Is MPT and buy and hold DEAD?
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[quote=iceco1d]
70% equity and down 50% huh? Man, I've seen 100% equity portfolios that aren't down 50% yet...you must have some real studs running that money!
Personally, I don't have any 50 y/o's with 70% equity. Not because "I saw this coming" - it's just not necessary IMO. Finally, after 5 pages, not a single person has actually stepped up with anything to validate the claim that MPT doesn't work and/or is "dead." In fact, the only things that I've seen posted simply validate the fact that most of us don't even really know how to quantify what MPT actually says, let alone explain why your claim of "it's dead" is broken. I don't know where some of you are getting your numbers, but I don't have a single client that's down anywhere near 50%. And as for those you keep saying are "screwed" for retirement...I don't think I have a client over 45 that's even down 30%, let alone 50%. I'd say for clients between the age of 45 and 85, their returns range anywhere from -23% (ish) to +2% (ish) in 2008. Really. I just don't get it. [/quote] preach it, brother. can I get an amen?[quote=stocksandblondes][quote=iceco1d]
70% equity and down 50% huh? Man, I've seen 100% equity portfolios that aren't down 50% yet...you must have some real studs running that money!
Personally, I don't have any 50 y/o's with 70% equity. Not because "I saw this coming" - it's just not necessary IMO. Finally, after 5 pages, not a single person has actually stepped up with anything to validate the claim that MPT doesn't work and/or is "dead." In fact, the only things that I've seen posted simply validate the fact that most of us don't even really know how to quantify what MPT actually says, let alone explain why your claim of "it's dead" is broken. I don't know where some of you are getting your numbers, but I don't have a single client that's down anywhere near 50%. And as for those you keep saying are "screwed" for retirement...I don't think I have a client over 45 that's even down 30%, let alone 50%. I'd say for clients between the age of 45 and 85, their returns range anywhere from -23% (ish) to +2% (ish) in 2008. Really. I just don't get it. [/quote] preach it, brother. can I get an amen?[/quote]Sure. Amen.
[quote=daytradah]
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...
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. [/quote] 25 yrs of no growth?? Really? NONE? You are truly looking at some sh*t that I just dont see. I can pull hundreds of accts in a minute that have made some TREMENDOUS gains in alot less time than that. Heres my thoughts on this--and i HAVE said this to clients that wanted to go all cash--If you truly believe that this market i.e. this country is NOT gonna come back +/- a few years..Like it has EVERY TIME before...take your money, put it under your matress, and stock up on beans and bullets.cause we're all fked anyway. Any if YOU believe this--your in the wrong damn profession. Your not helping anyone. All we've EVER had is the hope that the future will be better than the past--why else would you get out of bed in the morning?[quote=iceco1d] Lets have a little fun with this…
For all of the “MPT is dead” and “Death of Beta-Centric Portfolio Mgmt” people…lets start a healthy discussing of why exactly you feel MPT is “dead” and/or doesn’t otherwise work. Please be SPECIFIC about the pieces of MPT that you feel are incorrect, not applicable, and/or broken/damaged.
Just curious. [/quote]
There are no transaction costs in buying and selling securities. There is no brokerage, no spread between bidding and asking prices. You pay no taxes of any kind and only “risk” plays a part in determining which securities an investor will buy.
An investor can take any position of any size in any security he wishes. No one can move the market and liquidity is infinite. You can buy a trillion dollars worth of stock in a small speculative mining stock or buy one cent worth of Berkshire Hathaway. Nothing stops you from taking positions of any size in any security.
The investor does not consider taxes when making investment decisions, and is indifferent to receiving dividends or capital gains.
Investors are rational and risk adverse. They are completely aware of all risk entailed in an investment and will take positions based on a determination of risk, demanding a higher return for accepting greater volatility.
High volatility does not give better results, nor does lower volatility give lesser results.
Investors, as a group, look at risk-return relationships over the same time horizon. A short term speculator and a long term investor have exactly the same motivations, time horizon and profit target. Regardless of who you are, you will always give an investment the same amount of time to work out and volatility will be your only concern.
Investors, as a group, have similar views on how they measure risk. All investors have the same information and will buy or sell based on an identical assessment of the investment and all expect the same thing from the investment. A seller will be motivated to sell only because another security has a level of volatility corresponding to their desired return. A buyer will make a purchase because this security has a level of risk corresponding to the return that he wants.
Investors seek to control risk only by the diversification of their holdings.
All assets, including human capital, can be bought and sold on the market.
Investors can lend or borrow at the 91-day T-bill rate - the risk-free rate - and can also sell short without restriction.
Politics and investor psychology have no effect on the markets.
Quit being so touchy, people. Godalmighty.
A lifestyle that emphasizes a balanced diet and exercise works over the long term too. And yet sometimes we still have to go to the hospital, and the doc says to quit running for awhile until you get better. So you claim to be down 25-30% last year, and up 5% THIS year, despite having the worst January in history. Let’s assume that’s even true; are you “staying the course”? Are you counseling your clients every day that this time is just like previous recessions? Because I have one question: what if it isn’t? The banking system isn’t functioning; asset prices are collapsing across the board; we’ve just elected the most Socialist government in American history, who controls two branches. Have you told your clients that we might be going into a market like the 1970’s, when we have stag-deflation for two years, followed by high inflation? What will you do then? What if we go into a really protracted downturn, akin to the early 1930’s or the 1890’s?
You asked me why I get up in the morning, and I’ll tell you. I’m bearish, I’ve been ferociously bearish since September of last year, when this credit cycle finally ended. I was a stay-the-course guy, a buy-and-hold guy until the second week in September, when I realized it wasn’t going to work. So our job now is to save as many as we can. I’ve been telling business owners and clients, “I seriously hope I’m wrong about these markets. And if I am, you’ll see it in your business, soon enough. Your receipts will be going up, your payrolls will expand, and your profits will be back where they were before. And we’ll miss the first 20% or so of the next bull market, which is a chance I’m willing to take.”
"But if I’m right, your account with me will be the only thing IN YOUR LIFE that’s working."
That’s why I get up in the morning. 99% of FA’s on planet earth go to work every day, just like you, and they believe their job is to keep clients in the worst markets, and clients wonder to themselves, “if he knows so much, why didn’t he see the train wreck coming in his own company’s stock?”
I’d say for clients between the age of 45 and 85, their returns range anywhere from -23% (ish) to +2% (ish) in 2008.
* * * * *
I'm curious as to what investments they have, that they're up 2% (ish) in 2008. It's got to be cash and CD's, and some Treasuries. Because corporate bonds, preferreds, utilities, stocks--are ALL down double digits in 2008.
[quote=daytradah]
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. [/quote] Boy am I glad this new stimulus bill passed then. Perhpaps we shouldn't be all that upset about the carbon capture program that was a part of the bill. Now I understand why it was so important. No worries. Prez Obama's gonna fix everything. He's got a great plan.Bodysurf:
Posters are highly anxious because their books are cut in half and clients are not buying the 'stay the course' advice. They are now or will be leaving soon. 2008 was Shock and awe. 2009 =the Grindhouse which will cruelly provide false rallies and rangebound returns that destroy any vestige of patience left in 50 year old "growth" clients
You are correct about this administration. Obama is a hardcore ideologically committed leftist. He has declared war on business and has rolled out the class warfare banner. He is pursuing the REDISTRIBUTIVE policies he told us he would. When he talks about "REBUILDING" America stronger and better, its not what Reagan pursued.
Obamas "REBUILD" will be FRANCO style socialism that will erase decades of growth. It is seen by many that it is unpatriotic to conclude we have indeed reached the tipping point in Americas economic productive capacity but it will not be understood until most portfolios are down well beyone 50%. There are always things we can do, short term bonds, cash rich companies corp bonds, shorting the market, capturing dividends on select stocks......and then praying for the capital appreciation portion of the story to come back in a retirees useful lifetime which is within 36 months. We have an administration that is securing and successfully growing entitlement voters faster than productive voters in order to lock up the democratic powerbase for the next several elections. Barney Frank, Dodd, Schumer have successfully deflected their responsiblility for this debacle onto greedy business people who make more than $250000 per year. Everyone who owned stock funds that were in small cap, intl, large cap growth and value are down 50% plus. Anyone who denies it is fudging and pillow biting.Not being touchy--not a bit.
Just completely worn out from all the gloom and doom, the-sky-is-falling BS pumped out ervery friggin day. My point is still the same--if this time IS different, and the market goes to zero--we're all screwed and nothing we do matters anyway. If they needed the money we have in the market to live on right now, or w/in 2-3 yrs---it shouldnt have been in the market anyway, so they can afford to ride it out--and reap the rewards of DCA/systematic investing and dividend reinvestment. Inflation in 2 or 3 years? Shouldve been buying TIPS. Take a look at Frontier Managed futures Balanced fund. +28% for 2008. Up about 5% this year. Add 10% of that to a portfolio GREATLY reduces downside.The fallacy of the false choice. Markets don’t have to “go to zero”, and your clients who wonder if they should be in cash temporarily shouldn’t be confronted by a touchy FA who tells them instead to buy gold, shotguns, and canned goods.
Sometimes the sky is falling. Once every hundred years or so, the banking system falls apart, resulting in deflation everywhere. Every asset class gets wiped out. Maybe you're right--maybe all we need is a heavy dose of Obamanomics and a few more hearings and everyone will be excited to be lending again. Maybe the home price data put out half an hour ago is the last shoe to drop, and we're up--up-and-away from here in real estate markets. Maybe the annihilation we've seen in base commodities are a head-fake, and world demand is going to be picking up any day now. Maybe businesses are just itching to hire back millions of people they've just gotten through laying off, because they've got a big pile of new orders rollling in. Or maybe this is one of those events where prudent people sit back, and keep their powder dry, and absorb the big picture. Just because I'm short the market doesn't mean I'm short America, or I'm not a long-term optimist. I am. And when the smoke clears, my clients will be able to sift among the rubble, and buy whatever they want at fire sale prices. 40% short ETF's with out-of-the-money covered called; 35% long equities with deep-in-the-money covered calls with sell stops; 25% cash. And no phone calls from concerned clients--those ended back in September.Once every hundred years or so, the banking system falls apart, resulting in deflation everywhere.
You speak as if this has gone on for centuries. It happened in the 20s/30s and now. My market/banking history doesn't go back to the 1800s, but please tell me, after making a comment like this, that the banking system fell apart in the 1800s, 1700s, and 1600s and be specific for my own benefit.
[quote=Incredible Hulk] [quote=Bodysurf] Once every hundred years or so, the banking system falls apart, resulting in deflation everywhere.
[/quote]You speak as if this has gone on for centuries. It happened in the 20s/30s and now. My market/banking history doesn't go back to the 1800s, but please tell me, after making a comment like this, that the banking system fell apart in the 1800s, 1700s, and 1600s and be specific for my own benefit.[/quote] Not to speak for bodysurf, but there were at least five occasions in the 1800s when the banking/money system collapsed. The history of Europe is pretty much rife with money collapses. You really want to scare yourself, look what happened to Spain in the century after it imported so much gold from South America.
Google is your friend. As long as governments have been coining money, there have been booms and busts in the financial systems. And as long as governments have been able to print and borrow money denominated by the same currencies, the booms and busts have been that much more severe and protracted.
I’m not preaching the fall of the Roman Empire here. Just a severe retrenchment in the banking system, and a very harsh recession. And if you care to define a ‘depression’ as the worst recession anyone below the age of 85 can remember, that’s where we’re going.
When the S&L’s failed in 1988-1991, it precipitated a sharp and painful recession. Total losses to the banking system: $160 billion. That’s about what we’ve got in one company–AIG. Tack on Citi, Wachovia, Countrywide, Bear Stearns, Lehman, BAC, anyone who was in the vicinity of these CDO’s–you’ve got $2.5 trillion and climbing, every day. If we stopped going down right now, you’re looking at a collapse 15 times more severe than in 1991-2.
Plus, it’s happening worldwide. It’s worse in Europe than here. For you bulls, you’re running out of places to hang your hats.
MPT is a tool. In most markets, it works: it shiels the investor from losing everything as a result of having all his eggs in one basket. It rebalances periodically to take advantage of values created by falling prices in certain asset classes. But like all tools, it’s not appropriate at all times in all places. Our clients pay us to understand the big picture, and to move accordingly. Listen to them occasionally. “Mr. Jones, how’s your business doing? Oh really, you don’t remember it EVER being this bad?” Do that ten times a day for a few weeks across your entire book, and that might mean something.
[quote=Bodysurf]The fallacy of the false choice. Markets don’t have to “go to zero”, and your clients who wonder if they should be in cash temporarily shouldn’t be confronted by a touchy FA who tells them instead to buy gold, shotguns, and canned goods.
Sometimes the sky is falling. Once every hundred years or so, the banking system falls apart, resulting in deflation everywhere. Every asset class gets wiped out. Maybe you're right--maybe all we need is a heavy dose of Obamanomics and a few more hearings and everyone will be excited to be lending again. Maybe the home price data put out half an hour ago is the last shoe to drop, and we're up--up-and-away from here in real estate markets. Maybe the annihilation we've seen in base commodities are a head-fake, and world demand is going to be picking up any day now. Maybe businesses are just itching to hire back millions of people they've just gotten through laying off, because they've got a big pile of new orders rollling in. Or maybe this is one of those events where prudent people sit back, and keep their powder dry, and absorb the big picture. Just because I'm short the market doesn't mean I'm short America, or I'm not a long-term optimist. I am. And when the smoke clears, my clients will be able to sift among the rubble, and buy whatever they want at fire sale prices. 40% short ETF's with out-of-the-money covered called; 35% long equities with deep-in-the-money covered calls with sell stops; 25% cash. And no phone calls from concerned clients--those ended back in September.[/quote] I hear ya--I really do. Like I said--not being touchy. Any more than your being a pessimist. An the sh*t storm coming off of Pennsylvania Ave. scares the bejesus out of me personally----given the gun-toting, conservative southern heritage I was blessed with. However-- dont have the bennefit of fore-sight..not God, or nostradamous..gotta hope and pray what worked last decade-- and the one b/f that, and the one b/f that, and so on-- works again. If not--we're all just guessing. I could do that at home. So could you. At no charge.Yep--I agree. NOT what started the diuscussion though. You asked if MPT was dead. I presented my thought as to why it was not. It may be inappropriate at the moment. Hell, a nice fat variable annuity rider can weather this for years. Folks like the sound of a stream of income forever right about now.
Our clients pay us to understand the big picture, and to move accordingly. Listen to them occasionally. “Mr. Jones, how’s your business doing? Oh really, you don’t remember it EVER being this bad?” Do that ten times a day for a few weeks across your entire book, and that might mean something.
The biggest flaw in MPT is what’s happened lately. The idea that all one has to do is select a broad mix of non-correlated assets. Well, guess what? In times of the meltdowns we’ve seen in the past nine months, there’s no such thing as non-correlated assets. When you have the entire world economy predicated on the premise of easy lending and borrowing, and every asset on the planet dependent on that continuing, there’s no such thing as non-correlative assets. Harvard’s endowment is finding that out right now. As it happens, real estate in Dubai and Los Angeles ARE correlated; ditto for corporates in Topeka and Taiwan. The economy needs a healthy banking system, and we don’t have one.
I love VA’s, and came to realize that the only flaw in MY models was the possibility that insurers wouldn’t be around to pay the guarantees. Clients who have a statement that shows Pru or ING is contractually obligated to pay out $225,000 on a contract now worth $95,000, courtesy of quarter ratchets and daily compounding (in Pru’s case) might feel good for now, but without a market rebound, are all the insurers going to stand behind them?
I’m an active portfolio manager, with full discretion. Maybe that’s why we see the world through a different lens. I’m looking forward to the days I can go long again, and do what I do best, without having to be completely defensive. But that’s not going to be anytime soon.
And rebalancing is a feature of the mean-variance optimization technique employed by MPT practitioners. I have an MBA in finance, and am familiar with all the jargon these guys throw around. But considering I don’t have much regard for rebalancing, or MPT, it doesn’t affect my practice much.
I guess we go back to P/E, and Price to Book. Maybe Taleb was right and the Black Swan rules from here on out.
IndyEDJIMHO MPT’s goal is to identify an acceptable level of risk tolerance, and then find a portfolio with the maximum expected return for that level of risk, can’t see that ever going away.