Yes, I cut it out of my diet years ago…

Jim Rogers has been bullish on nearly all commodities for years. Commodities always require proper timing, since they don’t normally rise over time. There might be cases in the future when they do because of a genuine, permanent shortage, but any bull markets tend to be short-lived.

Given that there are thousands of companies at irrationally low prices these days, why invest in something that is not really cheap at all?

It may seem scary to invest in the stock market today, but that is where the great deals are.

Ed

The main purpose of asset allocation is reducing risk, not increasing return. If your purpose is to have the highest long term return, you should stick with 100% equities.

However, your figures show that rebalancing can work. If you had just invested with a 50%equity/50% bond allocation, you would end up with $143,917. With rebalancing, you ended up at $148,798.

Rebalancing, in your example, would reduce the equity allocation after 6 years of superior equity returns, so that there would be less equity before the big down year.

Not surprisingly, however, the 100% equity portfolio had a higher return. It also meant higher volatility. In the last 30 years, bonds have had 1/3 of the return of stocks, despite interest rates declining from historic highs to historic lows. Declining rates produce higher returns for bonds, so this period was ideal for bonds, yet stock returns were still 3 times higher.

Asset allocation will reduce your long term return, but also reduce your risk. The right answer, therefore depends on your long term goals and risk tolerance.

Rebalancing mostly reduces risk, but also tends to produce higher returns than buy-and-hold of your original allocation.

Ed

TD equity index e fund TDB900 gave
26.6,14,23.3,16.9,9.6,(-32.9)
TD bond index e fund TDB909 gave
6,6.5,5.7,3.6,3.2,5.7

these were their respective 6 years return

if i had invested $100,000

100% equity – portfolio would be $152,985
100% bond- portfolio would be $134,848

if instead i choose a 50%-50% portfolio with a yearly rebalance portfolio would be $148,798

all the returns(dividends) are being reinvested

equities comes up better even after losing 32.9% in the last year..

is asset allocation with periodic rebalancing required? it does’nt seem to do any good.

thanks

Good comments. Most investment decisions seem very complicated when you look short term. However, your long term view makes the decisions obvious.

There are periods of time when the markets are down or have low returns, but long term the returns are very good. The reasons for it are that, underneath all the short term sentiment, there are big, solid companies that can always adjust their operations to make profits. As long as companies can continue to produce rising profits over time, the markets eventually go up.

One more point in your debate with Paul. Short term, you can compare the returns of debt repayment vs. investing in the stock market. However, when you look at your financial plan and what you need in your life, there is a big difference.

The difference is that you cannot finance your retirement purely on debt repayment. Once your debt is at zero, then what? Eventually, most people will need a significant nest egg to finance their retirement.

Managing debt effectively is part of a financial plan, but no financial plan is complete without a sound investment strategy.

Ed

When we do long term projections of the Smith Manoeuvre, typically the benefit is approximately 25% from the tax refunds. Most of the long term projected benefit comes from the compound growth of the investments.

The Cash Dam is only a tax strategy, with no investments involved. So, it obviously makes money 100% of the time, just like the claiming of any other tax deduction. You are right though that the projected benefit of the Cash Dam is relatively small compared to the Smith Manoeuvre.

Ed

Has anyone checked the markets in the last few days of trading? I think Mr. Hoye was on to something and I am glad I continue to be fearful. I think over the next couple of weeks we are going to see lows that make November 20/21, 2008 look appealing. Hopefully you have enough cash on hand to take advantage!

If only there were true certification for “certified financial planners”, then we’d see a lot less of this kind of crap trying to lead the sheep astray.

Until hiring picks back up, all the blather about the stock market is jsut that: blather.

What a great opportunity for all of us to buy some shares in a few good Canadian dividend payers and start or continue your DRIP!!!!

Mark

I would recommend starting a DRIP if you’re thinking about stocks.

It’s what I started this year.

Check out:
http://www.dripinvesting.org/

DRIPs will open up a whole new world you for, if you do not already know.

Mark

Your argument seems to be that markets (inflation adjusted, are flat over 30yrs). This doesn’t take into account dividends, which in my portfolio are have yielded 2-5% (after tax, that’s still 1.7-4.25%). The payouts have kept up with and often exceeded inflation. This assumes 0% capital appreciation. Obviously markets have taken a beating, but I simply don’t believe this will go on forever. If you look any of the previous market crashes, markets do eventually recover.

So, given our current low interest rate environment, assuming a mortgage between 2.5-5% (but after tax deductions, about 40% lower = 1-3%) – then yes, certainly I’d take those odds. I doubt it’s going to ever get better.

Lastly, GICs and all other fixed income investments simply don’t beat inflation over the long run – how could any interest linked asset?

Our family’s plan is set for the long run – hopefully another 60yrs. So given that time frame, I’d bet you’d be hard pressed to pick any day in the stock market and show that I could not achieve better than 6-7% returns (dividends are already yielding half that amount). I’m not trying to slam debt repayment, I personally top up my monthly mortgage payments by some 15% in addition to very good lump size annual payments – but after or during a market crash is never a good time to stop investing.

I do FULLY agree that mutual funds are never a good idea.

Cash Dams and SM do not make much money longer term. The only advantage is the ability to write off interest. Is it really worth the risk?

If I’m selling MFs, yes absolutely!

Happy Investing

I think this is the bottom line. If you invest in markets during no growth or high growth times of the market, you’d better keep doing it now.

In this market, if you had $15000, and carefully entered on dips, you’d likely be up 15-20%. Look how much the fertilizer stocks are up from their lows, some almost 100%.

Your points are well made. This chart is meant to put 2008 into perspective and show how the markets work long term.

The chart was supplied to me, so I don’t have all the underlying data, but the conclusions are still valid, however.

Inflation would shift the chart a bit to the left and make it look more like a normal distribution. It would also tend to narrow the chart, since the largest losses (other than 2008) were generally during periods of significant deflation.

This would still clearly show the markets are up most of the time.

You need a larger gain to make up a loss, such as a 33% gain to make up for a 25% loss, but even with this assumption, there are 25 gains over 30% and only 9 losses over 20%.

So, there are still a lot more large gains than large losses. And the largest gains tend to happen not long after the largest losses.

The markets are much different than in the 1800s, but the main diference seems to be that it is more manic now. The long term trends, average returns, frequency of bear markets, etc. are essentially the same, though. This is because the long term results are based on the growth of the companies on the stock market.

There are a lot more factors that move markets short term now, but the long term picture has not changed much.

Ed

In the 1930s, the government did not really know how to manage an economy (perhaps they still don’t) and they made things much worse by drastically cutting back spending and increasing taxes. The stimilous package may or may not work, but a huge tax increase now would certainly make things worse.

I understand your comments about government spending not being effective and may even make the problem worse down the road because of the higher debt. My view is that the stimulous package by itself will have virtually no effect. From what I’ve read, only about 20% of it is even targeted at stimulous – the other 80% is all the pork spending and long term projects the Democrats have wanted to do for the last decade.

However, economists tell us each dollar is spent on average 6 times each year. So, what can happen is that the government spends a bunch of money which is probably essentially all wasted with little effect. Then after that, the money is spent 5 more times intelligently.

For example, the government gives a bunch of money to a buddy to do a useless research project. Let’s say the buddy does no research and just spends it. Wherever he spends it, the money will go to a company that will pay their employees, who will buy groceries and so on, with the money spent another 5 times intelligently. If someone puts the money in the bank, it is then lent out to someone else as well.

This is why spending sometimes works. The spending itself is a complete waste of money, but it is then spent smartly another 5 times.

This may not apply that much now, since I believe much of the money is on long term projects and may not even be spent this year, but this is the theory behind stimulous packages.

Ed

The 25 year period excludes dividends, as does the period often mentioned from 1965-82 when the market indexes were the same. Dividends were 5-7%/year average before 1950 and were about 4-5% from 1965-82.

I have not seen the inflation adjusted figure, but the 1930s had mostly deflation (negative inflation).

Ed

Yes, 25 years to return to the same dollar amount, but you are still short, as you had 25 years of inflation amounting to about 50%, so really you didn’t break even until about 1965 if you account for inflation.

Since that time the highs of the mid 1960’s saw no recovery until mid 80’s, another 20 year period of variable return. From the early eighties we have seen considerable increases until 2000, when volatility returned.

Now had you invested during the lows…….
Which seems why dollar cost averaging is so often promoted.

DAvid

I understand the skepticism, for sure there were many years where I wasn’t earning anything on my investments due to high MER’s and poor tax planning.

But the reality is, I do know many people that have their debt paid off, I’m on my way and by the time I do get it done, my tax-free and tax-friendly investments will almost certainly beat the returns from GICs. Cash damming and SM make it much easier to beat the interest paid on a mortgage.

In your calculation, taxes and inflation apply evenly (actually equity returns are taxed more favorably than interest income) to all investments. So the bottom line is if equities can outperform GICs by 0.2-2.5% (depending on the fees you pay), equities should do better. I know I manage to keep my fees to under 0.5%.

DAvid: “Hopefully this time it will be something less destructive. ”

I hope so also. I’m betting on the Chinese and Indian consumer. If the American consumer is/was responsible for the majority of growth this past century, then surely when 10X as many people start getting rich, they can spend their way into economic prosperity.

Very interesting discussion everyone – quite enjoying this one.