Why is it always "more risk?" Or is it?

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Why is it always "more risk?" Or is it?

Postby nisiprius » Sun Sep 01, 2013 8:38 pm

I've been brooding for a while on whether it's just my selective perception... it sure does seem to me as if all the advice we get from the investment world at large, for the last couple of decades, has varied in detail but been uniform in direction:

... take on more risk ...
... take on more risk ...
... take on more risk ...

In the last couple of days, we've had threads citing expert advice not to save for your kids' college, and not to have an emergency fund.

It all seems to me to be of a piece with "don't ramp down stock allocation in retirement," "increase stock allocation in retirement," "set your stock allocation ten, twenty percent higher than 'age in bonds,'" "increase your international percentage within your stock allocation," "increase your emerging markets percentage within your international allocation," "increase your small-cap holdings within your stock allocation," "increase your value holdings within your small-cap holdings," "swap out some of your high-grade bonds funds for low-grade junk bond funds," etc. etc. etc.

I don't think I can recall a case where someone has said "When you add international, or small-cap, or value to your stock portfolio, you should trim down your total stock allocation, so that your risk doesn't increase."

Is this selective perception on my part? What are some examples where the consensus wisdom for the general retail investor and retirement saver has called for lowering risk?
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Re: Why is it always "more risk?" Or is it?

Postby staythecourse » Sun Sep 01, 2013 9:20 pm

This topic has been discussed forever WAY before this board ever began. It is the crux of investing.

Mr. Swedroe has summarized it best in his books regarding folks taking on risk in that it should be based on one's willingness, ability, and need to take risk. If one has done DD and has pondered that question and comes out to 100% stocks or 100% bonds great. It is the SOLE RESPONSIBILITY of every investor to decide how much risk to take on as they and they alone can answer that question.

The more interesting question is what do folks define "risk" as in the first place. Some may consider risk as volatility (probability of short term loss) while others may view risk as not having enough money to last their lives (shortfall/ longevity risk). Whatever your view is by choosing to decrease one risk one is increasing the other. The wonderful bull market of bonds in 2000's coupled with the terrible stock market of 2000's makes it seem like just being conservative will decrease both risks. I am doubtful that is true as there is NO free lunch in investing or life.

Good luck.
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Re: Why is it always "more risk?" Or is it?

Postby livesoft » Sun Sep 01, 2013 9:33 pm

I don't think it is "more risk" for some of those things. Most people overestimate many risks and underestimate others. Kahneman has written about this. People with knowledge and experience (and who have read books like Kahneman's or Taleb's or Silver's) and math skills may do a better job of personal risk assessment than many others.

For example, Swedroe's three pillars of risk are great, but we are often asked on the forum: "How does one assess these three things for themselves?"
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: Why is it always "more risk?" Or is it?

Postby garlandwhizzer » Sun Sep 01, 2013 9:45 pm

nisi wrote
Is this selective perception on my part? What are some examples where the consensus wisdom for the general retail investor and retirement saver has called for lowering risk?


I think part of it is selective perception on your part because, based on your posts in this forum, it is clear that you are more risk averse than many of us. Part of the reason why most advisors are suggesting taking on more risk is the general perception that the returns of safe assets like Treasuries or TIPS are very likely to be about zero in real dollars for the next decade or so. Many people would rather tolerate the volatility of equities rather than accept the likely possibility of a zero real return over a decade for a significant percentage of their portfolios. Certainly I would, and last year I trimmed by bond+cash allocation to 25% - 30% with the rest in equities. That amounts to age minus 36 - 41. I am comfortable with that because I have a strong fundamental belief that corporate profits rise over time and increasing profits ultimately are what drives the stock market higher.

Undoubtedly some of those pushing investors to take more risk in asset allocation now are doing so to line their own pockets, taking commissions or other fees from equity funds for example. But many simply think that, given the current status of bond returns, the imminent tapering of QE at some point in the near future, and the possible return of significant inflation in the intermediate and long term, that bonds no longer offer risk-free return but rather a return-free situation with very real long term risks. I believe that such conservative, bond-loving authority as John Bogle has placed the probability that stocks outperform bonds over the next decade at 90%+.

Everyone must decide for himself or herself how to balance risk and reward, stocks and bonds. It is an individual decision and there is no single right answer for all. It's important, I think, to be comfortable enough with whatever your position is so you can sleep at night and also avoid panic selling during the inevitable stock downdrafts which, although wise, is not easy.

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Re: Why is it always "more risk?" Or is it?

Postby staythecourse » Sun Sep 01, 2013 10:00 pm

livesoft wrote:I don't think it is "more risk" for some of those things. Most people overestimate many risks and underestimate others. Kahneman has written about this. People with knowledge and experience (and who have read books like Kahneman's or Taleb's or Silver's) and math skills may do a better job of personal risk assessment than many others.

For example, Swedroe's three pillars of risk are great, but we are often asked on the forum: "How does one assess these three things for themselves?"


I totally agree EVERYONE over and underestimates risks. This includes YOU and ME and everyone else (including Mr. Swedroe himself). Since we don't know what risks will show up in the future it requires folks to guesstimate their ability to define their risk tolerance. That means some will guess correct on some risks, i.e. never selling during a bear market and will make mistakes on other risks, i.e. wife leaving them and taking half their earnings or having their company go bust along with most of their net worth.

I would caution assuming folks with more "knowledge" "experience" and "math skills" are better then others at preventing the same mistakes as everyone else. As far as I remember Odean and ?Barber studies showed WORSE performance among those with higher education and advanced degrees.

In the end, I believe, it is human fallacy to believe by analyzing HOW we make mistakes we can guarantee that we can correct/ prevent them. Do you not find it funny that Kahneman, Thalen, Taleb, etc... NEVER discuss their own investment prowess of NOT making the same mistakes. The reason is they are all human and are thus susceptible to making human behavioral mistakes. Until I see the data of what they did in their own 401lk during market ups and downs I can't give any credence KNOWING why mistakes happen make a difference in the end.

Good luck.
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Re: Why is it always "more risk?" Or is it?

Postby nedsaid » Sun Sep 01, 2013 10:19 pm

I think Nisiprius is on to something. I do think the investment community has ramped up the risk in recent years. Hard to say exactly why.

More public interest in investment in the stock market. When I was in college, it was the Wall Street Journal, Wall Street Week, the business section of your local paper, Wall Street Week, Nightly Business Report, and some financial publications. There was nothing like the financial media there is today. No CNBC, no Bloomberg. The Cable news was in its infancy. There was no internet.

There is more awareness of the corrosive power of inflation. Taking more risk is one way of dealing with it.

Academic research has pretty much said that you can add non-correlating and volatile asset classes to a portfolio. Supposedly, this increases return and reduces risk at the same time. So blame the academics for some of it.

The problem with all of this is that risk can only be measured in the past. We can only make educated guesses about risk and return in the future.
A fool and his money are good for business.
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Re: Why is it always "more risk?" Or is it?

Postby staythecourse » Sun Sep 01, 2013 10:25 pm

[quote="nedsaid"]
Academic research has pretty much said that you can add non-correlating and volatile asset classes to a portfolio. Supposedly, this increases return and reduces risk at the same time. So blame the academics for some of it.[quote]

I wouldn't say Markowitz paper in the ?1950's is recent.

Good luck.
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Re: Why is it always "more risk?" Or is it?

Postby nedsaid » Sun Sep 01, 2013 10:36 pm

The academic research didn't stop with Markowitz' paper.
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Re: Why is it always "more risk?" Or is it?

Postby Harold » Sun Sep 01, 2013 10:53 pm

nisiprius wrote:... take on more risk ...

To complete your ellipsis -- take on more risk and act like we're making our investments safer

Yes, of course you're right. There's a push for more and more risk taking. Whether it comes from the financial industry, or the eternal personal greed, I do not know. But it's clearly there.

It would be one thing if people were stating that they are willing to take on more risk with full understanding of potential consequences. But what's happening is that people frame risky approaches as if they were prudently safe ones. We see people saying to buy stocks because bonds are too risky, take lump sums because pensions might not be paid, invest in stocks instead of paying down mortgages because inflation might make the loan a valuable option, and on and on.

It's quite fascinating to observe (and quite disturbing when this trusted forum is devalued by such guidance being vociferously given to newcomers here).
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Re: Why is it always "more risk?" Or is it?

Postby Texas hold em71 » Sun Sep 01, 2013 11:01 pm

The problem with reading any article or this forum is that we all have different risk tolerances. The author could be more or less conservative than you.

Just today there are the posts you pointed out on emergency funds but there are others from people who believe social security, pensions, and annuities are still risky.

I think it is a cycle. We take on risk because we are compensated for it. We take on more to make more. We lose big. We cut back on risk. We get comfortable again or we see others taking on more risk and we think we are missing out so we take on more risk. And so on. Somewhere in there we figure out our risk tolerance. You don't really know your tolerance until you have weathered a job loss, a bear market, a seemingly unsellable house or a serious illness. You are just guessing.
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Re: Why is it always "more risk?" Or is it?

Postby pjstack » Sun Sep 01, 2013 11:11 pm

I don't think not having an "emergency fund" is necessarily "risky". I don't have one; my investments ARE my source of emergency money.

If something comes up (like a looming dental bill on my horizon right now) I will sell some of my mutual fund to pay for it.

Besides, interest rates are so low right now that a bank savings account earns less than inflation.
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Re: Why is it always "more risk?" Or is it?

Postby downshiftme » Sun Sep 01, 2013 11:28 pm

Very few people actually understand risk and with the last few years of wonderful stock market returns, aversion to risk is fading for many. The risk is real and it is really there, even if the bad possible outcome doesn't happen this time. It's almost a given that if people increase risk, but somehow manage to avoid a serious negative outcome, then they underestimate the decree of risk they were taking and opt for more risk in hopes of chasing even more reward. Until they actually encounter a negative scenario, after which many will overreact and pull out of anything with any risk, and lock in huge losses. Cycle and repeat after the next big run up. This applies to increasing equity allocations, using credit for emergency funds, and leverage of all sorts. All are fine choices if you understand the risks and assume them willingly. Many people don't actually understand there is risk unless the bad scenarios occur to them personally.
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Re: Why is it always "more risk?" Or is it?

Postby bobcat2 » Sun Sep 01, 2013 11:59 pm

Harold wrote:It would be one thing if people were stating that they are willing to take on more risk with full understanding of potential consequences. But what's happening is that people frame risky approaches as if they were prudently safe ones. We see people saying to buy stocks because bonds are too risky, take lump sums because pensions might not be paid, invest in stocks instead of paying down mortgages because inflation might make the loan a valuable option, and on and on.
:thumbsup :thumbsup

And of course there is the granddaddy of them all. Stocks become less risky if you hold them for a long time, but you still collect the full equity risk premium. Is this a great country or what? Apparently the only risk of holding risky stocks over a long investment horizon is the behavior risk of panicking at the 'wrong' time. So even panicking, but at that 'right' time, is risk free if you hold stocks for a long time. :D

BobK :wink:
In finance risk is defined as uncertainty that is consequential (nontrivial). | | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
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Re: Why is it always "more risk?" Or is it?

Postby staythecourse » Mon Sep 02, 2013 1:30 am

bobcat2 wrote:And of course there is the granddaddy of them all. Stocks become less risky if you hold them for a long time, but you still collect the full equity risk premium. Is this a great country or what? Apparently the only risk of holding risky stocks over a long investment horizon is the behavior risk of panicking at the 'wrong' time. So even panicking, but at that 'right' time, is risk free if you hold stocks for a long time.


In life there are probabilities and possibilities. Since the future is unknown there are two ways to invest. One is assuming anything is possible like rolling dice with random chances of different die to show up. If you believe this the POSSIBILITY of stocks being riskier in the long run in both lower returns and magnitude of underperformances vs. a more conservative portfolio is of course possible.

Now if you invest in PROBABILITIES then no. I have NUMEROUS times shown throughout the HISTORY of this country in EVERY rolling period that the longer a heavier stock portfolio is held the less chance of underperformance AND the magnitudes of underperformances decrease with the increasing time they are held.

Me personally, I invest heavier in stocks not because of the above, but because I think it passes the smell test of common sense. It only makes sense one would require a higher expected return for a investing in an asset that has a HIGHER potential of losing money vs. fixed income.

I think folks thinking they can get the same returns with less risk of loss (heavy fixed income) are the ones who have no past data, financial theory, or logical explanation to support their feelings. They just love to claim "well anything can happen in the future", i.e. possibilities. There is nothing wrong with investing in possibilities, but can't see why the same folks refuse to admit it is okay to invest in probabilities.

The conservative investors on this board love to refute any reason to be heavier in stocks even though all the financial theory and past data refute their claims

Good luck.
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Re: Why is it always "more risk?" Or is it?

Postby kksmom » Mon Sep 02, 2013 2:09 am

It is interesting that there are people asking one to take more risk and then there was this post by William Bernstein re cash reserves/short durn bonds one should have in another thread. Havent read his book though.

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.

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Re: Why is it always "more risk?" Or is it?

Postby Red Rover » Mon Sep 02, 2013 3:12 am

I will enter the distribution phase in 120 days (but who's counting?). My thoughts on risk. If all my assets are in fixed income, there is a strong likelihood that the money will not last as long as I want, but any loss I experience over 12 months will most likely be very limited, i.e. it will not wipe me out. The risk is that my money will not last long enough, and that is too much risk for me.

If all my assets are in equities, there is a strong likelihood that I will experience a loss of 30-50% at some time(s), but will probably come out well ahead over the long haul. That is also too much risk for me.

The best choice for me is somewhere between the two, and 30-70 or 70-30. My AA is 70-30 right now, but I am beginning to think 50-50 is where I will end up in january when I retire.

I haven't really sensed any pressure to take more risk, although I do enjoy the commercials that want to sign me up so I can "take my trading to the next level", "get 300 free trades for 6 months", or "buy on the green light, sell on the red, and hold on the yellow".
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Re: Why is it always "more risk?" Or is it?

Postby YDNAL » Mon Sep 02, 2013 9:36 am

nisiprius wrote:I've been brooding for a while on whether it's just my selective perception... it sure does seem to me as if all the advice we get from the investment world at large, for the last couple of decades, has varied in detail but been uniform in direction:

... take on more risk ...
... take on more risk ...
... take on more risk ...

Depends who you believe to be "the investment World at large."
  • People are living longer and planning for longer retirements.
  • I agree with some posters whom have said that lower hoped-for returns in fixed income options may force some people to suggest adding overall risk to a mix of investments to mitigate the potential to otherwise run out of money.
But, perhaps it is just your perception, nisiprius! :)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Re: Why is it always "more risk?" Or is it?

Postby House Blend » Mon Sep 02, 2013 10:16 am

The drumbeat I hear that never seems to end is not so much "more risk"
as it is "OMG! Must act now before it is too late!!!" Syria, debt ceilings, QE,
Greece, tsunamis, bond apocalypse, gold,... There's always something in the news that investors must react to or face dire consequences. Listen to us (and watch our commercials). Investing is too complicated, you need us to manage it for you. Yesterday's advice is no longer valid.

There's no money to be made in "Stay the course."
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Re: Why is it always "more risk?" Or is it?

Postby ofcmetz » Mon Sep 02, 2013 10:36 am

nedsaid wrote:I think Nisiprius is on to something. I do think the investment community has ramped up the risk in recent years. Hard to say exactly why.


Maybe some of it is because of the paltry yields of fixed income investments since 08/09 compared to the more impressive returns of equity?
Showing up at the donut shop at 5 am to get them hot out of the oil is an example of successful market timing.
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Re: Why is it always "more risk?" Or is it?

Postby jb1934 » Mon Sep 02, 2013 10:55 am

Follow the money. Wall street or the "investment industry" are not fiduciaries. Is there more
profit to be made in aggressive investing or conservative investing?
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Re: Why is it always "more risk?" Or is it?

Postby peppers » Mon Sep 02, 2013 11:13 am

People love a good story.

The Ogre - Risk..inflation, deflation, default.....
The Victim - Individual investor lost in the financial wilderness...
The Sage - The wise mentor spoken about in whispers that must be sought out to find the answer....
"..the cavalry ain't comin' kid, you're on your own..."
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Re: Why is it always "more risk?" Or is it?

Postby stan1 » Mon Sep 02, 2013 12:01 pm

People are taking more risk because they have to. Pensions have gone away. People are taking more risk because they want to. Most people don't have the luxury of a six figure salary yet still want a home, 60" TV, vacations, cars, and activities for the kids.

Financial services companies, authors, and advisors are trying to make a buck by telling people how they can have it all (which means increasing risk). The chance of success is low, and I think there will be a lot of aging baby boomers/gen xers living with their kids instead of retiring to a golf course home in FL or AZ.
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Re: Why is it always "more risk?" Or is it?

Postby The Wizard » Mon Sep 02, 2013 12:01 pm

I'm not sure there's anything really happening here; it may be more Nisi's perception.
What has happened over the past few decades is an increase in low-cost and user-friendly investment options, with this internet thing and all.
Seems like when I was a kid back in the 60's, you HAD to use a broker and pay a load to buy mutual funds, from what little I know, just tracking my small gift amounts under the UGMA.

Additionally, there's been increasing press over the past decade about how WOEFULLY underfunded most workers with DC plans are, compared to the old days when everyone had palmy pensions. There may be some push for those folks to go riskier to salvage their retirement, when what is really needed is a higher contribution/savings rate in most circumstances...
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Re: Why is it always "more risk?" Or is it?

Postby CyberBob » Mon Sep 02, 2013 12:22 pm

nisiprius wrote:... take on more risk ...
... take on more risk ...
... take on more risk ...

    Investment management provides only one de-
    pendable way to survive through the uncertainty
    of the future: diversification. Diversification means
    owning assets that do not move up and down to-
    gether—a portfolio designed to subdue volatility
    rather than to maximize returns, while still expos-
    ing you to the widest possible range of positive op-
    portunities. (A colleague once suggested you are
    never adequately diversified unless you have some
    holdings that make you uncomfortable.) Placing
    large bets on an unknown future is worse than
    gambling, because at least in gambling you know
    the odds. This is why I propose restoring 60/40 to
    its rightful place as the center of gravity of asset
    allocation for long-term investors.
    -- Peter Bernstein, 2002, The 60/40 Solution (PDF)

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Re: Why is it always "more risk?" Or is it?

Postby Levett » Mon Sep 02, 2013 1:38 pm

"I think Nisiprius is on to something. I do think the investment community has ramped up the risk in recent years. Hard to say exactly why."

Yes, Nisi is on to something. And Harold has identified the complete thought.

I'm sure there's no single "why," but I've noticed that such trumpeting of "more risk" predominantly comes from males--be they advisors, reps of fund companies, or posters in general.

Perhaps what the investment community needs is a lower testosterone level. :wink:

Meditation can help. 8-)

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Re: Why is it always "more risk?" Or is it?

Postby The Wizard » Mon Sep 02, 2013 1:45 pm

Maybe it's just recency bias then, how about that?
Was this same push for more risk prominent just five years ago, the last half of 2008?
I don't actually recall but I'm not making the premise...
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Re: Why is it always "more risk?" Or is it?

Postby patrick » Mon Sep 02, 2013 1:52 pm

It depends on where you look. People who are afraid of interest rate risk in bonds often switch to cash, the safest investment of all if you measure risk by volatility. People who invest in gold aren't necessarily doing it because they think taking risk there is wise, but rather because they think gold is safer than stocks or bonds. Furthermore many insurance based investing products are sold based on claims of extreme safety.
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Re: Why is it always "more risk?" Or is it?

Postby gwrvmd » Mon Sep 02, 2013 2:10 pm

Nisi: Great post, the forum was getting a little boring, your post has rejuvenated it.
I'll make some comments which will make me a target but that is okay

I am 76 years old, 100% equities since I first started serious investing in late 70s. Started with Vanguard with Windsor Fund which was one of the 3 funds Vanguard had at the time.

Didn't sell a penny in 1987 or 2002 but learned to have faith in the American system of private enterprise capitalism so in 2008 I bought with what little cash I had. To do what I do, I admit takes a very high risk tolerance. Rare for a Boglehead
I estimate my present portfolio is 25% to 30% more than if I had ever bought bonds.
I also estimate my present portfolio it is 25% to 30% higher because I never converted any of my IRA, 403(b) or Kehoe/HR 10 accounts to Roths. Why pay taxes to the government decades before you have to? There was recently a thread here that advised a graduate student to begin his investing with a Roth----pay taxes 40 years early--what is the logic of that?
I realize that about 25% of my retirement assets belong to the government but they have been compounding and been reinvested for many years and most are still doing so.

So far my RMDs have been between 3.8% - 4.8%, don't be afraid of the effect of RMD on your taxable income. Most of my deferred taxes are still being invested and compounding in my portfolio. (added as edit) All my deferred taxes in my portfolio went up 16% so far this year and my RMD this year is 5.3%, what's not to like? Damn glad I didn't pay them back in the 80s and 90s.

Inflation makes cash(and bonds) risky. As Nedsaid " The corrosive power of inflation"

Volatility is not risk, longevity is risk. When you are investing your target date is not the year you turn 65 it is the year you die. For most working people your investing horizon is 50 years away....Inflation is the enemy!....Gordon
Disciple of John Neff
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Re: Why is it always "more risk?" Or is it?

Postby IlliniDave » Mon Sep 02, 2013 2:33 pm

Doesn't seem to be a big surprise to me, and it probably isn't anything new. Wasn't Graham considered half-insane when he said everyone should have at least 25% of their money in stocks when he wrote in the late 1930s? Of course, that was in the aftermath of a speculative binge fueled in part by buying on margin that resulted in a monumental crash. I believe only a minority of people enter investing with the sole intent of prudently building a high-ballast retirement account. Most people start with the hope of significantly improving their lot in life through creation of wealth. In other words, they want to make themselves rich. To turn a little money into a lot of money necessitates risk.

Further, risk can mean about anything, so depending on where you are and who you are the biggest risk could be long-term shortfall or short-term fluctuation, too much ex-US exposure or not enough, too much reliance on market cap or too much deviation from it, too much hedging for inflation, or not enough. And with MPT we add riskier elements to our larder to make the sum of the parts less risky.

So I think things are pretty much as they always were. There's always been promotion of ways to get somewhat higher returns. When rough waters appear there's a temporary shift to conservatism, but as soon as things stabilize a little people in the aggregate start reaching for returns.
Don't do something. Just stand there!
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Re: Why is it always "more risk?" Or is it?

Postby George-J » Mon Sep 02, 2013 3:59 pm

I do appreciate nisiprius' issues - like
nisiprius wrote:.... all the advice we get from the investment world at large....

... take on more risk ...
... take on more risk ...
... take on more risk ...

....

I can't help but see "risk" as an overused four letter word. What does it mean? It seems to vary from poster to poster. Many suggest fuzzy something that is not well defined.
Similar to -
staythecourse wrote: ... The more interesting question is what do folks define "risk" as in the first place. ... .

I like Warren Buffett's quip I read some time ago. Words to the effect that -
"Risk equates to not knowing what you are doing."


With some posts that I cannot relate to and others that I can. I am 73 years old - and find "gwrvmd"'s post in line with my thinking and experience.
If interested in my details - go here and here as well

Thanks to everyone for the good reads
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Re: Why is it always "more risk?" Or is it?

Postby JoMoney » Mon Sep 02, 2013 4:35 pm

The Wizard wrote:Maybe it's just recency bias then, how about that?
Was this same push for more risk prominent just five years ago, the last half of 2008?
I don't actually recall but I'm not making the premise...


There definitely has been a stronger push away from cash like investments in recent years. I believe some of it is concern about the large numbers of younger folks who have only experienced the last decade of stocks. I have co-workers in their late twenties who refuse to invest in stocks because they believe it's a rigged game, and point to several news articles that will confirm that belief. I think those pushing "risk" where risk is a higher stock allocation are somewhat trying to counteract that:
"Today, only 22% of investors under the age of 35 say they're willing to take on a substantial level of risk"
http://money.cnn.com/2010/09/07/markets ... /index.htm

Another factor is QE. With such low interest rates it's hard to even consider bonds as an "investment", with yields below expected inflation (and a perceived risk of very high inflation) it's harder than ever for an investment adviser to recommend cash/bonds as an "investment".

As far as Small-Cap stocks and EM stock "risk", I think this is recency as well. In 1998 people were asking Warren Buffett "Why do large caps outperform small caps?". Buffett explained how the growth rate couldn't continue, and of course it didn't. The small-caps that were trading at a significant discount in PE compared to large-caps have since outperformed and the recency bias just makes it easier to sell. Access to EM stocks is easier than ever, there more and more fund with these choices available. So I think the SC and EM push is a recency bias, they have both had a good decade of performance and the financial industry (and the academics funded by the industry) will market their new whiz-bang products as hard and as long as they can. When the 10 year charts and graphs of SC/EM performance don't look so good, we'll stop hearing about it.
"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: Why is it always "more risk?" Or is it?

Postby tadamsmar » Mon Sep 02, 2013 4:45 pm

Do all these actions really imply more risk?

"set your stock allocation ten, twenty percent higher than 'age in bonds,'"

That might lead to less risk by the standards of the Trinity Study.

"increase your international percentage within your stock allocation,"

If you you international is low enough, this could reduce risk for a given target estimated mean according to mean-variance analysis.

"increase your emerging markets percentage within your international allocation,"

This could also reduce risk according to mean-variance.
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Re: Why is it always "more risk?" Or is it?

Postby richard » Mon Sep 02, 2013 5:02 pm

bobcat2 wrote:
Harold wrote:It would be one thing if people were stating that they are willing to take on more risk with full understanding of potential consequences. But what's happening is that people frame risky approaches as if they were prudently safe ones. We see people saying to buy stocks because bonds are too risky, take lump sums because pensions might not be paid, invest in stocks instead of paying down mortgages because inflation might make the loan a valuable option, and on and on.
:thumbsup :thumbsup
And of course there is the granddaddy of them all. Stocks become less risky if you hold them for a long time, but you still collect the full equity risk premium. Is this a great country or what? Apparently the only risk of holding risky stocks over a long investment horizon is the behavior risk of panicking at the 'wrong' time. So even panicking, but at that 'right' time, is risk free if you hold stocks for a long time. :D

BobK :wink:

We know these things to be true because 90 or 100 years of returns history is a reliable guide to the next 30 years, as proven by the academic studies. :D

Those who believe risk is risky, a genuine economic matter rather than a psychological flaw, are just stick-in-the-muds.
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Re: Why is it always "more risk?" Or is it?

Postby Professor Emeritus » Mon Sep 02, 2013 5:08 pm

staythecourse wrote:
bobcat2 wrote:And of course there is the granddaddy of them all. Stocks become less risky if you hold them for a long time, but you still collect the full equity risk premium. Is this a great country or what? Apparently the only risk of holding risky stocks over a long investment horizon is the behavior risk of panicking at the 'wrong' time. So even panicking, but at that 'right' time, is risk free if you hold stocks for a long time.


In life there are probabilities and possibilities. Since the future is unknown there are two ways to invest. One is assuming anything is possible like rolling dice with random chances of different die to show up. If you believe this the POSSIBILITY of stocks being riskier in the long run in both lower returns and magnitude of underperformances vs. a more conservative portfolio is of course possible.

Now if you invest in PROBABILITIES then no. I have NUMEROUS times shown throughout the HISTORY of this country in EVERY rolling period that the longer a heavier stock portfolio is held the less chance of underperformance AND the magnitudes of underperformances decrease with the increasing time they are held.

Me personally, I invest heavier in stocks not because of the above, but because I think it passes the smell test of common sense. It only makes sense one would require a higher expected return for a investing in an asset that has a HIGHER potential of losing money vs. fixed income.

I think folks thinking they can get the same returns with less risk of loss (heavy fixed income) are the ones who have no past data, financial theory, or logical explanation to support their feelings. They just love to claim "well anything can happen in the future", i.e. possibilities. There is nothing wrong with investing in possibilities, but can't see why the same folks refuse to admit it is okay to invest in probabilities.

The conservative investors on this board love to refute any reason to be heavier in stocks even though all the financial theory and past data refute their claims

Good luck.


Oh dear
It takes me about 6 hours in class to explain the concept of risk, but I will try.
Investing is almost NEVER about risk, it is about UNCERTAINTY.
The example I use with my students is a roulette game. In roulette all the risks are carefully defined.
The "Uncertainty" is whether the casino is crooked or even that the wheel is deformed.
Uncertainty reflects our limited knowledge of the shape of the distribution of the risk curve.
So if we know precisely how the wheel is deformed it changes the "risk" of various bets.
Even if we know the casino cheats it changes the risk of various bets.
A market for risk that is not uncertain will run very efficiently.
There will be no enhanced return for taking on more "risk"
What they want is for you to take on more uncertainty
I do agree that many analysts use the term risk when they mean uncertainty
primarily because uncertainty itself is usually mathematically intractable.
So the risk term is actually the (Risk + uncertainty)
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Re: Why is it always "more risk?" Or is it?

Postby The Wizard » Mon Sep 02, 2013 6:06 pm

I tend to agree with the Professor. In discussing financial investments, I'm prone to think I have ZERO risk of losing a substantial portion of my assets due to fraud or theft. Perhaps Madoff's clients thought similar, but I'm with TIAA-CREF and Vanguard and there darn well better be zero risk of any funny business with them.
Uncertainty-wise, I'm not sure whether my portfolio will go up 20% or down 15% over the next 12 months.
I'm aware that different asset classes and subclasses have different Standard Deviations or volatility, so I try to combine them so as to reduce the volatility of the combined portfolio.
This isn't rocket surgery...
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Re: Why is it always "more risk?" Or is it?

Postby stlutz » Mon Sep 02, 2013 10:50 pm

Thanks for starting the thread, nisiprius. A couple of thoughts:

I suppose there is a valid justification for limiting one's exposure to investments offer no or negative real expected returns. That is why I don't invest in commodities, for example (even though commodities and bonds are obviously very different things).

However, what I find very disconcerting is how often "experts" suggest increasing risk without saying that this is what they advise.

John Bogle is on the top of my list for this, in two things he has been pushing of late. First is his view that investors need to tilt their bond exposure toward corporate bonds because the "total" bond market is no longer good enough. More dramatic is that the proponent of the "age in bonds" rule is now advising that you "count" Social Security and any other fixed payments you may receive in retirement as bonds. And, of course, at today's low rates, such payments count as a lot of bonds. From what I understand of his views, a new retiree who is 80% stocks would have been considered "too aggressive" a few years ago; now Bogle would consider this person to be "about right" even though the underlying rule ("age in bonds") hasn't changed!

In today's environment, taking more risk may or may not be the right things to do. I just wish the "experts" would explicitly say that this is what they are advising instead of redefining what "age in bonds" means, saying that dividend stocks=bonds etc.

As for me, I'm a believer in the 60/40 approach.
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Re: Why is it always "more risk?" Or is it?

Postby pkcrafter » Tue Sep 03, 2013 2:12 am

Is this selective perception on my part? What are some examples where the consensus wisdom for the general retail investor and retirement saver has called for lowering risk?

There aren't any examples because your perception is correct. Risk isn't risky anymore--a very dangerous way of thinking, but the average investor is buying in.

Consider this:
The good news for fund investors is that the performance gap has closed over time. The difference in performance of 20-year annualized returns for the average stock fund investor and the S&P 500 has shrunk considerable from 1998 to 2012. In 1998, the gap was 10.65%, and it was 3.96% in 2012. The Dalbar study attributes the improvement to “investors who entered the markets in the 90s have now experienced multiple market declines and recoveries and have learned from those experiences.”

Not a chance--they have learned nothing, same 'ol behavioral mistakes.

http://www.forbes.com/sites/tomanderson/2013/03/28/fund-investors-lag-as-sp-500-nears-all-time/


Risk vs Uncertainty

Placing large bets on an unknown future is worse than gambling, because at least in gambling you know the odds.

Peter Bernstein, The 60/40 Solution

Good Barry Ritholtz article on risk vs uncertainty.

http://www.ritholtz.com/blog/2012/12/defining-risk-versus-uncertainty/
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Why is it always "more risk?" Or is it?

Postby Professor Emeritus » Tue Sep 03, 2013 5:39 am

pkcrafter wrote:

Risk vs Uncertainty

Placing large bets on an unknown future is worse than gambling, because at least in gambling you know the odds.

Peter Bernstein, The 60/40 Solution

Good Barry Ritholtz article on risk vs uncertainty.

http://www.ritholtz.com/blog/2012/12/defining-risk-versus-uncertainty/


Column and some responses are a good start but we actually do try to analyze and occasionally quantify the uncertainty.
Life expectancy tables are still among the most studied attempts at defining uncertainty
The key is to know what you don't know.
FWIW stock markets have some of the highest uncertainties we try to estimate. There is some evidence albeit imperfect that uncertainties decline as the time period stretches out.
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Re: Why is it always "more risk?" Or is it?

Postby IlliniDave » Tue Sep 03, 2013 6:11 am

Professor Emeritus wrote:
Oh dear
It takes me about 6 hours in class to explain the concept of risk, but I will try.
Investing is almost NEVER about risk, it is about UNCERTAINTY.
The example I use with my students is a roulette game. In roulette all the risks are carefully defined.
The "Uncertainty" is whether the casino is crooked or even that the wheel is deformed.
Uncertainty reflects our limited knowledge of the shape of the distribution of the risk curve.
So if we know precisely how the wheel is deformed it changes the "risk" of various bets.
Even if we know the casino cheats it changes the risk of various bets.
A market for risk that is not uncertain will run very efficiently.
There will be no enhanced return for taking on more "risk"
What they want is for you to take on more uncertainty
I do agree that many analysts use the term risk when they mean uncertainty
primarily because uncertainty itself is usually mathematically intractable.
So the risk term is actually the (Risk + uncertainty)


A group within the academic world seems to have (formally) defined standard deviation of returns as risk, so apparently among some authorities the concepts are deliberately used interchangeably. That's an idea that I was exposed to only within the last year (10 months ago I'd never heard of MPT), and I have to admit that intuitively I found it unsatisfying. Mathematically it is convenient I suppose.

As a hobby-like pursuit I've been on a mission to define risk for myself as it pertains to finances. I have no idea whether the pursuit will be worthwhile. The game seems to boil down to balancing the amount of short-term risk/uncertainly one tolerates in the early and middle phases to best reduce the chances of long-term shortfall. Other things can come into play, but to a layman that seems to be the gist of it.
Don't do something. Just stand there!
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Re: Why is it always "more risk?" Or is it?

Postby nisiprius » Tue Sep 03, 2013 6:11 am

George-J wrote:I like Warren Buffett's quip I read some time ago. Words to the effect that -
"Risk equates to not knowing what you are doing."
Oh, dear. Did he say that? Or did he mean it ironically, as in the sense that nobody does know what they're doing?

It raises an interesting point. I've quipped that there is no such thing as a risk to the man with a working crystal ball. One of the commonest delusions in investing is "this investment might be risky for some people, but not for me because I know what I'm doing."

Clearly, the degree of knowledge can affect the degree of risk. Arnold Rothstein incurred less risk than other gamblers betting on the 1919 World Series because he had fixed the game.

With regard to investments and the efficient market hypothesis, what do people think about risk and knowledge? I would have said myself, just out of my head, that investments have a "intrinsic risk," which is what remains when you have factored in all publicly available information, which can reduced only by using non-publicly available information. And that to the degree that the market is efficient, there is very little difference between my risk and the intrinsic risk.

Oddly enough, way back when, I formulated the "efficient Nisiprius hypothesis" which I didn't call by that name; I phrased it as "When it comes to investing, I don't know what I'm doing." That's what led me to index funds in the first place. Over time, I've modified it to "I don't know what I'm doing, and I don't think anyone else does either, except maybe Warren Buffett and I'm not sure about him."

Let's say we invert Buffett's phrase and reword it to say "The knowledgeable retail investor experiences less risk than the ignorant one." Is there a meaning for "risk" that makes this statement true, and, if so, how true?
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Re: Why is it always "more risk?" Or is it?

Postby George-J » Tue Sep 03, 2013 7:05 am

nisiprius wrote:
George-J wrote:I like Warren Buffett's quip I read some time ago. Words to the effect that -
"Risk equates to not knowing what you are doing."
Oh, dear. Did he say that? Or did he mean it ironically, as in the sense that nobody does know what they're doing?

It raises an interesting point. I've quipped that there is no such thing as a risk to the man with a working crystal ball. One of the commonest delusions in investing is "this investment might be risky for some people, but not for me because I know what I'm doing."

Clearly, the degree of knowledge can affect the degree of risk. Arnold Rothstein incurred less risk than other gamblers betting on the 1919 World Series because he had fixed the game.

With regard to investments and the efficient market hypothesis, what do people think about risk and knowledge? I would have said myself, just out of my head, that investments have a "intrinsic risk," which is what remains when you have factored in all publicly available information, which can reduced only by using non-publicly available information. And that to the degree that the market is efficient, there is very little difference between my risk and the intrinsic risk.

Oddly enough, way back when, I formulated the "efficient Nisiprius hypothesis" which I didn't call by that name; I phrased it as "When it comes to investing, I don't know what I'm doing." That's what led me to index funds in the first place. Over time, I've modified it to "I don't know what I'm doing, and I don't think anyone else does either, except maybe Warren Buffett and I'm not sure about him."

Let's say we invert Buffett's phrase and reword it to say "The knowledgeable retail investor experiences less risk than the ignorant one." Is there a meaning for "risk" that makes this statement true, and, if so, how true?


Nisi - I've been trying to find a reference to my Buffett quote - here is something from an early-2008 posting at Bogleheads ---
George-J wrote:
D-Dog wrote:IAny thoughts on these risks and how we address them?


A couple of views:

Warren Buffett
: -- was asked about risk at the most recent Berkshire annual meeting in Omaha. Here is the question and answer exchange:
Q: What are your thoughts on tracking volatility in an attempt to measure risk?

Buffett: "Volatility does not measure risk. Beta, which is a measure of volatility, is nice and mathematical, and wrong. Past volatility does not measure the risk of investing now. Risk comes from the nature of being in certain kinds of businesses and from not knowing what you're doing."

Peter Bernstein: -- in his excellent book on risk, Against the Gods, The Remarkable Story of Risk, writes as follows:
“The essence of risk management lies in maximising the areas where we have some control over the outcome while minimising the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us.”
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Re: Why is it always "more risk?" Or is it?

Postby JoMoney » Tue Sep 03, 2013 9:39 am

Maybe there is less risk if you're able to control business the way Buffett does.
Burton Malkiel says it's "less risk" for Princeton to invest in China because they're making private investments, allowing them to help with the management expertise and avoid certain agent problems.
http://www.youtube.com/watch?v=uVcV0H4qtgw&t=58m45s
The way Buffett buys whole businesses, he is in a much better position to manage them like a private investment.
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