Rick Ferri on max risk (volatility) tolerance

[Nords]

I don't read a lot of Humberto Cruz, but this time he got Rick Ferri to do his talking for him... "Don't overestimate your tolerance for risky investments"

 

[Gone4Good]

Couldn't agree more. Most people like risk when assets are appreciating and then run like scared little school girls when prices fall. That is why study after study shows the majority of individual investors buy high and sell low.

It's much better to have an asset allocation you can stomach then one that sends you fleeing for safety at exactly the moment you should be doubling down.

 

[TromboneAl]

Yes, good article.  I'd go further and say that there's no way that you can know your risk tolerance until you experience a big downturn with your life savings dropping in value.  You just can't simulate that ahead of time.

And there's another side to this that usually isn't discussed.  What about your tolerance or your ability to sleep when you've chosen a bond-rich low-yield investment and stocks are going through the roof?  Can you resist jumping into a bubble-type environment?

 

[wabmester]

And there's another side to this that usually isn't discussed.  What about your tolerance or your ability to sleep when you've chosen a bond-rich low-yield investment and stocks are going through the roof?  Can you resist jumping into a bubble-type environment?

If there's one hallmark of an ER, it's that they are comfortable with the trade-off between leaving a lot of money on the table and sleeping well at night. The future earnings that we walk away from dwarf any investment gains we might miss from not chasing the herd.

 

[Texas Proud]

I remember one time back in 1999 when my 80 yo mother was mad that she did not have more stock... my brother had just had a 100% return on investments that year and she was a mear 25 to 30%...

I said diversification works very well when you do not want it to....

In 2001 when she did not lose anything in the previous two years (and actually made a bit of money) she was complaining that she was not making enough... my sister said she lost 40% and could not belive my mom broke even...

I said diversification works very well when you want it to...

 

[TargaDave]

I'm not a Bernstein groupie but I loved his risk tolerance analogy to a simulated plane crash versus the real thing. Heck, all you have to do is match the optomistic-pessimistic posts on this site to the paticular time period just in the last few years. People were far more negative (and conservative) here in late 2002 just before the nice run up.

Also agee completely with T-Al on jumping in late on the upside. Works both ways.

I think another challenging item about risk tolerance is how people might react to a 70's style stagflation; flat market for 15 years with rising inflation and no clear sector leadership. No panic involved, you just slowly get eatin away fatigued trying to apply your 1980-2005 mindset to a completely different environment. I hear people say "I'll just increase my stock allocation in the pullbacks" (1980-2005 mindset). Not so sure that will work.

 

[lazyday]

Heck, all you have to do is match the optomistic-pessimistic posts on this site to the paticular time period just in the last few years.

Hopefully, there's a difference between what people say and what they do.

I find myself too easily swayed by others. My emotions might point me towards going with the crowd--after a correction, it feels scary, like things will keep falling, and the oppositte when markets have done well.
But I am slow and deliberate with my actions, sometimes acting against my feelings. Like buying something that's falling, even though it seems like it's throwing money down the drain.
Over the long run, it has served me very well.

(My point is that people may talk scared or elated, but hopefully, most of them aren't acting on it.)

 

[Nords]

I hear people say "I'll just increase my stock allocation in the pullbacks" (1980-2005 mindset). Not so sure that will work.    

Well, when you sell everything else during a bear market so that you don't have to sell beaten-down stocks, then you've effectively raised your stock allocation...

 

[WilliamG]

"Well, when you sell everything else during a bear market so that you don't have to sell beaten-down stocks, then you've effectively raised your stock allocation... "

Nords, I take it that you do not subscribe (or do?) to the Armstrong/buckets/etc strategies  of not selling stocks in a down market? 

 

[Nords]

"Well, when you sell everything else during a bear market so that you don't have to sell beaten-down stocks, then you've effectively raised your stock allocation... "

Nords, I take it that you do not subscribe (or do?) to the Armstrong/buckets/etc strategies  of not selling stocks in a down market? 

We don't go to Armstrong's multi-year "beat every bear market and then some" extreme. We keep a two-year cash pad. We spend the MM half of that in the first year.

If stocks were still down at the end of the first year then we'd start chewing through the five-year CDs (taking the early-withdrawal penalties) to get us through the second year.

At the end of the second year, if stocks were still down, then we'd sell whatever had the "best" year to raise another year's spending cash. And during that third year we'd probably also look at Cut-Throat's 11 ways to slash your spending.

At the end of the third year... you get the picture.

After reading Jeremy Siegel's "The Future for Investors" I think we'd probably keep reinvesting the dividends in our small-cap stock & DOW ETFs. We'd take a look at pulling the spending cash out of Tweedy, Browne and Berkshire Hathaway just to rebalance (and because they have by far the most cap gains).

If the market recovers during one of those years, then the first thing we'd do at the end of THAT year would be to make a two-year withdrawal. The first year's spending cash would go back into the MM and the second year's spending cash would go into a bunch of five-year CDs. Then the cycle would begin anew...

 

[wabmester]

After reading Jeremy Siegel's "The Future for Investors" I think we'd probably keep reinvesting the dividends in our small-cap stock & DOW ETFs.

I thought Siegel liked high-yield dividend stocks and a large chunk of international. What did he say to make you want to bet on small and the DOW?

BTW, nice bull (Siegel) vs bear (Arnott) discussion from last year here:

Forbes

(I voted for the bear!)

 

[Nords]

I thought Siegel liked high-yield dividend stocks and a large chunk of international.   What did he say to make you want to bet on small and the DOW?

Grammar bust. I meant that we'd keep reinvesting the dividends (as Siegel suggests). I didn't mean to suggest that he's enamored of small cap or the DOW or ETFs (although we are).

 

[wildcat]

Nords -

Just a question. Do you plan on holding Berkshire (just rebalance) or selling it all off? I know you mentioned in a previous thread that you felt it was no longer worth it to buy/research individual stocks anymore but it seems to me that BRK would be a great one to hold if we experience a down market (Buffet could actually put gobs of cash to work). BRK good anti-bull play, your thoughts?

 

[brewer12345]

Nords -

Just a question.  Do you plan on holding Berkshire (just rebalance) or selling it all off?  I know you mentioned in a previous thread that you felt it was no longer worth it to buy/research individual stocks anymore but it seems to me that BRK would be a great one to hold if we experience a down market (Buffet could actually put gobs of cash to work).  BRK good anti-bull play, your thoughts?   

This is obviously a tangent, but I have to say that I don't really understand why people look at BRK so much differently than other insurers/reinsurers. Yeah, Buffet is a great investor, but a lot of that has been watered down by the mammoth size of BRK's balance sheet. To me, it just looks like a really huge, well-capitalized insurer. Most well-run insurers make gobs of money, and most have lower premiums implicit in their prices than BRK.

 

[Nords]

Just a question. Do you plan on holding Berkshire (just rebalance) or selling it all off? I know you mentioned in a previous thread that you felt it was no longer worth it to buy/research individual stocks anymore but it seems to me that BRK would be a great one to hold if we experience a down market (Buffet could actually put gobs of cash to work). BRK good anti-bull play, your thoughts?

(*choke*) Sell Berkshire Hathaway?!? We've seen what happened to investors who held on to their shares when Standard Oil & Bell Telephone broke up. I think this is at least as good a value play.

We just sold off a chunk of Tweedy, Browne Global Value (after their runup) and rebalanced it into Berkshire (on sale last month at $2713) so that each is about 30% of our retirement portfolio. Each has done fine in their own way but TBGVX's 1.37% ER really chaps my hide next to Berkshire's ER of.... zero.

I think we'd sell off the rest of the Tweedy in our taxable account (we also have some in our IRAs) before we'd sell more Berkshire. But we'd also have to think about Berkshire becoming more than 40% of our portfolio. I guess the prudent thing to do would be to sell off both of those before we started chewing into the small-cap value & DOW ETFs. Geez, in 20 years we may be dividend investors just like TH.

This is obviously a tangent, but I have to say that I don't really understand why people look at BRK so much differently than other insurers/reinsurers.  Yeah, Buffet is a great investor, but a lot of that has been watered down by the mammoth size of BRK's balance sheet.  To me, it just looks like a really huge, well-capitalized insurer.  Most well-run insurers make gobs of money, and most have lower premiums implicit in their prices than BRK.

Their insurance is big, sure, but so is their grocery business. Yet no one cares how much food they sell!

I think Ajit Jain has managed to preserve an AAA bond rating and that's what keeps Gen Re so special. It also helps to be able to write a $9 BILLION check when you want to buy the occasional utility. Otherwise I think Berkshire is just one of the world's largest mutual funds... or, more accurately, the world's biggest CEF selling at a 27% discount to NAV.

Can't wait to read Alice Schroeder's book.

 

[wildcat]

Well, Nords I figured you were a smart guy and thanks for reassurance. I know Brew disagrees and I do realize BRK's main biz is insurance but how many insurance companies allocate capital in a manner similar to BRK? I don't know too many that dabble in equities so I find it hard to consider BRK just a well cap'd insurance company.

I still think it is a good anti-bull play and any bear market is the best time to have Warren and Charlie work for you.

 

[brewer12345]

Well, Nords I figured you were a smart guy and thanks for reassurance.  I know Brew disagrees and I do realize BRK's main biz is insurance but how many insurance companies allocate capital in a manner similar to BRK?  I don't know too many that dabble in equities so I find it hard to consider BRK just a well cap'd insurance company.

I still think it is a good anti-bull play and any bear market is the best time to have Warren and Charlie work for you.

Virtually every long tail lines writer of P&C insurance invests substantially in equities. The amount varies by the capitalization and risk tolerance of the particular insurer. Different strokes, I guess, but given how impenetrable insurers inherently are, I'd rather own simpler, cheaper ones that make good returns.

 

[lazyday]

a 27% discount to NAV.

What do you use to estimate its NAV?

 

[Nords]

Well, Nords I figured you were a smart guy and thanks for reassurance.

I still think it is a good anti-bull play and any bear market is the best time to have Warren and Charlie work for you.

Yeah, well, we'll see how smart I am a year after Buffett resigns or dies. I figure they know what they're doing better than I would, too, but this is one of the stock market's biggest management risks. Simpson, Jain, & Santulli may end up believing their own press releases and completely screw it up. Spouse & I figure that we can get away with this because we both have govt pensions, so our retirement portfolio looks more like a barbell than a carefully distributed diversification.

What do you use to estimate its NAV?

What I read in the news & reports.  And here's another way.