Asset allocation in a US stock market bubble

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Can i ask what that table is from?

I've spent way too much time using compound interest calculators and running numbers through excel and that looks like the lazy option I've been wanting for a while!
 

yes that table is more realistic, all I am saying is that the prognosis for the US economy is way too optimistic and that the recent performance in a very strong bull market is making all the comparison figures look too rosy. We know that most people don't have the patience and fortitude to sit through long bear markets, they didn't after 2001, they didn't after 2008 and even the short one in 2020 .
If you were reading all the stuff after 2001, everyone was negative on the US, then it was all about China, commodities, Europe, oil, tech stocks , banks and property, that lasted a long time. People forget that all that, its only since 2015 that there has been all this exclusivity about the US markets being the only show in town.
 
SquirrelChaser said:
Can i ask what that table is from?

I've spent way too much time using compound interest calculators and running numbers through excel and that looks like the lazy option I've been wanting for a while!
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It’s the Dimensional Retuns book which they publish annually.

I’ve been using it since 2008 with my clients.
 
What was the annual return in the years following 1940? It was good right?
Yet Pearl Harbour was 1941.

If you buy in 1926 ahead of the Wall Street crash you make money.

If you buy ahead of WWII you make money.
If you buy at the end of the 1960s you make money despite the 1970s inflation.

The message is this. Stop fretting about the short term and all the reasons you can tell yourself not to invest.


For the avoidance of doubt I’m not recommending just investing in the S&P 500, just that investors shouldn’t fret about trying to time the market.
 
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Marc said:
Stop fretting about the short term and all the reasons you call tell yourself not to invest.
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It depends on investment horizon, if someone has a 10 to 15 year investment horizon they should look at that time period in a rolling window historically and look at the distribution of returns matching that time period (not an 84 year period starting in world war 1 as per the first graphic).

They should also pay attention to the amount of money made or lost and whether it matches their targets/needs (not simply 'makes money'/'loses money' as per the second graphic).

There were certainly people around the great financial crisis who had to continue working, because they couldn't afford to retire due to hits to their pension pots, a quick google will throw up news stories there.
 

Hang on a minute. Some Irish people lost much more money during the global financial crisis than they needed to/should have done due to over leverage/profound home bias and frankly just shockingly poor investment advice.

Sean Quinn is the poster boy for that surely?
 
??

Looking at the rolling 10 or 15 year window only tells you (at best) the range of expected returns over that investment period which swing from negative to positive depending on the window you choose. It tells you nothing about the 10 year window which starts today.

What you could-usefully- do with 10-15 year windows is compare the returns with the alternate investment options and inflation. That's an eye opener- over the last 10 years house prices here have doubled while the S&p 500 has tripled.

You could also incorporate a 10 year window to model the next 10 years under the assumption returns will revert to long term averages. Right now that suggests returns over the next 10 years will be far lower than the last 10 years- but there's also the (low in my opinion) possibility that high returns will act to further increase the long term average which works mathematically as well.

But the key elements will be risk tolerance and alternatives- you'll always have to balance certainty with potential returns. Targets and needs are very different. If you absolutely need a certain amount of cash in 10 years then you have to put that amount of cash into an account over the next 10 years. If you're happy to risk the (historically small) possibility of having half that amount for the (historically high) chance of having 50% more, you put it into an index tracker.

For myself, my base assumption is that the return on my chosen indexes will, over my 40 year odd investment timeframe, be 75% or higher than the long term annualised return. That or higher and I'll be fine, lower and I'll have to work part-time for a few more years.  BUT even if it's half tthe long term average (the worst case i could find over 20 years) I'll still be far better off (relative to the alternatives) than I would have been otherwise AND be able to retire in significantly more comfort. So it'll just be a smaller win rather than a loss.
 
Marc said:
It’s the Dimensional Retuns book which they publish annually.

I’ve been using it since 2008 with my clients.
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That is an extremely useful resource which I never heard of before and is probably going to heavily influence my decision making.

Thanks.
 
SquirrelChaser said:
If that is true then most people are total fools.

If you start investing at 40 in your pension (like i did) your investment horizon should be at least 4 decades, given an average life expectancy of 80. Longer if you don't smoke.
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so you think its OK to wait until you are 80 to say "ah yes that investment went well , I had to wait most my life mind you but at least I proved that everything works out in the long term as the statistical tables showed back when I was 40, Now Im going to party like its 1999 as I couldn't do it back then"
 
From Ben Carlson’s book ‘A Wealth of Common Sense’
 

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The money lost in the GFC here in Ireland has nothing whatsoever to do with debates about whether the S&P is running hot. Diversified portfolios always recover. Overly concentrated and overly leveraged rubbish generally doesn’t.
 
What's your basic point?

My best guess is you think investing in the stock market is bad, or that long term trends should be ignored In favour of recent history.
 
SquirrelChaser said:
I'm not sure what your point is about telecoms in Europe?
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(1) the European regulatory/competition authorities loathe market power or dominance when the hint of it emerges they kill it in the crib which is bad for stock investors, capitalists, VC's.....European telcos are kind of like the case study for this.....incumbent network providers forced to open their networks to others, compulsory MVNO agreements etc. It's like a capitalist's worst nightmare - billions of capex penciled at an XYZ return only for a sovereign authority to come in a re-write the math and hobble the returns. Ireland is doing a version of this with the RPZ nonsense with the inevitable results which is capitalists have walked away from the market & we have under investment.

(2) Given the above.....is it any wonder that all the VC emerging tech innovation is occuring in the United States......the sky is the limit in the US in terms of where your company might go valuation wise....in Europe your likely to get your knees cut off if your idea takes off....the choice is easy for the best and brightest

(3) European telecoms is also an example of what happens when you cut off the tails in terms of returns - you get under-investment, by any measure European telecoms are behind on the leading edge in terms of connectivity......for example in 2022, 5G coverage in Europe was 73%, compared to 96% in the US, 95% in South Korea, 90% in Japan, and 86% in China.

As Europe/Ireland puzzles why we dont have any domestic European champions to rival Google, Facebook or why our stock markets are underperforming US ones or why we dont control the leading edge in any industry anymore or why there is no VC ecosystem close to rivaling the one in the US - one of the answers, amongst many, is what has happened to European telcos or PRS investors in the Irish housing market for that matter.

It's why Europe is about to lose the race to 'own' the artificial intelligence future. This is not an insignificant outcome and paying €13 a month for unlimited mobile data is kind of the definition of a win with a small 'w' seen in the context of the big stuff. In the same way that sitting in a rent controlled apartment in Dublin is a win with a small ‘w’.
 
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SquirrelChaser said:
What's your basic point?

My best guess is you think investing in the stock market is bad, or that long term trends should be ignored In favour of recent history.
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No on the contrary actually, I have a fairly large portfolio. My main point that this is not the time to be putting money into the US markets specifically at sky high US stock prices and also at historic dollar exchange rates. I think the focus on the US markets is a mistake and this has been a phenomenon over the last decade due to the performance of the US tech sector. While these maybe great companies for the very long term their prices are simply too high, remember Microsoft took sixteen years to get back to the share price it had inn 2000 and that is one of the world's best and most valuable companies.

Forty years is too long, nobody would wait that long and would have long cashed out at a loss, thats why market crashes happen because most people do not have that resilience even if theoretically they say they have a 40 year investment horizon. Its far better to be putting money into the markets during the crash which is also not what most people do either. Thats why there are all these postings about investing in US markets now but nobody was posting about that back in 2010 or 2002
 
joe sod said:
My main point that this is not the time to be putting money into the US markets specifically at sky high US stock prices and also at historic dollar exchange rates.
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Yeah its double trouble - for a euro based investor right now......and we aint in TINA anymore.....its possible to find euro-denominated fixed income instruments with relatively short duration where one can get high single digit returns that would mimic a historical allocation & return to SPY......you can also go dumpter diving......its hard to explain how hated the FTSE/LSE is right now...and to that I'll stuff in Amsterdam or DAX..not everything there is low quality old world junk thats gonna get disrupted by AI.....
 
Just a point about historical data.

Because stock returns are so noisy in the short term I need about 60 years of returns for a meaningful t statistic so that I can demonstrate statistically the equity risk premium. In other words just to explain to someone from another planet why we buy stocks at all when there is so much uncertainty compared to say t-bills.
 
letitroll said:
its possible to find euro-denominated fixed income instruments with relatively short duration where one can get high single digit returns that would mimic a historical allocation & return to SPY
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can you give any examples of those instruments that can easily be bought?
 
You make good points about US stocks being expensive. Every metric apparently suggests that's the case. The question is what's the alternative with a better or nearly equal long term annualised return?

My investment horizon is 40 years, 20 years of investing via my pension mostly, followed by 20 years of spending- but it's not like I'll be convert everything to cash when I retire, so I'll still be invested long afterI stop actuallypaying in. I think this is probably normal for most people with private pensions.

I am making investments which I will probably hold for a much shorter period to be fair, but I'm still focusing on long-term average returns as a guide. Mainly because I've yet to hear a convincing argument for using anything else as a guide.

Yeah, most people buy the boom and sell the bust with unfortunate consequences for them. I sat on my hands during 2022, and I think focusing on the right numbers helps overcome the impulse to sell/change your fund. That was with my pension though, I'm not sure if I would have been so blasé about the plummet if it was money I'd wanted to be able to spend in the near future.
 
letitroll said:
its possible to find euro-denominated fixed income instruments with relatively short duration where one can get high single digit returns that would mimic a historical allocation & return to SPY.
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Would also like details of such funds
 
We’ve been listening to this spoof about the US market being expensive for years.

A very expensive mistake if someone had listened to it.

It could be a very expensive mistake to not have the biggest and best companies in the world in your portfolio.

Pensions can be rebalanced tax-free. I wouldn’t dream of tilting my 100% equities allocation away from the US (it’s a global strategy).
 
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