Sorry, can't resist. Article about a recession prediction:
Even though Rosenberg has been wrong for several years and deservedly has a reputation as a “perma-bear,” eventually he will be right. But I am skeptical of his reliance on history as predictive of the business cycle, particularly when looking at data that is three or more decades old. Our economy has become progressively more dominated by the service sector. In 1959, roughly the same number of people worked in the services and goods-producing sectors of the economy. Now there are five times more workers in services than in goods.
The services sector is not nearly as vulnerable to interest rates or to shifts in capital spending as the goods-producing sector. This is why the volatility of U.S. GDP has decreased steadily as services have become more dominant. Barring an exogenous event such as the pandemic, it is unlikely we will see the hard recessions or exceptional recoveries we saw 30 or 40 years ago.
Rosenberg said the business cycle is “not dead,” but it would be more accurate to say it has retired to a place where it enjoys a far more sedate lifestyle.
Yes I know, its like an addiction, only one cup of Java today ☕. Bank of America predicts S&P 500 will be up 16% over the coming 12 months:
So, what will happen, 99% chance of a recession (previous post) or the S&P 500 going up 16%???? Only you know for sure, right 🤔?
OK Pizza Man, you're good at shooting down ideas 😖, but what do YOU DO with asset allocation 🙂? Well, even if long term financial predictions were even somewhat accurate (and they are not), I have no use for them, they don't add anything to how I approach asset allocation 😵. The two biggest challenges to retirement income, from my point of view anyway, are A) starting with a big enough retirement nest egg, which will give you more flexibility, and B) sequence of return risks. Hopefully challenge A is taken care of before you retire. For me challenge B is taken care of by having 2 years of emergency money (money market), 3-5 years of bonds, CD's and treasuries, and the rest in total US stock market index funds. @hines202 promotes a very similar idea, except for all stocks being in the US market 🧐.
I realize this only works if you start with a big enough nest egg to make the three buckets that big 🤑. What people are predicting for the future doesn't affect this setup at all. How would it change it 🤔? Although I rarely change or re-balance my investments, I haven't bought or moved a stock fund in over three years and only sold to refill my 3-5 year bucket, I do keep my eyes open for rare opportunities 😶. In 2012 I increased my stock allocation by a lot because stocks were having a fire sale, and kept that high stock allocation every since. In March 2020 I did a very big Roth conversion, again because stocks were on sale, paid for from selling stock funds in my taxable account at 0% capital gain tax. Then about 3 months ago I sold all my bond funds (mostly TIPS) and bought short term brokered CD's and Treasuries. When was the last time CD's and treasuries were this good 😍?
What I enter into PRC was discussed in my April 1st posting on this thread. My stock ROR was only a real 5.3%, which is less than the historical average, and PRC shows that I will not run out of money. Why I chose 5.3% is explained in my April 1st post. This basically takes the place of low stock return predictions if you want to look at it that way. So, instead of reading about predictions, I look for rare opportunities, which do happen.
No java was consumed leading up to the writing of this post☕. Thoughts????
I forgot to add the rare opportunity of the extension of the enhanced ACA (Obama Care) as a good event to take advantage of.
@pizzaman Yeah there's the one guy who predicted the 2008 crisis and he's made a cottage industry out of it. Every so often he comes out of the groundhog day hold and makes some prediction, always wrong. Someday he'll be right again and will be lauded. But it upsets me how often the financial trade rags and websites buy ito this and spread it. Or, they know it's BS and just go for the clickbait. Take all those "expert" predictions with a grain of salt, folks. Nobody knows the future, the next pandemic, alien landing, war, all sorts of black (or white!) swan events. Plan for the worst, hope for the best!
Bonds vs Equities over the Long Term - Which is Lower Risk When Taking Inflation (Real) into Account
Interesting article by David Blanchett titled: Is Jeremy Siegel Right About Stocks for the Long Run?
There is clear evidence that the real-downside risk of equities was higher over shorter time horizons. For example, the real-downside deviation of equities was higher than bills and stocks for every country for a one-year investment period; but as the period increased, the relative benefit of owning equities clearly increased. While equities might not be a perfect hedge for inflation over longer periods, they clearly became increasingly attractive as an inflation hedge over a longer investment period.
The debate regarding how the risk of equities change over time will never be settled. When thinking about the risk of equities, though, context is important, especially with respect to the definitions of risk and changes in wealth. Using historical returns for 16 countries from 1870 to 2020, my analysis shows that while the nominal variability of wealth was greater for equities over longer periods (e.g., versus bills or bonds), the reverse was true when considering real-downside risk.
Households who want to fund a goal over an extended period that is adjusted for inflation (e.g., retirement income) should actively consider owning equities, even if they are relatively risk averse.
Were equities Siegel’s “perfect” hedge against inflation? The historical evidence shows that the equity-inflation hedge hasn’t been perfect; but it has been better than bills or bonds. I’d describe equities as the “imperfect perfect” hedge against inflation for the long-term.
This analysis fits in with using the bucket approach for retirement asset allocation; a couple years of cash, 3-5 years bonds (or similar), the rest in equities. This approach reduces risk over most of your retirement time horizon.
You still exposed to the risk of equity market down for 10 years or more.
Yes that's very true, but what's the alternative? If stocks are down 10 or more years in a row, that undoubtedly means inflation will be high, and bond funds won't be able to keep up with inflation either. However, the most number of years in a row that the S&P 500 has been down since 1928 is four (1929-1932) and this has happened only once. Its been down three years in a row twice, and two years in a row once. That's it! 10-year US Treasury Bonds have been down two consecutive years only three times. That's it. Life's risky, so if things go bad for years on end, you will need to adjust your spending to compensate, or increase your bond holdings with US Treasuries and sleep well at night 😴.
This web sites has all the numbers: https://awealthofcommonsense.com/2022/12/how-often-is-the-market-down-in-consecutive-years/
"Chaos and Retirement Income" By James B. Sandidge, JD 2019
Interesting research article (attached and can be found at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3521850) if unnecessarily convoluted. It talks about sequence of return risk by invoking the butterfly effect (small change early on cascades into big problems later on) with regards to retirement cash flow as related to investments returns. I believe it was written for retirement planning "professionals" as he talks about the need for active management. Anyway, the idea is if your investments are negative for a year, especially early in your retirement, don't increase your cash flow by inflation the following year, or what ever your % annual increase in your cash flow is, problem solved, mostly (from page 23 of report):
Figure 10 illustrates the importance of early years and the potential positive impact of skipping one increase in cash flow for someone who retired in 1966. The first bar (red) shows that if you increased cash flow by 3 percent annually beginning the second year you finished the twenty-fifth year with $94,532. The second bar shows that if you skipped an increase the second year, beginning increases the third year, you finished with $248,200, a significant increase for a seemingly small adjustment.
The third bar assumes you increased cash flow the second year but skipped an increase the third year, then resumed annual increases the fourth year. The impact of
skipping one cash-flow increase declines with time. This is especially important when the long-term impact of those adjustments may not be obvious in the short-term.
Skipping increases early is a particularly effective strategy when you can skip multiple years. Figure 10 showed the effect of skipping a single cash-flow increase; figure 11 shows the impact of skipping multiple years by delaying the first increase. Figure 11 shows that if someone retired in 1957, withdrew 5 percent the first year and increased cash flow 3 percent annually beginning the second year, they finished the twenty-fifth year with $95,865. The second bar shows that if they delayed
an increase one year, they finished with $184,786, and each subsequent bar shows the impact on ending values of delaying the first increase by an additional year.
Each delay obviously increases absolute wealth, but figure 12 shows the declining incremental impact of each additional year of delay. The second bar in figure 11 is 93 percent bigger than the first, and the third is 44 percent bigger than the second, and so forth. Figure 12 again illustrates the nonlinear nature of retirement income. Retirees should delay increasing withdrawals as long as possible, because the longer they delay the more aggressive they can be with their initial withdrawal.
The butterfly effect also makes delaying market losses more important post-retirement. In figure 13, I assumed a twentyfive-year period in which a retiree withdrew 5 percent initially, increased that dollar amount 3 percent annually, and earned 10 percent every year but one in which they lost 25 percent.
The bars show account values after twenty-five years depending on which one of the first ten years you suffered a 25-percent loss. If you incurred the loss the first year, you finished the twenty-fifth with $122,630. Delaying the loss by one year (bar 2) increased ending wealth to $236,898, a 93-percent increase (figure 14). Delaying that loss to the fifth year left more than 50 percent of the original investment, and delaying the loss until the tenth year left you with almost your original $1 million investment intact after twenty-five years. Conversely, if the investor had been accumulating wealth, he finished with the same dollar amount regardless of the year of the loss.
As of 5/31/23. https://interactive.researchaffiliates.com
Required citation:
"Source: Research Affiliates, LLC (“Research Affiliates”) © Research Affiliates 2023. All intellectual property rights in the Asset Allocation Interactive website and any data thereto are the property of Research Affiliates. Neither Research Affiliates nor any of its affiliates, licensors or contractors shall be liable for any error, omission, inaccuracy, or incompleteness in the Asset Allocation Interactive website or any data related thereto. No further distribution of Research Affiliates data is permitted without Research Affiliates’ express consent."
(Excel sheet will not upload here.)
@wallace471 Bob - thanks for posting this. Over what timeframe are these returns projected?
Looks like 10 years.
Overview of Research Affiliates, LLC: https://wallmine.com/adviser/229364/research-affiliates-llc
Top of Table in the black bar that runs along to top:
Expected Returns (Core Assets)
‐Asset Type Category Asset Class Index Name
Nominal Return
(Expected 10Y)
Real Return
(Expected 10Y)
@pizzaman Think I know the answer, but do you plan to use any of these %ages in your PRC model?
