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Hi,

Based on Ray's post, and running by some other people, I am scaling back from 70-30 to 60-40.

I am scaling back from 70-30 to 60-40

Argh. IMHO, 70-30 is already scaled pretty far down.
And there's no real difference between 70-30 and 60-40. That's just a teeny step.


I recently made a (more-or-less) follow-up post on the MI board.
Where I quoted Ken Fisher: "IF YOU DON’T HAVE A GOOD REASON TO BE BEARISH, YOU SHOULD BE BULLISH."

I don't think that deciding to scale back (or up) should be an emotional decision.
Go by data, not gut.

Currently, the S&P500 SMA indicator & other timing signals say to be invested.
I am close to 99-1. When my signal says to sell, I'll be going to more like 10-90, no baby steps.

I am close to 99-1. When my signal says to sell, I'll be going to more like 10-90, no baby steps.

I have to say, this is my approach as well. I started out thinking that the path to investing success lay through diversification, but back then I always felt that too much of my money was in the wrong things. For a simple-minded retail investor like myself, the only reason to own anything other than equities is to moderate the volatility of the overall portfolio. Once I worked out that volatility was not risk, I just bought equities. Like rayvt, I use slow-twitch timing to avoid serious downturns, and sometimes it steers me wrong; but never for long. I have reasonable confidence in my ability to dodge the mega-bears (e.g. 2001 and 2008); and that gives me the patience to put up with the regular ones. On balance, I just feel better being 100% wrong part of the time than partly wrong all the time.

Baltassar

“Based on Ray's post, and running by some other people, I am scaling back from 70-30 to 60-40.”

Link to Rays post so we know what your talking about?

“For a simple-minded retail investor like myself, the only reason to own anything other than equities is to moderate the volatility of the overall portfolio. Once I worked out that volatility was not risk, I just bought equities. Like rayvt, I use slow-twitch timing to avoid serious downturns, and sometimes it steers me wrong; but never for long. I have reasonable confidence in my ability to dodge the mega-bears (e.g. 2001 and 2008); and that gives me the patience to put up with the regular ones. On balance, I just feel better being 100% wrong part of the time than partly wrong all the time.”

Did you dodge the mega-bears? I certainly didn’t. 2008/2009 was brutal.

We all have to find a way to sleep at night, and not panic when things look bad. For me that’s been just holding on. I looked into the Global Equities Momentum strategy (a timing strategy much touted about 10 years ago). I couldn’t do it. Couldn’t follow the timing signals.

FWIW I’m about 85% stocks. Sold and donated some Berkshire last year, 5% of port. Still have an awful lot of it. Tax considerations making me delay selling more.

Tax considerations making me delay selling more.

This has become a serious issue for me as well. To the extent that my damn-the-torpedoes in-or-out approach made sense for me, it was at least partly because most of my money was in tax deferred retirement accounts. That is still true, but not as true as it once was.

I spend more time thinking about this than any other investment issue. Moving toward a more diversified, 60/40-ish arrangement in the cash account would in itself produce an eye-watering tax bill.

I am the first to admit this is a good problem to have; but it still counts as a problem from my perspective.

Baltassar

“FWIW I’m about 85% stocks. Sold and donated some Berkshire last year, 5% of port. Still have an awful lot of it. Tax considerations making me delay selling more.”

Agree, right or wrong, I’m wired the same way and currently ~93% stocks with majority in Berkshire. Warren’s 30% cash position eases concern wrt overvaluation. Even without his steady net selling & allocation adjustment the last 18 months, I doubt I’d sell. 2008-9 taught me I could stomach a 50% drop (with some indigestion) & ride it out although it was a long 4 years or so before we reached pre-GFC highs.

Will be interesting to see how mindset changes with age and a few more years in the drawdown phase & a correction/bear, but so far just sitting tight with an occasional trim for living expenses and hoping to live long enough to outlast when the next sizable downturn arrives. Good luck to those that attempt to sell & buy back market time, but it can be a real challenge & costly.

"I spend more time thinking about this than any other investment issue."

It's a good thing to think about. Asset allocation affects portfolio return more than individual stock selection, and there's no agreement between experts. Buffett recommends a 90/10 allocation between stocks and short term treasuries, whereas Bogle recommended a 25/75 allocation for a 75-year old investor.

A 2016 paper applying the Kelly criterion

https://sites.math.washington.edu/~morrow/336_18/2...

calculated the following, optimal allocations for a stock/T-Bill portfolio. Assuming historical volatilities the optimal allocation came down simply to the difference between the expected returns of stocks and T-Bills. (result at bottom of page 8)

4 percentage point expected difference, 100% stocks
3 percentage point expected difference, 75% stocks
2 percentage point expected difference, 50% stocks
1 percentage point expected difference, 25% stocks
0 percentage point expected difference, 0% stocks

Surely one's personal situation must be taken into account.

For those who use timing methodologies, do you ever go back and do an analysis (an honest analysis including taxes, forgone dividends, etc) of what the difference would be had you simply done nothing instead?

[I responded to a random post in the thread, so not a response to any individual.]

For those who use timing methodologies, do you ever go back and do an analysis


I have not made an analysis including taxes and dividends. The former has been de minimus until recently, and the latter is hard to work out since I only use ETFs. But my experience has been that trades in and out of cash have rarely produced significant gains or losses. The entire benefit for me has been concentrated in having avoided disaster in 2001 and (especially) 2008. There is, needlessly to say, no guarantee that I will be three times lucky.

I honestly don't see much difference between raising cash based on valuation versus doing so in response to market momentum. Both seek "inefficiencies" that can be exploited by those who put their minds to it.

Baltassar

William Sharpe, who won a Noble Prize for his work on asset allocation, was once asked how he determined his personal asset allocation. He replied that he just chose an allocation where he could stomach the declines. So much for mathematical analysis.

William Sharpe, who won a Noble Prize for his work on asset allocation...

<pet peeve>
Mr Sharpe, a very respectable fellow, has won no Nobel prize, for the simple reason that there is no Nobel prize for economics. Mr Sharpe won the Riksbank prize, formally the Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne. It's an attempt to hijack the fame of Mr Nobel's name and foundation in order to burnish the reputation of some low-life money shufflers.

There are prizes in five subjects set forth and funded from Mr Nobel's will which are what are commonly and reasonably understood to be Nobel Prizes. Additionally, there is now a separate "Sverige Riksbank Prize in Economic Sciences in Memory of Alfred Nobel" which was dreamt up in the '60s to give a gloss of respectability to the dismal science and funded by the Bank of Sweden, not by Mr Nobel's will. A blatant theft and smearing of the good name of a perfectly respectable arms merchant.

In separate news, I myself have endowed the Mungo Fitch Award in Self-Aggrandizing Award Naming in Memory of Alfred Nobel, or the "Nobel Price for Egotism" for short, the first edition of which was won (and heartily deserved) by the Sveriges Rijksbank.

</pet peeve>

Jim

But my experience has been that trades in and out of cash have rarely produced significant gains or losses. The entire benefit for me has been concentrated in having avoided disaster in 2001 and (especially) 2008. There is, needlessly to say, no guarantee that I will be three times lucky.

Curious how you define "disaster".

In 2008/2009 we went from comfortable financial independence to not being, but since we were not living off the portfolio and work kept coming in it didn't make a difference to us. 15 years of portfolio growth later, a 50% drop now would be painful, but not actually a disaster.

This is 'timely':

Protecting Your Portfolio Can Come at a Steep Cost
https://www.msn.com/en-us/money/savingandinvesting...

Bill Bengen, author of the 4% (now 4.7%) 'rule':
“I don’t think ‘buy and hold’ makes sense for retirees,” says retired financial advisor William Bengen. “Their nest egg is crucial. They have to do whatever is possible to maintain their nest egg at reasonable levels.”
...
“Mine is a tactical, short-term position based on advice from my risk-management service,” Bengen says. “They feel it is a high-risk market environment, and I have to agree.”

Bill Bernstein:
“There’s a hard truth behind such portfolios, which is [that] thinking of de-risking your portfolio every time you get nervous demonstrates a lack of investing discipline,” Bernstein told Barron’s in an email. “The stock market rewards in rough proportion to perceived risk, so responding to increased risk by pulling back from stocks will usually (but not always) be doing the wrong thing at the right time.”

He doesn’t stop there. “And since that’s true most of the time, if you do it repeatedly it’s almost certain that your long-term returns will suffer.”

Bengen agrees. He says if you permanently kept just 25% of your portfolio in equities, his 4.7% rule wouldn’t necessarily hold true, because you might not have enough gains to fund that level of withdrawals.

Maybe different if you use and can stick with a disciplined timing strategy?

Maybe different if you use and can stick with a disciplined timing strategy?

One thought:
One might say that a pricing strategy is better than a timing strategy. There is no requirement to own something you yourself believe is overvalued, if your opinion is informed and has concluded that there is no positive return to be had for a long time. I certainly wouldn't own SPY at these levels in an untaxed account, and that has nothing to do with any market timing signal.

(actually most market timing omens are pretty darned bullish for the short term, except perhaps for one notable one: the most bullish sentiment level ever measured)

Jim

most market timing omens are pretty darned bullish for the short term, except perhaps for one notable one: the most bullish sentiment level ever measured

This:
https://edition.cnn.com/markets/fear-and-greed
is a sentiment indicator, based on several components (Breadth, Volatility etc.). One week ago it was at an "Extreme Fear" level, now it's nearly "back to normal".

the most bullish sentiment level ever measured
...
One week ago it was at an "Extreme Fear" level, now it's nearly "back to normal".

That's fairly short term.

I was thinking of something like this
https://verifiedinvesting.com/blogs/economic-chart...
That particular link is showing the highest bullishness since that data series began in 1967. A few similar measures are also hitting records.

(probably paywalled) https://www.economist.com/finance-and-economics/20...
Bloomberg/Conference board data, a record number of investors think US stock prices will rise in the next year. On this metric, previous record (back to 1990) of about 43 hit around 1997 and again in 2017, current level about 56.

Party like it's 1999! Sock it to me! To the mooon, Alice!

Jim


(yes, those are coded references to prior secular bull market top stretches)

I think you can get whatever data you want on investor optimism. Here is the AAII data which shows bullishness below long term average.

https://www.aaii.com/sentimentsurvey

Aussi, who has not been able to find a consistent forward (6 month) return relationship to current or slope of investor optimism.

I think it was this.

I have looked at how much my investments have grown in 2024, and am having thoughts about what to do going forward. The S&P500 total return YTD is almost 28%.
A $1M portfolio gained about $280,000. That's a lot to leave invested when valuations are so high and there is a bit of political uncertainty.
If a smart person says that he has moved a lot out of stocks and into T-bills, maybe it would be a Good Thing™ to take that entire 2024 gain and put it into T-bills. It sure would be nice to protect that gain.
Last year's (2023) total return was 22.3%. That's, um, about 55% return in 2 years.
FWIW, the T-Bill TR YTD is +5.2% (TBIL), 3 mo Tbills
XBIL, (6 mo) is 4.9%
SHY (1-3 yr treasuries) YTD is 3.65%
I'd hate to get 4%-5% when stocks get 25%, but would hate it even more to get -15% in stocks and lose a big part of that huge gain.
As the saying goes "....pigs get slaughtered."

A $1M portfolio gained about $280,000. That's a lot to leave invested when valuations are so high and there is a bit of political uncertainty.
If a smart person says that he has moved a lot out of stocks and into T-bills, maybe it would be a Good Thing™ to take that entire 2024 gain and put it into T-bills. It sure would be nice to protect that gain.

At the end of the year, this person has $1.28M in the above scenario.
I'm trying to understand the reasoning here. How is it good to "protect the gain" of $280k by moving it into T-bills, but to not move the $1M into T-bills? Why $280k, why not $500k, why not perhaps $1.28M, or why not $0? What is the specific reasoning to move $280k into T-bills? Why "protect" only $280k instead of protecting more or less than that amount?

I'm trying to understand the reasoning here. How is it good to "protect the gain" of $280k by moving it into T-bills, but to not move the $1M into T-bills?

It is a logical fallacy. A very common logical fallacy. Which I don't remember the name of.

Same fallacy as "playing with the house money" after a gambling win. Treating money differently depending on where it came from. There is, of course, no difference between the $1M and the $280K -- it's all your money.

After thinking about it for a few days, I realized that it's stupid. A dollar bill does not know where it came from.

"Overvaluation" is a tricky thing to determine.

2014-2024:
https://stockcharts.com/freecharts/perf.php?SPY,BR...

SPY +300%
BRK.b +290%

Berkshire was quite cheap back then (1.23x book at end of 2013).
I don't think any of us here would have said the same for SPY. Quite the opposite.

What is the specific reasoning to move $280k into T-bills? Why "protect" only $280k instead of protecting more or less than that amount?

Because we are victims of emotions when money is involved, and the profit sum of 280k somehow becomes different from the rest of the money. We'll use credit cards rather than touch money we have painstakingly save, but will blow an end-of-year bonus on frivolous purchases. We'll buy a loser, but won't admit it and sell until it gets back to the magical number of the purchase price. The stories of non-feeling psychopaths being excellent investors are totally believable.

The article by Rational Walk covers this well:
https://newsletter.rationalwalk.com/p/coffee-can-i...

One of the quotes he has is about Aswath Damodaran on NVDA

“I would be lying if I said that selling one of my biggest winners is easy, especially since there is a plausible pathway, albeit a low-probability one, that the company will be able to deliver solid returns, at current prices. I chose a path that splits the difference, selling half of my holdings and cashing in on my profits, and holding on to the other half, more for the optionality (that the company will find other new markets to enter in the next decade). The value purists can argue, with justification, that I am acting inconsistently, given my value philosophy, but I am pragmatist, not a purist, and this works for me. It does open up an interesting question of whether you should continue to hold a stock in your portfolio that you would not buy at today's stock prices, and it is one that I will return to in a future post.”

-h

We hear the phrases "cash in profits", "locking in profits" many times.

The only way to "lock in profits" or to "cash in profits" is to sell the entire stock, rather than just selling the capital gain amount. For those that understand that, do not read on.

Imagine you have 1000 shares, at $100 per share, and $0 cash. Total equity: $100,000.

Next the share price moves to $125 per share, and your capital gain is $25K. Let's say you "lock in profits" by selling $25K worth of stock. So you sell 200 shares (200 * $125 = $25K). You think to yourself "I have just taken out a profit of $25K - that profit is now safe, wow, I have done well and I'm glad to be more level headed than some".

The share price next moves back to the original quote of $100 per share.

You now have 800 shares, at $100 per share, and $25K cash. Total equity: $105,000.

Your profit over the cycle: $5,000.

By "locking in your profit" when the price was higher, you thought you locked in $25K, but you actually locked in $5,000.

What you really locked in was the capital gain associated with the $25K sale, which was a capital gain of $5,000 ($20K worth of stock sold at $25K, i.e. 200 shares bought at $20K and sold at $25K).

- Manlobbi

What is the specific reasoning to move $280k into T-bills? Why "protect" only $280k instead of protecting more or less than that amount?

The strategy is not *entirely* nonsensical.

Say a given investment has a prospective return at the current price and you decide on a given position size and you buy it. Other things being equal, if the price pops up 10% the prospective return goes down, so a move to own 10% fewer shares isn't entirely illogical. There is no obligation that the reduction in share count precisely match the price change one for one--arguably a non linear reaction makes a bit more sense--but it is a very simple and good enough implementation of the notion that a position size should logically have a strong relation to the reward/risk assessment.

This equates to a strategy of a constant dollar allocation unless/until there is a change in estimated IV. i.e., the number of dollars of market value you keep in a given asset rise no faster than the value per unit of that asset. In a tax sheltered account with negligible trading costs these days, this will in effect keep risk and reward at a constant level while random cycles of valuation cause your breakeven cost to slowly ratchet down.

Maybe it's not the best strategy in the world, but it works--I did it for years--and isn't illogical or mathematically unfounded.

Jim

if the price pops up 10% the prospective return goes down, so a move to own 10% fewer shares isn't entirely illogical. ...
This equates to a strategy of a constant dollar allocation unless/until there is a change in estimated IV. i.e., the number of dollars of market value you keep in a given asset rise no faster than the value per unit of that asset.

This is gambler's fallacy.

Let's say the base assumption is that stock price = IV + a random number between -100% and +1 million % (not uniformly distributed) of price.
Short term, IV stays the same, price pops up by a random number. Why should it go back to IV? Slot machines have no memory.
Never mind that ANY price movement is a combination of actual change on IV (which can be sudden due to new information) amd a random walk.

This is gambler's fallacy. ...
Short term, IV stays the same, price pops up by a random number. Why should it go back to IV? Slot machines have no memory.

Because the stock market isn't a slot machine, it's a weighing machine. Prices aren't random, they are mean reverting (admittedly slowly and weakly) to fair value. Most stock prices visit it from time to time. And even if they stay far from it for a long stretch at some high or low value, there will be oscillations about that abnormal level.

It's easy to prove to yourself: Pick any stock history for which you have an estimate of fair value, which is presumably fairly smooth. Let's say you use your cyclically adjusted EPS estimate as an example.
Check the buy and hold returns for some long stretch of time.
Check the return for the same stretch of a strategy that periodically (weekly, whatever) rebalances to a dollar value equal to a constant times your smooth EPS number.
The second strategy will have a higher IRR. And of course you will have much better risk control: you'll never own a bubble-sized allocation to a bubble-priced stock.

In the degenerate case of a stock with no change in its intrinsic value estimate you will have a constant number of dollars invested in the stock, and the breakeven price on that block of stock will gradually fall because you will be periodically selling a small piece at a higher price and buying a small piece at a lower price over and over again. Over time the position will be throwing off a slow net stream of cash.

I'm not saying this is the best strategy in the world, but it does what it says on the tin. The biggest drawback is that it presupposes that you have a material cash allocation and you don't have a strong opinion on exactly how much of your portfolio it accounts for: not everyone is in that boat. Oh, and don't try it with a stock which has any conceivable chance of actually falling in intrinsic value! As you note, intrinsic value can change abruptly--you can lose money on those no matter what your position sizing strategy is. Just use the strategy on picks where the trajectory of IV (though not necessarily the slope) is the steadiest you can find.

Jim

In this thread quite some sentiment indicators were mentioned. Here is another one: The posts on the Shrewdm Berkshire board.

Many poster express their bearish sentiment, saying "S&P is x% overvalued", "scaling back on stocks", "most likely return from here in the next years ... between -2% and +2%". So there are only 2 options:

A) "We" here are superior, know it all better than all the others who are pushing the bull forward (ahem, why then didn't we buy Nvidia etc.?)

B) Or we are not that unique --- meaning that there is far too much pessimism, concerns, cautiousness, bearishness for the market NOT to continue to rise. The bull ends not before it's taken for granted. Judging from all those bearish posts "we" instead expect it to end any moment --- which is the opposite of the sentiment signaling that the end is nigh.

What you really locked in was the capital gain associated with the $25K sale, which was a capital gain of $5,000...

Very true! And, unless the sale is from a non-taxable account, you'll have the short-(or hopefully only long-)term cap gains tax to pay on that $5K, further reducing any real gain.

Pete

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