Was there a point during investing when you decided to take on more risk? - Page 2

clifp · 03-20-2008, 10:53 PM

I have the opposite problem. I seem to always want to take more risk than I need to take.
Load up on company stock check
Short internet stocks in 99 check
Trade Options check
Buy individual stocks not funds check
Invest in start ups check
Trade Government TIPs bonds for Sallie Mae inflation bonds check
Take out a Home equity loan to invest in the market check.
Buy financial stocks in the last 4 or 5 months check
Sell the riskiest financial stocks even when the dividend newsletter says to NOPE

Nords has a saying "you've won the game now you are just running up the score" I keep that in the back of the mine everytime I make another risky investment and it has some impact. So I am careful to leave the majority of my assets in safe stuff Berkshire, index funds, GNMA bond funds, but my 10% mad money is 40-50% and probably will always remain that way...
Until I get really burned.

haha · 03-21-2008, 04:08 AM

Quote:

Originally Posted by jIMOh

I don't see any data, other than people's opinions.

Innova is right; I figured this out a while back with respect to double short funds from ProShares.

Not only that, this whole thread has a big flaw. "I need a greater return, therefore I will take more risk."

Better to say "I need more money, therefore I will save more."

Risk is what it is, it cares not what you need. You may be lucky, you may be unlucky.

Ha

megacorp-firee · 03-21-2008, 07:13 AM

I started out risky and got progressively riskier. Individual stocks, then options trading. As I got nearer to retirement I got religion and went from stopped options trading (well almost ... the occasional covered call when I still had individual stocks), then lately got rid of the individual stocks. Then I went way to the right and actually went from 95/5 AA to about 60/40. I do get antsy now and then but resist the temptation.

I now am an confirmed kool aid drinker. I believe I am one of the few actual buy and holders on this forum.

... but check this spot after I start messing around with converting my 401k over to an IRA

freebird5825 · 03-21-2008, 07:57 AM

always a medium to high risk 70/30 in pre-FIRE days (age < 47)

gradually moved to medium risk 60/40 in year before FIRE (age 47)

currently at moderate to low risk 50/50 during FIRE (age 48 )

will stay at 50/50 for a while. riding it out...may change once expenses are analyzed for current income and prevailing overall market conditions

jIMOh · 03-21-2008, 09:08 AM

Quote:

Originally Posted by innova

No data?

You clearly didnt read the seeking alpha article, then. You can download the entire dataset used for the study and run it yourself. Linked from article.

**snipped to keep this short**

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

Quote:

Back to math class for you.

I'd watch the person you question without knowing more.

Consider 3 sets of 6 data points, representing returns of a fictitious investment.

There is a simple mathematical reason why a 2X fund will NOT match the yearly returns even though each day it met it's objective. Exponential math and volatility.

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).

The look at more negative situation

-1%
-2%
-1%
-3%
-1%
-5%

first loses 12%, other loses 24%. Because returns were on same side of zero, the 2X leverage held true.

repeat on plus side
5%
1%
3%
1%
2%
1%

the first gains 13.66%, the leverage fund actually is more than double at 28.69%.

There are 3 key forces working on math side
1) exponential functions do not mean 2X is 2X. The same way as an ice skater reduces their radius 1/2 when spinning, it increases their speed 4X. That is math and physics.

2) We cannot predict returns. If enough data points exist, the 2X number will close to what a person sees if invested in the leveraged fund.

3) The sequence of returns matters. If someone has $100 and loses 25%, they need a 33% gain to break even. If same person has a 33% return and then the 25% loss, they are ahead.

A position like this (1/3 aggressive and 2/3 diversified) requires constant rebalancing (I am thinking 4X per year, maybe 12, maybe 24). I need the stomach for the risk. If market generally goes upward, this strategy will work well, if in a volatile market, I need enough cash to keep rebalancing in and the brain to know that when the bull comes, I will get better returns.

24X rebalancing is because I get paid 24X per year, and this is my 401k at work (in a self directed brokerage).

rs0460a · 03-21-2008, 09:24 AM

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 · 03-21-2008, 09:43 AM

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 · 03-21-2008, 10:48 AM

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 · 03-21-2008, 12:40 PM

Quote:

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.

Quote:

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 · 03-21-2008, 01:28 PM

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 · 03-21-2008, 01:47 PM

Quote:

Originally Posted by innova

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** · 03-21-2008, 03:41 PM

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 · 03-22-2008, 10:48 AM

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 · 03-22-2008, 12:58 PM

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 · 03-22-2008, 02:34 PM

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 · 03-22-2008, 03:53 PM

Quote:

Originally Posted by jIMOh

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 · 03-22-2008, 04:06 PM

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** · 03-22-2008, 05:14 PM

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 · 03-22-2008, 11:20 PM

Quote:

Originally Posted by 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.
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

03-21-2008, 07:13 AM	#23
megacorp-firee Thinks s/he gets paid by the post Join Date: Apr 2007 Posts: 1,090	I started out risky and got progressively riskier. Individual stocks, then options trading. As I got nearer to retirement I got religion and went from stopped options trading (well almost ... the occasional covered call when I still had individual stocks), then lately got rid of the individual stocks. Then I went way to the right and actually went from 95/5 AA to about 60/40. I do get antsy now and then but resist the temptation. I now am an confirmed kool aid drinker. I believe I am one of the few actual buy and holders on this forum. ... but check this spot after I start messing around with converting my 401k over to an IRA __________________ Life is GREAT!

03-21-2008, 07:57 AM	#24
freebird5825 Thinks s/he gets paid by the post Join Date: Feb 2008 Location: 43N Latitude, NY Posts: 1,566	always a medium to high risk 70/30 in pre-FIRE days (age < 47) gradually moved to medium risk 60/40 in year before FIRE (age 47) currently at moderate to low risk 50/50 during FIRE (age 48 ) will stay at 50/50 for a while. riding it out...may change once expenses are analyzed for current income and prevailing overall market conditions __________________ *Freebird* Life's greatest happiness is to be convinced we are loved - Victor Hugo, Les Miserables, 1862

03-21-2008, 09:24 AM	#26
rs0460a Full time employment: Posting here. Join Date: Feb 2006 Posts: 987	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

03-21-2008, 09:43 AM	#27
FinanceDude Give me a museum and I'll fill it. (Picasso) Give me a forum ... Join Date: Aug 2006 Posts: 7,727	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........ __________________ Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)

03-21-2008, 01:28 PM	#30
Nords Moderator Emeritus Join Date: Feb 2004 Location: Oahu Posts: 15,999	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... __________________ * * For more info see "About Me" in my profile.

03-20-2008, 10:53 PM	#21
clifp Thinks s/he gets paid by the post Join Date: Oct 2006 Posts: 2,338	I have the opposite problem. I seem to always want to take more risk than I need to take. Load up on company stock check Short internet stocks in 99 check Trade Options check Buy individual stocks not funds check Invest in start ups check Trade Government TIPs bonds for Sallie Mae inflation bonds check Take out a Home equity loan to invest in the market check. Buy financial stocks in the last 4 or 5 months check Sell the riskiest financial stocks even when the dividend newsletter says to NOPE Nords has a saying "you've won the game now you are just running up the score" I keep that in the back of the mine everytime I make another risky investment and it has some impact. So I am careful to leave the majority of my assets in safe stuff Berkshire, index funds, GNMA bond funds, but my 10% mad money is 40-50% and probably will always remain that way... Until I get really burned.

03-21-2008, 10:48 AM	#28
growing_older Recycles dryer sheets Join Date: Jun 2007 Posts: 430	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.

03-21-2008, 03:41 PM	#32
CuppaJoe Moderator Join Date: Jun 2007 Location: Northern California Posts: 2,403	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. __________________ “Say the secret word, win $100.”--the one, the only, Groucho Marx

03-22-2008, 10:48 AM	#33
Lagniappe Dryer sheet aficionado Join Date: Mar 2006 Posts: 44	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. Last edited by Lagniappe; 03-22-2008 at 01:54 PM..

03-22-2008, 12:58 PM	#34
dmpi Recycles dryer sheets Join Date: May 2006 Posts: 370	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.

03-22-2008, 02:34 PM	#35
Meadbh Thinks s/he gets paid by the post Join Date: Jul 2006 Posts: 1,645	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......

03-22-2008, 04:06 PM	#37
old woman Recycles dryer sheets Join Date: Dec 2005 Posts: 266	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.

03-22-2008, 05:14 PM	#38
ziggy29 Moderator Join Date: Oct 2005 Location: Texas Hill Country Posts: 3,106	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. __________________ FIRE Clock: 11:27 PM. FIREd at midnight but very subject to change.... waiting for the government to privatize the gains and socialize my losses in my 401K...