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The Hazards of Asset Allocation in a Late-Stage Major Bubble

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Re: The Hazards of Asset Allocation in a Late-Stage Major Bubble

#41

Post by throw0101a »

sfblah wrote: post #24
throw0101a wrote: post #14

Just keep buying. A post by Nick Maggiulli in 2017: > Many investors focus on the right time to buy stocks because they don’t want to buy near a peak in case of a future market crash. I understand the feeling. With the market near all time highs in early 2017, it can be tempting to hold off until there is a larger negative adjustment in prices. > The only problem with this approach is the market could go up for a sig…

This line of reasoning assumes the future looks like the past. Which is generally a solid mode of thinking. But, if the future looks like the past, shouldn't it give you pause that on many metrics markets are substantially more richly valued than at any peak in the last 100 years? You can't have it both ways. Either the past is useful or it's not. If it's useful, then you have two conflicting data points -- market ti…

> If it's useful, then you have two conflicting data points -- market timing doesn't work, and we're at the top of a big bubble.

Market timing does not work over the long-term, and even if we are at the top of the bubble, you can't know we're at the top, but more importantly: it doesn't matter.

* https://awealthofcommonsense.com/2014/02/worlds-worst-market...

> If it does, then yes you should expect to recoup the money eventually from buying at the top (though, if you bought at the top in 1929, you had to wait until the 1950s to get back to even).

And what would your returns if you kept doing DCA every paycheque from the 1929 top, on the ride all the way done, and then little by little through the 1930s, 1940s, and 1950s?

Turns out, not horrifically:

> I wanted to show how market conditions can affect the end results of an investor who periodically invests in the stock market over time. Leaving aside taxes, costs, inflation, etc., I ran the numbers by decade going back to the 1930s to see how much money an investor would have ended up with by investing $10,000 each year on a monthly basis (or $833/month) in the S&P 500.

* https://awealthofcommonsense.com/2018/04/the-luck-of-the-dra...

Especially if you have some bonds to rebalance with:

> For instance, investors earned a real 2% average annual return on their equity investments during the 1930s, according to Ibbotson Associates, a market research firm. But they pocketed a real 7.1% on their government bonds and 2.7% on short-term Treasury bills. Yet during the 1950s investors earned a real average annual return of 16.8% on stocks, while losing 2.2% on bonds and 0.3% on bills.

* https://www.marketplace.org/2009/01/05/history-rewards-stalw...

Bonds and rebalancing also would have saved a portfolio with the S&P 500 in the 2000s:

* https://www.forbes.com/sites/investor/2010/12/17/the-lost-de...

Re: The Hazards of Asset Allocation in a Late-Stage Major Bubble

#42

Post by gverrilla »

papabrown wrote: post #26
xyzzyz wrote: post #17

Earlier quoted context omitted.

I presume most of today’s stock owners are actually owners of 401k account which invests in something like Vanguard Target retirement fund. As a result, they know pretty much nothing about stocks, yet they do own them.

I would presume that as well. However, that doesn't negate the fact that 10% vs 55% is a considerable gap. In 1929 if the shoeshine guy was giving you stock tips, it signaled a very different level of market euphoria than today when your gym trainer is talking about stocks. Also, today we live in a world where there's just so much more accessibility to information. Only about 1.3% of the planet has ever owned Bitcoin…

> Only about 1.3% of the planet has ever owned Bitcoin. Source?

Re: The Hazards of Asset Allocation in a Late-Stage Major Bubble

#43

Post by icelancer »

exabrial wrote: post #36

I'm sorta skeptical. With 12% of the usa vaccinated and things on the verge of opening, I really don't see things going into a recession unless the powers at be do something stupid. I think this is fundamentally different than other bubbles because there's a guaranteed light at the end of the tunnel.

The tunnel has been flooded with QE methods' light. The tunnel is hardly dark... for asset owners.

Re: The Hazards of Asset Allocation in a Late-Stage Major Bubble

#44

Post by slt2021 »

icelancer wrote: post #40
slt2021 wrote: post #15

it is not equity that is overpriced. it is that printed dollar that is overpriced (cash is trash). any bond guarantees long-term loss. In 1990, 2k, 2008 investors could escape from equities to bonds with 6% yield, but now they have nowhere to go. That concludes that this bubble will continue as long as interest rate remains near zero. Federal Reserve basically cornered the entire market into equities, investors have…

>> That concludes that this bubble will continue as long as interest rate remains near zero. Yeah, I think that is the generally accepted understanding of what's happening right now especially with additional stimulus / QE methods. Think you are already seeing equity escape into other asset classes in commodities and cryptocurrency, too.

and look at gigantic bubble that was created in crypto, because of that asset rotation - do you think crypto (which is funny money) is fairly valued as compared to real companies with real cash flows?

the only right strategy is what China have been doing - they have been selling US treasuries and buying real assets left and right across Asia and Africa - securing their grip on rare earth minerals, gold/silver, commodities, emerging markets, infrastructure projects and land.

Re: The Hazards of Asset Allocation in a Late-Stage Major Bubble

#45

Post by TuringNYC »

lumost wrote: post #8
vmception wrote: post #2

pragmatic and I enjoy pretending to be a perma-bear as much as the next guy, but if the macro environment leads to more currency being created or distributed than prior times, then nothing is overvalued yet relative to how much money has to be placed into them when it is seeking yield, so that means here I will have to disagree: "But this bubble will burst in due time, no matter how hard the Fed tries to support it"…

A potentially more productive view is that the fed cannot support the bubble indefinitely. It's becoming clear that money can be printed without causing inflation if its unevenly distributed in the economy. This amounts to large scale wealth redistribution to support asset price increases. If you earn dollars for a living, your purchasing power in terms of future dollar income is being eroded. You will purchase a hom…

>> A potentially more productive view is that the fed cannot support the bubble indefinitely.

The interesting thing is whether "cannot" means the point when they literally can not because the market and inflation wont bear it...or when they wise up to the tinder box they have created. The problem with the latter is -- which administration would allow this to be under their watch. Once a problem is bad enough, you might as well just kick the can a bit more until you literally can not.

(yes, i realize the Fed is independent but there is still quite a bit of control)

Re: The Hazards of Asset Allocation in a Late-Stage Major Bubble

#46

Post by icelancer »

Clewza313 wrote: post #16
MrPowers wrote: post #13

Earlier quoted context omitted.

Emerging markets and value stocks are historically cheap on a relative basis, see the What to Do? section at the end of the article.

If the US stock market collapses, they'll go down too. They might go down less, but if the bubble is going to burst, you'd still be better off keeping your money out until then and only buying once they're cheap. Of course, this requires being able to time the markets twice, which is... non-trivial.

>> They might go down less, but if the bubble is going to burst, you'd still be better off keeping your money out until then and only buying once they're cheap.

Not if the sure-to-follow inflation from a collapse devalues your cash faster than emerging markets and value equities.

Re: The Hazards of Asset Allocation in a Late-Stage Major Bubble

#47

Post by TuringNYC »

viburnum wrote: post #29

Where else are rich people going to park their money? The demand for investable assets has gone way up because rich people have gotten much richer, and rich people around the world (such as newly minted emerging market billionaires) often prefer American assets for liquidity and good legal protections. I'm sure these investors would prefer that stocks earn more than 2.5% but that's just the going rate now. What alter…

Not only do bonds yield nothing, they yield less than zero once you consider inflation. And long bonds yield near zero but...you have huge bond price risk if rates rise again.

There is no real choice now, you have to park the cash somewhere...and so it ends up everywhere from stocks to commercial real estate to VC (and eventually into our tech salaries, into rent, to the landlord, to the bank, and back into MBS in institutions :-)

Re: The Hazards of Asset Allocation in a Late-Stage Major Bubble

#49

Post by nmfisher »

throw0101a wrote: post #14

Just keep buying. A post by Nick Maggiulli in 2017: > Many investors focus on the right time to buy stocks because they don’t want to buy near a peak in case of a future market crash. I understand the feeling. With the market near all time highs in early 2017, it can be tempting to hold off until there is a larger negative adjustment in prices. > The only problem with this approach is the market could go up for a sig…

On the other hand, if you bought into the Nikkei in the late 80s/early 90s, you'd still be in negative returns 30 years later.

Re: The Hazards of Asset Allocation in a Late-Stage Major Bubble

#50

Post by icelancer »

slt2021 wrote: post #44
icelancer wrote: post #40

Earlier quoted context omitted.

>> That concludes that this bubble will continue as long as interest rate remains near zero. Yeah, I think that is the generally accepted understanding of what's happening right now especially with additional stimulus / QE methods. Think you are already seeing equity escape into other asset classes in commodities and cryptocurrency, too.

and look at gigantic bubble that was created in crypto, because of that asset rotation - do you think crypto (which is funny money) is fairly valued as compared to real companies with real cash flows? the only right strategy is what China have been doing - they have been selling US treasuries and buying real assets left and right across Asia and Africa - securing their grip on rare earth minerals, gold/silver, commod…

No question. I think you can make the argument Ethereum (and to a lesser extent, Polkadot) could be fairly valued due to what it represents (platform for distributed applications, I refuse to use the shorthand phrase for it or decentralized finance), but BTC is simply just gold / reserve currency in nature and always will be per the Blockstream team's desires. So there's no way BTC's valuation relative to other stores of value is correct.

There are potential paradigm shifters in the cryptocurrency space as much as HN wants to shit on it, but I also agree with your larger point more than I disagree with it.

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