Setting up your investments like an RC low pass filter

[nun]

Does anyone think of their investment accounts like frequency filtering systems. ie there's a variable input (stock market fluctuation) that you frequency filter to remove high frequency variation and produce a stable output (income).

[MasterBlaster]

No - Never

I usually think of my investments like toilet paper. You save as much as you can because you'll really be in trouble if you run out.

[HFWR]

Never thought of that analogy. I supposed asset allocations to cash and bonds would tend to dampen volatility, but, much like a filter, would also tend to attenuate returns.

[KingB]

Quote:

Originally Posted by nun Does anyone think of their investment accounts like frequency filtering systems. ie there's a variable input (stock market fluctuation) that you frequency filter to remove high frequency variation and produce a stable output (income).

I am RE now. I try to forget all the tech lingo.

[bob boag]

Do ETFs have a higher Nyquist frequency than mutual funds?

[easysurfer]

Quote:

Originally Posted by nun Does anyone think of their investment accounts like frequency filtering systems. ie there's a variable input (stock market fluctuation) that you frequency filter to remove high frequency variation and produce a stable output (income).

Interesting analogy. I've never thought of them that way.

I look to my investments more like a vegetable garden. When I get an overflow of one crop, I sell those or cut back. Then I add to where another type of crop isn't producing. (Sounds a little like rebalancing, doesn't it? )

[nun]

Quote:

Originally Posted by HFWR Never thought of that analogy. I supposed asset allocations to cash and bonds would tend to dampen volatility, but, much like a filter, would also tend to attenuate returns.

Yes, I agree, but I was thinking of a cash bucket as the capacitor in an RC circuit. You charge it with gains from stocks and bonds and then discharge it (ie take income out) at a constant rate, the fluctuations of the market have been dampened. Thinking of it as an integrator is also useful. Also as it's a passive circuit there's no gain so you can't take out more than you put in....so it models LBYM too.

[unclemick]

Mostly 60/40 with brief excursions to 50/50 Ben Graham and 100% stock. More 60/40 since 1970 though.

Displined rebalancing - well not really, more emotional with 1987(bought on the dip) to 1992 100%. Can you say irrational exuberance before it's time?



True grit would have kept me 100% stock during savings decades.

heh heh heh - ain't hindsight wonderful?

[Dawg52]

Usually when I think of my investments, I reach for a bottle of pepto bismol. Well, not really.

[Animorph]

Only when I'm in a technical mood.

Most of the time I think of it as white-water rapids in a river. Lots of ups and downs but the average level changes slowly and you eventually get where you're going.

[REWahoo]

I think of it as being similar to the gastrointestinal system.

<Fill in your description here.>

[clifp]

Quote:

Originally Posted by nun Does anyone think of their investment accounts like frequency filtering systems. ie there's a variable input (stock market fluctuation) that you frequency filter to remove high frequency variation and produce a stable output (income).

Not exactly since my EE days are long behind me. However, it is the primary reason I write a lot of out of the money covered call, and few out of the money puts. I give up the upside for a more dependable stream of income.

[Nords]

Quote:

Originally Posted by nun Does anyone think of their investment accounts like frequency filtering systems. ie there's a variable input (stock market fluctuation) that you frequency filter to remove high frequency variation and produce a stable output (income).

I've always understood the reasons we never let financial managers mess with electronics.

Now I'm beginning to wonder if it should also work the other way around.

If I had to develop a model for investing I'd start with chaos theory and add in a bunch of random mutations. And then I'd filter it through REWahoo's model...

[nun]

Quote:

Originally Posted by Nords I've always understood the reasons we never let financial managers mess with electronics. Now I'm beginning to wonder if it should also work the other way around. If I had to develop a model for investing I'd start with chaos theory and add in a bunch of random mutations. And then I'd filter it through REWahoo's model...

My analogy isn't of investment performance, but of how a cash bucket provides stable income. Of course it has to be big enough to absorb market fluctuations and provide income throught a down turn. You might also think of two tanks of water; a big one for your investments that is connected to the second smaller on holding your cash the output of which is your income

[GregLee]

Quote:

Originally Posted by nun Does anyone think of their investment accounts like frequency filtering systems. ie there's a variable input (stock market fluctuation) that you frequency filter to remove high frequency variation and produce a stable output (income).

No. High frequency variation is comparatively innocuous. Think of an extreme case: you need to cash out an investment that is up 10% on half the days of the month and down 10% on the other days, but you don't know exactly which days it will be up and which days down. You can get its average value easily enough by cashing out 1/31 of it each day. Low frequency variation would be more of a problem.

[ERD50]

OK, you can think of it that way. But to keep the analogy (quite literally) going, the important thing is what signal are you trying to capture (or reject)? Do you care about high frequency noise, or is the long term trend what you are concerned about?

I'll accept some noise pulses without disrupting the system, as long as my DC bias keeps increasing.

-ERD50

[Ken11]

I do think of it as kind of a low pass filter.
Cash is the capacitor.

If I have around 3 years minimum expenses in cash then I can stand to have a high percentage of whats left in a diversified set of worldwide equities (and maybe a bit in commodities). Why? Because major dips usually substantially recover within 3 years. So, you can ride this out by drawing down cash and refusing to sell equities when they are weak.

If this puts my cash&bond allocation below the popular levels then so be it.
At least that's how Im feeling today.
(I wont have to actually make my allocation until later this year when I take my lump sum.)

If your retirement horizon is >30 years then it seems a long term investment view is appropriate. This tends to favor a high allocation to equities.

[Nords]

Quote:

Originally Posted by nun My analogy isn't of investment performance, but of how a cash bucket provides stable income. Of course it has to be big enough to absorb market fluctuations and provide income throught a down turn. You might also think of two tanks of water; a big one for your investments that is connected to the second smaller on holding your cash the output of which is your income

I guess the root question here is whether I think of my finances using an analogy.

My answer would be "No."

Engineers who can do math can do a lot of damage a lot more quickly. I can see how the stock market would look like a gigantic engineering playground... for example aviator Bud Hebeler's "Analyze Now!" negative-feedback system.

[FreeAtLast]

High frequency variation unlike the stock market does not have much emotion involved.

[nun]

Quote:

Originally Posted by ERD50 OK, you can think of it that way. But to keep the analogy (quite literally) going, the important thing is what signal are you trying to capture (or reject)? Do you care about high frequency noise, or is the long term trend what you are concerned about? I'll accept some noise pulses without disrupting the system, as long as my DC bias keeps increasing. -ERD50

Well it would be nice if the low frequency trend was upwards so you can keep topping up the capacitor so that your DC output stays constant. If the input from your investments (ie voltage) is lower than you need (in a bad year) you have to deplete the capacitor....maybe an exponentially falling WR is the way to adjust your yearly spending in bad times.

Quote:

No. High frequency variation is comparatively innocuous. Think of an extreme case: you need to cash out an investment that is up 10% on half the days of the month and down 10% on the other days, but you don't know exactly which days it will be up and which days down. You can get its average value easily enough by cashing out 1/31 of it each day. Low frequency variation would be more of a problem.

High frequency variation isn't a problem as long as it doesn't drive your taking of income. That's why I thought of the RC low pass circuit. It smooths out all the high frequency peaks so you can't market time.