Wow, you all are brutal!

Honestly I am not trying to come on here and brag about one thing or another. Personally as a Registered Investment Advisor who manages money for a living I find the market on a short term time frame to be incredibly difficult to figure out consistently. Lets take just this last week where the market (S&P 500) rallied 3% on "hopes" of a fiscal cliff deal. I don't know about you all but I certainly did not see that coming.

I honestly thought you all would like this as you all seem to hate anyone with the words "Financial Advisor" in their business title on this forum. With index investing you all can save a lot on fees and I don't stock pick either.

I use very long term charting techniques and pay thousands of dollars a year to various trending and modeling program sites. Also, my blog has many views and thoughts that were not written after the fact but if you would like my view on the market right now for the next few months here goes:

With regards to buying the S&P 500 index which is all I am referring to:

I believe we will pullback and retrace some of the quick gains we made over the prior week or two but we will find a bottom in that area and begin to move higher. In 2013 we will break 1500 in the S&P 500 and maybe even move to the 1550 area where I believe we will form a multi year top. This could be between 1550-1600 or just 1500-1550, its hard to guess so far out. At that point I believe this will be our 5 year top. The market will try to move higher and not be able to do so then all eyes will turn to dumping stocks and we will have another crash. Not just a pullback or correction, but a crash.

There you have it, playing with as open a hand as possible and if you want to read my other predictions and posts you can view my blog below. It is along these same lines where I said the market would bottom around 1340 area and rally and that was two weeks ago. Not bad I would say, I didn't nail the absolute bottom but that is extremely hard to do.

http://financeinlife.blogspot.com/2012/ ... -time.html

Also, feel free to email me directly and I will email you copies of my trending and timing model. I can show you how it works and explain it to you all.

MGoldberg@GoldbergFinancialLLC.com

It's hard to believe this:



When you go on to say this:



I guess I'd like to see evidence that your approach to market timing is likely to win out over the standard practice of periodically rebalancing asset allocations in a portfolio. In other words, can you consistently time the market correctly, or over time will your good guesses be counterbalanced by bad guesses such that there's no difference between your approach and rebalancing based on percentage-change thresholds or even annual rebalancing on a given date?

I too would like to see evidence. And I'd want to be very careful in analyzing that evidence to ensure that risk and fees are both properly accounted for. As I've said elsewhere, I am not as skeptical of timing in general as many on here are. But based on my own analysis I believe successful timing is very rare and only works over medium term periods, usually a few years.

The real question would be whether the fees you charge lead to higher net returns that exceed your fees after adjusting for the probabilities. Any fee you charge occurs with 100% probability. Market moves occur with probability. If we assume that a typical monthly move is 2% and we assume average annual returns of 12% to make nice round numbers then, if your only choice is in or out of the market, you'd need to be right 2/3 of the time just to equal the market before fees. That is exceedingly tough to do.

For all I know, you have done that. But I would need to see convincing evidence before believing it. As someone once said: "Extraordinary claims require extraordinary evidence"

Just an aside on timing: I think as you get closer to retirement (assuming that you're investing for retirement, not a short-term goal), timing the market becomes really important. If you simply rebalance according to a calendar schedule without looking at what's going on with the market, you could lock in losses rather than gains.

There's an interesting analysis on the Canadian Couch Potato site that explores whether rebalancing a portfolio boosts returns (the answer is "it depends"):

http://canadiancouchpotato.com/2011/03/ ... t-returns/

It raises a lot of questions about the specific period during which you hold an investment, which of course becomes more and more important as you get closer to needing the money you've been investing. I don't bother trying to time the market now to lock in my gains, but you can bet that I'll be watching the market very carefully once I hit my 60s.

This is a big issue for us right now. While I have never been one to accept blanket qualitative statements about what is best, I think that in most cases the math supports the overall widespread recommendations (using tax deferred accounts for example). But there is a lot to consider in the details.

We've been mostly in stocks forever, and retirement "should" be almost 20 years out for us so that made sense. A few years ago we decided we could retire early and set a date. As recently as 1 year ago that date was in 2017-2019. We decided to start shifting into bonds and income investments. We were doing that by putting new money in bond funds but not really selling much otherwise.

But because of some fortuitous events over the last year (and just plain impatience knowing we could do this) we have moved the date up to 2015. Now we want to shift substantially more into safer investments and bonds. That means we need to sell stock holdings to significantly increase our fixed income allocation. While there are many ways to do that, timing seems to matter a lot, especially with regard to taxes.

We have some index funds that we've held for a long time that have gains in them. If we sell now and pay the taxes in 2012 we are assured of the lower rate. I expect the fiscal cliff to get resolved and the low CG rate to be extended but the "price" I pay for doing the sale this year is paying taxes a year earlier. With risk-free returns so low, the loss in return for that decision is probably less than 2%. The risk of a crash, no fiscal cliff resolution or other adversity is probably higher so the numbers start to make sense for just doing it, paying the tax man, and giving up a couple of years of deferral. When we had higher returns and higher CG taxes, deferral made a lot more sense. It would also make more sense if I had a decade or so time horizon.

Anyway, as someone going through these decisions right now and building a lot of spreadsheets, I can tell you that current conditions are making much of the traditional advice questionable for anyone approaching retirement.

I'm sure you've considered this, but some portion of your retirement investments would still have a time horizon of several decades, right? Unless you're planning to pull everything out and put it into an annuity or something? (I no longer know how this stuff works in the US.)

If I live to be 90 (highly unlikely given my family history but better to plan for it), I'd still have 25 years for my investments to grow after I hit 65. My plan is to always keep a portion in equities; even if it's a smaller percentage than it is now.

Yes. We're shooting for 70% stocks, 30% bonds in both our taxable and tax deferred portfolios. That might sound a bit aggressive but my wife will be getting a guaranteed pension that we consider equivalent to a bond portfolio so our equivalent allocation will be much more balanced/conservative.

Still, getting to that mark in our taxable portfolio requires selling some stocks and paying the taxes. Even though it is taxable, you get deferral of capital gains by holding and not selling.

The way it looks now, our required minimum distributions will be putting us in a position of paying taxes on income we don't need once we hit 70, largely because we will also have the pension and social security. We are seriously looking at ways (72t?) to start taking tax deferred money out as soon as we quit working since it will effectively let us spread the tax burden over more years. It's getting pretty darned complicated, especially when you try to factor in speculations about future tax rates and future attempts to means test social security and so forth.


I plan to live to about 90..."plan" both in the sense of hoping for it and also being prepared for that financially.

Personally I feel the way you two are looking at your investment approach to be all too common, of a mistake. The market doesn't care what year you are set to retire and with that approach you make it sound like you don't need to pay any attention to your investments until 10 years out and just HOPE that when you get to retirement its at a peak in the market instead of a valley. Thats no way to plan for retirement.

The breakdown and split also don't matter when assets move in such high levels of correlation to each other. Pull up a 5 year chart of the AGG (Barclay's Aggregate Bond Fund" and SPX (S&P 500) you will see they are BOTH at long term highs and in 2008 they both crashed together. What protection by diversification are you really achieving?

Rotating in and out of certain asset classes is the only true way to make money and protect your money in the market. You must get out of stocks right before we crash again and look for appropriate assets to rotate into. Sometimes that might mean just sitting in cash or buying the SH and betting against the market.

Any "passive" or "couch potato" portfolio is based on the benefit of uncorrelated assets; it's built on Markowitz's Modern Portfolio Theory (which of course is flawed because it assumes that investors are rational and markets are efficient, but its basic premise of the benefits of uncorrelated assets has held up). So, for example, a conservative portfolio of 80% bonds and 20% stocks delivers higher returns than an all-bond portfolio with pretty much no increase in volatility. Credit Suisse analyzed about 100 years of data on this and found that the theory holds up: if you diversify by holding uncorrelated assets, you increase yield while reducing volatility.

So you aim for uncorrelated investments within your equities (easiest way to do that is with an index fund), and you aim for uncorrelated investments within your entire portfolio by having a mix of stocks and government bonds. Stocks and bonds were negatively correlated during the 1950s, 60s, and the 2000s. They're not always negatively correlated, but they do generally move independently.

Well Sonny Boy (just kidding), I think we've been in the market for longer than you've been alive. The main lesson i've learned is that "experts" are as clueless about the future direction as the rest of us and all that really matters is asset allocation and fees. Minimizing fees is a 100% certain way to avoid costs which is equivalent to making money.

By the way, I also have an MBA in finance and a PhD in an engineering field that was basically about statistics and stochastic processes. Financial markets are stochastic processes - many of my classmates were economics PhDs and had I checked a couple of different boxes and took a couple of macro/micro classes instead of my engineering math I'd have an econ PhD instead. So I think I know what I'm talking about from the theoretical/academic side of things.

But that doesn't mean I haven't made a few practical mistakes. I certainly don't take offense at you saying we've made mistakes because we have. But it does scare me that you are in a position to advise people when you seem to have such a profound misunderstanding for why I did what I did.

We were mostly in the stock market for about 30 or so years because, on average, the stock market returns higher each year. But the cost of that extra return is higher risk (using various measures). We are moving some money out of the market because we want to reduce risk. Why? Because (1) we'll be withdrawing soon so we can't afford a huge drop, and (2) we've been lucky enough to accumulate enough money over a lifetime of investing that we don't need to take a lot of risk. So why not take everything out? Because we also expect to live a long time without a steady job income (by choice) so we need to make sure our nest egg continues to grow under various economic conditions. That means we need exposure to corporate earnings in the form of common stock claims. A lower equity exposure say 50/50 or 60/40 would probably be advised to most people but, again, we have a sizable government pension coming so we can afford to be a little more aggressive and maybe generate some extra returns for our heirs, for fun, and for the causes we support.

So yes, I know the market doesn't care about me and would crush me at the first opportunity. But I also think I know how to tread lightly around the market and only take the risks that are necessary without risking getting crushed.



There I agree with you. Assets have become highly correlated and that does make asset allocation less critical right now. But part of the reason bonds have become "volatile" is because they have seen dramatic price increases as interest rates have fallen. Very low interest rates also put pressures on corporate capital structures and mess up long term models/assumptions.

But, in the end we can reasonably predict how bonds will respond to interest rate changes while the responses of common stocks is more variable. So bond investments should still be lower risk. But we'll see.



Can you email us the day before the crash? That would be great. It would be even better if you promised to guarantee to reverse our trades if your prediction failed. Could you do that for us?

Bonds are well-correlated to interest rates, IF you pick the right rate. Stocks are correlated to interest rate CHANGES for the most part but the relationship is imperfect. Corporations can adjust their capital structure in response to rates but time constant is measured in years.

You also made an important distinction that I agree with - GOVERNMENT bonds should be uncorrelated with equities except through interest rates. When rates are stable the correlation should be low. When rates fall quickly as they have since 2008, we should expect correlation. CORPORATE bonds on the other hand have some of the same exposure to business risks as stocks so they should be expected to be correlated to stocks (and interest rates). (That's why junk bonds basically perform like equities since their prices are mostly determined by business risks.)

So, it should be no surprise to anyone who understands these things that we see high correlation lately nor should it be seen as a reason to change ones thinking about what to do.

There has been so much written on here since my last post I will try to address some of it. First off, the market never cares how close to retirement you are so rotating to bonds closer to retirement is useless. Its a huge misconception that this is somehow cheaper, reference 2008, it all tanked.

As far as emailing you the day before a crash certainly I can't do that but I welcome any of you email me at my business address of MGoldberg@GoldbergFinancialLLC.com
and I will email you a copy of the trending models and tools I use and how I use them. I certainly don't nail every bottom or top short term but in general the models do at least allow me to rotate out and rotate back into stocks closer to the tops and bottoms.

I understand your post to reduce risk as you near retirement age and rebalance your allocation but personally I feel if I pull up a 4 year chart of bonds (via Barclay Aggregate Bond Fund Indiex AGG) and the S&P 500 and they look the same....that would scare me. How much are you really reducing your risk.

I think you'd be safer in an annuity. Some pay 7% annually every year no risk of loss to principal at all. Especially as you near retirement age.

There it is. Annuities are a good candidate for the worst investments anyone can ever make. They are high fee and no lower risk than the companies issuing them. Insurance companies can and do go out of business.

Haha, that is exactly what I was thinking. GoldbergFinancial, did you comprehend, at all, what DoingHomework was saying in his responses? You seem to be missing the point.