Pension risk bonds Vs equity Vs cash Vs property fund

Sarenco

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I’ve never heard the phrase “median P/E” before and, having read the article posted by @Sunny, I’m inclined to think it’s completely bogus as an indicator of future equity index returns.
A further disingenuous contribution from you, I remain unclear regarding your respective agendas and motives.
That’s absolutely fine with me.

I’m surprised that you think I have an undisclosed motive - I simply give my personal opinion on here without any vested interest.
 

Sunny

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You’re just making stuff up and the danger is that people will listen to you. Focussing on an index’s median rather than its mean is best practice, as one can be assured that the valuation metric is not skewed by individual outliers, such as may occur with one-time write-offs or other material accounting trickery. The “markets are expensive/12 years isn’t a long time horizon/put your money in State Savings Bonds” nonsense is as reckless as it is dangerous.
And my last comment on this is that you can't tell another poster that they are making stuff up and that it is dangerous for people to listen to them and use words like reckless and dangerous and then simply copy something from the internet as 'best practice'. If you think that by pointing this out that I have an alternative motive then grand.
 

Gordon Gekko

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That’s interesting, given that Ned Davis use “median earnings yield” as standard. It’s pretty standard in many areas to eschew the mean in favour of the median, but then neither of you are really interested in meaningful discussion, are you? Much easier to construct rabbit-holes and derail the discussion.

e.g. Poster No 1: “Is my 12 year time horizon too short?”

Poster No 2: “No, it’s okay for X/Y/Z reason”

In rides Sarenco: “You chosen an arbitrary 12 year time horizon!” This despite it being at the root of the person’s initial enquiry.

And then his pal Sunny: “You copied X/Y/Z from the internet!”

Presumably people are familiar with the term “sock puppet”?
 

Sarenco

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I must confess that I have never heard of Ned Davis either. Who is he?

I really don’t understand why anybody would use the P/E of a “median stock” as a reference point when projecting returns for a market cap weighted index. The largest cap stocks will always dominate the index so why would the P/E of the median stock in that index particularly matter?

I never suggested that the 12-year timeline specified by the OP was arbitrary. I’ve no idea where you are getting that idea from.

I can assure you that I have never used a “sock puppet” to post on this forum. I find it odd that you would think otherwise.
 

Sunny

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That’s interesting, given that Ned Davis use “median earnings yield” as standard. It’s pretty standard in many areas to eschew the mean in favour of the median, but then neither of you are really interested in meaningful discussion, are you? Much easier to construct rabbit-holes and derail the discussion.

e.g. Poster No 1: “Is my 12 year time horizon too short?”

Poster No 2: “No, it’s okay for X/Y/Z reason”

In rides Sarenco: “You chosen an arbitrary 12 year time horizon!” This despite it being at the root of the person’s initial enquiry.

And then his pal Sunny: “You copied X/Y/Z from the internet!”

Presumably people are familiar with the term “sock puppet”?
Now you are just sounding ridiculous going on about sock puppets. If you want to claim something you got on the internet as best practice while telling other posters that they are making something up and are dangerous, then you better be prepared to back it up with something better than 'Ned Davis use it'. Ned Davis (Not sure why they are being held up as the final voice) might use it but I am also willing to be bet it is not the only measurement they use and like every other statistical measure comes with health warnings. Or you can answer why the vast majority of other research houses don't. Are they wrong? So maybe instead of insulting other posters and their contributions, you can answer the question. Why is the median P/E the best measure to use and how exactly does it deal with write offs and other accounting trickery as you put it? I am genuinely interested.
 

Duke of Marmalade

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Girls please!
Actually the link by Sunny is very interesting, and whether Gordon quoted from it without referring to his source is really not terribly relevant. Just to get the technicals out of the way, the median does not refer to median size of company but to median size of P/E. It is a fair statistic to consider, though it is not absolutely consistent to track this statistic against the 10 year returns as these latter are overall cap weighted.
The negative correlation between past P/E ratios and the subsequent 10 year growth is stark, and it is intuitively appealing.
The graph itself was constructed in February 2016 and the P/E was 21.5 which the author states is only 2.7% below the level that would be considered overpriced. Interestingly, today it stands at 21.9. The historic average (median) level is 16.9. So a very crude calculation is to say that in 12 years time the P/E level will have fallen from 21.9 to 16.9 - a fall of 23% in price, all else equal. Meanwhile earnings of 4.6% p.a. will be enjoyed. However, after allowing for taxes and charges this does not suggest to me that equities look good over this time period. Of course, this was all done in S&P land.
But bonds are a far worse proposition. No capital upside. Yields of 0%. Potentially big downside. Institutions are holding bonds at negative yields for technical reasons all tied up with the policies of the central banks. Retail investors should shun bonds for the foreseeable future. Once the central bank manipulation has been wound down and bond yields rise to around 4% p.a. then they will again serve a purpose in stabilising and diversifying fund performances.
Meanwhile cash or State Savings is your only man.
 
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cremeegg

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Hoping to avoid the personal tone that is creeping in. I would like to address this point.

Focussing on an index’s median rather than its mean is best practice, as one can be assured that the valuation metric is not skewed by individual outliers,
I don't think that a median P/E or (earnings yield) ratio is common practice. I may be wrong about that I am not an expert, thats just my understanding. However the idea that a ratio like this may be skewed by an outlier is simply incorrect. There are certain metrics which can be skewed by outliers but a P/E ratio is not one of them. The usual example is given of average wages being skewed by a small number of high earners, is not relevant to a ratio.

If one company with a high P/E makes up 90% of an index and 10 companies with low P/Es make up the rest it is the mean and not the median P/E that drives results. For a market cap index that's arithmetic not opinion.

or to put it another way.

I really don’t understand why anybody would use the P/E of a “median stock” as a reference point when projecting returns for a market cap weighted index. The largest cap stocks will always dominate the index so why would the P/E of the median stock in that index particularly matter?
or as the Duke might say

the median ... is a fair statistic to consider, though it is not absolutely consistent to track this statistic against the 10 year returns as these latter are overall cap weighted.
Although the use of the word "absolutely" here is just Belfast good manners.
 

Duke of Marmalade

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Hoping to avoid the personal tone that is creeping in. I would like to address this point.



I don't think that a median P/E or (earnings yield) ratio is common practice. I may be wrong about that I am not an expert, thats just my understanding. However the idea that a ratio like this may be skewed by an outlier is simply incorrect. There are certain metrics which can be skewed by outliers but a P/E ratio is not one of them. The usual example is given of average wages being skewed by a small number of high earners, is not relevant to a ratio.

If one company with a high P/E makes up 90% of an index and 10 companies with low P/Es make up the rest it is the mean and not the median P/E that drives results. Thats arithmetic not opinion.
cremeegg if earnings are nil P/E is infinite. One company with nil earnings would mean the average for the whole lot is infinite. If earnings are near nil we would not quite have infinity but we would have very large outliers. This problem always exists when the underlying distribution is very skewed e.g. bounded below by zero but unlimited bounds on the upside. That is the case with wages and with P/Es.
I am not a practitioner but I can see that median would be the preferred statistic. Of course, another statistic which would make sense as a mean would be to divide the market cap by the aggregate market earnings. This would be averaging P/E with E as the weights.
 
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cremeegg

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But bonds are a far worse proposition. No capital upside. Yield of 0%. Potentially big downside. Institutions are holding bonds at negative yields for technical reasons all tied up with the policies of the central banks. Retail investors should shun bonds for the foreseeable future. Once the central bank manipulation has been wound down an bond yields rise to around 4% p.a. then they will again serve a purpose in stabilising and diversifying fund performances.
Meanwhile cash is your only man - max out is State Savings.
This for me is the heart of the matter.

My pension is 30% (or some such) in bonds. Just how risky is this. And is this a new risk that investment managers are unfamiliar with. To misquote Warren Buffet, am I swimming without clothes.
 

cremeegg

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cremeegg if earnings are nil P/E is infinite. One company with nil earnings would mean the average for the whole lot is infinite.
Ah Duke, whatever about the median P/E not being useful, the average for the lot becoming infinite only arises if you average the averages. Learning not to do that is literally Junior Cert stuff.

This is the correct approach.

Of course, another statistic which would make sense as a mean would be to divide the market cap by the aggregate market earnings.
 

Duke of Marmalade

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Ah Duke, whatever about the median P/E not being useful, the average for the lot becoming infinite only arises if you average the averages. Learning not to do that is literally Junior Cert stuff.
Example: A: Market Cap=100 Earnings = 5; B: 100,3; C 100,0
P/E = 20, 33, Kinda big
Median P/E: 33
Mean P/E: Kinda big

I don't see any average of the averages there.
 
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