Fa...@Anonymous: Thanks. I haven't seen Mebane Faber's blog. Perhaps I'll take a look.<br /><br />Don't be too hasty to make a change to your allocation. It pays to mull these things carefully. With the stock markets roaring for over 5 years now, it's getting easy to become comfortable with owning more stocks. If you increase your stock allocation now and decrease it again after the next stock crash, you're effectively buying high and selling low. <br /><br />You're right that events can force your hand on selling assets. You can buy insurance, have a solid emergency fund, and live on significantly less than you earn, but it's still true that a sufficiently bad event could still force you to sell at a bad time.<br /><br />I'd like to hear the marketing ideas for selling "Wife slept with mailman" insurance :-)Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.com