My spectacles are still cracked!

On the subject of diversification and rebalancing (you can’t have the latter without the former, although the reverse is certainly NOT true), Rick says:

I don’t expect the market to behave consistently over any significant period of time. The reason I chose an example with no gains was to show that rebalancing can make a profit from volatility even when there is no underlying price appreciation. I suspect that is the mathematical explanation behind the study SiliconPrairie referenced. If a market was continually increasing then 100% stocks should do better- not that that is very realistic either!

I can believe some rebalancing could do better- especially with all of the market volatility we’ve had this year. I really wish I could time the market. I console myself with the fact that no one can really time the market with long term success.

I can rebalance though- as it can be done with a calculator rather than a crystal ball!

What Rick says is true …

… just understand that if you are committed to a diversification / rebalancing strategy, you will most likely:

a) under-perform the market over LONG periods of time (simply because you will have less in the market – on average – than a 100% stock portfolio)

Remember: the market (DJIA) has NEVER returned less than 8% in ANY 30 year period over the past 100+ years – I strongly suspect that if you were 100% invested the day before the market started to crash in October 2007 and simply waited 30 years, the same will hold true – and,

b) have to content yourself with not being able to reach a Rich(er) Quick(er) Number:

That’s OK for some … but, the premise under which I write is that it’s not OK for my target audience. That’s all 🙂

Is it OK for you?

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13 thoughts on “My spectacles are still cracked!

  1. The term “market timing” reminds me of double dutch. With the jumper waiting on the outside of the ropes, anticipating the rhythm of the ropes until they can predict them.
    I tried this a few times in grade school and got whacked in the face.

  2. Adrian,

    I’m not sure about point a). If periods of stagnant returns and volatility are long enough and common enough then 100% stocks may be worse than say 90% stocks/ 10% cash + rebalancing even over a very long time period.

    As for point b) I agree that IF you are good at picking stocks you can make a lot more a lot faster than accepting the market average returns.

    However, what if you aren’t so at picking stocks? What penalty will you pay for not diversifying? By concentrating your investments you could get a 100% loss. If that mistake happened near your goal you could almost double the time needed to reach your number.

    I submit that any idiot can get lucky for a year or two and beat the market via concentrating on a few “good” stocks or timing the market correctly, but it takes a legendary investor to beat the market consistently for a number of years. I’ve tried individual stocks enough that I’m tired of whacked in the face though.


    Market timing is even worse because short term fluctuations in the stock market seem to be truly random. At least with the ropes you are trying to predict a trajectory that is predictable… timing the stock market is much more like Russian roulette!

  3. @ Rick – Now you’re talking “if’s” 🙂

    The facts are the facts: there has NEVER been a 30 year period (incl. purchasing the day before any of the previous crashes) where the market has returned less than 8% compounded. So, if your Number can be reached by an 8% return and you are happy to wait 30 years, don’t sweat it … dump 100% into a low-cost Index Fund and wait.

    On the other hand, if your Number/Date can be reached by rebalancing, go for it I say! I think it will give you a lesser return, long-term, which is the only time period that I am interested here.

    Josh’s Number is far more – and, his Date far sooner – than can be achieved with a traditional approach to stocks – with/without rebalancing.

    So, if he IS serious about getting there, then he simply HAS to become an expert in something: business, stock trading, property development … and, mitigate the attendant risks as best he can.

    Alternatively, he can simply let go of his dreams … 🙁

  4. @ Jeff – Thanks. I’m sure that the tool looks useful, but how can you be sure of the veracity of the data?

    However, for one of my posts on stock market returns [ ] I said:

    “Here’s where I like the research that Paul Grangaard did for his excellent book, The Grangaard Strategy … using the research done by Ibbotson Associates (published annually in their authoritative ‘Stocks, Bonds, Bills, and Inflation® Valuation Edition Yearbook’), Grangaard found that over the 75 year period between 1926 and 2000, large cap stocks averaged and annual return of 11% (small cap stocks did a little better at 12.4%), but he also found … the best thirty-year holding period delivered a 13.7% average annual rate of return between 1970 and 1999, while the worst thirty-year period delivered an average annual rate of 8.5% between 1929 and 1958.”

    Ibbotson is regarded as THE authority on historical stock market returns … I stand by my comments. 🙂

  5. “I’m sure that the tool looks useful, but how can you be sure of the veracity of the data?”

    The author used stock market data from “Irrational Exuberance,” (Princeton University Press, 2000, 2005) by Dr. Shiller. Since Dr. Shiller is a colleague of Professor Ibbotson’s at Yale University, my guess is that the raw data is accurate. After looking at the excel spreadsheet I downloaded off of Dr. Shiller’s website at Yale, it appears that political calculations accurately presented Shiller’s raw historical data. You can download it and run the figures yourself ( I would recommend that you look particularly at the time period 6/1902-6/1932.

  6. @Adrian,

    My guess is that Grangaard’s reporting of historical market returns is the same as/similar to Dr. Shiller’s.

    What was intending to point out was that there have been multiple 30 year periods where the market has returned less than 8% (compounded).

  7. @ Jeff – And, what I’m pointing out is that based upon the last 75 years of the same data (reported in 2 books by a well-respected financial ‘expert’) that the market has NOT returned less than 8%.

    Clearly, somebody is provided incorrect data here …

  8. @Adrian,

    No one is arguing that during Grandgaard’s study period (1929-2000) the market returned less than 8% (compounded).

    Grandgaard study, however, does not support your statement that “there has NEVER been a 30 year period (incl. purchasing the day before any of the previous crashes) where the market has returned less than 8% compounded.” NEVER is a long time, certainly longer than the period discussed in the Grandgaard study.

    Schiller’s data (1871-2009) extends beyond Grandgaard’s data range…and shows there are multiple 30-year periods (outside of Grandgaard’s study period) that have returned less than 8% (compounded).

  9. @ Jeff – Thanks. I’ll go with the last 75 years (a period that INCLUDES the Great Depression) and sleep quite soundly …

  10. I’d like to comment on Rick Francis’s statement above.
    It appears he is having a bit of bad luck in his investing in stocks. I feel This could very well be due to lack of fundamental knowledge in how to rate stocks , or how to locate those top stocks,which would help his portfolio.
    I assert ,he needs to study further, learn more and be better equipped before making those purchases.Perhaps a course in accounting will help him better evaluate the stocks which he is interested in.Perhaps , he needs to further research the leaders of each company(so he’ll better understand these leaders) .Great Companies are always run by Great leaders with vision of where this company is and should be headed.Honest leaders 🙂
    If your constantly losing money in the stock market, then its time to re-evaluate your skills for picking those stocks.Take a bit of time,paper trade, and keep real tight notes as to what you bought, what price you bought at, why you bought , and watch these paper purchases,till you understand where your weaknesses lie.Its less costly this way. 🙂

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