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The Margin of Error
Old 06-04-2008, 11:27 PM   #1
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The Margin of Error

The margin of error is usually defined as, "the radius of a confidence interval".

I don't know if any of you read the three part Wall Street Journal article on the Bear Stearns collapse, but it is worth reading if you can find it in the library or elsewhere.

The part that interested me was the reason stated for the Fed stepping in. It was the Fed's judgment, and that of other Wall Street luminaries, that a straight collapse would have driven the market down, "2000 points".

I think we should all contemplate that for a moment. It is easy to say, "Yes, but it didn't happen." Yet, my thought is, "It didn't happen, but what is the margin of error in a market like this?"

Are things that shaky? Apparently so.

boont
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My thoughts on this...
Old 06-05-2008, 08:45 AM   #2
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My thoughts on this...

It all depends on where you are in your "financial life".

In '87, I was investing for retirement (e.g. IRA/401K) for five years. I had a bit of panic due to that downturn, but others told me - you're young; don't worry about it.

In 2000-01 I was still working, still investing for retirement. When the market turned down, I (and my DW) had been in the market for 18+ years and had a few "scares" along the way. However, we paid off our note (mortgage) in late 1999 and directed our payment to increase our retirement investments. By that time, I understood the idea of "buying cheap".

By 2005, I started looking at our joint portfolio, and "crunching the numbers". They revealed that we could probably retire at 100% of our current net income. However, being "only 57", my DW thought I was crazy to want to retire (all her relatives worked till 62-65).

Anyway, at the time I decided to keep on till I could not take the j*b anymore. I started to reposition our portfolios from 90/10 to 60/40, putting a portion in MM's.

I retired last year (age 59). At that time, I purchased a SPIA with the value of 10% of our joint portfolio (another thread on annuities, which I won't get into here).

So here I am (in a "down" market). I took some of the money "off the table" by getting the annuity. I removed some of the "risk" by bumping up my MM (along with my DW's account, since she is expected to retire within the year).

Right now, I'm sitting on cash that will ensure 106% (I increased my budget 6% over last year, when I retired) for 3+ years.

What's happening in the market in any one day/year dosen't bother me (and it should not bother you, especially if you are in the accumulation phase - which I'm not).

My forecast for the future (planned on living till 100 ) is that my DW/me will be funding our charities and still living "the good life" till we pass. Since my planning is for 40 years, our bequeth will either buy a library book, or the wing of a library (of course, with our name on it )...

Current market conditions don't necessarily mean the end of the world. Sometimes, they open the door to great opportunities.

- Ron
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Evaluating Risk
Old 06-06-2008, 03:23 PM   #3
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Evaluating Risk

" Current market conditions don't necessarily mean the end of the world" Ron

Everything in your post assumes that the past will be the same as the future. But tomorrow will not be the same as today, and there is no magic formula that will allow you to predict the future based on the past.

The world is going through a gradual change as to the centers of power. The dollars you hold (cash on hand) have been revalued by a global market. This is a global economy you can't escape the impact of by hiding out in the U.S. The price of gas alone proves that. You are impacted whether you like it or not.

The question is, what can you do about it? If you were an airline you would have bought fuel futures like South West did. Their competitors refused to do that and they are now paying the price.

Your job is not to just sit back and watch your pile, it is to evaluate risk and act accordingly.

Your risk evaluation, like many others, is based on an outmoded model. That's my view anyway.

Analog thinking does not work in a digital world. And you can't make it work with a bundle of bromides like, "diversification" and, "safe withdrawal rates."

b.
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Old 06-06-2008, 04:09 PM   #4
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Old 06-06-2008, 04:43 PM   #5
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Originally Posted by boont View Post
And you can't make it work with a bundle of bromides like, "diversification" and, "safe withdrawal rates."
Or
"It's different this time"
Or
"Tomorrow will not be the same as today"

IMO, what we've learned from the past is significant. Yes, it's probably important to diversify beyond the US market (to include non-equities).
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What we've learned
Old 06-07-2008, 02:10 AM   #6
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What we've learned

"What we've learned from the past is significant" , samclem

That may, or may not, be true. However, the only evidence you produce are in the character of cliche.

Please explain to me what you have learned from your study of the past that qualifies you to make predictions about the future.

I suggest that you are not knowledgeable enough about the past, or it's relevance to the future, to make any valid statement.

If you can make such a statement, which you consider, providential, I suggest you make it now.

boont
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My 2 centavos worth
Old 06-07-2008, 08:20 AM   #7
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My 2 centavos worth

Quote:
Originally Posted by boont View Post
"What we've learned from the past is significant" , samclem

Please explain to me what you have learned from your study of the past that qualifies you to make predictions about the future.

I suggest that you are not knowledgeable enough about the past, or it's relevance to the future, to make any valid statement.

If you can make such a statement, which you consider, providential, I suggest you make it now.

boont
Financials aside, studying the past gives you a clue of human behavior. We are largely cooperating herd animals, notwithstanding self-serving statements of independence. Taking all of us in the whole capitalist system, it's collapse is not what we want, therefore, each member in that system will try to preserve that system in his own way, while trying to take a profit.

Your view is way too nihilistic.
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Old 06-07-2008, 08:20 AM   #8
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Old 06-07-2008, 08:32 AM   #9
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Quote:
Originally Posted by boont View Post
The margin of error is usually defined as, "the radius of a confidence interval".

I don't know if any of you read the three part Wall Street Journal article on the Bear Stearns collapse, but it is worth reading if you can find it in the library or elsewhere.

The part that interested me was the reason stated for the Fed stepping in. It was the Fed's judgment, and that of other Wall Street luminaries, that a straight collapse would have driven the market down, "2000 points".

I think we should all contemplate that for a moment. It is easy to say, "Yes, but it didn't happen." Yet, my thought is, "It didn't happen, but what is the margin of error in a market like this?"

Are things that shaky? Apparently so.

boont
We have a prophet among us! It looks like you posted this two days before yesterday's market plummet of around 400 points.

That would represent 1/5th of the 2000 points you mention. So, if it happens four more times then we will be there. I think most of us can weather that, especially if such a drop is followed by a rebound. A nice, strong, five year rebound would be delightful.

Remember when the Dow was in the 13,000's? Ah, those were the days.
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Old 06-07-2008, 08:50 AM   #10
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Originally Posted by boont View Post
"What we've learned from the past is significant" , samclem

That may, or may not, be true. However, the only evidence you produce are in the character of cliche.
That was the joke, get it? You jumped on those who are guided by "a bundle of bromides", but offered a raft of them yourself. Your "method" (whatever it is) might be supported by some actual data, but it isn't offered up in your posts.

Quote:
Originally Posted by boont View Post
Please explain to me what you have learned from your study of the past that qualifies you to make predictions about the future.
Everything we know about the present and everything we can prognosticate about the future is based on inter-relationships we've observed in the past. Everything. If you look at a tire and say it is flat, that only makes sense if you know the appearance of a full tire. Now, if you believe that, say, overall US equity returns will be outside the historical norm we've experienced in the past, that does NOT necessarily mean that you are disregarding the past. It could mean that your observation of the past and your assessment of the interrelationships that produced those results indicate that the future results will be outside the previous range. But, to be valid, your assessment must still be grounded in your observations of the relationships as they existed before as they exist now, and as you believe they will exist in the future. Get it?

Some people make pronouncements and prognostications based on heuristics that are not explicitly based on observations of the past and are not amenable to analysis. These assessments are called "hunches."
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Old 06-07-2008, 12:55 PM   #11
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Originally Posted by boont View Post
Your risk evaluation, like many others, is based on an outmoded model. That's my view anyway.

Analog thinking does not work in a digital world. And you can't make it work with a bundle of bromides like, "diversification" and, "safe withdrawal rates."

b.
Uh, wasn't it the "digital" guys with "new risk evaluation models" who ended up bankrupt? Analog concepts like LBYM, savings, DCA, diversification etc. have led me to great wealth gains this decade. Maybe Grandma was right
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Old 06-07-2008, 01:47 PM   #12
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. . . a straight collapse would have driven the market down, "2000 points".

I think we should all contemplate that for a moment. It is easy to say, "Yes, but it didn't happen." Yet, my thought is, "It didn't happen, but what is the margin of error in a market like this?"

Are things that shaky? Apparently so.

boont

Although you strongly discount historic reference, the example you give fits neatly inside historic experience. The 1987 crash was a one day drop of 22.6%, or the equivalent of 2,700 points on yesterday's Dow close - greater, apparently, then what was feared to result from a Bear Sterns collapse. Even larger (50+%) stock market declines over longer periods are not at all unusual.

Most of us here willingly except that level of volatility because we believe it is generally rewarded over time through higher long run returns.
Most of us also believe that we can't predict the next 20+% drop and that it is counterproductive to try. If that is the case, then there is nothing to do other than keep working your plan . . . save, diversify and save some more.

That the world is changing is constant. But if you evaluate it honestly, not all the change is bad. And our future is actually quite bright when judged against those of our predecessors who dealt with World Wars, Depressions, Stagflation, potential nuclear holocaust, etc. That the world is becoming more capitalistic and more democratic is in no way a bad thing . . . even if it means $4 per gallon gasoline and the sharing of U.S. world power.

Our economy is strong, dynamic and flexible . . . probably more so now than at any time in its history. A 2,000 point drop, should it happen, will likely prove to be a buying opportunity.

Be of good cheer.
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