Saturday, March 16, 2013

Market timers vs. asset allocators

Reblog from Tuesday, March 3, 2009
Modern Portfolio Theory tells us to hold a balanced portfolio of stocks and bonds. If we want higher returns, we have to increase the portion of our portfolios devoted to risky stocks.

Jeremy Siegel takes this argument one step further and notes that if you have a longer time horizon, e.g., 20 years, there is no tradeoff between risk and return: holding bonds serves only to reduce return:
Stocks on the long term have returned 6.8% per year after inflation, whereas gold has returned -0.4% (i.e. failed to keep up with inflation) and bonds have returned 1.7%. The equity risk premium (excess return of stocks over bonds) has ranged between 0 to 11%, it was 3% in 2001[8]also.
John Mauldin has a good column on the revenge of the market timers. He shows, in the table below, that it matters when you get into the market.

The implied prescription is to look at market fundamentals and enter the market only when stocks are relatively cheap (as Shiller's methodology currently says it is).


  1. It think our monetary policy decisions will have major challenges for timers and strategic asset allocators during the rates normalization. Clearly as rates rise (from artificially low rates) duration will become a significant head wind for fixed income investors. That is just the start of it. Low rates has created asset bubbles in virtually all asset classes. High yield corporate credit spreads are compressed (See OAS HY spreads on St. Louis FRED's website). Equity Risk Premium has compressed due to the fairly explicit "Bernanke Put" and overly loose policy. It only makes sense that those corp. bond spreads and ERP's go higher without that explicit continued stimulus from the central bank. The only thing I think there is "relative" value in, is EPS Growth. Things like PEG Ratio seem to be the new value. That and having a negative duration at the front end of the yield curve. 2 Yr. Yields are multiple Std. Dev.'s over valued. Meanwhile, inflation is above 2% and unemployment is trending towards 6%. When market participants at the short-end are willing to give up their 45 bps for liquidity and exchange that for confidence short end rate volatility will come back. I look for a more hawkish fed (I hope as early as next week.).

  2. In my view we should never worry about risk as long as it’s done in calculated way. I do Forex trading with high risk, but important point is I do it with good money management and that’s something I am able to do it easily with OctaFX broker through their epic 50% bonus on deposit, it’s a really magnificent offer and really help me with the performance and allows me to succeed and trade with absolutely ease and control with things.