Online Calculator Mix that Explains Risks, etc.

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Online Calculator Mix that Explains Risks, etc.

Postby jeffersonkim » Mon Jul 01, 2013 1:14 am

I have about $24,000 in cash that I'd like to invest for approximately 5 years in a fully taxable account. I'm okay to wait longer if necessary. I don't really know what I'll need it for in the next 5 years, but if the opportunity arises, I guess I'd like to have it relatively ready.

I'm liking Vanguard's Admiral Shares as a potential option or their ETF equivelants.

Is there some kind of online calculator that helps me determine what my stock/bond mix should be that shows potential risks?

I'm looking at a combination of three main funds to keep it simple from Vanguard:

- Total Bond Market (BND)
- Total Stock Market Index (VTI)
- Total INternational Stuck Index (VXUS)
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Re: Online Calculator Mix that Explains Risks, etc.

Postby nisiprius » Mon Jul 01, 2013 6:48 am

I don't know of one. And to be cynical, I don't think the investment industry really wants investors to understand risk; it seems to me that it's all about pushing risky investments and playing verbal games, like saying you can "reduce" risks by choosing the right blends of stocks, and meaning, yeah, "less" risk like dropping 44% instead of 48% in 2008-2009.

What I suggest as a reasonable substitute is to look up growth charts at Morningstar or elsewhere--directions--for real mutual funds that have real combinations of stocks and bonds. The effect of adding international--either old-school EAFE index or newer total world including emerging markets--turns out to have been very small in the past, and while "how much international" is a contentious issue in the forum, the contention is mostly about the future.

The Vanguard LifeStrategy funds have been around for a reasonable time and while their composition has evolved, their percentage of stocks has been reasonably stable. So, you could, for example, plot the LifeStrategy funds--use the link to the live chart and spend some quality time sliding the mouse over the chart, reading out dollars, and imagining how you would feel seeing your account balance do that--and then look up the composition of the fund that's to your taste.

Live chart--be sure to click "Maximum" if the chart isn't showing all the way back to 1994.

Image

Notice the general pattern here. Risk was rewarded. But not as much as you might have thought at times. Most of the time, the four funds are in just the order you'd expect, most aggressive on top, least aggressive on the bottom. (Unfortunately, endpoints, endpoints, it's always endpoints--the picture look different if you start at a different place). And while I really do believe stocks do well in the long run, there is a serious danger of false optimism when stocks have had a good run; you mustn't fooled into thinking, say around the year 2000, that your retirement is in such good shape that you can ease off on your savings; and you mustn't hold so much in stocks that you'll do something foolish when the market plunges.

Another good set to chart is Fidelity's family of "Asset Manager" funds, which are (currently) named according to the percentage of stocks they include. The actual composition fluctuates around the percentage, because they are trying to, uh, time the market, but it doesn't matter much.

Warning: due to the "lost decade" for stocks, and due to the (people exaggerate this but it's true) "thirty year bull market in bonds," beware of recency--in the recent past you might as well have had a conservative allocation because an aggressive allocation didn't help that much, but that is historically unusual.
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Re: Online Calculator Mix that Explains Risks, etc.

Postby bertilak » Mon Jul 01, 2013 9:26 am

nisiprius wrote:Image

Notice the general pattern here. Risk was rewarded. But not as much as you might have thought at times. Most of the time, the four funds are in just the order you'd expect, most aggressive on top, least aggressive on the bottom. (Unfortunately, endpoints, endpoints, it's always endpoints--the picture look different if you start at a different place). And while I really do believe stocks do well in the long run, there is a serious danger of false optimism when stocks have had a good run; you mustn't fooled into thinking, say around the year 2000, that your retirement is in such good shape that you can ease off on your savings; and you mustn't hold so much in stocks that you'll do something foolish when the market plunges.

Nice chart.

A quick look might lead one to the following conclusion:
    Sure, those risky stocks can take a tumble but when they do they only fall back to about where a safer investment has plodded along to. So why not go for the more aggressive fund -- you are almost always ahead and when you are not you are even.

Now look at the same thing starting at 12/31/2000.
Image
With this view you might reach a different conclusion:
    Boy, those risky funds do take a tumble. Even when they recover they just barely make it up to where the safer funds are. Why take all that risk if there is no reward? Slow and steady wins the race!
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Re: Online Calculator Mix that Explains Risks, etc.

Postby dbr » Mon Jul 01, 2013 9:48 am

I think riskgrades went offline a couple of years ago.

TDAmeritrade has software tools on the thinkorswim platform but I know essentially nothing about it.

Don't lots of brokers have various analysis tools -- what about Morningstar?

GIYF

Note: You do have to decide risks you want to evaluate. A calculator will either try to pound out a standard deviation of return or a subjective scaling of risk of some kind. Someone might have a spreadsheet somewhere that tries to estimate the confidence intervals for various levels of final portfolio value. I don't know if the Gummy pages ever had that or what the status of those tools is now. If you were retired you could run a retirement calculator that computes chances of running out of money too soon, but that is not what you want.
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Re: Online Calculator Mix that Explains Risks, etc.

Postby pkcrafter » Mon Jul 01, 2013 10:09 am

jeffersonkim wrote:I have about $24,000 in cash that I'd like to invest for approximately 5 years in a fully taxable account. I'm okay to wait longer if necessary. I don't really know what I'll need it for in the next 5 years, but if the opportunity arises, I guess I'd like to have it relatively ready.

I'm liking Vanguard's Admiral Shares as a potential option or their ETF equivelants.

Is there some kind of online calculator that helps me determine what my stock/bond mix should be that shows potential risks?

I'm looking at a combination of three main funds to keep it simple from Vanguard:

- Total Bond Market (BND)
- Total Stock Market Index (VTI)
- Total INternational Stuck Index (VXUS)


You can't get anything useful on risk for a time frame of 5 years, market movement is far to random for that. Things to consider: first, what is your tax bracket? If high, you don't want taxable bonds. second, we normally don't recommend any stock for a five year period simply because the money you expected to have may not be there. However, if you can stand some fluctuation in the amount you end up with, you could use some stock, maybe 20%, which might give you a better return than you expected or a worse return. Stocks have lost ~50% of their value several times, so if you use 20% stock, you might end up 10% short of your goal. Bonds are also a problem right now because of a possible rise in interest rates, which would decrease the value of your bond fund and final expected amount. So, if you really want to save this money and have a certain amount in 5 years, you are pretty much stuck with cash, money market, and CDs.

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Re: Online Calculator Mix that Explains Risks, etc.

Postby nisiprius » Mon Jul 01, 2013 11:04 am

bertilak wrote:Nice chart.

A quick look might lead one to the following conclusion:
    Sure, those risky stocks can take a tumble but when they do they only fall back to about where a safer investment has plodded along to. So why not go for the more aggressive fund -- you are almost always ahead and when you are not you are even.

Now look at the same thing starting at 12/31/2000....
With this view you might reach a different conclusion:
    Boy, those risky funds do take a tumble. Even when they recover they just barely make it up to where the safer funds are. Why take all that risk if there is no reward? Slow and steady wins the race!
Indeed. I started at 1994 for the someone neutral reason that it was the inception date of the LifeStrategy funds.

I think the most neutral statement is that if you select a starting points and endpoints at random, over periods of around 15 to 25 years the more aggressive portfolios usually beat the more conservative portfolios but not always. Which is another way of saying the risk is still there, even over periods that long.

Even over periods as long as 80 years, endpoints matter quite lot. During the eight years 1921 to 1928, the stock market grew more than fivefold . That means that the annualized average "historical return of the stock market" is 10.32% if you measure from from 1921, 9.84% if you measure from the traditional 1296, and only 9.18% if you measure from 1929. Over 1% difference, annualized. The (rather arbitrary, if you read the original paper) choice of 1926 is not an obviously biased choice, but for practical purposes things like "the historical return of the stock market" should not really be stated as any more precise than "about 9-10%."

And for the original poster: what this shows is that you need to personally dig into data that you have sought out for yourself, and worry at it until you are happy that you understand the risk to your own satisfaction, rather than letting someone else point it out to you.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Online Calculator Mix that Explains Risks, etc.

Postby Scooter57 » Mon Jul 01, 2013 12:36 pm

Here's an interesting look at the inflation adjusted gains of the S&P historical index stretching back to the late 1800s.

http://seekingalpha.com/article/1529312 ... ar-markets

I found it interesting that the very long term average annual growth rate after inflation was very close to what bonds traditionally have yielded. Of course, none of us have that long a term to invest and past results do not predict future results, yadda yadda.

Personally, I wonder if any pre-internet numbers have much relevance as trading now is so entirely different from what it was in those ancient days when we saw prices in the paper or phoned brokers who charged big fees for trades.
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Re: Online Calculator Mix that Explains Risks, etc.

Postby fredd » Mon Jul 01, 2013 4:03 pm

Are the charts total return and not just price movements? Yahoo historical prices give you the adjusted close which includes dividends and splits.

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Re: Online Calculator Mix that Explains Risks, etc.

Postby nisiprius » Mon Jul 01, 2013 5:55 pm

Scooter57 wrote:Personally, I wonder if any pre-internet numbers have much relevance as trading now is so entirely different from what it was in those ancient days when we saw prices in the paper or phoned brokers who charged big fees for trades.
I think this is a very serious question. The chaotic long-term behavior of the stock market reflects the chaotic behavior of society itself. People are assigning importance to long-term performance differences measured in basis points. Yet off the top of my head I can reel of half a dozen "revolutions" in the stock market that might have changed the MPT parameters by that much. You refer to the end of fixed commissions, and it is my recollection that I once paid Merrill Lynch something like $120 commission to buy $4,000 worth of stock, and that was on top of a hidden fee for buying an odd lot. But besides before and after fixed commissions, how about:

Before and after the creation of the Federal Reserve in 1913.

How about: before and after World War I, when retail investors first started to enter the stock market in large numbers?

Before and after the SEC? Before the SEC, price manipulation was assumed--it was how the game was played--and a bull didn't mean someone who thought the market would go up, it meant someone who was trying ruin the bears by making the market go up. And trying to psych out just how much money was behind the other guys, because the one that had the secret "syndicate" behind them with unsuspected cash reserves was going to win.

Before and after electronic data processing, or, at least, IBM accounting machines and such. Maybe armies of "girls" with rotary calculators and filing cabinets kept accurate records, but I do wonder just how reliable any of the financial data before the 1950s really is. Man O man, I once opened some business journal and saw those financial charts drawn by hand by draftsmen--hand-lettered, hand-shaded... all black-and-white of course, ten different hatch patterns like a geological map...

Before and after 1971, when the U.S. abandoned the gold standard.

Before and after the 401(k), which brought a new wave of retail investors into the market in unprecedented numbers.

I mean, seriously is it possible to believe that none of these nudged any of the MPT parameters, and that the stock market today follows the same quantitative model as it did when J. P. Morgan personally stepped in to calm the Panic of 1907? This stock market has the same mean, variance, and correlation coefficients as HFT pushing bits in cyberspace?

Image
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