Experts Agree

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Sometimes while eating lunch, I will turn on the television in the doctors dining room in my hospital and watch CNBC.

I basically just want to know how well the markets are doing that day. Owning stock is fun and watching The funds I’ve invested in go up and down is not unlike the thrill of a horse race.

But I get much more for my money than a simple reporting of what the market is doing.

I get analysis!

I get expert opinion on which stocks to buy and sell!

I get predictions on which way the market is going!

Lucky me!

But what of these experts? Surely they were picked by the network executives because of their excellent track record of predicting which way the market is going.

Or not.

Steve LeCompte at CXO Advisory must be a very patient individual indeed. For since 2005, he’s been collecting predictions by public experts, And patiently grading them on whether or not the predictions come true.

The results? These experts confidently predicting which way the market was going, have been right an astounding 47.4% of the time!

You read that right.These so-called experts have been right less often than a coin flip.

jim_cramer_1

Here’s a hot tip, write it down; flip a coin

So if you had diligently acted on all of their sage advice, you would’ve done worse than random chance predicted. And that’s even before they charged the extra 2 or 3% expenses for their “expertise.”

Shocking stuff really. And one has to ask why.

Could it be that these guys are skilled sales people hocking their wares, subconsciously (one hopes) trying to bend the future towards their preferred outcome?

Could it just be that they’re in the entertainment business and that outrageous predictions are more interesting than boring ones?

Who knows?
The lesson is clear though; Ignore them.

And here’s one of the messages that almost all of these experts have been agreeing upon of late; now is the wrong time to be holding bonds.

Which I think translates loosely into this:

1. In the recent past. Bonds have done poorly, often losing value at the same time stocks are climbing.

2.Bonds have not been yielding much interest recently.

3. (Probably worth mentioning that bonds will predictably do poorly whenever yields are low. In fact a low yield on a bond really means one thing and one thing only: bonds are expensive right now and their value is likely to go down.)

So if all the experts are agreeing on this, What’s the right thing to do?

(Hint: the answer to this question is always the same.)

You got it. Ignore them.

Why should you ignore them when Bonds are yielding so little and are so obviously overpriced?

The answer comes back to why you should own them in the first place.

The reason you should own bonds is to mitigate the risk of owning stocks.

And the less risk tolerant you are, the the greater the percentage of bonds you should own in your portfolio.

And your risk tolerance should not change based on the current yields on bonds, the recent performance of stocks, or really anything external.

Your risk tolerance is determined by you and you alone. By your life circumstances such as time to retirement. By your emotional makeup and ability to stomach losses. Buy your current and future financial responsibilities and assets.

The very nature of bonds is that they correlate poorly with stocks. So when the stock market was humming like it did during 2013, it is not all surprising that bonds did poorly. Money flows from bonds into stock during bull markets.  Everyone likes a winner.

Conversely, when people panic and pull money out of the stock market, where do they put it? Usually in safe investments like short-term treasury bonds.

This is why during the period from 2000-2010, when there were two big stock market corrections, portfolios more heavily weighted towards bonds did better than aggressive ones.

And it seems to me that maybe all these market gurus are just echoing our own thoughts. When we see stocks go up and bonds go down, it is human nature to wish we had more stocks and less bonds. So these experts are really just telling us what we want to hear; “It’s okay to do what you want. Your intuition is correct.”

And since we want to hear it, they get good ratings, and the circle is closed.

Which is all well and good, as long as we have the spine to just ignore these experts.

(If expert is, in fact, the right term for someone who is wrong more than half the time)

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14 Responses to “Experts Agree”

  1. Robert January 27, 2014 at 10:51 am #

    Unless by bonds you mean very short-term bonds (<3 years), I couldn't disagree more. Bond prices don't reflect the market value because of unprecedented levels of intervention/manipulation by the Fed. They are at all-time low yields. There is no direction to go but up. If you hold longer term bonds, you'll get killed when that happens. If you want to reduce stock risk right now, I'd go to cash, or to very short-term bonds.

  2. Miles Dividend M.D. January 27, 2014 at 11:08 am #

    Agree Robert. My bond positions currently are all short term treasuries (shy), short term investment grade, (vcsh).

    When yields go up Ill move from vcsh to long term Tips.

    I have no problem with holding a competitive CD in your bond bucket either.

    The point is shifting from bonds to stock right now is the wrong thing to do.

  3. walterj February 2, 2014 at 10:30 am #

    Things change and strategies that once worked, stop working. Investing in bonds now or perhaps in the next five years is not very smart. Bonds are risky. A small change in interest rates can cause a large loss in longer maturity bonds and this is a real permanent loss. All this risk for a yield that barely keeps up with inflation.
    .
    Check out:
    http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/
    .
    For a young investor, a large percentage in stock, even up to 100% is not excessive if they buy when the market is not overvalued and have the discipline not to panic when market dips occur.
    .
    Having a portion in cash, not really invested, not earning much, doesn’t make sense to me unless the market becomes excessively overvalued.
    .
    If you are afraid of the ups and down of the stock market, good luck with your bonds.
    .
    A good first book on investing is “The Elements of Investing: Easy Lessons for Every Investor” by Charles Ellis and Burton Malkiel.
    .
    A more advanced book is, “The Most Important Thing: Uncommon Sense for the Thoughtful Investor” by Howard Marks.

  4. Miles Dividend M.D. February 2, 2014 at 3:27 pm #

    Walter,

    I completely disagree with you on this one.

    Owning bonds is not about returns, It’s about mitigating risk. One need only look at the behavior of stocks and bonds this last week to see that when stocks fall the money flows into bonds (even in low interest rate environments.)

    As mentioned in the above comments post, interest rate risk is not much of factor with short term treasuries or short term investment grade bonds (which is what I own in my portfolio in a low yield environment, like now.) If you prefer CDs, so be it, but moving allocation from bonds to stocks at at the time of overvalued stocks because yields are down makes no sense at all.

    If you can stick with a high equity allocation strategy, that’s great. But this is a decision that should reflect your risk tolerance, not the current interest rate environment.

    Warren Buffet always advocates for equities and against bonds. But historically the efficient frontier for a stock/bond portfolio has shown increased actual returns with 10% bonds because of the diversification benefit.

    Worth repeating. Increased actual returns, not risk adjusted returns (although obviously there is decreased volatility as well.)

    Thanks for your comments,

    Alexi

  5. Walterj March 17, 2014 at 5:37 pm #

    I recently saw this article where Warren Buffett recommends 90% stocks, 10% short term treasurys.

    http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/

    I don’t think I’ll convince you of my view, however I am enjoying your blog.

  6. Miles Dividend M.D. March 17, 2014 at 8:05 pm #

    Walter,

    Very enjoyable article thank you for sharing it.

    I’ve got no problem with a 90% stock/10% bond portfolio. In fact if I had to guess which portfolio would do the best over the long-term it would be either a 90/10% portfolio or 95/5% portfolio.

    The point that I’m making here is that you should determine your percentage of bonds based on your risk tolerance and nothing else.

    And that you should certainly ignore the experts.(I think this is a central message that Buffet imparts in this article in fact.)

    And one final point that I would make; if you want to shift your portfolio towards a more aggressive allocation, it would make sense to wait for the next market crash to do so that you can buy the stocks when they are cheaply priced.

    Alexi

  7. Grant July 6, 2014 at 7:54 pm #

    Alexi, I recently came across your blog and thoroughly enjoy your philosophical bent and thoughtful posts. I’m also a physician (an anesthesiologist in Toronto) with a keen interest in investing.

    I note Robert’s comment 6 months ago about bonds – “They are at all time low yields. There is no direction to go but up”. Well, we know how that prediction turned out, at least so far this year. A good reminder how making interest rate forecasts (or any other market forecasts) is a mugs game.

    I find bonds the most interesting part of the capital markets. I invest in intermediate term treasury funds (average term 5 years), as the research shows that they are the most efficient for most investors. I also own a short term corporate bond fund. It’s worth noting that in a rising interest rate environment, to have a higher return by investing in short term bonds, interest rates must move higher than expected, as prices are already reflected in the current yield curve. In other words you must know something the market doesn’t.

    That being said, the differences aren’t much over the long term, and one must go with one’s comfort level and stay the course.

    • Miles Dividend M.D. July 6, 2014 at 8:22 pm #

      Grant,

      Welcome aboard!

      I look forward to your takes on investing. I learn a lot from commenters on a daily basis.

      I (completely) agree with you that forecasting is a mugs game.

      That being said, one of the things I track is a simple ETF momentum strategy as discussed in this post.

      http://www.milesdividendmd.com/stop-being-active/

      I was absolutely shocked last month to see that the ETF with the most 5 month momentum was TLT (long term government treasuries!)

      I never would have predicted that outcome in a million years.

      That finding really put an exclamation point on the fact that the market is so incredibly complex that forecasting future movements is a fools errand.

      AZ

    • Robert July 7, 2014 at 3:10 am #

      I may have been imprecise but I think it is too early to tell if I was wrong. I was speaking from a multi-year, long-term view of things. I’m not trading in and out of markets frequently. We’ve been in a 30+ year bull market for bonds. Whether interest rates tick down a bit more or not is irrelevant. We are near 0%, and the future is eventually up. That could be 5 years from now. We could have a major debt-fueled depression since we didn’t resolve issues this last time. We could have inflation. I don’t know. I was just saying that I don’t see a bright future for bonds in the long term. I may be wrong–government manipulation is strong–but judge me in 5-10 years, not in 6 months. This is the time scale context within which to view my remarks: http://www.aheadofthecurve-thebook.com/13-03.html.

      • Miles Dividend M.D. July 7, 2014 at 7:35 am #

        Robert,

        I think the point is not who was right or wrong in their prediction. For one thing at that point I certainly wasn’t predicting that bonds would perform well in the coming six months.

        (Honestly If I had been forced to make any prediction, I would’ve predicted long-term bonds to have done poorly in the coming six months.)

        Smart long-term predictions at this point would predict a poor coming decade for Bonds (based on low current interest rates) and a poor coming decade for Stocks (based on current high valuations/the Gordon equation, etc.). So where does the smart investor put their nickel? Does he go all in emerging markets?

        I think the answer is pretty clear. The smart investor determines their percentage bonds based on their risk tolerance alone. Then they buy, hold, and rebalance their portfolio periodically. And they resist the urge to make predictions.

        Alexi

        • Robert July 7, 2014 at 5:21 pm #

          I realize my post sounds defensive, but I didn’t mean it that way. I simply am trying to clarify that my bond outlook is based on all-time lows and a long-term perspective.
          There is a place you can go besides equity and bonds–that is cash. It isn’t a bad option if you believe bond yields are going to increase and equities are going to decrease. (Again, if you play this game, I’d see it as a long-term play, not something you are in and out of every few months. I was mostly out of NASDAQ/risky internet stocks in 2000 and didn’t get fully back into the market until 2009. That is a long-term view. I follow risk-management signals from James Stack’s Investech newsletter).

          • Grant July 7, 2014 at 5:52 pm #

            By cash do you mean a high interest savings account, or GICs (guaranteed investment certificates)? – that’s what we in Canada call CDs. Certainly GDs are a good option, although they lack liquidity, and of course don’t go up in value when stocks crash. I prefer bond funds, as even when interest rates go up you don’t lose money over the duration of the fund, due to new bonds being invested at the higher rates, and you have liquidity for buying stocks when they crash.

          • Robert July 7, 2014 at 7:18 pm #

            1 month T-bills, money market accounts, short-term CDs, or a short-term bond fund. All depends how paranoid you are!

  8. Grant July 7, 2014 at 1:35 pm #

    Robert, sorry, I was just using you comment to point out how futile it is to make market predictions. I agree that bond returns will be poor going forward, but that doesn’t really matter, as that is not the main purpose of the bonds in your portfolio in the first place. Besides, there are many reasonable ways of managing a portfolio. But guessing about interest rates isn’t one of them.

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