Jason Zweig Article on Shallow & Deep Risk

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Jason Zweig Article on Shallow & Deep Risk

Postby jginseattle » Sat Jul 27, 2013 6:54 pm

Here's the link to Mr. Zweig's article. "Deep" risk is the subject of William Bernstein's new e-book.

http://blogs.wsj.com/moneybeat/2013/07/ ... the-woods/
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Simplegift » Sat Jul 27, 2013 7:59 pm

Thanks for the notice about Mr. Bernstein's coming e-book on "deep" risk. He always offers such a fresh and engaging take on his subject, with a few memorable anecdotes to boot. I look forward to reading it.

About Bernstein's four deep risks: Not sure the average investor can do much about "devastation risk" or "confiscation risk" — but they can certainly invest in stocks for "inflation risk" and bonds for "deflation risk". There's much to recommend the balanced portfolio approach for the defensive investor. To me, though, this was the most cogent part of Mr. Zweig's preview:

Jason Zweig wrote:But holding stocks to insure against deep risk drives your shallow risk through the roof. While stocks should protect you against inflation in the long run, they are guaranteed to expose you to frightening price drops in the shorter run. That, in turn, could push you into the final frontier of deep risk: your own behavior.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby plannerman » Sat Jul 27, 2013 8:15 pm

Sounds a lot like "stocks in the long run" to me.

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Re: Jason Zweig Article on Shallow & Deep Risk

Postby livesoft » Sat Jul 27, 2013 9:02 pm

Whether folks like it or not, the idea to buy and/or rebalance on an RBD is a way to fight against the behavioral risk of panicking when the shallow risk of a drop in stocks happens.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Sidney » Sat Jul 27, 2013 9:06 pm

livesoft wrote:Whether folks like it or not, the idea to buy and/or rebalance on an RBD is a way to fight against the behavioral risk of panicking when the shallow risk of a drop in stocks happens.

Isn't this just another way of saying "don't panic"?
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Bill Bernstein » Sat Jul 27, 2013 9:20 pm

Hi All:

Thanks for noticing.

The main point of the article is not to buy foreign real estate or to build a spacecraft in your backyard, but rather to realize that the historical record shows that:

1) In the post-gold-standard era ("fiat money era," in contradistinction, I suppose, to "Rolls Royce money era . . . ), inflation is a real probability at some point, and deflation is much less likely.

2) Bonds and bills get slaughtered with severe inflation, and stocks, while taking a hit early on, retain their real value in the longer term.

3) That the cheapest way (that is, the way that sacrifices returns the least) to insure against severe inflation is a diversified global stock portfolio, with TIPS and a soupcon of precious metals and natural resource stocks.

4) If your time horizon is much less than 20-30 years, you should still be more concerned with shallow than deep risk.

5) Even if you have a long time horizon, you still need to have plenty of liquidity so you can keep your head, and perhaps buy cheap, during the bad times.

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Re: Jason Zweig Article on Shallow & Deep Risk

Postby JoMoney » Sat Jul 27, 2013 9:27 pm

Sidney wrote:
livesoft wrote:Whether folks like it or not, the idea to buy and/or rebalance on an RBD is a way to fight against the behavioral risk of panicking when the shallow risk of a drop in stocks happens.

Isn't this just another way of saying "don't panic"?


RBD re-balancing is too much active management for my tastes. I'm not saying it's a bad idea, in fact having cash on the sidelines waiting to invest during "fire sale" scenarios has been a good value based approach to investing in stocks. Unfortunately, there's a lot of opportunity cost given up waiting around for a "really bad day" that may never happen. I've liked the idea of just "don't panic", which for some people is too much to ask for... but of course trying to get someone panicked to re-balance and put their safe money under a falling knife is tough emotionally as well.
In general, rather then re-balancing to a fixed percentage, my preference has always been to keep a fixed amount of cash (and short term bonds) to weather the storm. I'm not about to put my "emergency funds" at risk, but while I'm still earning a paycheck I'll continue to invest in equities. When I get to a point where I'm withdrawing funds I expect to keep a much larger "emergency fund" and would probably decrease my equity withdrawal rate during the RBD times.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby livesoft » Sat Jul 27, 2013 9:30 pm

Sidney wrote:
livesoft wrote:Whether folks like it or not, the idea to buy and/or rebalance on an RBD is a way to fight against the behavioral risk of panicking when the shallow risk of a drop in stocks happens.

Isn't this just another way of saying "don't panic"?

No because when equities drop there are big differences among selling in a panic, holding tight, and buying more.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Sidney » Sun Jul 28, 2013 1:12 am

livesoft wrote:
Sidney wrote:
livesoft wrote:Whether folks like it or not, the idea to buy and/or rebalance on an RBD is a way to fight against the behavioral risk of panicking when the shallow risk of a drop in stocks happens.

Isn't this just another way of saying "don't panic"?

No because when equities drop there are big differences among selling in a panic, holding tight, and buying more.


I guess I was viewing things as a 2-state world. Either you stick to your plan or you don't. Obviously, there are degrees of not sticking ranging from do nothing to doing something that takes your farther away.

But, for example, is (a) doing nothing in a down market and watching your equity drop from a target of 50/50 to say, 40/60 without rebalancing different from (b) "panicking" in a flat market due to fear of a pending downturn and selling off from 50/50 to 40/60?

The "simplest" way to avoid the behavioral risk is to hold a one-fund portfolio that is at your desired allocation. This may have some location problems, of course. But you aren't reliant on the need to overcome the anxiety and buy on a bad day.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Simplegift » Sun Jul 28, 2013 4:28 am

wbern wrote:In the post-gold-standard era ... inflation is a real probability at some point, and deflation is much less likely.

Thanks for contributing, Bill. Have to agree that inflation is by far the most formidable "deep risk" that confronts investors in the modern era — and it's certainly a risk that average investors can protect against in their portfolios with a healthy allocation to global equities and TIPS. It also helps that central banks around the world are now acutely aware of the consequences of letting inflation get out of hand again (after the 1970s) and remain vigilant about rising prices.

On the other hand, though serious deflation has been rare since countries abandoned the gold standard (chart below), I don't believe it can be discounted as a significant, deep risk to one's portfolio — mainly because the economic consequences of a prolonged deflationary spiral are so devastating and so hard for central banks to reverse (see Japan). In fact, by one view, the 2008 financial crisis was a deflationary shock in which the most damaging consequences were just narrowly averted (so far) — and we all remember how that felt.

The point: Do invest in global equities and TIPS to protect against the deep risk of inflation, but don't abandon high-quality bonds entirely, just because their yields are low and the deep risk of deflation seems remote. Stay balanced!

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Re: Jason Zweig Article on Shallow & Deep Risk

Postby JoMoney » Sun Jul 28, 2013 4:46 am

Sidney wrote:...
is (a) doing nothing in a down market and watching your equity drop from a target of 50/50 to say, 40/60 without rebalancing different from (b) "panicking" in a flat market due to fear of a pending downturn and selling off from 50/50 to 40/60?
...


Yes, it's different.
In scenario "a" you may not be in a position to take additional stock market risk. If you have a need for a fixed amount of cash it would be inappropriate to take from your cash-like assets and put it into equities because you want to double-down and hope the equities go back up in value when you need the money.

In scenario "b" you are making a emotional decision to market time, and there's no saying you won't change your mind later, people often do and often at the wrong times.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby RooseveltG » Sun Jul 28, 2013 8:28 am

To me, the article suggests the need for a higher stock allocation rather than a "liability matching portfolio" when you have enough.

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Re: Jason Zweig Article on Shallow & Deep Risk

Postby JoMoney » Sun Jul 28, 2013 8:50 am

RooseveltG wrote:To me, the article suggests the need for a higher stock allocation rather than a "liability matching portfolio" when you have enough.

Roosevelt.


I would agree. But if you're already fully invested in stocks, where is the money going to come from to increase your allocation? And if you've got "extra" money sitting in cash/bonds, why were you keeping it out of stocks? How much growth have you missed out on because it was sitting on the sidelines waiting for stocks to take a dip (market timing)?
But if that sidelined cash investments was for a specific near term purchase or emergency, do you really want to take a chance with it by buying more stocks when you don't know how low they'll go?
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Park » Sun Jul 28, 2013 11:45 am

Simplegift wrote:On the other hand, though serious deflation has been rare since countries abandoned the gold standard (chart below), I don't believe it can be discounted as a significant, deep risk to one's portfolio — mainly because the economic consequences of a prolonged deflationary spiral are so devastating and so hard for central banks to reverse (see Japan). In fact, by one view, the 2008 financial crisis was a deflationary shock in which the most damaging consequences were just narrowly averted (so far) — and we all remember how that felt.

The point: Do invest in global equities and TIPS to protect against the deep risk of inflation, but don't abandon high-quality bonds entirely, just because their yields are low and the deep risk of deflation seems remote. Stay balanced!


http://www.tradingeconomics.com/japan/inflation-cpi

About Japan, that is commonly given as an example of a country with a fiat currency and a problem with deflation. But take a look at the link above. At its worst, deflation has been no more than 2.5% per year. I am far from an economist. But I believe that was one reason why the gold standard was abandoned, and fiat currency took its place. With a fiat currency, a central bank can print money. If you print enough money, you will unfortunately get inflation, but you will also resolve any deflation.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Default User BR » Sun Jul 28, 2013 12:01 pm

Sidney wrote:I guess I was viewing things as a 2-state world. Either you stick to your plan or you don't. Obviously, there are degrees of not sticking ranging from do nothing to doing something that takes your farther away.

RBD buying part of his plan.


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Bill Bernstein's latest book. Where?

Postby Taylor Larimore » Sun Jul 28, 2013 12:24 pm

In a forthcoming e-book, “Deep Risk: How History Informs Portfolio Design,” Mr. Bernstein sifts through decades of financial data and global history to identify what creates deep risk.

Bill:

Any book you write, I want to read (and likely include it in our Investment Gems).

I tried to order your new book from Amazon but they do not carry it? Any suggestions?

Best wishes
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Bill Bernstein » Sun Jul 28, 2013 1:07 pm

Hi All:

Re deflation risk, that's really a non-issue, since any sane investor sits on a large hoard of cash anyway, and cash (or, if you like, even short-intermediate high-quality bonds) will do fine with deflation.

I discuss in detail Japan's "deflation." There was none prior to 1995, 5 years after the collapse began, and since then prices have deflated by 2% total. That's not 2% pa, but 2% overall. That's absolutely nothing compared to the 30-40% price falls seen in the Valhalla of the gold standard.

Sorry about the pub date on the e-book. I'm estimating 6 weeks; I wasn't expecting Jason to do a piece on it so soon!

For the record, I don't own, and don't plan to own, foreign real estate or bullion in a vault in Perth, tho I do wonder from time to time why I didn't buy that 2 bedroom in the 7eme in 1984 for $50k ;-)

Finally, about the seeming conflict between the LMP and deep risk: By the time your LMP should be in place--your late 60s, more or less--you're at the green ban . . .er, shallow risk stage. Deep risk is for young'ns (meaning anyone younger than me).



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Re: Jason Zweig Article on Shallow & Deep Risk

Postby dbr » Sun Jul 28, 2013 1:23 pm

Bill, would you care to comment on the relative risk from inflation and from deflation for people holding annuities, including SS. This can mean fixed annuities, and it can mean inflation indexed annuities. Note SS payments do not deflate if inflation is negative.

I think all discussion of how retirement is funded have to include annuitized income streams as part of the commentary,
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Sidney » Sun Jul 28, 2013 1:26 pm

JoMoney wrote:Yes, it's different.
In scenario "a" you may not be in a position to take additional stock market risk. If you have a need for a fixed amount of cash it would be inappropriate to take from your cash-like assets and put it into equities because you want to double-down and hope the equities go back up in value when you need the money.

Probably just a semantic difference. But in this case, I would argue that the plan wasn't a percentage allocation plan, it was a fixed (minimum) low-risk asset plan. Nothing wrong with that as long as you know that is the plan and you aren't just making it up later to convince yourself that you didn't panic.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Bill Bernstein » Sun Jul 28, 2013 1:32 pm

Well, obviously fixed, nominal, annuities won't do well with severe inflation; in fact, they can become rapidly worthless.

Even with "inflation-adjusted" ones, you have to be careful. For example, salesmen will tell you that you can buy one with a 2% "inflation rider," which means that if inflation exceeds 2%, you lose.

And many annuities actually indexed to the CPI have limits--ie, their annual increase may be limited to 10%. Obviously, that's not good either.

So you have to tread carefully.

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Re: Jason Zweig Article on Shallow & Deep Risk

Postby dbr » Sun Jul 28, 2013 1:41 pm

wbern wrote:Well, obviously fixed, nominal, annuities won't do well with severe inflation; in fact, they can become rapidly worthless.

Even with "inflation-adjusted" ones, you have to be careful. For example, salesmen will tell you that you can buy one with a 2% "inflation rider," which means that if inflation exceeds 2%, you lose.

And many annuities actually indexed to the CPI have limits--ie, their annual increase may be limited to 10%. Obviously, that's not good either.

So you have to tread carefully.

Bill


Thanks.

I think I should have confined my question to deflation.

I guess my real point is that it seems to me fixed annuities and even inflation protected ones like SS would be powerful offsets to the risks of deflation. In fact retirees as a whole would seem to have less to fear from deflation than from inflation, including the fact that job loss is not a threat, etc. I can see one threat to fixed annuities in a deflationary environment, which would be risk of default. The current situation in the public pension area could illustrate the tip of the iceberg on this.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Blue » Sun Jul 28, 2013 1:56 pm

wbern wrote:since any sane investor sits on a large hoard of cash anyway, and cash (or, if you like, even short-intermediate high-quality bonds)

Bill



Could you expound on this? What constitutes "large hoard"?

Looking forward to reading your new book.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Bill Bernstein » Sun Jul 28, 2013 2:02 pm

"Large hoard" =

1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses
2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years.

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Re: Jason Zweig Article on Shallow & Deep Risk

Postby ruralavalon » Sun Jul 28, 2013 2:09 pm

Jason Zweig, referencing W. Bernstein wrote:The best insurance against inflation, he says, is a globally diversified stock portfolio with an extra pinch of gold-mining and natural-resource companies.

Rats!!

Just when I'm selling off the extra pinch of VGPMX to simplify our portfolio. Well, Bernstein did say that before in The Four Pillars of Investing. So its not really news to me. We still want to simplify, and we still have Total International.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Simplegift » Sun Jul 28, 2013 2:33 pm

Park wrote:About Japan, that is commonly given as an example of a country with a fiat currency and a problem with deflation. But take a look at the link above. At its worst, deflation has been no more than 2.5% per year. I am far from an economist. But I believe that was one reason why the gold standard was abandoned, and fiat currency took its place. With a fiat currency, a central bank can print money. If you print enough money, you will unfortunately get inflation, but you will also resolve any deflation.

You may be right about Japan. I'm not an economist either and the case of Japan is a perplexing one. From what I've read, deflation may not even be the primary cause of their low growth problems, but rather a natural byproduct of their aging demographics, their culture and the global competitive environment today (e.g., lots of inexpensive labor). Plus, their deflation, though protracted, has been mild compared to pre-gold standards, as you and Bill point out.

As to your main point, my understanding is that the way the Fed increases the money supply is to buy securities (and by doing so injects money into the system by giving the holders of those securities money in exchange). The supply of those securities then goes down, their prices go up and the interest rates decline. The problem is that, if the beginning interest rates are too low, then this isn't an effective option, as interest rates can only go to zero (as with Japan).

This is why deflation seems far worse than inflation in the short term. The Fed can always fight inflation by raising interest rates — but they can only cut interest rates to zero, no lower. The Fed may have other deflation-fighting arrows in their quiver, but their options are limited, I believe. Thus the benefit of keeping high-quality bonds and cash in one's portfolio, as deflation insurance.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Watty » Sun Jul 28, 2013 2:42 pm

wbern wrote:3) That the cheapest way (that is, the way that sacrifices returns the least) to insure against severe inflation is a diversified global stock portfolio, with TIPS and a soupcon of precious metals and natural resource stocks.



For someone that is younger and still in the accumulation phase a 30 year fixed rate mortgage would automatically provide some inflation protection. My parents had a 30 year fixed rate mortgage at about 3.5% during the double digit inflation years of the late 1970's and after a while their mortgage payment was less than their utility bills.

This can work out well in two ways since not only are you paying off the mortgage in inflated dollars but the house price is likely increasing in value with inflation, even if it does not keep up with inflation.

Personally though I am dubious that if you are getting near retirement that getting or keeping a mortage just for the investing arguments that you hear is a good choice since you will be adding the monthly mortgage payment to your investment withdrawals once you are retired. This could not only require taxable withdrawals but would increase your withdraws from your portfolio in down years.

In looking at the possible investing impact of both the shallow and deep risks they are in general a lot less for someone in the accumulation phase then an older person in the distribution phase since the younger person will be making ongoing savings contributions and "buying low" and will recover much quicker than someone older who is drawing down their portfolio.

The younger person does of course have more risk of job loss in a poor economy.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby richard » Sun Jul 28, 2013 3:02 pm

"Deflation, the persistent drop in the value of assets, is extremely rare in modern history, Mr. Bernstein says. It has hit Japan but almost nowhere else in the past century, thanks to central banks that print money to drive up prices."

I hope this quote isn't accurate, as it would indicate Bill is forgetting major deflation around 1930. One big example is Germany. It would be a huge understatement to say that ended badly. (Why does everyone remember the German inflation in the early 1920s but not the subsequent deflation?) The US also had some deflation around the same time. Central banks notably did not "print money" in response.

Would someone like to explain why moderate levels of fully expected inflation is a problem?
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Bill Bernstein » Sun Jul 28, 2013 3:12 pm

Watty:

That is a superb point about the mortgage, and goes into the booklet! PM me so i can acknowledge you.

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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Bill Bernstein » Sun Jul 28, 2013 3:15 pm

Richard:

"The past century" was Jason's, not mine. In the book, I make quite clear I'm talking about the fiat money era, after 1934, when France abandoned the gold standard.

There was a bit more deflation immediately after that relating to the fact it took the world's central banks a few years to figure out that tightening the money supply in a depression wasn't a good idea.

But after 1940, certainly, deflation's been a rarity.

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Re: Jason Zweig Article on Shallow & Deep Risk

Postby richard » Sun Jul 28, 2013 3:25 pm

Bill,

Glad to hear you were misquoted. You're usually rather good at that history thing :D

Recent history shows some major central banks tightening in the face of a deep recession, but that's another topic.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Bill Bernstein » Sun Jul 28, 2013 3:49 pm

Richard:

That's right, but it would be a shame to get this thread locked by the politics police!

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Re: Jason Zweig Article on Shallow & Deep Risk

Postby nedsaid » Sun Jul 28, 2013 3:57 pm

This was a very good article. To most investors, inflation is the biggest enemy to their portfolios. Since I entered the labor force, I estimate that a dollar then is worth $2.50 to $3.00 today. Mostly this is based on the cost of housing and the price of gas.

So the trick is to get your stash to grow beyond inflation. The traditional asset class stocks and bonds both beat inflation over long periods of time. Stocks though more volatile accomplished this better than bonds. Cash (short term treasuries, money market funds) has kept up with inflation and maybe beat it by a hair.

Now that interest rates are very low by historical standards, bonds barely match inflation and cash loses to inflation. So instead of all three asset classes beating inflation: one asset class beats inflation, one barely keeps up, and the third falls behind.

So this puts investors trying to beat inflation (one of the deep risks) in the uncomfortable position of having to take on more risk. Namely owning more stocks.

I am not too concerned about deflation. During the latest financial crisis, it was a possibility but the US Government stepped in with massive fiscal and monetary intervention. Even with the economy experiencing low growth, we have still seen inflation.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Phineas J. Whoopee » Mon Jul 29, 2013 6:58 pm

Simplegift wrote:...
The problem is that, if the beginning interest rates are too low, then this isn't an effective option, as interest rates can only go to zero (as with Japan).

This is why deflation seems far worse than inflation in the short term. The Fed can always fight inflation by raising interest rates — but they can only cut interest rates to zero, no lower.
...

There is no zero lower-bound on interest rates, at least not for large economic actors.

Long real rates have been negative as recently as a couple of months ago.

Nominal rates can, have, and no doubt someday again will become negative. Treasury offers a no-balance-limit zero-percent certificate of indebtedness, but transfers in can be no more than $1000 per transaction, although if you really wanted to push it, you could buy $5,000,000 in 4-week T-bills each week, presumably at negative interest (otherwise why do what I'm saying), and instead of rolling them put the proceeds into the zero - which Treasury is under no obligation to continue offering, and should not unless it is in the interest of the taxpayers.

We individuals may have the advantage of the option of withdrawing stacks of $100 bills and storing them somewhere safe (for a fee - there's a negative return); but corporations? Local and state governments? Endowments? Can't be done.

Danish treasuries returned -2% for a while.

US T-bills traded above par for a while.

The ECB has recently finished technical preparations to pay negative interest on excess reserves.

The Fed has spoken of (I don't know if there's been any action) changing the Treasury auction system to allow negative bids from the primary dealers.

Bank of New York / Mellon charges its corporate customers a percentage-based fee for deposits in excess of a few tens of millions of dollars. If that isn't negative nominal interest, what is?

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Re: Jason Zweig Article on Shallow & Deep Risk

Postby richard » Mon Jul 29, 2013 7:32 pm

A problem in many people's analysis is that they focus on the effects inflation has on spending but not on earning. They'll attribute price increases to the evils of inflation, but won't attribute increases in compensation or portfolio growth to inflation. While there are distributional issues, on an aggregate level, spending equals income. If you're paying more, someone is earning more. If you're paying less, total income is lower.

Interest rates are very low because the economy is slow. The Fed can often get the economy growing faster, but it's usual tools don't really work when inflation is very low, nominal rates are very low and real rates are even lower.

There is a lot of opposition to government efforts to prevent deflation. Those efforts might succeed.

I've yet to see a good argument as to why moderate expected inflation is a problem (rewriting menus every so often does not count as a major problem). Deflation, on the other hand, has been associated with very bad situations.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby CyberBob » Mon Jul 29, 2013 7:39 pm

Blue wrote:
wbern wrote:...since any sane investor sits on a large hoard of cash anyway, and cash (or, if you like, even short-intermediate high-quality bonds)...

Bill



Could you expound on this? What constitutes "large hoard"?

Looking forward to reading your new book.

wbern wrote:"Large hoard" =

1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses
2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years.

Bill

Slightly off-topic, but forget 'age-in-bonds', I'm likin' this a lot more ^^^

Bob
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby staythecourse » Mon Jul 29, 2013 8:12 pm

nedsaid wrote:Cash (short term treasuries, money market funds) has kept up with inflation and maybe beat it by a hair.


This is debatable in a real post tax world. Mr. Ferri in "AAAA" has a great graph of $1 of cash deposited in 1950 and has shown post inflation and post tax for a 25% tax bracket you have LESS then that original dollar now.

Good luck.
...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Blue » Mon Jul 29, 2013 9:57 pm

CyberBob wrote:
Blue wrote:
wbern wrote:...since any sane investor sits on a large hoard of cash anyway, and cash (or, if you like, even short-intermediate high-quality bonds)...

Bill



Could you expound on this? What constitutes "large hoard"?

Looking forward to reading your new book.

wbern wrote:"Large hoard" =

1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses
2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years.

Bill

Slightly off-topic, but forget 'age-in-bonds', I'm likin' this a lot more ^^^

Bob


Agree -
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby brewsky » Thu Aug 01, 2013 10:31 pm

wbern wrote:Hi All:

3) That the cheapest way (that is, the way that sacrifices returns the least) to insure against severe inflation is a diversified global stock portfolio, with TIPS and a soupcon of precious metals and natural resource stocks.

Bill
,



Q: Is there a good example of a broad-based "Natural Resource" fund? (preferably from Vanguard) I'm not into individual stocks.

Q: What is a good example of a "Precious Metals" Fund (besides Vanguard, which I understand is not a "pure" precious metals fund)

Thanks!
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby JoMoney » Thu Aug 01, 2013 10:55 pm

brewsky wrote:
wbern wrote:Hi All:

3) That the cheapest way (that is, the way that sacrifices returns the least) to insure against severe inflation is a diversified global stock portfolio, with TIPS and a soupcon of precious metals and natural resource stocks.

Bill
,



Q: Is there a good example of a broad-based "Natural Resource" fund? (preferably from Vanguard) I'm not into individual stocks.

Q: What is a good example of a "Precious Metals" Fund (besides Vanguard, which I understand is not a "pure" precious metals fund)

Thanks!


ETF:"Vanguard Materials ETF (VAW)" or Fund: "Vanguard Materials Index Fund Admiral Shares (VMIAX)"
Are "Natural Resources" sector specific... Most sector specific funds have half of their holdings in the top 10 stocks and close 10% of the fund in single larges stock. Trying to slice-and-dice a portfolio is silly. There is very little evidence that over the long run you gain anything from diverging from the simple "Total Market" approach. You will most likely just end up paying more and needlessly complicating things.

The concept of owning a fund based on holding "Precious Metals" drives me crazy from an investment standpoint. Precious metals earn/yield NOTHING. It's just a bunch of shiny blocks sitting on a shelf somewhere, you pay an annual fee, and bit by bit your "precious metals" eventually would be fee'd away to nothing.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby snowman9000 » Fri Aug 30, 2013 6:22 pm

richard wrote:
I've yet to see a good argument as to why moderate expected inflation is a problem (rewriting menus every so often does not count as a major problem). Deflation, on the other hand, has been associated with very bad situations.


Well, tempting a thread lockdown, inflation is a hidden tax. And it doesn't fall equally on everyone. Those who run the money into the system get use of it pre-inflation. The rest of us get the haircut. It's sort of like a bid-asked spread. It's popular because people don't realize they are losing wealth. In fact, many will think they are getting richer. Like a lot of things, the benefits are concentrated but the costs are dispersed and hidden, which doesn't lead to much dissent.
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby jeffyscott » Sat Aug 31, 2013 8:58 am

brewsky wrote:Q: Is there a good example of a broad-based "Natural Resource" fund? (preferably from Vanguard) I'm not into individual stocks.


It's not Vanguard, but there is T. Rowe Price New Era, with ER of 0.67%. Based on M* screen, this is the third lowest in the category behind (the non-broad based) Vanguard Materials Index at 0.14% and ING Global Resources at 0.65%.

There are 34 ETFs in the natural resouces category, according to m*. But (just based on the funds' names) most, including Vanguard's, appear to cover a narrow slice of "natural resources", GNR and IGE look like the cheapest broad-based choices, with ER of 0.40% and 0.48%.
press on, regardless - John C. Bogle
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby YDNAL » Sat Aug 31, 2013 10:00 am

wbern wrote:...since any sane investor sits on a large hoard of cash anyway, and cash (or, if you like, even short-intermediate high-quality bonds)...

Bill

CyberBob wrote:
wbern wrote:"Large hoard" =

1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses
2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years.

Bill

Slightly off-topic, but forget 'age-in-bonds', I'm likin' this a lot more ^^^

Bob

The life-cycle hypothesis has been kicked around since 1950s (Franco Modigliani). As such, I've been a proponent of "a floor invested safer Assets" much prior to reading Bill's The Ages of Investors. Bill has put figures behind some of this.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby 1210sda » Sat Aug 31, 2013 12:12 pm

wbern wrote:"Large hoard" =

1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses
2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years.

Bill


Dear Dr. Bill,

1. What do you consider *basic* living expenses ??

2. If someone had basic living expenses of 40,000 and SS of 22,000, would "large hoard" be $360,000 (40,000 - 22,000=18,000 x 20) ? Just want to make sure that I understood your comment.

1210
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Tonen » Sat Aug 31, 2013 7:03 pm

wbern wrote:Hi All:

4) If your time horizon is much less than 20-30 years, you should still be more concerned with shallow than deep risk.

Bill
,


This is a ightbulb moment for me. Bill are you implying its a fair thing to consider gradually decreasing deep risk (especially inflation) protection with advancing age, notwithstanding any allowance for an estate? More simply, should the very elderly drop TIP's?

As an inflation-phobe, I have long had a set and forget 50/50 coupon vs Inflation linked bond allocation, 50/50 domestic international equities, 20% equities as REITS. Since inflation risk becomes less of an issue with shorter time frames, maybe the plan should be adjusted to reducing (spending) inflation bonds/ REIT's/ international when it seems likely my wife and I will peg out inside 10-15 years?

Or maybe I'm thinking too hard - fiddling with my current naive diversification might just increase the risk of succumbing to a behavioural screwup :happy
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Re: Jason Zweig Article on Shallow & Deep Risk

Postby Fclevz » Wed Oct 09, 2013 5:20 pm

wbern wrote:...a diversified global stock portfolio...

So is the simplest way to get this still something like what was mentioned in The Investor's Manifesto? That is, a basic Total Stock Index fund (U.S) and a Total International Stock Index fund, in a roughly 2:1 ratio?

Cheers,
Fred
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A hard to beat combination.

Postby Taylor Larimore » Wed Oct 09, 2013 5:27 pm

Fclevz wrote:
wbern wrote:...a diversified global stock portfolio...

So is the simplest way to get this still something like what was mentioned in The Investor's Manifesto? That is, a basic Total Stock Index fund (U.S) and a Total International Stock Index fund, in a roughly 2:1 ratio?

Fred:

In my opinion, that two-fund combination in a 2:1 ratio will be hard to beat--especially after taxes.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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