Thou shalt not split 60/40

[Taggart]

Thou shalt not split 60/40

I think I'll just continue with my boring, dinosaur 60/40 portfolio in the RRSP, but kind of interesting article all the same. Makes you think. Am I doing it all wrong? However, their way makes for complication and more than likely added expense, and since I'm the type who likes neither, I tend to back away from this idea. I especially liked the response from Powell Lucas below the article.

[Shakespeare]

The time when the mass media promotes short funds is the time to go long.

[Taggart]

The time when the mass media promotes short funds is the time to go long.

Agreed.

[ghariton]

kind of interesting article all the same. Makes you think.

Yes, but not in a good way.

FWIW, I bought a little bit of QID (an ETF short NASDAQ with double leverage) some years ago, watched it bounce around for a while, then asked myself why I was holding this sucker. Saw no point to it -- if I want to hedge I'll sell down some of my QQQ and invest in fixed income instead. I also looked at PHO, an infrastructure ETF. It's been doing more or less as well as VTI, sometimes a bit better, sometimes a bit worse, but not exactly what I'd call diversification. Again, I saw no point to it.

But then I suppose the sales people need hot new products into which to churn their customers' accounts -- only to churn them out again in a few years, when the next new thing is discovered.

George

[StuBee]

ISTM that in a general way, we are seeing a tendency towards an acceptance of increasingly complex vehicles through financial engineering. This is all in the name of a yearning for yield. In a sense, caution is being increasingly "thrown to the wind" through an inability to accept a lower yielding environment. We all know the saying: "short-term pain for long-term gain" but no one is willing to wait anymore. How often in the past has the statement "This time it is different" actually been true?

I think we should admire (though not necessarily agree with) our financial institutions in there ability to take advantage of the diverse characteristics (weakness's?) of those on the buy side.

As for me, I will be patient... I have purposefully and thoughtfully (with the help of many here...) built a solid boat (at least I think so...). We are currently in a storm... Yet, this too shall pass.

Ironically, in a way, I think that all of this angst and thrashing and generally counterproductive activity can be good since it will lead to market inefficiencies (i.e. they can only lose money...). Somebody is going to benefit and I am hoping that that will be me

[Shakespeare]

"Financial engineering" is designed to benefit the broker, not the client.

[HardWorker]

The time when the mass media promotes short funds is the time to go long.

"When your cab driver say it's time to buy stock X, it's time to sell stock X".

[optionable68]

The time when the mass media promotes short funds is the time to go long.

"When your cab driver say it's time to buy stock X, it's time to sell stock X".

[sydney2]

"Financial engineering" is designed to benefit the broker, not the client.

I agree also Our non-registered is 60/40...but our rrsp's are more equity based and I have no plans to change the portfolio, as we start to draw down on them, the dividend payers help make up the difference. I am getting more immune to the volatility and view a lot of it as just noise....if we had panicked and sold in 2008, instead of buying up some of the oversold equities, we wouldn't be where we are today, there are some great buys out there right now, with good yields.

[adrian2]

death-to-equities-8-13-79.jpg

Interesting to note from the graph was that the Business Week's pronouncement did not coincide with the bottom of equities; that came about 3 years later. That's a nerve wrenching wait for many people.

[newguy]

death-to-equities-8-13-79.jpg

Interesting to note from the graph was that the Business Week's pronouncement did not coincide with the bottom of equities; that came about 3 years later. That's a nerve wrenching wait for many people.

And I bet the inflation adjusted bottom(what the story was about) came even later.

newguy

[$seeker]

Here is some more neat financial engineering for you
http://www.macquarieprivatewealth.ca/da ... cation.pdf

Sounds a little like what Ray Dalio is doing but wondered what would be wrong with the 16+% return with the much lower volatility and drawdown as summarized on page 22.
This looks like the Holy Grail no?
I do not own this or have any connection with this co. Just looking at the strategy

[IdOp]

"Financial engineering" is designed to benefit the broker, not the client.

They[1] dance with[2] the ones[3] that brung them.

[1] The financial engineers
[2] work for
[3] the purveyors of packaged pecuniary products

[Thorn]

As a retired defensive investor, I have found that a careful reading of many structured products places all the advantages in the seller's hands and none in the investor's.

For me, anything beyond corporate bonds, common shares and selected ETFs (broad, passive, non-leveraged, low-fee) entails unacceptable risk as I am unwilling to spend the time needed to understand the products, especially when seasoned professionals often indicate that they can't understand them either.

[mudLark]

As for me, I will be patient... I have purposefully and thoughtfully (with the help of many here...) built a solid boat (at least I think so...). We are currently in a storm... Yet, this too shall pass.

Yabbut, it presently seems likely that the storm is propelling us into the doldrums.

Certainly the storm will pass and certainly we will eventually drift out of the subsequent calm; when is the real question. ISTM that many 60 somethings (and their portfolios) will be DOA.

With an increasing dearth of leverage in a Europe and North America desparate for real (as opposed to financially engineered) growth, many of the old rules are going to fail before this storm abates. Figuring out new rules for the "new normal" is the long-term (5 to 10 years) investors' challenge.

[StuBee]

Certainly the storm will pass and certainly we will eventually drift out of the subsequent calm; when is the real question. ISTM that many 60 somethings (and their portfolios) will be DOA.

If you are content with zero real growth on FI and if from your Equity you limit yourself to spending the income then arguably, you should do all right.

In my case, for this to be possible, I have chosen to spend the majority of my FI before my age 65 (I am currently 50, not yet retired but able to retire in about 3 years) and then replace this source of financing with CPP (actually QPP), OAS and, about 15K$/year DB (in todays dollars). At age 65, my source of income will be 50%-60% "pension" and 40% to 50% dividends. All of this will be sufficiently split between me and my wife such that we will pay very little income tax.

In addition, at that time, about a third of our capital (basically our entire Foreign Equity component with whatever remaining FI) will be available for "catastrophic events".

Needless to say, I have been working at this plan for close to two decades...

[northbeach]

Certainly the storm will pass and certainly we will eventually drift out of the subsequent calm; when is the real question. ISTM that many 60 somethings (and their portfolios) will be DOA.

If you are content with zero real growth on FI and if from your Equity you limit yourself to spending the income then arguably, you should do all right.
In my case, for this to be possible, I have chosen to spend the majority of my FI before my age 65 (I am currently 50, not yet retired but able to retire in about 3 years) and then replace this source of financing with CPP (actually QPP), OAS and, about 15K$/year DB (in todays dollars). At age 65, my source of income will be 50%-60% "pension" and 40% to 50% dividends. All of this will be sufficiently split between me and my wife such that we will pay very little income tax.
In addition, at that time, about a third of our capital (basically our entire Foreign Equity component with whatever remaining FI) will be available for "catastrophic events".
Needless to say, I have been working at this plan for close to two decades...

I am more or less relying on the same logic; we are currently retired.
However, dividends can be cut sharply if things get nasty.

From: http://www.dividendgrowthinvestor.com/2 ... ssion.html

During the 1920’s, annual dividends on the Dow Industrials ranged between 3.90 points in 1921 to 6 in 1927. In 1928 and 1929 annual dividends increased to 9.80 and 12.80 respectively. After that dividends did decrease to as low as 3.40 points in 1933. For those who bought all of their stocks in 1929 the decrease in dividend income would have been over 70%.

Hopefully, things will never get this nasty.

[StuBee]

From: http://www.dividendgrowthinvestor.com/2 ... ssion.html

During the 1920’s, annual dividends on the Dow Industrials ranged between 3.90 points in 1921 to 6 in 1927. In 1928 and 1929 annual dividends increased to 9.80 and 12.80 respectively. After that dividends did decrease to as low as 3.40 points in 1933. For those who bought all of their stocks in 1929 the decrease in dividend income would have been over 70%.

Hopefully, things will never get this nasty.

This, actually, is what I was referring to in my notion of "Catastrophic event". Fortunately, over that 4 year period (1929-1933) Cost Of Living decreased by about 30%. So, real dividends "only" decreased by about 50% and progressively so over a 4 year period. However, it took about 15 years for the dividend flow to fully recuperate in real dollars. I am able to accommodate a 30% to 50% real cut with recuperation over a 10 to 15 year period. I have chosen to mix historical reality with optimism .

[Taggart]

However, dividends can be cut sharply if things get nasty.

From: http://www.dividendgrowthinvestor.com/2 ... ssion.html

During the 1920’s, annual dividends on the Dow Industrials ranged between 3.90 points in 1921 to 6 in 1927. In 1928 and 1929 annual dividends increased to 9.80 and 12.80 respectively. After that dividends did decrease to as low as 3.40 points in 1933. For those who bought all of their stocks in 1929 the decrease in dividend income would have been over 70%.

Hopefully, things will never get this nasty.

I prefer to look at real returns data (when I can obtain it) rather than nominal:

From page 188 of Robert Shiller's excellent book, Irrational Exuberance (second edition) which I've just started to read for the first time ever:

"Recall that between the stock market peak in September 1929 and the bottom in June 1932, when the stock market fell 81% as measured by the real S&P index, real dividends fell only 11%."

[northbeach]

Hard to believe Shiller's claim of an 11% decrease in real terms.

From the article I quoted, dividends fell 70% from around 12% down towards 3.4% and cost of living decreased by about 30% in the same period.

Doesn't seem to jive with Robert Shiller's numbers. I would tend to believe Shiller, but how can there be such a divergence.

[newguy]

Hard to believe Shiller's claim of an 11% decrease in real terms.

From the article I quoted, dividends fell 70% from around 12% down towards 3.4% and cost of living decreased by about 30% in the same period.

Doesn't seem to jive with Robert Shiller's numbers. I would tend to believe Shiller, but how can there be such a divergence.

Look it up.

http://www.econ.yale.edu/~shiller/data.htm

newguy

[BRIAN5000]

This looks like the Holy Grail no?

No this is the Holy Grail.

http://valueweightedindex.com/IndexComp ... omparison/

The index continually rebalances towards the cheapest stocks according to various measures of value, resulting in a portfolio that should benefit significantly from the pricing inefficiencies within the relevant universe over the long term. The index consists of a much more diversified portfolio than a market cap weighted index

[northbeach]

From page 188 of Robert Shiller's excellent book, Irrational Exuberance (second edition) which I've just started to read for the first time ever:
"Recall that between the stock market peak in September 1929 and the bottom in June 1932, when the stock market fell 81% as measured by the real S&P index, real dividends fell only 11%."

Using the data from the Shiller spreadsheet, the decrease in real dividends was 39% from the peak to 1934.

link was provided by newguy http://www.econ.yale.edu/~shiller/data.htm

Not really sure which number is more relevant, 11% to the June 1932 bottom or 39% to 1934 after the market had already begun to recover.

Probably not best to speculate and just hope that the future will be benign.

[StuBee]

From page 188 of Robert Shiller's excellent book, Irrational Exuberance (second edition) which I've just started to read for the first time ever:
"Recall that between the stock market peak in September 1929 and the bottom in June 1932, when the stock market fell 81% as measured by the real S&P index, real dividends fell only 11%."

Using the data from the Shiller spreadsheet, the decrease in real dividends was 39% from the peak to 1934.

link was provided by newguy http://www.econ.yale.edu/~shiller/data.htm

Not really sure which number is more relevant, 11% to the June 1932 bottom or 39% to 1934 after the market had already begun to recover.

From a "living off of dividends" perspective, the 39% decline would be the more relevant number. The 11% decline (to 1932) provides unfortunately only part of the picture.

[mudLark]

...just hope that the future will be benign.