Government Shutdown/Default [effect on investments]

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umfundi
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Re: Government Shutdown/Default [effect on investments]

Post by umfundi »

protagonist wrote:Another point, Keith....you are looking from the perspective of somebody who was working and contributing regularly to the portfolio throughout this period, so you were investing in down periods and now is an unprecedented "up", so if you sold today you would have an advantage.

I was looking from the perspective of a hypothetical retiree who invested a lump sum 13 years ago and had no excess income to invest since.

It's sort of apples and oranges.
protagonist, no.

I separated my response in to two parts:

If you have a lump sum and invest no more:

http://www.bogleheads.org/forum/viewtop ... 7#p1827417

And later, if you start with zero and invest a regular sum.

http://www.bogleheads.org/forum/viewtop ... 7#p1827587

You can combine these two as they pertain to your own circumstances.
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protagonist
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

please ignore this post....duplicate that I can't delete. sorry
Last edited by protagonist on Mon Oct 14, 2013 10:07 pm, edited 1 time in total.
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VictoriaF
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:What we cannot agree upon is whether time mitigates that risk....most people here I think would say it does, whereas I would say "I don't know....I don't have enough information to decide".
Time does not mitigate the risk. See bobcat2's comments and a citation of Gene Fama and Ken French commenting on how stocks become riskier over long investment horizons in the message Re: Do you believe stocks are safer the longer they are held.

Victoria
Last edited by VictoriaF on Mon Oct 14, 2013 9:53 pm, edited 1 time in total.
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protagonist
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

umfundi wrote:
protagonist wrote:Another point, Keith....you are looking from the perspective of somebody who was working and contributing regularly to the portfolio throughout this period, so you were investing in down periods and now is an unprecedented "up", so if you sold today you would have an advantage.

I was looking from the perspective of a hypothetical retiree who invested a lump sum 13 years ago and had no excess income to invest since.

It's sort of apples and oranges.
protagonist, no.

I separated my response in to two parts:

If you have a lump sum and invest no more:

http://www.bogleheads.org/forum/viewtop ... 7#p1827417

And later, if you start with zero and invest a regular sum.

http://www.bogleheads.org/forum/viewtop ... 7#p1827587

You can combine these two as they pertain to your own circumstances.
yes, you did. My error.
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote:
protagonist wrote:What we cannot agree upon is whether time mitigates that risk....most people here I think would say it does, whereas I would say "I don't know....I don't have enough information to decide".
Time does not mitigate the risk. See bobcat2's comments and a citation of Gene Fama and Ken French commenting on how stocks become riskier over long investment horizons in the message Re: Do you believe stocks are safer the longer they are held.

Victoria
I would think that would be true....as I think I mentioned previously a one-time 50% drop (like in 2008) is not nearly as bad as the compounding effect of fifty years of average 1% annual drops. Plus risk is finite. Compare playing one hand of poker to playing poker every day over a year. The odds are the same and the amount likely won/lost is proportional to the total invested in the game. ( If I'm loose with the math in my posts, I invite criticism from a mathematician or statistician. I suspect there are many on this site, and if I am wrong I welcome the opportunity to learn)
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VictoriaF
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:
VictoriaF wrote:
protagonist wrote:What we cannot agree upon is whether time mitigates that risk....most people here I think would say it does, whereas I would say "I don't know....I don't have enough information to decide".
Time does not mitigate the risk. See bobcat2's comments and a citation of Gene Fama and Ken French commenting on how stocks become riskier over long investment horizons in the message Re: Do you believe stocks are safer the longer they are held.

Victoria
I would think that would be true....as I think I mentioned previously a one-time 50% drop (like in 2008) is not nearly as bad as the compounding effect of fifty years of average 1% annual drops.
The comparison depends on what happens after the one-time 50% drop. Would the market remain completely flat for the next 50 years? A quick spreadsheet calculation
$1000 * 0.99^50 = $605
$1000 * 0.5 = $500
shows that if nothing happens after a 50% drop, it's worse than gradual 1% declines over 50 years. But of course, in reality much has happened after the 2008-2009 50% drop.
protagonist wrote:Plus risk is finite. Compare playing one hand of poker to playing poker every day over a year. The odds are the same and the amount likely won/lost is proportional to the total invested in the game. ( If I'm loose with the math in my posts, I invite criticism from a mathematician or statistician. I suspect there are many on this site, and if I am wrong I welcome the opportunity to learn)
I think gambling is different because it's more random. Incidentally, last Friday's WSJ article How Often Do Gamblers Really Win? claims that the longer you play the more likely you are to lose:
WSJ wrote:On any given day, the chances of emerging a winner aren't too bad—the gamblers won money on 30% of the days they wagered. But continuing to gamble is a bad bet. Just 11% of players ended up in the black over the full period, and most of those pocketed less than $150.
Victoria
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protagonist
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote: The comparison depends on what happens after the one-time 50% drop. Would the market remain completely flat for the next 50 years? A quick spreadsheet calculation
$1000 * 0.99^50 = $605
$1000 * 0.5 = $500
shows that if nothing happens after a 50% drop, it's worse than gradual 1% declines over 50 years. But of course, in reality much has happened after the 2008-2009 50% drop.
Oh, you are right. If you started with $100 and lost 1% a year, the second year you would only lose 1% of $99 rather than of the starting $100, etc, so of course you are right.

VictoriaF wrote:I think gambling is different because it's more random.
On what are you basing the assumption that the stock market is not random? And if it is not random and is stacked in our favor, why are we not all computerized day traders? (Obviously, trading fees, but let's ignore that for the sake of argument).
As you said, the risk is not mitigated over time.
VictoriaF wrote: Incidentally, last Friday's WSJ article How Often Do Gamblers Really Win? claims that the longer you play the more likely you are to lose:
WSJ wrote:On any given day, the chances of emerging a winner aren't too bad—the gamblers won money on 30% of the days they wagered. But continuing to gamble is a bad bet. Just 11% of players ended up in the black over the full period, and most of those pocketed less than $150.
I didn't read the article, but I assume the argument is that if the house odds are .say, 1% in their favor, on a given day it is almost a tossup, whereas over time the odds will catch up with almost everybody. Analogy...if a coin came up heads 49% of the time on one toss, betting $1000, you have fairly even odds of winding up with either $2000 or zero, whereas on a thousand tosses, betting a dollar on each, you would probably end up with pretty close to $980. and the likelihood of winding up with more than $1000 (eg winning) would be relatively low. Right? Add to that the psychology of gambling and not knowing when to quit when you are ahead...there are probably very few long-term winners.
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:
VictoriaF wrote:I think gambling is different because it's more random.
On what are you basing the assumption that the stock market is not random?
Stocks represent part ownership in the underlying businesses. Over time businesses grow, and thus the value of the business ownership increases. This part is not random, this is an increasing trend. Jack Bogle gives a formula for the market growth as
Market Value Growth = Dividends + GDP growth + Inflation.

Jack uses this formula for providing general, long-term guidance for valuing one's stock holdings. The GDP growth is what gives the stocks the upward trend.

Jack also stresses that on top of the general increasing trend there are wild speculative market fluctuations. The speculative fluctuations are much more random, but still not completely random.
protagonist wrote:And if it is not random and is stacked in our favor, why are we not all computerized day traders?
Computerized, high-frequency traders are trying to catch patterns in micro-short-term fluctuations. Some of them are trading on insider information.
protagonist wrote:As you said, the risk is not mitigated over time.
There are many potential events that could derail the market value from its upward trend, e.g., a global economic collapse a la 2008 after which the economy would go into a tailspin and could not be revived, an environmental catastrophe, an epidemic, a strong crowd sentiment. Investor psychology (studied in Behavioral Finance) is a very important factor in the market performance. After the Great Depression, people stayed out of the market for generations; after the market runup of the 1990s, people have developed a persistent faith in the markets that was not shaken even in 2001 and 2008. The Web, and recently the social media, amplifies the information spread and increases crowd effects.

Thus, while the probability of the market doing well is rising with time, the expected value of the deviation from a good performance also rises.

Victoria
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American In Korea
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Re: Government Shutdown/Default [effect on investments]

Post by American In Korea »

protagonist wrote:
My point is that you need millenial data to say anything meaningful about your 1/3 century that you have left. Otherwise you are just guessing. Like me. We are doing the same thing- following the same course. The difference is you have faith. I don't. I see what I am doing as gambling. The science is not there to support it.
Yes but you also have the bias of news exposure being consistently negative.
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

American In Korea wrote:
protagonist wrote:
My point is that you need millenial data to say anything meaningful about your 1/3 century that you have left. Otherwise you are just guessing. Like me. We are doing the same thing- following the same course. The difference is you have faith. I don't. I see what I am doing as gambling. The science is not there to support it.
Yes but you also have the bias of news exposure being consistently negative.
I don't think that protagonist argues based on his news exposure. I think his arguments have two biases:
1. He makes an assumption about the Bogleheads.
2. He has a model in mind that he tries to fit to the markets.

Protagonist's assumption about the Bogleheads is that they argue and invest on faith, that they blindly "stay the course." This may be true for some members, but the most interesting and thoughtful participants are as thoughtful and as skeptical as protagonist is. Their arguments and actions are the result of thinking and analysis, not of blind staying the course.

Protagonist's model of complex dynamic systems is not a bad one, but we seldom see pure models in the natural life, let alone in human systems, where participants have free will, and that free will can get aggregated for good or for bad reasons.

Victoria
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote:Stocks represent part ownership in the underlying businesses. Over time businesses grow, and thus the value of the business ownership increases.
Do they? Or is it all "survivor bias"? What percentage of startups are around 10, 20, 50 years later? How many of the original Dow companies are still in the index? (If the tendency of businesses was to grow, then ones that were around 300 years ago like the East India Company would make Microsoft and Walmart look like neighborhood candy stores, no?). Again, I don't think our data history is long enough to make valid 20-50 year predictions, though I would welcome comments from mathematicians on this.
VictoriaF wrote:There are many potential events that could derail the market value from its upward trend, e.g., a global economic collapse a la 2008 after which the economy would go into a tailspin and could not be revived, an environmental catastrophe, an epidemic, a strong crowd sentiment. Investor psychology (studied in Behavioral Finance) is a very important factor in the market performance. After the Great Depression, people stayed out of the market for generations; after the market runup of the 1990s, people have developed a persistent faith in the markets that was not shaken even in 2001 and 2008. The Web, and recently the social media, amplifies the information spread and increases crowd effects.
Good...getting back on track with the original thread. So we have a potential looming catastrophe, the date of which we know. We all agree that the downside is huge. The upside of it not happening is probably not great. What we do not know is the probability of it happening or the extent of the consequences if it does. On these parameters (and hopefully not behavioral bias) we should decide whether to "stay the course" or remain on the sidelines for perhaps a week or two. Somethink the market has already "factored in" the risk. Others don't (one can point to 2007-8 as an example, except in 2007-8, even if one could see the catastrophe coming, there was no way to time it- arguably the timing this go-around is relatively well known in advance). So this may be a different case than most "market timing" cases, where much less information is available in advance. I'm not saying it is fundamentally different, or I would be temporarily jumping ship myself. I just don't know.
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:
VictoriaF wrote:Stocks represent part ownership in the underlying businesses. Over time businesses grow, and thus the value of the business ownership increases.
Do they? Or is it all "survivor bias"? What percentage of startups are around 10, 20, 50 years later? How many of the original Dow companies are still in the index? (If the tendency of businesses was to grow, then ones that were around 300 years ago like the East India Company would make Microsoft and Walmart look like neighborhood candy stores, no?). Again, I don't think our data history is long enough to make valid 20-50 year predictions, though I would welcome comments from mathematicians on this.
I think this is a question to economists: Why do we assume that the economy always grows? Frankly, I have never challenged this assumption and would like to know the answer. I think this is a deeper question than examples of disappearing businesses (such as East India Company), because old businesses and old business models are being subsumed by new ones. Is Japan an example of an economy that is not growing?
protagonist wrote:
VictoriaF wrote:There are many potential events that could derail the market value from its upward trend, e.g., a global economic collapse a la 2008 after which the economy would go into a tailspin and could not be revived, an environmental catastrophe, an epidemic, a strong crowd sentiment. Investor psychology (studied in Behavioral Finance) is a very important factor in the market performance. After the Great Depression, people stayed out of the market for generations; after the market runup of the 1990s, people have developed a persistent faith in the markets that was not shaken even in 2001 and 2008. The Web, and recently the social media, amplifies the information spread and increases crowd effects.
Good...getting back on track with the original thread. So we have a potential looming catastrophe, the date of which we know. We all agree that the downside is huge. The upside of it not happening is probably not great. What we do not know is the probability of it happening or the extent of the consequences if it does. On these parameters (and hopefully not behavioral bias) we should decide whether to "stay the course" or remain on the sidelines for perhaps a week or two. Some think the market has already "factored in" the risk. Others don't (one can point to 2007-8 as an example, except in 2007-8, even if one could see the catastrophe coming, there was no way to time it- arguably the timing this go-around is relatively well known in advance). So this may be a different case than most "market timing" cases, where much less information is available in advance. I'm not saying it is fundamentally different, or I would be temporarily jumping ship myself. I just don't know.
The current crisis has a potential to derail the global economy, cause the deepest crisis known to the man, and as result, not to bring market values to today's levels for another 42 years. Individually, we don't know the probabilities of various outcomes; we cannot run Monte Carlo simulations on unique events. Collectively, the market has priced the sum total of the eventualities into its current prices.

Victoria
Last edited by VictoriaF on Tue Oct 15, 2013 9:25 am, edited 1 time in total.
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote:
I don't think that protagonist argues based on his news exposure. I think his arguments have two biases:
1. He makes an assumption about the Bogleheads.
2. He has a model in mind that he tries to fit to the markets.

Protagonist's assumption about the Bogleheads is that they argue and invest on faith, that they blindly "stay the course." This may be true for some members, but the most interesting and thoughtful participants are as thoughtful and as skeptical as protagonist is. Their arguments and actions are the result of thinking and analysis, not of blind staying the course.

Protagonist's model of complex dynamic systems is not a bad one, but we seldom see pure models in the natural life, let alone in human systems, where participants have free will, and that free will can get aggregated for good or for bad reasons.

Victoria
Partly correct. Protagonist makes no assumption about ALL Bogleheads, or tries to make a model fit. Protagonist is more of a skeptic than many. Protagonist does think that most people in general (Bogleheads included) have too much faith in their assumptions to question them. Protagonist is really just questioning his own assumptions and trying to make sense out of all of this. Protagonist does not claim a model of complex dynamic systems as his own....he is merely regurgitating his own (perhaps simplistic- he is a layman regarding this and finance) understanding of chaos theory that has been developed by others over the past fifty years, which MAY be a pure model in natural life and human systems....chaos theorists I think would say yes, the evidence suggests so. Protagonist argues that most dominant financial "theories" or "hypotheses" (eg efficient markets "hypothesis") are not really hypotheses or theories because the hard scientific evidence is not there to support or refute them and they are essentially untestable. So he follows the philosophy that makes most intuitive sense to him (which is currently closely aligned with that espoused by Jack Bogle), but he still constantly questions it. Especially when confronted with situations such as the looming potential default, for reasons detailed above in multiple posts. (And yes, he likes to shake things up).
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote:
I think this is a question to economists: Why do we assume that the economy always grows? Frankly, I have never challenged this assumption and would like to know the answer. I think this is a deeper question than examples of disappearing businesses (such as East India Company), because old businesses and old business models are being subsumed by new ones. Is Japan an example of an economy that is not growing?
There are trends within trends within trends. I have ALWAYS challenged that assumption. Chaos theory would, I believe, suggest that the length of a "cycle" or "holding pattern", or when or where it will occur, is unpredictable. The best example of an economy that declined over a long period in "recent history" might be the Roman/ European economy from approximately the year 200 until the Renaissance. Or perhaps the Turkish or Arabic economy from the 12th-15th century until today. Or the Egyptian economy since the death of Cleopatra.
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:
VictoriaF wrote:
I don't think that protagonist argues based on his news exposure. I think his arguments have two biases:
1. He makes an assumption about the Bogleheads.
2. He has a model in mind that he tries to fit to the markets.

Protagonist's assumption about the Bogleheads is that they argue and invest on faith, that they blindly "stay the course." This may be true for some members, but the most interesting and thoughtful participants are as thoughtful and as skeptical as protagonist is. Their arguments and actions are the result of thinking and analysis, not of blind staying the course.

Protagonist's model of complex dynamic systems is not a bad one, but we seldom see pure models in the natural life, let alone in human systems, where participants have free will, and that free will can get aggregated for good or for bad reasons.

Victoria
Partly correct. Protagonist makes no assumption about ALL Bogleheads, or tries to make a model fit. Protagonist is more of a skeptic than many. Protagonist does think that most people in general (Bogleheads included) have too much faith in their assumptions to question them. Protagonist is really just questioning his own assumptions and trying to make sense out of all of this.
Make it all people. Everyone has some blind-spot assumptions that have to be challenged.
protagonist wrote:Protagonist does not claim a model of complex dynamic systems as his own....he is merely regurgitating his own (perhaps simplistic- he is a layman regarding this and finance) understanding of chaos theory that has been developed by others over the past fifty years,
I was imprecise. I did not mean that you have invented the model, only that you apply it to the market as a pure and only model.
protagonist wrote:which MAY be a pure model in natural life and human systems....chaos theorists I think would say yes, the evidence suggests so.
I strongly doubt a comprehensive applicability of any model to human systems. Perhaps, some chaos theorists will read and clarify this point.
protagonist wrote:Protagonist argues that most dominant financial "theories" or "hypotheses" (eg efficient markets "hypothesis") are not really hypotheses or theories because the hard scientific evidence is not there to support or refute them and they are essentially untestable. So he follows the philosophy that makes most intuitive sense to him (which is currently closely aligned with that espoused by Jack Bogle), but he still constantly questions it. Especially when confronted with situations such as the looming potential default, for reasons detailed above in multiple posts.
It is well-known that economists suffer from physics envy and give their theories names that belong to hard sciences. (In fact, applying chaos theory to human market performance is also a way of expanding hard science to soft objects.)

Jack's philosophy is much better than most alternatives. But there are other good philosophies, such as liability matching. Bill Bernstein, for example, advocates a two-prong portfolio:
- Liability Matching Portfolio (LMP), and
- Risk Portfolio (RP).

LMP is a part of your portfolio that is invested in the safest possible assets and is expected to survive most shocks. LMP does not care about shutdowns, defaults, or sequestrations. RP is the rest of your portfolio with which you do what you want. You can be as conservative or as reckless as you wish, because your basic needs ("liabilities") are guaranteed by the LMP.

Victoria
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote: Jack's philosophy is much better than most alternatives. But there are other good philosophies, such as liability matching. Bill Bernstein, for example, advocates a two-prong portfolio:
- Liability Matching Portfolio (LMP), and
- Risk Portfolio (RP).

LMP is a part of your portfolio that is invested in the safest possible assets and is expected to survive most shocks. LMP does not care about shutdowns, defaults, or sequestrations. RP is the rest of your portfolio with which you do what you want. You can be as conservative or as reckless as you wish, because your basic needs ("liabilities") are guaranteed by the LMP.

Victoria
Protagonist likes Bill Bernstein. Protagonist finds his posts intelligent and amusing, and has recommended his books to others. One of these days Protagonist may get around to reading them himself, if he ever reads any more books about finance. Protagonist is beginning to feel a bit like The Munchkin Man.
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:Protagonist is beginning to feel a bit like The Munchkin Man.
Munchkin Man's demeanor can be useful for questioning one's assumptions.

Victoria
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Re: Government Shutdown/Default [effect on investments]

Post by MnD »

protagonist wrote:Good...getting back on track with the original thread. So we have a potential looming catastrophe, the date of which we know. We all agree that the downside is huge. The upside of it not happening is probably not great.
There's major upside potential to this "crisis" in both the short and medium term. I wouldn't be "out" of the market for one minute, let alone weeks.
The resolution of the "temporary" tax rates and thresholds during fiscal cliff crisis removed a huge amount of uncertainty from investors with positive outcomes for equities. The unresolved uncertainty now centers on US Government fiscal policy (the spending side) which is as equally or more important to investors. While I'm not holding my breath for the sort of "breakthrough" that occurred at the end of the fiscal cliff, a framework could emerge that leads to a clearer picture of US fiscal policy. This crisis has not been favorable to one particular group. The possibility of their loss of influence in the fiscal policy debate in around 15 months is now heightened. One might consider what sort of fiscal policy would emerge if the only lever the opposition had was the Senate filibuster. What I'm thinking about is what that situation would mean for investments in equity and fixed income. I conclude stay the course on equities and I'm still on the fence as to whether or not to re-assume FI positions with interest risk, whuich was the exact situation prior to the shutdown.
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Re: Government Shutdown/Default [effect on investments]

Post by Doc »

LadyGeek wrote:
Doc wrote:I "spent" the ~8% annual gain on 3% of my portfolio for three months and traded a TIPS fund representing ~2% of my portfolio for a short corporate fund to gain some better Treasury/non-Treasury exposer at the expense of the unexpected inflation risk over the next few months.
Good point. Can you elaborate on your interpretation of these "events" as unexpected inflation?

I see two camps here. One is "stay the course" in which your risk tolerance should be able to handle a large drop in equities. IOW, treat this as no different than a large market swing. That's the whole point of asset allocation (stocks / bonds), which is to minimize the impact. How well can you sleep at night if your portfolio suddenly tanks 50%?

The other camp is hedging a bet by transferring securities for short term stability (I think that's what you are doing). The whole point of Treasury Inflation Protected Security (TIPS) is to provide protection for unexpected inflation. (It's in the Role in a portfolio section). That is very different than expected inflation as used in everyday context.

I couldn't find a good definition of unexpected inflation, so I'm not quite sure on the intent. Is there a consensus that the impending shutdown / default counts as unexpected inflation?
I didn't mean to imply that the current events had anything to do with inflation. TIPS did not perform as well as nominal Treasuries in '08 and had a lot more volatility than either nominal Treasuries or investment grade corporates during the last 6 days at least on the short end. I also had poor execution on a short TIPS ETF execution yesterday but not on a short corporate ETF indicating perhaps some difference in liquidity between the two. In the current climate I am willing to give up some of my short term inflation risk insurance for better short term price stability and better liquidity.

I also rebalanced a small amount of equities for FI three months early to again gains some short term stability.

The Boglehead mantra is "stay the course and rebalance". But when we get to these short term crises people tend to forget the "rebalance" part and talk about either "stay the course" or "bailout".

All I'm doing is some minor juggling to make sure that I am in the best position to rebalance if the current crisis leads to a sharp equity decline triggering my rebalancing bands.
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Re: Government Shutdown/Default [effect on investments]

Post by nimo956 »

The problem with cashing out for a week or two until the problem is resolved is that we don't know that everything will be resolved in that timeframe. I anticipate that the debt limit will be raised for two months or so to get us through to the new year. When all the congressmen get back from their vacations, we will be in the same place we are in right now. Are people going to constantly be jumping in and out of the market every time the debt limit needs to be raised?
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Re: Government Shutdown/Default [effect on investments]

Post by umfundi »

nimo956 wrote:The problem with cashing out for a week or two until the problem is resolved is that we don't know that everything will be resolved in that timeframe. I anticipate that the debt limit will be raised for two months or so to get us through to the new year. When all the congressmen get back from their vacations, we will be in the same place we are in right now. Are people going to constantly be jumping in and out of the market every time the debt limit needs to be raised?
Go back to the thread about the person who cashed out in advance of the fiscal cliff. He "lost" about 5% in a week.

No one knows.

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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote: It is well-known that economists suffer from physics envy and give their theories names that belong to hard sciences. (In fact, applying chaos theory to human market performance is also a way of expanding hard science to soft objects.)
"Social sciences", eg psychology, sociology, may be "soft sciences" because their variables are hard to control, but that said, they fit the definition of science and use scientific method....they have hypotheses that can be tested by experiment. They can manipulate variables and observe outcomes. Are there any financial studies where hypotheses are tested experimentally? Economists do not have the ability to manipulate variables a priori. It is all assumptions based on a very short period of past observaion....far too short I believe to come up with meaningful long-range conclusions (imagine if Darwin based his Theory of Evolution on one hundred years of past evidence of life forms- how convincable would that be?). Or they rely on Monte Carlo projections based on the same scanty and very possibly meaningless hundred years of data (and a hundred years is generous- within which they often cherry-pick...eg "evidence of the behavior of the market from 2001 through today shows that...+) The same academics even admit in the same breath that "past performance does not predict future events". And is convincable a word? I've always used it, but it doesn't look right.
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:
VictoriaF wrote: It is well-known that economists suffer from physics envy and give their theories names that belong to hard sciences. (In fact, applying chaos theory to human market performance is also a way of expanding hard science to soft objects.)
"Social sciences", eg psychology, sociology, may be "soft sciences" because their variables are hard to control, but that said, they fit the definition of science and use scientific method....they have hypotheses that can be tested by experiment. They can manipulate variables and observe outcomes. Are there any financial studies where hypotheses are tested experimentally? Economists do not have the ability to manipulate variables a priori. It is all assumptions based on a very short period of past observaion....far too short I believe to come up with meaningful long-range conclusions (imagine if Darwin based his Theory of Evolution on one hundred years of past evidence of life forms- how convincable would that be?). Or they rely on Monte Carlo projections based on the same scanty and very possibly meaningless hundred years of data (and a hundred years is generous- within which they often cherry-pick...eg "evidence of the behavior of the market from 2001 through today shows that...+) The same academics even admit in the same breath that "past performance does not predict future events". And is convincable a word? I've always used it, but it doesn't look right.
Are you arguing with Victoria or providing supporting evidence? She wrote that economists have physics envy, not social scientists. She also referred to the human market performance, and not to behavioral economics which are, in fact, based on well defined experiments.

Victoria
Last edited by VictoriaF on Tue Oct 15, 2013 10:49 am, edited 1 time in total.
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

nimo956 wrote:The problem with cashing out for a week or two until the problem is resolved is that we don't know that everything will be resolved in that timeframe. I anticipate that the debt limit will be raised for two months or so to get us through to the new year. When all the congressmen get back from their vacations, we will be in the same place we are in right now. Are people going to constantly be jumping in and out of the market every time the debt limit needs to be raised?
But the people who decide to cash out today for a week and then buy back on a specific date may miss a huge part of a larger drop. And if there is no drop the worst that they can expect is missing out on a small uptick. I don't think anybody can imagine the market gaining 20 or 50% in the near future as a result of not defaulting. That would just recreate the conditions in place a month ago (with superimposition of the cost of the shutdown to the economy over the past weeks). The potential severity of this crisis combined with its level of predictability and relative lack of market response in advance is a very rare if not almost unique occurrence, More discussion of that would get into politics and get this thread shut down. Anyway, I am staying the course. I question whether I am doing the wise thing.
Last edited by protagonist on Tue Oct 15, 2013 11:00 am, edited 4 times in total.
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote:
protagonist wrote:
VictoriaF wrote: It is well-known that economists suffer from physics envy and give their theories names that belong to hard sciences. (In fact, applying chaos theory to human market performance is also a way of expanding hard science to soft objects.)
"Social sciences", eg psychology, sociology, may be "soft sciences" because their variables are hard to control, but that said, they fit the definition of science and use scientific method....they have hypotheses that can be tested by experiment. They can manipulate variables and observe outcomes. Are there any financial studies where hypotheses are tested experimentally? Economists do not have the ability to manipulate variables a priori. It is all assumptions based on a very short period of past observaion....far too short I believe to come up with meaningful long-range conclusions (imagine if Darwin based his Theory of Evolution on one hundred years of past evidence of life forms- how convincable would that be?). Or they rely on Monte Carlo projections based on the same scanty and very possibly meaningless hundred years of data (and a hundred years is generous- within which they often cherry-pick...eg "evidence of the behavior of the market from 2001 through today shows that...+) The same academics even admit in the same breath that "past performance does not predict future events". And is convincable a word? I've always used it, but it doesn't look right.
Are you arguing with Victoria or providing supporting arguments? She wrote that economists have physics envy, not social scientists. She also referred to the human market performance, and not to behavioral economics which are, in fact, based on well defined experiments.

Victoria
Protagonist is not arguing with Victoria. Maybe Protagonist is just being cantankerous for fun. Protagonist is unsure.
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:Maybe Protagonist is just being cantankerous for fun. Protagonist is unsure.
Protagonist is being unpredictable. What is a suitable model?

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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote:
protagonist wrote:Maybe Protagonist is just being cantankerous for fun. Protagonist is unsure.
Protagonist is being unpredictable. What is a suitable model?

Victoria
Hell if I know, Victoria.
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Re: Government Shutdown/Default [effect on investments]

Post by umfundi »

One thing is 100% sure: The answer you will get on Bogleheads to the question: Should I stay the course?

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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:
VictoriaF wrote: Incidentally, last Friday's WSJ article How Often Do Gamblers Really Win? claims that the longer you play the more likely you are to lose:
WSJ wrote:On any given day, the chances of emerging a winner aren't too bad—the gamblers won money on 30% of the days they wagered. But continuing to gamble is a bad bet. Just 11% of players ended up in the black over the full period, and most of those pocketed less than $150.
I didn't read the article, but I assume the argument is that if the house odds are .say, 1% in their favor, on a given day it is almost a tossup, whereas over time the odds will catch up with almost everybody. Analogy...if a coin came up heads 49% of the time on one toss, betting $1000, you have fairly even odds of winding up with either $2000 or zero, whereas on a thousand tosses, betting a dollar on each, you would probably end up with pretty close to $980. and the likelihood of winding up with more than $1000 (eg winning) would be relatively low. Right? Add to that the psychology of gambling and not knowing when to quit when you are ahead...there are probably very few long-term winners.
It's the Pareto principle in action:
WSJ wrote:Of the 4,222 casino customers, just 2.8%—or 119 big losers—provided half of the casino's take, and 10.7% provided 80% of the take.
Taleb has noted that if 20% of people perform 80% of work, then 1% of people perform 50% of work. He applied inductive reasoning as follows:
- 20% of people --> 80% of work
- 20% of 20% = 4% of people --> 80% of 80% = 64% of work
- 20% of 4% = 1% of people --> 80% of 64% = 50% of work

Thus, high-fliers are the ones who are "working" to support casinos.

My own observation is that player persistence is a case of Kahneman's and Tversky's loss aversion. According to K&T's Prospect Theory, people are risk averse for certain gains and risk seeking for certain losses. Gamblers who have lost some money take risks to "recapture" these losses.

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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote: Taleb has noted that if 20% of people perform 80% of work, then 1% of people perform 50% of work. He applied inductive reasoning as follows:
- 20% of people -- 80% of work
- 20% of 20% = 4% of people -- 80% of 80% = 64% of work
- 20% of 4% = 1% of people -- 80% of 64% = 50% of work

Thus, high-fliers are the ones who are "working" to support casinos.
I haven't read Taleb, but from what I have read in multiple posts on Taleb here (correct me if I am wrong), I assume that, like myself, he is mainly regurgitating chaos theory as applied to finance and human behavior, Unlike myself, he has become rich and famous in doing so. Again, correct me if I am wrong, but I doubt if he would put faith in models projecting 20-50 years into the future based on 100 years of retrospective data. His argument you present above seems to be based on symmetry of scale, a fundamental principle of chaos theory (eg Mandelbrot's fractals)
VictoriaF wrote: According to K&T's Prospect Theory, people are risk averse for certain gains and risk seeking for certain losses.
Victoria
That is, I think, fundamentally fascinating stuff that may be (to a large extent) scientifically testable, and may have bearing on how we (many of us on this forum, maybe including myself) are approaching this impending potential crisis. I don't know anything about it, but it sounds interesting. Can you explain, including, if possible, any relevance you see to the point of this thread (our investment approach to tomorrow's possible "ëvent")? I can see a possible connection between what you call "player persistence" and "staying the course". Or am I reading too much into it?
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Anyone Else Scared?

Post by baldbull »

I know, I know...I have an IPS, a 25 year time horizon...

but I have this nagging feeling to take my profits and hide for a few years. You can't tell me other bogles are not thinking the same thing. Never ending QE, Debt Ceilings, US Housing Market, Bond Bubbles....
Problem is there won't be much place to hide if these implode.

In 1929, they didn't yet realize they were in a Great Depression. Does history repeat itself?

http://static1.businessinsider.com/imag ... djia-7.png
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Re: Anyone Else Scared?

Post by RyeWhiskey »

Noise. Tune it out. So no, I'm not scared. :beer
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Re: Anyone Else Scared?

Post by technovelist »

baldbull wrote:I know, I know...I have an IPS, a 25 year time horizon...

but I have this nagging feeling to take my profits and hide for a few years. You can't tell me other bogles are not thinking the same thing. Never ending QE, Debt Ceilings, US Housing Market, Bond Bubbles....
Problem is there won't be much place to hide if these implode.

In 1929, they didn't yet realize they were in a Great Depression. Does history repeat itself?

http://static1.businessinsider.com/imag ... djia-7.png
That's the sort of tail risk that a gold allocation is intended to insure against.
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Re: Anyone Else Scared?

Post by baldbull »

technovelist wrote:
baldbull wrote:I know, I know...I have an IPS, a 25 year time horizon...

but I have this nagging feeling to take my profits and hide for a few years. You can't tell me other bogles are not thinking the same thing. Never ending QE, Debt Ceilings, US Housing Market, Bond Bubbles....
Problem is there won't be much place to hide if these implode.

In 1929, they didn't yet realize they were in a Great Depression. Does history repeat itself?

http://static1.businessinsider.com/imag ... djia-7.png
That's the sort of tail risk that a gold allocation is intended to insure against.
Scary looking chart eh?
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:
VictoriaF wrote: Taleb has noted that if 20% of people perform 80% of work, then 1% of people perform 50% of work. He applied inductive reasoning as follows:
- 20% of people -- 80% of work
- 20% of 20% = 4% of people -- 80% of 80% = 64% of work
- 20% of 4% = 1% of people -- 80% of 64% = 50% of work

Thus, high-fliers are the ones who are "working" to support casinos.
I haven't read Taleb, but from what I have read here (correct me if I am wrong), I assume that, like myself, he is mainly regurgitating chaos theory as applied to finance and human behavior, Unlike myself, he has become rich and famous in doing so. Again, correct me if I am wrong, but I doubt if he would put faith in models projecting 20-50 years into the future based on 100 years of retrospective data.
Taleb is not referring to the chaos theory. He relies on his empirical knowledge of the markets having worked on the Wall Street and the Chicago Mercantile Exchange. In this line of work he has observed many unpredictable events that shook the markets, and he has noticed that these events were not foreseen a priori but were trivialized with a posteriori explanations. Taleb is well read in several languages including English, French and ancient Aramaic. Once he started looking, he saw Black Swans everywhere. His broad historical, philosophical and financial perspective is what makes his books fascinating.

You are correct that Taleb would not put faith in models projecting into future. He is very skeptical of models.
protagonist wrote:
VictoriaF wrote: According to K&T's Prospect Theory, people are risk averse for certain gains and risk seeking for certain losses.
Victoria
That is, I think, fundamentally fascinating stuff that may be (to a large extent) scientifically testable, and may have bearing on how we (many of us on this forum, maybe including myself) are approaching this impending potential crisis. I don't know anything about it, but it sounds interesting. Can you explain, including, if possible, any relevance you see to the point of this thread (our investment approach to tomorrow's possible "ëvent")?
Kahneman's and Tversky's work on judgement and decision making under uncertainty is, in fact, highly testable. Kahneman received the 2002 Nobel Prize in the Economic Sciences for this work; sadly, Tversky died in 1996. Curiously, Kahneman is a psychologist, the prize is in economics, and economists have a tendency to look down at psychologists.

I am an amateur. I read a lot Behavioral Economics and I am trying to fit BE ideas in my work. In my opinion, with respect to tomorrow's markets--the day before a potential Default,--the most likely human bias is the status quo bias. People will stay with what they had for the past few days, remaining either in or out of the market. Another relevant bias is loss aversion. Those who got out of the market in anticipation of the default can't (psychologically) get back because that would solidify their loss. Those who stayed in the market have aversion to potential losses if the markets take off on good news.

Important note: The psychology of Behavioral Economics relies on well-designed controlled experiments and is published in respectable peer-reviewed publications. However, the derivatives of this work, like the arguments I presented above--and like much of Behavioral Finance,--are speculative and have not been tested. In reality, people are subject to multiple simultaneous biases, and some of these biases may be pointing to opposite choices. It's difficult to tease out which biases would prevail and which behaviors would follow. For example, some bad news may set of a panic; those currently in the market would start selling, and those who are currently out of the market may start buying soon after the price drops below that at which they have sold (the latter being a bias of the "certainty of gains").

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Re: Anyone Else Scared?

Post by Quickfoot »

It sounds like it might be a good time for you to stop looking at your account for a while (assuming you have a reasonable asset allocation). Fear is an emotion and emotion is the investor's enemy. Give yourself some time to figure out if your asset allocation exceeds your risk tolerance or if you are just overloaded with worries.

It's actually a good time to invest, we only get high returns because of risk. Historically (even thousands of years ago) when risk is low return is also low.
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Re: Anyone Else Scared?

Post by baldbull »

Quickfoot wrote:It sounds like it might be a good time for you to stop looking at your account for a while (assuming you have a reasonable asset allocation). Fear is an emotion and emotion is the investor's enemy. Give yourself some time to figure out if your asset allocation exceeds your risk tolerance or if you are just overloaded with worries.

It's actually a good time to invest, we only get high returns because of risk. Historically (even thousands of years ago) when risk is low return is also low.

It is a fear of losing considerable profits received thru the last 5 years.

Emotional yes, Irrational?---not so sure.
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Re: Anyone Else Scared?

Post by frugaltype »

technovelist wrote:
baldbull wrote:I know, I know...I have an IPS, a 25 year time horizon...

but I have this nagging feeling to take my profits and hide for a few years. You can't tell me other bogles are not thinking the same thing. Never ending QE, Debt Ceilings, US Housing Market, Bond Bubbles....
Problem is there won't be much place to hide if these implode.

In 1929, they didn't yet realize they were in a Great Depression. Does history repeat itself?

http://static1.businessinsider.com/imag ... djia-7.png
That's the sort of tail risk that a gold allocation is intended to insure against.
It's not clear to me why people think gold protects against catastrophe. If the world collapses, gold is useless. Food, guns (sigh), medicines would be the things to have.
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Re: Government Shutdown/Default [effect on investments]

Post by umfundi »

Victoria,

Interesting. I have a friend who bailed out of the market early in 2008. Having made the "correct" call, he has been unable to convince himself to buy back in. He is now behind where he would have been had he simply remained invested.

I don't know what you might call this, but I have seen people before that made a "correct" market timing call and then became paralyzed in making the next decision. As someone (much brighter than I am) observed, with market timing you have to be right twice.

There is the same issue here. Suppose you do something now, and then Congress just kicks the can down the road a few weeks. Then, what do you do?

You can explain this to me at dinner! 8-)

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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

umfundi wrote:As someone (much brighter than I am) observed, with market timing you have to be right twice.
Hi Keith,

This someone has made an astute observation, whereas Behavioral Economics provide explanations such as loss aversion, status quo bias, and perhaps cognitive dissonance. An example of the last one is thinking, "Given that I've sold it, I firmly believe that it must go down. Right now it's up and I cannot buy it until it's down."

Another relevant bias is anchoring, where the best possible (but highly improbable) scenario of selling at the peak and buying at the bottom serves as an anchor and spoils any lesser opportunities of exiting or reentering the market.
umfundi wrote:You can explain this to me at dinner! 8-)
See you tomorrow,

Victoria
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Re: Anyone Else Scared?

Post by jepetto »

baldbull wrote:
technovelist wrote:
baldbull wrote:
In 1929, they didn't yet realize they were in a Great Depression. Does history repeat itself?

http://static1.businessinsider.com/imag ... djia-7.png
Scary looking chart eh?
Note the parallels between the two lines are completely dependent on how the scales are drawn. The 1928 chart represents a growth of almost 200%, the 2012 chart less than 30%. To make the charts comparable, the Dow today would need to be at almost 24,000. I could take probably any period in which there's been stock market growth over two years and plot it in such a way as to make the lines look like history is repeating. Growth charts like this should really be on a logarithmic scale to make comparisons.
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Re: Anyone Else Scared?

Post by exeunt »

No. And that's a ridiculous chart.
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Re: Anyone Else Scared?

Post by lloydbraun »

Not scared for my investments as my investment horizon is 35-40 years. I'm concerned about the short and medium term macro-economic effects of a possible debt default but I'm assuming it would sort itself out in time for me to cash in my funds in 2050.
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote:
Taleb is not referring to the chaos theory. He relies on his empirical knowledge of the markets having worked on the Wall Street and the Chicago Mercantile Exchange. In this line of work he has observed many unpredictable events that shook the markets, and he has noticed that these events were not foreseen a priori but were trivialized with a posteriori explanations.... Once he started looking, he saw Black Swans everywhere. His broad historical, philosophical and financial perspective is what makes his books fascinating.

You are correct that Taleb would not put faith in models projecting into future. He is very skeptical of models.
One thing I gleaned from multiple posts on the subject is that a big part of the backbone of what he has to say is that "black swans" do and will happen, and are the main source of "signal" (eg driving force) of the markets, amidst a lot of other "noise". Their timing, nature, amplitude and effect are unpredictable, and thus the best we can do is to prepare ourselves to be resilient to them, in contrast to what most people do which is prepare and plan based on the "noise" (eg the vast majority of other events), so when the "signal" happens it catches them by surprise. Don't quote that as understanding, since I have not read Taleb, only seen comments- you are the authority here on Taleb- but that is what I gleaned from it, and that is, from my limited understanding, highly consistent with chaos/complexity theory. if chaos/complexity theory can be practically applied to investing by an individual, I could see it being in that way.

I am not terribly worried from an investing perspective about tomorrow. I am close to 50% invested in stocks (low cost indices)....most of my other assets are in CDs with a small amount of bonds. If the stock market drops 50% I can still survive on 75% of my assets. In the highly unlikely scenario of total financial meltdown, including the FDIC and cash, I still have contingencies that would probably see me through, bruised but intact. That's probably the main reason I am "staying the course", rather than faith in what I am doing, efficient markets, EWR's, etc that I think is overblown and based on dubious data. Other things about it concern me more than my own financial security, and those I do not have control over...they are in the hands of a few in Washington, so worrying too much about them is unproductive.
Last edited by protagonist on Tue Oct 15, 2013 2:54 pm, edited 7 times in total.
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Re: Anyone Else Scared?

Post by smpatel »

baldbull wrote:
Quickfoot wrote:It sounds like it might be a good time for you to stop looking at your account for a while (assuming you have a reasonable asset allocation). Fear is an emotion and emotion is the investor's enemy. Give yourself some time to figure out if your asset allocation exceeds your risk tolerance or if you are just overloaded with worries.

It's actually a good time to invest, we only get high returns because of risk. Historically (even thousands of years ago) when risk is low return is also low.

It is a fear of losing considerable profits received thru the last 5 years.

Emotional yes, Irrational?---not so sure.
Greed is keeping you in.
Fear is wanting you out.

It is a constant fight, let them fight. You will make more money snoring guess who said that!
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:
VictoriaF wrote:
Taleb is not referring to the chaos theory. He relies on his empirical knowledge of the markets having worked on the Wall Street and the Chicago Mercantile Exchange. In this line of work he has observed many unpredictable events that shook the markets, and he has noticed that these events were not foreseen a priori but were trivialized with a posteriori explanations.... Once he started looking, he saw Black Swans everywhere. His broad historical, philosophical and financial perspective is what makes his books fascinating.

You are correct that Taleb would not put faith in models projecting into future. He is very skeptical of models.
One thing I gleaned from multiple posts on the subject is that a big part of the backbone of what he has to say is that "black swans" do and will happen, and are the main source of "signal" (eg driving force) of the markets, amidst a lot of other "noise". Their timing, nature, amplitude and effect are unpredictable, and thus the best we can do is to prepare ourselves to be resilient to them, in contrast to what most people do which is prepare and plan based on the "noise" (eg the vast majority of other events), so when the "signal" happens it catches them by surprise. Don't quote that as understanding, since I have not read Taleb, only seen comments- you are the authority here on Taleb- but that is what I gleaned from it, and that is, from my limited understanding, highly consistent with chaos/complexity theory. if chaos/complexity theory can be practically applied to investing by an individual, I could see it being in that way.
You are mostly correct. Here are some minor comments:
- Taleb not only claims that Black Swans are unpredictable but also that they are appearing increasingly more often.
- Taleb does not like the words resilient or robust and uses anti-fragile instead.
- I am not an authority, but I like this stuff.

When I am done with my immediate reading needs, I should read Gleick's Chaos to see if I can actually relate it to the Black Swans.

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Re: Anyone Else Scared?

Post by YDNAL »

baldbull wrote:I know, I know...I have an IPS, a 25 year time horizon...
The chart you linked reminds me of one of those 'Ink Blot' psychology cards... "what do you see?"
baldbull wrote:It is a fear of losing considerable profits received thru the last 5 years.
Until 25 years hence, those are known as *paper profits* - almost like an "Ink Blot'.

[edit to correct spelling]
Last edited by YDNAL on Tue Oct 15, 2013 3:29 pm, edited 1 time in total.
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Re: Government Shutdown/Default [effect on investments]

Post by protagonist »

VictoriaF wrote:
When I am done with my immediate reading needs, I should read Gleick's Chaos to see if I can actually relate it to the Black Swans.

Victoria
Gleick's book is a very good introduction, though quite old now. It is also very readable for the layman (like me). Whether there is a better, more contemporary introduction, I don't know. You might check Amazon reviews.
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Re: Government Shutdown/Default [effect on investments]

Post by VictoriaF »

protagonist wrote:
VictoriaF wrote:
When I am done with my immediate reading needs, I should read Gleick's Chaos to see if I can actually relate it to the Black Swans.

Victoria
Gleick's book is a very good introduction, though quite old now. It is also very readable for the layman (like me). Whether there is a better, more contemporary introduction, I don't know. You might check Amazon reviews.
I already have Gleick. It make sense to actually open it {guiltily},

Victoria
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roymeo
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Re: Anyone Else Scared?

Post by roymeo »

exeunt wrote:No. And that's a ridiculous chart.
+1
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