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Hobby Stocks and Rebalancing

 
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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Wed Feb 16, 2005 7:05 pm    Post subject: Hobby Stocks and Rebalancing Reply with quote

As I look at the data, I keep coming back to this question: Is rebalancing portfolio allocations a good idea? More and more, the data have been telling me NO!, except under the most stressful conditions. Rebalancing takes far more away from the upside than it gives back in the way of downside protection.

Right now, today, rebalancing is a good idea. These are stressful times. Stock valuations remain in bubble territory. Interest rates are low.

All of this will change. When stock valuations fall down to reasonable levels, even if they remain high, rebalancing will become a bad idea once again.

Those are the conclusions that I draw from my most recent survey using my most recent calculators. I examined whether one should rebalance hobby stocks with his core holdings or whether he should allow them to grow unimpeded.

Most of the time, my answer is: Let them grow.

The Portfolios

Portfolio A was entirely in stocks as represented by the S&P500 index. This corresponds to the hobby stock portion of one's portfolio.

Portfolio B consisted of 50% stocks and 50% Treasury Bills. It was rebalanced annually. This was the core holding.

The Conditions

I started with an initial balance of $100000. I set the investment expenses at 0.20%.

I allocated 20% of the initial balance to Portfolio A and 80% to Portfolio B.

I withdrew 3%, 4% and 5% of the initial balance (plus inflation) from the individual portfolios in proportion to their balances.

I recorded balances of the combined portfolio at year 30 when I rebalanced Portfolios A and B and when I let them grow separately.

Calculator Conditions

I used the Gummy 04 version of the Deluxe Calculator V1.1A08 dated January 28, 2005. This calculator includes a complete set of Gummy's data, which can be entered separately as if they were stocks and commercial paper.

Portfolio A appears as stock holdings and Portfolio B appears as if it were commercial paper.

Here are the key entries:

Portfolio A: Entered as stocks
Portfolio B: Entered as commercial paper

Portfolio A: 100% S&P500 stocks
Portfolio B: 50% S&P500 stocks and 50% T-Bills

Stock allocation: 20%
Fixed Income Series: commercial paper
Front end/back end?: 50%
Inflation: CPI
Investment expenses: 0.20%
Rebalance? NO!, the basic condition, and YES for making comparisons.
Others: Gummy's Algorithms 1 and 2: NO. Remove gains? NO.
Others: Reinvest Dividends? Yes, 100%. Reinvest Interest? Yes, 100%.

The calculator automatically rebalances the holdings within a portfolio. It offers a choice as to whether to rebalance between the two portfolios.

I examined 30-year historical sequences starting in 1921-1980. Gummy's data are for the years 1928-2000. I used Professor Shiller's S&P500 stock data prior to 1928. I used the stock returns of 2000 for the years 2001-2010. Be cautious about any conclusions based on sequences starting in years 1921-1927 and ending in 2001-2010. (Those 30-year sequences start in 1971-1980.)

Dollar Allocations

I set the initial balance equal to $100000.

I allocated 20% of this initial balance to portfolio A. This is $20000 in the S&P500 index.

I allocated 80% of this initial balance to portfolio B. This is $80000. It is divided equally between the S&P500 index and Treasury Bills.

Portfolio B started with $40000 in the S&P500 index and $40000 in Treasury Bills.

The combination of the two portfolios started out with $60000 in the S&P500 index and $40000 in Treasury Bills.

Tables

I am including tables of the balances at year 30 with withdrawal rates of 3%, 4% and 5% of the initial balance (plus inflation). All balances are in terms of real dollars. That is, after adjusting for inflation.

I have one table in which portfolios A and B are allowed to grow separately. I have another table in which the 20% / 80% allocation of portfolios A and B are maintained through annual rebalancing.

I have a third table in which I present the differences of the balances with and without rebalancing. Positive numbers indicate a rebalancing bonus. Negative numbers indicate a rebalancing penalty.

[In making these calculations, I substituted zero for any negative balance. This prevents any big losses from distorting the results.]

The fourth table has a 1 whenever the money ran out by year 30 with rebalancing. The fifth table has a 1 whenever the money ran out by year 30 without rebalancing.

[These two tables turn out to be identical except for one condition. It is the 1940 historical sequence with a 5% withdrawal rate. The 1940 portfolio with rebalancing would have run out of money by year 30. Without rebalancing, the 1940 portfolio would have lasted for the full 30 years.]

Analysis

Only a few conditions show a rebalancing bonus. Those with a bonus show only a small improvement. The sequences with a rebalancing bonus are those associated with high valuations and times of severe portfolio stress: a few years around 1929 and the entire decade of the 1960s.

Typically, there was a penalty for rebalancing. Typically, it was huge.

Conclusions

Except in times of severe portfolio stress, one is better off letting his hobby stocks grow unimpeded.

This happens to be a time of severe portfolio stress. Today's valuations are higher than during the Great Depression and during the 1960s (and stagflation).

Have fun.

John R.


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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Wed Feb 16, 2005 7:08 pm    Post subject: Reply with quote

Without rebalancing Portfolios A and B

Year, Real Balances at year 30 for withdrawal rates of 3%, 4% and 5%

Code:
1921   220593    157638     94682
1922   205387    145021     84656
1923   194709    133620     72532
1924   189150    130054     70958
1925   229980    156474     82968
1926   242309    154433     66558
1927   220587    136735     52882
1928   154644     85425     16207
1929   104222     21875    (60928)
1930   115923     22254    (72007)
1931   155226     59363    (36675)
1932   356755    239613    122471
1933   355752    264195    172639
1934   244991    148984     52978
1935   309518    205191    100864
1936   196049     93041     (9979)
1937   109079     20171    (69441)
1938   273410    168593     63776
1939   188875     87077    (14751)
1940   184096     98141     12186
1941   255004    179831    104657
1942   393582    313295    233007
1943   400798    314899    229000
1944   273669    207297    140925
1945   176510    129986     83462
1946   172301    126888     81475
1947   277082    225192    173301
1948   271019    223389    175759
1949   258912    213974    169036
1950   230362    191613    152865
1951   219235    177129    135022
1952   174265    135618     96971
1953   169468    128136     86804
1954   199800    154556    109312
1955   125581     81399     37216
1956   107537     58375      9213
1957   121727     68705     15682
1958   154047    101109     48172
1959   102736     47799     (7144)
1960   105696     43997    (17744)
1961   105673     48097     (9491)
1962    85823     20570    (44955)
1963   112430     47334    (17806)
1964    84861     18686    (47814)
1965    65124      1935    (61812)
1966    68512     (5443)   (80204)
1967   112703     30922    (51199)
1968   112791     14966    (82897)
1969   117327     10653    (97009)
1970   188101     69757    (48877)
1971   182515     74733    (33216)
1972   166125     65993    (34125)
1973   143476     58712    (26064)
1974   195806    123071     50336
1975   302578    234061    165545
1976   217995    157143     96292
1977   176900    123627     70355
1978   206505    160015    113525
1979   212856    173300    133743
1980   200159    164483    128808

More follows.

John R.


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JWR1945
***** Legend


Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Wed Feb 16, 2005 7:13 pm    Post subject: Reply with quote

With rebalancing of Portfolios A and B

Year, Real Balances at year 30 for withdrawal rates of 3%, 4% and 5%

Code:
1921   187744    131037     74330
1922   172249    118777     65305
1923   171252    116293     61334
1924   167130    113552     59973
1925   205778    140009     74241
1926   221687    142702     63717
1927   204601    128595     52589
1928   153325     86686     20047
1929   104098     24737    (55009)
1930   113555     25038    (63967)
1931   144617     56664    (31420)
1932   281670    184303     86937
1933   281471    204355    127239
1934   200404    117975     35546
1935   248022    159917     71812
1936   163428     73784    (15896)
1937    95793     14423    (67623)
1938   215701    126085     36469
1939   152465     63507    (25546)
1940   152263     75222     (1819)
1941   210471    143276     76080
1942   315750    245361    174971
1943   324062    248669    173276
1944   235806    174244    112682
1945   162613    116798     70983
1946   160539    116116     71694
1947   252910    202934    152958
1948   251855    205150    158444
1949   241604    197301    152998
1950   217174    178912    140650
1951   208529    167094    125659
1952   170465    131697     92929
1953   166633    125255     83877
1954   194756    149724    104691
1955   125292     80999     36706
1956   108021     58891      9761
1957   122085     69266     16448
1958   152690    100119     47547
1959   103274     48543     (6192)
1960   106125     44928    (16304)
1961   106411     49081     (8258)
1962    86916     22015    (43138)
1963   112513     48131    (16290)
1964    85655     20014    (45928)
1965    66298      3333    (60164)
1966    69521     (3793)   (77881)
1967   111769     31858    (48362)
1968   111713     16383    (78982)
1969   115254     12138    (91894)
1970   179591     67675    (44491)
1971   176050     72902    (30387)
1972   163196     65675    (31831)
1973   143224     59304    (24627)
1974   193658    121803     49948
1975   291172    223882    156591
1976   214773    153982     93191
1977   176614    122891     69167
1978   206183    159101    112019
1979   213577    173329    133082
1980   201828    165439    129050


The next table shows the rebalancing bonuses.

Have fun.

John R.


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JWR1945
***** Legend


Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Wed Feb 16, 2005 7:21 pm    Post subject: Reply with quote

Rebalancing bonus (penalty).

Year, Differences in the real balances at year 30 for withdrawal rates of 3%, 4% and 5%

Code:
1921   (32849)   (26600)   (20352)
1922   (33138)   (26245)   (19351)
1923   (23457)   (17327)   (11198)
1924   (22019)   (16502)   (10985)
1925   (24203)   (16465)    (8727)
1926   (20622)   (11731)    (2841)
1927   (15986)    (8140)     (293)
1928    (1319)     1260      3840
1929     (123)     2863         0
1930    (2367)     2785         0
1931   (10608)    (2699)        0
1932   (75085)   (55309)   (35534)
1933   (74281)   (59840)   (45399)
1934   (44587)   (31009)   (17432)
1935   (61496)   (45274)   (29052)
1936   (32621)   (19257)        0
1937   (13286)    (5748)        0
1938   (57709)   (42508)   (27307)
1939   (36410)   (23570)        0
1940   (31833)   (22919)   (12186)
1941   (44533)   (36555)   (28577)
1942   (77832)   (67934)   (58036)
1943   (76736)   (66230)   (55724)
1944   (37863)   (33053)   (28243)
1945   (13897)   (13188)   (12478)
1946   (11763)   (10772)    (9781)
1947   (24172)   (22257)   (20343)
1948   (19163)   (18239)   (17315)
1949   (17308)   (16673)   (16038)
1950   (13187)   (12701)   (12215)
1951   (10706)   (10035)    (9363)
1952    (3800)    (3921)    (4042)
1953    (2834)    (2881)    (2927)
1954    (5044)    (4832)    (4620)
1955     (290)     (400)     (510)
1956      484       515       547
1957      359       562       765
1958    (1357)     (991)     (625)
1959      538       744         0
1960      428       931         0
1961      738       984         0
1962     1093      1445         0
1963       84       796         0
1964      794      1329         0
1965     1175      1398         0
1966     1009         0         0
1967     (934)      936         0
1968    (1079)     1417         0
1969    (2073)     1485         0
1970    (8510)    (2082)        0
1971    (6465)    (1831)        0
1972    (2929)     (317)        0
1973     (251)      592         0
1974    (2148)    (1268)     (388)
1975   (11406)   (10180)    (8953)
1976    (3222)    (3161)    (3100)
1977     (286)     (736)    (1187)
1978     (322)     (914)    (1505)
1979      721        30      (661)
1980     1669       956       242


There are not many bonuses. There are lots of big penalties.

Have fun.

John R.


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JWR1945
***** Legend


Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Wed Feb 16, 2005 7:24 pm    Post subject: Reply with quote

Failed: Without Rebalancing

Year, Failures (negative balances) at year 30 for withdrawal rates of 3%, 4% and 5%

Code:
1921   0    0    0
1922   0    0    0
1923   0    0    0
1924   0    0    0
1925   0    0    0
1926   0    0    0
1927   0    0    0
1928   0    0    0
1929   0    0    1
1930   0    0    1
1931   0    0    1
1932   0    0    0
1933   0    0    0
1934   0    0    0
1935   0    0    0
1936   0    0    1
1937   0    0    1
1938   0    0    0
1939   0    0    1
1940   0    0    1
1941   0    0    0
1942   0    0    0
1943   0    0    0
1944   0    0    0
1945   0    0    0
1946   0    0    0
1947   0    0    0
1948   0    0    0
1949   0    0    0
1950   0    0    0
1951   0    0    0
1952   0    0    0
1953   0    0    0
1954   0    0    0
1955   0    0    0
1956   0    0    0
1957   0    0    0
1958   0    0    0
1959   0    0    1
1960   0    0    1
1961   0    0    1
1962   0    0    1
1963   0    0    1
1964   0    0    1
1965   0    0    1
1966   0    1    1
1967   0    0    1
1968   0    0    1
1969   0    0    1
1970   0    0    1
1971   0    0    1
1972   0    0    1
1973   0    0    1
1974   0    0    0
1975   0    0    0
1976   0    0    0
1977   0    0    0
1978   0    0    0
1979   0    0    0
1980   0    0    0

Have fun.

John R.


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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Wed Feb 16, 2005 7:26 pm    Post subject: Reply with quote

Failed: With Rebalancing

Year, Failures (negative balances) at year 30 for withdrawal rates of 3%, 4% and 5%

Code:
1921   0   0   0
1922   0   0   0
1923   0   0   0
1924   0   0   0
1925   0   0   0
1926   0   0   0
1927   0   0   0
1928   0   0   0
1929   0   0   1
1930   0   0   1
1931   0   0   1
1932   0   0   0
1933   0   0   0
1934   0   0   0
1935   0   0   0
1936   0   0   1
1937   0   0   1
1938   0   0   0
1939   0   0   1
1940   0   0   0
1941   0   0   0
1942   0   0   0
1943   0   0   0
1944   0   0   0
1945   0   0   0
1946   0   0   0
1947   0   0   0
1948   0   0   0
1949   0   0   0
1950   0   0   0
1951   0   0   0
1952   0   0   0
1953   0   0   0
1954   0   0   0
1955   0   0   0
1956   0   0   0
1957   0   0   0
1958   0   0   0
1959   0   0   1
1960   0   0   1
1961   0   0   1
1962   0   0   1
1963   0   0   1
1964   0   0   1
1965   0   0   1
1966   0   1   1
1967   0   0   1
1968   0   0   1
1969   0   0   1
1970   0   0   1
1971   0   0   1
1972   0   0   1
1973   0   0   1
1974   0   0   0
1975   0   0   0
1976   0   0   0
1977   0   0   0
1978   0   0   0
1979   0   0   0
1980   0   0   0

Have fun.

John R.


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hocus2004
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Joined: 10 Jun 2004
Posts: 752

PostPosted: Thu Feb 17, 2005 4:00 am    Post subject: Reply with quote

Typically, there was a penalty for rebalancing.

I haven't devoted much thought to the rebalancing question. All of the thoughts set forth below are tenative ones. I really am just thinking aloud in the writing of this post.

My initial reaction is that the rebalancing concept in in direct contradiction to the buy-and-hold concept. To the extent that buy-and-hold is a good idea, rebalancing is a bad idea. And to the extent that rebalancing is a good idea, buy-and-hold (at least the currently prevailing understanding of what it requires) is a bad idea.

What does it mean to "buy-and-hold?" It means to stick with a strategy long enough for it to pay off, to not permit changes in the moods of Mr. Market to dictate your investment decisions. In most circumstances, that makes a lot of sense. You generally are going to come to better decisions when you are thinking things through carefully before the battle begins rather than in the heat of battle when your emotions are likely to sway you in the wrong direction. So buy-and-hold generally pays off.

To say that you are going to rebalance is to say that you possess less than complete confidence in your buy-and-hold strategy. Say that your strategy is to go with 60 percent stocks and 40 percent bonds. You decide on that allocation because your analysis shows that it has the best chance of prevailing in the long term. Stocks go up dramatically, causing the stock portion of your portfolio to grow to more than 60 percent. You sell stocks to get back to a 60 percent allocation. You are NOT sticking with the original allocation, you are NOT sticking with the original strategy. You are sticking with the original percentage, which requires the sellling of stocks. It is Mr. Market that is causing you to make this change. You are permitting Mr. Market to dictate your investment choices.

What makes rebalancing appealing is that, when you sell stocks after a price run-up, you do not appear to be responding emotionally. The emotional choice would be to buy more stocks in a price run-up, and you are instead selling. You are selling high, and that is what the "buy low, sell high" maxim says you should do. So you are going against your emotional pull and doing just the right thing.

It is true that rebalancing causes you to move in a direction counter to the direction in which your emotions would pull you. In that sense, rebalancing is good. The fact remains, however, that rebalancing also runs counter to the buy-and-hold philosophy. You are NOT sticking with your original strategy when you rebalance. You are not giving it time to pay off. You are modifying your original strategy in response to the actions of Mr. Market.

The root problem is not with the rebalancing concept per se. The root problem is with the idea that an investor should have the same allocation to stocks at all times. That idea is just flat-out wrong. The data does not support that idea. Rebalancing is just a tactic that has been developed to get the investor back to the starting-point allocation percentage, which has been presumed to possess magical powers. There is no one allocation percentage that is optimal at all times for all investors. The search for one "optimal" allocation is a search for water that is dry or for darkness that helps one see better. We will never determine the one "optimal" allocation because the optimal allocation varies over time. What is "optimal" always depends on what prices apply to stocks at a given moment.

Rebalancing counters buy-and-hold. I like "buy-and-hold," so I don't see that as being such a good thing. But it is being employed by investors who are employing a version of buy-and-hold that does not make much sense, a version in which you buy-and-hold the same percentage of stocks regardless of the valuation levels that apply. In these circumstances, rebalancing can serve a good purpose when it causes those with excessively high stock allocations to lower their stock allocations a bit.

My view is that we need a new understanding of what is entailed by the phrase "buy-and-hold." I think that the idea has great power--You need to stick with a strategy long enough for it to pay off. The flaw in the currently prevailing view of buy-and-hold is the idea that one should decide how much in the way of stocks one should buy-and-hold without taking valuation levels into account. If you took valuation levels into account when you decided on what percentage of stocks to hold, it would seem to me that you would not need to worry about rebalancing. You would just change your stock allocations through the working of your original strategy as events played out over time.

Someone who followed a long-term timing strategy would be (in some circumstances, but by no means in all circumstances) selling stocks after price run-ups and buying them after price drops, just as would those who rebalance. But he would be doing so in a way that was consistent with his starting point strategy rather than in contradiction to it. The starting-point strategy and the implementation strategy would be integrated.

I think that the appeal of rebalancing is due to the fact that investors sense that ignoring valuations does not really make sense. Rebalancing is really a form of timing. It is changing allocations in response to changes in prices. Its flaw is that it is an arbitrary use of a timing tactic within an overall overall strategy that rejects the use of timing. The right way to tap into the benefits of timing is at the time when the portfolio is being constructed. Changes made during the implementation of the plan should be consistent with the starting-point strategy rather than in conflict with it.


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Mike
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PostPosted: Thu Feb 17, 2005 6:44 am    Post subject: Reply with quote

Quote:
Right now, today, rebalancing is a good idea. These are stressful times.

Rebalancing is a limited form of switching/market timing. It is not surprising that it works best at higher valuations, since that is when switching away from stocks statistically adds value. (Stocks go up most of the time, so rebalancing will mostly move people out of equities.)


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JWR1945
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PostPosted: Thu Feb 17, 2005 8:22 am    Post subject: Reply with quote

hocus2004 and Mike are right about valuations and timing.

They form the core issue.

Many, if not all, mechanical strategies are built around the assumption that you can do little or nothing meaningful in the way of measuring and exploiting value.

Value strategies are built on the assumption that you can measure valuation in a meaningful way. Even though you do not know exactly when a company's true (or intrinsic) value will be recognized, you can be confident that it will be recognized within a broadly defined time period. Some would say within a decade. Others would say longer.

Two groups send out the wrong message.

Many people get in trouble because they think that they can measure intrinsic value much more accurately than they can and because they are unwilling to wait for the market to recognize value.

Academic researchers tend to cloud the issue because of the difficulty in modeling value strategies correctly. Typically, they examine investment strategies that are force-fit to match their models, requiring too much trading for too little reward.

Have fun.

John R.


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JWR1945
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PostPosted: Thu Feb 17, 2005 9:56 am    Post subject: Reply with quote

Mike wrote:
Quote:
Right now, today, rebalancing is a good idea. These are stressful times.

Rebalancing is a limited form of switching/market timing. It is not surprising that it works best at higher valuations, since that is when switching away from stocks statistically adds value. (Stocks go up most of the time, so rebalancing will mostly move people out of equities.)

Let me add a few comments along these lines.

The hobby stock portfolio of 100% stocks is usually superior to the core portfolio, which is split equally between stocks and Treasury Bills.

If the two portfolios were equally attractive, results would favor rebalancing most of the time. For both portfolios to be equally attractive, they would have to have the same rate of return on average. Having Treasury Bills in the core portfolio causes it to be inferior under typical circumstances. Rebalancing is inferior most of the time because the rebalancing bonus is not sufficient to overcome the performance drag caused by holding Treasury Bills.

We can easily recognize when rebalancing is a better choice. It is when holding stocks is dangerous. Holding stocks is dangerous when valuations are high.

Have fun.

John R.


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Mike
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PostPosted: Thu Feb 17, 2005 10:38 am    Post subject: Reply with quote

Quote:
Rebalancing is inferior most of the time because the rebalancing bonus is not sufficient to overcome the performance drag caused by holding Treasury Bills.

Since asset classes such as commodities, and SCV have rates of return equal to or better than the S&P, rebalancing with them would seem to have a better chance of adding value.


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JWR1945
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PostPosted: Thu Feb 17, 2005 12:41 pm    Post subject: Reply with quote

Mike wrote:
Quote:
Rebalancing is inferior most of the time because the rebalancing bonus is not sufficient to overcome the performance drag caused by holding Treasury Bills.

Since asset classes such as commodities, and SCV have rates of return equal to or better than the S&P, rebalancing with them would seem to have a better chance of adding value.

I was unaware of this in terms of commodities. I thought that commodities themselves have delivered inferior performance except during times of high inflation.

It may be that investments related to commodities (such as share of commodity producers) provide good returns.

Have fun.

John R.


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Mike
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PostPosted: Thu Feb 17, 2005 4:45 pm    Post subject: Reply with quote

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=560042


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unclemick
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PostPosted: Fri Feb 18, 2005 6:46 am    Post subject: Reply with quote

Continuing the grand tradition: "If the ducks are quacking, feed them." - Wall Street has rolled out some commodity mutual fund type products.

Pimco seems the most interesting. Radr's forum/website has done some interesting work in this area. I'm a Boglehead more than a 'slice and dicer' - but I continue to monitor their work with more than casual interest.

Getting back to the home front:

Nephew 2: age 25, single, military 'lifer' - Continue to DCA via TSP into Vanguard TSM - revisit in thirty years(from start date).

Nephew 1: age 31, married, first child due in April, also career military, - leave first, age 21-31, ten years of DCA TSM alone - take care of near term - house down payment, etc, etc with shorter term investments. Come back to the original when you are 'old' and ready to retire to see what 'time in the market and compounding has done'.

Us'in's: age 61/62, eleven years into ER, two early SS streams this year plus two small pensions:

Dump REITs, Lifestrategy, - go Vanguard Target Retirement Series blended to get 30 - 40% stocks and start taking out the portfolio yield.

Excess above the budget goes into dividend stocks. Screw conventional calculators - I'm thinking ORP which tells me to spend taxable first, then IRA when RMD at 70 1/2 kicks in. If 'future expected returns' are much lower due to high valuations, then the power of compounding tax deferred is lessened.

Still cogitating running some calculators(ORP and FireCalc) on this one. But my old school brain thinks in income streams:

1. Pensions - basically non - cola

2. SS his and hers - inflation adjusted

3. Dividend stocks - some inflation combating capibility over time

4. Target Retirement set close to Vanguard's age related recommendation and take out the yield(div/interest). Latitude to shift up in stocks if valuations get better in the next 25 years.

I like the four legged table of income streams: even if all the legs are not exactly equal - fits my way of thinking.


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JWR1945
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PostPosted: Fri Feb 18, 2005 7:01 am    Post subject: Reply with quote

You are talking about commodity futures, not commodities themselves.

It is one thing to own a farm. It is another thing to own the rights to this year's crop.

Commodity futures have a bad reputation.
1) In a Barron's commentary, Alex Abelson mentioned that there are no long-term success stories among commodity traders. A little earlier, there had be a single, fabulously successful success story. The commentary was written after this sole exception had gone bankrupt.
2) Commodity futures are noted for high rates of return and high volatility. But that is before commissions. Less well known is that commissions are high as well. They wipe out most of the upside.

Interestingly, commodities futures follow the insurance company pattern that Benoit Mandelbrot mentioned specifically in his book, The (Mis)behavior of Markets. The futures market in cotton should have been immensely profitable. And it is, most of the time. But every now and then, a series of unlikely disasters happen, all in a row, one right after another. That is when traders (and farmers) go belly up.

Commodity futures are exceedingly hazardous.

I dare not go down that path.

Have fun.

John R.


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