Was there a point during investing when you decided to take on more risk?

[rs0460a]

My answer....

Not necessarily what you were asking for, but I "increased my risk" by retiring (actually, E.R.)

It's sort of like jumping out of an airplane with a parachute. Will it open at all? Will it not open, but the reserve open before you "splat" ?

My DW/me saved/invested for 25+ years for our retirement, planning (and hoping) as most folks do.

But when you finally "pull the cord" (without the aid of a j*b to keep you "in the air") you surely understand what risk is all about ...

- Ron

 

[FinanceDude]

I was 100% in equities until December of 1999. I moved to 20% in bonds and have stayed there ever since, as I keep on top of the rebalancing.

It has served me well........

 

[growing_older]

I was "riskier" when just starting out, but moved to a more balanced asset allocation when I reached a critical mass of account value. Sort of the reverse of what you were asking about. I'm expecting to stay this way for a long time, but I think I understand the idea of increasing risk at some point. When I have enough that I meet my retirement goals, then I might think about riskier investments for any excess. This seems to me like the hedge funds and angel investments that appeal to the truly wealthy. If you have plenty of money for all practical purposes, then some "mad" money can really swing for the fences.

 

[innova]

In the 3 links provided, 2 were forums and one was a blog. I hardly call those reputable sources.

Maybe consider the source of the information. I regard most of the folks at the diehards forum as highly knowledgable, more than a few being published authors and more than a few academics in the mix as well.

The 'blog' you criticize uses actual market data, I don't see how you can quarrel with that. Its certainly more concrete than your hypothetical example, but I'll concede your view there. An academic paper would have been a better justification of my argument.

1%
2%
3%
-3%
-2%
-1%

if these were returns of an investment, the end result would be a .14% loss if taken straight up. If each return was *2, then the loss would be .55% (4 times bigger).

This scenario here is precisely why caution is warranted. The market spends a majority (perhaps a vast majority) of its daily moves in a random oscillation of positive and negative. Relatively few of those days are large moves in either + or - territory.

In downward or even sideways markets, its not a good choice compared to holding the index itself - especially with the high costs factored in. I think the 2x strategy would be absolutely stunning in an sustained upward market. Please let me know when we're starting one so I can join in. I believe this product to be best used for traders, not long term investors.

What I'd really like to see is how these function in a real portfolio,not in isolation. IE.. if you allocate your large blend holding to SSO instead of VFINX, you can hold 1/2 of it and allocate more to bonds, for example. I guess we'll have to wait for the real numbers to know for sure. Good discussion - please let us know how it turns out.

 

[Nords]

By "risk" I'm going to assume "more volatile", not "hitting on 17".

As I approached pension vesting, we moved our portfolio from tamer mutual funds to ETFs & individual stocks. The pension would be the equivalent of a COLA'd annuity (or a portfolio of I bonds) and the rest of the portfolio could handle a lot more volatility.

Some of it was curiousity about different investing techniques, and I've run the gamut. Some of it was not wanting to miss all the opportunities in the 2001-2 markets, and we got our share. But what remains is the confidence of having a cashflow that pretty much covers a bare-bones survival budget.

Tweedy, Browne puts out a survey of investment wisdom where one of their customers had retired with more than enough for her expenses. Since she didn't "need" a good portion of her portfolio (and was planning to give it to charity) they encouraged her to invest in more volatile assets (like Berkshire Hathaway). Of course she's run up the score considerably since then, no doubt thanks to T-B's outrageous wisdom that enables them to charge an even more outrageous 2% fee.

But it's not that difficult to learn how to run a diversified portfolio with a small-value-international tilt and a portion of individual stocks. Bob Clyatt even advocates venture capital in his WLLM portfolio.

Another advantage toward taking on more risk is that it removes temptation & idle curiousity. When you're presented with a once-in-a-lifetime-opportunity to get in on the ground floor of optioning collateralized leveraged inverse b33v3r cheeze futures, you can "console" yourself with the satisfaction of already having 10-15% of your portfolio way out there on the risk-reward efficient frontier. Having to liquidate that (and pay taxes) for "new" opportunities can cure a lot of testosterone poisoning...

 

[jIMOh]

Maybe consider the source of the information. I regard most of the folks at the diehards forum as highly knowledgable, more than a few being published authors and more than a few academics in the mix as well.

The 'blog' you criticize uses actual market data, I don't see how you can quarrel with that. Its certainly more concrete than your hypothetical example, but I'll concede your view there. An academic paper would have been a better justification of my argument.



This scenario here is precisely why caution is warranted. The market spends a majority (perhaps a vast majority) of its daily moves in a random oscillation of positive and negative. Relatively few of those days are large moves in either + or - territory.

In downward or even sideways markets, its not a good choice compared to holding the index itself - especially with the high costs factored in. I think the 2x strategy would be absolutely stunning in an sustained upward market. Please let me know when we're starting one so I can join in. I believe this product to be best used for traders, not long term investors.

What I'd really like to see is how these function in a real portfolio,not in isolation. IE.. if you allocate your large blend holding to SSO instead of VFINX, you can hold 1/2 of it and allocate more to bonds, for example. I guess we'll have to wait for the real numbers to know for sure. Good discussion - please let us know how it turns out.

The money will be moving between PRFDX- my core large cap fund, PRSIX- more core bond fund, and ULPIX. I have to wait until June before I can do this- my old 401k is sitting at Vanguard, we were bought out in 2007 and it won't rollover to where I can use brokerage until June of 2008.

I do agree sideways markets will make this tough. Sideways markets are tough on most strategies.

 

[CuppaJoe]

Not sure what you mean by "risk." Money I thought I could live without, as in "let it go to zero and I won't blink an eye," was kept a in large cap fund for the first 10-15 years on my investing experiment. After that I started asset allocating.

 

[Lagniappe]

I too am in the "less risk over time" camp. I was blissfully unaware that I was following a fairly risky, all US stock strategy, with a combination of mutual funds and individual stocks. Over time both my education about risk and my portfolio size increased. When I hit a major milestone a couple of years ago, I decided that preservation of wealth was becoming more important (I certainly wouldn't want to have to work 10-15 more years rebuilding that nest egg if it was decimated), and began to diversify. I went from a random collection of mutual funds and stocks to a 70/25/5 stock/bond/commodity mix, with the stocks split evenly between US and international. In another couple of years, I will hopefully reach FI, and will likely tilt a little further toward preservation.

 

[dmpi]

25 years ago I started with a 50-50 mix of equities (large cap US stocks) and bonds. Over the years I have gradually increased my equities exposure. Five years ago I added international to the mix. Currently I’m at 70% Large Cap US stocks, 22% International stocks, and 8% Bonds/Fixed income. So I belong to the “more risk over time” camp.
My logic (more like blind faith) is that if your nest egg is large enough & you don’t panic during the bear markets then you’ll get thru the tough times and make the good times even better.

 

[Meadbh]

The answer depends on whether you mean market risk or portfolio risk.

Despite the ravages of time I am keeping a reasonably aggressive equity allocation. Over time I have become more adventurous in the asset classes in my portfolio (adding real estate and venture capital, but staying away from hedge funds and limited partnerships). So I suppose you could say I have increased my market risk. But since my asset allocation now includes more non-correlated classes, I have lowered my portfolio risk.

Can't do much about longevity risk, unless I take up smoking, eat poorly, give up exercise, or jump in front of a bus......

 

[soupcxan]

In the 3 links provided, 2 were forums and one was a blog. I hardly call those reputable sources.

You clearly don't understand how the UltraBull fund works, and why it's a bad idea for a long term investor. Look at this comparison of annual total returns from Yahoo Finance comparing the UltraBull to Vanguard's S&P500 index. The only years where your fund actually meets or exceeds it's 200% target are the years where the index is NEGATIVE. As others have pointed out, this is due to volatility - the greater the volatility in the market, the more likely your fund is going to underperform the index, even in good years. Go read the fund's own prospectus if you don't believe us.

Bottom line is that by using this fund, you get less than 2x the upside in good years, but more than 2x the downside in bad years. That's a horrible plan for a long-term investor.

Year VFINX ULPIX Ratio
2007 5.4 0.9 16%
2006 15.6 23.8 152%
2005 4.8 2.8 60%
2004 10.7 17.8 165%
2003 28.5 55.1 193%
2002 -22.2 -46.5 210%
2001 -12.0 -32.1 267%
2000 -9.1 -28.3 313%
1999 21.1 29.6 140%
1998 28.6 43.0 150%

 

[old woman]

I started my first IRA with 2K in a CD in April 1984. The next year I put 2K more in and used it to buy a mutual fund that promptly lost money so I got scared. The next year I added 2K and sold the mutual fund to buy the local electric company stock at a PE of 10 with a nice dividend. Then for a few years I added 2K and used the accumulated dividends to buy another kind of stock sticking to what seemed safe. I lost a lot of money in 2000-2001 in companies like AOL, DELL that seemed like big safe companies to me. Now I am almost all mutual funds and overweighted in Emerging markets and international. I figure as long as I am working I can afford the risk.

 

[ziggy29]

When I was about 24 (about 1989), I learned enough about the history of the market to realize that in my situation, the biggest risk was in taking not enough (I had my 401K contributions going to 1/4 stocks and 3/4 bonds). Once I understood the dynamics of long-term stock investing better, I flipped flopped my allocation.

Since then, though, my primary interest is in seeking the so-called "efficient frontier" where I look at the level of risk I'm comfortable with and try to build an allocation that's likely to maximize return within that risk level. Every handful of years the acceptable level of risk drops slightly, to the point where I'm usually about 65-70% in stocks.

 

[Nords]

I started my first IRA with 2K in a CD in April 1984. The next year I put 2K more in and used it to buy a mutual fund that promptly lost money so I got scared.
Now I am almost all mutual funds and overweighted in Emerging markets and international. I figure as long as I am working I can afford the risk.

Our kid's IRA is in T. Rowe Price's International Index (PIEQX) until she turns 18 (two-plus more years). It's down about 12% YTD.

Once I explained the concepts of "K-Mart" and the "flashing blue-light special" to her, I used CFB's analogy of the stock market being the only store in the world where the customers run away screaming during the sales. She's finally beginning to believe me about long-term performance, short-term volatility, and having ~45 years to let it all sort itself out.

So she's going to keep plugging her paychecks into the fund, especially while the blue-light special is flashing...

 

[TargaDave]

I'd say lower risk for us as the nugget grew. Now at 55/45 with the equity side biased towards large cap dividend payers. 20% international. About 5% gold-silver which is not typical for us (gloom and doom parental influence). As volatile and emotional as the metal is, I sleep OK owning it right now.

Big risk was starting the biz. Still have a non-negligible chunk of shares left from the buyout (sold about half when I parted ways with the new owners). This is an invisible micro-micro-cap NASDAQ company, so about as risky as it gets. Of course the cost basis was a lot of sweat and sleepless nights but no real $ cost, or huge income sacrifice. Heck, I feel lucky to have gotten anything out of it all, which tends to temper the feeling of risk associated with stilling owning some of it.

 

[Linney]

Was there a point during investing when you decided to take on more risk?

Yes. When I started working many years ago, our company was reducing our pension contribution in exchange for a (then fairly new) 401k account with significant company match on contributions. I signed up for 20% stock funds and 80% money market. About two years later, the 401k expanded to add quite a number of new investment choices. A colleague analyzed the new funds and wrote a long but very instructive email with his analysis of how we should be investing our 401k accounts. I read his email three times through and then marched over to personnel and changed my allocation to 80% stock mutual funds and 20% money market. I also started taking more interest in learning more about investing -- it was in retrospect the beginnings of my quest for FIRE.

Over the years as the balance has grown larger and larger, I have slowly shifted the allocation and am now invested at 65% equities / 30% bonds / 5% MM. I like the fact that early investing has put me in a position where I do not need to take on as much risk.

--Linney