Sold my beloved FPACX today after many many good years of prosperity. Everything comes to an end I guess. It was like putting down an old dog of mine.

Hi Professor David,
Indeed Jeremy Grantham is famous for his long-term market segment predictions.
Initially, he formulated his judgments for the upcoming decade; more recently he has shortened the timeframe to seven years. Initially, his projections seemed highly prescient; more recently his projections have proved less prescient. Like most of what happens in the marketplace, a reversion-to-the-mean iron law seems to be exercising its power.
Any prediction worth scoring must be accompanied by a well defined timeframe. Certainly, Grantham’s long-term forecasts meet that standard. A fine organization such as the statistically oriented CXO Advisory Group are well aware of that requirement.
Grantham not only made his more famous longer-term estimates, but he also made shorter-term predictions. The time scale of those predictions ranged from a single month to more than a year. CXO sorted his predictions based on their various time-spans and scored them accordingly. The 40 Grantham forecasts that CXO evaluated were done so consistent with the appropriate timeframes.
I scanned those 40 test items to confirm the timeliness of the prediction/measurement compatibility. They appear to be properly assessed on a time basis. The CXO testing excluded, and therefore did not address, Grantham’s long-term 7 year forecasts.
Dependent on what subject is being addressed, some long-term forecasts are feasible with the likelihood of reasonable accuracy; others are not. The marketplace appears to be in this latter category.
To support my contention, just review the annual checkerboard patterns that have been registered by the various investment categories and are summarized by any Periodic Table of Annual Investment Returns. Here are Links to several examples:
https://investment.prudential.com/util/common/get?file=1D065355D2CC360385257B7D00536F8A
https://www.americancentury.com/content/dam/americancentury/ipro/pdfs/flyer/Periodic_Table.pdf
These are just sample tables. The second reference even shows the drastic movements of various bond categories.
Chaos is supreme. I surely do not see any pattern. Category leaders quickly descend to the bottom of the heap. Standard deviations are huge, especially when contrasted against average annual returns. I doubt many folks have the talent and/or the luck to persistently capture this chaotic behavior in any forecasting model.
Super-forecasters do exist, but in very small numbers. Phil Tetlock’s research does establish their existence, although even within this elite group a regression tendency has been observed. Perhaps Jeremy Grantham is a member of this elite group. I hope so; I do like him, but my confidence has been eroded.
Best Wishes.

Nothing to see here, kids.
WSCVX has had mediocre performance for the past four years and their current portfolio is a collection of value traps, waiting for the turnaround that never comes. A heavy weighting in financials and industrials doesn't help either - two of the sectors one does not want to currently be in.

On CXO, you might note two things. First, the data ends in 2012. Second, they're measuring the short-term performance of the market after public statements by a guy who isn't talking about the short-term.
The statement “The probable winning bet [is] a very mean reversal … for the next few years” is assessing by six-month performance of the S&P. Uhhh ...
That doesn't defend Grantham's record as a forecaster. He entirely agrees that as long as the Fed sees itself as the market's savior, the historical forces on which their market projections rely are largely unreliable. That's a separate issue from asset class projections, whose question is "in the intermediate term, is small or large likely, as a class, to do better than what we've come to expect from the market as a whole."
As ever,
David

Hi Ted,
Thank you for reminding MFOers of the CXO Advisory Group Guru Grades study. It is one of the few easily accessible research works that carefully scores specifically named market forecaster accuracy. It is a treasure.
The Guru Grades demonstrate that “The only value of stock forecasters is to make fortune-tellers look good”. That’s not my bit of wisdom; it comes from Warren Buffett.
I am a Jeremy Grantham fan. Over the years, I have attended at least a half-dozen of his market projection presentations. These lectures were very professionally researched, organized, and delivered. My impressions of Grantham are that he is smart, logical, honest, and humble. He is soft-spoken.
All of these fine personal attributes contribute to him being accepted as a trustworthy market expert. I believed his market forecasting record would be superior to most of his competitors in that field.
Therefore, the reference that you provided is both informative and shocking. Based on that record, it certainly appears that Mr. Grantham is a run-of-the-mill market forecaster. I made the mistake of not checking his performance scorecard. That’s a cardinal sin for any investor; verification is a mandatory task.
According to the CXO ratings, Grantham is graded at the 44% accuracy level. That’s below a coin flipping probability. His record is slightly below the CXO Guru group average of 47%. That’s a major disappointment given my long-standing impressions of his talent.
It seems that when the hard statistical data is revealed, yet another of my perceptions of a market wizard’s super-forecasting abilities is shattered. Market forecasters can’t forecast, even Jeremy Grantham. Persistent excellence in that discipline simply does not exist.
I made the mistake of only trusting my gut instincts in this instance. It’s not that gut instincts are always wrong. In fact, they are right a large percentage of the time. The problem is that they are not always right. I should have taken time to verify his accessible prediction accuracy. I thank CXO for doing that arduous task.
I also thank you for referencing that and other useful research.
Best Wishes.

Overpricing can be as small as 0.5%, so this comment alone does not cause me to worry. He did get it right in early March, 2009, when he said "the train is leaving the station." Too bad his management company's funds have not done particularly well and certainly do not reflect his outlook over the years. I am sure they have constraints that inhibit them from overweighting asset classes very much.

"Grantham's observation that stocks have been overpriced about 80% of the time over the past 25 years. " 25 years is a long time to wait for mean reversion. Maybe he needs to adjust his estimates of fair value.

>> Grantham's observation that stocks have been overpriced about 80% of the time over the past 25 years.
May it continue.

"a financial services brand that's simple, maybe even a little fun"
Yep. 30 years of giggles, and counting! Now if only they'd go back to the low minimum / waived minimum model that might be marketable to the timid and confused audience they're intending to address, I'd be happier.
David

Asset bloat is the least of their worries. ARTQX is down by 70% in about two years; $10 billion to $3 billion, roughly. ARTVX is down 90% in four years; $3 billion to $300 million, again in rough numbers.
David

Hi, guys.
I know that Grantham is sort of a divisive figure here, with a bunch of folks describing him as some combination of failed and a perma-bear. There are two drivers of his failure to join the recent party. His firm's discipline is driven by mean-reversion. Their argument is, first, that stock valuations can be weird for years, but not weird forever. They keep reverting to about the same p/e they've held in the long-term. Why do they revert? Because stocks are crazy-risky and, unlike The Donald, most investors aren't willing to risk multiple bankruptcies on their way to great returns. Expensive stocks are riskier, so their prices don't stay permanently high. And, second, that profit levels can be weird for years, but not weird forever. Why do they revert? At base, if you're making obscene profits, competitors will eventually come in and find a way to steal them from you. More companies competing to provide the same goods or services drives down prices, hence profits.
Sadly, it hasn't worked that way for a long while. Grantham's argument is that price reversion has been blocked by the Fed since the days of Alan Greenspan. What happens when the market begins to crash? The Fed rushes in to save the day. In effect, they teach investors that pricey stocks aren't all that risky which encourages investors to keep pursuing higher priced stocks. Leuthold noted, for instance, that valuations at the bottom of the 2007-09 crash were comparable to those at the peak of most 20th century cycles. The problem with relying on the Fed is that pretty clear. And he argues that profit reversion has been blocked by a shift in executive compensation: executives are personally (and richly) rewarded for short-term stock performance rather than long-term corporate performance. If an executive had a billion to spend on a new warehouse distribution system that might payoff in five years or on dividend checks and a stock repurchase that plumped the price (and their bonus) this year, the choice is clear. In 2015, S&P 500 corporations put over $1 trillion into stock buybacks and dividends - economically unproductive choices - while is more than double what they'd done 10 years before.
Both of those factors explain Grantham's observation that stocks have been overpriced about 80% of the time over the past 25 years. His current estimate is that US stocks are overpriced by 50-60% right now.
Good news: that's not enough to precipitate a market crash, though "a perfectly ordinary" bear market is likely underway. Vanguard's Extended Market Index Fund (VIEIX) hit bottom on February 11th, down 25% from its June high. That matched, almost to the dollar, the decline in the emerging markets index. Both have rallied sharply over the past 10 days. Regardless, most stocks have been through a bear. Really catastrophic declines, though, rarely occur until market valuations exceed their long-term average by two standard deviations. The current translation: the S&P 500 - about 1900 as I write - at 2800 would be bad, bad, bad.
Bad news: you're still not going to make any money. GMO's model projects negative real returns on bonds (-1.4%), cash (-0.3%) and US large caps (-1.2%). Vanguard's most recent white paper on valuations, using different methods, leaves bonds at zero real return, stocks modestly positive.
Better news: the best values are in the riskier assets, which I hinted at above. US small caps are projected to make 1.5% real, emerging debt is at 2.8% and emerging equity at 4.5%.
For what that's worth,
David

@DavidV: Thanks for the question which is very bond specific. As you suggest, with bonds there are many variables in terms of credit quality, duration, structure and place of issuance (in the case of foreign securities). I find it best to invest in broader income-focused or asset allocation funds and let an expert sort this all out. T. Rowe Price's summary and annual reports for RPSIX (available on their website) probably should be required reading. The fund is not for everyone, but its composition offers insights into how someone might structure an income based portfolio. There's many other fine funds with similar objectives but different approaches. Max mentioned some.
My take on RPSIX's current approach is that the fund is pretty much avoiding bonds further out than 10 years duration and also underweighting government bonds in favor of mid-grade and lower quality corporates. The near 50% weighting in BBB and lower is most interesting. I don't think Price is including the fund's near 20% equity stake in their credit analysis, so that needs to be taken with a grain of salt.
(I attempted to cut & paste some relevant features from their summary page. But the fund's approximately 20% stake in equities made presenting an accurate representation too difficult.)
View Summary: http://www3.troweprice.com/fb2/fbkweb/composition.do?ticker=RPSIX

If I read it correctly, Strategic Income offered "unlikely shelter in the current storm." The analyst has been negative on Strategic Investment's downside for at least a couple years.
David

@DavidV & MFO Members Here are some suggestions.
Regards,
Ted
Suggested Bond Time Period Allocations:
25 Years + To Retirement:
11-25 " " "
1-10 " " ":
Retirement:
:
http://www.seninvest.com/article13.htm

Hi Sven,
I thought Deluxe no longer covered Schedule D and Turbotax forces you to move up to Premier. Or is it the case that the forms exist, but there is no interview to walk you through filling them out and you have to do it manually?
Anyway, I got too irritated with Turbotax's money grab two years ago and switched to HRBlock. Has a few quirks, but imported easily from TT files and is getting everything done for half the price of the software.
lrwilliams

I don't get the M* commentary. Nothing has changed with this fund's structure, style, process, or philosophy since it started. I have spent a lot more time than M* talking to the entire management team at Osterweis over the past 12 years. Interesting the commentary was written only about two weeks after the same analyst praised the fund and its management for its "excellent risk-adjusted" performance and as a "shelter in the current storm", and "outshining its benchmark", "relative resilience". He goes on to compliment the managers who "are better at assessing credit risk than the rating agencies", and then said the fund's volatility "has been on par with the Barclays Agg". Given that nothing changed at the fund during those two weeks, the new commentary is hard to swallow. When I first read it a few weeks ago, I tried to get a response from M*. Of course they did not respond to my inquiry about the 180-degree about face. This for me is more evidence that the written analysis of funds is often worth a lot less than digging through the numbers and fund documents themselves.

Hi Dex,
MikeM is exactly on-target.
You provide a fine list of glittering generalities. These are such motherhood concepts and values that they are typically acknowledged without careful scrutiny. They appeal to the emotions, but are they actionable in terms of retirement planning or a retirement decision?
My answer is a definite No. They are kindness and goodness, but are far too vague for decision making. It’s the kind of stuff we get from politicians. It sounds good and is even generically correct, but is it enough? No. We need hard numbers for the retirement process.
Your list provides soft (and admirable) guidelines. But they don’t come close to suggesting an answer to the quantity of needed savings. Suppose a worker saved one thousand dollars a year and invested with modest success for 40 years. Is that enough?
Likely not. Early Monte Carlo runs would inform that worker that he needs a more aggressive savings plan. A later Monte Carlo simulation might suggest that a longer work period is needed for a healthy retirement portfolio survival likelihood. That’s not pleasant news, but it helps for better decision making.
Why the reluctance to use accessible tools that will enhance the probability of a successful retirement? These “calculators” do not “make retirement complicated”. They put meat on the bones. They add numerical substance to pure guesswork and gross approximations.
I do not understand your position that more information will somehow damage the preparation for retirement and a final retirement decision. Monte Carlo simulations add scale to a retirement roadmap.
Best Wishes.

FYI: Investors have piled into U.S. mutual bond funds and exchange-traded funds targeting Treasury debt for 10 consecutive weeks, the longest stretch in nearly five years.
The winning streak underscores surging demand for safe-haven assets amid an uncertain global economic outlook and growing volatility across many asset classes.
Regards,
Ted
http://blogs.wsj.com/moneybeat/2016/02/19/investors-pile-into-treasury-bond-funds-for-10th-straight-week/tab/print/

"(ETHSX) is one of just a handful of funds that has consistently beaten the market over virtually every time period."
Statements like this always leave me wondering what "consistent" means, and what "market" means.
As an example, has a fund that underperformed by 2% in each of 2011, 2012, 2013, and 2014, but outperformed by 15% in 2015 "consistently" outperformed? Its 1, 3, 5 year records say that it has done well, but I'd hardly call it consistent.
ETHSX's record is somewhat like that, only it has done well in the past three calendar years. Though it has done poorly this short YTD (as has the entire sector) relative to "the market". It did not fare well relative to "the market" in 2012, while 2010 and 2006 were relative disasters. Here I'm using the S&P 500 and MSCI ACWI to represent "the market".
IMHO more significant (for any fund) is how well it has done relative to its sector. ETHSX's rankings are in the bottom half (M* category) for 3, 5, 10, and 15 year periods. With this statement I'm guilty of the same cherry picking as Barron's - I'm not looking year by year (or rolling periods). Though year by year, still it has ended only two of the last ten calendar years in the top two quintiles.
Lipper says pretty much the same thing, ranking it a 3 on consistency (3, 5, 10, and overall) within its Lipper category.
Note that Lipper divides the health care fund universe into two parts - domestic and global. This is another illustration of why defining terms, i.e. "the market" matters. Lipper considers ETHSX a global fund (JAGLX being a more consistent peer), while Lipper considers FSPHX to be a consistent domestic health care fund.

FYI: (Click On Article title At Top Of Google Search)
This year’s market has not been good for anyone’s health. After the rockiest start ever to a new year, the volatility has continued such that even the recent three-day rally still has stocks down more than 6% as of Thursday. Health-care stocks, after five years of market-beating gains, have been hit particularly hard, down 8.6% for the year so far. The only sector in worse shape is financials, down 12.3%.
In our Jan. 30 cover story, Barron’s told readers it was “Time to Buy Bank Stocks.” Investors would be wise to look at health-care funds as well.
Regards,
Ted
https://www.google.com/#q=Two+Top+Health-Care+Funds+Barron's