Hi all,
Learning about lifecycle investing, using TPAW and some of the underlying math. I have a question about applying it to my circumstances.
I'm generally tracking all the uncertainty about the best way to estimate expected stock returns (CAPE10, some model regressing CAPE10 on historical returns, etc). Confirming that these estimates provide "real" expected yield on equities with both theoretical rationale and some degree of empirical data to support.
I understand the "Standard" approach to estimating the safe real rate of return is to look at TIPs.
But I'm a touch confused about what to use for the real rate on a safe investment.
If I buy a 20-year TIPS bonds and hold it maturity, my FI portfolio has that real return set ("locked in") for that duration and I shouldn't care what the current TIPS real yield is, right? If I hold TIPS bond funds, then I assume the market sets the value so the price is consistent with the current TIPs real yield.
What if my "safe" investment for calcuating the ERP is not TIPS but somethign else (for me specifically, it's the TSP G-fund). Over the long run the G-fund outpaces normal inflation (it does loose to long period of inflation and surprise inflation) and has shown somewhere around a 2% real yield (but not the last 5 years or so)... but becuase its yield changes regularly, I should be able to calculate the degree to which the G-Fund is losing or winning to inflation on a regular basis. I think this implies that I should consider some dynamic asset allocation in my Equity/Bond split AND be more (or less) aggressive in my AA than if I were using TIPS based on the G-fund vs inflation?
For example right now G-Fund (4.375 which may be slightly more than inflation, say about 1%, but certainly less than the 2% we get with TIPs) and thus my ERP is actually higher than assuming TIPs and my AA should be more into equities than "standard" ERP calculations would suggest.
Practically - in TPAW, I think this means that I'm going to be making theses adjustments in the advanced settings that deal with rates of return. But since these estimates about ERP are based on long-term trends, how often does it make sense to adjust the AA? To be clear, I'm not thinking about drastic market timing (all in /out) but shifting more like 90/10 to 70/30 based on the esimated ERP.
Or is this part of the "relatively flat" portion of the utility optimation curve where it doesn't really matter that much![:oops:]( "D'oh")
Thanks for any feedback/ thoughts on this.
Learning about lifecycle investing, using TPAW and some of the underlying math. I have a question about applying it to my circumstances.
I'm generally tracking all the uncertainty about the best way to estimate expected stock returns (CAPE10, some model regressing CAPE10 on historical returns, etc). Confirming that these estimates provide "real" expected yield on equities with both theoretical rationale and some degree of empirical data to support.
I understand the "Standard" approach to estimating the safe real rate of return is to look at TIPs.
But I'm a touch confused about what to use for the real rate on a safe investment.
If I buy a 20-year TIPS bonds and hold it maturity, my FI portfolio has that real return set ("locked in") for that duration and I shouldn't care what the current TIPS real yield is, right? If I hold TIPS bond funds, then I assume the market sets the value so the price is consistent with the current TIPs real yield.
What if my "safe" investment for calcuating the ERP is not TIPS but somethign else (for me specifically, it's the TSP G-fund). Over the long run the G-fund outpaces normal inflation (it does loose to long period of inflation and surprise inflation) and has shown somewhere around a 2% real yield (but not the last 5 years or so)... but becuase its yield changes regularly, I should be able to calculate the degree to which the G-Fund is losing or winning to inflation on a regular basis. I think this implies that I should consider some dynamic asset allocation in my Equity/Bond split AND be more (or less) aggressive in my AA than if I were using TIPS based on the G-fund vs inflation?
For example right now G-Fund (4.375 which may be slightly more than inflation, say about 1%, but certainly less than the 2% we get with TIPs) and thus my ERP is actually higher than assuming TIPs and my AA should be more into equities than "standard" ERP calculations would suggest.
Practically - in TPAW, I think this means that I'm going to be making theses adjustments in the advanced settings that deal with rates of return. But since these estimates about ERP are based on long-term trends, how often does it make sense to adjust the AA? To be clear, I'm not thinking about drastic market timing (all in /out) but shifting more like 90/10 to 70/30 based on the esimated ERP.
Or is this part of the "relatively flat" portion of the utility optimation curve where it doesn't really matter that much
Thanks for any feedback/ thoughts on this.
Statistics: Posted by sunrider6 — Wed Mar 06, 2024 12:53 am — Replies 2 — Views 310