I am Looking for a Financial Term

[MikeD]

I want to convey two things that are difference but almost sound the same and are often confused to our financial guys using their own industry-related terms.

I believe that the following represents our situation:

While we were working, we were 100% in stocks. Now with two years to go until we are both retired we are 45/35/20.

We are 'risk-averse.' I think I have this one nailed. We do not want to take larger chances (riskier) for larger returns. We prefer to have an asset allocation that smooths out the large market fluctuations between bull and bear markets. We want average returns without the risk of large losses or the potential for large gains. We prefer to get a smaller gain without taking the chance that we will have a large loss. I think extremely risk-averse people use an all CD asset allocation for instance. We are not extremely risk-averse. We will accept some risk of loss for an average gain. I think we want a ratio of 45/35/20 to flatten our year-to-year graph.

The other thing that we are, the name-of-the-thing that I am looking for the term for, is: We are willing to tolerate short-term volatility. We don't get all bent out of shape when the market dips one day and recovers the next. We ignore the short-term trends and concentrate on the long-term trend. I think this is often confused with being risk-takers but it is not the same thing.

So what industry term would I use for describing us? I am pretty sure that we are risk-averse and day-to-day and month-to-month volatility-ignorers. What is the phrase for the second one?

Am I right that they are two different things and there are names for them? Do I not know what I am talking about?

Is there a list of frequently used terms here?

Thank you in advance.

[COcheesehead]

I would call you long term, moderate risk investors.
Or buy and hold investors with a moderate risk profile.

[OldShooter]

Not a direct answer to your question but you might enjoy reading behavioral economists and Nobel Prize winners Richard Thaler ("Misbehaving") and Daniel Kahneman ("Thinking Fast and Slow.") Both talk quite a bit about the somewhat irrational ways we humans perceive and react to risk.

Thaler's famous insight is to differentiate between totally rational "econs" as depicted by traditional economics and the more common "humans."

[NYEXPAT]

When I worked on Wall Street the industry jargon used was "PITA", but it may have since changed?

[Newventurer]

Optimist?

[braumeister]

Sounds like you might be getting close to the difference between investor and trader.

[Spock]

If you're risk averse
but claim tolerance of volatility
What if the volatility was "slower"... instead of flash crashes that pop right back within hour/day/week it was more like 6 months of declines before it head back up again?
Stated differently, the volatility was slower than your sell/planning/rebalance horizon?


I guess I can see being tolerant of flash crashes, but to truly be tolerant of price declines is not really being risk averse because you risk losses during a longer decline. But then my main investments are cash and coffee cans in the back yard. Equities just look too much like a casino placing bets.

[racy]

Quote:

Originally Posted by MikeD ...The other thing that we are, the name-of-the-thing that I am looking for the term for, is: We are willing to tolerate short-term volatility. ... I think this is often confused with being risk-takers but it is not the same thing....So what industry term would I use for describing us?....

I'd offer "Investor" as opposed to Trader, or more likely today, algorithm.

Edit ... didn't see Braumeister's when I posted.

[Aerides]

Perhaps even qualify it, you are self-defined as "Buy and Hold Investors" (like most of us, like most passive investing types).

[Luck_Club]

:2 funny:

Quote:

Originally Posted by NYEXPAT When I worked on Wall Street the industry jargon used was "PITA", but it may have since changed?

I was just discussing with my wife today. Why didn't that fee only advisor take us on as clients. All I wanted was a nice steady return with little to no downside on a consistent basis.

[HI Bill]

Quote:

Originally Posted by MikeD I think extremely risk-averse people use an all CD asset allocation for instance.

Yes, some of them do. They just don't understand that given today's rates on CDs, the risk is that inflation will destroy their spending power over the decades, and much sooner if inflation takes off.

[DrRoy]

Quote:

I would call you long term, moderate risk investors. Or buy and hold investors with a moderate risk profile.

+1

[DatumPoint5]

I agree with COcheesehead and DrRoy, I would vote to call you........

"long term, moderate risk investors" OR "buy and hold investors with a moderate risk profile".

These two statements describe the "risk profile" of my wife and I in our VG Brokerage account.

[youbet]

Quote:

Originally Posted by HNL Bill They just don't understand that given today's rates on CDs, the risk is that inflation will destroy their spending power over the decades, and much sooner if inflation takes off.

Agreed. Especially for true ER folks planning 30, 40 or more years of full retirement, inflation is likely a bigger risk than the risk of long term poor equity market performance or short term equity market variation. Unless your WR is very modest (the increment CD's pay over inflation has been small historically) or your financial plans are very padded, 30 - 40 years of modest inflation while the FIRE portfolio is earning only CD rates can be very risky business!

It's easy to confuse "risk" with "variation." Think of all the folks who say they "lost" 30%+ in the Great Recession despite the fact they didn't panic and sell and have enjoyed more than a full recovery over the past decade.

[OldShooter]

Quote:

Originally Posted by youbet Agreed. Especially for true ER folks planning 30, 40 or more years of full retirement, inflation is likely a bigger risk than the risk of long term poor equity market performance or short term equity market variation. Unless your WR is very modest (the increment CD's pay over inflation has been small historically) or your financial plans are very padded, 30 - 40 years of modest inflation while the FIRE portfolio is earning only CD rates can be very risky business! It's easy to confuse "risk" with "variation." Think of all the folks who say they "lost" 30%+ in the Great Recession despite the fact they didn't panic and sell and have enjoyed more than a full recovery over the past decade.

Well, it's even worst. Modern Portfolio Theory (Markowitz) defines risk as variation and amuses itself pretending that market behavior has a Gaussian distribution and that standard deviation is hence a useful parameter. The only way I can understand this is to assume that his portfolio paradigm was a pension fund with a regular stream of withdrawals, or he was thinking short-term like a year or two.

Long term, risk is declining purchasing power and the missed growth that equities have historically provided. Rip Van Winkle's 20 year sleep is perfect for the long term investor, who can then simply sleep through all Mr. Market's gyratiions. Like this week.

Another tool we have, now 50 years after Markowitz's paper, is TIPS. Frankly, I don't understand why any investor would buy a long treasury bond and accept the inflation risk versus buying TIPS and eliminating it. I don't think long bonds are conservative investing at all.