Down goes the Dow

This does not appear to be clear thinking. Or at least it is not a clear representation of clear thinking.

1) In what ways are the costs of being wrong asymmetrical?

2) Just as much as (pick your investment class) may well deviate a great deal from whatever benchmark you wish to choose so too will the benchmark deviate from the chosen investment class. As a result, saying that investing in the given investment class is risky because it may deviate from the benchmark makes no more and no less sense than saying that investing to match the benchmark is risky because it may deviate from the given investment class.

3) Yes, emerging markets could go down 20% while the rest of the world goes up 20%. At the same time, the rest of the world may go down 20% while emerging markets go up 20%. The downside of (unwisely) staying with the benchmark is pretty huge. No?

4) The finite investment horizon is the only part of your post that makes logical sense. The rest is emotional vagueness, not clear thinking optimization.

5) For those with a long term horizon a 100% stock portfolio almost certainly makes sense as does shifting among stock classes 100% IF there is logical reason to believe that one will be correct more often than not.

ok.

I'll try not to repeat too much of what I wrote earlier, but no guarantees.

1) costs of being wrong being asymmetrical. More precisely - if I get something very wrong, then I might not have the time to fix the mistake.

Let's say I go 100% EM. Then there is another currency crisis and they all drop 35% in 8 weeks. developed markets fall, say, 5%.

that is a huge hit - loss math makes it very, very hard for me to get that back. I don't have an unlimited time horizon. And I might chicken out and sell at the bottom.

Let's say I figure the odds of that are just 5%. but it happens. I could be right 95 times on smaller bets but that one major error would eliminate all the gains I had scraped together.

In other words, all bets are not equal. My overweighting small caps over big caps...might impact my portfolio a small amount, but I've been right. But if I went 100% emerging markets and got it wrong - that one mistake would destroy all the benefit of my other 99 decisions.

that's what I mean by asymmetrical.

2) Not sure what you mean by talkign about benchmarks. I use index funds that track each asset class.

I acknowledge that definining a stock market or any asset class is arbitrary, so I usually use multiple tracking index funds. For example, I'll use two funds to track US tech - one market cap weighted, the other equal weighted.

for EM stocks, I'll use one market cap weighted and another based on dividends.

I figure if I spread the bets around, I won't diverge much from the underlying asset class.

is that what you mean?

3) see #1 - I try to avoid big bets as much as I can because of the consequences of getting a big bet wrong.

4) ok

5) 'logical reason' - well I think you are giving too much credit to good thinking and wise asset allocation. Even the smartest, most logical people get the market very, very wrong. apparently isaac newton went flat broke chasing a stock market bubble. Few of the best brains on wall street saw 2008 coming. These people probably got things right more than they got things wrong, but they were still destroyed.

Re EM: agip look into EM bond funds. Compared to EM equities similar or better returns and almost half the volatility. Vanguard has introduced 2 index funds VGAVX and VGOVX in that category. TCW's TGEIX has been around since 1998.

http://performance.morningstar.com/fund/ratings-risk.action?t=TGEIX

®ion=usa&culture=en-US . Comparison to EM equities VEIEX

http://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation1_1=100&showYield=false&symbol1=veiex&symbol2=tgeix&annualOperation=0&endYear=2013&initialAmount=10000&allocation2_2=100&annualAdjustment=0&startYear=1999

Do your own DD.

P.S. GMO has 2 funds GMDFX GMCDX

http://performance.morningstar.com/fund/ratings-risk.action?t=GMDFX

®ion=usa&culture=en-US ;

http://performance.morningstar.com/fund/ratings-risk.action?t=GMCDX

http://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation1_1=100&showYield=false&symbol1=VEIEX&symbol2=GMCDX&annualOperation=0&endYear=2013&initialAmount=10000&allocation2_2=100&annualAdjustment=0&startYear=1985

only available as institutional.

gente:

I've been using PCY for emerging market debt - but it is sovereign debt only - probably putting some corporate debt in the mix would be a good idea

I'll take a look

I'm trying to sort out using high risk debt like EM debt, high yield corproate, high yield muni and convertibles...

I like the clarity of keeping the two separate...but I appreciate the appealing sharpe ratios of those kinds of bonds.

we did hit another high for the sp 500 today but fell back a smidge

so

there's a war in europe

there's a war in Iraq

there's a war in Syria

China is fomenting unrest in HK

Europe is in recession and probably deflation

yet

the stock market is solid as a rock.

This is one of those moments where if the market falls 3%, it will probably fall 10% pretty quickly - traders watching other traders are driving this thing - I think selling could cascade pretty fast.

I'm worried, but that don't mean dirt.

And sanctions against Russia are hitting exports hard.

agip wrote:

we did hit another high for the sp 500 today but fell back a smidge

so

there's a war in europe

there's a war in Iraq

there's a war in Syria

China is fomenting unrest in HK

Europe is in recession and probably deflation

yet

the stock market is solid as a rock.

This is one of those moments where if the market falls 3%, it will probably fall 10% pretty quickly - traders watching other traders are driving this thing - I think selling could cascade pretty fast.

I'm worried, but that don't mean dirt.

Hey, I thought you were the guy saying how great the emerging markets were. Have you checked the US Dollar Index recently? Nearing 84, which has been major overhead resistance for the last 4 years. When the world is in trouble, where do you think they come? Right, and that's buying pressure.

What is the 4th largest bull market in history?

This one. By my chart, the S&P was up 196% since March 10, 2009 at the close on Friday. I believe #3 was up 223%, and I figure we have a shot to pass that before this thing is over.

That sound you hear in the background is all the right wing pundits--and Peter Schiff in particular--wiping the egg off their faces.

Should I short the Argentinian Peso? It seems to be on a death spiral.

not sure what you are saying re; emerging markets. But I'll agree with everything you said.

new highs today for just about every major index - but,alas, not the dow.

emerging markets flying - now up 13.9% for the year (VWO)

agip wrote:

not sure what you are saying re; emerging markets. But I'll agree with everything you said.

My, you are an agreeable chap!

Regarding agip's comment that one bad move can wipe out gains that have been scraped together using lots of good moves, I have this nugget of wisdom for everybody, that is of my own creation, and that I think is essentially unassailable:

"There are only 3 things in life that are easy: fvcking up, spending money, and creating a mess."

I put agip's description into #3, which in another formulation, says that the universe tends toward entropy. It is far easier to tear down the value in a portfolio than it is to build up an equivalent amount. Hence agip's asymmetry.

agip, will read your earlier comment a bit later. One thing coach d said that bears repeating is that when things are shaky around the world, there is a flight of money to US markets. Look at the Chinese, who are flush with cash. They are all over the world now, from France to Nigeria to Canada, and have affected and invested in markets wherever they go. Now, the effects are beginning to be seriously seen in the USA in places other than LA, SanFran, and NYC. Chinese cash is currently pouring into US equity and bond markets, I am told by someone in a position to know. He believes that such foreign money coming in is the sole reason for the rise of the US markets.

Also, something I was talking about earlier: the housing bubble in Canada. A couple of days ago M* did a piece on exactly that, very brief and inconclusive, but showing in what ways the current housing situation in Canada is analogous to that in the US at its height, complete with bank exposure to loans. It is unquestionable that it is the Chinese, including the early vanguard from Hong Kong who came in the 1970's and 1980's, who have driven up the housing prices in Vancouver and Toronto, which has had somewhat of a spillover effect into other areas of the country, but which drives the national indicators, especially if they are price-weighted. Also, Americans went in and bought up lots of prime waterfront land in the maritime provinces, driving up prices locally. Foreign money coming in and taking over a domestic market.

Maserati wrote:

Regarding agip's comment that one bad move can wipe out gains that have been scraped together using lots of good moves, I have this nugget of wisdom for everybody, that is of my own creation, and that I think is essentially unassailable:

"There are only 3 things in life that are easy: fvcking up, spending money, and creating a mess."

I put agip's description into #3, which in another formulation, says that the universe tends toward entropy. It is far easier to tear down the value in a portfolio than it is to build up an equivalent amount. Hence agip's asymmetry.

plus some more stuff

But this is false logic. Sorry, but it just is.

Take for example the simple case of an individual who has determined that investing only in US stocks will meet her investment needs. (keeping it simple to reduce the amount of writing required here - this does not impact the essential argument)

Now she decides to learn enough about what drives markets so as to be able to guess correctly most of the time whether a particular year will be better for large caps or better for small caps. Then, each year on Jan 1 she readjusts her portfolio to more heavily weight the market segment that is likely to outperform - say 60% large, 40% small one year and then reversed another year when market conditions call for it.

In other words, she is doing exactly what agip propounds (and apparently does).

What I am saying is that it would make more sense to go 100% large cap, 0% small cap in one year and then reverse another year when market conditions call for it.

I must admit that I am getting a bit bored with typing so I will just assume that you can do the math and see that I am correct. All counter-arguments brought to bear to date (and all that will ever be brought to bear) amount to just so much verbiage hiding the reality that it is nothing more than trying to justify the unjustifiable. It is maximizing one's emotions (Oh, scary day, 100% in small caps - are you CRAZY?) rather than maximizing the value of one's investments.

agip--

Those are CBO estimates, and more importantly, are per recipient figures. The total commitment is staggering.

Even on that graph, look at the rate of increase from the beginning of the red (actual) line, to its end, after ACA: from around 9200 to around 11400

Reductions are in estimates, which were already off the charts. Projection is now to remain constant as a % of GDP, even as the labor force shrinks and the Medicare rolls simultaneously swell. And that's only to 2024, which will arrive faster than anybody thinks. And this is using potentially very optimistic GDP estimates.

My concerns remain unchanged--not only does the problem persist, its scale persists. As an aside, I know somebody inside CBO, but can never get anything of value out of them. Really, the reports speak for themselves, and I haven't yet read this one.

Age of Innocence wrote:

when market conditions call for it.

if we knew when markets conditions called for something, we would do it.

we never know this for sure, tho.

let's say we were retiring on 12/31/01.

Did we know on sept 10, 2001 to sell all stocks and go to cash?

Or did we know to sell emerging markets stocks right before one of their periodic collapses? no. Did some people in March 2009, right before a giant, massive rally?

for that matter, did k5 sell right before the market rallied 20%+?

what am I missing here? what is my mechanism to make sure my evaluation of 'market conditions' is correct?

Maserati wrote:

agip--

Those are CBO estimates, and more importantly, are per recipient figures. The total commitment is staggering.

Even on that graph, look at the rate of increase from the beginning of the red (actual) line, to its end, after ACA: from around 9200 to around 11400

Reductions are in estimates, which were already off the charts. Projection is now to remain constant as a % of GDP, even as the labor force shrinks and the Medicare rolls simultaneously swell. And that's only to 2024, which will arrive faster than anybody thinks. And this is using potentially very optimistic GDP estimates.

My concerns remain unchanged--not only does the problem persist, its scale persists. As an aside, I know somebody inside CBO, but can never get anything of value out of them. Really, the reports speak for themselves, and I haven't yet read this one.

I hear you - I don't have the knowledge to evaluate this revision downward in medicare costs, but clearly it caught a lot of people unawares and any way you look at it...the story is better now. Might still be dismal, but better.

agip wrote:

Age of Innocence wrote:

when market conditions call for it.

if we knew when markets conditions called for something, we would do it.

we never know this for sure, tho.

let's say we were retiring on 12/31/01.

Did we know on sept 10, 2001 to sell all stocks and go to cash?

Or did we know to sell emerging markets stocks right before one of their periodic collapses? no. Did some people in March 2009, right before a giant, massive rally?

for that matter, did k5 sell right before the market rallied 20%+?

what am I missing here? what is my mechanism to make sure my evaluation of 'market conditions' is correct?

Very odd that you would focus in on those particular words, 'when market conditions call for it'. If I did not have more respect for you from previous engagements I might be tempted to berate you over such silliness.

Instead, since I do have a great deal of respect for you, I will simply say, please feel free to substitute whatever words strike your fancy - I'll suggest one set "when I (Mr/Mrs Investor) believe that one segment of the market is likely to outperform another over the course of the coming year". Feel free to choose another more to your liking if you wish.

Now go ahead and substitute the words of your choice. I am fairly certain that you have said on multiple occasions that you rebalance when you believe that one segment of the market is likely to outperform another. I am 100% certain that the logic (no fuzzy words and mish mashed thoughts) that I presented stands up to the light of careful scrutiny.

for pete's sake - I make small changes - on the margin - so if I am wrong it is ok - you are somehow equating giant, massive bets with tiny marginal changes.

do you live in a world of pure theory? or the real world where people have limited patience and time horizons?

what logical leap am I missing? why should I equate makign small caps 1% instead of 5% the same as switching my entire stock portfolio to EM stocks?

(is this you, bigfoot?)

Agip, I am most certainly not equating small changes on the margin with making massive bets. Indeed, my point is exactly the opposite. The fact that you believe that you can make more money for yourself and your clients by making marginal changes implies with 100% certainty that you should be making 100% moves to better serve them.

But I see that you are going to hide behind words shedding more heat than light ("giant", "massive", "pure theory"...). This makes it clear that you are not prepared to understand the truth about this issue. Not a terrible crime, just a limitation (which we all have).

You are not emotionally prepared to have this discussion at this time. Perhaps you never will be - I don't know. But if you have a quiet moment, try running numbers, avoid the emotional baggage, and recognize that large swings in portfolio allocation DO NOT equate to large increases in portfolio volatility or portfolio risk.

Now, regarding bigfoot - I have heard of the fellow. But surely we all know better than to believe in imaginary beasts.

well bigfoot has shown me a few things on this thread - could be you, I dunno.

ok - I will try to get my head around what you are saying.