Balance is overrated

[photoguy]

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Originally Posted by CaliforniaMan The attached plot illustrates the point about decreasing volatility with increasing time periods. I think it probably wasn't clear what I meant. Historically volatility does decrease with longer time periods as would be expected from the Law of Large Numbers, where variance decreases toward the mean with increasing sample size. No real surprise here.

Thanks for posting the chart -- I have a better understanding of your point now. Malkiel's numbers are certainly very appealing as they show a steady progression in the worst case from -25% return to a healthy 8% as one increases the time frame from 1 to 25 years. However, these numbers are not very stable due to small sample sizes and fat tails. So if you recompute worst case rolling returns from 1928-2013 (Malkiel only used 1950-2002) the numbers are much lower (see attached table). Also the numbers (mine and malkiel's) do not include inflation (as far as I can tell) so real returns are even lower. So it's quite possible, even in the US with the best performing stock market, to have very different performance from the mean over long time periods.

Also, even if we use Malkiel's numbers that seem to converge to a mean (if there even is a fixed mean), the dispersion of returns in absolute dollars becomes larger not smaller over time.

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As for survivorship bias, I think that is the more interesting question, but I am not certain that it applies. There is a qualitative difference between the US and the other failed states in recent history, stability, rule of law, heterogeneity of society, support for the constitution, on and on.

I agree there are some structural advantages that may have made US stock returns better than other countries, however it's not clear that these will continue to the same extent going forward (or that they explain all of the historical out performance of the US market). For what it's worth, Pfau reduces US historical returns by 2% in his MC simulations. I don't necessarily agree with this adjustment but mention it to indicate that some leading academics think using past history will be too rosy going forward.

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Also, I don't take seriously the premise "what would have happened if the debt ceiling wasn't raised" that this would cause a total market collapse. We didn't even have a total market collapse tin the 1930s, even with the failure of banks and disastrous unemployment. It would have deepened the recession but in the end our system seems to be fairly self-righting. Don't forget every two years we get a chance to throw the ... out.

It might not have been a total market collapse but I'd bet that it would cause a lot more ER failures or extreme levels of belt tightening for high equity portfolios.



Getting back to the OP (lawman) I don't think he's crazy for wanting to go 90-95% bonds for security assuming that with very low real returns he can meet his financial objectives (isn't this basically what bernstein proposes?). It's not a path I would choose personally though.

[lawman]

You guys are a lot smarter than I. All I know is that John Hussman (someone I have much respect for ) and someone who has beaten the S & P 500 from the inception of his fund through 2013 says this market is going down in a big way. I also can look at the ten year period of 2000 through 2009 and see that the annualized rate of return for that period was a negative number. I am confident that more money at this point will not make me any happier..If I can just hang on to what I have God will have blessed me much more than I ever could have imagined..It also seems reasonable to me to expect positive returns from most bond funds as long as I'm willing to hold them for whatever duration period they have and along with a substantial amount of my portfolio invested in I-bonds purchase many years ago that pay a nice interest rate plus an inflation rate and with 5 - 10% still in equities I am optimistic that I can spend my remaining days fishing and playing with my grand kids and sleep well at night even through market turmoil...I hope for you guys sake the market keeps going straight up..That would make us all happy..

[sengsational]

There was bound to be someone who loaded up on derivatives, betting against the market in general, and come out looking like a hero by not getting slammed in 2008. Hussman, running a one star M* fund frankly gets zero respect from me; it doesn't take a lot of intellegence to always play the bear card.

[daylatedollarshort]

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Originally Posted by lawman I also can look at the ten year period of 2000 through 2009 and see that the annualized rate of return for that period was a negative number. I am confident that more money at this point will not make me any happier..If I can just hang on to what I have God will have blessed me much more than I ever could have imagined..

I just look at where we are on this list:

Global Rich List

And think wow, that's pretty cool as it is. Good enough. We aren't going to gamble with what we have, even if the odds are highly in favor of gambling.

[brewer12345]

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Originally Posted by sengsational There was bound to be someone who loaded up on derivatives, betting against the market in general, and come out looking like a hero by not getting slammed in 2008. Hussman, running a one star M* fund frankly gets zero respect from me; it doesn't take a lot of intellegence to always play the bear card.

Stupid is as stupid does.

[sengsational]

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Originally Posted by brewer12345 Stupid is as stupid does.

I'm not sure if you mean having faith in Hussman is "ill advised" or not having faith in Hussamen is "ill advised"!

[haha]

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Originally Posted by sengsational I'm not sure if you mean having faith in Hussman is "ill advised" or not having faith in Hussamen is "ill advised"!

I am not sure an investor should ever base his plans on faith in anyone or anything.

If a person can read and interpret graphs and has a modicum of business understanding it is easy enough to understand what Hussman points out. Unless you think his data is suspect, there is no place for belief, or opinions from others about it.

You can decide, perhaps rationally or otherwise, whether this data and the apparent distance from historical ratios etc. means anything in terms of your own investing decisions. Many people here have basically decided that nothing could make a difference in their investment decisions, and it is hard to prove that this may not be the ideal approach, though it is not mine.

Ha

[CaliforniaMan]

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Originally Posted by haha I am not sure an investor should ever base his plans on faith in anyone or anything. If a person can read and interpret graphs and has a modicum of business understanding it is easy enough to understand what Hussman points out. Unless you think his data is suspect, there is no place for belief, or opinions from others about it. You can decide, perhaps rationally or otherwise, whether this data and the apparent distance from historical ratios etc. means anything in terms of your own investing decisions. Many people here have basically decided that nothing could make a difference in their investment decisions, and it is hard to prove that this may not be the ideal approach, though it is not mine. Ha

I completely agree with your first point. And as you, I do enjoy reading about and often playing with economic data. But other than trying to figure out a SWR I don't try to apply it to time or adjust AA.

Possibly others here do this as I do, not because we think it is ideal or not, but rather to protect us from ourselves. I do play a bit with equities outside my retirement accounts, but inside my retirement accounts, other than change my AA as I got older, I haven't changed anything based on what I have heard or seen in the news. Based on my past experience, I do believe that I have done better than many others in my circumstances and better than I would have done had I tried to outsmart the market.

In fact the times I have tried it, I have done abysmally. Protecting ourselves from ourselves may be the most important thing we can do for ourselves. Sorry for so many ourselves...

In addition, it is immensely simpler and less time consuming.

[REWahoo]

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Originally Posted by CaliforniaMan Protecting ourselves from ourselves may be the most important thing we can do for ourselves. Sorry for so many ourselves...

+1

Couldn't have said it better ourself.

[haha]

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Originally Posted by CaliforniaMan I completely agree with your first point. And as you, I do enjoy reading about and often playing with economic data. But other than trying to figure out a SWR I don't try to apply it to time or adjust AA. Possibly others here do this as I do, not because we think it is ideal or not, but rather to protect us from ourselves. I do play a bit with equities outside my retirement accounts, but inside my retirement accounts, other than change my AA as I got older, I haven't changed anything based on what I have heard or seen in the news. Based on my past experience, I do believe that I have done better than many others in my circumstances and better than I would have done had I tried to outsmart the market. In fact the times I have tried it, I have done abysmally. Protecting ourselves from ourselves may be the most important thing we can do for ourselves. Sorry for so many ourselves... In addition, it is immensely simpler and less time consuming.

I wouldn't disagree with this. My problem is that if I strongly think that things are getting overdone, and ignore it, and see my balances going down, I don't like it. Consensus is never appealing to me.

My judgment is so -so, but after over 40 years of active investing, much of it with no other income, I know definitely that I am not a buy high sell low kind of person. In stocks, bonds, houses or used furniture. So I see no need to be protected from myself. What I also never will be able to do is invest in the hot new industry or stock, which may make people's everlasting fortunes. Just not mine. I essentially cannot believe in stories.

Ha

[lawman]

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Originally Posted by REWahoo +1 Couldn't have said it better ourself.

"We have met the enemy and the enemy is us"