bostonbubble.com

[GenXer]

Market timing does not work. We can sit here and speculate what will happen with this investment or that investment. This is why people fail. They try to time the market by picking off investments using their 'analysis'. The problem with that is that people are most often wrong in predicting anything at all. This is why I refuse to do it. This is why any buys/sells are part of an overall strategy, and not because its the right time to buy anything. If you don't have the money, you can not buy even the best investment which involves risk. This is always true. But if you have the money, you buy what you need to make your portfolio complete.

When treasury bonds fail, you'll be worried about things other than cash. Same goes for muni bonds. When I said they are backed by the power of the state government to tax, I meant it. Corporate bonds on the other hand are a pure speculation right now, though one can argue that very short term are safer. Yes, you do have to worry about interest rates, and about government meddling in this (which it does).

It makes no sense saying 'oh, bonds are risky, so let me buy real estate'. Bonds are safer than stocks and real estate, and can be a good part of your portfolio. Yes, bonds ARE risky. Every investment is risky. Even CDs are risky if you have more than $250k of them.

[melonrightcoast]

[melonrightcoast]

[GenXer]

melonrightcoast: I'm not mad at anybody - I'm simply trying to point out that by using people who succeed as an example for those who are trying to do it now, you are not proving your case! Basically, we know some people did well, because of luck or skill (we may never know which). This doesn't mean they'll keep doing well, and it doesn't mean that just because numbers seem to line up (depending on how you do the calculation) that people who do the same NOW will succeed. Too much uncertainty, and too much risk given the kind of multiples people have to pay for real estate now (to bring this argument home), and the kinds of risk most people take.

Most people do not have anything resembling to a stable portfolio, and are instead swayed by emotions and noise. This is prevalent, there are very few exceptions. This is why the outcomes are so prone to luck rather than skill. This is my argument in a nutshell. There is no way you or I can prove somebody is lucky or they have skill (the data set required to do that simply does not exist even for those doing this for 20 years), but given that most people are not really doing much planning of their finances, there is a number of people who would do well simply due to luck. I do not recommend this approach - that is, belief that one has 'skill'. Look at what happened to Harvard endowment. They were too arrogant, and they got caught with their pants down, fair and square.

I don't advocate changing anything, or making people do anything. Everybody is free to do anything they want. This is called capitalism, and I'm 100% for it. As I mentioned before, what I'm saying only applies to those people who are interested in doing a thorough downside risk mitigation with a 'margin', so to speak. This may not work for everybody. But I'm sure as heck going to do this myself and will recommend this to all those who would listen. Everybody else can keep doing what they are doing.

By the way, the approach I'm advocating does not involve skill, or some sophisticated prediction or guesswork. You just have to be aware of the negative risk and manage it accordingly. You do need skill buying/selling/repairing a house, and buying/managing/maintaining a portfolio, but these skills do not require any predictive abilities whatsoever.

[Guest]

Hi GenXer
Thanks for your posts, I have read all of the ones from this stream and will try to catch up with other older ones. One question though I think hasn't been covered in prior posts although please let me know if so.

How do you think about diversification, ie how do you go about trying to measure the diversification in a portfolio? I agree that bonds are quite underrated as an investment tool. However how do you try to get your head around what is the true diversification one might expect from a portfolio?

Even if I sliced up my savings into 10% FDIC CDs, 10% equities, 10% coporate bonds, 10% Tsy, 10% TIPS, 10% real estate and so on (those are just randomly chosen fake buckets), this looks diversified intuively, but I might be heavily loaded up on USD exposure and US sovereign risk.

I repeat my prior point that all the OECD nations have certain similarities to GM and Chrysler in terms of too many obligations and not enough revenue.

What do you think about those kinds of risks?

[balor123]

The answer to your question falls within the realm of portfolio optimization. It can be performed through a combination of quantitative and qualitative analysis. A good financial adviser makes their money here.

[GenXer]

Guest: Let me put it this way. There are many tools that I can use for portfolio management and construction. Diversification is one of them, but it depends on individual circumstances. There is an immense body of knowledge on different asset classes, bond selection, mutual fund selection and risk management. This is a Real Estate forum, and I try to stick to real estate here, mentioning investments only when it adds to the topic. If you are interested, my contact info can be found by clicking my nickname, and you can contact me directly.

balor123: An interesting note - the most important portfolio optimization and prediction tool based on Monte Carlo used by almost all advisers has failed them terribly (there was an article in Financial Planning and WSJ) because none of them have any idea what it does and why the ones they are using are always wrong. In this crash, diversification barely saved anybody. Seems like all asset classes collapsed together as much as 60%. The tools they used contained Gaussian statistics, which means they are worse than nothing when trying to predict and mitigate the risks due to a power law type crash. I've used plenty of 'optimization' tools, and let me tell you - unless you build one yourself (which I eventually plan to do - based on power laws and Monte Carlo), even if you pay $100k for one - you'll still get garbage.

[balor123]

My bonds may have fallen in value a lot but I got dividends in the mean time! One thing to keep in mind about the stock market is that it can move significantly in response to total demand so that even if companies are doing well their stock prices can still decrease. There has been an expectation for some time that the baby boomer would all start pulling their money out of the market all of a sudden. Some people acted on this and got lucky. I mostly just put it in the back of my mind but that effect could still occur, if it hasn't already (in which case, that money isn't coming back). The result would be a lot of volatility in the market as traders cause a more significant amount of volume, especially with all this cheap money flying around. The same effect can still happen with housing as well and those two are likely to be correlated for this reason (also taxes, healthcare, you get the point). A rising population of retirements alone would be enough to cause significant inflation as retirees don't really work but spend money from savings causing significant velocity. Good news is much of this wealth has been wiped out already but not all of it.

Anyway, on the topic of tools, I agree that most of these tools are problematic. The way I see it there are good advisers but you can't get enough of their time for them to do a good job for you. Those who will give you the time aren't good. I think many of the tools provide value but very little about them is communicated and it's pretty important. Financial Engines, for example, assumes that you'll cash out your portfolio at retirement age and purchase an annuity. I found that out from an article not on their website. Many of these target date funds expect that you'll pick your date at age 65, not when you'll really retire. You have to know how these tools are built to make good use of them.

[balor123]

One other point that I should make about financial advisers is they are very expensive. They typical adviser makes about $130k/year, probably more in Boston. The fee is possibly tax deductible if you own a house but many of us don't. If it isn't, then that person's time is worth almost double what your time is worth if you make ~$100k/year. You can afford to spend roughly 2 hours for every hour they spend so it's worth trying yourself if you can do a good job. Many people can't but from what I've seen of many advisers people don't realize how little there really is to the particular task they are asking of them. Plus, avoid a number of issues of delegating the work: transparency, trust, reliability, etc.

[GenXer]

The wealth distribution, as well as market share is governed by the same power laws. Several very high profile advisors (or advisor firms) have most of the clients. There are very few individual advisers who are actually giving advice - more like selling products including annuities and other junk that nobody would want if they knew how useless it is in most cases. I know several high networth advisers who are much better than average - most of them are in CA. But even they don't know much about the new research, which means they don't really understand the risks involved (i.e. just because the market never went down 90% since the great depression doesn't mean it can not go down 90% again, for whatever reason, with or without a depression). In MA, I have never heard of an adviser actually knowing something. There may be decent financial planners who can help people straighten their finances, but as soon as it gets into investments (including real estate), all bets are off. Actually, the $130k is another nonsense statistic. Its like saying that lawyers make $200k (actually, median is $100k). Turns out that the spread is HUGE (i.e. standard deviation). That is, 25% of lawyers make $40k. Most investment/financial advisers (90% of them) fail! So you have survivorship bias issues - the median may be $130k, but that is because there are a couple who make millions and the rest make nothing. But its a great tactic for getting you to take the classes - this is how somebody else makes their money.

[balor123]

I didn't realize there were so many failures. I guess license requirements filter a lot of people out as well. I remember reading an article on Investment News that Fidelity brokers make $200k in Boston. That a lie as well? Many of those at big brokerage firms have conflicts of interest. You wan a competent independent. There's only two financial advisers in the entire Greater Boston area who offer DFA funds, the institutional equivalent and IMO better than Vanguard. Why? They don't provide a kickback to the salesman (which is paid by investors). They should all at least offer it. How many advisers are there here? Maybe a few thousand? There's roughly your odds of finding a good one.

[GenXer]

Actually, its funny but DFA is no better than Vanguard. Yes, they do have more asset classes, but overall its not worth going through all that trouble to be able to offer DFA funds (going to CA on your own dime, getting indoctrinated by the likes of Fama and French about Modern Portfolio Theory, etc). I wanted to do it at first, but then changed my mind. The products by themselves will not do anything for the clients - its the adviser's understanding of the risks and using the right tools. DFA fees are on par, but they use active management strategies which by defaul will not beat passive indexing (or at least, can not be proven to beat it). By the way, institutional Vanguard funds have even LOWER fees than regular vanguard (by as much as 50%! - from 0.2% to 0.1%, which is a big deal if you have a few mil, and you can buy them off the shelf). Sure a broker can make $200k, but he has to perform. Many firms like Raymond James make advisors into salespeople - the more people they can get into their own mutual funds, the more money they'll make. Just like in Boiler Room.

[ConcernedCitizen1]

I went to a presentation recently and there was a wealth management co presenting. This company has billions under advice. They showed an asset allocation model with x% in bonds, x% in equities and so on. The presenter proposed that holding more cash over the last 3 years would have been better than the standard model with a certain percentage in bonds. I just thought it was such a joke that this company is charging money for advice when all they did was run a backward looking portfolio optimisation model that is obviously fighting yesterday's battle. Tomorrow's battle is going to look different and having so much in cash may not do much against inflation.
Hence my interest in seeing how people handle backward looking vs forward looking analysis.
I think one can't really separate a general investment forum from a real estate forum, they are pretty interrelatied.Anyways, just my view.

[GenXer]

ConcernedCitizen1: You are right about real estate. vs investment - however all investment advice is personal. If your money is in a 401k vs. an IRA vs. taxable account, choices available are different, and most people are quite limited, unless you have a lot of assets already. This is why I said that it all depends - you must have the best choices regardless of where the money is, and this is where you need to be able to tell investments apart in a very substantial way. This is a big part of my job, because often investments get changed on the fly (Vanguard does it, and not in your favor, I must add), so I have to keep up with everything that happens in the investment world on daily basis.

You are 100% correct about complete uselessness of using yesterday's information to try to predict what will happen tomorrow (you can't). But then again, there are plenty of high net worth who can't tell good advice from bad. I feel sorry for them. The fees they pay for this type of advice is probably enormous compared to the quality. But then again the guy wore a suit, isn't that right? When somebody wears a suit and talks in a 'professional' manner, he must be right .

As far as what's right for you - it all depends. Also, just because you say X in stocks Y in bonds - the info is quite meaningless. Securities selections are extremely important. Cash is irrelevant to your portfolio composition - your cash is your reserve fund, and has nothing to do with your portfolio. Tactical asset allocation is akin to market timing, and if you keep changing your % allocations, you won't get anywhere. If I started predicting the future market performance, I'd call myself a prophet, and I'd register with SEC as such. They should have created this designation a long time ago, because most advisers seem to belong to this category.

[balor123]

Some people have investor's block and pay for an adviser because they simply get their heads around this stuff, even though it isn't very complicated and certainly worth the time. Others do try to learn it but get all the wrong lessons. Not clear that a random adviser will do any better. For others their time simply isn't worth it since they make more than the adviser. Issues I described earlier still exist of course.

My experience with a handful of advisers is that at best they provide uninteresting advice. From those who are competent, it seems that they get an adviser to defer responsibility to another. If they make the wrong choices then they can only blame themselves. If they hire someone, though, then they can blame that person, even if it doesn't get their money back.

A good financial adviser is worth the money but as a whole the field is incredibly wasteful and misguided. People don't seem to have any sense of how much they should be paying an advisers and as a result they can get away with ridiculous fees. I wish the government would clean up that mess. Maybe we would avoid more bubbles.