My daughter is a millionaire

[IdealFugacity]

I think assuming a 10% return on equities is a little optimistic. Your call, but lately I've been playing around with a number like 6.5%.

[vilemerchant]

65 years is a hell of a long time. After peak-oil, the food wars and then the water wars it's anyones guess what your investment will be doing, if it even exists [img]/images/graemlins/smile.gif[/img]

[DespotInExile]

[ QUOTE ]
65 years is a hell of a long time. After peak-oil, the food wars and then the water wars it's anyones guess what your investment will be doing, if it even exists [img]/images/graemlins/smile.gif[/img]

[/ QUOTE ]

I agree with you, and I'm not kidding. In addition to preparing for good times by purchasing an annuity, etc., I'm also planning to prepare her for bad times, by sending her to Gunsite for firearms training, and stockpiling rifles and ammunition.

[DcifrThs]

pete, is it your contention that for a 65 year time frame that an all equity portfolio will outperform a bonds + equity portfolio (forgetting about a more widely diversified portfolio for a second)?

if so, then you are flat wrong. the main problem goes to how you are thinking about these things. it isn't like you're getting 10% return with equities and 8% return with bonds at the same level of risk. 10% return of equities is higher risk than 8% return of bonds.

to avoid this problem, you can simply leverage bonds to get to the same risk/return tradeoff as equities and thus get the diversification without sacrificing any of the returns.

your expected sharpe ratio of equities is about .25 and same for bonds.

but by combining both leverage and diversification over that time frame you can CRUSH an all equity portfolio with a widely diversified one and it isn't even a close comparison. the expected sharpe ratio of the latter can be >.6 but can be conservitively put at .5

Barron

[DespotInExile]

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this is the kind of "conventional wisdom" you need to avoid.

let's assume an portfolio made up of 100% equities would return 10%, while your equity/bond portfolio may only return 8%.

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Just so we're on the same page fact-wise, the Balanced portfolio I cited has been around since 1991 and has returned 10.6%

The Vanguard Equity Index has been around since 1991 and has returned 10.5%.

The Growth annuity has returned 5.99% and has been around since 1993.

The Equity Income annuity has returned 11.1% and has been around since 1993.

The International index has been around since 1994 and has returned 9.4%

All other Vanguard annuities lack a comparably long track record.

Net net: it's hard to make assumptions like I'm automatically giving up 2 points forever. I'm probably giving up something, but I do it for lower volatility.

Obviously, I understand that more compounding earlier, results in more headroom at the end to weather downturns.

But what you guys dont seem to get is that I'm not trying to maximize returns here. I will take lower returns for lower standard deviation. My daughter gets rich at retirement if I can make base hits; absolutely no point swinging for the fences.

Lower volatility investment + higher initial contribution = greater likelihood of success.

The poker analogy would be whether you want to push every small edge, even if +EV, or if you dont push edges but you dont have as much variance.

[ QUOTE ]
I think we've been in a historically atypical invesmtent environemnt since 1991, and we're due for some mean regression.

we're not due for anything.

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If by this comment you mean that the past is not a predictor of the future, then yes, I agree. There is no guaranteed "mean reversion", particularly if you believe the data set has any heteroschedasticity due to fundamental and enduring changes in things like interest rates, productivity gains, global competition, etc.

However, that said, absent heteroschedasticity, datasets to tend to exhibit mean reversion, and thus simply as a matter of correlation--not causation--I do think we're in for worse times in the future. You could also point to fundamental problems in the economy, like the long term weakening of the dollar, the twin deficit expansion, the demographic shift of retiring boomers and the lack of a large tax payer base behind the boomers--all as negative factors that will drag returns in the future below what we have experienced for the past 30 years.

[BradleyT]

If you add $10,000 every year it should be worth $20M in 65 years. Teach your daughter to do the same for her kid and your grandkids+ should be set for life.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
this is the kind of "conventional wisdom" you need to avoid.

let's assume an portfolio made up of 100% equities would return 10%, while your equity/bond portfolio may only return 8%.

[/ QUOTE ]

Just so we're on the same page fact-wise, the Balanced portfolio I cited has been around since 1991 and has returned 10.6%

The Vanguard Equity Index has been around since 1991 and has returned 10.5%.

The Growth annuity has returned 5.99% and has been around since 1993.

The Equity Income annuity has returned 11.1% and has been around since 1993.

The International index has been around since 1994 and has returned 9.4%

All other Vanguard annuities lack a comparably long track record.

Net net: it's hard to make assumptions like I'm automatically giving up 2 points forever. I'm probably giving up something, but I do it for lower volatility.

Obviously, I understand that more compounding earlier, results in more headroom at the end to weather downturns.

But what you guys dont seem to get is that I'm not trying to maximize returns here. I will take lower returns for lower standard deviation. My daughter gets rich at retirement if I can make base hits; absolutely no point swinging for the fences.

Lower volatility investment + higher initial contribution = greater likelihood of success.

The poker analogy would be whether you want to push every small edge, even if +EV, or if you dont push edges but you dont have as much variance.

[ QUOTE ]
I think we've been in a historically atypical invesmtent environemnt since 1991, and we're due for some mean regression.

we're not due for anything.

[/ QUOTE ]

If by this comment you mean that the past is not a predictor of the future, then yes, I agree. There is no guaranteed "mean reversion", particularly if you believe the data set has any heteroschedasticity due to fundamental and enduring changes in things like interest rates, productivity gains, global competition, etc.

However, that said, absent heteroschedasticity, datasets to tend to exhibit mean reversion, and thus simply as a matter of correlation--not causation--I do think we're in for worse times in the future. You could also point to fundamental problems in the economy, like the long term weakening of the dollar, the twin deficit expansion, the demographic shift of retiring boomers and the lack of a large tax payer base behind the boomers--all as negative factors that will drag returns in the future below what we have experienced for the past 30 years.

[/ QUOTE ]

first, everybody needs to understand that return=X*risk. basically, you can target a level of risk OR return and for all intents and purposes be targeting the same thing. this conclusion results from the fact that the expected sharpe ratio for ANY asset class (save commodities) will be between .2 and .3 (about .25).

what level of risk is acceptable to you? 5%? 8%? 15%? at any level of risk you choose, you can create a portfolio that will vastly outperform the return you get from bonds alone, bonds + equities, or equities alone.

that is it.

Barron

also, "mean reversion" is pretty meaningless since we'll never have a "mean." if you mean, instead, that prices of risky assets have a cyclical predisposition then i agree because the underlying factors that drive them tend to move cyclically, i.e. the business cycle....and given that we are at the tail end of the latest (global) cycle, yes i agree the prices of risky assets are in danger of a correction, but flows can still push them higher before that correction comes due.

[stinkypete]

[ QUOTE ]
pete, is it your contention that for a 65 year time frame that an all equity portfolio will outperform a bonds + equity portfolio (forgetting about a more widely diversified portfolio for a second)?

if so, then you are flat wrong. the main problem goes to how you are thinking about these things. it isn't like you're getting 10% return with equities and 8% return with bonds at the same level of risk. 10% return of equities is higher risk than 8% return of bonds.

to avoid this problem, you can simply leverage bonds to get to the same risk/return tradeoff as equities and thus get the diversification without sacrificing any of the returns.

your expected sharpe ratio of equities is about .25 and same for bonds.

but by combining both leverage and diversification over that time frame you can CRUSH an all equity portfolio with a widely diversified one and it isn't even a close comparison. the expected sharpe ratio of the latter can be >.6 but can be conservitively put at .5

Barron

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i made the assumption that the bonds aren't leveraged. if i'm wrong about that, ignore everything i said. and i realize that there may be better ways to take on more risk than just by switching from bonds to equities. my main point was that he can afford to take on more risk than he seems to think.

also, tell me how i can get my money into a highly leveraged portfolio with a 0.5+ sharpe ratio most easily. i want to be rich and i'm willing to gamble.

[DesertCat]

[ QUOTE ]

if so, then you are flat wrong. the main problem goes to how you are thinking about these things. it isn't like you're getting 10% return with equities and 8% return with bonds at the same level of risk. 10% return of equities is higher risk than 8% return of bonds.


[/ QUOTE ]

Over multiple decades the risk is the same. Because you have zero risk of loss with both approaches and don't have to use any leverage.

[ QUOTE ]

to avoid this problem, you can simply leverage bonds to get to the same risk/return tradeoff as equities and thus get the diversification without sacrificing any of the returns.


[/ QUOTE ]

I can't do this, and wonder how you can. Specifically where can you borrow margin cheaper than the yields on the bonds you buy with it?

And even if you can overcome this obstacle, this approach has other problems. To max returns you have to stay heavily margined. So you are taking a huge risk of a black swan (an event outside your expected volatility ranges) hitting your windshield as you are driving 100 mph, and wiping you out.

Even if you can avoid this, you have the psychological problem that occurs when the market turns and your leveraged assets decline in value, increasing your leverage substantially. Even if your porfolio is built to ride out that storm (because it falls within historical volatility ranges), many investors can't deal with the stress and will sell their portfolio at the point of maximum losses.

Essentially LTCM (long term capital management) was built using similar theories (by guys who helped write those theories) and it worked for a few years until they hit a black swan and wiped out.

[IdealFugacity]

You have zero of risk of loss in the stock market over multiple decades?

i think not...