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It is not about "black swans" it is about leverage and how you plan for it
Old 02-06-2012, 12:20 PM   #1
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It is not about "black swans" it is about leverage and how you plan for it

There is nothing new to us in this article but I like how the author talks about those 98% success rates in monte carlo calculators, Firecalc, etc. The financial industry is alarmed with the data showing that black swan events are more likely in the real fat tail world than in the normally distributed simulators. But the author points out that a surprise 10 or 20% drop in our portfolio doesn't cause disaster it simply means we need to change course. A 2% (or greater) likelihood of a black swan doesn't really change anything now for investors like us who are not leveraged. It just means we are more likely to have to change course to get back on track than the simulator predicted. The important thing is to look at the possible scenarios that may unfold and have a plan for when and how you would change course to adapt. Of course, none of this alters the move toward more conservative initial SWR rates for those of us who worry that growth rates over the next couple of decades are likely to be low. Starting out a little safer is part of "the plan."
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Old 02-06-2012, 12:40 PM   #2
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Originally Posted by donheff View Post
There is nothing new to us in this article but I like how the author talks about those 98% success rates in monte carlo calculators, Firecalc, etc. The financial industry is alarmed with the data showing that black swan events are more likely in the real fat tail world than in the normally distributed simulators. But the author points out that a surprise 10 or 20% drop in our portfolio doesn't cause disaster it simply means we need to change course. A 2% (or greater) likelihood of a black swan doesn't really change anything now for investors like us who are not leveraged. It just means we are more likely to have to change course to get back on track than the simulator predicted. The important thing is to look at the possible scenarios that may unfold and have a plan for when and how you would change course to adapt. Of course, none of this alters the move toward more conservative initial SWR rates for those of us who worry that growth rates over the next couple of decades are likely to be low. Starting out a little safer is part of "the plan."
I am surprised that anyone would think the market follows and will follow a normal/Gaussian distribution. But then, I see people trying to apply signal processing techniques that assume such a distribution, to the market and I wonder if they are even aware of their assumptions.

Every now and then I figure out my total present spending (minus what my FERS pension provides to me). It is interesting to determine what kind of withdrawal rate that would have been on the day of my lowest portfolio balance during 2008-2009. So far, so good.

Also, knowing that I could and would cut back further helps my confidence, too. Do I really need new furniture, iPad, new TV, and so on when what I had/have is just fine? No. The first thing I would do is remove the link to Amazon from my browser favorites and then I'd stop buying things I don't really need.
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Old 02-06-2012, 01:18 PM   #3
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Intersting article. I've never been a fan of Monte Carlo analysis as a primary influence either - I had not seen this Otar article http://www.retirementoptimizer.com/a.../MCArticle.pdf on the shortcomings of Monte Carlo analysis before today but it summarizes most of what I've read before. While I realize 'past performance doesn't predict future results', I'd rather see how I would have actually fared using actual past history (like FIRECALC). Knowing how I would have fared had I retired at the most inopportune time during the 30's depression, that's good bad enough for me. Even for someone as conservative as I am, it is possible to be overly pessimistic IMO.
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Old 02-06-2012, 02:39 PM   #4
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I am surprised that anyone would think the market follows and will follow a normal/Gaussian distribution. But then, I see people trying to apply signal processing techniques that assume such a distribution, to the market and I wonder if they are even aware of their assumptions.
Heh. There was a quant discussion board where I participated as a local Objective-C language expert. It was fun reviewing some of the algorithms and test cases that they came up with. One of the biggest issues I saw was all these physicists turned Wall Street gooroos using Gaussian or Laplacian random number generators in their code or test suites. It was just too easy for them to call a standard library routine that was "close enough". Textbooks teaching the use of "standard normal" methods don't help.
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Old 02-09-2012, 09:16 PM   #5
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I read the Taleb book, and I'm not sure that the way the "black swan" concept is being tossed about in the first article is appropriate. For instance, in a wiki article it says that the event is a surprise, has a major impact, and is rationalized by hindsight. So the event is something not captured at all by the model. Another way of putting it is "extreme outlier."
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Old 02-11-2012, 10:37 PM   #6
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I read the Taleb book, and I'm not sure that the way the "black swan" concept is being tossed about in the first article is appropriate. For instance, in a wiki article it says that the event is a surprise, has a major impact, and is rationalized by hindsight. So the event is something not captured at all by the model. Another way of putting it is "extreme outlier."
Taleb's concept of the black swan is that it is an unforseeable, adverse event. I notice how quickly the concept has been degraded into merely a very adverse event, like 2008, which was not only not unforseeable, but was actually predicted by some commentators. People seem to resist the idea that new and destructive effects might appear in the future without any warning.
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Old 02-11-2012, 10:52 PM   #7
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Taleb's concept of the black swan is that it is an unforseeable, adverse event. I notice how quickly the concept has been degraded into merely a very adverse event, like 2008, which was not only not unforseeable, but was actually predicted by some commentators. People seem to resist the idea that new and destructive effects might appear in the future without any warning.
Like 9/11 on steroids! As the resident glass-half-empty cheerleader, such events seem more than less likely. I hope YMMV.
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Old 02-11-2012, 11:03 PM   #8
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No bears allowed here

I learned that long ago, and still made good $$$ despite myself....

Still a Bear and still long stocks with a lot of those bonds that are sure losers...
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Old 02-11-2012, 11:13 PM   #9
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Do I really need new furniture, iPad, new TV, and so on when what I had/have is just fine? No. The first thing I would do is remove the link to Amazon from my browser favorites and then I'd stop buying things I don't really need.
How about a new laptop or a 24" LCD monitor? These are the two items that I have been contemplating for a while since my laptop is over 10 years old. It is still operating but slow. It would be nice to buy a refurbished notebook or desktop computer with a big screen. I need to stop visiting e-bay so often.
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