The main drawback with cap weighted investing is that you have bought the market. We know from history and experience the market is not always a good deal. There are times when the market is overvalued. Your entry point (level) into the market is very important for both your short and long term returns. Buying into the market when it is overvalued is likely to result in less than average returns. If you are worried about the valuation level of the market, then perhaps the best approach if you have a lump sum to invest is to set a disciplined schedule to invest those monies over time based upon either a time target being reached, ie. invest 1/4 now, 1/4 in three months, 1/4 in six months, etc., and/or dependent upon the market level path, ie. if the market goes down 10% invest 1/4, if down another 5% then another 1/4, etc.
If you are young and likely to be putting regular savings into the market, then don't worry about trying to finesse your entry. You've got time and the lion's share of your likely accumulated wealth in front of you and there is no time like the present to start investing.
Showing posts with label long term. Show all posts
Showing posts with label long term. Show all posts
Monday, April 6, 2015
Friday, April 3, 2015
A Fundamental Misunderstanding
If you believe your financial advisor needs to be fully informed about what is going on in the market so that they can better look after things for you, then you have a fundamental misunderstanding about what the markets are, what somebody can do for you, and what are reasonable expectations.
A long term investment horizon strips away the need to know what is going on in the here and now. 99% of the sturm und drang created by the markets is simply noise.
A long term investment horizon strips away the need to know what is going on in the here and now. 99% of the sturm und drang created by the markets is simply noise.
Saturday, February 14, 2015
What Rate of Return Can You Reasonably Expect by Peter Bernstein
Latest FAJ looks at retirement issues on its 70th anniversary.
Peter Bernstein took a look at stock and bond returns over a two hundred year period to try and figure out whether there was a "basic return" that could be expected for each asset class. He normalized his analysis to take account of starting and ending multiples and yields to ascertain what the return was over those periods.
His basic conclusion was that stock returns exhibited a mean nominal basic return of 9.6% with a standard deviation of 1.6% and some mean reversion elements.
With regard to bonds, the outcome was much less conclusive. The mean nominal basic bond return came to 4.9% with a standard deviation of 2.3%, but there a wide band of uncertainty associated with the data and in fact he concluded we could have no confidence in expecting the nominal basic return because inflation would surprisingly pop up (investors were slow to respond to changing inflation environments) and there was no pattern to the returns (little credence can be attached to what anybody has to say about what the real what the real long term rate of interest should be, has been, or will be in the future over the long run). About the only thing we can say for bond holders is they can make con judgments about future returns beyond the duration of the particular instrument they happen to hold at any given moment.
Bottom-line: long run equity returns were more predictable than long run bond returns (with even greater application for real returns). With equities one can at least conjecture whether the market is high or low (based on recent returns), with the bond market there is no such opportunity.
He concludes that stocks are fundamentally less risky than bonds, not only because their returns have been consistently higher than those of bonds over the long run but also because less uncertainty surrounds the long term return investors can expect on the basis of past history.
Peter Bernstein took a look at stock and bond returns over a two hundred year period to try and figure out whether there was a "basic return" that could be expected for each asset class. He normalized his analysis to take account of starting and ending multiples and yields to ascertain what the return was over those periods.
His basic conclusion was that stock returns exhibited a mean nominal basic return of 9.6% with a standard deviation of 1.6% and some mean reversion elements.
With regard to bonds, the outcome was much less conclusive. The mean nominal basic bond return came to 4.9% with a standard deviation of 2.3%, but there a wide band of uncertainty associated with the data and in fact he concluded we could have no confidence in expecting the nominal basic return because inflation would surprisingly pop up (investors were slow to respond to changing inflation environments) and there was no pattern to the returns (little credence can be attached to what anybody has to say about what the real what the real long term rate of interest should be, has been, or will be in the future over the long run). About the only thing we can say for bond holders is they can make con judgments about future returns beyond the duration of the particular instrument they happen to hold at any given moment.
Bottom-line: long run equity returns were more predictable than long run bond returns (with even greater application for real returns). With equities one can at least conjecture whether the market is high or low (based on recent returns), with the bond market there is no such opportunity.
He concludes that stocks are fundamentally less risky than bonds, not only because their returns have been consistently higher than those of bonds over the long run but also because less uncertainty surrounds the long term return investors can expect on the basis of past history.
Thursday, March 4, 2010
Forest for the trees
I feel as though I am so caught up in the day to day fear wranglings that are our present situation, that I risk missing the forest for the trees.
One of my problems is that my short term outlook is heavily influenced by my longer term outlook (hard sledging ahead), and it is hard to get away from that.
But at another level, I have the feeling that if only I could step back from the fear abyss, I could see that the market is fine and the current fearalysis provides opportunity on the upside.
One of my problems is that my short term outlook is heavily influenced by my longer term outlook (hard sledging ahead), and it is hard to get away from that.
But at another level, I have the feeling that if only I could step back from the fear abyss, I could see that the market is fine and the current fearalysis provides opportunity on the upside.
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