Hi Guys,
I never anticipated that my regression-to-the-mean comment would promote such excited, inflammatory, and provocative reactions. I perceived my submittal to be rather innocuous. Apparently it was not received as such.
I was simply trying to emphasize how patience is a winning strategy when investing in either stocks or bonds. Market returns are highly volatile.
Returns in any single year vary wildly. As the investment timeframe expands to a decade or two, the average returns become much better behaved. I suppose my initial post failed to hit that nail squarely on its head. That's my fault. But I'll provide a reference to a chart that nicely illustrates the point I was trying to make:
http://www.businessinsider.com/range-of-annualized-stock-bond-returns-2014-11
The chart depicted in the reference tells the complete timeline story. In the short run, market returns are not predictable. The annual return swings defy prediction. However, in the looonger run, average market reward fluctuations dampen down to rather tight swings that most investors would find are quite tolerable.
I meant nothing more than it would be bad practice to panic after a single bad year. The next year or the year after that will soften the negative blow as a regression-to-the-mean (there I go again) comes into play. The chart in my reference provides the data to support that observation.
If you disagree, please contact the author of that piece (Sam Ro) and/or the firm that generated the basic data. I'm the wrong target. The data are the data.
Best Wishes

I've noticed that the Contact Information has been missing for awhile too.

Very interesting issue, David. Congrats.
On the Nifty 50 indexing issue, we have certainly considered the effects of indexing at our shop. Despite the growing number of smart beta products, over 80% of the AUM of all passive index funds remains invested in cap-weighted products.
Cap-weighted products are by nature momentum-based investments. When momentum is in vogue (such as we saw in the Nifty Fifty era), these products can perform well. But over time, we feel cap-weighting is a terrible way to invest.
We studied the Dow, the S&P 500 and Russell 1000 over time. It turns out that Fama's size effect works well in these larger cap indexes. Over time, there is a size penalty for the biggest companies of the index, and a size premium for the smaller companies of the index.
Bill Ackman wrote in his letter to shareholders in January 2016 that 20 cents of every new dollar invested in the stock market comes via a passive index-tracking fund, and that number grows every year.
Think about this: for every dollar that goes into SPY, 12 cents goes into the largest six stocks of the Dow. For every dollar that goes into XLP, 13 cents goes to Procter & Gamble. Similar story for the other sector ETFs.
Ben Graham wrote that the market is voting machine in the short run, and a weighing machine in the long run. That in the long run, the best businesses attract the most market capital. And that's the way it used to work before ETFs.
Now, the market is hit with a blizzard of crazy votes, and it is throwing the scale off. The largest companies aren't the largest because they are the best. They are the largest BECAUSE they are the largest (and get hit in the face with ETF inflows whether their business fundamentals justify it or not).
We believe actively traded mutual funds are in the best position to take advantage of the opportunities presented by passive indexing.
Keep up the good work, David.

For what it's worth, I notified Morningstar of the manager problem five days ago. Here's what I've heard so far:
Hello David,
Thank you for writing to us.
I apologize for the delay in response and for the inconvenience you may have experienced in the interim. I did try replicating the issue and it seems to be a technical error due to which the portfolio manager data for the mutual funds is not been populated on the Management tab. I have requested our developers to assist us with the same and will keep you posted once I receive any response from them. For your reference, the case ID will be 01001640.
We appreciate your patience and understanding and I sincerely apologize for the inconvenience caused!
If you have any additional questions or comments, please don't hesitate to reply to this email and I will be happy to further assist you.
Best regards,
___________________________________
Morningstar Global Product Support
Karansingh Thakur
Morningstar, Inc.
To the extent you see problems in their system, I'd encourage folks to write "[email protected]" to let them know. Their system has seemed incredibly glitch-y to me over the past couple months (lots of slow loads, blank pages and missing data), but I'm not sure if there are larger than usual issues going on.
David

@bee EDV is a bit unusual in that it holds a portfolio with an extremely high duration. You've got a good idea in looking at zeros (like the AC target date funds) for other vehicles with high duration. (That's because for zeros, duration equals maturity; normally with LT bonds, duration is much less than maturity.)
But since BTTRX is a target date fund, its duration gets shorter and shorter. Its 2025 target date means that it now has an 8 year duration. Even a decade ago it started with just an 18 year duration.
If you just need a 10 year history (and not all of 2016), you can try using PTTRX. Identical 5 year return to EDV. Over the earlier part of EDV's lifetime, it did a little better. It was more stable in 2008 (not rising quite as much) and 2009 (not falling quite as much), and outperformed in 2010.
Other long duration funds didn't track EDV nearly as well (i.e. were not nearly as wild) over 2008-2009. Maybe WHOSX (duration ranged between 16 and 23 years over the past decade) would be a passable substitute if you need to cover all of 2006.

As I have expressed before, IMO; one may continue to name the ongoing markets since the big melt as still feeling the effects of policy(s) and that "this time is still different" and thus the "mean regression chart line" is progressive/dynamic, not static and has the baseline in "float" mode. The 2008/2009 market melt was/is an overwhelming shift in the financial marketplace that is still impacting and discovering its future path.
In other words, jolts to the market come along that can take years to work their way through. There may or may not be an ultra long term static "mean regression chart line", but at least for these multi-year periods, it's dynamic.
Even assuming an ultimately constant mean, because of these jolts it seems one needs an extremely long time frame to compute that average - say 100 years or more, in order to include the jolt of the Great Depression, or maybe 150 years back to the panics of the late 1800s, or ... At some point you're essentially averaging the entire "modern" history of the stock market.
More info from the 1928-present NYU/Stern data set I've cited (this table was in the spreadsheet, they're not date ranges I selected):

Period     S&P 500   3 mo Treas   10 Yr Treas
1928-2016  11.42%     3.46%        5.18%
1967-2016  11.45%     4.88%        7.08%
2007-2016   8.64%     0.74%        5.03%

. The S&P 500 is up "only" about 15% YTD. If it ends 2017 up 20%, that would raise arithmetic mean of 2007-2017 just to 9.68%. If you're a believer in a constant long term mean, that suggests that recovery from the 2008 jolt still has years to go.

@catch22,
Using portfolio visualizer I was able to create a third scenario, a 50/50 portfolio of LT treasuries (I used BTTRX since data wasn't available on EDV back far enough) and your EFT choice, SDY.
Compare the data in yellow. Since 2006, 50/50 portfolio has gotten you the same return as a 100% all equity dividend paying EFT like (SDY), with a lot less of a roller coaster ride.
Will this be the case going forward? I think non-correlated assets will help provide smoothness, but returns may be muted for many asset classes.

Hi @msf
Thank you for your presentation.
I started this reply to the thread relative to the bond portion of this discussion. I've obviously blipped more just below.
What I'll name, The Exquisite Investor; being without much meaningful flaw as to getting the timing right 75% of the time and being patient enough to wait until the next trading (buy/sell) shows its face via technical numbers in particular, but with an understanding of real world events that can/do/may factor into why the technical numbers arrive and depart creating a more possible profitable investment.
I suppose this process could place this as to one being a "value" investor; being careful enough to try to understand that some "value" within investment sectors is cheap for a good reason and may remain cheap for a long time; a perverted "mean".
As I have expressed before, IMO; one may continue to name the ongoing markets since the big melt as still feeling the effects of policy(s) and that "this time is still different" and thus the "mean regression chart line" is progressive/dynamic, not static and has the baseline in "float" mode. The 2008/2009 market melt was/is an overwhelming shift in the financial marketplace that is still impacting and discovering its future path.
I may be completely wrong about any or all of this....tis my view at this time. @Tony may respond as to the technical side.
The below chart compare for about 10 years for EDV and SDY may surprise a few folks for total returns over the time frame. I recall @bee using EDV for reference points against other sectors for cross over points, etc. I fully expect most folks would not consider a holding as EDV or similar versus a more likely holding of a total bond fund or a 10 year Treasury fund for a bond area investment. One is able to view the movement of EDV and cross overs points relative to my pick of SDY for reference, especially during the ongoing turmoil of the markets for several years after the melt. Europe, in particular; was still attempting to find a path forward for several years, which includes events as "Greece" being in the news headlines as well as the ongoing, questionable stability of many European banks during the "recovery" period.
Yes, the 10 year Treasury will remain a reference point and this is valid for on overview of risk on or off conditions, but remains a choice of various bond types, eh?
http://stockcharts.com/freecharts/perf.php?EDV,SDY&n=2467&O=011000
Okay, time for another coffee, yes?
Regards,
Catch

@Crash
RBC appears to be more than fairly priced at this point in time. If interest rates really move upward over the next few years; one may have a chance to have some profit from current pricing levels.
http://stockcharts.com/h-sc/ui?s=RY&p=W&yr=5&mn=0&dy=0&id=p16334527354

A basic problem with "the rule called 'regression to the mean'" is that it assumes what it purports to show, viz. that the mean doesn't change.
For example, since 1928, the S&P 500 has averaged around 400. Anyone expecting it to "regress to the mean"? I didn't think so. Why not? It's because the mean isn't a constant - the S&P has an upward bias.
On what basis are we to assume that the market rate of return doesn't also change over time?
The business insider article showed that 20 year time frames are too short a time to compute an average for "market" returns - even assuming that there is some constant long term average. The graph there showed that the average return over 20 year periods ranged from 6% to 18%. Hardly a constant average.
So now we have two questions. The original: Is there a single long term average return for the market? We now add: how long a time frame do we need to use to get even a decent approximation of that "constant" average.
Rather than explain things, "regression to the mean" shows how people take something on faith (consistency of long term returns) to circularly prove that over the long term, a certain average rate of return can be expected.
People like to assume constancy. That's the point of the seeking alpha piece. Market doing well? That will continue; not. Market return averaged X% in the past? That will continue. Maybe, maybe not.
Just for the record, "mean regression" is a short term prediction - it says that when the last value of a random variable is sufficiently far from its mean, the next value it assumes will more likely than not be closer to the mean.
http://mathworld.wolfram.com/ReversiontotheMean.html
If a random variable truly has a constant mean, then over time you'll approach that mean, not because of mean regression, but because of the law of large numbers.
http://mathworld.wolfram.com/LawofLargeNumbers.html

Hi Guys,
Change happens; it is a certainty.
"Richard Russell, the famous Dow Theorist, once noted that over a shorter time frame almost anything can happen in the financial markets, but over much longer, meaningful periods of time (referring to years), the surest rule in the stock market is the rule called "regression to the mean.""
This quote was extracted from this regression advocating article:
https://seekingalpha.com/article/2315705-regression-to-the-mean-and-why-investors-should-not-ignore-its-importance
I am in complete agreement with the main theme of this article. There is a compelling and irresistible market pull towards a regression-to-the-mean. In any single year, almost any extreme is possible; anything can and does happen even if probabilities are low. But as the timeframe expands, the marketplace adjusts to deliver more predictable average returns. Over time, sanity rules.
I have zero confidence that I can predict tomorrow's market returns, but I am very comfortable about staying in the market for the loooong run.
Best Wishes

A factor that affects returns about as much as expense ratio is turnover. Here's an old but readable column citing research from a decade ago supporting the thesis that trading costs amount to at least as much as costs included in the ER:
https://www.advisorperspectives.com/pdfs/newsltr27-2.pdf
I tend to lean toward managed funds, but at the same time I also keep an eye on expenses, both documented (ER) and implicit (trading costs via turnover). FWIW, with the exception of a few placeholder positions I have (in case I ever want the funds), and one major bond fund holding, all of my funds have less than 50% annual turnover. Of those, all but one fund has under 40% turnover.
M*'s portfolio analysis claims that my weighted average ER is about a half percent below a "similarly weighted hypothetical portfolio". So while my expenses are not rock bottom, I'm satisfied with my average expense ratio too.
One minor gripe concerning the cited AAII article - it uses RMDs as withdrawal amounts. The main problem with this is that people's need for cash in retirement is fairly stable, as opposed to RMDs. RMD calculations require you to take 1 / (remaining lifetime), which grows exponentially as you get older and your expected lifetime shrinks toward zero.

@ Edward: Thanks for the above article, in this month's commentary. I was wondering if anyone is using the above mentioned , indexing & ETF's, to lowering their costs & therefore put a few more bucks into one's pocket. After rolling two 401-ks I'm thinking of doing something like this with 1/3 of my assets.
Thanks for any & all replies,
Derf

I agree that mixing in some bonds other than Treasuries would be more representative of real investor results. Beyond that, it's not clear what that mix should be. Bogle, of all people, thinks that even the total bond market index (US Aggregate) is still weighted too heavily toward US government bonds.
(See the section "The bond index portfolio is not representative of the vast majority of fixed income investors" in this 6 page pdf.)
Aside from junk, I would expect the general shape of the long term curve for US bonds (in whatever mix) to be similar to the image above, though the return should be somewhat higher (corresponding to the higher risk of some of the bonds in the mix).

FYI: Brexit, threats from North Korea, political upheaval in the U.S., and other recent geopolitical events have been putting investors on edge and creating spikes in market volatility. Add elevated market valuations to the mix, and it might seem like a recipe for stock market mayhem
Regards,
Ted
https://www.fa-mag.com/news/shifting-to-international-equities-34952.html?print
M* Snapshot BBALX:
http://performance.morningstar.com/fund/performance-return.action?t=BBALX&region=usa&culture=en_US
Lipper Snapshot BBALX:
http://www.marketwatch.com/investing/fund/bbalx
BBALX Ranks #1 In The (WA) Fund Category By U.S. News & World Report:
https://money.usnews.com/funds/mutual-funds/world-allocation/northern-global-tactical-asset-allc-fund/bbalx

Thanks for linking this article @Ted,
Well worth the read:

The second, specifically in the fintech world, is the blockchain. Many technologists tell me the block chain is the most important innovations in human history. They equate it in terms of importance to fire, the wheel and the internet.
The typical financial advisor has either never heard of the blockchain or is unable to describe it, meaning that advisors today are as clueless as their clients. And that’s not a healthy situation for the client. The blockchain is the underlying technology that was used to develop bitcoin, the world’s first digital currency.

Since XT's inception it has trailed QQQ:

@msf, I understand that 10 years treasury is often used for illustration purpose. Would a total bond index make more sense even though it may not have the long history as treasury?

1. The objective is to get as much into the Roth as possible while paying taxes on $10K.
Using Bee's example, the current combined value of all five accounts is $61,830. If you recharacterize all but the one that did best (PRIDX), you wind up with $13,106 in the Roth and $48.724 recharacterized back to the traditional IRA. If you recharacterize all but, say, PRWCX, you wind up with "just" $11,206 in the Roth and $50,624 recharacterized back to the trad IRA.
Either way you pay taxes on $10K, but leaving PRIDX as the converted fund results in the largest percentage of your portfolio converted into the Roth for the same amount of tax.
That's not to say that you're stuck with these investments. You could choose to exchange PRIDX inside the Roth for PRWCX and/or exchange PRWCX inside the traditional to PRIDX, or anything else. Perhaps I should have said you pick the "subaccount" with the highest value to keep as a Roth, and recharacterize the others.
2. Bee mentioned that an objective is to keep income low enough to qualify for ACA subsidies. Getting $1500 out of a taxable account to pay for the Roth conversion could result in recognizing capital gains, and thus increase income. That extra income might disqualify Bee from any ACA subsidy. On the other hand, getting the $1500 out of a Roth account would not increase income, so the ACA subsidy would remain safe.
3. Say you have two funds each worth $1500, the amount of the tax. You expect the first to double in the next four years, the other one to grow by 50%. All else being equal, you'd rather keep the first investment and sell off the second, since you'd have more money ($3000 vs. $2250) at the end of four years. Of course there are other considerations, notably asset allocation and risk. In glossing over those considerations, I may have underestimated their importance.

@expatsp +1