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Geoff Considine
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Geoff is the founder of Quantext. Geoff was an early contributor to SeekingAlpha and now writes regularly for Advisor Perspectives and Financial Planning. He has been working in asset management analytics and research for more than ten years. Before entering finance, Geoff was a research... More
My company:
Quantext
My blog:
Income Focus News
My book:
Survival Guide for a Post Pension World
  • Stocks for the Long Run? 2 comments
    Jul 29, 2009 6:30 PM

    I have recently written an article on Advisor Perpectives that looks at the risk of under-performance in equities over extended periods of time:

    The Retirement Portfolio Showdown: Zvi Bodie vs. Jeremy Siegel

    I am increasingly struck by the fact that people do not understand Bodie's key point with regard to equity risk--that while the probability of under-performing bonds decreases with holding period, the risks of severe under-performance increases.  Bodie's thesis (published in 1995) is well worth understanding.  Bodie concludes that stocks are too risky for retirement planning, but I do not find that this is the case.  That said, the potential for long-term under-performance of equities is real, and investors need to be aware of this. 

     
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  • E.D. Hart
    , contributor
    Comments (957) | Send Message
     
    Geoff,
    Thanks for the post. Perhaps they are both incorrect, and the proper way to go about the long term is:

     

    1) Make a determination of macro strategy (harsh or benign for equities--real interest rates positive, or negative, etc)
    2) set asset allocation targets based on macro forcast
    3) pick specific securities or ETFs and /or HF to best capture alpha
    4) Integrate risk management (disciplined buy/sell rules, sticking to policy portfolio, timing tools)

     

    I remember that you advocate something similar to this, so the debate seems simplistic when asked in either or terms.

     

    Personally Im overweight energy and commodities, and underweight bonds, reals estate, and am in about 40% foreign and domestic equities.

     

    After determining that the most probable macro environment going forward is slower growth and higher inflation--I certainly don't want my money in tips (as CPI is bogus).

     

    I don think Siegel gets it quite right either. Their are obviously very long holding periods where equities under perform (witness 2000-2009) and Bodie has an excellent point about risk. But if tips don't keep pace with the true rate of inflation--then their is a risk there too.

     

    Maybe the better question is: what is the optimal asset allocation given the most likely macro environment going forward...
    29 Jul 2009, 11:21 PM Reply Like
  • No Free Cake
    , contributor
    Comments (1220) | Send Message
     
    Part of investing is setting realistic expectations of performance. A portfolio of all Treasuries, TIPS or otherwise, can be satisfactory if your expectations are modest. For example, if you won't need your investments until you retire and even then you don't plan to spend (consume) much of your portfolio.

     

    If you try to obtain some "optimal" return and create a lifestyle that can *only* be sustained if you meet or exceed that goal, well, then your odds of failure are pretty high. If that's your plan, you need to consider what lifestyle changes you will make if your returns differ from your expectations.

     

    I suspect there are a lot of recent retirees struggling with this issue right now. Investing for retirement is much different than when accumulating assets for the future.
    30 Jul 2009, 12:00 AM Reply Like
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