Search found 178 matches

by jln
Sun Mar 31, 2013 7:17 am
Forum: Investing - Theory, News & General
Topic: John Norstad website
Replies: 5
Views: 1759

Re: John Norstad website

shashi wrote:You should write a book ...
I did write a book - it's the finance page on my web site, I just didn't get it published by a third party!

The series of "homework" papers on MPT, when smashed together in order from first to last, is pretty much indistinguishable from a book.

But that book is heavy on math. If you mean a popular book on investing, I have no interest in that. Too much work, and I have nothing much to add to the practical advice of John Bogle and many others, several of whom are great authors who post or have posted in this forum.

John Norstad
by jln
Sat Mar 09, 2013 9:24 am
Forum: Investing - Theory, News & General
Topic: Interesting asset allocation experiment
Replies: 14
Views: 1699

Re: Interesting asset allocation experiment

Would you share how you found an apartment for 3 months and the approximate range of pricing for that area of Paris? Our goal is to also spend 3 to 6 months in Paris sometime in the next 3 years and so far all apartments we have seen, seem more geared to annual rentals. Also looking to do the same thing in Italy. I used a rental agency called Lodgis that I found via a link on the Sorbonne's web site. They have a good web site and an efficient procedure for going through all the rental paperwork. Try browsing their selection of apartments to get a feel for what's available and prices: http://www.lodgis.com . My apartment is 1,100 euros per month, currently about $1,430. I also had to pay an agency fee of 580 euros ($775), and I had to buy a...
by jln
Sat Mar 09, 2013 9:09 am
Forum: Investing - Theory, News & General
Topic: Interesting asset allocation experiment
Replies: 14
Views: 1699

Re: Interesting asset allocation experiment

pastafarian wrote: So John...is your equity share in Total World Stock? :happy
My version of Taylor's famous four fund portfolio:

35% Vanguard Total Stock Market Index Fund Admiral Shares
15% Vanguard Total International Index Fund Admiral Shares
25% Vanguard Total Bond Market Index Fund Admiral Shares
25% Vanguard Inflation-Protected Securities Fund Admiral Shares

Aggregate expense ratio: 0.10%

John Norstad
by jln
Sat Mar 09, 2013 3:45 am
Forum: Investing - Theory, News & General
Topic: Interesting asset allocation experiment
Replies: 14
Views: 1699

Re: Interesting asset allocation experiment

Since you're the one who wrote the simulation you should already be aware that just because a computer can print out a number to arbitrarily many decimal places doesn't necessarily mean those digits signify anything. The precision of the output is no better than the precision of the least precise input. Depending on the model it could even be worse. Your numbers are 2.9% +/- 0.1, or a 3% variance either way. I would argue nobody can predict the future with that degree of precision. Yes, I'm very aware of the imprecision. At best these kinds of exercises reveal trends and patterns, not precise answers. See my nearly infinite number of old posts on this very topic! My conclusion would be it doesn't make any important difference either way. Y...
by jln
Thu Mar 07, 2013 9:41 am
Forum: Investing - Theory, News & General
Topic: Interesting asset allocation experiment
Replies: 14
Views: 1699

Re: Interesting asset allocation experiment

NYBoglehead wrote:While you seem to have thought it out, I'm not sure I would change my AA to increase the probability by 0.2%. That's just me.
The probability decreases by 0.2%, from 3.0% to 2.8%. Not a huge deal to be sure, but it is in fact heading in the right direction!

John Norstad
by jln
Thu Mar 07, 2013 9:09 am
Forum: Investing - Theory, News & General
Topic: Interesting asset allocation experiment
Replies: 14
Views: 1699

Interesting asset allocation experiment

Hi all. I'm 64 and retired. For about 15 years, since I first got interested in Finance in the late 90's, I've held through thick and thin a 60/40 stock/bond portfolio, currently invested in Taylor's famous four fund Vanguard portfolio. I have also written some simulation software that tells me among many other things the probability that I'll run out of money before I die, leaving me with only my Social Security income. With my 60/40 allocation, that number is currently 3.0%. Not too bad, but maybe I could do better. Today I ran an experiment to see what would happen if I changed my asset allocation. At 50/50 stocks/bonds, the probability drops to 2.8% and the median portfolio ending value stays approximately the same. At 40/60 stocks/bond...
by jln
Sun Jan 06, 2013 8:27 am
Forum: Personal Finance (Not Investing)
Topic: Personal finances for 3 months in Paris
Replies: 15
Views: 1781

Personal finances for 3 months in Paris

Bonjour à tous le monde. I'm going to be living in Paris for 3 months this summer and taking a class at the Sorbonne. What's the best way to arrange my personal finances during this visit? My bank (JP Morgan Chase) charges a 3% transaction fee when I use my Visa charge card. At least, that's what they charged when I put the 200 Euro tuition deposit on my card last week. Is there any graceful way to avoid this? Also, any advice about medical insurance to cover my 3 month stay? I haven't even started to look into this yet. Anyway, this should be quite an adventure. I'm working through the paperwork now to rent an apartment in what looks like a nice neighborhood just across the river from Notre Dame in the Latin Quarter. 30 m2, about 320 squar...
by jln
Fri Nov 09, 2012 6:22 am
Forum: Personal Investments
Topic: Stocks for the long run good book?
Replies: 20
Views: 4394

Re: Stocks for the long run good book?

this article written by some random guy Gee, I don't FEEL random - I feel pretty much non-stochastic, or something like that. Hey, trying to be funny ain't easy this early in the morning. But your main point is quite valid. I have absolutely no academic or any other credentials, so you have to judge what I say only by its content, not by who I am, which is nobody, or somebody "random", or something equally lowly in the hierarchy of trustworthy punditry on these weighty matters. Now if I were Nate Silver, you'd have good reason to take what I say on faith, but sadly I'm not, so you don't. My apologies for the subjunctive in the last sentence - I'm taking French classes, so I can't help myself. Sorry to join this conversation somew...
by jln
Wed Apr 18, 2012 12:41 pm
Forum: Investing - Theory, News & General
Topic: How to think about diversification
Replies: 124
Views: 11323

Re: How to think about diversification

Apple is a great example. Apple could easily be toast in a few years. Yes. !5 years ago it was in fact almost toast. Then Steve Jobs came back and saved the company. Now sadly Steve is gone. What's going to happen next? Continued success, or another downward spiral like in the 80's and 90's when Steve was kicked out by Sculley and went to NeXT? All interesting speculation. Here's my problem: Sure, Apple could easily be toast in a few years. One big misstep and they're gone. We all know this. To the extent that this opinion is shared by other investors, this possibility is already reflected in Apple's current share price. Even though I'm fully aware of this possibility and share this fear, the only way I can protect myself by under-weightin...
by jln
Wed Apr 18, 2012 8:28 am
Forum: Investing - Theory, News & General
Topic: How to think about diversification
Replies: 124
Views: 11323

Re: How to think about diversification

Think about diversifying across the economy vs. diversifying across companies. We'll use Apple as an example of a big company with 5% of "the economy" (or, more properly speaking, 5% of the total value of the investable equity in the US). We'll use Joe's Auto Parts as an example of a tiny company with .00001% of "the economy". Finally, let's assume for this discussion that there are 5,000 publicly traded companies in the US. If you diversify across the economy, you invest 5% of your equity allocation in Apple, because Apple represents 5% of the economy, at least according to the aggregated current judgement of all other investors. Similarly, you invest .00001% in Joe's Auto Parts. If you diversify across companies, you i...
by jln
Wed Mar 28, 2012 7:41 am
Forum: Investing - Theory, News & General
Topic: Think Twice About that Financial Advisor
Replies: 44
Views: 5501

Think Twice About that Financial Advisor

Harold Pollack has an interesting blog post titled Think twice about that financial advisor that talks about a new NBER paper. Here's a digested version: The correct advice pretty much fits on a single sheet of paper that is available for free at the public library. Moreover, the products one should recommend buying are inexpensive, and are widely-available at leading websites. Thus the predicament of the modern financial advisor. Thus also the predicament of her unsophisticated customers. If the right advice is simple and free, at-best the expensive and complicated advice she will sell you will be overpriced, and probably more than a little wrong. Moreover, if the correct products to buy are cheap, no-load index funds that generate little ...
by jln
Tue Feb 21, 2012 2:21 pm
Forum: Investing - Theory, News & General
Topic: What are your metrics?
Replies: 15
Views: 1402

Re: What are your metrics?

I measure my portfolio's performance using its monthly internal rate of return data for the last 36 months. For benchmark data I use S&P 500 monthly returns, US 1 month T-bill monthly returns, and monthly Fama-French data from Ken French's web site. I update my data and recalculate at the beginning of each new month, adding the previous month to the data and dropping the oldest month from 3 years ago. I compute my portfolio's CAPM alpha and beta relative to both the S&P 500 and the US Total Market. I also compute the Fama-French 3 factor model load factors and alpha. My primary goal is to have the alpha numbers consistently greater than 0, which means that I'm "beating the market" after expenses and adjusting for risk. My ...
by jln
Thu Feb 16, 2012 12:21 pm
Forum: Personal Finance (Not Investing)
Topic: At what age did you start feeling old?
Replies: 110
Views: 13013

Re: At what age did you start feeling old?

When I was 20 in college and a high school kid called me "sir" in a fast food restaurant when he asked if he could take a chair from my table. I still remember it quite well. I was shocked.

For real? Probably around 50 or so when I discovered I no longer had either the physical energy or the passionate desire to stay up all night programming computers, when that was what I did all day at work already. I started to get interested in other things. This was not a bad thing.

John Norstad
by jln
Thu Feb 16, 2012 12:11 pm
Forum: Investing - Theory, News & General
Topic: Are SWR studies "joint-and-survivor?"
Replies: 41
Views: 3183

Re: Are SWR studies "joint-and-survivor?"

I have a Monte Carlo simulator that I wrote for my personal use that deals with this issue. It knows my current age and my wife's current age. It also has CDC mortality tables for males and females. In each simulation, the software uses the mortality tables to compute random death dates for me and my wife. "Success" is defined as not running out of money before both of us have died. I also have a parameter I can set to decrease our monthly budget by a given amount after one of us has died. Many expenses remain the same, but some go down. Another important factor is income taxes, which go up after one partner dies because the filing status changes from married filing jointly to single. My program deals with this too. A nice propert...
by jln
Thu Jan 12, 2012 4:03 pm
Forum: Personal Consumer Issues
Topic: Coffee
Replies: 64
Views: 10056

Re: Coffee

We like Metropolis Redline Espresso. We use a DeLonghi espresso coffee maker. We buy a 5lb bag mail order every 3-4 weeks and store it as is in the closed bag in a dry closet. We use a cheap blade grinder but grind it fine. Metropolis is a local small Chicago company.

John Norstad
by jln
Thu Jan 12, 2012 3:39 pm
Forum: Personal Consumer Issues
Topic: Do you own Apple products?
Replies: 114
Views: 9442

Re: Do you own Apple products?

In my family of 3 (not counting a daughter who doesn't live with us):

1 MacBook Pro
1 iMac
1 iPad
3 iPhones
1 Apple TV
1 Time Capsule
3 Airport Express
--
11 Total

Not counting old equipment in storage that is no longer in active use (various iPods, etc.)

I've been an addict since 1984 (and an Apple developer since then too).

Computer scientists are engineers are like everyone else. Some love them. Some hate them. Few have no opinion.

John Norstad
by jln
Sun Jan 08, 2012 7:47 am
Forum: Investing - Theory, News & General
Topic: Distribution of returns
Replies: 100
Views: 6015

Re: Distribution of returns

Can you summarize what’s been done in that kind of utility assessments of investments? – utility maximizing where the utility to be maximized is purchasing power produced from her cash flow plan for her future needs and goals?? Dick Purcell Wikipedia gives a nice summary: Intertemporal Consumption . Here's a couple of examples of typical scholarly articles about this topic by academics frequently mentioned here on Bogleheads: Eugene Fama's 1970 paper Multiperiod Consumption-Investment Decisions . Bodie, Merton, and Samuelson's 1992 paper Labor supply flexibility and portfolio choice in a life cycle model . There is an extensive literature on this kind of analysis. I cannot pretend to be very familiar with it. Some day I'd like to learn mor...
by jln
Sat Jan 07, 2012 9:59 am
Forum: Investing - Theory, News & General
Topic: Distribution of returns
Replies: 100
Views: 6015

Re: Distribution of returns

John's simulator shows that the timing of IRA distributions has a bigger impact than return means, No, the return mean has a much bigger impact. The Roth vs. Rollover IRA issue has a smaller impact that is still significant, and turns out to be fairly independent of the return mean assumption. Confusing, I know. but if the tax/benefits code is even less stable than the average returns then has he really gained a useful insight? Nothing in life is certain. But uncertainty does not make reasoned decisions impossible. I once saw Finance defined as the discipline that studies "the allocation of scarce resources under conditions of uncertainty". Sure it's hard to do this, but not impossible. DIsmissing the entire endeavor because of t...
by jln
Sat Jan 07, 2012 6:39 am
Forum: Investing - Theory, News & General
Topic: Distribution of returns
Replies: 100
Views: 6015

Re: Distribution of returns

The more I study the problem though the more I start to wonder if annuities aren't as horrible as they're made out to be. I guess I'm going to have to go do some more research there, I've somewhat neglected them so far. Same here. I want to some major research and thinking about this in terms of our own personal plans. In terms of my simulator, interesting things happen. Right now I use it with the goal in mind of minimizing the failure rate of our investment portfolio. This isn't the right measure for trying to add annuities to the model, because with an annuity a portfolio failure is less of a disaster because you have social security plus the annuity to support you. The bigger the annuity, the more of a benefit this becomes. I'd need a ...
by jln
Sat Jan 07, 2012 5:57 am
Forum: Investing - Theory, News & General
Topic: Distribution of returns
Replies: 100
Views: 6015

Re: Distribution of returns

Don't withdraw more than 4% inflation adjusted This one was the big problem for me, because in planning for retirement I quickly realized that our needs for portfolio withdrawals were not even close to being constant. Before my wife and I start taking social security, we have to take all of our needed income from our portfolio. This drops quite a bit when the first one of us starts taking social security, and then even more when the second one does. Similarly, our medical insurance expenses will drop quite a bit when Medicare kicks in. In some years we'll have major expenses like new cars, in other years we won't. When one of us dies, expenses for the survivor will go down. And so on. And 4% of what? Our current portfolio value? The portfo...
by jln
Sat Jan 07, 2012 5:28 am
Forum: Investing - Theory, News & General
Topic: Distribution of returns
Replies: 100
Views: 6015

Re: Distribution of returns

Rodc wrote:In posts I just use "about 1 chance in 3 of being outside geomean +/- std".
That's perfectly OK for short horizons like one year - the difference is just a rounding error in this situation. But it doesn't work at all for longer horizons like 10-40 years, where you start to see absurdities like a 1 in 6 chance of having more than a 100% loss.

John Norstad
by jln
Fri Jan 06, 2012 7:34 am
Forum: Investing - Theory, News & General
Topic: Distribution of returns
Replies: 100
Views: 6015

Re: Distribution of returns

Very very slow double-take. ... OK, then, what is the correct measure of variability ? Obviously (?) not the standard deviation of the raw data, but the standard deviation of the logarized data (?). And that's where I block... You've made a good start. In the normal distribution model we have geometric means, arithmetic means, and standard deviations. The lognormal model has corresponding concepts: The continuously compounded mean return, the instantaneous mean return, and standard deviations. There's lots of log(1+blah) and exp(blah)-1 and adding and subtracting 1/2 sigma squared in the equations. You have to be careful to do it all correctly, and in particular use the right version of "mean" in the right contexts. When I figure...
by jln
Fri Jan 06, 2012 7:11 am
Forum: Investing - Theory, News & General
Topic: Distribution of returns
Replies: 100
Views: 6015

Re: Distribution of returns

You have done a good job with this. But that seems all too rare. Thanks, Rodc. I try! Number 1 lesson: How enormously uncertain it all is. Cumulative density function graphs show likely outcomes ranging from an ending portfolio value of 0 (failure) up to many millions of dollars. And that's even ignoring the issues of parameter uncertainty. Number 2 lesson: Parameter uncertainty is a big problem. Sensitivity analysis is very important. The more you play around with different parameter settings the more you learn and the more you appreciate the importance of this problem. This reinforces lesson 1 and makes everything even more uncertain. Number 3 lesson: In a fully parameterized simulation like mine you learn a great deal about the paramete...
by jln
Thu Jan 05, 2012 3:19 pm
Forum: Investing - Theory, News & General
Topic: Distribution of returns
Replies: 100
Views: 6015

Re: Distribution of returns

Isn't it amazing how after all that modeling all you've basically got is what your gut was already telling you? Sometimes, but not always. My gut can only take me so far. When my gut does express an opinion, and it happily happens to agree with my simulations, I take that to be a nice sanity check on my Java code. E.g., if I decrease our monthly budget, the failure rate goes down, not up, and that helps to reassure me that I didn't inadvertently reverse a sign in my calculations or do something equally stupid. Even in these cases, the simulations often reveal patterns that my gut didn't expect and/or couldn't predict. E.g., the relative magnitudes of the change in the failure rate as a function of the change in the monthly budget - there m...
by jln
Thu Jan 05, 2012 8:01 am
Forum: Investing - Theory, News & General
Topic: Distribution of returns
Replies: 100
Views: 6015

Re: Distribution of returns

People are forever trying to make finance a branch of physics, trying desperately to tame the uncertainty by this sort of analysis. Life is uncertain, no amount of math is going to fix that. Just my take, but I think this sort of stuff (and I have done plenty of it over the years) is of no value to the individual investor, but might have value to a professor who has to publish stuff for the sake of publishing stuff. If one finds it fun, by all means do it. Just don't get confused and think it is very useful (again, just MHO). I pretty much agree, but would not put it quite as strongly. I do this kind of thing mostly because it's fun, but also because I do think it's useful to me as an individual investor. I'll give some examples. I recentl...
by jln
Thu Jan 05, 2012 7:06 am
Forum: Investing - Theory, News & General
Topic: Distribution of returns
Replies: 100
Views: 6015

Re: Distribution of returns

Central Limit Theorem, which says if a large collection of random variables are independent, identically distributed, and have finite variance, then in the limit their sum must be normally distributed. FWIW that is the most common version, perhaps better named the Additive Version of the Central Limit Theorem. It holds if the process is additive (summing) (averaging is a form of summing so holds for arithmetic average). There is also a multiplicative version. Over the course of time returns are the product of returns day by day (hour by hour, minute by minute), not additive. The multiplicative version proves the result is lognormal (given the same hypotheses). Yes. In my paper I apply the additive version to the log returns to conclude tha...
by jln
Wed Jan 04, 2012 8:06 am
Forum: Investing - Theory, News & General
Topic: Distribution of returns
Replies: 100
Views: 6015

Re: Distribution of returns

In the random walk model, stock returns are lognormally distributed. This is at best a rough first-order approximation to how markets actually work. Here's what I wrote about this problem in section 7 of my paper Random Walks , where I develop the mathematics of the model. The main tool used to derive the math is the Central Limit Theorem, which says if a large collection of random variables are independent, identically distributed, and have finite variance, then in the limit their sum must be normally distributed. Alas, the simple random walk model is in some disrepute these days. Econometricians have in fact rejected the Random Walk Hypothesis. In section 3 we made three strong assumptions about returns over time. We assumed that they wer...
by jln
Fri Dec 30, 2011 11:48 am
Forum: Investing - Theory, News & General
Topic: Risk vs uncertainty
Replies: 142
Views: 12315

Why standard deviation?

There's some compelling math behind the common practice of using standard deviation as a measure of the informal notion of "risk," at least in contexts compatible with the exposition that follows. Define a risk averse investor to be any investor who has the following two properties: 1. No matter how much money he has, the investor would always be happy to have another dollar. This property is called non-satiation . 2. The more money he has, the less important it becomes to the investor to have one more dollar. For example, if he only has $1 to start with, getting another $1 is more important than it would be if he has $1 million to start with. This property is called decreasing marginal utility of wealth . Note that this definitio...
by jln
Fri Nov 04, 2011 2:06 pm
Forum: Investing - Theory, News & General
Topic: My new web site address
Replies: 14
Views: 1736

Re: My new web site address

Verde wrote:
I will be a devoted follower greedily devouring any future additions to the new website.
Stay tuned. I have ideas for work this winter on at least 3 new papers, on pre-retirement glide paths (the stuff Wade and I and others were discussing at length a few months ago), more portfolio survival studies using CDC mortality data, and post-retirement asset allocation and glide paths.

John Norstad
by jln
Fri Nov 04, 2011 2:03 pm
Forum: Investing - Theory, News & General
Topic: My new web site address
Replies: 14
Views: 1736

Re: European financial follies

bobcat2 wrote:When I want to see how things are going in Europe, I look at this chart first. It is not a pretty picture. Notice that today's spread, since the introduction of the Euro, is a new high. :cry:
Paul Krugman follows these spreads too and posts the same charts on his blog, so you're in good company. Very ugly. Will the Euro survive? It seems that as time passes the chances lessen.

John Norstad
by jln
Fri Nov 04, 2011 1:59 pm
Forum: Investing - Theory, News & General
Topic: My new web site address
Replies: 14
Views: 1736

Re: My new web site address

Opponent Process wrote:John I'd be very interested in seeing your current portfolio allocation.
I've always been a fan of Peter Bernstein's "60/40 Solution", and that's what I've done for 15 years now, since I took an interest in investing back in the late 1990s. After I finish the rollover from TIAA-CREF to Vanguard, I will have a version of Taylor's famous 4-fund Vanguard portfolio:

40% US equity (Total stock market index admiral shares)
20% Foreign equity (Total international stock index admiral shares)
20% US bonds (Total bond market index admiral shares)
20% US inflation-linked bonds (Inflation-protected securities admiral shares)

John Norstad
by jln
Fri Nov 04, 2011 8:36 am
Forum: Investing - Theory, News & General
Topic: My new web site address
Replies: 14
Views: 1736

My new web site address

Good morning! I'm 5 weeks into retirement now and enjoying it very much. I wanted to let people know that my web site has a new address. Apple will be discontinuing their MobileMe web hosting service in June 2012, so I had to find a new home for my finance papers and articles and other stuff. The old address is: http://homepage.mac.com/j.norstad The new address is: http://www.norstad.org The old address will continue to work until next June. If you have bookmarks or links to my old site that you care about, you should try to update them to reference the new site. For example, for my article "Investing in Total Markets": Old address: http://homepage.mac.com/j.norstad/finance/total.html New address: http://www.norstad.org/finance/to...
by jln
Sun Sep 04, 2011 8:07 am
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

2. In the population of people below goal, there is a preponderance of people hopelessly below. For example, 10 years from rapid decline of capability to work, maybe $100k in savings. I think that here is a terrible moral dilemma: What to advise? Start saving more, right now, as much as you can, forget about retiring early, and most likely forget about your dreams for a financially comfortable and secure retirement. Asset allocation concerns are second or third order compared to this. It's a tough, tough problem, with no easy answer or magic wand solution. In brutally honest terms, the only real answer is "sorry, you blew it." Maybe a lottery ticket, but you'd really be better off taking the money you'd spend on it and adding it ...
by jln
Sun Sep 04, 2011 7:03 am
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

jln - If you have a Vanguard account, go to the bottom right corner of the login page and click the "Financial Engines plan" link under the Services menu. That will bring you to the FinancialEngines.com website, which is the one founded by Bill Sharpe . This software does exactly as you describe. In my opinion, this software has a very well designed GUI and provides me with a range of forecasts that lets me know if I'm on track or not. It even has a slider bars for risk, which ranges from very conservative to very aggressive ; and for retirement age (adjust your age until you hit your goals). There's enough documentation of how it works to satisfy most investors. What bothers me is that it persistently bugs me to increase my risk...
by jln
Sat Sep 03, 2011 9:10 am
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

Can someone please explain the "CRRA", "DRRA", and "IRRA" acronyms? jln - Your utility function tutorial, An Introduction to Utility Theory is excellent. I can now understand what's being discussed. LadyGeek: I'm very sorry to be so late in my reply. I somehow missed your question and only saw it today. CRRA = constant relative risk aversion. The investor prefers to hold the same percentage asset allocation (has the same "relative" attitude towards risk) at any level of wealth. Based on evidence from historical data, this is usually considered to be roughly a "representative" or "average" or "neutral" attitude. IRRA = increasing relative risk aversion. The investor prefe...
by jln
Sat Sep 03, 2011 7:53 am
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

To get serious for a moment, that fantasy tool I outlined is actually doable. I've spent a professional lifetime designing and developing this kind of software in other disciplines, and the technology is up to the task. Some parts are harder than others. The parts that talk to the outside world (investment firm computers, government databases) would be tough and the fantasy is a bit futuristic. But I've done work like this for my own personal use automating queries and transactions with both Vanguard and TIAA-CREF, so it is indeed possible. The big problem is a lack of standards, so you'd need to write one piece of code that knows how to talk to Vanguard's computers, another piece that knows how to talk to Fidelity's computers, and so on. A...
by jln
Sat Sep 03, 2011 6:44 am
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

Dick Purcell wrote:You present me this choice? –

A. Maintain my U = E(r) – ½ * A * (Little Greek thing)^2

OR

B. Improve my prospects for dollars
I present you with this equivalent choice:

A. Keep the probabilities of the bad cat food outcomes low.

OR

B. Improve my prospects for dollars by going more aggressive.

That's how all the equations translate into plain English. Or, more properly speaking, that's how the plain English translates into equations.

It's a tradeoff. You can have A OR B, but not both.

John Norstad
by jln
Fri Sep 02, 2011 3:52 pm
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

Dick Purcell wrote:Then I had a better – scratch that, safer – idea. To retain a modicum of focus in the exchanges, and in self-defense, communicate with you only by Twitter. Ha!
LOL. But best to use short words of just one syl like Paul S did. Would slow me down. Said this with 178 chars and only 1-syl words BTW. Ha! back to U! Ta-ta 4 now.

John Norstad
by jln
Fri Sep 02, 2011 3:45 pm
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

I think to serve the investor's interests, it has to be based on (a) current balance, (b) goal, and (c) required return rate to get from (a) to (b). To go from those variables to allocations, we consider various allocations' return-rate probabilities -- and maybe there is where we consider something about the investor's attitude toward goal-meeting probability vs. magnitude of shortfall. Well, if it helps think about this, the calculations are pretty trivial. Given your goal, your current balance, the number of years you have left, and your savings rate, there's a single simple equation that will tell you what rate of return you need to have a 50/50 chance of reaching your goal. Given that rate of return, it's another simple equation to te...
by jln
Fri Sep 02, 2011 1:52 pm
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

First, Wade - congratulations and best of luck! I remember when my own kids were born. It's a really, really big day. I've got two of them, but they're 25 and 30 years old now. This post is kind of a combined reply to lots of other ones and wanders around talking about several topics. I'm not going to quote everyone. I'll just start with one quote from my good friend and sparring partner Dick Purcell. (By the way, if we got together and wrote that program I proposed, we'd definitely have to put Dick in charge of making sure that we always stayed focused on helping real people achieve their goals - he'd be our chief quality control guy. And for sure Wade would be lead engineer for our simulations team). But your viewpoint is certainly valid ...
by jln
Fri Sep 02, 2011 12:30 pm
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

So IRRA below goal and DRRA above goal fits people's values and interests. But this idea that the more overshoot there is in your nest egg, the more willing you are and ought to be to gamble it on trying to get FURTHER funds... well, it not only does not make sense to me, I can't imagine myself acting in that way. Big argument! I know the right answer! You're both wrong! There's only one true path! No, this all just personal preferences. There's no right or wrong here. Dick like apples. DRiP Guy like oranges. I like bananas. Nothing to see here - move along. By the way, IRRA at lower levels of wealth and DRRA at higher ones would also be a valid kind of utility function that might be the one that best describes Dick's preferences. Good for...
by jln
Fri Sep 02, 2011 12:14 pm
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

I don't want to try to include all factors such as saving rate -- just allocation as I proceed year by year from start to defined end $$ goal. But why exclude all other factors? If you're short of your goal, making your allocation more aggressive is only one of several things you can do. Shouldn't investors be permitted and encourage to explore all the options? Making your allocation more aggressive to meet your goal is going to seriously increase cat food probabilities, for one thing, compared to the option of increasing your savings rate. Delaying your retirement by another year or two is also a perfectly reasonable option. Why deny the investor the opportunity to explore this option? Why not have a tool that lets you explore allocation ...
by jln
Fri Sep 02, 2011 8:58 am
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

This is a personal story. So we've being doing all this talking about glide paths, and at the same time I'm at the very end of my own glide into retirement (one month left). This prompted me to think about all the decisions I've made over my years of saving for this glorious day. I started saving for retirement in 1979, when I turned 30. That was the age at which my employer automatically enrolled people in our retirement plan at TIAA-CREF. At the time, as with most young people, I figured I was going to live forever, and I paid no attention. The default asset allocation at the time was 50% in TIAA Traditional, a very conservative fixed income fund, and (I believe) 50% in some kind of US stock fund. I was ignorant, so that's what I accepted...
by jln
Thu Sep 01, 2011 3:36 pm
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

OK, Dick, let's get creative and have some fun. Imagine a tool that monitors your portfolio over time. You've told it your goal, and it knows your asset allocation, glide path plan, savings rate, and desired retirement date. It alerts you if you go off the path towards your goal. The tool shows a thermometer calibrated in dollars with your goal marked and your projected portfolio value on your retirement date. There are several sliders that you can use to play what if games. Savings rate slider: Adjust your percentage of income savings rate. Risk aversion/tolerance slider: Adjust your asset allocation to be more or less aggressive. Goal slider: Adjust your goal, expressed as an income percentage of your last working year's income prior to y...
by jln
Thu Sep 01, 2011 2:15 pm
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

I think what you just did is vary return rate for one year out in the middle of the glide curve. Yes, as a quick example of possible "jags" from one year to the next. What about effect on the current allocation from deviations in the return rates of all the prior years? That would change the overall shape of the jaggy curve as a whole, but not increase the size of the individual year-to-year jags. AND -- If I'm the investor, I'm more concerned with the cumulative effect of return rates of all the prior years having made my current balance far below that with the smooth median-every-year curve. The little glide path experiment doesn't even attempt to deal with any of these issues, and it wasn't designed to. Are we even talking abo...
by jln
Thu Sep 01, 2011 11:01 am
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

But I doubt if we'd see very many changes like, for example, a sudden 10% change in the allocation to stocks from one year to the next. Well, I don't have time to do full simulations and graphs right now, but I was able to do a single simple calculation as an example. Look at the curve for A=3 at year 25. At this point the lock box is 30% of the meta-portfolio, the investment portfolio is 70% of the meta-portfolio, and the stock percentage in the investment portfolio is 77%. The stock percentage drops from 77% to 74% after one year if we get the expected return. That's the gentle glide down the curve from this year to next year as we make the portfolio slightly more conservative. If instead we get a different return, the stock percentages ...
by jln
Thu Sep 01, 2011 10:28 am
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

bobcat2 wrote:The idea is to get them a safe level of income thru SS, DB pension, and annuitization.
Excellent. This idea has always appealed to me too. At least enough to meet basic living expenses. Let the portfolio support fancy vacations and other non-essentials.

John Norstad
by jln
Thu Sep 01, 2011 9:18 am
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

No one is forced to annutize in the DC Managed Plan, although it is encouraged. It is, however, apparently used by the professionals managing the plan to price your retirement income goal prior to retirement. I believe pricing a deferred life annuity before retirement is how they determine whether you are on target to meet your retirement income goal whle you are working. First, thanks for the link to the Merton/DFA plan. I've bookmarked it to enjoy later. Pricing an annuity to set a target for retirement savings is a common practice. I believe that Bill Sharpe and Financial Engines do this too, and I see it in lots of papers. However, it occurs to me that for someone who doesn't want to annuitize fully at retirement, the target has to be ...
by jln
Thu Sep 01, 2011 9:05 am
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

John – I have a question based on a sequence of messages in this thread regarding your glide path graph. For conciseness, in the three numbered items just below I’m paraphrasing excerpts from those messages, fairly I hope: 1. In your graph, a glide path specifies asset allocation for each year through the life of the plan. 2. I asked: For year 19, shouldn’t I wait until I know results for years 1-18 before choosing year-19 allocation? 3. You answered (I think this is right) that your glide path assumes you get the median return rate each year. Your model could simulate what I suggested, but in most cases the differences would be minor. My reply, in this current post, is “wanna bet?” I suspect that if instead of assuming median every year, ...
by jln
Thu Sep 01, 2011 7:57 am
Forum: Investing - Theory, News & General
Topic: Redefining risk
Replies: 261
Views: 35677

Re: Effect of sequence of returns on portfolio

It's completely symmetric. This isn't completely true. The general principle is true that large losses and large gains have a greater impact closer to the retirement date both before and after retirement. But the details usually differ. Typically, the number of years of saving before retirement is significantly greater than the number of years of withdrawals after retirement. In addition, in many cases the size of the withdrawals each period after retirement are larger than the size of the additions each period before retirement. Both of these factors can magnify the impact after retirement compared to the impact before retirement (I think). One more comment. This principle applies equally to large gains and large losses. Why don't the lar...