Is asset allocation possible without looking at historical data

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saver7007
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Re: Is asset allocation possible without looking at historical data

Post by saver7007 »

Thanks everyone for all the responses in this thread. I’ve read the replies so far and here’s a summary of what I’ve picked up as considerations besides historical data:

- Understand the nature of the investment
- Instead of backtesting or forecasting just max your savings rate and pick any balanced asset allocation
- Know your personal need/willingness/ability to take risk and your ability to sleep at night, and look at what happens if stocks go to zero
- Think about liability matching
- Assume that the government will succeed in the long run at its stated monetary goals like having 2% inflation and non-negative real interest rates
- Warren Buffett probably never does historical backtesting, he looks at the current price vs the estimated future profitability of businesses and also looks at the quality of management

I’ll throw in one more thought which is just needing optimism about the future economy even if it's unpredictable, I can't see much point in investing if you believe there’s little or no chance things will go well like they have historically, but if things do go well then stock index funds are a great way to participate in the gains. There’s a lot to think over in this thread, thanks.
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watchnerd
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Re: Is asset allocation possible without looking at historical data

Post by watchnerd »

saver7007 wrote: Mon Apr 24, 2023 11:08 pm I can't see much point in investing if you believe there’s little or no chance things will go well like they have historically, but if things do go well then stock index funds are a great way to participate in the gains.
I don't think one has to believe that stocks will do as well as they have historically to justify investing in stocks.

It's all about the numbers.

If you think stocks will do better than the alternatives (in the present), then that's enough reason.
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NiceUnparticularMan
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

watchnerd wrote: Mon Apr 24, 2023 11:17 pm
saver7007 wrote: Mon Apr 24, 2023 11:08 pm I can't see much point in investing if you believe there’s little or no chance things will go well like they have historically, but if things do go well then stock index funds are a great way to participate in the gains.
I don't think one has to believe that stocks will do as well as they have historically to justify investing in stocks.

It's all about the numbers.

If you think stocks will do better than the alternatives (in the present), then that's enough reason.
Yep.

At the end of the day, I don't think the allocation question is a super tough one in practice. Like, there may be no absolute certainty about stocks being the best long-term investment, but is there really a better bet available? And is there really a better bet than roughly liability matched IP bonds for very low risk real income? If those are both the best bets available for those purposes, that is all you need to use a DFA-style retirement savings plan.

To me the more "interesting" issues are about savings/withdrawal rates. Like, how much is it reasonable to save now given a certain future income goal? How much is it reasonable to withdraw now given a certain probability of distribution of lifespans/spending goals?

Those are the sorts of issues that might rationally depend on asset prices generally. And I do think it is entirely possible, perhaps likely even, that over time asset prices could go up systematically such that you need more savings to meet the same goals, and can withdraw less from a given amount of savings.
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

Logan Roy wrote: Mon Apr 24, 2023 1:53 pm The entity that needs jet fuel shouldn't be an anomaly. Their presence and demand should be factored into pricing well in advance.
You just explained why efficient pricing of jet fuel futures doesn't imply every entity should have the same allocation to jet fuel futures, even if you do not realize that is what you did.

I won't belabor the point further, but once you grasp that is true, that distinction explains a lot of things you currently find inexplicable.
Well then it's not clear we're debating anything. Because I've been quite specific that the thing I'm skeptical of is a risk 'premium', as opposed to risk 'compensation'.
Perhaps there is indeed a semantic issue here. This is the standard definition of a risk premium:

"A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk."

https://en.wikipedia.org/wiki/Risk_premium

Risk premiums are just a particular quantification of risk compensation. You could also talk about lower prices as a quantification of risk compensation. These are mathematically identical concepts, just expressed differently.
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

randomguy wrote: Mon Apr 24, 2023 4:42 pm
saver7007 wrote: Fri Apr 21, 2023 11:21 am
Has anybody else wondered if they are relying too heavily on recent historical data and on theories and patterns derived from those data, and been able to find alternative rationales to make AA choices?
To pick an AA you need estimates of returns and variance.
Not necessarily with any precision, if your risky portfolio is just broadly diversified stocks.

Meaning I can choose just to buy broadly diversified stocks on the theory their returns and variance on an individual level likely warrant the assumption that diversification might be helpful. I don't need precise estimates to warrant that thought, at least not when the marginal costs of broad stock diversification are so cheap, and if anything it is more costly to try to exclude individual stocks or categories of stocks.

Where it gets tricky is if you think some other asset classes that might or might not be worth including in your risky asset portfolio along with broadly diversified stocks, and you want to make your decisions about exactly what mix of risky assets to hold in what measure based on estimates of what different mixes would change versus an all stock portfolio.

But if you don't see a need to do that, meaning you are OK just using broadly diversified stocks for your risky portfolio, then you really don't need to try to determine such estimates.
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

seajay wrote: Mon Apr 24, 2023 6:16 pm Image
I'll just note again that charts like this really do a good job illustrating the structural break associated with the transition out of the Bretton-Woods system and into the modern international monetary system.

But the prior chart did a better job illustrating what that implies for modern retirement savers.
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Re: Is asset allocation possible without looking at historical data

Post by watchnerd »

NiceUnparticularMan wrote: Tue Apr 25, 2023 5:35 am all you need to use a DFA-style retirement savings plan.
What is a DFA-style retirement savings plan?
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NiceUnparticularMan
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

saver7007 wrote: Mon Apr 24, 2023 10:46 pm
Taylor Larimore wrote: Mon Apr 24, 2023 2:12 pm saver7007:

I retired from the government in 1982 with about $1Million in savings, income from a pension, two SPIAs (Single Premium Immediate Annuities) and later Social Security.

My income is more than I need. The result is that my asset-allocation makes little difference to me.

I wish you the same peace of mind.

Taylor
Jack Bogle's Words of Wisdom: "The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course."
I appreciate the response. Thanks to reading Mr. Bogle’s books several years ago I believe I’m on the right track with his words of wisdom by investing in low cost index funds, avoiding fees and trading, and just staying the course and being optimistic about the future. I also spend what is probably unnecessary time on spreadsheets trying to figure out what year I’ll have enough to retire if I so choose, and that may be where I’m going wrong. It’s probably better to learn to accept the unpredictability of it while having confidence in the plan and enjoying the ride.
I note that Taylor retired right around the beginning of what is known as the "golden age of bonds". That golden age would also apply to things like pensions and SPIAs. It was a golden age because the low prices of such assets in the early 1980s combined with dropping inflation rates meant they bought an unusually high amount of real income. It lasted until something like 2012 or so, and of course if you saved some of the excess during those 30 years you could still be in very good shape now.

And it is actually pretty much impossible for such assets to do nearly as well again in the next long period given their current pricing. The question is more exactly how much worse they will do.

So unfortunately, Taylor's favorable income experience with these sorts of assets is not really repeatable by a retiree facing today's asset prices. This is sometimes a tough pill to swallow, but it is what it is.
Last edited by NiceUnparticularMan on Tue Apr 25, 2023 6:25 am, edited 1 time in total.
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

watchnerd wrote: Tue Apr 25, 2023 6:02 am
NiceUnparticularMan wrote: Tue Apr 25, 2023 5:35 am all you need to use a DFA-style retirement savings plan.
What is a DFA-style retirement savings plan?
In their Target funds, they mostly use a combination of globally-diversified stocks deep in accumulation (they also include a small allocation to global bonds but I see it as optional, and indeed they phase those out by retirement). And then as retirement approaches they build up an allocation to IP bonds, eventually having about 75% at retirement, which eventually shifts up further to 80% in late retirement.

With the IP bonds, they use three funds--a long-term fund, a market/intermediate fund, and a short-term fund. By using varying mixes of these funds over time, they can roughly liability match their IP bond mix, meaning it starts off relatively long-term while still pre-retirement, and gradually shifts down into and then through retirement.

I note this is the same basic plan some here were discussing before DFA introduced these funds in late 2015--I'm only referring to it as a DFA-style plan for convenience. And like I said above, it is admirably simple in conception and limited in necessary assumptions.
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Re: Is asset allocation possible without looking at historical data

Post by Logan Roy »

km91 wrote: Mon Apr 24, 2023 6:12 pm
Logan Roy wrote: Mon Apr 24, 2023 5:29 pm
km91 wrote: Mon Apr 24, 2023 5:08 pm
Logan Roy wrote: Mon Apr 24, 2023 4:20 pm So I take an All Weather approach: there are four basic states economies can be in: growth rising or falling, and inflation rising or falling. We could find ourselves stuck in any one of these states for an indeterminate period of time. We have to go back 50 years just to get one decent example of each. We're not working with much data, and the previous period of stagflation didn't feature anywhere near this much debt. So we're always in relatively uncharted territory.

So what I aim to do is construct a balance of assets that ensure I'm always being kept afloat by something, and always buying something close to historic lows. The Harry Browne was one of the first really good examples of this, and it was based on this kind of reasoning – rather than just backtesting. As such, it's spent 30-40 years forward testing returns just as good as its backtests. I don't think it's perfect – because it didn't have access to assets like TIPS when it was designed. I think sector ETFs and alternative assets, like infrastructure, also give All Weather portfolio builders more efficient solutions. But I opt for a pessimist's portfolio. Ideally I want positive returns in every environment, and that's all about balance and things working in a mechanistic fashion, not made obvious by those periodic tables of asset classes, etc. But it is more obvious when you put things in the context of macro.
How do you get comfortable with this approach to portfolio construction when we only have historical asset price data for a small handful of economic regimes? There's been one period stagflation in modern history, we have no idea how asset prices will react to another prolonged period of stagflation given the other macro variables. There's been like 3 rates regimes in the last 100 years. How can we tell anything about how assets will perform in different environments when the sample size of economic environments is small?
"Empirical knowledge can be divided into three categories: (a) knowledge by direct observation; (b) knowledge that is deductively inferred from observations; and (c) knowledge that is non-deductively inferred from observations, including knowledge arrived at by induction and inference to the best explanation. Category (c) includes all scientific knowledge."
– Michael Huemer
(a) and (b) aren't particularly applicable in this case, are they, since the number of observations of different economic regimes is relatively tiny. n=1 for stagflations in modern history, so what if anything does the global stagflation of the 70s tell us about how today's S&P would react to prolonged inflation with low growth, given current monetary policy and debt levels? US public debt blew out over the last decade, yet inflation was non existent, growth was sluggish, and rates hit rock bottom and US stocks went on a 16% CAGR 10 year run. How can we have conviction that macro economic variables tell us anything at all about asset price returns when anecdotal evidence and naïve intuition tell us there's little connection? Even the simple intuition that rising growth causes stock prices to rise, which causes demand for long term money to rise, long bond prices to fall only weakly holds. Is there a risk of relying to heavily on macro narratives to provide evidence where historical data doesn't exist?
I can't really get on board with your a priori assumptions, as they don't make total sense. But if we're looking for macroeconomic data, we can look at 500+ years of economic history – as Bridgewater and the Fed do. So we can look at why things happen, and what the historic response to those things has been. Working out how markets relate to economies isn't nearly as difficult as some people make it – the key is understanding that markets look ahead, and they look at cause and effect.
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Re: Is asset allocation possible without looking at historical data

Post by Logan Roy »

NiceUnparticularMan wrote: Tue Apr 25, 2023 5:45 am
Logan Roy wrote: Mon Apr 24, 2023 1:53 pm The entity that needs jet fuel shouldn't be an anomaly. Their presence and demand should be factored into pricing well in advance.
You just explained why efficient pricing of jet fuel futures doesn't imply every entity should have the same allocation to jet fuel futures, even if you do not realize that is what you did.

I won't belabor the point further, but once you grasp that is true, that distinction explains a lot of things you currently find inexplicable.
I think you may need to brush up on the basics. The whole point of cap-weighting is that it makes no difference whether every market participant has a totally unique portfolio, or they all hold the market. The net result is identical, and the price of jet fuel would be the same.

Well then it's not clear we're debating anything. Because I've been quite specific that the thing I'm skeptical of is a risk 'premium', as opposed to risk 'compensation'.
Perhaps there is indeed a semantic issue here. This is the standard definition of a risk premium:

"A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk."

https://en.wikipedia.org/wiki/Risk_premium

Risk premiums are just a particular quantification of risk compensation. You could also talk about lower prices as a quantification of risk compensation. These are mathematically identical concepts, just expressed differently.
Well just to clarify for you: I don't believe in a 'net' premium. So if you take 1,000 higher risk bets, I don't think you'll be rewarded with a higher return. I think you'll be compensated for the risk you take.
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

Logan Roy wrote: Tue Apr 25, 2023 12:39 pm The whole point of cap-weighting is that it makes no difference whether every market participant has a totally unique portfolio, or they all hold the market. The net result is identical
In terms of the results for individual asset buyers, that, of course, is false. An airline company is not in the same financial position whether it holds a market portfolio of stocks or specifically holds jet fuel futures, because the jet fuel futures are hedging its future need to buy jet fuel.

And of course a retiree is not in the same financial position in those two cases either. Nor would a retiree be in the same position with, say, 100% stocks versus 50% stocks and 50% of the same jet fuel futures an airline might buy.
and the price of jet fuel would be the same.
What is true is jet fuel futures can be efficiently priced even though many investors own none of them at all, for good reasons.

I should really stop, though, because you are just expressing the same confusion between allocation and pricing in different words, and obviously my pointing that out isn't helping you see the confusion.
Well just to clarify for you: I don't believe in a 'net' premium. So if you take 1,000 higher risk bets, I don't think you'll be rewarded with a higher return.
Premium "net" of what?

I note I think the only time I have heard the phrase "net risk premium" commonly used is in the insurance context, and that is a different concept from the risk premiums people are typically discussing in the context of factors.

By the way, again for the record:

Normally when people are using the term "risk premium" in the context in which I use that term, they are referring to risks on a portfolio level, and only risks which cannot be diversified away.

So merely saying the portfolio contains "1,000 higher risk bets" doesn't specify risk on a portfolio level. With only such a vague description to go on, such a portfolio could still be very risky, or not risky at all, or anything in between.

However, IF that portfolio as a whole is riskier than a very-low-risk asset, AND IF that risk cannot be eliminated through further diversification, THEN there might be a risk premium associated with it--ASSUMING the marginal investors in that particular asset market are risk averse.

Failure to attend carefully to all those conditions will lead to a failure to understand what people like me mean by a risk premium. I don't use the term "net risk premium" in this context at all.
I think you'll be compensated for the risk you take.
Exactly how?
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Re: Is asset allocation possible without looking at historical data

Post by km91 »

Logan Roy wrote: Tue Apr 25, 2023 12:25 pm I can't really get on board with your a priori assumptions, as they don't make total sense. But if we're looking for macroeconomic data, we can look at 500+ years of economic history – as Bridgewater and the Fed do. So we can look at why things happen, and what the historic response to those things has been. Working out how markets relate to economies isn't nearly as difficult as some people make it – the key is understanding that markets look ahead, and they look at cause and effect.
Sure, we have 500 years of macro data but maybe 100 years of reliable asset price data. I suspect the connection between macro and markets is not as straightforward as you make it sound, and seems to rely on mostly tried and true macro narratives. Gold and commodities for inflationary environments, stocks for growth environments, nominal bonds for deflationary environments, etc. Any talking head on CNBC gives the same sector rotation, macro positioning, risk on risk off story. Markets might be forward looking, but perhaps we spend too much time projecting cause and effect on to them. It's not clear that me that the interest rate regime of 1700 tells us anything about expected asset returns today when the structure of the economy, currency regime, monetary regime, public debt levels, etc are completely different. I'm skeptical that the complexity of the economy and numerous macro variables can really be distilled into a markets forecast
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Re: Is asset allocation possible without looking at historical data

Post by Logan Roy »

km91 wrote: Tue Apr 25, 2023 2:48 pm
Logan Roy wrote: Tue Apr 25, 2023 12:25 pm I can't really get on board with your a priori assumptions, as they don't make total sense. But if we're looking for macroeconomic data, we can look at 500+ years of economic history – as Bridgewater and the Fed do. So we can look at why things happen, and what the historic response to those things has been. Working out how markets relate to economies isn't nearly as difficult as some people make it – the key is understanding that markets look ahead, and they look at cause and effect.
Sure, we have 500 years of macro data but maybe 100 years of reliable asset price data. I suspect the connection between macro and markets is not as straightforward as you make it sound, and seems to rely on mostly tried and true macro narratives. Gold and commodities for inflationary environments, stocks for growth environments, nominal bonds for deflationary environments, etc. Any talking head on CNBC gives the same sector rotation, macro positioning, risk on risk off story. Markets might be forward looking, but perhaps we spend too much time projecting cause and effect on to them. It's not clear that me that the interest rate regime of 1700 tells us anything about expected asset returns today when the structure of the economy, currency regime, monetary regime, public debt levels, etc are completely different. I'm skeptical that the complexity of the economy and numerous macro variables can really be distilled into a markets forecast
It's cause and effect, and less random than people who look at markets in isolation tend to believe. e.g. Over the long-term, gold tends to keep up with inflation, but if the policy response to inflation is hikes, then that's going to strengthen the dollar (which is what we measure gold in), as well as increasing the opportunity cost of holding gold. So the immediate action on gold's price is usually negative; and then gold behaves like a heatsink for the dollar. In the 70s, gold looks like a great inflation hedge, but it made most its ground up when policy switched to easing; which tends to happen after we tighten too much – and this is entirely logical. Any Bloomberg viewer should grasp this. All markets are doing is trying to get ahead of what happens next. And this is how the largest pools of institutional capital are managed. If there's a better idea, there'd be a lot of money keen to get into it.
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Re: Is asset allocation possible without looking at historical data

Post by Logan Roy »

NiceUnparticularMan wrote: Tue Apr 25, 2023 1:37 pm
Logan Roy wrote: Tue Apr 25, 2023 12:39 pm The whole point of cap-weighting is that it makes no difference whether every market participant has a totally unique portfolio, or they all hold the market. The net result is identical
In terms of the results for individual asset buyers, that, of course, is false. An airline company is not in the same financial position whether it holds a market portfolio of stocks or specifically holds jet fuel futures, because the jet fuel futures are hedging its future need to buy jet fuel.

And of course a retiree is not in the same financial position in those two cases either. Nor would a retiree be in the same position with, say, 100% stocks versus 50% stocks and 50% of the same jet fuel futures an airline might buy.
and the price of jet fuel would be the same.
What is true is jet fuel futures can be efficiently priced even though many investors own none of them at all, for good reasons.

I should really stop, though, because you are just expressing the same confusion between allocation and pricing in different words, and obviously my pointing that out isn't helping you see the confusion.
The reason you should stop is because what you're saying makes little sense. So long as 'jet fuel' is traded, we should assume the price is efficient. It doesn't matter how much of the market holds 'jet fuel' futures, or how many shares are traded; what sets the price is where traders are willing to trade. Only a very small part of the market need actively trade any specific asset. The rest can mirror the allocation, or ignore it. It makes no difference. Volumes don't set prices.

Well just to clarify for you: I don't believe in a 'net' premium. So if you take 1,000 higher risk bets, I don't think you'll be rewarded with a higher return.
Premium "net" of what?

I note I think the only time I have heard the phrase "net risk premium" commonly used is in the insurance context, and that is a different concept from the risk premiums people are typically discussing in the context of factors.

By the way, again for the record:
I'll try to explain in excruciating detail. When you bet on a 100:1 shot, the 'premium' is the fact that bet pays more than a 2:1 bet. That's not being debated. By 'net', we mean if you place either of those bets 1,000 times, will the 'net' outcome be different? In gambling markets, it isn't. The premium on an individual bet covers the risk, and no more. A 'net premium' would imply the market pays risk-taking gamblers an excess premium. (I know we're not talking about gambling, it's an example.)
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Re: Is asset allocation possible without looking at historical data

Post by secondopinion »

Logan Roy wrote: Tue Apr 25, 2023 5:14 pm
km91 wrote: Tue Apr 25, 2023 2:48 pm
Logan Roy wrote: Tue Apr 25, 2023 12:25 pm I can't really get on board with your a priori assumptions, as they don't make total sense. But if we're looking for macroeconomic data, we can look at 500+ years of economic history – as Bridgewater and the Fed do. So we can look at why things happen, and what the historic response to those things has been. Working out how markets relate to economies isn't nearly as difficult as some people make it – the key is understanding that markets look ahead, and they look at cause and effect.
Sure, we have 500 years of macro data but maybe 100 years of reliable asset price data. I suspect the connection between macro and markets is not as straightforward as you make it sound, and seems to rely on mostly tried and true macro narratives. Gold and commodities for inflationary environments, stocks for growth environments, nominal bonds for deflationary environments, etc. Any talking head on CNBC gives the same sector rotation, macro positioning, risk on risk off story. Markets might be forward looking, but perhaps we spend too much time projecting cause and effect on to them. It's not clear that me that the interest rate regime of 1700 tells us anything about expected asset returns today when the structure of the economy, currency regime, monetary regime, public debt levels, etc are completely different. I'm skeptical that the complexity of the economy and numerous macro variables can really be distilled into a markets forecast
It's cause and effect, and less random than people who look at markets in isolation tend to believe. e.g. Over the long-term, gold tends to keep up with inflation, but if the policy response to inflation is hikes, then that's going to strengthen the dollar (which is what we measure gold in), as well as increasing the opportunity cost of holding gold. So the immediate action on gold's price is usually negative; and then gold behaves like a heatsink for the dollar. In the 70s, gold looks like a great inflation hedge, but it made most its ground up when policy switched to easing; which tends to happen after we tighten too much – and this is entirely logical. Any Bloomberg viewer should grasp this. All markets are doing is trying to get ahead of what happens next. And this is how the largest pools of institutional capital are managed. If there's a better idea, there'd be a lot of money keen to get into it.
The general cause and effect is more predictable than the source of the cause, the amount of effect, and the timeframe thereof. I do not think anything is random, but we cannot consider all the variables needed; therefore, we use randomness as a means to obtain an approximation.
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Re: Is asset allocation possible without looking at historical data

Post by Logan Roy »

secondopinion wrote: Tue Apr 25, 2023 5:27 pm
Logan Roy wrote: Tue Apr 25, 2023 5:14 pm
km91 wrote: Tue Apr 25, 2023 2:48 pm
Logan Roy wrote: Tue Apr 25, 2023 12:25 pm I can't really get on board with your a priori assumptions, as they don't make total sense. But if we're looking for macroeconomic data, we can look at 500+ years of economic history – as Bridgewater and the Fed do. So we can look at why things happen, and what the historic response to those things has been. Working out how markets relate to economies isn't nearly as difficult as some people make it – the key is understanding that markets look ahead, and they look at cause and effect.
Sure, we have 500 years of macro data but maybe 100 years of reliable asset price data. I suspect the connection between macro and markets is not as straightforward as you make it sound, and seems to rely on mostly tried and true macro narratives. Gold and commodities for inflationary environments, stocks for growth environments, nominal bonds for deflationary environments, etc. Any talking head on CNBC gives the same sector rotation, macro positioning, risk on risk off story. Markets might be forward looking, but perhaps we spend too much time projecting cause and effect on to them. It's not clear that me that the interest rate regime of 1700 tells us anything about expected asset returns today when the structure of the economy, currency regime, monetary regime, public debt levels, etc are completely different. I'm skeptical that the complexity of the economy and numerous macro variables can really be distilled into a markets forecast
It's cause and effect, and less random than people who look at markets in isolation tend to believe. e.g. Over the long-term, gold tends to keep up with inflation, but if the policy response to inflation is hikes, then that's going to strengthen the dollar (which is what we measure gold in), as well as increasing the opportunity cost of holding gold. So the immediate action on gold's price is usually negative; and then gold behaves like a heatsink for the dollar. In the 70s, gold looks like a great inflation hedge, but it made most its ground up when policy switched to easing; which tends to happen after we tighten too much – and this is entirely logical. Any Bloomberg viewer should grasp this. All markets are doing is trying to get ahead of what happens next. And this is how the largest pools of institutional capital are managed. If there's a better idea, there'd be a lot of money keen to get into it.
The general cause and effect is more predictable than the source of the cause, the amount of effect, and the timeframe thereof. I do not think anything is random, but we cannot consider all the variables needed; therefore, we use randomness as a means to obtain an approximation.
It's less random when we label what economic regime we're in. When we stack them all on top of each other (as many crude academic models do), it's going to appear chaotic, because assets can move in both directions, and we've erased the information that tells us what they're reacting to.
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Re: Is asset allocation possible without looking at historical data

Post by watchnerd »

Logan Roy wrote: Tue Apr 25, 2023 5:14 pm
km91 wrote: Tue Apr 25, 2023 2:48 pm
Logan Roy wrote: Tue Apr 25, 2023 12:25 pm I can't really get on board with your a priori assumptions, as they don't make total sense. But if we're looking for macroeconomic data, we can look at 500+ years of economic history – as Bridgewater and the Fed do. So we can look at why things happen, and what the historic response to those things has been. Working out how markets relate to economies isn't nearly as difficult as some people make it – the key is understanding that markets look ahead, and they look at cause and effect.
Sure, we have 500 years of macro data but maybe 100 years of reliable asset price data. I suspect the connection between macro and markets is not as straightforward as you make it sound, and seems to rely on mostly tried and true macro narratives. Gold and commodities for inflationary environments, stocks for growth environments, nominal bonds for deflationary environments, etc. Any talking head on CNBC gives the same sector rotation, macro positioning, risk on risk off story. Markets might be forward looking, but perhaps we spend too much time projecting cause and effect on to them. It's not clear that me that the interest rate regime of 1700 tells us anything about expected asset returns today when the structure of the economy, currency regime, monetary regime, public debt levels, etc are completely different. I'm skeptical that the complexity of the economy and numerous macro variables can really be distilled into a markets forecast
It's cause and effect, and less random than people who look at markets in isolation tend to believe. e.g. Over the long-term, gold tends to keep up with inflation, but if the policy response to inflation is hikes, then that's going to strengthen the dollar (which is what we measure gold in), as well as increasing the opportunity cost of holding gold. So the immediate action on gold's price is usually negative; and then gold behaves like a heatsink for the dollar. In the 70s, gold looks like a great inflation hedge, but it made most its ground up when policy switched to easing; which tends to happen after we tighten too much – and this is entirely logical. Any Bloomberg viewer should grasp this. All markets are doing is trying to get ahead of what happens next. And this is how the largest pools of institutional capital are managed. If there's a better idea, there'd be a lot of money keen to get into it.
Yes.

Global macro investing is a thing.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Is asset allocation possible without looking at historical data

Post by km91 »

Logan Roy wrote: Tue Apr 25, 2023 5:14 pm Any Bloomberg viewer should grasp this
Yes, we all know financial news viewers make such great investors...

This is just macro positioning. If you're making allocation decisions based on Fed actions or dollar strength or earnings results, you're speculating not investing. I get that there's a large portion of the market that invests this way, but you have to be early and right to be successful at it. As a retail investor I have neither the time or energy to try to divine where the market is going and even if I did I doubt I'd be able to compete with Bridgewater or any other global macro fund
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Re: Is asset allocation possible without looking at historical data

Post by Logan Roy »

km91 wrote: Tue Apr 25, 2023 6:22 pm
Logan Roy wrote: Tue Apr 25, 2023 5:14 pm Any Bloomberg viewer should grasp this
Yes, we all know financial news viewers make such great investors...

This is just macro positioning. If you're making allocation decisions based on Fed actions or dollar strength or earnings results, you're speculating not investing. I get that there's a large portion of the market that invests this way, but you have to be early and right to be successful at it. As a retail investor I have neither the time or energy to try to divine where the market is going and even if I did I doubt I'd be able to compete with Bridgewater or any other global macro fund
No. You have to start reading posts properly.
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Re: Is asset allocation possible without looking at historical data

Post by Logan Roy »

watchnerd wrote: Tue Apr 25, 2023 6:02 pm
Logan Roy wrote: Tue Apr 25, 2023 5:14 pm
km91 wrote: Tue Apr 25, 2023 2:48 pm
Logan Roy wrote: Tue Apr 25, 2023 12:25 pm I can't really get on board with your a priori assumptions, as they don't make total sense. But if we're looking for macroeconomic data, we can look at 500+ years of economic history – as Bridgewater and the Fed do. So we can look at why things happen, and what the historic response to those things has been. Working out how markets relate to economies isn't nearly as difficult as some people make it – the key is understanding that markets look ahead, and they look at cause and effect.
Sure, we have 500 years of macro data but maybe 100 years of reliable asset price data. I suspect the connection between macro and markets is not as straightforward as you make it sound, and seems to rely on mostly tried and true macro narratives. Gold and commodities for inflationary environments, stocks for growth environments, nominal bonds for deflationary environments, etc. Any talking head on CNBC gives the same sector rotation, macro positioning, risk on risk off story. Markets might be forward looking, but perhaps we spend too much time projecting cause and effect on to them. It's not clear that me that the interest rate regime of 1700 tells us anything about expected asset returns today when the structure of the economy, currency regime, monetary regime, public debt levels, etc are completely different. I'm skeptical that the complexity of the economy and numerous macro variables can really be distilled into a markets forecast
It's cause and effect, and less random than people who look at markets in isolation tend to believe. e.g. Over the long-term, gold tends to keep up with inflation, but if the policy response to inflation is hikes, then that's going to strengthen the dollar (which is what we measure gold in), as well as increasing the opportunity cost of holding gold. So the immediate action on gold's price is usually negative; and then gold behaves like a heatsink for the dollar. In the 70s, gold looks like a great inflation hedge, but it made most its ground up when policy switched to easing; which tends to happen after we tighten too much – and this is entirely logical. Any Bloomberg viewer should grasp this. All markets are doing is trying to get ahead of what happens next. And this is how the largest pools of institutional capital are managed. If there's a better idea, there'd be a lot of money keen to get into it.
Yes.

Global macro investing is a thing.
Absolutely. The Harry Browne portfolio was probably a bigger revelation for me than passive investing. And I think it's exactly what the question posed here is about.

Anyone can optimise a portfolio based on what would've been optimal to hold over any arbitrary stretch of history. 16% in European Small-caps? 14.2% in Gold?.. It's something you can obsess over, but it doesn't mean anything – we're putting faith in the idea some asset classes are better than others.. Then the HB portfolio comes along – doesn't appear to be back-fitted at all – it's just this simple idea: there are four environments you can be in, and it doesn't make any real assumptions beyond that. And then it produces these incredibly consistent returns, and seems to forward-test as well as it back-tests.. Not a perfect portfolio, but maybe a perfect principle on how to build a portfolio.
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Re: Is asset allocation possible without looking at historical data

Post by km91 »

Logan Roy wrote: Tue Apr 25, 2023 6:41 pm
km91 wrote: Tue Apr 25, 2023 6:22 pm
Logan Roy wrote: Tue Apr 25, 2023 5:14 pm Any Bloomberg viewer should grasp this
Yes, we all know financial news viewers make such great investors...

This is just macro positioning. If you're making allocation decisions based on Fed actions or dollar strength or earnings results, you're speculating not investing. I get that there's a large portion of the market that invests this way, but you have to be early and right to be successful at it. As a retail investor I have neither the time or energy to try to divine where the market is going and even if I did I doubt I'd be able to compete with Bridgewater or any other global macro fund
No. You have to start reading posts properly.
"All markets are doing is trying to get ahead of what happens next."

I don't know, you said it not me. Markets are positioning to get ahead of what happens next, this is speculation. If it was as easy as you say we'd all just watch CNBC and be rich

I agree that a portfolio should have a strong connection to the underlying economic activity of the the economy but I think an investor should target this by exposure to earnings and productive assets, not by exposure to macro variables. The problem with macro is that everyone views the world they way they think it should be, not how it actually is. If you think you know that the Fed's balance sheet or the strength of the dollar tell us about stock and bond returns, fine, but I personally think it's incredibly difficult to synthesize 500 years of macro history into a coherent portfolio AA. How much of macro history is even relevant in our current time of floating exchange rates and fiat currency?
Last edited by km91 on Tue Apr 25, 2023 8:42 pm, edited 4 times in total.
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Re: Is asset allocation possible without looking at historical data

Post by seajay »

Logan Roy wrote: Tue Apr 25, 2023 6:50 pm
watchnerd wrote: Tue Apr 25, 2023 6:02 pm
Logan Roy wrote: Tue Apr 25, 2023 5:14 pm
km91 wrote: Tue Apr 25, 2023 2:48 pm
Logan Roy wrote: Tue Apr 25, 2023 12:25 pm I can't really get on board with your a priori assumptions, as they don't make total sense. But if we're looking for macroeconomic data, we can look at 500+ years of economic history – as Bridgewater and the Fed do. So we can look at why things happen, and what the historic response to those things has been. Working out how markets relate to economies isn't nearly as difficult as some people make it – the key is understanding that markets look ahead, and they look at cause and effect.
Sure, we have 500 years of macro data but maybe 100 years of reliable asset price data. I suspect the connection between macro and markets is not as straightforward as you make it sound, and seems to rely on mostly tried and true macro narratives. Gold and commodities for inflationary environments, stocks for growth environments, nominal bonds for deflationary environments, etc. Any talking head on CNBC gives the same sector rotation, macro positioning, risk on risk off story. Markets might be forward looking, but perhaps we spend too much time projecting cause and effect on to them. It's not clear that me that the interest rate regime of 1700 tells us anything about expected asset returns today when the structure of the economy, currency regime, monetary regime, public debt levels, etc are completely different. I'm skeptical that the complexity of the economy and numerous macro variables can really be distilled into a markets forecast
It's cause and effect, and less random than people who look at markets in isolation tend to believe. e.g. Over the long-term, gold tends to keep up with inflation, but if the policy response to inflation is hikes, then that's going to strengthen the dollar (which is what we measure gold in), as well as increasing the opportunity cost of holding gold. So the immediate action on gold's price is usually negative; and then gold behaves like a heatsink for the dollar. In the 70s, gold looks like a great inflation hedge, but it made most its ground up when policy switched to easing; which tends to happen after we tighten too much – and this is entirely logical. Any Bloomberg viewer should grasp this. All markets are doing is trying to get ahead of what happens next. And this is how the largest pools of institutional capital are managed. If there's a better idea, there'd be a lot of money keen to get into it.
Yes.

Global macro investing is a thing.
Absolutely. The Harry Browne portfolio was probably a bigger revelation for me than passive investing. And I think it's exactly what the question posed here is about.

Anyone can optimise a portfolio based on what would've been optimal to hold over any arbitrary stretch of history. 16% in European Small-caps? 14.2% in Gold?.. It's something you can obsess over, but it doesn't mean anything – we're putting faith in the idea some asset classes are better than others.. Then the HB portfolio comes along – doesn't appear to be back-fitted at all – it's just this simple idea: there are four environments you can be in, and it doesn't make any real assumptions beyond that. And then it produces these incredibly consistent returns, and seems to forward-test as well as it back-tests.. Not a perfect portfolio, but maybe a perfect principle on how to build a portfolio.
Four assets, each having the capacity to offset inflation, gold price increase, cash deposit interest, bond interest, stock prices, but where stocks additionally pay dividends, and the individual asset volatility of inflation pacing is smoothed down to a more consistent inflation pacing portfolio value outcome.

You don't need to backtest or predict whether assets/items that remain in demand will tend to generally see their price/value rise with inflation as that's a natural tendency. Individual assets/items might see variations as demand waxes and wanes, but a diverse bunch of assets is inclined to see that wash. Indeed the individual volatilities can add-value, in the way of trading (rebalance) benefits, reducing one that had surged ahead to add to another that was lagging, add-low/reduce-high trading, via a simple periodic rebalance back to equal weightings type rule.
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Re: Is asset allocation possible without looking at historical data

Post by seajay »

NiceUnparticularMan wrote: Tue Apr 25, 2023 6:01 am
seajay wrote: Mon Apr 24, 2023 6:16 pm Image
I'll just note again that charts like this really do a good job illustrating the structural break associated with the transition out of the Bretton-Woods system and into the modern international monetary system.

But the prior chart did a better job illustrating what that implies for modern retirement savers.
Indeed there is a apparent step-up to a new plateau level as from the mid 1940's after the Bretton Woods 1944 agreement. I think you may find however that the 1930's/1940's years lower level may have been a factor of a World War event during those years.
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Re: Is asset allocation possible without looking at historical data

Post by randomguy »

NiceUnparticularMan wrote: Tue Apr 25, 2023 5:57 am
randomguy wrote: Mon Apr 24, 2023 4:42 pm
saver7007 wrote: Fri Apr 21, 2023 11:21 am
Has anybody else wondered if they are relying too heavily on recent historical data and on theories and patterns derived from those data, and been able to find alternative rationales to make AA choices?
To pick an AA you need estimates of returns and variance.
Not necessarily with any precision, if your risky portfolio is just broadly diversified stocks.

Meaning I can choose just to buy broadly diversified stocks on the theory their returns and variance on an individual level likely warrant the assumption that diversification might be helpful. I don't need precise estimates to warrant that thought, at least not when the marginal costs of broad stock diversification are so cheap, and if anything it is more costly to try to exclude individual stocks or categories of stocks.

Where it gets tricky is if you think some other asset classes that might or might not be worth including in your risky asset portfolio along with broadly diversified stocks, and you want to make your decisions about exactly what mix of risky assets to hold in what measure based on estimates of what different mixes would change versus an all stock portfolio.

But if you don't see a need to do that, meaning you are OK just using broadly diversified stocks for your risky portfolio, then you really don't need to try to determine such estimates.
Yes if you are 100% stocks you don't need to make estimates. Tell me though how you are picking an AA with stocks and bonds with no data. You have no way of knowing if stocks return 0%, 10% or 20% or what the variance is. You have have no idea of bonds default 1% or 10%. And so on down the line. You can make arguments why investing in stocks and bonds is better than say beanie babies without historical data with arguements like them being productive assets. But even then there is a chance and it turns out collectibles are more valuable. If you have historical data you can know how few items that are designed to collectible work out...
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Re: Is asset allocation possible without looking at historical data

Post by watchnerd »

randomguy wrote: Tue Apr 25, 2023 9:57 pm
Yes if you are 100% stocks you don't need to make estimates. Tell me though how you are picking an AA with stocks and bonds with no data. You have no way of knowing if stocks return 0%, 10% or 20% or what the variance is. You have have no idea of bonds default 1% or 10%. And so on down the line. You can make arguments why investing in stocks and bonds is better than say beanie babies without historical data with arguements like them being productive assets. But even then there is a chance and it turns out collectibles are more valuable. If you have historical data you can know how few items that are designed to collectible work out...
You don't need historical data to determine which assets have IRR (stocks, bonds, rental real estate, PoS crypto, etc), and which only give speculative return (art, wine, PoW crypto, beanie babies, watches [my thing]).
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
randomguy
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Re: Is asset allocation possible without looking at historical data

Post by randomguy »

watchnerd wrote: Tue Apr 25, 2023 10:31 pm
randomguy wrote: Tue Apr 25, 2023 9:57 pm
Yes if you are 100% stocks you don't need to make estimates. Tell me though how you are picking an AA with stocks and bonds with no data. You have no way of knowing if stocks return 0%, 10% or 20% or what the variance is. You have have no idea of bonds default 1% or 10%. And so on down the line. You can make arguments why investing in stocks and bonds is better than say beanie babies without historical data with arguements like them being productive assets. But even then there is a chance and it turns out collectibles are more valuable. If you have historical data you can know how few items that are designed to collectible work out...
You don't need historical data to determine which assets have IRR (stocks, bonds, rental real estate, PoS crypto, etc), and which only give speculative return (art, wine, PoW crypto, beanie babies, watches [my thing]).
Sure. Now give me the AA I should hold beween IRR assets A,B,C,D and speculative assets E,F,G,H. You have no historical data. Does your answer change if A is stocks versus PoS crypto or if E is gold versus beanie babies? Given the zero historical data how are you distinguishing. As I said you can make some arguments for why productive assets are worth more. But with no data, are you sure? Realistically it is impossible to avoid historical data. It effects our whole world view.
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Re: Is asset allocation possible without looking at historical data

Post by watchnerd »

randomguy wrote: Tue Apr 25, 2023 11:01 pm
watchnerd wrote: Tue Apr 25, 2023 10:31 pm
randomguy wrote: Tue Apr 25, 2023 9:57 pm
Yes if you are 100% stocks you don't need to make estimates. Tell me though how you are picking an AA with stocks and bonds with no data. You have no way of knowing if stocks return 0%, 10% or 20% or what the variance is. You have have no idea of bonds default 1% or 10%. And so on down the line. You can make arguments why investing in stocks and bonds is better than say beanie babies without historical data with arguements like them being productive assets. But even then there is a chance and it turns out collectibles are more valuable. If you have historical data you can know how few items that are designed to collectible work out...
You don't need historical data to determine which assets have IRR (stocks, bonds, rental real estate, PoS crypto, etc), and which only give speculative return (art, wine, PoW crypto, beanie babies, watches [my thing]).
Sure. Now give me the AA I should hold beween IRR assets A,B,C,D and speculative assets E,F,G,H. You have no historical data. Does your answer change if A is stocks versus PoS crypto or if E is gold versus beanie babies? Given the zero historical data how are you distinguishing. As I said you can make some arguments for why productive assets are worth more. But with no data, are you sure? Realistically it is impossible to avoid historical data. It effects our whole world view.
I don't need historical data to determine the IRR of bonds and stocks.

And I don't use any historical data to determine my AA. My LMP is straight up math based on real return needs mapped to a TIPS ladder, and my risk portfolio is just cap weighted to global market weights.

If I want to guesstimate future returns, when I buy TIPS, I only look at the current real yield. When I buy nominal bonds, I can look at the nominal yield. History tells me nothing as any additional return is based on inflation / interest rate changes, which I can't predict.

As for speculative assets with no IRR, I don't know anyone who has a solid method for estimating gold returns ex ante or valuation. It's a random walk.

Investing and speculating are not the same, as Benjamin Graham said.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Is asset allocation possible without looking at historical data

Post by randomguy »

watchnerd wrote: Tue Apr 25, 2023 11:05 pm
randomguy wrote: Tue Apr 25, 2023 11:01 pm
watchnerd wrote: Tue Apr 25, 2023 10:31 pm
randomguy wrote: Tue Apr 25, 2023 9:57 pm
Yes if you are 100% stocks you don't need to make estimates. Tell me though how you are picking an AA with stocks and bonds with no data. You have no way of knowing if stocks return 0%, 10% or 20% or what the variance is. You have have no idea of bonds default 1% or 10%. And so on down the line. You can make arguments why investing in stocks and bonds is better than say beanie babies without historical data with arguements like them being productive assets. But even then there is a chance and it turns out collectibles are more valuable. If you have historical data you can know how few items that are designed to collectible work out...
You don't need historical data to determine which assets have IRR (stocks, bonds, rental real estate, PoS crypto, etc), and which only give speculative return (art, wine, PoW crypto, beanie babies, watches [my thing]).
Sure. Now give me the AA I should hold beween IRR assets A,B,C,D and speculative assets E,F,G,H. You have no historical data. Does your answer change if A is stocks versus PoS crypto or if E is gold versus beanie babies? Given the zero historical data how are you distinguishing. As I said you can make some arguments for why productive assets are worth more. But with no data, are you sure? Realistically it is impossible to avoid historical data. It effects our whole world view.
I don't need historical data to determine the IRR of bonds and stocks.

And I don't use any historical data to determine my AA. My LMP is straight up math based on real return needs mapped to a TIPS ladder, and my risk portfolio is just cap weighted to global market weights.

If I want to guesstimate future returns, when I buy TIPS, I only look at the current real yield. When I buy nominal bonds, I can look at the nominal yield. History tells me nothing as any additional return is based on inflation / interest rate changes, which I can't predict.

As for speculative assets with no IRR, I don't know anyone who has a solid method for estimating gold returns ex ante or valuation. It's a random walk.

Investing and speculating are not the same, as Benjamin Graham said.
How did you calculate the risk of default on the TIPs ladder? Why did you chose to hold 100/0 instead of 80/20? Given zero historical data how are you deciding that stocks are going to have higher returns than bonds? After all you have no knowledge of things like earnings growth (pretty much every use of the world growth requires historical knowledge). Why did you pick Stocks over Crypto? I would suggest there is a ton of historical data that you are using to make choices like this. It isn't at the level of well stocks returned 10%+-20% and bonds did 4%+-5% so we blend them to gether to get X but it is still there. Historical data tells us countries like the US don't default very often. Historical data tells us that stocks tend to outperform bonds. And a couple hundreds years of stock data makes it feel a lot more comfortable than something with a dozen.
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Re: Is asset allocation possible without looking at historical data

Post by watchnerd »

randomguy wrote: Wed Apr 26, 2023 12:11 am
watchnerd wrote: Tue Apr 25, 2023 11:05 pm
randomguy wrote: Tue Apr 25, 2023 11:01 pm
watchnerd wrote: Tue Apr 25, 2023 10:31 pm
randomguy wrote: Tue Apr 25, 2023 9:57 pm
Yes if you are 100% stocks you don't need to make estimates. Tell me though how you are picking an AA with stocks and bonds with no data. You have no way of knowing if stocks return 0%, 10% or 20% or what the variance is. You have have no idea of bonds default 1% or 10%. And so on down the line. You can make arguments why investing in stocks and bonds is better than say beanie babies without historical data with arguements like them being productive assets. But even then there is a chance and it turns out collectibles are more valuable. If you have historical data you can know how few items that are designed to collectible work out...
You don't need historical data to determine which assets have IRR (stocks, bonds, rental real estate, PoS crypto, etc), and which only give speculative return (art, wine, PoW crypto, beanie babies, watches [my thing]).
Sure. Now give me the AA I should hold beween IRR assets A,B,C,D and speculative assets E,F,G,H. You have no historical data. Does your answer change if A is stocks versus PoS crypto or if E is gold versus beanie babies? Given the zero historical data how are you distinguishing. As I said you can make some arguments for why productive assets are worth more. But with no data, are you sure? Realistically it is impossible to avoid historical data. It effects our whole world view.
I don't need historical data to determine the IRR of bonds and stocks.

And I don't use any historical data to determine my AA. My LMP is straight up math based on real return needs mapped to a TIPS ladder, and my risk portfolio is just cap weighted to global market weights.

If I want to guesstimate future returns, when I buy TIPS, I only look at the current real yield. When I buy nominal bonds, I can look at the nominal yield. History tells me nothing as any additional return is based on inflation / interest rate changes, which I can't predict.

As for speculative assets with no IRR, I don't know anyone who has a solid method for estimating gold returns ex ante or valuation. It's a random walk.

Investing and speculating are not the same, as Benjamin Graham said.
How did you calculate the risk of default on the TIPs ladder? Why did you chose to hold 100/0 instead of 80/20? Given zero historical data how are you deciding that stocks are going to have higher returns than bonds? After all you have no knowledge of things like earnings growth (pretty much every use of the world growth requires historical knowledge). Why did you pick Stocks over Crypto? I would suggest there is a ton of historical data that you are using to make choices like this. It isn't at the level of well stocks returned 10%+-20% and bonds did 4%+-5% so we blend them to gether to get X but it is still there. Historical data tells us countries like the US don't default very often. Historical data tells us that stocks tend to outperform bonds. And a couple hundreds years of stock data makes it feel a lot more comfortable than something with a dozen.
I don't calculate risk of default on a TIPS ladder.

As for 100/0 or 80/20 I don't understand what you're referring to.

I didn't pick anything over anything else. I hold securitized tradeable assets at their market cap weights.

I hold exactly as much stocks relative to crypto as the market caps indicate, i.e. about a 60:1 ratio in accordance with their market caps of 68 trillion vs 1.2 trillion. The same approach is used for gold and global bonds.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

seajay wrote: Tue Apr 25, 2023 8:41 pm Indeed there is a apparent step-up to a new plateau level as from the mid 1940's after the Bretton Woods 1944 agreement.
And then a further temporary step up when Bretton Woods is unwinding, and then a structural step down after the transition to free-floating gold is complete.

This other chart you posted makes it clear what that meant for modern investors:

Image

Even with the help from using SV instead of TSM, using gold in the modern monetary era has largely led to less efficient retirement portfolios.

Good to know.
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

randomguy wrote: Tue Apr 25, 2023 9:57 pm
NiceUnparticularMan wrote: Tue Apr 25, 2023 5:57 am
randomguy wrote: Mon Apr 24, 2023 4:42 pm
saver7007 wrote: Fri Apr 21, 2023 11:21 am
Has anybody else wondered if they are relying too heavily on recent historical data and on theories and patterns derived from those data, and been able to find alternative rationales to make AA choices?
To pick an AA you need estimates of returns and variance.
Not necessarily with any precision, if your risky portfolio is just broadly diversified stocks.

Meaning I can choose just to buy broadly diversified stocks on the theory their returns and variance on an individual level likely warrant the assumption that diversification might be helpful. I don't need precise estimates to warrant that thought, at least not when the marginal costs of broad stock diversification are so cheap, and if anything it is more costly to try to exclude individual stocks or categories of stocks.

Where it gets tricky is if you think some other asset classes that might or might not be worth including in your risky asset portfolio along with broadly diversified stocks, and you want to make your decisions about exactly what mix of risky assets to hold in what measure based on estimates of what different mixes would change versus an all stock portfolio.

But if you don't see a need to do that, meaning you are OK just using broadly diversified stocks for your risky portfolio, then you really don't need to try to determine such estimates.
Yes if you are 100% stocks you don't need to make estimates. Tell me though how you are picking an AA with stocks and bonds with no data.
Sure!

So the general framework of modern portfolio design is you have a risky portfolio and then a very low risk asset (sometimes called risk-free asset, but that is a theoretical ideal).

So first step, you need to pick your very low risk asset. In the context of retirement savings for a USD real spender, something like liability-matched TIPS is a good choice for liabilities up to 30 years out, and you don't need any particular data to know that. You just need to know you spend real, you plan to spend over a long time, and that the default risk on Treasuries is very low.

Second step, how much do you want to put into this very low risk portfolio? It could be 100%, so why not that? Well, the minimal answer is just that TIPS don't go out more than 30 years, and stocks don't have such a limit. This is really just coming out of the DCF model of stocks.

All this is sufficient to imply USD retirement savers should use something like a DFA-style glidepath, starting with basically all stocks when you are more than 30 years from retirement, shifting down to at least mostly TIPS by the time you retire.
You have no way of knowing if stocks return 0%, 10% or 20% or what the variance is.
So in the model above, it actually wasn't necessary to assume stocks had any sort of equity risk premium at all, just that unlike TIPS, they had cash flows extending beyond 30 years.

That said, long story short, if you assume a modest equity risk premium, you might see stocks as efficient replacements for TIPS sooner than 30 years, say down to about 20 years.

So, is a modest equity risk premium something you need historic data to determine? Well, on the one hand, I personally would not be comfortable assuming that the equity risk premium existed if I had not tested that hypothesis empirically at all. On the other hand, I definitely do not think you can look at the average difference between stock and TIPS returns over some prior observation period and assume it will be the same over the next long period.

So I would more say this is consistent with my comment above that I use historic observations to disconfirm theories, but do not assume past performance predicts future returns.
You have have no idea of bonds default 1% or 10%.
Again, I think whether or not the U.S. government is likely to default on Treasuries isn't an historic "data" issue. It is obviously relevant that the U.S. government has very good reasons not to do that, and that it is in a position where it is unlikely it would have to do that. And I would agree that even so, if the U.S. actually had a history of frequently defaulting anyway, that would disconfirm the theory. But that would not be a "data" issue, just a question of historical fact, which is being used to potentially disconfirm a theory.
You can make arguments why investing in stocks and bonds is better than say beanie babies without historical data with arguements like them being productive assets. But even then there is a chance and it turns out collectibles are more valuable. If you have historical data you can know how few items that are designed to collectible work out...
Right, people come up with all sorts of ideas about what would be better for retirement savers than a simple portfolio of diversified stock and liability-matched IP bonds. I'm generally not interested in those ideas unless they have a solid theoretical foundation, but judicious use of data might help disconfirm them.

But that is tricky business. Like, consider that gold issue. In theory, gold should behave very differently as a free-floating commodity versus when the international monetary system involved pegging the USD price of gold. And I'm not particularly interested in selectively investing in free-floating commodities, so I am not particularly interested in gold today, given the modern monetary system.

But some people really like to push gold as an investment, and they like to cite historical data that they claim shows investing in gold can be helpful for retirement savers. Ironically, it is really easy to see in that data exactly what happened when gold transitioned to being free-floating instead of pegged, and why that actually disconfirms their theories.

But do they actually accept the very obvious implications of their own data? In practice, no.

So again, I do think historical data can potentially play a role in disconfirming theories. But in practice, it doesn't always prove very effective, even when it should.
Last edited by NiceUnparticularMan on Wed Apr 26, 2023 6:07 am, edited 3 times in total.
Logan Roy
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Re: Is asset allocation possible without looking at historical data

Post by Logan Roy »

km91 wrote: Tue Apr 25, 2023 7:06 pm
Logan Roy wrote: Tue Apr 25, 2023 6:41 pm
km91 wrote: Tue Apr 25, 2023 6:22 pm
Logan Roy wrote: Tue Apr 25, 2023 5:14 pm Any Bloomberg viewer should grasp this
Yes, we all know financial news viewers make such great investors...

This is just macro positioning. If you're making allocation decisions based on Fed actions or dollar strength or earnings results, you're speculating not investing. I get that there's a large portion of the market that invests this way, but you have to be early and right to be successful at it. As a retail investor I have neither the time or energy to try to divine where the market is going and even if I did I doubt I'd be able to compete with Bridgewater or any other global macro fund
No. You have to start reading posts properly.
"All markets are doing is trying to get ahead of what happens next."

I don't know, you said it not me. Markets are positioning to get ahead of what happens next, this is speculation. If it was as easy as you say we'd all just watch CNBC and be rich

I agree that a portfolio should have a strong connection to the underlying economic activity of the the economy but I think an investor should target this by exposure to earnings and productive assets, not by exposure to macro variables. The problem with macro is that everyone views the world they way they think it should be, not how it actually is. If you think you know that the Fed's balance sheet or the strength of the dollar tell us about stock and bond returns, fine, but I personally think it's incredibly difficult to synthesize 500 years of macro history into a coherent portfolio AA. How much of macro history is even relevant in our current time of floating exchange rates and fiat currency?
The whole posts. Not just a single line. Markets are obviously trying to get ahead of what happens next [unnecessary comment removed by admin LadyGeek].
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

randomguy wrote: Tue Apr 25, 2023 11:01 pm As I said you can make some arguments for why productive assets are worth more. But with no data, are you sure? Realistically it is impossible to avoid historical data. It effects our whole world view.
Consistent with my first post above, I'll just emphasize again that I personally agree using historic data to DISconfirm theories makes sense.

And for that matter, I agree most posters here would probably not invest in ownership over lending if the data showed the additional risks of ownership were uncompensated, as that would DISconfirm their theory as to why it could be worth taking on those risks.

So if that is the sort of use of historical data you think is unavoidable, I agree to that extent.
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Re: Is asset allocation possible without looking at historical data

Post by Target2019 »

saver7007 wrote: Mon Apr 24, 2023 11:08 pm Thanks everyone for all the responses in this thread. I’ve read the replies so far and here’s a summary of what I’ve picked up as considerations besides historical data:

- Understand the nature of the investment
- Instead of backtesting or forecasting just max your savings rate and pick any balanced asset allocation
- Know your personal need/willingness/ability to take risk and your ability to sleep at night, and look at what happens if stocks go to zero
- Think about liability matching
- Assume that the government will succeed in the long run at its stated monetary goals like having 2% inflation and non-negative real interest rates
- Warren Buffett probably never does historical backtesting, he looks at the current price vs the estimated future profitability of businesses and also looks at the quality of management

I’ll throw in one more thought which is just needing optimism about the future economy even if it's unpredictable, I can't see much point in investing if you believe there’s little or no chance things will go well like they have historically, but if things do go well then stock index funds are a great way to participate in the gains. There’s a lot to think over in this thread, thanks.
There are certainly periods in life where optimism is tested. I could tell you about our savings efforts, and our evolution in building an asset allocation we could believe in, but that just becomes a meaningless thought in a thread which is very deep into statistics and theory.

There are very good principles and explanations found when exploring topics on social media forums. But the sheer amount of information can lead you down a path of over-analyzing, analysis paralysis, and so on. With an uncertain future (your primary concern?), how do you achieve some mental balance about investing, and just live your life happily?

I give my children finance and investing books from time to time. I don't use a hard sell, but reinforce the slow and steady approach. What they do is their choice. I see that their decisions do not exactly fit my recommendations. Oh well, I get the chance to demonstrate with a chart the volatility of one company versus 1000's in an index fund.

The companies you invest in are part of our capital economy. There is a business cycle which affects how well companies perform. Take a look at the very thin line that appears on this chart. https://eresearch.fidelity.com/eresearc ... sibusiness

Think of what occurs "out there" when we slide into recession. Remember, it comes after expansion, when everyone felt so good. Now, panic sets in, and the external overwhelms you with more negative than positive. But in the background the economy keeps moving. And then it builds into another expansion.

The stock market cycle does not align to this chart, and that shouldn't matter to your investing pattern anyways. If you invest automatically according to your asset allocation, you'll succeed. That is the point.
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Re: Is asset allocation possible without looking at historical data

Post by Logan Roy »

seajay wrote: Tue Apr 25, 2023 8:33 pm
Logan Roy wrote: Tue Apr 25, 2023 6:50 pm
watchnerd wrote: Tue Apr 25, 2023 6:02 pm
Logan Roy wrote: Tue Apr 25, 2023 5:14 pm
km91 wrote: Tue Apr 25, 2023 2:48 pm

Sure, we have 500 years of macro data but maybe 100 years of reliable asset price data. I suspect the connection between macro and markets is not as straightforward as you make it sound, and seems to rely on mostly tried and true macro narratives. Gold and commodities for inflationary environments, stocks for growth environments, nominal bonds for deflationary environments, etc. Any talking head on CNBC gives the same sector rotation, macro positioning, risk on risk off story. Markets might be forward looking, but perhaps we spend too much time projecting cause and effect on to them. It's not clear that me that the interest rate regime of 1700 tells us anything about expected asset returns today when the structure of the economy, currency regime, monetary regime, public debt levels, etc are completely different. I'm skeptical that the complexity of the economy and numerous macro variables can really be distilled into a markets forecast
It's cause and effect, and less random than people who look at markets in isolation tend to believe. e.g. Over the long-term, gold tends to keep up with inflation, but if the policy response to inflation is hikes, then that's going to strengthen the dollar (which is what we measure gold in), as well as increasing the opportunity cost of holding gold. So the immediate action on gold's price is usually negative; and then gold behaves like a heatsink for the dollar. In the 70s, gold looks like a great inflation hedge, but it made most its ground up when policy switched to easing; which tends to happen after we tighten too much – and this is entirely logical. Any Bloomberg viewer should grasp this. All markets are doing is trying to get ahead of what happens next. And this is how the largest pools of institutional capital are managed. If there's a better idea, there'd be a lot of money keen to get into it.
Yes.

Global macro investing is a thing.
Absolutely. The Harry Browne portfolio was probably a bigger revelation for me than passive investing. And I think it's exactly what the question posed here is about.

Anyone can optimise a portfolio based on what would've been optimal to hold over any arbitrary stretch of history. 16% in European Small-caps? 14.2% in Gold?.. It's something you can obsess over, but it doesn't mean anything – we're putting faith in the idea some asset classes are better than others.. Then the HB portfolio comes along – doesn't appear to be back-fitted at all – it's just this simple idea: there are four environments you can be in, and it doesn't make any real assumptions beyond that. And then it produces these incredibly consistent returns, and seems to forward-test as well as it back-tests.. Not a perfect portfolio, but maybe a perfect principle on how to build a portfolio.
Four assets, each having the capacity to offset inflation, gold price increase, cash deposit interest, bond interest, stock prices, but where stocks additionally pay dividends, and the individual asset volatility of inflation pacing is smoothed down to a more consistent inflation pacing portfolio value outcome.

You don't need to backtest or predict whether assets/items that remain in demand will tend to generally see their price/value rise with inflation as that's a natural tendency. Individual assets/items might see variations as demand waxes and wanes, but a diverse bunch of assets is inclined to see that wash. Indeed the individual volatilities can add-value, in the way of trading (rebalance) benefits, reducing one that had surged ahead to add to another that was lagging, add-low/reduce-high trading, via a simple periodic rebalance back to equal weightings type rule.
I think it's the perfect demonstration of: diversification, rebalancing for risk management, rebalancing as a contrarian strategy, applying macro to asset allocation, how to generate cashflow from non-productive assets, and that value really does move from pool to pool, and is always relative.. And, if you build a really efficient portfolio, you don't need to mess with weightings – it may make more sense to add leverage. The endowment model is ultimately a very similar design imo.

I'm still not sure there's a better portfolio out there. But TIPS should enable an investor to make an improved version. The tricky thing for me is that TIPS can sort of cover the bases of cash, treasuries and gold, esp. if we use short and long duration. So I've not found anything as elegant as HB's solution. Ray Dalio's looked good, but then treasuries moved to negative real yields – so that throws up another problem. TIPS could (I think probably will) get back to that too. So it gets complicated fast.
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Re: Is asset allocation possible without looking at historical data

Post by grok87 »

according to the talmud
https://en.m.wikipedia.org/wiki/Diversi ... e)#History
wrote: Diversification is also mentioned in the Talmud. The formula given there is to split one's assets into thirds: one third in business (buying and selling things), one third kept liquid (e.g. gold coins), and one third in land (real estate). This strategy of splitting wealth equally among available options is now known as "naive diversification", "Talmudic diversification" or "1/n diversification", a concept which has earned renewed attention since the year 2000 due to research showing it may offer advantages in some scenarios.
so
1/3 stocks, 1/3 unleveraged real estate, 1/3 cash (short term tips?)

cheers
grok
RIP Mr. Bogle.
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Re: Is asset allocation possible without looking at historical data

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I removed an off-topic comment. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters.
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Re: Is asset allocation possible without looking at historical data

Post by km91 »

Logan Roy wrote: Wed Apr 26, 2023 6:04 am The whole posts. Not just a single line. Markets are obviously trying to get ahead of what happens next [unnecessary comment removed by admin LadyGeek].
Dalio says the US is a declining empire. Buffett says never bet against America. Macro will tell you whatever story you want to hear. Good luck getting ahead of what happens next
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Re: Is asset allocation possible without looking at historical data

Post by watchnerd »

grok87 wrote: Wed Apr 26, 2023 6:42 am according to the talmud
https://en.m.wikipedia.org/wiki/Diversi ... e)#History
wrote: Diversification is also mentioned in the Talmud. The formula given there is to split one's assets into thirds: one third in business (buying and selling things), one third kept liquid (e.g. gold coins), and one third in land (real estate). This strategy of splitting wealth equally among available options is now known as "naive diversification", "Talmudic diversification" or "1/n diversification", a concept which has earned renewed attention since the year 2000 due to research showing it may offer advantages in some scenarios.
so
1/3 stocks, 1/3 unleveraged real estate, 1/3 cash (short term tips?)

cheers
grok
Wouldn't lending (i.e. corporate bonds) also qualify as 'business'?
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Re: Is asset allocation possible without looking at historical data

Post by Logan Roy »

km91 wrote: Wed Apr 26, 2023 8:09 am
Logan Roy wrote: Wed Apr 26, 2023 6:04 am The whole posts. Not just a single line. Markets are obviously trying to get ahead of what happens next [unnecessary comment removed by admin LadyGeek].
Dalio says the US is a declining empire. Buffett says never bet against America. Macro will tell you whatever story you want to hear. Good luck getting ahead of what happens next
Actually Buffett said the US probably had a few decades left; Dalio worries that the US only has a few decades left. They don't disagree. You do need to read beyond the bylines.. And how do you think I'm advocating getting ahead of what happens next (if you had read some of my posts)?
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

watchnerd wrote: Wed Apr 26, 2023 8:56 am
grok87 wrote: Wed Apr 26, 2023 6:42 am according to the talmud
https://en.m.wikipedia.org/wiki/Diversi ... e)#History
wrote: Diversification is also mentioned in the Talmud. The formula given there is to split one's assets into thirds: one third in business (buying and selling things), one third kept liquid (e.g. gold coins), and one third in land (real estate). This strategy of splitting wealth equally among available options is now known as "naive diversification", "Talmudic diversification" or "1/n diversification", a concept which has earned renewed attention since the year 2000 due to research showing it may offer advantages in some scenarios.
so
1/3 stocks, 1/3 unleveraged real estate, 1/3 cash (short term tips?)

cheers
grok
Wouldn't lending (i.e. corporate bonds) also qualify as 'business'?
There is a side constraint on lending for interest . . . .
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Re: Is asset allocation possible without looking at historical data

Post by watchnerd »

NiceUnparticularMan wrote: Wed Apr 26, 2023 9:02 am There is a side constraint on lending for interest . . . .
I'm not sure what you mean.

Religious prohibitions against usury?

If so, those don't apply to me, personally.
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Re: Is asset allocation possible without looking at historical data

Post by km91 »

Logan Roy wrote: Wed Apr 26, 2023 8:57 am
km91 wrote: Wed Apr 26, 2023 8:09 am
Logan Roy wrote: Wed Apr 26, 2023 6:04 am The whole posts. Not just a single line. Markets are obviously trying to get ahead of what happens next [unnecessary comment removed by admin LadyGeek].
Dalio says the US is a declining empire. Buffett says never bet against America. Macro will tell you whatever story you want to hear. Good luck getting ahead of what happens next
Actually Buffett said the US probably had a few decades left; Dalio worries that the US only has a few decades left. They don't disagree. You do need to read beyond the bylines.. And how do you think I'm advocating getting ahead of what happens next (if you had read some of my posts)?
"We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned. I have been investing for 80 years – more than one-third of our country’s lifetime. Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future."

This is from Buffet's shareholder letter from this year. Like I said, people pick and choose the macro evidence that reconfirms their prior conclusions
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

watchnerd wrote: Wed Apr 26, 2023 9:11 am
NiceUnparticularMan wrote: Wed Apr 26, 2023 9:02 am There is a side constraint on lending for interest . . . .
I'm not sure what you mean.

Religious prohibitions against usury?

If so, those don't apply to me, personally.
Yes, that was intended to be a somewhat tongue-in-cheek reference to historic Jewish laws prohibiting lending with interest.

Obviously the general problem with 1/n formulas is you have to decide what counts as an asset class worth including in the 1/n formula.
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Re: Is asset allocation possible without looking at historical data

Post by watchnerd »

NiceUnparticularMan wrote: Wed Apr 26, 2023 9:46 am
watchnerd wrote: Wed Apr 26, 2023 9:11 am
NiceUnparticularMan wrote: Wed Apr 26, 2023 9:02 am There is a side constraint on lending for interest . . . .
I'm not sure what you mean.

Religious prohibitions against usury?

If so, those don't apply to me, personally.
Yes, that was intended to be a somewhat tongue-in-cheek reference to historic Jewish laws prohibiting lending with interest.

Obviously the general problem with 1/n formulas is you have to decide what counts as an asset class worth including in the 1/n formula.
Or, in this case, trying to map assets that exist today to those that existed in the ancient / classical / medieval eras.
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Re: Is asset allocation possible without looking at historical data

Post by NiceUnparticularMan »

watchnerd wrote: Wed Apr 26, 2023 10:11 am
NiceUnparticularMan wrote: Wed Apr 26, 2023 9:46 am
watchnerd wrote: Wed Apr 26, 2023 9:11 am
NiceUnparticularMan wrote: Wed Apr 26, 2023 9:02 am There is a side constraint on lending for interest . . . .
I'm not sure what you mean.

Religious prohibitions against usury?

If so, those don't apply to me, personally.
Yes, that was intended to be a somewhat tongue-in-cheek reference to historic Jewish laws prohibiting lending with interest.

Obviously the general problem with 1/n formulas is you have to decide what counts as an asset class worth including in the 1/n formula.
Or, in this case, trying to map assets that exist today to those that existed in the ancient / classical / medieval eras.
Indeed.

The general idea of diversification is a good one, and an old one. As to how best to implement it today--I am skeptical that ancient texts have a lot of insight to share on that subject, and instead it appears to me that most people nominally following that method are largely "interpreting" those texts in a way which supports whatever they decided they wanted to do independent of the text.
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Re: Is asset allocation possible without looking at historical data

Post by secondopinion »

Logan Roy wrote: Tue Apr 25, 2023 5:40 pm
secondopinion wrote: Tue Apr 25, 2023 5:27 pm
Logan Roy wrote: Tue Apr 25, 2023 5:14 pm
km91 wrote: Tue Apr 25, 2023 2:48 pm
Logan Roy wrote: Tue Apr 25, 2023 12:25 pm I can't really get on board with your a priori assumptions, as they don't make total sense. But if we're looking for macroeconomic data, we can look at 500+ years of economic history – as Bridgewater and the Fed do. So we can look at why things happen, and what the historic response to those things has been. Working out how markets relate to economies isn't nearly as difficult as some people make it – the key is understanding that markets look ahead, and they look at cause and effect.
Sure, we have 500 years of macro data but maybe 100 years of reliable asset price data. I suspect the connection between macro and markets is not as straightforward as you make it sound, and seems to rely on mostly tried and true macro narratives. Gold and commodities for inflationary environments, stocks for growth environments, nominal bonds for deflationary environments, etc. Any talking head on CNBC gives the same sector rotation, macro positioning, risk on risk off story. Markets might be forward looking, but perhaps we spend too much time projecting cause and effect on to them. It's not clear that me that the interest rate regime of 1700 tells us anything about expected asset returns today when the structure of the economy, currency regime, monetary regime, public debt levels, etc are completely different. I'm skeptical that the complexity of the economy and numerous macro variables can really be distilled into a markets forecast
It's cause and effect, and less random than people who look at markets in isolation tend to believe. e.g. Over the long-term, gold tends to keep up with inflation, but if the policy response to inflation is hikes, then that's going to strengthen the dollar (which is what we measure gold in), as well as increasing the opportunity cost of holding gold. So the immediate action on gold's price is usually negative; and then gold behaves like a heatsink for the dollar. In the 70s, gold looks like a great inflation hedge, but it made most its ground up when policy switched to easing; which tends to happen after we tighten too much – and this is entirely logical. Any Bloomberg viewer should grasp this. All markets are doing is trying to get ahead of what happens next. And this is how the largest pools of institutional capital are managed. If there's a better idea, there'd be a lot of money keen to get into it.
The general cause and effect is more predictable than the source of the cause, the amount of effect, and the timeframe thereof. I do not think anything is random, but we cannot consider all the variables needed; therefore, we use randomness as a means to obtain an approximation.
It's less random when we label what economic regime we're in. When we stack them all on top of each other (as many crude academic models do), it's going to appear chaotic, because assets can move in both directions, and we've erased the information that tells us what they're reacting to.
I understand. My point is it is easier to qualify the economic regime rather than quantify the results thereof.
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Re: Is asset allocation possible without looking at historical data

Post by seajay »

grok87 wrote: Wed Apr 26, 2023 6:42 am according to the talmud
https://en.m.wikipedia.org/wiki/Diversi ... e)#History
wrote: Diversification is also mentioned in the Talmud. The formula given there is to split one's assets into thirds: one third in business (buying and selling things), one third kept liquid (e.g. gold coins), and one third in land (real estate). This strategy of splitting wealth equally among available options is now known as "naive diversification", "Talmudic diversification" or "1/n diversification", a concept which has earned renewed attention since the year 2000 due to research showing it may offer advantages in some scenarios.
so
1/3 stocks, 1/3 unleveraged real estate, 1/3 cash (short term tips?)
Thirds commerce, land, in-hand ... and TIPS aren't in-hand, gold (silver) is more fitting of the advice. Two thirds in-hand (land/gold), no counter-party risk. Generational wealth mantra of 'a-third, a-third, a-third' ... land, art, gold ... increases that to no counter-party risk. The "If you don't hold it, you don't own it" old adage. Deposit money into a bank nowadays and it becomes the banks money. Deposit money into a brokerage account and they'll buy the stocks you like, in their name.
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Re: Is asset allocation possible without looking at historical data

Post by seajay »

Logan Roy wrote: Wed Apr 26, 2023 6:23 amI'm still not sure there's a better portfolio out there. But TIPS should enable an investor to make an improved version. The tricky thing for me is that TIPS can sort of cover the bases of cash, treasuries and gold, esp. if we use short and long duration. So I've not found anything as elegant as HB's solution. Ray Dalio's looked good, but then treasuries moved to negative real yields – so that throws up another problem. TIPS could (I think probably will) get back to that too. So it gets complicated fast.
TIPS have their risk, buying fire insurance from a arsonist. The US has had the benefit of dominant global reserve currency, been able to export inflation onto others. In the case of here in the UK and inflation bonds have been sold when the 'insurance risk' was low, withdrawn when the risk increased. With the world moving away from US dollar domination in 10, 20, whatever years time the US might also be in a position of no longer being able to fully insure inflation bonds and having to periodically 'revise' the insurance terms and conditions. Solely relying upon a TIPS ladder is by no means a certainty. Taxation rates for instance might simply be revised. 20% inflation, 20% TIPS yield, 30% taxation of nominal gain -7% net real.
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