@nc-cpl Agree. My plan is decomposition leading into retirement. It just happens that 5 is the segment number that works for me. Thanks.
@pizzaman I wonder if he's offhandedly referring to direct indexing here. I still wonder why someone would take that approach, unless wanting to totally geek out on things. Is there enough opportunity in loss harvesting to do that? Once you harvest the losses where you want to, you're no longer "indexed" right? You're then in something else, your own index I suppose.
Well, that's not what I got out of it, but who knows. The web site that posted the quote did not put it in context nor inferred what was said right before his quote. Direct indexing is for people with a lot on time on their hands 😏: https://www.investopedia.com/direct-indexing-5205141
Bond funds starting to look better: https://www.barrons.com/articles/bonds-buying-opportunity-fed-rate-pause-d07e3781?siteid=yhoof2
Bonds are having a moment. With the Federal Reserve expected to be at the end of its interest-rate hiking cycle, investors are reassessing the fixed-income market—and looking to high-quality bonds with intermediate maturities as the best bet for stable income.
As bonds outperform, cash loses some of its luster. Historical data show that cash exposures return less on average than core bond and short-term bond exposures when the Fed stops tightening, BlackRock found. From 1990 to early 2023, core bond exposures performed 4% better than cash equivalents on average when the Fed held or dropped rates, while high-quality short-term bonds performed 1.9% better than cash.
In case you missed it, Vanguard updated their projected return model (May 2023, actually modeled as of March 31, 2023):
https://advisors.vanguard.com/insights/article/series/vanguardmarketperspectives#projected-returns
These are 10-year annualized nominal returns, consistent with past Vanguard reports/results.
Morningstar recently published a comparison to the prior 2021 (and some 2022) Vanguard forecasts as well:
“The outlook for investors is brighter today than it was a year ago,” says Todd Schlanger, senior investment strategist at Vanguard’s Investment Strategy Group."
GMO has updated their projected (real) returns as of April 2023:
@wallace471 Isn't GMO traditionally the "negative Nellie" standout among all the firms? I think the challenge for many is (example) reading Vanguard predicting 4.1-6.1% return for large U.S. equity, while GMO is saying -1.8%!! What's a PRC user to do?
Ignore predictions! 😋
From the Vanguard prediction report:
Notes: These probabilistic return assumptions depend on current market conditions and, as such, may change over time.
IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model® regarding the
likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not
guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for
each modeled asset class. Simulations are as of March 31, 2023. Results from the model may vary with each use and over
time. For more information, see the Notes section.
Need I say more 🧐.
@pizzaman Pizza - you are well-known for your roguish rejection of projections...lol! However, for many, these reports represent a "reasonable source" upon which to base one's estimate (and input into PRC!). Sure, you can pull a %age out of your keister if you wish. These firms have some very smart folks with insight into the specifics, math and mechanics of estimating future performance (I think the word "prediction" implies greater certainty than "estimate" does), and has some value in helping to choose a %age to input into PRC which you would need to do anyway.
@nc-cpl: That is my understanding as well....GMO is considered to be more at the negative side of the predicted return "spectrum". Note that the Vanguard returns are "nominal"....so accounting for the Vanguard assumed inflation (was it 3%?), the converted real returns for Vanguard would also be lower (but positive).
@wallace471 Affirmative on the nominal and inflation adjustment bring the % down. Given that Vanguard looks to be in the 1.1-4.1% range for equities given an estimated inflation rate between 2-3%. Personally, I always like to see some historical reference as to how on or off target they've been in prior years and base my weighting on that.
roguish rejection of projections - Pizza Man the Rogue has a nice ring to it 😝, depending on what definition you use 🤔:
- behaving in a way that is slightly bad or wrong, but that is not to serious;
- playfully mischievous.
I like the last one 😊.
Anyway, this is how financial predictions (that's really what we are talking about, predictions) work:
Pizza Man Financial Services, LLC is headed by Mr. Pepperoni that hires only the smartest folks with insight into the specifics, math and mechanics of estimating future performance, especially individual stocks. (Actually he is a one man show, don't tell anybody). He is well respected in the financial community and has many devotees. (How do we now all this, well, because he said so on his numerous podcasts and in his research reports which you can get copies of for a price). This is how Mr. Pepperoni makes his money; he makes 1,000 predictions, each prediction picks two stocks that will perform very well in the next 3 months. Each of the 1,000 predictions picks different stocks. Mr. Pepperoni knows full well that any one prediction only has a 10% chance of being right. No matter. He gets the emails of 1,000 people, very easy to get. Even Mr. Peperoni gets mail offering a free dinner if you sit through a retirement planning talk. How do they get your name? So he sends out the emails stating what a great company Pizza Man Financial Services, LLC is and provides, free of charge, two stock predictions. 3 months go by and sure enough, only 100 of the 1,000 predictions come true. Now, Mr. Peperoni, being the highly educated professional that he is, sends out another email to the 100 people that received the correct predictions. Wanting to prove to the 100 people that Mr. Pepperoni just didn't get lucky, he provides two more stock predictions, free of charge of course. Three months later, only 10 of the 100 predictions come true. No matter. Mr. Pepperoni sends another email to the 10 people that received the fabulous predictions. He states that this is proof of his stock picking ability and its just the beginning of your road to riches. All you have to do is send him $1,000, preferably PayPay, and you will receive his annual newsletter packed full of predictions. Mr. Pepperoni, knowing a golden goose when he sees one, will next in-ploy ChatGPT to come up with an even better sales pitch, and soon will retire himself to his own secluded private Island that he will buy using the proceeds from his newsletter.
Pizza Man - The Rogue
☕ ☕
Just finished my second cup of FULL strength caffeine enriched java. Seriously now, predictions in any field are poor at best. Here is a nice review article about predictions that takes the middle ground : https://theconversation.com/economic-forecasting-why-it-matters-and-why-its-so-often-wrong-53829
Getting it wrong more times than getting it right
Studies reveal the inability of forecasters to correctly or timeously predict outcomes. Based on a sample of 63 industrial and developing countries, a study by Prakash Loungani at the International Monetary Fund is revealing. It showed that private sector forecasters were only able to predict two of the 60 recessions that occurred over the sample while the majority remained undetected.
Professor Philip Tetlock also spent many years researching the accuracy of forecasts – specifically in a political realm. After collecting and analyzing 28,000 predictions from 284 experts, he found that the average expert’s forecasts were only slightly more accurate than random guessing.
This ubiquitous failure to make predictions in an uncertain world has called to question the reliability of “official” forecasts generated by government and inter-governmental institutions as well as those from the private sector.
The answer
A fundamental component of the global environment is uncertainty. Rather than expecting forecasts to foresee events, Homo Economicus should rationally accept that uncertainty exists. As Makridakis et al suggest: use forecasts to estimate the uncertainty, and then double the range. This is because people are conditioned to underestimate uncertainty and should therefore not believe any predictions about the future. Rather develop plans that will be sensitive to surprises.
Despite their poor track record, forecasters still play a vital role. They are integral to establishing even a general sense of the future. The practice of forecasting can therefore not be relegated.
Here is another one from the Harvard Business Review: https://hbr.org/2009/01/why-we-cant-predict-financial
Why We Can’t Predict Financial Markets
The future, like any complex problem, has far too many variables to be predicted. Quantitative models, historical models, even psychic models have all been tried — and have all failed. Just imagine predicting something far simpler than the future of the stock market; say, chess. There are an overwhelming 10 to the 120th power possible moves. That’s a 1 followed by 120 zeros! As James Hogan explains it in his book Mind Matters, that sum far exceeds the number of atoms in the universe.
Here is another good one from The Guardian: https://www.theguardian.com/money/2017/sep/02/economic-forecasting-flawed-science-data
Why economic forecasting has always been a flawed science
The Good Judgment team believes part of the problem is that we misunderstand the science of forecasting and look to the wrong people for predictions. If we want to know what’s happening to the economy, we think the obvious thing to do is ask an economist. But Storey says that may be the wrong approach. Forecasting is an art that is separate from the need to have specific subject knowledge. The people who were best at predicting the Arab spring, he said, were not Middle East experts. They were people who studied eastern Europe and had seen similar patterns develop there. We don’t need subject experts, we need people who are great at forecasting anything.
Not only have we been bad at forecasting, but there is not much sign of improvement. Mark Pearson, deputy director for employment, labour and social affairs at the OECD in Paris, said: “We are getting worse at making forecasts because the world is getting more complicated.”
