corn18
Thinks s/he gets paid by the post
- Joined
- Aug 30, 2015
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I would offer that "risk" is a useful word with a well understood meaning. Using the word "risk" in lieu of the term "square toot of variance" muddles the issue, it doesn't clarify it.
A retiree can, today, purchase a portfolio 100% of 30 year Treasuries with a fixed yield of 2.6%. He may be told by his FA that his portfolio is risk free, since it has no repayment risk and zero variance in rate of return (heck, if the rate were -10%, it would still be risk free). Now, in the way most people understand the word "risk" in their daily lives, is the real (i.e. inflation-adjusted) value of our retiree's portfolio truly at zero risk over the next 3 decades? Is its real return free of variability, variance, and fluctuation?
Using correct term ("square root of variance in annual return") improves the situation, IMO.
That may have been useful to Markowitz because volatility can be measured and risk is not so easy. But for real-world investors I think this is a false premise. Montgomery Ward, Sears Holdings, GE, Enron, Theranos, PG&E, ... The list goes on and on.
If I've left that impression then I haven't communicated well. I have no objection to MVO, or to making groovy charts showing the efficient frontier, etc. My gripe is with the use the term "risk" to label the X-axis on those charts (and, more broadly, to use "risky" rather than "volatile" to describe individual equities or entire portfolios that have high variability of either returns or value).@samclem, @Doc0, you are both implicitly buying the idea that volatility is risk and vice-versa.
Ah, come on: you're basing your argument on one study that took place in Yugoslavia (circa 1951) and has never (at least to my knowledge) been replicated. As a side note, about 1200 the monkeys did not complete the experiment as they were asked to leave due to their disruptive behaviors. Furthermore, the researchers' judgment was called into question regarding trying to place 10,000 monkeys in a stadium with a capacity of 4300.
Good question, aja8888. But, it's not a matter of what I believe. Let's talk science here.
FYIO, aja8888..
The monkeys involved in the research were vetted. Monkeys that could tell heads from tails were excluded. No need to additionally contaminate a pre-doomed research project. How this ever got funded remains a mystery to me. But, that's besides the point and we don't want to go off on a tangent.
However, since you show an an unusual amount of interest in this research let me share some more little-known information about this project:
There were a number of events during the trial that were not anticipated.
1. Monkeys chose to bite into the coins before trying to flip them. Most of the monkeys after biting into the coins seemed disappointed or angry and simply threw the coins away. Some of the coins hit other monkeys which caused angry posturing and occasional hitting.
2. Another problem arose when some of the male monkeys gathered the thrown coins (before the researchers could get to them) and offered female monkeys the coins (for what reason I do not know). However, if a female monkey declined accept the coins, a whole lot of screeching occurred, causing the researchers to weep.
3. The monkeys did not understand the concept of bathroom breaks (causing the researchers to retch).
4. The monkeys, early on in the experiment, divided on philosophical grounds, into two camps. Even though they couldn’t tell heads from tails, let alone flip a coin, the two groups become extremely agitated with one another about the meaning of having a coin land on the same side twice in-a-row. Was it luck or was it skill?
aja8888, thanks for asking me something that I know about.
OK, sorry. I did misunderstand. We agree, I think.If I've left that impression then I haven't communicated well. ... My gripe is with the use the term "risk" to label the X-axis on those charts (and, more broadly, to use "risky" rather than "volatile" to describe individual equities or entire portfolios that have high variability of either returns or value).
A retiree with a 40 year withdrawal horizon can easily withstand considerable ups and downs in short term portfolio values. If the long-term (smoothed), real value of their portfolio remains on an upward trajectory they may have little to worry about and be at low risk, especially compared to a less volatile portfolio that nonetheless loses real value over time (due to withdrawals, returns, or any other reason).
Pop Quiz: ....
One of the reason why I present this pop quiz is that some people (but not all) believe our current 9 year bull run will last forever. ....
Pop Quiz:
An Investor has a 50/50 portfolio which a crash then occur which the stocks value decline 50% while the bonds maintain it's value before the crash. The investor's portfolio has now changed to 33% stock/67% bond.
I suggest two possible options in this situation for that investor:
Option 1: Do nothing and let the market recover which will change his portfolio back to 50/50.
Option 2: Re-allocate his 33/67 portfolio back to 50/50. This will take advantage of the recovery, possibly beat the market in the long run, but may involve taking a higher risk than Option 1.
....
Food for thought.
Life is all about choices.
...
Should investors re-allocate their portfolio to become more defensive.....when there is a downward trend in the LEI? . ...
...
Should investors re-allocate their portfolio to become more defensive.....when there is a downward trend in the LEI?
I intend to re-allocate when there is a downward trend....but other people may choose to ignore it. ...
IMO, no. I think investors should just B&H, I haven't seen evidence that says any indicator is reliable enough to drive my investment decision.
Can you provide more evidence that there is a strong correlation? A couple observations may be no more than coincidence.
Spurious Correlations (many more examples here)
-ERD50