Is MPT and buy and hold DEAD?
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This time is different, and part of being an FA is realizing the investment climate and reacting accordingly. When every asset class on planet earth is uniformly collapsing–including the very homes our clients are living in–you need to go to cash or, if you can, short ETF’s.
I resigned from Smith Barney on December 30th. I manage accounts on a fully discretionary basis, and in September went to cash. In October, I went short the market, and was immediately in violation of SB’s investment guidelines for GPM managers. In December, I was told to put my clients back into the market by 12/31, and that my failure to do so would be construed as my resignation from the firm.
Going down the halls during those lousy Oct-Dec months (I wasn’t there in Jan or Feb, but I’ll assume it’s the same) I would hear all the FA’s with all their talking points, cajoling clients not merely to wait it out, but to add more capital if at all possible. And every dollar that’s been added is now worth two thirds that.
In bull markets, everyone looks like a genius. Buy-and-holders, daytraders, dividend players, 130/30 strategies, alternatives–everyone. It’s easy to make money in the environment we’ve seen in the 25 years or so leading up to 2007. A good FA is one who saw the big picture, and acted. There’s a time to listen to what’s going on in the lives of our clients’, and in their companies and in their homes, instead of using every phone call from them as a chance to sell something else.
[quote=Spaceman Spiff]Alan Skrainka put out a great piece for us this morning. I’d get in trouble if I just copied and pasted the whole thing, so I’ll just pull some quotes.
First, he calls this time frame a black swan event. Black swan, if you're like me and hadn't heard that term before, is a large impact, hard to predict, and rare event beyond the realm of normal expectations. Simply put, you can't statistically predict everything that will ever happen. No matter how many times you crunch the numbers, sometimes things just go wrong. A poet once wrote "the best laid plans of mice and men oft go awry." [/quote] You can tell by that piece that Skrainka hasn't even read The Black Swan. I'm not sure I grasp all the essentials, but one of the things Taleb wrote was the highly improbable events happen all the time but humans have a limited capacity to factor them into our predictions.Nice post. Good points.This time is different, and part of being an FA is realizing the investment climate and reacting accordingly. When every asset class on planet earth is uniformly collapsing–including the very homes our clients are living in–you need to go to cash or, if you can, short ETF’s.
I resigned from Smith Barney on December 30th. I manage accounts on a fully discretionary basis, and in September went to cash. In October, I went short the market, and was immediately in violation of SB’s investment guidelines for GPM managers. In December, I was told to put my clients back into the market by 12/31, and that my failure to do so would be construed as my resignation from the firm.
Going down the halls during those lousy Oct-Dec months (I wasn’t there in Jan or Feb, but I’ll assume it’s the same) I would hear all the FA’s with all their talking points, cajoling clients not merely to wait it out, but to add more capital if at all possible. And every dollar that’s been added is now worth two thirds that.
In bull markets, everyone looks like a genius. Buy-and-holders, daytraders, dividend players, 130/30 strategies, alternatives–everyone. It’s easy to make money in the environment we’ve seen in the 25 years or so leading up to 2007. A good FA is one who saw the big picture, and acted. There’s a time to listen to what’s going on in the lives of our clients’, and in their companies and in their homes, instead of using every phone call from them as a chance to sell something else.
in the 20s leverage on stocks wiped people out.
today, our country has the leverage but it’s on homes
good financial advise is to keep leverage low
[quote=Spaceman Spiff]Alan Skrainka put out a great piece for us this morning. I’d get in trouble if I just copied and pasted the whole thing, so I’ll just pull some quotes.
First, he calls this time frame a black swan event. Black swan, if you're like me and hadn't heard that term before, is a large impact, hard to predict, and rare event beyond the realm of normal expectations. Simply put, you can't statistically predict everything that will ever happen. No matter how many times you crunch the numbers, sometimes things just go wrong. A poet once wrote "the best laid plans of mice and men oft go awry." Second, buy and hold does work, even after a time like this. Everyone's thinking about the Great Depression and the crash of 1929. NOBODY is thinking about 1933, 1934, 1935, or 1936. If you would have bought into the S&P with dividends reinvested 4/20/32, not at the bottom of the downturn but in the middle of it, your returns would have looked like this: 1 yr - -58.8% 3 yr - -4% 5 yr - +4.8% 10 yr - +.5% (there was a good sized bear in 1937) 20 yr - +7.7% So, you take the worst market we've ever seen and invest right smack in the middle of it and you averaged 7.7% over the next 20 years. If you would have held on for a few more those returns would have gone up pretty well because 1954 and 1955 were phenomenal years. Better than the 1990's. So, to my simple brain, buy and hold still works. MPT still works. Of course when you throw in human emotions, which are running really high right now, it might make you think that we need to reinvent the wheel. We don't. We just need to push on the gas so the wheel will start turning again. [/quote] Space, I have to sort of disagree on this one. Skrainka made valid points, but if I were to go to any of my clients (even the 40 year-olds) and tell them that in 20 years, they MAY have a shot at 7.7%, and that in 10 years, they MAY break even, I would have ACAT's coming out my behind. I realize the point that this is theoretically the "worst case" scenario, but keep in mind that many/most clients only recently made back their 2000-2002 losses. So there are lots of people out there with that 10-year break-even number NOW. To think they may have to wait another 20 years to make a reasonable equity return is just egg on their faces. So, the facts aren't wrong, I just don't like the message this sends. Personally, I think Skrainka is making up for his "hold-through-anything" strategy.This may be a point for a different thread, and of course hindsight is 20-20…but I wonder how unpredictable the “perfect storm” really was. I am no economist, but I read somewhere that at the height of the real estate boom house prices increasing almost 40% year over year, while the average income in America was only increasing it’s standard 3-4% (unless you were a mortgage broker, of course). That is clearly unsustainable…in this case, there isn’t a MPT that would work. I would argue that we (financial professionals), or at least the people we lean on for the nuts and bolts of the numbers, whose research we depend on, should have caught that. IMO, the lesson we should learn from the debacle is that financial professionals should have a more holistic approach and understanding of what we put our clients in, MPT’s be damned.
With the markets down close to 50%, why sell now? Isn’t that professing to have the ability to time the market? If you are confident in your conviction you can time the market, why didn’t you sell or short the market at 14,164?
What are your options if you do sell? Go to cash at 1.5%? And how the hell will you know when to get back in the market? After it's up 50%? I know I'm preaching to the choir here. Thanks to the 24 hour news, these swings are largely emotional. Emotions don't last, the value of highly skilled people and excellent business models do. MPT and BAH make sense 90% of the time. Those close to retirement that were 100% in equities didn't learn from all the examples past, apparently. StokEasy steps to financial success
1. Focus on having zero debt, including no mortgage
2. get 2 years of income in cash
3. your age should be the % invested in fixed income, rest in equities and some commodities
problem is most adivsors like to skip 1 & 2 b/c they don’t make any money on those
Jo Jones,
I'm not necessarily disagreeing with you on this but let's just say I'm a 40 year old teacher and my wife is a teacher and we have two kids. We both make $45,000 a year. We've been given zero financial help from parents. How would we not have a mortgage and how would we have saved up $90,000 just to be sitting in cash?in 11 years, if they had averaged 90k per year they’d have made over a million in income before taxes. They should be able to figure out a way to live in a way where there house is paid off and they have an emergency cushion.
[quote=Spaceman Spiff]Alan Skrainka put out a great piece for us this morning. I’d get in trouble if I just copied and pasted the whole thing, so I’ll just pull some quotes.
First, he calls this time frame a black swan event. Black swan, if you're like me and hadn't heard that term before, is a large impact, hard to predict, and rare event beyond the realm of normal expectations. Simply put, you can't statistically predict everything that will ever happen. No matter how many times you crunch the numbers, sometimes things just go wrong. A poet once wrote "the best laid plans of mice and men oft go awry." Second, buy and hold does work, even after a time like this. Everyone's thinking about the Great Depression and the crash of 1929. NOBODY is thinking about 1933, 1934, 1935, or 1936. If you would have bought into the S&P with dividends reinvested 4/20/32, not at the bottom of the downturn but in the middle of it, your returns would have looked like this: 1 yr - -58.8% 3 yr - -4% 5 yr - +4.8% 10 yr - +.5% (there was a good sized bear in 1937) 20 yr - +7.7% So, you take the worst market we've ever seen and invest right smack in the middle of it and you averaged 7.7% over the next 20 years. If you would have held on for a few more those returns would have gone up pretty well because 1954 and 1955 were phenomenal years. Better than the 1990's. So, to my simple brain, buy and hold still works. MPT still works. Of course when you throw in human emotions, which are running really high right now, it might make you think that we need to reinvent the wheel. We don't. We just need to push on the gas so the wheel will start turning again. [/quote] I think one of the problems in comparing past returns, has to do with were the country was... We were primarily manufacturing back then, then since that point in time the country has revolutionized(real word??) itself into what it is today... Financial Capital of the world, and creators of great ideas(electronics,medicine...etc)... Where else is there to go, when you reach the top??? I think those past returns were predicated on the idea that this country was always evolving improving itself... Second Point... Of course Alan is going to say that, he can't come out and say "Oh ummm by the way, that whole buy and hold thing that we thought worked... turns out it doesn't"... reminds me of what Greenspan said when he was interviewed..."My assumptions that were right for so long seemed to have been wrong" or something like that.. Third Point... technical analysis.. You can insert most funds, including index, and see when the price drops below the 200 day moving average, it's time to get out... worked in 2001 and 2008..and before that too...With the markets down close to 50%, why sell now? Isn’t that professing
to have the ability to time the market? If you are confident in your
conviction you can time the market, why didn’t you sell or short the
market at 14,164?
If you couldnt tell it was getting very bad at the beginning of 2008 and was going to get much worse, then you are just blind to functioning of the economy. You will never get every little up and down turn, but all it takes is going cash on half the portfolio even as early as mid 2008 to put your client in a much better situation. Know as fear sets in start buying into the market gradually increasing your positions as things get better. Its not an all or nothing deal, take a % out and add some back when levels look good. Its just a matter of sidestepping a few big corrections every decade or so, and on the other end you can't be greedy and try to get the maximum out of the market on the bull runs.
Don't buy. Rent. It's cheaper, you don't lose mobility, and you don't tie up all your wealth in a highly leveraged asset. Plus you don't have to pay a 5 percent commission to sell it.in 11 years, if they had averaged 90k per year they’d have made over a million in income before taxes. They should be able to figure out a way to live in a way where there house is paid off and they have an emergency cushion.
Jo Jones,
We'll agree to disagree on this but in 11 years at 90,000 a year is only $990,000, not over a million and you are assuming that the couple was at that amount from year one to year 11. There is a real world out there, you may not live in it but your clients do! I hope you aren't telling your clients that it's their fault they are in this mess because they're idiots! Back to the MPT dead or alive: The basic idea of MPT is diversification. For all the people that believe MPT is dead are you saying you don't believe in diversificaton?[quote=buyandhold][quote=Spaceman Spiff]Alan Skrainka put out a great piece for us this morning. I’d get in trouble if I just copied and pasted the whole thing, so I’ll just pull some quotes.
First, he calls this time frame a black swan event. Black swan, if you're like me and hadn't heard that term before, is a large impact, hard to predict, and rare event beyond the realm of normal expectations. Simply put, you can't statistically predict everything that will ever happen. No matter how many times you crunch the numbers, sometimes things just go wrong. A poet once wrote "the best laid plans of mice and men oft go awry." [/quote] You can tell by that piece that Skrainka hasn't even read The Black Swan. I'm not sure I grasp all the essentials, but one of the things Taleb wrote was the highly improbable events happen all the time but humans have a limited capacity to factor them into our predictions. [/quote] That was one of the quotes he used in the piece. I just didn't put it here.For all the people that believe MPT is dead are you saying you don’t believe in diversificaton?
* * * *
Sure I do. Right now we’re diversified in short positions across international, domestic, fixed income, commercial real estate, and financials. Also we’ve got a lot of cash. We’ve got an extremely well-diversified portfolio of short positions.
It’s a little more sarcastic than you were looking for, probably. But over the past year, MPT, well-diversified portfolios are down 60%. Where I live, that’s a failure of both theory and practice. MPT works in bull markets, because even during up markets you have sectors that fall apart. In deflationary bear markets, nothing works on the long side. The key to a good manager is knowing which kind of economic climate we’re really in.
This is asolutely NOT true. I cannot understand why seasoned intelligent professionals continue to spout this BS. WEll diversified portfolios are NOT down 60%. Period. That is BULLsh*t! If yours are, you were not diversified. You did not do your research and you got lazy. Buying 4 fking american funds that are on a glossy brochure is NOT diversfication. Down 24-25% for all '08..up 5% this year. Do some GD research.
It’s a little more sarcastic than you were looking for, probably. But over the past year, MPT, well-diversified portfolios are down 60%. Where I live, that’s a failure of both theory and practice. MPT works in bull markets, because even during up markets you have sectors that fall apart. In deflationary bear markets, nothing works on the long side. The key to a good manager is knowing which kind of economic climate we’re really in.
Don't buy. Rent. It's cheaper, you don't lose mobility, and you don't tie up all your wealth in a highly leveraged asset. Plus you don't have to pay a 5 percent commission to sell it. [/quote][quote=josephjones107]in 11 years, if they had averaged 90k per year they’d have made over a million in income before taxes. They should be able to figure out a way to live in a way where there house is paid off and they have an emergency cushion.
....said the wise man AFTER the housing market went down 25-30% nationwide.
Tell ya what...I'll buy the house and you sign a lease and I'll rent it to you. I get the tax advantages and the equity, and you get the 'flexibility'.
Bodysurf:
You are getting at the heart of my point. MPT assumes temporary downturns it doesnt assume collapse and WEALTH DESTRUCTION. Can you say Nikkei. We are 25 years of no growth and counting....
30% of the wealth that was perceived to be in the market is now carbon molecules returned to the atmosphere in the form of smoke and ash. Buy and Hold is fantastic if you have a revolving 20 year time frame everytime we bear up. My main point is if you are 50 + years old and were advised to hold 70% stock because you identified yourself or your advisor told you that you were a "growth" investor, you are now looking at 50% loss for starters. I am cleaning up a shyt load of portfolios that had far too little fixed income and were far too aggressive. Any one posting that they know the market will come back in the next few years is simply expressing an opinion of HOPE. Hope doesnt buy groceries or take you on a cruise. You are more likely to live out the remainder of your retirment years with 1/2 the income you thought you could reasonably generate. If you are going from $5MM to $2.5MM not that big of a tragedy, but $1MM to $500k is serious and so on down the line. In short, the retirement you thought you had is TOAST. You can rationalize like this administration that we didnt really need all of that money anyway. All of your hardwork and overtime was just your greed and you needed a good spanking. The govt can do it better. Now you will be forced to rely on the govt and learn to love the way they provide for you.