Bubblesofearth wrote:GoSeigen wrote:Bubblesofearth wrote:This is always going to be the optimal approach. Select a stock market that has performed the best at the end of the investment period.
BoE
I don't think that is what TJH and I are doing: those were actual real time portfolios, with all the mistakes one makes as well as the successes. e.g. my wife's ISA suffered an almost 100% loss of an investment in a corporate bond with a minimum nominal purchase size of US$200,000 -- bought well below par but still, ouch!
What TJH was arguing -- which I agree with, and which was the foundation philosophy of TMF -- is that private investors are in a special position where they can get better returns than available via either active funds or trackers by carefully allocating their funds to individual shares or bonds and learning from their successes and mistakes.
GS
I was responding to hiriskpaul's post regarding the S&P.
BoE
FT All Share investor from the start of 2000 to the end of 2020, who withdrew 4% SWR (4% inflation adjusted income) would have 26% of their inflation adjusted original 2020 start date portfolio value remaining (excluding costs/taxes). For a US investor who did the same with the S&P500 they'd have 27% of the inflation adjusted start date value remaining.
https://tinyurl.com/ejmnyrac For UK RPI £4.00 2000 value when inflated is recently £7.20, whilst the available capital is down to around 25% of its former value. Not good.
UK investors investing in US$ would have had the advantage of getting $1.62 per £ at then end of 1999, and only having to give $1.37 to receive a £ back again at the end of 2020 i.e. currency differences moved in their favour over that period. Over other periods however that works the other way around.
Many opine that its not realistic to look to consistently beat the index. That very few active fund managers actually achieve to do so for prolonged periods after costs and taxes. If it were easy then the numbers that did succeed in doing so would tend to reflect that ease. Rather the actual numbers tend towards indicating luck.
In the way of comparison, 50/50 stock/bonds did OK over that period
https://tinyurl.com/vh3jccv7 ending with 72% of its inflation adjusted start date value. Much the same for all-bonds. Gold did even better and even after a 4% SWR a investor ended with 2.3 times more in inflation adjusted value. No one single asset/class consistently does relatively well, over other periods bonds and/or gold would be poor single asset holding choices. Diversification helps lower risk. There is a degree of multi-year inverse correlation between the likes of stocks and gold and over some periods stocks will be the winner and gold will do poorly, and over other periods vice-versa.
Sequence of returns also matters. Go back to start from 1972 for instance and 50/50 stock/gold has compared in total return to all-stock - both providing around 10.6% annualised rewards. Apply a 4% SWR to that however and the outcomes were 1.7 times more inflation adjusted value at the end of 2020 for all-stock compared to 10.2 times more for 50/50 stock/gold.
The above all assumed that yearly rebalancing back to target weightings was employed. Broadly however rebalanced versus non rebalanced can yield similar overall rewards, rebalancing (or not) doesn't reliably add or detract from rewards, but again over sub-set periods one or the other will often prove to have been the better (worst) choice. Drawing some more often yields better results than not drawing at all. SWR + gain tends to sum to be greater than just gain alone.
The broad conclusion that Jack (John) Bogle arrived at was to hold a broad balanced portfolio (diversify) and not to bother with rebalancing.
Terry's (TJH) HYP has been a relatively good case outcome. Others I believe have seen much poorer outcomes even when looking to manage their portfolio much the same way. Using Terry's total return (accumulation) historic figures back from 1988 and I see similar overall total return outcome to that of a more balanced/diverse portfolio, but where Terry's portfolio was the more volatile. Which for measures such as Sharpe Ratio is a poorer risk adjusted reward - such as being more exposed to sequence of returns risk factors. Of the order standard deviation in yearly total returns, worst year, best year ...
TJH HYP Accumulation 21 -42 +68
Balanced Portfolio 11 -13 39
That all said and yes I also agree that
private investors are in a special position where they can get better returns than available via either active funds or trackers by carefully allocating their funds to individual shares or bonds and learning from their successes and mistakes
Much of longer term rewards are a factor of start date valuations. Buying gold for instance in 1980 when it cost a little over one ounce of gold to buy the Dow, compared to 2000 when it cost 40 ounces is indicative of relatively high/low valuations. Similar extremes can be see if you compare house price to gold ratios. Or whatever other valuation measures you might utilise. If over a 20 year period you managed to buy a asset after a 33% drop, and sell after a good +33% run up then that timing would have doubled the overall reward. In contrast if you bought after a 33% run up, sold after a -33% retraction then that halved rewards. Comparing a good case outcome with the bad case outcome and that's a four-factor difference, which over 20 years is a 7% annualised difference. Private investors are better placed to adjust their assets/allocations than are funds that often are obligated to hold certain ranges/proportions of assets. A factor however is that often PI's make poor asset allocation/valuation decisions, typically opting to buy-high (greed) and sell-low (fear) that broadly has most PI's lag the broader 'Index' and in some cases by massive amounts. As such common mantra is that many PI's would be better served by just cost averaging in and out of Index fund type investments.
High yield can be a indicator of value, but can also be risky. Possibly indicative of demise, in other cases strong rebound/upside potentials. That risk is generally reflected in HYP's by the higher overall portfolio volatility. Such volatility isn't good for sequence of returns risk however, such as if drawing a regular income/pension. Typically you'll find for those that are in retirement whilst they might be seen to be all-in on stocks (HYP) that in reality they'll have a decent slice of 'bonds' in one form or another, such as actual cash reserves to cover multiple years or other sources of income such a pensions. Factor in those 'bonds' also into the total assets/returns and comparing like-for-like such a using SWR based withdrawal measures (or whatever) is the more ideal means to compare different choices of assets/allocations. Such 'equalised' comparisons are however very rarely seen/stated.