10-Year Correlated Future Performance

Comments on “Good Portfolio Teammates Boost Returns and Reduce Downside,” by Craig Israelsen, Ph.D., in the October 2021 AAII Journal:

How stable are the correlations and combined performance found here? What makes me believe that what worked best last decade will be above-average in the coming decade, rather than just having a nice result looking in the rearview mirror? Several of the winning combinations had worst return years that were less favorable than that of the balanced index in the previous decade. It is easier to believe in the stability of correlations among asset classes, but tougher for specific funds, especially actively managed ones. For example, bonds will not likely benefit from falling interest rates this decade, and health care could be facing regulatory headwinds (e.g., negotiated Medicare prescription pricing).
—Jim L. from Michigan

Good article to stimulate thought, but so simplistic that it could mislead some readers. I concur with Jim. It is highly likely that the prior 10 years (or any 10-year period) of data used to design this portfolio are highly uncorrelated to expected performance over the next 10 years. For example, most of the individual standard deviations are relatively large. Try multiplying each by three to produce a good three standard deviation estimate of how much total variation you would reasonably expect for 95% of any 10-year period. Couple this concern with the expected randomness of the timing of each year’s variation—for each fund, since they are independent variables—and you can appreciate the scope of “known uncertainty” the market presents. When you look at the performance of professional advisers, you will always see the effects of reversion to the mean. That is why financial advisers always make you sign an agreement that says past performance does not guarantee future results. Despite all their training, certifications, models, data and calculations, they have no more predictive skill than the average AAII member, since we all share the same uncertain universe.
—Barry J. from Texas

Craig Israelsen responds:
Jim and Barry, I agree with your concerns. Hopefully the article stimulates thoughts about the importance of broad diversification within our portfolios so that a few good teammates naturally exist each year.

Technology Dividends

Comment on “Differentiating Between High Yield and High Dividend Growth Strategies,” by Derek J. Hageman, in the October 2021 AAII Journal:

Interesting that you picked Lumen Technologies Inc. (LUMN) as a high dividend yield stock with poor dividend growth. This has been one of my most successful picks this year, as I am enjoying the high dividend yield and price appreciation. A deeper dive is necessary to see that the CenturyLink cable assets are losing value as subscribers cut the cable for the landline phone subscriptions and Wall Street underestimated the value of the fiber optic component of the Lumen purchase. The company is trying to rebrand itself as a fiber optic story now, which is not so much a dividend play anymore. As it pays down debt, it should do well given its positioning in the backbones of the internet. It could cut the dividend and grow much faster if it jettisoned the CenturyLink legacy components, unless it finds use in delivering internet to homes in a competitive field.
—Louis S. from Florida

Vanguard Legacy

Comments on “Actionable Steps That Will Get You to Your Life Goals,” an interview with Jack Brennan, in the October 2021 AAII Journal:

Glad to see that the legendary ideas of Jack Bogle are still being espoused. I just wish that the current Vanguard management lived these values the way that these two Jacks have. Vanguard is changing, and it’s not for the better. Its products are still some of the best on the market, but its customer service and principles of management are slipping. As a proud owner, it’s very sad to see.
—Tim B. from South Carolina

I agree with Tim that Vanguard seems to have lost its way. It is trying to be all things to all people. In the process, it may gain many smaller accounts, while losing the larger, serious Boglehead investors.
—James F. from Florida

Differences in Wealth

Comments on “How Retirees Handle Portfolio Allocation, Income and Spending,” from Dispatches in the October 2021 AAII Journal:

It’s always interesting to compare yourself to others in the same boat. One thing I am unclear on is what is the difference in median known retirement wealth versus median estimated investable wealth? Why are they different by such a large amount?
—John G. from Michigan

The editors respond:
The median observable wealth is based on 401(k) and IRA accounts in JPMorgan’s and Employee Benefit Research Institute’s joint database. Median estimated investable wealth is from IXI/Equifax Inc. and includes assets not in the other database.