The following letter is in response to our article, How Long is the Long Run?, which appeared last week.
I enjoyed your article, “How Long is the Long Run.” I am once again reminded that researchers seem to have a permanent disregard for valuation in these kinds of analysis. The data is overwhelming that buying stocks at high PE ratios will lead to less than expected returns over 20-year time horizons.
Why is this data ignored? Probably because it is more difficult to set up the analysis and back-test actively managed portfolios that switch from stocks to bonds based on high and low valuations. If anyone runs the numbers it will become evident that actively managing in high and low PE environments is superior to a fixed 60-40, all stocks, or all bonds. Once again, the real issue is that everyone is looking for a portfolio construction solution that allows them to buy and hold. (sigh)
Thanks again for presenting great stuff!
CFP, Chief Investment Officer
Pinnacle Advisory Group, Inc
The following letter is in response to our article, The Retirement Portfolio Showdown: Jeremy Siegel v. Zvi Bodie , which appeared two weeks ago.
The Retirement Portfolio Showdown" by Geoff Considine is a really excellent article. After reading it several times I have two questions that perhaps you can answer. They are:
- What is the historic period used to compile the SPY and AGG statistics used in the simulation through May 2008?
- Can you be more specific about what is included in the QPP portfolio (i.e. the percents in domestic equity, foreign equity, etc.)?
Thanks in advance for any help you can provide.
Geoff Considine replies:
Thanks for your kind words! The exact constituents of th3 50/50 portfolio are described in this article (it is linked in the Advisor Perspectives article).
For all simulations, I used three trailing years of data which is the baseline that I use in all of my analyses-- I have published dozens of case studies using three trailing years of data for input and all baseline settings in QPP, except if I note otherwise. The fact that I use three years of data does not mean that the QPP projections will match that three-year period--they will not. QPP's forward-looking projections are derived from the trailing data, combined with the assumed equity risk premia plus a balance between risk and return that is derived from long-term statistics from capital markets.
You may also be interested in this article about the forward-looking projections:
Geoff Considine, Ph.D.Quantext, Inc.
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