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tony

20 Years Of The Best And Worst

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Everyone wants to be in the best-performing asset class every year. The thing is, few people are savvy enough to consistently choose the best. That’s why diversification is key. This chart shows annual returns for eight broad-based asset classes, cash, and a diversified portfolio ranked from best to worst.
Notice how the “leadership” changes from year to year, and how competitively the diversified portfolio performed over 20 years (see the “average” column).

 

I posted something similar before but this has been updated showing how a diversified portfolio performed against different asset classes. Worth studying

 

Tony

 

https://www.mfs.com/wps/FileServerServlet?articleId=templatedata/internet/file/data/sales_tools/mfsvp_20yrsb_fly&servletCommand=default

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Tony,

 

There are plenty of research papers showing that the individual investor chases asset classes that have had the best performance in a market cycle. This makes no sense but that is what they do ....chase past performance. Investors should do what they normally would do when shopping ...buy things on sale. But on Wall street individuals act the exact opposite of what they would do at a mall....They buy when things get marked up not down.

 

I love to look at the Callan charts because it helps me stay away from the future losers & add to the next winners. Once an asset shows up near the top of the chart for multiple years it tends to under-perform the next 3-5 years. The assets that are on the bottom for consecutive years rotate up the charts. (see the purple box on your linked chart?)

 

The simple way to rotate out of overvalued areas of the market into undervalued areas is to re balance annually or quarterly

 

2016 is shaping up to be a great year for investors that understand "reversion to the mean" in markets. The highest valuations are having a tough year & the lowest valuations are doing quite well.

 

As an investor I am always looking for an asset that gets punished over multiple years. Research shows that investors are rewarded for buying the losers & selling huge winners. So the famous Buffet quote comes to mind "Be greedy when everyone is fearful and fearful when everyone is greedy"

 

What Happens When You Buy Assets Down 80%?

http://mebfaber.com/2013/06/25/what-happens-when-you-buy-assets-down-80/

 

Current Valuation metrics: here are good sites that will show investors where the value is.

 

http://www.starcapital.de/research/stockmarketvaluation

 

http://www.researchaffiliates.com/AssetAllocation/Pages/Equities.aspx

 

 

PS: I can hear Steve now....Who would would buy stocks in & Brazil let alone a gold mining company....YUCK!

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Ken haven't looked at your links yet but what I get from the chart is not to make decisions based on whats and whats not. Instead the chart shows the safest course to investing success is to hit the middle ground by staying diversified.

 

Tony

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Tony,

 

The missing piece to diversification is correlation. A portfolio can be diversified and still have a unacceptable draw-downs. So building a diversified portfolio of non-correlated assets w/ re-balancing has been the safest way to grow wealth IMHO. Today more than ever major asset classes are becoming more correlated. Large, Mid, Small, international, REITs funds have very high correlations vs. the past. All five of these go up or down together rarely does one do well when others aren't.

 

http://www.assetcorrelation.com/majors

 

Making sure everything in your portfolio isn't going up or down at the same time will help balance things out. That Vanguard fund I showed you have been quite impressive. Probably the lowest cost alternative fund I track. It has been doing it's job to say the least.

 

http://finance.yahoo.com/q?uhb=uh3_finance_vert&fr=&type=2button&s=vmnfx

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Here is a site with all sorts of cool tools to play around with on PortfolioCharts.com. One new addition is the ability to select a group of assets, the required minimum rate of return, and it will spit out the portfolios that had the smallest yearly loss. 5%, 8%, then 10% required returns

 

Best of all, it’s free!

 

Pre-built Model Portfolios

 

http://portfoliocharts.com/portfolios/

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Here is a site with all sorts of cool tools to play around with on PortfolioCharts.com. One new addition is the ability to select a group of assets, the required minimum rate of return, and it will spit out the portfolios that had the smallest yearly loss. 5%, 8%, then 10% required returns

 

Best of all, it’s free!

 

Pre-built Model Portfolios

 

http://portfoliocharts.com/portfolios/

 

Ken,

I agree! From your chart http://portfoliocharts.com/assets/ I already have the Total Stock Market, Total International stock market, Total Bond Market and Money Market. I am fully diversified with the crucial stock/bond split appropriate for my age and need for the money. It doesn't get any simpler than that for us regular guys and gals. BTW to add on to what you said that investors buy when stocks are expensive, they also make the mistake of thinking they can find that gem that is going to make them rich and to brag at parties. A boring portfolio will get people to their goals, an exciting portfolio for most will not because one has to buy low and get out at the high, a trade you might be able to do at the right time once or twice, but its based on luck. While being lucky pays too, it should never be legitimate strategy.

 

I carry this perspective. I do not want to be afraid and concerned about my investments because something "out there" in the market place is changing, or the never ending scares of the financial news media or changes in our tax deferred retirement plans. There was a big concern two years ago because there was a change in TPA for our Pension2. As I believe it worked out because its not what the TPA does or doesn't do, its what we do. As I understand it, it worked out fine and our CalSTRS pension2 is still a very good 403b for California teachers.

 

So, I really don't care what happens in the market because it is what I do that counts, keep costs very low, only trade because of an imbalance in my asset classes, while working always contribute something, while retired, keep living frugally, and take dividends and capital gains first and then withdrawal when needed. My philosophy is to expect nothing from "out there" (stock market). Isn't it usually what we do anyway?

 

Steve

PS while I agree the correlations between equities worldwide is high, the stock/bond split is the only correlation that is important. The stock bond split saved my butt during 2008.

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The simple way to rotate out of overvalued areas of the market into undervalued areas is to re balance annually or quarterly

 

2016 is shaping up to be a great year for investors that understand "reversion to the mean" in markets. The highest valuations are having a tough year & the lowest valuations are doing quite well.

Would you mind giving an example of how you might balance your portfolio and explain what data you analyze in order to determine the balance?

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Blosky,

 

Diversification and balance may not go hand in hand. Many indexes have hundreds of stocks in them so they are diversified but a portfolio of large cap, small cap, & international indexes are highly correlated = not very well balanced.

 

So I structure portfolios across asset classes Stocks, Bonds, Real Estate, Commodities, Cash. Second I look to diversify those asset classes with the best investment vehicles. (mostly broad based Index funds & ETFs) Then I look to see how these securities are correlated over various time periods. I don't want everything correlated (going up & down together) http://www.assetcorrelation.com/majors

 

So balance comes from various positions having some zig & zag. (low to neg correlation) When stocks take a hit, I want something that balances that out. traditionally that is a high quality bond index (treasuries/goverment bonds) high yield /junk bonds have high correlation to equities so they are not much help in market corrections. Gold & other alternatives have low correlation to stocks & bonds. So the most balanced portfolio IMHO has Stocks, Bonds & Alternative investments. That is why I am a fan of All-Weather portfolios.

 

Last thing is that I like to weight the portfolio towards value. I get worried when asset classes outperform over long periods 3-5 years. So currently portfolios have less in US stocks vs. their target weightings. FYI US stock indexes are in their 8th straight up year. That worries me.

 

Hope that answered the question?

 

Ken

 

 

Valuation metrics I monitor:

 

http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP.php

 

http://www.advisorperspectives.com/dshort/updates/Market-Valuation-Overview.php

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Hope that answered the question?

 

I think so. I'm a novice investor and just trying to learn as much as possible. I wanted to get a sense of how one might balance their portfolio quarterly. I understand that my portfolio needs to be diversified and that one shouldn't try and chase the market, but at the same time it's difficult to deny what's happened over the years based on those charts. I was just curious how someone might use those charts to influence their investments.

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"based on those charts"

 

Those links to fundamental valuations I posted are worthless in the short term (1-3 years). But are deadly accurate over 7-10 year time-frames. So I structured portfolios based on long term fundamentals (valuations) but I look at hundreds of charts to tell me what markets are currently doing so I can position accounts accordingly. "Don't fight the trend" is one phrase that sticks with me.

 

I no longer believe in Modern Portfolio Theory which is the #1 followed strategy by my advisor peers. Markets have changed since that Noble Prize winning theory was written. Today correlations of assets have changed. What was considered a balanced portfolio 25-50 years ago isn't the same in today's markets.

 

If you want to read a great E-book on how markets really work. My buddy wrote a pretty good one recently. (free download)

http://www.billcara.com/ebooks/fourpillars-ebook/

 

chart school:

http://stockcharts.com/school/doku.php?id=chart_school

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So I structured portfolios based on long term fundamentals (valuations) but I look at hundreds of charts to tell me what markets are currently doing so I can position accounts accordingly. "Don't fight the trend" is one phrase that sticks with me.

 

So what would those portfolios look like? Or is that "pay for" information?

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Blosky,

 

I listed similar models I use under the Golden Butterfly post. I use 5-10 ETFs to structure portfolios I weight them via value and trend metrics.

 

Here are some websites that might be helpful.

 

https://portfoliocharts.com/portfolio/permanent-portfolio/

 

http://www.alhambrapartners.com/wp-content/uploads/2015/07/Standard-Momentum-Allocation.pdf

 

http://www.advisorperspectives.com/dshort/updates/Monthly-Moving-Averages.php

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