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- Fri Jan 03, 2014 2:57 pm
- Forum: Investing - Theory, News & General
- Topic: REGISTRATION FOR THE 2014 BOGLEHEAD CONTEST
- Replies: 537
- Views: 43645
- Fri Oct 25, 2013 9:51 am
- Forum: Investing - Theory, News & General
- Topic: Aftershock investor- an anti boglehead read
- Replies: 17
- Views: 3103
Re: Aftershock investor- an anti boglehead read
Prof Scott Sumner has been explaining it on his blog for years. I think no one grasps monetary policy effects better than him.stlutz wrote:At what point does one conclude that the view that QE will cause runaway inflation, gold to go to $10,000 etc. is wrong? We've been hearing that for many years now. Perhaps it would be better to take advice from those who can explain why QE has been neither inflationary nor stimulative.
http://www.themoneyillusion.com/
- Thu Sep 19, 2013 5:49 am
- Forum: Investing - Theory, News & General
- Topic: Why a 2% Inflation Target by the Federal Reserve
- Replies: 7
- Views: 1139
Re: Why a 2% Inflation Target by the Federal Reserve
What would be the theoretical----&/or practical---- reason(s) be behind the Fed's inflation target of 2% over the intermediate term? Part of me wonders why it wouldn't be better to target inflation at 0%? Could it be that there needs to be a certain percentage of monetary "slop" in the economic system to prevent a credit squeeze----and if the definition of inflation truly is "too much money chasing too few goods"----that such is the explanation for the 2% number? TIA for your thoughts on this economics theory question. Sconie It blows my mind. The fear of deflation seems to be the reason, although history has shown that as long as the deflation in not the result of the arbitrary Fed money manipulation, but natural r...
- Fri Aug 02, 2013 5:34 am
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
If a pension fund has sufficient assets to pay its liabilities when they fall due because of good historic returns this is proof that the gdp at that time is capable of bearing the burden placed on it by these payments. It shows that there are investors who are willing and able to exchange their income for the pension fund’s assets. Correlation does not imply causation.
- Fri Aug 02, 2013 2:39 am
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
So what if GDP growth is zero? Assets held can still return dividends forever to pay benefits. Are you saying this infinite income should have a zero discount rate? No matter what the dividend yield, the discount rate is zero? That dividend yield is completely irrelevant to sustainability of pension benefits? That a low dividend yield is just as good as a high dividend yield because in both cases the discount rate is zero? What if the assets held by the pension fund are worthless after 30 years when benefits fall due, (perhaps they invested in infrastructure per Epsilon's suggestion and realized too late that what they were doing was equivalent to digging holes and filling them back up. :happy ) but gdp grew at 10% real for 30 years. Would...
- Thu Aug 01, 2013 3:08 pm
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
Gdp should obviously be allocated to the legitimate owners thereof – the rightful claims of pensioners entitle them to a portion of gdp. It can however only be paid out of income produced by the efforts of the then active economic participants – either by taxing that income or by selling assets to the recipients of that income. It can also come from consuming assets. Not just selling them to current workers, but using them up. Any account should have both a balance sheet and a cash flow statement. GDP is a purely cash flow item. Paper assets derive their value from future gdp - if everyone retires gdp goes to zero - stocks, bonds cash even property (no income = no rent) goes to zero. We revert to a barter economy, where a different set of ...
- Thu Aug 01, 2013 2:52 pm
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
The selection of the discount rate, the estimate of investment returns, is a big deal because it can halve or double the amount of current contributions and taxes needed for sustainability, just as an individual's investment return determines how much they need to save for retirement. Individuals can sacrifice (save) current consumption to fund future consumption. On the macro level this is not possible – future pensions can only be paid out of future gdp. We cannot set aside a portion of current gdp to pay these future liabilities. Pensions can only be paid out of income produced by the then active economic participants – either by taxing that income or by selling pension fund assets in exchange for income earned by the economically activ...
- Thu Aug 01, 2013 4:36 am
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
The fact is public db pensions are guaranteed.
Government has the power to raise taxes in future to pay these benefits.
If we expect that these future payments will make up an unsustainable % of future income(gdp) then we must conclude that pensions are underfunded.
If these liabilities are sustainable in terms of future expected gdp then it is irrelevant if a risk free discount rate shows them to be underfunded.
If they are not sustainable then no level of returns from investing in risky assets can salvage the situation.
Government has the power to raise taxes in future to pay these benefits.
If we expect that these future payments will make up an unsustainable % of future income(gdp) then we must conclude that pensions are underfunded.
If these liabilities are sustainable in terms of future expected gdp then it is irrelevant if a risk free discount rate shows them to be underfunded.
If they are not sustainable then no level of returns from investing in risky assets can salvage the situation.
- Thu Aug 01, 2013 1:53 am
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
Because some of the gdp is return on capital (profits or interest) and some of that capital is owned by retired people. If you allocate the entire gdp the active workers then retired workers are not getting any. It would indeed be theft if the entire gdp is allocated to active workers, thereby flouting the property rights of others– that’s a recipe for anarchy. Implicit in this discussion is the assumption that pension benefit claims are legitimate, and it is in the interests of society to fully meet these claims. Gdp should obviously be allocated to the legitimate owners thereof – the rightful claims of pensioners entitle them to a portion of gdp. It can however only be paid out of income produced by the efforts of the then active economi...
- Wed Jul 31, 2013 3:00 pm
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
There is certainly a way to fund retirement which does not involve transfers from the economically active to pensioners: store goods. This method can, in theory, work even if there is no next generation. This has been done in the past, some homesteaders would build an enormous wood pile while they were able so that they did not need to cut wood later in life. Having the "economically active" having full benefit of gdp produced at the time the pension is paid is not the same as "no transfers". Your condition is equivalent to the next generation confiscating the capital of the prior generation. Ok, but if we store goods to fund retirement there is no point arguing about appropriate discount rates for valuing future benefi...
- Wed Jul 31, 2013 9:37 am
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
A government anticipating a demographic bulge of retirees (and they are easy to anticipate) could do a lot worse than ensuring that infrastructure is in tip-top condition. This is just one way to set aside a portion of current production for future consumption. What about the 'crowding out' effect? We want the crowding out effect in this case. Spending on infrastructure reduces consumption before the retirement bulge hits and reducing infrastructure spending increases consumption during the retirement bulge. In any case infrastructure does not have to be private, on a personal level you could reroof your house with a 30 year roof just before retirement. Raising additional taxes to spend on infrastructure crowds out investments which the ma...
- Wed Jul 31, 2013 1:30 am
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
What about the 'crowding out' effect?Epsilon Delta wrote: A government anticipating a demographic bulge of retirees (and they are easy to anticipate) could do a lot worse than ensuring that infrastructure is in tip-top condition. This is just one way to set aside a portion of current production for future consumption.
- Tue Jul 30, 2013 2:36 pm
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
Individuals can sacrifice (save) current consumption to fund future consumption. If they want this future consumption to be guaranteed they should use a liability matching strategy. In simple terms the discount rate used to calculate the amount to be saved should be the real yield on long term treasuries. Most of us opt to forego the guarantee due to the high cost – which is perfectly rational. We discount our at-risk future consumption at a risky rate to calculate how much to save. On the macro level this is not possible – future public guaranteed db pensions can only be funded out of future gdp. We cannot set aside a portion of current gdp to fund these future liabilities – see my previous post. Gdp is created by the economically active. ...
- Tue Jul 30, 2013 10:28 am
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
If you subscribed to the viewpoint below – what discount rate would you regard as appropriate to value and fund public db pension liabilities? From a macro-economic perspective the payment of pension benefits always imposes a burden on the members of society who are economically active when the payment is made. In aggregate it is irrelevant whether those benefits are transferred from the productive members of society to the retired population by taxing them or by withdrawing savings (interest/dividends/rent/capital redemptions) which derives its value from their productivity. If a government levies a tax to fund future pension liabilities and transfers the proceeds to an investment like bonds or stocks this action is not a burden on the eco...
- Mon Jul 29, 2013 5:09 am
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
Taxpayers have some choices about how to raise the money to pay the debt. I disagree, taxpayers don’t get to make any decisions, voters have that privilege. I live in a country where voters make up 70% of the adult population, but taxpayers only 5%. In any event none of this means S&L governments need only invest in safe assets. It means they have to discount the pension liability using a near risk-free rate. That does not mean they have to invest only in near risk-free assets. BobK Sorry to pick on you bobcat, it is only because your arguments are so persuasive, and as my interests won’t be served if you are right, my bias motivates me to frantically seek refutation. I find it strange that you have no problem using risky investments t...
- Mon Jul 29, 2013 4:52 am
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
Re: Pensions, actuaries, and stocks for the long run
Great discussion, good arguments on both sides. I think this might be a case where micro (finance theory) and macro contradict each other. Bobcat2 presents proof that standard finance theory and some big names in that discipline supports the use of a risk free discount rate to value guaranteed benefits. I question whether the valuation of public db pension liabilities is a micro issue where standard finance theory applies, my gut feel is that this falls in the macro domain. (I’m not sure if this applies to S&L government, perhaps that is where I miss the point.) We have seen many instances in the post crisis years where astute micro economists betrayed their ignorance of macro (eg. Eugene Fama on the treasury view as referenced by Jack)...
- Mon Jul 29, 2013 4:49 am
- Forum: Investing - Theory, News & General
- Topic: Pensions, actuaries, and stocks for the long run
- Replies: 155
- Views: 17675
- Mon Jun 24, 2013 8:28 am
- Forum: Investing - Theory, News & General
- Topic: Is there a long-term decline in returns on US equities?
- Replies: 22
- Views: 2923
Re: Is there a long-term decline in returns on US equities?
Transaction costs have declined over this period, the after costs trend line would show less of a decline.
I agree with Statsguy, I also think markets are generally less risky due to a number of factors than 130 years ago.
I agree with Statsguy, I also think markets are generally less risky due to a number of factors than 130 years ago.
- Sat Jun 22, 2013 12:27 pm
- Forum: Investing - Theory, News & General
- Topic: Modern Portfolio Theory
- Replies: 89
- Views: 13778
Re: Modern Portfolio Theory
The earth shattering revelation I got from MPT was the distinction between market risk and specific risk.
The fact that the market does not price the diversifiable specific risk an undiversified portfolio is exposed to.
The market only discounts market risk, if you fail to diversify fully you don’t get the full discount.
This adds another dimension to diversification beyond the old concept of not keeping all your eggs in one basket.
I don’t think this fact was fully appreciated (if at all) prior to Markowitz’s work- for that he deserves all the accolades.
The fact that the market does not price the diversifiable specific risk an undiversified portfolio is exposed to.
The market only discounts market risk, if you fail to diversify fully you don’t get the full discount.
This adds another dimension to diversification beyond the old concept of not keeping all your eggs in one basket.
I don’t think this fact was fully appreciated (if at all) prior to Markowitz’s work- for that he deserves all the accolades.
- Wed May 08, 2013 8:39 am
- Forum: Investing - Theory, News & General
- Topic: Do you believe stocks are safer the longer they are held?
- Replies: 80
- Views: 6317
Re: Do you believe stocks are safer the longer they are held
If you invested in the Japanese stock market in 1989 would you feel better about it now than you did in 1992, say.longview wrote:Stocks are "less risky" in the longterm in the way people mean it -- to their portfolio. (only academics are talking about stock, in a vacuum, are more "risky").
ie, if you invested 1k in 1929 all in the equity index, you'd be feeling pretty good right about now. You wouldn't be too worried. Much less worried than you were in, say, 1932.
- Wed May 08, 2013 7:37 am
- Forum: Investing - Theory, News & General
- Topic: Do you believe stocks are safer the longer they are held?
- Replies: 80
- Views: 6317
Re: Do you believe stocks are safer the longer they are held
Do you believe bonds are safer the longer they are held? I believe that what is determined by the length of the holding period is the safest asset. In the theory of portfolio selection the risk-free (safest) asset is defined as the security that offers a perfectly predictable rate of return in terms of the selected unit of account and the length of the investor's decision horizon. That probably sounds confusing, but the following examples should clear things up. Examples - * If the unit of account is the US dollar and the decision horizon is three months, the safest asset is a Treasury bill that matures in three months. * If the decision horizon is 20 years then the safest asset is a 20 year zero coupon Treasury bond, assuming the unit of ...
- Wed May 08, 2013 3:11 am
- Forum: Investing - Theory, News & General
- Topic: Standard Deviation Calculation Help
- Replies: 9
- Views: 1537
Re: Standard Deviation Calculation Help
To convert annual sd to monthly sd you divide by sqrt(12).
So 17.38/sqrt(12) = 5.02
Hope that helps.
So 17.38/sqrt(12) = 5.02
Hope that helps.
- Tue May 07, 2013 9:54 am
- Forum: Investing - Theory, News & General
- Topic: Do you believe stocks are safer the longer they are held?
- Replies: 80
- Views: 6317
Re: Do you believe stocks are safer the longer they are held
Yes our estimate of the future mean return may be in error. That was the point I was making. If we knew the "true" future mean return of equities then investing in equities would involve roughly the same amount of risk regardless of the holding period, because we would be closing in on the mean return over time, but the cumulative dispersion of returns would be increasing. But we don't know that, so investing in stocks becomes somewhat riskier the longer the holding period. Many people appear to assume that their expected return for stocks is the "true" mean return going forward. It is not, it is an estimate, and the fact that it is an estimate means they are underestimating the amount of risk entailed in investing in e...
- Tue May 07, 2013 9:39 am
- Forum: Investing - Theory, News & General
- Topic: Do you believe stocks are safer the longer they are held?
- Replies: 80
- Views: 6317
Re: Do you believe stocks are safer the longer they are held
I see Bodie's argument was mentioned (that higher option prices with longer time horizons proves that risk increases with time). So I am reposting a post of mine from years ago, maybe someone can answer my question. IIRC, Bodie concluded that the cost of insuring against earning less than the risk-free rate of interest increases as the length of the investment horizon increases. Here's the paper . No, Bodie observed that the cost of insuring against earning less than the risk-free rate of interest increases as the length of the investment horizon increases. I agree with his observation. He concluded based on his observation that risk increases with time. I disagree with his conclusion. Figure 1. In his paper shows how the cumulative cost of...
- Sat Apr 13, 2013 8:43 am
- Forum: Investing - Theory, News & General
- Topic: The Economist: Bitcoin's record price looks like a bubble
- Replies: 20
- Views: 3423
Re: The Economist: Bitcoin's record price looks like a bubbl
Another example of the perils of bubble predictions. The Economist called a bubble at $80, now after wandering north of $200 it is back at $80. Will the Economist admit their prediction was wrong? Nah, they will probably take credit for accurately calling a bubble in advance.
See Prof Scott Sumner's take.
http://www.themoneyillusion.com/?paged=2
See Prof Scott Sumner's take.
http://www.themoneyillusion.com/?paged=2
- Sun Mar 03, 2013 2:52 pm
- Forum: Investing - Theory, News & General
- Topic: Long term stock market risk
- Replies: 51
- Views: 6541
Re: Long term stock market risk
Thanks Assumer, that was very helpful.
- Thu Feb 28, 2013 7:00 am
- Forum: Investing - Theory, News & General
- Topic: Long term stock market risk
- Replies: 51
- Views: 6541
Re: Long term stock market risk
Yes please. It would also be helpful if you can illustrate with an example. (I tried using EV $22 Sd $540, but I don't know what you used for Total money to produce these graphs).assumer wrote:
The equation for risk of ruin (the chance of losing all your money at any time in the future) is:
( (1 - EV / Std) / ( 1 + EV / Std ) ) ^ ( Total_Money / Standard Deviation ).
There are also equations for losing $X after Y hours, gaining $X after Y hours, or losing $X before reaching $Z, ad infinitum which I can post if others are curious.
Can it be used with % such as: Expected return 5% per year, Annual Sd 15% ?
- Tue Jan 01, 2013 2:50 pm
- Forum: Investing - Theory, News & General
- Topic: 2013 BOGLEHEAD CONTEST REGISTRATION
- Replies: 481
- Views: 37376
- Tue Dec 04, 2012 2:17 am
- Forum: Investing - Theory, News & General
- Topic: Chart: The Futility of Stock Market Prediction
- Replies: 31
- Views: 4003
Re: Chart: The Futility of Stock Market Prediction
If it were not possible to predict stock prices, then algorithmic program traders would not be making money. Obviously, some people have figured out in some time frames and under some defined parameters to make money predicting price movements. Isn't it enough for BH's to be happy to make money the "BH way" and leave it at that? The people who know how, are wise not to let on. To say it is impossible seems to me to be forgetting insider trading, sophisticated algorithms or making pronouncements not far from religious dogma. Algorithmic trading can make money without predicting future stock prices by cannibalising the old fashioned market maker’s business, performing the same function at a fraction of the cost. It can lower transa...
- Mon Dec 03, 2012 3:49 am
- Forum: Investing - Theory, News & General
- Topic: Kyle Bass Letter
- Replies: 44
- Views: 5269
Experts
A tenet of Boglehead philosophy is that index funds (invested in listed securities) are priced by liquid markets eliminating the need for investors to have- or hire skill to determine value.Jebediah wrote:farms, real estate, timber, goats, forklifts, etcHomerJ wrote: What exactly is a "real, productive asset"?
These “real productive assets” trade in illiquid, inefficient markets where the experts have an edge.
How do I figure out the right price to pay? Do you think price matters?
Should I pay Kyle Bass or someone else for this expertize, how do I identify the best valuation specialist?
- Sat Dec 01, 2012 3:36 pm
- Forum: Investing - Theory, News & General
- Topic: The anti-Taleb reviews Antifragile
- Replies: 197
- Views: 35405
Re: Taleb is the best!!!
I think he would say that the probabilities of these rare events (black swans) are unknowable. And that anyone who says they can calculate them is a charlatan (he often uses more colorful terms!) so basically you need to position yourself to benefit from them. if you are left standing when everyone else has been destroyed, that is incredibly valuable. think joseph kennedy. http://en.wikipedia.org/wiki/Joseph_P._Kennedy,_Sr. cheers, Positioning yourself to benefit from them might not be without risk. Interview with Taleb and Roubini on CNBC on Feb 9 2009 ( S&P 500: 870 ). http://www.youtube.com/watch?feature=endscreen&v=hk4TgUxX0fQ&NR=1 The host introduces them: “The next guests are both widely credited with predicting the curre...
- Thu Nov 29, 2012 1:21 am
- Forum: Investing - Theory, News & General
- Topic: The anti-Taleb reviews Antifragile
- Replies: 197
- Views: 35405
Re: Taleb is the best!!!
I think some are perhaps missing the point. Taleb does not consider himself an investor anymore, nor a statistician but a philosopher. I've just bought the book and am finding it very good so far. "And we can almost always detect antifragility (and fragility) using a simple test of asymmetry; anything that has more upside than downside from random events (or certain shocks) is antifragile; the reverse is fragile." Yes, yes, a hundred times yes... :) So corporate bonds, No. Selling covered calls, No. Equities (and in particular small/value), Yes. Buying LEAPS, Yes. See this link, http://www.bogleheads.org/forum/viewtopic.php?f=10&t=87293 #4 and #10. cheers, This illustrates my disagreement with Taleb - your post, like his book...
- Wed Nov 28, 2012 7:38 am
- Forum: Investing - Theory, News & General
- Topic: The anti-Taleb reviews Antifragile
- Replies: 197
- Views: 35405
The anti-Taleb reviews Antifragile
Eric Falkenstein resumes his long standing feud with Nassim Taleb with this lengthy but telling review of Taleb’s latest book ‘Antifragile’ http://falkenblog.blogspot.com/2012/11/taleb-mishandles-fragility.html Some excerpts: ‘His latest book Antifragile is driven by his discovery that there is not an English word for the opposite of fragile, which he thinks could not be 'robust' (this neologism is one of the few new ideas presented in this book, not that I think we need more new Taleb ideas). Fragile things lose a lot of value when mishandled, 'anti-fragile' things increase a lot in value when mishandled. He thinks this is very profound and therefore needs a book. The problem is that mishandle implies an adverse effect by definition, which...
- Sun Jul 22, 2012 5:01 pm
- Forum: Personal Consumer Issues
- Topic: Ernie you beaut
- Replies: 2
- Views: 744
Ernie you beaut
As the only Saffer on this forum (to my knowledge) I need to gloat:
Well done Ernie,you deserve it, no matter how they come!
4 Majors for SA in 5 years. Nearly another one at the Masters this year (but well done Bubba, I enjoyed your victory through my tears for Louis).
We are emerging market investment wise, but 1st world+ in golf.
I justify this post under Personal Consumer Issues, based on the amount I spend on golf.
Well done Ernie,you deserve it, no matter how they come!
4 Majors for SA in 5 years. Nearly another one at the Masters this year (but well done Bubba, I enjoyed your victory through my tears for Louis).
We are emerging market investment wise, but 1st world+ in golf.
I justify this post under Personal Consumer Issues, based on the amount I spend on golf.
- Fri Jul 20, 2012 3:02 am
- Forum: Investing - Theory, News & General
- Topic: pros and cons of gold
- Replies: 84
- Views: 8168
Re: pros and cons of gold
As the article is titled ‘The arguments for and against investing in gold’, I think the argument made by Profs. Fama and French should have been included. It is the best argument against gold as an investment as far as I’m concerned. See: http://www.dimensional.com/famafrench/2010/04/qa-does-gold-belong-in-my-portfolio.html ‘much of the stock of gold is in the form of jewellery and other goods that pay a "consumption dividend." This dividend increases the current price of gold and lowers its expected capital gain return. But an investor who holds gold bullion as a portfolio asset only expects to get the expected capital gain, which does not suffice to compensate for the risk of the asset.’ This argument also applies to residential...
- Thu Jun 28, 2012 10:16 am
- Forum: Investing - Theory, News & General
- Topic: Are we certain there is an equity risk premium?
- Replies: 54
- Views: 6999
Re: Are we certain there is an equity premium?
The expected equity risk premium is not guaranteed over any time period. Time does not lower risk.azanon wrote:"Hoping to get a higher return" is not analogous to an equity premium. Equity premium means that stocks, matter of fact, average a higher return than bonds over the long-term. It means that for your risk you get a greater return, given an infinite time period.
The realised premium should not be confused with the expected premium. Expected premium = mean of distribution. Realised premium = 1 data point in distribution.
For any civilisation with a finite life expecatancy the ERP will be zero, as all value is destoyed in the end.
- Thu Jun 28, 2012 10:00 am
- Forum: Investing - Theory, News & General
- Topic: Are we certain there is an equity risk premium?
- Replies: 54
- Views: 6999
Re: Are we certain there is an equity premium?
--Expected returns and actual returns are inversely related. When investors expect high returns (as in 1999), prices are bid up which causes future actual returns to be low. When investors expect low returns (March 2009), prices are low which causes future returns to be high. This is not the view of mainstream finance. Rather high prices (associated with lower than normal discount rates applied to expected future cash flows) reflects the market’s expectation of a lower risk associated with those cash flows. So prospective returns are lower because risk was lower, or so the theory goes. In 1999 (so the theory says) prices were high not because investors expected high future returns, but because investors believed that risk would be lower an...
- Thu Jun 28, 2012 9:34 am
- Forum: Investing - Theory, News & General
- Topic: Are we certain there is an equity risk premium?
- Replies: 54
- Views: 6999
Re: Are we certain there is an equity premium?
This may well be true.azanon wrote:An equity premium is optional for the typical human.
You may not have much respect for the ability of aggregate investors to make rational decisions, but perhaps you have more faith in the world’s corporate leaders who are expected to make smart decisions in return for their ample rewards .
They take the other side of the trade – their cost of capital = the return to investors.
If these executives thought that equity financing was cheaper than debt financing (ie. negative expected equity risk premium), they would simply raise sufficient equity to pay off all debt.
- Wed Jun 27, 2012 1:43 am
- Forum: Investing - Theory, News & General
- Topic: Can a zero-return asset actually improve a portfolio?
- Replies: 156
- Views: 16459
Re: Can a zero-return asset actually improve a portfolio?
getRichSlower wrote:I ran some random numbers where asset1 has a 50% probability of returning +100% or -40% in any given year and asset2 has a 50% probability of returning +100% or -50% in any given year. My results indicated a geometric mean of between 15-16%, not 27.5%.
I think Wbond meant to say 'perfectly negatively correlated' not 'perfectly uncorrelated', ie. correlation = -1.
When the returns of the 2 assets follow a random path the correlation is 0.
- Mon Jun 11, 2012 10:14 am
- Forum: Non-US Investing
- Topic: Investment options for South African investors?
- Replies: 12
- Views: 1255
Re: Investment options for South African investors?
For JSE listed ETFs see these links.
http://www.etfsa.co.za/
http://www.satrix.co.za/default.aspx
http://etf.absacapital.com/Products/Exc ... fault.aspx
ERs are in the 40bps range.
The major problem I find is that tax advantaged accounts charge at least an additional 1% above the ER, and SA ETFs investing in offshore assets are absurdly expensive (1%+).
For offshore exposure it is better to move money physically offshore and invest there.
http://www.etfsa.co.za/
http://www.satrix.co.za/default.aspx
http://etf.absacapital.com/Products/Exc ... fault.aspx
ERs are in the 40bps range.
The major problem I find is that tax advantaged accounts charge at least an additional 1% above the ER, and SA ETFs investing in offshore assets are absurdly expensive (1%+).
For offshore exposure it is better to move money physically offshore and invest there.
- Thu May 31, 2012 5:34 am
- Forum: Investing - Theory, News & General
- Topic: Seven Most Important Equations--Milevsky
- Replies: 13
- Views: 2598
Re: Seven Most Important Equations--Milevsky
BobK
I had a look at the pages of the book available on Google books.
If you perhaps still have the book at hand, I would appreciate if you can answer my question below:
Table 7.1 in the chapter on Kolmogorov shows Lifetime Ruin Probabilities with a Balanced Portfolio. Does it mention elsewhere how Milevsky generated these probabilities - Monte Carlo?
Thanks
I had a look at the pages of the book available on Google books.
If you perhaps still have the book at hand, I would appreciate if you can answer my question below:
Table 7.1 in the chapter on Kolmogorov shows Lifetime Ruin Probabilities with a Balanced Portfolio. Does it mention elsewhere how Milevsky generated these probabilities - Monte Carlo?
Thanks
- Sun May 06, 2012 2:01 pm
- Forum: Investing - Theory, News & General
- Topic: Payment calculations for a variable annuity
- Replies: 3
- Views: 597
Re: Payment calculations for a variable annuity
The formula you use for a fixed annuity is a rough approximation (in fact very rough).
See pg 2 of this thread for a better calculation method which is based on actual mortality tables.
http://www.bogleheads.org/forum/viewtop ... 9#p1377979
See pg 2 of this thread for a better calculation method which is based on actual mortality tables.
http://www.bogleheads.org/forum/viewtop ... 9#p1377979
- Wed May 02, 2012 6:44 am
- Forum: Investing - Theory, News & General
- Topic: Overview of DFA Managed DC Retirement Plan
- Replies: 55
- Views: 6550
Re: Overview of DFA Managed DC Retirement Plan
I know nothing about the DFA managed DC retirement plan, but I think I understand what they are trying to achieve – they are trying as much as possible to mimic a DB pension fund. I agree that the graph shown is a bit too optimistic for the managed plan, but the median for the managed plan could be higher than the median for the traditional plan if we assume: - that the line marked ‘managed DC pension’ represents a DB pension, where the pensioner receives an income for life in exchange for forfeiting the remaining investment balance at death. - the line marked ‘traditional DC pension’ refers to the situation where the pensioner carries all investment and longevity risk, and their beneficiaries stand to inherit whatever is left at death. Ove...
- Mon Apr 30, 2012 9:07 am
- Forum: Investing - Theory, News & General
- Topic: [Poll] My philosophy on SPIAs
- Replies: 65
- Views: 5337
Re: [Poll] My philosophy on SPIAs
It's not that hard to do amateur-actuary stuff and get a ballpark estimate. On SPIAs, I figure it has got to be more like a 90% benefits/premium ratio, probably a little higher because of adverse selection. It just can't be 60%. BRK Direct EZ-Quote says, for a man born 4/1/1947 (age 65) "Your investment of $187,537 will yield 2.30% based upon our mortality assumptions and the U.S. Treasury yield curve as of April 23, 2012. This investment will provide you with $1,000 every month for as long as you live, beginning on June 1, 2012." I get the CDC 2003 Life Table for Males. Notice that this is the general population, not the supposedly-healther adversely-selected part of the population that buys annuities. It shows me that of an ini...
- Thu Apr 26, 2012 9:14 am
- Forum: Investing - Theory, News & General
- Topic: Is there any proof of correlation between risk & return?
- Replies: 212
- Views: 19059
Re: Is there any proof of correlation between risk & return?
Dr. Falkenstein published this entry on his blog: http://falkenblog.blogspot.com/2012/04/who-gets-equity-risk-premium.html He seems to have changed his mind from 'The equity risk premium is zero', to 'The equity risk premium is zero for the marginal investor'. Relative risk theory only makes sense if the equity premium is zero, but then everything is consistent. While the equity risk premium is down to about 3.5% these days, and realistic standard errors are about 4%, no one thinks it is zero. I asserted it was zero previously because it seemed possible, and was really the only missing piece of the puzzle. Now I'm thinking I made an error. The equity risk premium is positive, close to the 3.5% most others believe. They key is that this retu...
- Wed Apr 25, 2012 8:50 am
- Forum: Investing - Theory, News & General
- Topic: Forget stocks - buy and hold annuities instead
- Replies: 80
- Views: 9406
Re: Forget stocks - buy and hold annuities instead
I'd just like to remind people that getting longevity insurance via an SPIA and the asset allocation after annuitising can be decoupled, so current low bond yields are not necessarily a reason to avoid an SPIA. My favourite UK annuity product would enable me to select from a range of funds inside the annuity, including UK and international equities, inflation-protected, nominal and corporate bond funds, and a property fund. I could run a 50:50 portfolio inside the annuity if I wanted to. Income would obviously be variable with asset fluctuation, and there would be an additional constraint on asset allocation, you need to avoid a 50% drop at all costs, because the insurance company interprets the regulatory requirement to provide a life-tim...
- Wed Apr 25, 2012 2:15 am
- Forum: Investing - Theory, News & General
- Topic: Forget stocks - buy and hold annuities instead
- Replies: 80
- Views: 9406
Re: Forget stocks - buy and hold annuities instead
The problem is how to invest funds earmarked for annuitization whilst waiting for higher rates. Short term deposits earn less than inflation, long bonds suffer capital losses when rates rise (exactly the scenario you desire to get a higher income immediate annuity), stocks are risky.Bongleur wrote:The "anatomy of annuity" chart is interesting being dated 2009. One can presume that most of the "interest" is from LT Treasuries; so when their rate drops, the total income from annuitizing early drops a lot. If LT Treasuries are at above average rates, then lock it in...
- Mon Apr 23, 2012 2:53 am
- Forum: Investing - Theory, News & General
- Topic: Forget stocks - buy and hold annuities instead
- Replies: 80
- Views: 9406
Re: Forget stocks - buy and hold annuities instead
Due to adverse selection, SPIA's probably only offers value to less than 25% of the population (The healthiest quartile).
- Fri Mar 23, 2012 10:02 am
- Forum: Investing - Theory, News & General
- Topic: from nisiprius, a 'greatest post' in case you missed it
- Replies: 147
- Views: 21985
Re: from nisiprius, a 'greatest post' in case you missed it
The "risk" of equities that generates the ERP is the annual volatility. It's a complete fallacy that appears in many ways in ever discussion of equity risk on this board that the real risk of equities is some intrinsic property of the asset class, rather than being an attribute of the relationship between the asset and an individual investor with particular circumstances, pyschology and strategies. I think the mainstream view is that volatility is not risk, but a ballpark proxy for risk. Don’t you think that the preferential claim on corporate resources enjoyed by bondholders over stockholders plays a bigger part in the relative risk of stocks vs. bonds? After all companies have to pay their taxes first – so holders of government...
- Fri Mar 23, 2012 1:55 am
- Forum: Investing - Theory, News & General
- Topic: from nisiprius, a 'greatest post' in case you missed it
- Replies: 147
- Views: 21985
Re: from nisiprius, a 'greatest post' in case you missed it
It's assumed that the likelihood that an investor follows a plan is independent of how aggressive the plan is. All the theory assumes that investors will actually stay the course, whatever course they've chosen. Yet Chuck Jaffe claims in a throwaway remark for which I can't find a source, that in reality the average investor bails on a 20% loss. And the evidence from Morningstar investor returns is, unequivocally, that investors in most mutual funds a) earn returns significantly lower than the hypothetical return of an investor who stayed the course, and b) that, therefore, most mutual fund investors are not staying the course. I think this is selective –average investors face the same risk from their conservative assets– they also bail ou...