Early Retirement Extreme Forums

The past year total return of international stocks (VXUS), REITs (VNQ), bonds (intermediate - IEF), and high yield (JNK) are all now below the past year total return of treasury bills (BIL). However, the broad U.S. market still has strong momentum, so if you're focused on mainly U.S. stocks, you may not realize that these other asset classes are flat/declining.

Compare to 2011 and 2015 (and probably several other older examples) where the U.S. market started to flatten/decline at the same time as VXUS, VNQ, and JNK. Makes sense that they would all decline together since they are usually pretty correlated. Differences now are that bonds are also declining due to rising rates, and U.S. stocks continue to levitate upward even as everything else stalls. The optimism in U.S. markets is currently sky-high due to strong earnings, the strong dollar, Trump policies, and whatever else. This optimism is already priced into stocks and it's getting less and less likely to hear even more good news for stocks like tax changes, trade deals, even lower unemployment, etc. Optimism is more likely to mean-revert on a short time-scale, compared to stock valuations which take several years to mean-revert.

Also, as strong as U.S. stocks' momentum is now, currently 57% of stocks are under their 200 day SMA. Not damning on its own but combined with everything else, it's not a good sign. As good as the S&P500 looks, if you had a portfolio of equal-weighted asset classes or even equal-weighted U.S. stocks, you probably would have been better off just holding cash (T-bills/CDs/money market) the past year.

There definitely seems to be more downside than upside in most of the major asset classes. So, preparing for a crash of some kind is just due diligence. OTOH, if it doesnt come soon there is a good chance I will get FOMO and succumb to the bull market euphoria at exactly the wrong time.
So I'm sticking with the risk barbell for now.

Also, consider this; T Bill's are kind of a risky investment because they represent a kind of permanent market-timing. Holding cash is betting on a crash.

Indeed holding cash is usually too risk averse, creating the risk that your portfolio will fall too short of your needs. I'm not saying to hold cash but that it's interesting to compare to market returns. It also factors into market psychology. If enough people see that they could earn a guaranteed 3% vs. hoping for a volatile 6% elsewhere, that will put more pressure on the markets. A lot of people look at short term performance, as in the past year's performance, and we're coming up on the end of the calendar year. US Stocks will still probably be ahead of cash at year's end but who knows.

International stocks are still probably a better place to park your money vs. cash for the next several years, just going by valuations, but in the meantime there may be a point where you would have been better off having cash to be able to invest in some stuff more cheaply.

An advisor I know personally who has a great track record has 2/3 of his stock portfolio in VGSLX and VEMAX (he likes that it's heavy in Chinese stocks).

He's got me thinking about it.

I've been waiting for the rest of the world (international and emerging) to catch up to the US for seven years now. OK, they all had pretty much the same 2017, but all the other years US has outperformed.

Then when you consider most of my US holdings are high dividend payers, I feel like I've tried to pick the most underperforming portfolio possible already, at least for 2018. If I'm down another 10% next year it'll just be business as usual; so what?

VEMAX has been in the crapper this year *because* it's so China-heavy.

@unemployable -- That's partly why he likes VEMAX. (sorry - not sure of your point)

@LuckyC -- I don't view cash as part of my portfolio when looking at returns. I'm not looking for a return on my cash (I know it's essentially negative).

I'm trying to think of a good analogy. Maybe my cash is like seed I keep for my garden. When I assess the productivity of my garden each year, I don't include the non-productivity of the seed I keep in reserve. To stretch the analogy, my goal isn't to use all of my seed every year to produce as much as possible, my goal is to use as little seed as necessary to produce a satisfactory return while keeping an adequate seed stock for future needs.

I know ROI is the key metric during the accumulation phase. OTOH, it's important to set reasonable goals and learn to be happy with them, otherwise you fall into the trap of never being totally happy regardless of the return. If you can hit your goals without being all-in all the time, why not hold significant cash to take advantage of unexpected opportunities?

Sorry, I think I'm derailing ...

You are not derailing at all in my opinion.
The number one most underrated aspect in investing is always psychology: implementing a strategy that you can stick to is usually much more important than finding the “best” strategy in terms of mathematical expected return (assuming a logical strategy to begin with).

Take dividends for example: they are fiscally less efficient VS buybacks but if the cash flow “tricks” you into better behavior (I know it does trick me) then I think they are “better” in the big picture kind of way.

Talking about cash, personally keeping some dry powder has always helped me stay level headed when the market was going down, because I would think “well if it goes down it creates a great buy opportunity”.
It makes me cheer for a downturn
I also think increasing cash % is a great way to hedge in today’s environment (I don’t think bonds will help), much better than selling short or other weird things I’m not competent enough to handle

jennypenny wrote: ↑

Mon Oct 08, 2018 7:12 am

@unemployable -- That's partly why he likes VEMAX. (sorry - not sure of your point)

I have a couple points.

First, the rest of the world's stock markets have way underperformed the US in recent years. There are some good fundamental reasons for this, but this divergence can't last forever. So I'm not sure we'll see an "international slowdown", and if we do, not so sure it will will result in much underperformance in global markets vs. whatever the US does.

I do typically like having some money in emerging, because when EM has a good year it's a really good year, like 40-50% in USD terms. That said, they are broadly correlated to the US in that they make stuff for us. Most of the time they're a higher-beta version of US markets. VEMAX is a but too heavy on China than I'd like, but since my retirement money is in Vanguard I don't have a better idea that's low-cost than VEMAX.

...

I agree that I would feel better with more bonds than cash if I had to start withdrawing from my portfolio.
On the other hand, trading based on how it would make me feel generally does not work out well.

classical_Liberal wrote: ↑

Mon Oct 08, 2018 6:39 pm

Does anyone else feel a bit more comfortable with I-term US treasuries now the 10-year is priced above mean inflation?

Not yet. I think the 10-year will push up against the 4 handle in 12-18 months.

You may want to look at dividend stocks or ETFs as a cash substitute. They've generally priced in higher bond rates at this point.

jennypenny wrote: ↑

Mon Oct 08, 2018 7:12 am

Maybe my cash is like seed I keep for my garden. When I assess the productivity of my garden each year, I don't include the non-productivity of the seed I keep in reserve. To stretch the analogy, my goal isn't to use all of my seed every year to produce as much as possible, my goal is to use as little seed as necessary to produce a satisfactory return while keeping an adequate seed stock for future needs.

I like this analogy, so I'm gonna hijack it and stretch it a bit to account for inflation +/- opportunity cost.
The seeds dont store indefinitely, they have a half life. The longer you hold onto them the less they'll yield.

@unemployable & classical_Liberal
I would not use stocks or ETFs as a cash substitute. They are not at all the same thing.

@TD--Feel free to hijack it. I'm not good at analogies and didn't do a great job with this one. I like your point about how the longer you hold the seeds, the less they'll yield. It's a good reminder of the difference between holding cash and hoarding cash.