Should risk be stated in dollars terms instead of AA %?

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TheTimeLord
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Should risk be stated in dollars terms instead of AA %?

Post by TheTimeLord »

Maybe I haven't quite understood the concept of risk here but it seems like people always speak of it in terms of AA but when they advise people they talk in terms of losing 50% of their equity investment which is a dollar amount. So is risk just the the amount of dollars you feel you can lose and you equity investmnet should be double that amount regardless of the what that makes your AA?
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Re: Should risk be stated in dollars terms instead of AA %?

Post by sscritic »

I am a fan of dollars. I will use dollars in retirement to buy food. I like to eat. Dollars are the way to go in my opinion.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by billyt »

I would think it makes the most sense to look at risk as a dollar amount. How much can you afford to lose?
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Re: Should risk be stated in dollars terms instead of AA %?

Post by 555 »

Losing dollars is when cash disappears from your mattress.

The market dropping is something different.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by ThePrune »

For the adult Investing classes I teach, I have the participants do an "Asset Allocation" exercise. The goal is to help them individualize the PERCENTAGES for their allocation. But I always have them estimate a target stock allocation percentage based on maximum number of absolute DOLLARS they could lose in a bear market without become emotionally overwhelmed.

Thus, based on Behavioral Finance considerations, I'm a fan of always bringing absolute dollars into the picture.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by 555 »

sscritic wrote:I am a fan of dollars. I will use dollars in retirement to buy food. I like to eat. Dollars are the way to go in my opinion.
When the stock market drops, do you go hungry?
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Re: Should risk be stated in dollars terms instead of AA %?

Post by sscritic »

555 wrote:
sscritic wrote:I am a fan of dollars. I will use dollars in retirement to buy food. I like to eat. Dollars are the way to go in my opinion.
When the stock market drops, do you go hungry?
No, because I keep dollars that are not invested in stocks. In fact, I keep enough of them that I will be able to eat for many years to come. That's the whole point of thinking in dollars and not percents. If the market drops 50% and I have a 70% equity-30% bond allocation, how many years will I be able to eat? I will only be able to answer that question after I translate all those percentages back to dollars.

Percents are a short cut way of talking about dollars. Sometimes we do it for secrecy. I told you my 70-30 split, but you don't know how much I have to spend from just that information. For example, you don't know if I will have enough to pay cash for a $500k house after that 50% drop. Note that the house is priced in dollars, not percents. That's why I want to own dollars, not percents.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by cheese_breath »

sscritic wrote:I am a fan of dollars. I will use dollars in retirement to buy food. I like to eat. Dollars are the way to go in my opinion.
All my financial accounting and projection spreadsheets are in dollars too. (I do use percentages in inflation and portfolio growth projections, but the answers always come out in dollars.)
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Re: Should risk be stated in dollars terms instead of AA %?

Post by 555 »

sscritic wrote:
555 wrote:
sscritic wrote:I am a fan of dollars. I will use dollars in retirement to buy food. I like to eat. Dollars are the way to go in my opinion.
When the stock market drops, do you go hungry?
No, because I keep dollars that are not invested in stocks. In fact, I keep enough of them that I will be able to eat for many years to come. That's the whole point of thinking in dollars and not percents. If the market drops 50% and I have a 70% equity-30% bond allocation, how many years will I be able to eat? I will only be able to answer that question after I translate all those percentages back to dollars.

Percents are a short cut way of talking about dollars. Sometimes we do it for secrecy. I told you my 70-30 split, but you don't know how much I have to spend from just that information. For example, you don't know if I will have enough to pay cash for a $500k house after that 50% drop. Note that the house is priced in dollars, not percents. That's why I want to own dollars, not percents.
Sure, but what you are saying, and what the OP is saying, are as different as chalk and cheese.

That's my point.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by MP1233 »

sscritic wrote:
555 wrote:
sscritic wrote:I am a fan of dollars. I will use dollars in retirement to buy food. I like to eat. Dollars are the way to go in my opinion.
When the stock market drops, do you go hungry?
No, because I keep dollars that are not invested in stocks. In fact, I keep enough of them that I will be able to eat for many years to come. That's the whole point of thinking in dollars and not percents. If the market drops 50% and I have a 70% equity-30% bond allocation, how many years will I be able to eat? I will only be able to answer that question after I translate all those percentages back to dollars.

Percents are a short cut way of talking about dollars. Sometimes we do it for secrecy. I told you my 70-30 split, but you don't know how much I have to spend from just that information. For example, you don't know if I will have enough to pay cash for a $500k house after that 50% drop. Note that the house is priced in dollars, not percents. That's why I want to own dollars, not percents.
I feel the same way. A 90% equity/10% bond-cash investment portfolio may be VERY risky for some, but for others it would not. If you have low expenses, significant pension and social security incomes, and sufficient cash to cover expenses for 5-10 years, you can do what ever you want with your investments. The only ones at risk in this scenario are your heirs and charities. IMO, personal risk is measured by how long could you maintain your current lifestyle if the market tanks.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by placeholder »

I think some of both because the market doesn't drop by "dollars in your portfolio" in goes down by its own valuation numbers which are most easily translated into a percentage drop that then has to be applied to your holdings so you have to do a calculation to take a dollar drop you can tolerate and create an asset allocation that supports the number.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by dbr »

StarbuxInvestor wrote:Maybe I haven't quite understood the concept of risk here but it seems like people always speak of it in terms of AA but when they advise people they talk in terms of losing 50% of their equity investment which is a dollar amount. So is risk just the the amount of dollars you feel you can lose and you equity investmnet should be double that amount regardless of the what that makes your AA?
Risk is not one single thing or expressed in one single set of terms. The answer is both and lots of other things besides.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by TheTimeLord »

So it sounds like a concensus that risk should be looked at in terms of the loss in value you can tolerate measured by dollars and that can be used to figure out the proper AA instead of vice-versa.
Last edited by TheTimeLord on Fri Jun 13, 2014 10:29 am, edited 1 time in total.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by sport »

I would suggest that dollars and percentages are just two ways of describing the same thing, once you know your portfolio size. For example, for a 1M portfolio, 60% is exactly the same as 600K. Since we each know the size of our own portfolio, we also know how the percentages translate into dollars. Percentages have an advantage because we can discuss them, and one can plan, independent of portfolio size. This is even easier for an individual as portfolio size keeps changing.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by sscritic »

I think that a retired person might think about this differently from a 26 year old just starting to save. I am in the former category and no longer adding serious sums to my savings, thus a drop in the market is a drop in my savings, not a real buying opportunity (a little one, perhaps).
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Re: Should risk be stated in dollars terms instead of AA %?

Post by 555 »

StarbuxInvestor wrote:So it sounds like a concensus that risk should be looked at in terms of the loss in value you can tolerate measured by dollars and that can be used to figure out the proper AA instead of vice-versa.
No.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by TheTimeLord »

jsl11 wrote:I would suggest that dollars and percentages are just two ways of describing the same thing, once you know your portfolio size. For example, for a 1M portfolio, 60% is exactly the same as 600K. Since we each know the size of our own portfolio, we also know how the percentages translate into dollars. Percentages have an advantage because we can discuss them, and one can plan, independent of portfolio size. This is even easier for an individual as portfolio size keeps changing.
Jeff

If portfolios were static that might be true. But you still have to understand do you drived dollars from percentage or percentage from dollars. If I feel I can only lose $250,000 then but the value of more portfolio changes the pervcentage changes as long as the dollar amount remains constant.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by TheTimeLord »

555 wrote:
StarbuxInvestor wrote:So it sounds like a concensus that risk should be looked at in terms of the loss in value you can tolerate measured by dollars and that can be used to figure out the proper AA instead of vice-versa.
No.
Please explain.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by 555 »

StarbuxInvestor wrote:
555 wrote:
StarbuxInvestor wrote:So it sounds like a concensus that risk should be looked at in terms of the loss in value you can tolerate measured by dollars and that can be used to figure out the proper AA instead of vice-versa.
No.
Please explain.
Read the other posts. They're not saying what you're saying. Not at all.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by TheTimeLord »

555 wrote:
StarbuxInvestor wrote:
555 wrote:
StarbuxInvestor wrote:So it sounds like a concensus that risk should be looked at in terms of the loss in value you can tolerate measured by dollars and that can be used to figure out the proper AA instead of vice-versa.
No.
Please explain.
Read the other posts. They're not saying what you're saying. Not at all.
ThePrune wrote:For the adult Investing classes I teach, I have the participants do an "Asset Allocation" exercise. The goal is to help them individualize the PERCENTAGES for their allocation. But I always have them estimate a target stock allocation percentage based on maximum number of absolute DOLLARS they could lose in a bear market without become emotionally overwhelmed.

Thus, based on Behavioral Finance considerations, I'm a fan of always bringing absolute dollars into the picture.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by TheTimeLord »

555 wrote:
StarbuxInvestor wrote:
555 wrote:
StarbuxInvestor wrote:So it sounds like a concensus that risk should be looked at in terms of the loss in value you can tolerate measured by dollars and that can be used to figure out the proper AA instead of vice-versa.
No.
Please explain.
Read the other posts. They're not saying what you're saying. Not at all.
billyt wrote:I would think it makes the most sense to look at risk as a dollar amount. How much can you afford to lose?
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Re: Should risk be stated in dollars terms instead of AA %?

Post by sport »

StarbuxInvestor wrote:
jsl11 wrote:I would suggest that dollars and percentages are just two ways of describing the same thing, once you know your portfolio size. For example, for a 1M portfolio, 60% is exactly the same as 600K. Since we each know the size of our own portfolio, we also know how the percentages translate into dollars. Percentages have an advantage because we can discuss them, and one can plan, independent of portfolio size. This is even easier for an individual as portfolio size keeps changing.
Jeff

If portfolios were static that might be true. But you still have to understand do you drived dollars from percentage or percentage from dollars. If I feel I can only lose $250,000 then but the value of more portfolio changes the pervcentage changes as long as the dollar amount remains constant.
I would suggest the opposite. If you have a 1M portfolio, you may feel that you can only lose 250K. However, if your portfolio doubles to 2M, you probably would not want to limit losses to the same level. If your portfolio grows to 5M, a 250K loss would be of little concern.
Jeff
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Re: Should risk be stated in dollars terms instead of AA %?

Post by dbr »

StarbuxInvestor wrote:So it sounds like a concensus that risk should be looked at in terms of the loss in value you can tolerate measured by dollars and that can be used to figure out the proper AA instead of vice-versa.
Certainly not.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by pkcrafter »

Expressing in $$ provides a better effective association, but consider this approach from John Hohn, CFP
We know that defining risk as a percentage loss does not give a vivid picture of potential loss for most investors, and we have substituted a dollar amount instead. Hohn believes that translating the dollar amount into other values is even more effective. He provides these examples:

Putting market losses and gains in perspective is always important. Emotional turmoil inevitably increases when the absolute dollar amount of the loss is translated into other values.

1 “There goes our plans for a new car down the drain.”
2 Or, “No vacation for the next three years.”
3 Or, “We are going to need to keep your mother with us, now. We’ll never come up with the money for the retirement home.”
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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: Should risk be stated in dollars terms instead of AA %?

Post by Sunny Sarkar »

Should risk be stated in dollars terms instead of AA %?
Theoretical risk is in percentages.
Real risk is in dollars.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by jackholloway »

StarbuxInvestor wrote:
555 wrote:
StarbuxInvestor wrote:So it sounds like a concensus that risk should be looked at in terms of the loss in value you can tolerate measured by dollars and that can be used to figure out the proper AA instead of vice-versa.
No.
Please explain.
I cannot speak for 555, but when I look at a monthly return statement and see that it have "lost" 200k, it hurts. The larger the portfolio, and the riskier, the more likely I am to see such a number. 90/10 can see a move like that fairly frequently. By expressing in percentages, I, at least, self-inoculate against the emotional impact of fairly normal market moves.

Expressing in dollars instead pushes towards extreme portfolios, as I would either shift towards an more conservative portfolio to avoid large loss numbers, or towards a riskier one as I would the supposedly not care about losses above my floor. Given that history shows I would care, the actual result of a riskier portfolio would be panic at the bottom, and that rarely leads to good decisions.

I suspect this is the key to a LMP. By stating up front that money is not fungible - losses in the floor are inherently different than losses in the risky component, investors have a chance to change their psychology. If an investor gets that, and sets the floor right, they can do very well indeed. Most believe they can do that, and most actually cannot if I read the studies right.

In other words, setting percentages is a way to move the thinking away from specific loss numbers that depend on too many assumptions and towards something that can be measured, but at the cost of an investor taking a different risk than they think they are.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by Call_Me_Op »

Really depends upon how you define risk.

The one thing that should be defined i terms of (inflation adjusted) dollars is your floor.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by niceguy7376 »

In Public forums, % is used to express risk because we dont know the total numbers. Even in "Asking Portfolio questions" template, we ask to list them in % so that the poster can still have some form of privacy. It is also easy to spread the knowledge across multiple people, be it in class or an online forum.

Even one of the poster that teaches finance to adults said "The goal is to help them individualize the PERCENTAGES for their allocation."

Thus % is a standard format of spreading the knowledge and it is then upto each individual to convert those into dollar amounts for their own circumstances.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by TheTimeLord »

jsl11 wrote:
StarbuxInvestor wrote:
jsl11 wrote:I would suggest that dollars and percentages are just two ways of describing the same thing, once you know your portfolio size. For example, for a 1M portfolio, 60% is exactly the same as 600K. Since we each know the size of our own portfolio, we also know how the percentages translate into dollars. Percentages have an advantage because we can discuss them, and one can plan, independent of portfolio size. This is even easier for an individual as portfolio size keeps changing.
Jeff

If portfolios were static that might be true. But you still have to understand do you drived dollars from percentage or percentage from dollars. If I feel I can only lose $250,000 then but the value of more portfolio changes the pervcentage changes as long as the dollar amount remains constant.
I would suggest the opposite. If you have a 1M portfolio, you may feel that you can only lose 250K. However, if your portfolio doubles to 2M, you probably would not want to limit losses to the same level. If your portfolio grows to 5M, a 250K loss would be of little concern.
Jeff
If you go that way since you feel you could lose $250K at $1 million you get an AA of 50/50 using dollars. Now providing your risk tolerance hasn't changed at $2 million you could lose $1,250K so you get an AA 100/0. So you are looking at not what you can lose but what you must maintain which will constantly raise your equity allocation as your portfolio increases. But there is still an absolute dollar amount just not for loss but portfolio size at $750K.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by inbox788 »

StarbuxInvestor wrote:Maybe I haven't quite understood the concept of risk here but it seems like people always speak of it in terms of AA but when they advise people they talk in terms of losing 50% of their equity investment which is a dollar amount. So is risk just the the amount of dollars you feel you can lose and you equity investmnet should be double that amount regardless of the what that makes your AA?
No. There is no direct link between risk and AA. Risk means different things to different folks. Some people think standard deviation. Risk is full of assumptions. Assumptions change. Dollars change. 2014 dollars? 1990 dollars? 2060 dollars?

Our tolerance for risk isn't linear. If your investment portfolio were $1000 vs. $1,000,000,000 an AA of 50/50 may not be correct for either extreme. But somewhere between $10,000, $100,000, $1,000,000, and $10,000,000 which covers most people, the marginal risk behavior and tolerance doesn't or shouldn't change dramatically.

AA doesn't paint a complete picture, but it's one number that's better than most other single numbers.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by IlliniDave »

Math is pretty easy. I can mentally go back and forth between % and dollars, and even between AA% and dollars without tremendous difficulty.

There's a couple problems with that approach

-You are making assumptions about bear markets that may be optimistic relative to what the future holds.
-Thinking about your assets losing value and seeing them do so are two different things.

It's not a bad exercise as long as one understands that they are not a) somehow capping their losses and b) ensuring avoidance of big emotional gut punches.

For my personality quirks, I find it better to frequently remind myself that I'm going to get kicked in the teeth financially. Hard. The only question is when. And I try never to "spend" my investments in my head which helps me stay detached and treat account balances as just numbers. Probably the worst thing I could do would be to imagine what my nest egg would look like if it was a pile of cash sitting on a table in front of me.

Risk is not an easy thing to define, quantify, or avoid. Whatever works for an individual is the best way for them to approach it.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by TheTimeLord »

inbox788 wrote:
StarbuxInvestor wrote:Maybe I haven't quite understood the concept of risk here but it seems like people always speak of it in terms of AA but when they advise people they talk in terms of losing 50% of their equity investment which is a dollar amount. So is risk just the the amount of dollars you feel you can lose and you equity investmnet should be double that amount regardless of the what that makes your AA?
No. There is no direct link between risk and AA.
No one is saying there isn't per se. The question is which is the horse and which is the cart. And it seems to me reading here people actual look at the "50% loss" possibility in equities calculate and equity investment amount and then back in their AA. But it is often discussed as if it flows the other way. I am just going bydozens of posts I seen here discussing how someone can determine if they are taking too much risk.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by 555 »

There are all kinds of facts and figures you can state about a portfolio, and the rest of a person's financial picture, that can be stated in terms of $ or % or both (and you can translate between them). So "either % or $" is a straw man. It doesn't matter.

You want to figure out how to save and invest to reach financial security, and people discuss how to do this.You could try to maximize the probability of reaching a certain level of assets, or more generally, optimize some kind of utility function. I just don't think "fear of a certain dollar loss" is going to be part of a rational strategy.

Think about it. Suppose you want to accumulate 25 years worth of expenses. Early you can, and may need to, take some risk. When you are close to your target you can take risk off the table. (If you are well above, lay down a safe floor, and you can take risk with the excess if you choose.) But what about when you are at 10 or 15 years of expenses saved up. Unless you go very conservative already (meaning you need more saving, or get less final accumulation) you will routinely have daily fluctuations of a month or two of expenses, and can easily see some peak to trough drops of a year or two of expenses. That's just the reality of it. You just have to deal with it.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by dbr »

StarbuxInvestor wrote: No one is saying there isn't per se. The question is which is the horse and which is the cart. And it seems to me reading here people actual look at the "50% loss" possibility in equities calculate and equity investment amount and then back in their AA. But it is often discussed as if it flows the other way. I am just going bydozens of posts I seen here discussing how someone can determine if they are taking too much risk.
How about a counter-example. For the retiree running out of money and still being alive seems like a consequence one would like to avoid. Consequences we would like to avoid that might occur with significant likelihood are what we call risks. It is known that most likely a person trying to withdraw several percent (around 4%) from a portfolio has pretty little risk of running out of money if he holds at least 40% in stocks. At less than 30% in stocks the risk of running out of money is very high. The conclusion is that a person who holds 80% bonds because they can't accept the implied possibility of a sometime loss of 50% in too much in stocks is looking at the wrong AA if what they really want to manage is the risk of running out of money in retirement. Does that help?
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Re: Should risk be stated in dollars terms instead of AA %?

Post by TheTimeLord »

dbr wrote:
StarbuxInvestor wrote: No one is saying there isn't per se. The question is which is the horse and which is the cart. And it seems to me reading here people actual look at the "50% loss" possibility in equities calculate and equity investment amount and then back in their AA. But it is often discussed as if it flows the other way. I am just going bydozens of posts I seen here discussing how someone can determine if they are taking too much risk.
How about a counter-example. For the retiree running out of money and still being alive seems like a consequence one would like to avoid. Consequences we would like to avoid that might occur with significant likelihood are what we call risks. It is known that most likely a person trying to withdraw several percent (around 4%) from a portfolio has pretty little risk of running out of money if he holds at least 40% in stocks. At less than 30% in stocks the risk of running out of money is very high. The conclusion is that a person who holds 80% bonds because they can't accept the implied possibility of a sometime loss of 50% in too much in stocks is looking at the wrong AA if what they really want to manage is the risk of running out of money in retirement. Does that help?

Not really since those percentages only ring true in regards to specific expense amounts and portfolio size. I understand what you are saying I have looked at it that way for years but after reading many posts here I realized I might be looking at the shadow not the object. Now grant depending on the angle of the light the shadow might be a very good representation.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by letsgobobby »

This might make sense if you are more concerned with 'volatility risk' as opposed to 'the risk of permanent loss.'

The volatility risk approach only matters for an irrational investor (that is, most of us). If there is 'something' about losing $250k that will cause us to abandon our IPS, then we should never hold more than $500,000 in stocks (or maybe $400,000... or maybe $300,000). And to that extent we must be honest with ourselves about our vulnerability to that behavioral error.

I recall during the 2007-09 crash, I stopped checking my quarterly net worth for about 6 months. I had the realization it would be too painful, and that I might get sick (also, by extension, I might do something irrational). I found this worked very well.

The next time we have a stock market crash, I will have about 5 to 20 times more money at risk. I will be even more sure not to check net worth at that time. If I find I have lost $500,000 or $1,000,000 or some other very large number, I cannot predict what I will do.

As a defense against cheating and my own irrational behavior, my Google Spreadsheet is configured so that when I open it, the only thing I see are three ratios: stock/bond; domestic/international; bond allocation (stable value/total bond/I bond). That way I can quickly see whether I need to rebalance, but without having to check dollar amounts.* I almost never need to rebalance.

*obviously this has its limitations. If I see that rebalancing is in order, it's not possible to do that without looking at dollar figures. This is how I handled this paradox in 2007-09: I bought stocks in round figures. For example, if my desired AA was 50/50 and my actual AA was 40/60, I would buy $100,000 of stocks. It wouldn't put me exactly back to 50/50 - maybe it'd be 52/48 or 47/53 - but it would get the job done without checking total portfolio size, since I knew that would make me throw up.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by sport »

letsgobobby wrote:This might make sense if you are more concerned with 'volatility risk' as opposed to 'the risk of permanent loss.'

The volatility risk approach only matters for an irrational investor (that is, most of us). If there is 'something' about losing $250k that will cause us to abandon our IPS, then we should never hold more than $500,000 in stocks (or maybe $400,000... or maybe $300,000). And to that extent we must be honest with ourselves about our vulnerability to that behavioral error.

I recall during the 2007-09 crash, I stopped checking my quarterly net worth for about 6 months. I had the realization it would be too painful, and that I might get sick (also, by extension, I might do something irrational). I found this worked very well.

The next time we have a stock market crash, I will have about 5 to 20 times more money at risk. I will be even more sure not to check net worth at that time. If I find I have lost $500,000 or $1,000,000 or some other very large number, I cannot predict what I will do.

As a defense against cheating and my own irrational behavior, my Google Spreadsheet is configured so that when I open it, the only thing I see are three ratios: stock/bond; domestic/international; bond allocation (stable value/total bond/I bond). That way I can quickly see whether I need to rebalance, but without having to check dollar amounts.* I almost never need to rebalance.

*obviously this has its limitations. If I see that rebalancing is in order, it's not possible to do that without looking at dollar figures. This is how I handled this paradox in 2007-09: I bought stocks in round figures. For example, if my desired AA was 50/50 and my actual AA was 40/60, I would buy $100,000 of stocks. It wouldn't put me exactly back to 50/50 - maybe it'd be 52/48 or 47/53 - but it would get the job done without checking total portfolio size, since I knew that would make me throw up.
If you think of those times as "buying opportunities" rather than losing money, you will feel better about it. You might even look forward to those events.
Jeff
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Re: Should risk be stated in dollars terms instead of AA %?

Post by red5 »

StarbuxInvestor wrote:Maybe I haven't quite understood the concept of risk here but it seems like people always speak of it in terms of AA but when they advise people they talk in terms of losing 50% of their equity investment which is a dollar amount. So is risk just the the amount of dollars you feel you can lose and you equity investmnet should be double that amount regardless of the what that makes your AA?
I am of the opinion that talking about % is pretty much equivalent to talking about $. After all, a % is just a decimal and is used to multiply by some $ value which will result in another number with $ as the unit.

If you have $100 in equities then you are risking 50% of it, or in other words you are risking $50 of it....
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Re: Should risk be stated in dollars terms instead of AA %?

Post by letsgobobby »

jsl11 wrote: If you think of those times as "buying opportunities" rather than losing money, you will feel better about it. You might even look forward to those events.
Jeff
Agreed - I do, and I did in 2007-09. That is why I now have 5-10x more at risk in stocks than I did then. That makes me 5-10x less likely to look at my portfolio total next time around.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by dbr »

letsgobobby wrote:
jsl11 wrote: If you think of those times as "buying opportunities" rather than losing money, you will feel better about it. You might even look forward to those events.
Jeff
Agreed - I do, and I did in 2007-09. That is why I now have 5-10x more at risk in stocks than I did then. That makes me 5-10x less likely to look at my portfolio total next time around.
This goes to the problem that outcome is a lifelong result, or more than lifelong. The outcome is not simply based on a loss of x (% or $) occurring in some specific time period. The fact that the stock market declines by 50% from some point to another point is, in and of itself, meaningless. The event is important depending on how long the market stays down, what the investor is doing while it is down, and what the investor did when it went down (bailed in panic?). The 50% rule as a test of risk was and is only intended to assess the investor's ability to stay invested rather than sell out in a panic at a market bottom. As such it is a piece in assessing an allocation choice, but it is far from the whole thing. As such, if the investor finds it more meaningful to ask that question in dollars rather than percents, that is fine. Probably it should be done in both, depending on how the investor perceives things.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by sport »

letsgobobby wrote:
jsl11 wrote: If you think of those times as "buying opportunities" rather than losing money, you will feel better about it. You might even look forward to those events.
Jeff
Agreed - I do, and I did in 2007-09. That is why I now have 5-10x more at risk in stocks than I did then. That makes me 5-10x less likely to look at my portfolio total next time around.
As your investing career becomes more and more successful (you are wealthier) your priorities can gradually shift from capital growth to capital preservation. As this occurs, your need to take risk decreases and you may wish to revisit your choice of allocation. In other words, when you have it made, why risk it, if you don't have to?
Jeff
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Re: Should risk be stated in dollars terms instead of AA %?

Post by Dandy »

Dollars is the key. Especially as your portfolio grows always translate the percentage into dollars to assess your risk. A 30% loss on a 100k portfolio is a lot different on a million dollar one. That is why there is a lot of wisdom, for many, in reducing risk in retirement and Wm Bernstein's have 20 to 25 years of residual expenses in safe products.

In the accumulation phase you have a chance to make up portfolio hits due to contributions and time. That is usually not as much of an option in retirement with reduced or eliminated earning power and withdrawals instead of contributions.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by ogd »

I find percentages most useful in investment evaluations, though I keep a dollar floor in the back of my mind.

Risk tolerance changes with portfolio size. Once you've been at $X, you don't like going below $Y, where Y=F(X) and fairly linear, definitely not the same Y as when the portfolio is small. Furthermore, expenses and lifestyle change with portfolio size, and this is probably a good thing.

Lastly, many questions related to portfolio balance don't make sense in absolute dollars. Imagine trying to answer "are long or intermediate bonds better at balancing $1M in equities" or "is $500k too much in munis". Any advice you give and get has to be relative. Etc.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by letsgobobby »

jsl11 wrote:
letsgobobby wrote:
jsl11 wrote: If you think of those times as "buying opportunities" rather than losing money, you will feel better about it. You might even look forward to those events.
Jeff
Agreed - I do, and I did in 2007-09. That is why I now have 5-10x more at risk in stocks than I did then. That makes me 5-10x less likely to look at my portfolio total next time around.
As your investing career becomes more and more successful (you are wealthier) your priorities can gradually shift from capital growth to capital preservation. As this occurs, your need to take risk decreases and you may wish to revisit your choice of allocation. In other words, when you have it made, why risk it, if you don't have to?
Jeff
but the question is: If I used to have an 80/20 portfolio of $400k stocks/$100k bonds, and now I have a 50/50 portfolio that is $1,000,000 stocks/$1,000,000 bonds, is my portfolio more or risky than it used to be?
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Re: Should risk be stated in dollars terms instead of AA %?

Post by sscritic »

IlliniDave wrote:Math is pretty easy. I can mentally go back and forth between % and dollars, and even between AA% and dollars without tremendous difficulty.
555 wrote:There are all kinds of facts and figures you can state about a portfolio, and the rest of a person's financial picture, that can be stated in terms of $ or % or both (and you can translate between them). So "either % or $" is a straw man.
I disagree.

My portfolio contains 60% stocks and 40% bonds for a total of 100%. Tell me the dollar amounts involved.

My portfolio contains $60 of stocks and $40 of bonds for a total of $100. Tell me the percentages involved.

I can go one from $ to %, but not from % to $, not unless I know a $ to start with.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by 555 »

sscritic wrote:
IlliniDave wrote:Math is pretty easy. I can mentally go back and forth between % and dollars, and even between AA% and dollars without tremendous difficulty.
555 wrote:There are all kinds of facts and figures you can state about a portfolio, and the rest of a person's financial picture, that can be stated in terms of $ or % or both (and you can translate between them). So "either % or $" is a straw man.
I disagree.

My portfolio contains 60% stocks and 40% bonds for a total of 100%. Tell me the dollar amounts involved.

My portfolio contains $60 of stocks and $40 of bonds for a total of $100. Tell me the percentages involved.

I can go one from $ to %, but not from % to $, not unless I know a $ to start with.
What %age of the market do you own? (No need to answer. It's rhetorical. I know you get it.)

I'm not saying this whole topic is subsumed within
http://en.wikipedia.org/wiki/Projective_geometry
:wink:
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Re: Should risk be stated in dollars terms instead of AA %?

Post by ogd »

sscritic wrote:My portfolio contains 60% stocks and 40% bonds for a total of 100%. Tell me the dollar amounts involved.

My portfolio contains $60 of stocks and $40 of bonds for a total of $100. Tell me the percentages involved.

I can go one from $ to %, but not from % to $, not unless I know a $ to start with.
Ah, but you cheated. You gave one piece of information in the first case (the 60%, because the rest is implied) and two in the second (the $60 and $40). If someone just gave the $60, the picture would be incomplete. Or, if you allow for the possibility of a third asset, you gave 2 vs 3 pieces of information.

Anyway, the point of this thread, if there is one at all, isn't about which is more descriptive, but rather along the lines of: "when you make decisions about an asset, do you mostly consider its dollar amount in isolation or in relation to the rest of the portfolio". I'm going with the latter.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by sscritic »

555 wrote: What %age of the market do you own? (No need to answer. It's rhetorical. I know you get it.)

I'm not saying this whole topic is subsumed within
http://en.wikipedia.org/wiki/Projective_geometry
But you would still need to know the $ of the market. Try this:

What is the ratio of 6 to 2?
The ratio is 4. What numbers did I divide to get 4?

The point is that one space is of a lower dimension than the other, just as you say. If you project from a 10 dimensional space to a 9 dimensional space, you have lost information. A statistician would talk about degrees of freedom (why you divide by n-1 when you compute a standard deviation).
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Re: Should risk be stated in dollars terms instead of AA %?

Post by Dandy »

but the question is: If I used to have an 80/20 portfolio of $400k stocks/$100k bonds, and now I have a 50/50 portfolio that is $1,000,000 stocks/$1,000,000 bonds, is my portfolio more or risky than it used to be?

Yes because the risk is in dollars - losses and gains are in dollars that you could spend. You have more dollars at risk. If equity markets drop 50% which portfolio will lose the most dollars? The 80% equity allocation will lose $200k (50% x $400k) - the $1 million equity allocation will lose $500k.

Now as your portfolio grows you should be able to take more dollar risk. But once you have diminished earning power and are withdrawing instead of contributing you need to be "comfortable" with the dollars at risk.
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Re: Should risk be stated in dollars terms instead of AA %?

Post by 555 »

Dandy wrote:but the question is: If I used to have an 80/20 portfolio of $400k stocks/$100k bonds, and now I have a 50/50 portfolio that is $1,000,000 stocks/$1,000,000 bonds, is my portfolio more or risky than it used to be?

Yes because the risk is in dollars - losses and gains are in dollars that you could spend. You have more dollars at risk. If equity markets drop 50% which portfolio will lose the most dollars? The 80% equity allocation will lose $200k (50% x $400k) - the $1 million equity allocation will lose $500k.

Now as your portfolio grows you should be able to take more dollar risk. But once you have diminished earning power and are withdrawing instead of contributing you need to be "comfortable" with the dollars at risk.
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