Episode 391: Musings About Base Rates, Crystal Balls, Dice And Santa, And Annual Portfolio Reviews For 2024
Jan 5, 2025
Get ready for an engaging exploration of financial predictions and portfolio performance. Discover why predicting market trends can be more like gazing into a crystal ball than a sure bet. Dive into the significance of historical base rates as a reliable guide for future investments. The discussion also reviews the ups and downs of various asset classes, including the winners like large-cap growth stocks and gold. Plus, there are valuable resources highlighted for enhancing your investment strategies. Buckle up for a fun ride through the market's twists and turns!
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insights INSIGHT
Crystal Ball Predictions
Financial predictions based on the past year's performance are often inaccurate.
These predictions frequently invoke a "new paradigm" similar to a historical period, which rarely materializes.
question_answer ANECDOTE
2024 Market Anomalies
High CAPE ratios at the end of 2023 did not lead to a market crash in 2024.
Gold, predicted to perform poorly due to positive real interest rates, was one of the best-performing assets.
volunteer_activism ADVICE
Base Rate Predictions
Use historical base rates as your starting point for predicting the future.
They provide a better range of likely outcomes than other methods, as history rhymes, not repeats.
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In 'The Psychology of Money,' Morgan Housel delves into the psychological and emotional aspects of financial decisions. The book consists of 19 short stories that illustrate how personal history, worldview, emotions, and biases influence financial outcomes. Housel emphasizes the importance of behavior over knowledge in managing money, highlighting the power of compounding, the dangers of greed, and the pursuit of happiness beyond mere wealth accumulation. He advocates for a frugal lifestyle, long-term perspective, and a balanced approach to investing, stressing that financial success is more about mindset and discipline than about technical financial knowledge[2][3][4].
In this episode we conduct our annual reviews of the Eight Sample Portfolios you can find at Portfolios | Risk Parity Radio and compare them with some commercial preparations.
In addition we discuss the year of 2024 in general, the performance of various asset classes, the follies of using the year as a crystal ball to predict the future, and the more effective use of base rates for that purpose. And the missing Santa Claus.
Testfolio Backtesting and Analysis Site: testfol.io
Amusing Unedited AI-Bot Summary:
Uncover the secrets to constructing a resilient investment portfolio while sidestepping the pitfalls of misguided financial predictions. Join me, Frank Vasquez, as I humorously dissect the world of economic forecasts and their accuracy, or lack thereof. Through a historical lens, we’ll examine past events like the 1970s inflation scare and the 1990s dot-com bubble, revealing the wisdom in relying on historical base rates for more stable predictions. This episode promises to arm you with critical insights from Morgan Housel and transform your understanding of market trends, using relatable analogies like dice rolls to make the probabilities clear and engaging.
Engage with a treasure trove of data as we review eight sample portfolios, shedding light on the roller-coaster performances of various assets over the past year. From the triumphs of large-cap growth stocks and gold to the contrasting fates of different sectors, discover the vital role of diversification. With a focus on both domestic and international opportunities, I outline the highs and lows, such as the standout performance of the MAG-7 and the challenges faced by REITs, while emphasizing the benefits of a diversified portfolio.
Finally, I unravel the performance of diverse investment strategies, including risk parity models and experimental leveraged portfolios. Unpack the complexities of asset allocations and the unique challenges posed by leverage, with insights into the successes and lessons learned. To wrap it up, I weave in a playful narrative about a year without Santa Claus, illustrating the importance of cautious investing amidst unexpected events. This episode blends finance, storytelling, and critical insights into an entertaining and informative package that promises to captivate both seasoned investors and newcomers alike.
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