Comments on: You can’t bank on an expected return http://monevator.com/you-cant-bank-on-expected-returns/ Make more money, invest profitably, retire early Wed, 23 May 2012 23:59:58 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: The Investor http://monevator.com/you-cant-bank-on-expected-returns/comment-page-1/#comment-10747 The Investor Fri, 18 Sep 2009 06:47:01 +0000 http://monevator.com/?p=2581#comment-10747 I think it was George Soros who said he can buy the pound in the morning and sell it in the afternoon... ;) Regarding index funds, isn't there a distinction between agreeing the market is an efficient clearing system for finding out the best price for stock A or B (or at least that you or I can't consistently exploit any of its failings for profit), as opposed to saying that the valuation of the stock market against other asset classes is always right? I'm not sure even strong efficient market theory implies the latter, though I'm ready to learn otherwise. I think it was George Soros who said he can buy the pound in the morning and sell it in the afternoon… ;)

Regarding index funds, isn’t there a distinction between agreeing the market is an efficient clearing system for finding out the best price for stock A or B (or at least that you or I can’t consistently exploit any of its failings for profit), as opposed to saying that the valuation of the stock market against other asset classes is always right?

I’m not sure even strong efficient market theory implies the latter, though I’m ready to learn otherwise.

]]> By: Mike http://monevator.com/you-cant-bank-on-expected-returns/comment-page-1/#comment-10696 Mike Fri, 18 Sep 2009 00:03:52 +0000 http://monevator.com/?p=2581#comment-10696 If you're going to disagree with yourself at least it's better to plump for one side of the argument or the other! (-; [not including the people that can hold two completely contradictory views at the same time and not be concerned by this.] On this last point it doesn't bear thinking too closely about rebalancing as a strategy if you are an index fund fan .... e.g. "I buy index funds because I believe the market is efficient, and then I rebalance because I believe it isn't ..." .... (-: PS (and yep I'm an index fund fan and try not to think about it ... ) If you’re going to disagree with yourself at least it’s better to plump for one side of the argument or the other! (-; [not including the people that can hold two completely contradictory views at the same time and not be concerned by this.]

On this last point it doesn’t bear thinking too closely about rebalancing as a strategy if you are an index fund fan …. e.g. “I buy index funds because I believe the market is efficient, and then I rebalance because I believe it isn’t …” …. (-:

PS (and yep I’m an index fund fan and try not to think about it … )

]]> By: The Investor http://monevator.com/you-cant-bank-on-expected-returns/comment-page-1/#comment-10675 The Investor Thu, 17 Sep 2009 17:30:09 +0000 http://monevator.com/?p=2581#comment-10675 Actually, I'm just thinking I don't agree with my own point above about drip feeding being an argument against the utility of considering long-run bad periods for stocks. If you have a paper worth of X invested in the market and it delivers a disappointing Y over the next 20 years, does it matter whether you happened to have built that fund up over decades previously or invested the day before the crash? Really it's a strong argument for rebalancing: http://monevator.com/series/how-to-rebalance-your-portfolio/ Actually, I’m just thinking I don’t agree with my own point above about drip feeding being an argument against the utility of considering long-run bad periods for stocks.

If you have a paper worth of X invested in the market and it delivers a disappointing Y over the next 20 years, does it matter whether you happened to have built that fund up over decades previously or invested the day before the crash?

Really it’s a strong argument for rebalancing:
http://monevator.com/series/how-to-rebalance-your-portfolio/

]]> By: The Investor http://monevator.com/you-cant-bank-on-expected-returns/comment-page-1/#comment-10674 The Investor Thu, 17 Sep 2009 17:24:47 +0000 http://monevator.com/?p=2581#comment-10674 Drip feeding is the most powerful counter-argument -- and another reason to avoid trying to time in and out of markets. Some of the stats you'll see (such as the Barclays Capital Equity Gilt ones I tend to quote on Monevator) do take into account dividends though -- they're total return stats. Drip feeding is the most powerful counter-argument — and another reason to avoid trying to time in and out of markets. Some of the stats you’ll see (such as the Barclays Capital Equity Gilt ones I tend to quote on Monevator) do take into account dividends though — they’re total return stats.

]]> By: Mike http://monevator.com/you-cant-bank-on-expected-returns/comment-page-1/#comment-10177 Mike Fri, 11 Sep 2009 05:16:53 +0000 http://monevator.com/?p=2581#comment-10177 I have heard some argument about long run periods having negative returns for equities. The classic period that is cited is the post depression period but these sort of arguments often fail to factor in stuff like: dividends index selection (for instance the Dow in the 30s was rubbish) in the case of the 30s deflation drip-feeding (yeah sure if you bought in 1929 just before the crash it would have hurt but most people don't buy all at once and never buy again) I have heard some argument about long run periods having negative returns for equities.

The classic period that is cited is the post depression period but these sort of arguments often fail to factor in stuff like:

dividends
index selection (for instance the Dow in the 30s was rubbish)
in the case of the 30s deflation
drip-feeding (yeah sure if you bought in 1929 just before the crash it would have hurt but most people don’t buy all at once and never buy again)

]]> By: The Investor http://monevator.com/you-cant-bank-on-expected-returns/comment-page-1/#comment-10158 The Investor Thu, 10 Sep 2009 20:09:17 +0000 http://monevator.com/?p=2581#comment-10158 @Tony - Yep, absolutely agree. Perhaps I've skipped over other forms of debt too lightly in these pieces -- as you say if borrowing to invest doesn't really make sense when you're borrowing via a cheap mortgage it certainly doesn't work for anything else! @Neal - I think it was Peter Lynch who said when he started in the fund management business he was told markets went up 10% a year and once out of the classroom he never saw an exactly 10% year again! ;) @Tony – Yep, absolutely agree. Perhaps I’ve skipped over other forms of debt too lightly in these pieces — as you say if borrowing to invest doesn’t really make sense when you’re borrowing via a cheap mortgage it certainly doesn’t work for anything else!

@Neal – I think it was Peter Lynch who said when he started in the fund management business he was told markets went up 10% a year and once out of the classroom he never saw an exactly 10% year again! ;)

]]> By: Tony http://monevator.com/you-cant-bank-on-expected-returns/comment-page-1/#comment-10140 Tony Thu, 10 Sep 2009 15:45:34 +0000 http://monevator.com/?p=2581#comment-10140 It's unpopular advice, but in the same vein, people shouldn't really invest unless cedit cards and personal loans have been repaid first (with the possible exclusions of interest-free and low interest student loan debt). Otherwise, this must also be the equivalent of borrowing to invest at 17% pa or so in the UK: even worse than your example of paying the mortgage early. However, from a practical point of view, one of the reasons the UK is in a mess, is that households have built up large non-mortgage debts, but still need to make provision for retirement etc. So most of us have to compromise and repay debts as a priority AND make a start on investing for the long term. It’s unpopular advice, but in the same vein, people shouldn’t really invest unless cedit cards and personal loans have been repaid first (with the possible exclusions of interest-free and low interest student loan debt). Otherwise, this must also be the equivalent of borrowing to invest at 17% pa or so in the UK: even worse than your example of paying the mortgage early.

However, from a practical point of view, one of the reasons the UK is in a mess, is that households have built up large non-mortgage debts, but still need to make provision for retirement etc. So most of us have to compromise and repay debts as a priority AND make a start on investing for the long term.

]]> By: Neal @ WealthPilgrim.com http://monevator.com/you-cant-bank-on-expected-returns/comment-page-1/#comment-10128 Neal @ WealthPilgrim.com Thu, 10 Sep 2009 12:52:08 +0000 http://monevator.com/?p=2581#comment-10128 This is the most important subject in terms of understanding investing. A given investment may have a 93% chance of returning between -10 and +15 - so folks kind of expect to fall in that range. What they don't expect is to have a -35% return - even though it is certainly in the range of possibilities. Because they internally dismiss the possibility, they react emotionally and this is where the investor really gets into trouble. Thanks for writing this important piece. This is the most important subject in terms of understanding investing.

A given investment may have a 93% chance of returning between -10 and +15 – so folks kind of expect to fall in that range.

What they don’t expect is to have a -35% return – even though it is certainly in the range of possibilities. Because they internally dismiss the possibility, they react emotionally and this is where the investor really gets into trouble.

Thanks for writing this important piece.

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