Search found 223 matches

by danbek
Wed Jan 07, 2015 12:59 am
Forum: Investing - Theory, News & General
Topic: Can you make money betting on random coin flips?
Replies: 296
Views: 39354

Re: Can you make money betting on random coin flips?

Nisiprius, You get the wrong value in the "triple-or-nothing" case because you have a p in the denominator instead of a b. Check the wikipedia forumula again ;-) "SURELY you're not suggesting that I should care about the expected LOGARITHM of the number of dollars I end up with?" This is exactly what The Kelly Criterion is suggesting that you do: maximize the expectation value of the logarithm of final portfolio value. Wikipedia does not make this clear, but it is there, e.g. buried in the parenthetical "to an individual with logarithmic utility, the Kelly bet maximizes expected utility, so there is no conflict". It's also clear from the Sympy "proof". See also http://quant.stackexchange.com/questions...
by danbek
Fri Dec 06, 2013 11:58 pm
Forum: Investing - Theory, News & General
Topic: Examples of default on short-term govt bills
Replies: 3
Views: 564

Re: Examples of default on short-term govt bills

Yes, I saw that list, but no durations! Even for the Greek case I've not yet been able to find details about the specific durations that were affected, and that was only last year! Some news coverage implied that all bondholders were affected, but I haven't yet seen a specific mention of any yield less than 1 year. You can apparently buy 3 month greek bills today, but I'm not sure about 1 month.

The answer won't affect any investment decisions for me, I'm mainly just curious about whether *everyone* take the haircut, or is very short-term paper excluded?
by danbek
Fri Dec 06, 2013 10:37 pm
Forum: Investing - Theory, News & General
Topic: Examples of default on short-term govt bills
Replies: 3
Views: 564

Examples of default on short-term govt bills

I've googling for this information, but it's been hard to find.

Are there examples of defaults on govt short-term debt, where short term is 1 month or less? Did the greek 2012 default in particular include default on 1-month bills? (not not even sure greece issued such bills).

I know there's the 1979 US t-bill thing, but given that investors were paid in full in the end, it's not really what I'm talking about. There was apparently a case of interest not being paid in 1814 on US bills, but those were 1 year bills, and it's not clear to me whether investors were eventually made whole (wikipedia has brief coverage here: http://en.wikipedia.org/wiki/Treasury_N ... ar_of_1812)
by danbek
Sun Dec 20, 2009 3:53 pm
Forum: Investing - Theory, News & General
Topic: [del]
Replies: 2
Views: 1374

Re: Morgan Takes Over The World

If one decided to leave one's money to compound away (ignoring the mechanics ensuring ownership for a moment) for a century or so after one's death, then it would eventually reach a point where you held ownership of a large portion of the world's equity. I know this isn't what you are going after, but It can't really be correct that you can start by owning, say, .0001% of the world's equity, and through the magic of compounding end up owning 10% some number of years later. After all, there's nothing stopping 100 different people from doing this, but 100 * 10% = 1000%. So there's a problem here. I think there is an important point here to be made about very-long-term equity returns, share dilution, economic growth, and technological advance...
by danbek
Thu Dec 17, 2009 4:29 pm
Forum: Personal Consumer Issues
Topic: "Great" novels you couldn't finish
Replies: 92
Views: 13358

Bleak House - Dickens (has some great early scenes, but too slow-moving)

Confederacy Of Dunces - After 25 pages of fart jokes I decided it was unlikely to be worth the effort.

The Captive & The Fugitive - I am a enormous fan of Proust, but I got bogged down early in The Captive & The Fugitive (volume 5 of 6) several years ago. I'm re-reading the series now, we'll see if I get through it this time. I recall having some trouble in the first 50 pages of Swann's Way when I first read it, but kept going due to influence of a very good friend, and all I can say is that the payoff is very much worth it.
by danbek
Thu Dec 17, 2009 12:21 am
Forum: Personal Finance (Not Investing)
Topic: CNN Money - Extreme modifications: 2% mortgages
Replies: 22
Views: 3226

Two private parties to a contract agree to modify the terms of the contract. Sounds like free enterprise to me. Am I missing something? Is there a govt subsidy going on here?
by danbek
Wed Dec 09, 2009 11:42 pm
Forum: Personal Finance (Not Investing)
Topic: M. Singletary: When Helping Isn't Helping
Replies: 12
Views: 2279

Re: M. Singletary: When Helping Isn't Helping

I dunno, I don't think it's all that provocative. Taking the article at face value, the kid is a spoiled brat and needs to be cut off. Are there really many people who would disagree?

Now, if she was arguing that parents should *never* pay for any of their kids college education, instead increasing their own retirement savings ... now *that* would be provocative!
by danbek
Wed Dec 09, 2009 4:02 pm
Forum: Personal Investments
Topic: My portfolio, More Bogleheadish than ever?
Replies: 1
Views: 814

Not sure how to answer, but perhaps the following will help? This kind of exercise helped me.

Given your current retirement savings, if you keep saving at the same rate until you turn 65, what real return is needed to be able to retire at current spending levels?

If the answer is "2%", then you are almost certainly taking on too much risk. If the answer is "8%", then you almost certainly need to save a lot more. In between ... a combination of the two ;-)

Adjust per your desired retirement age, desired standard of living, withdrawal rate etc.
by danbek
Wed Dec 09, 2009 12:37 pm
Forum: Investing - Theory, News & General
Topic: Volcker: Financial innovation is worthless
Replies: 18
Views: 2785

I'm sure the "senior financiers" in the audience have now seen the error of their ways, and immediately after the talk began lobbying governments to put in place a regulatory scheme implementing Volker's ideas. After all, if there's one thing that financiers are motivated by, it's being socially useful.
by danbek
Sun Dec 06, 2009 3:28 pm
Forum: Personal Finance (Not Investing)
Topic: To Act Like the Rich, Be Frugal
Replies: 74
Views: 13252

he doesn't talk enough about wealthy people that got wealthy mostly by having a huge income, like $1M+/yr. I understand what you're saying, but his point is... that the vast majority of millionaires in this country do NOT fall in this category... Most of us have pre-conceptions about millionaires... full-time maids! Personal assistants! Expensive houses! Luxury cars! That is what was so interesting about the book... He discovered that MOST millionaires don't have those things... AND that in many cases, they are millionaires BECAUSE they don't have those things... Well, who cares about being a millionaire if you can't have full-time maids, personal assistants, expensive houses, and luxury cars? :-) If your goal in life is to spend a huge am...
by danbek
Thu Dec 03, 2009 8:31 pm
Forum: Investing - Theory, News & General
Topic: What is so great about dividends? Alot of misinformation?
Replies: 219
Views: 48567

Cool a contest!
Ariel wrote:Which portfolio do you think had the highest return?
:arrow: High yield ... or ... Low yield
Low yield
How big do you think that difference was?
:arrow: Less than 1% annual ... or ... More than 3% annual
less than 1% annual

Which portfolio had the lower volatility?
:arrow: High yield ... or ... Low yield
High yield

I feel pretty confident about the "less than 1% annual" (based on a line in the schwab report that they found no real difference between high and low yield dividend-paying stocks) but more or less guessing on the others
by danbek
Thu Dec 03, 2009 1:21 pm
Forum: Investing - Theory, News & General
Topic: What is so great about dividends? Alot of misinformation?
Replies: 219
Views: 48567

ddb wrote: I can't "square" this because the linked website gives almost no information on methodology, and also as you note covers a short data period. 18 years is wholly insufficient to make generalizations about asset class performance.

- DDB
Fair enough!

Surely there is a definitive study somewhere discussing total return from dividend vs non-dividend stocks over the last 100 years? Does anyone know of one?
by danbek
Wed Dec 02, 2009 5:46 pm
Forum: Investing - Theory, News & General
Topic: What is so great about dividends? Alot of misinformation?
Replies: 219
Views: 48567

I'm sure there is some research on this but in general, are dividend stocks generally less volitile than non dividend paying stocks? If so that could be another small perk. This is one of the big dividend stock myths. Value stocks are more volatile than growth stocks, and dividend stocks tend to lean toward the value side of the spectrum. - DDB How do you square this with the Schwab report I linked upthread which says that dividend stocks were *less* volatile (by a lot) than non-dividend stocks from 1990-2008? Were those 18 years an exception? Here it is again: http://www.schwab.com/public/schwab/research_strategies/market_insight/investing_strategies/stocks/dividends_myths_and_realities.html (BTW, thanks to Taylor who pointed me to this s...
by danbek
Tue Dec 01, 2009 5:57 pm
Forum: Investing - Theory, News & General
Topic: What is so great about dividends? Alot of misinformation?
Replies: 219
Views: 48567

More fuel to the fire: 1) A Schwab report: http://www.schwab.com/public/schwab/research_strategies/market_insight/investing_strategies/stocks/dividends_myths_and_realities.html From 1990-2008, they found that dividend-paying stocks have "average 12-month return" of 15.7%, compared to 18.0% for non-dividend paying. However, the dividend payers were much less volatile: 15.7% STD vs 24.7%. I don't know what the t-bill rate over that period was, but definitely a higher sharpe ratio for dividend stocks. 2) There a paper by Arnott & Asness: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=295974 THey find that that when the market as a whole is paying out a high proportion of earnings as dividends, that subsequent earnings growth ...
by danbek
Mon Nov 30, 2009 10:52 pm
Forum: Investing - Theory, News & General
Topic: I don't understand housing costs
Replies: 104
Views: 14231

I find it very hard to believe that house prices in CA aren't going to fall quite a bit farther one way or another over the next 5-10 years. To expand on this, I do understand why people are willing to put more of their income towards housing in CA than in, say, ND. Or even MD for that matter. But at some point there is a limit on how much of one's income one can realistically afford to put towards housing, no matter how desireable that housing must be. The fact that prices are *so* much higher in CA suggests to me that CA has already reached that point. But I guess it's also possible that CA is once again setting a trend for the rest of the country; perhaps we all can afford much more expensive homes than we realize, and so prices elsewhe...
by danbek
Mon Nov 30, 2009 8:01 pm
Forum: Investing - Theory, News & General
Topic: I don't understand housing costs
Replies: 104
Views: 14231

The link showing median home price and median household income of homeowners is very interesting.

The average ratio is 3.0, but this is weighting CA at 6.6 the same as ND at 1.8, so not representative of what a "typical" homeowner faces in the US.

The comparison I like is MD and CA. MD has higher income than CA, and expensive houses, but not nearly as expensive as CA. The ratio (in 2005) for MD was 3.6, compared to 6.6 in CA. Crazy, just crazy. I find it very hard to believe that house prices in CA aren't going to fall quite a bit farther one way or another over the next 5-10 years.
by danbek
Mon Nov 30, 2009 7:15 pm
Forum: Investing - Theory, News & General
Topic: I don't understand housing costs
Replies: 104
Views: 14231

Here's a page showing some 2007 property tax numbers by state. http://articles.moneycentral.msn.com/Taxes/Advice/PropertyTaxesWhereDoesYourStateRank.aspx Nice chart ... it give median income not of the entire state but for homeowners only. It is for 2005, so we'd expect to see near-peak bubble craziness. And we do! In 2005, in CA, the price-to-income ratio was 6.6! Compared to, say, MO, where it was 2.4. This blows my theory that "only (relatively) rich people buy houses in CA" out of the water. If my theory were true, the median income among homeowners in CA would be much higher than in MO, enough so that the ratios were closer. So now I'm down to two different factors: 1) People in CA are (or at least were) willing to spend a m...
by danbek
Mon Nov 30, 2009 12:08 am
Forum: Investing - Theory, News & General
Topic: I don't understand housing costs
Replies: 104
Views: 14231

Re: I don't understand housing costs

I think everyone is familiar with the forces acting to increase house prices in CA. But I read the OP as wondering not about what these forces are, but about how they can push prices so out of proportion to income. Here are some possible explanations, which are almost certainly wrong, considering that I don't live in CA and don't own a home. But maybe someone will be inspired to offer better answers: 0. Perhaps price/income isn't really the right metric, and if you look at the right metric you see that housing isn't really that expensive there. 1. People in CA wait till they are older to buy, thus allowing time to save larger downpayments. 2. People in CA are willing to spend a higher percentage of their income on housing than people are el...
by danbek
Tue Nov 24, 2009 8:41 pm
Forum: Investing - Theory, News & General
Topic: Billionaires turning to gold
Replies: 48
Views: 6688

Can someone explain why gold is up so much recently, while long term US Govt bonds have such low interest rates? Shouldn't all of the economic fears that would lead people to buy gold also lead people to sell long term bonds?

Eddited Sorry, I'm being unclear here ... what I mean is that if the reason to buy gold now, and the reason that gold is soaring now, is that people expect high inflation in the future, why are long term US govt bond rates so low?[/b]
by danbek
Wed Nov 18, 2009 11:03 pm
Forum: Personal Consumer Issues
Topic: Investment Advice from Nicolas Cage
Replies: 14
Views: 3670

Needless to say, The Onion is also covering this story.

http://www.theonion.com/content/infogra ... cage_broke

Thinking he could win that bet with Keanu Reeves was a particularly poor decision.
by danbek
Wed Nov 18, 2009 10:22 pm
Forum: Investing - Theory, News & General
Topic: 5 myths about home ownership
Replies: 110
Views: 16086

Something that I don't think I've seen discussed directly in this thread is that for at least some people renting in a high-cost area, they simply can't afford to buy, and that makes the question of what is financially "better" moot. In my case I pay $925 rent for a two-bath three-bedroom condo. I'm lucky to have a nice large grassy space in front where my kids can play. I share a wall, but it's not a bedroom wall, and the neighbors are quiet (weren't quiet for the first 6 months I was here, luckily the loud roommate moved out). Interior is pretty beat up, but that's OK. If I wanted to buy a roughly equivalent house (which has advantages of, among others, private yard that no one else's dog poops on, no shared walls, more storage ...
by danbek
Wed Nov 18, 2009 12:54 am
Forum: Personal Investments
Topic: Question on holding Emergency Fund in tax advantaged account
Replies: 56
Views: 12436

Danbek, Oh, of course! So to replenish the "emergency fund", each time you have $1000 more saved you buy $1000 of stock in taxable, at the same time selling $1000 of stock in tax-advantaged and moving it into money market/bond fund/whatever. Very cool, why isn't this advice more known? What is the drawback? There is a choice which can cause problems. You need to either: 1) Stick with what I'd call your "normal" emergency fund(what you'd keep in the bank) and potentially come up short if you happen to be in need just as the market drops heavily, or 2) Greatly increase the size of your EF requirements, which might mean plugging more cash then you'd feel comfortable with into it. I finally settled #2, doubling the size of ...
by danbek
Tue Nov 17, 2009 1:52 pm
Forum: Personal Investments
Topic: Question on holding Emergency Fund in tax advantaged account
Replies: 56
Views: 12436

Danbek, I think the answers to your question can be found in the wiki: http://www.bogleheads.org/wiki/Placing_Cash_Needs_in_a_Tax-Advantaged_Account And to clarify, you never actually withdraw from the tax-advantaged account. You simply adjust your holdings within you tax-advantaged and your taxable. This is the example cited in the wiki: Suppose you have $15,000 in your portfolio with additional $5,000 as emergency fund. Then you could have: Taxable $10,000 tax-efficient stock index funds Tax-advantaged account, such as 401(k) $5,000 money market fund <- emergency fund $5,000 bond fund Let's say you need $5,000 in emergency. Then you sell $5,000 from the stock index funds in your taxable account and exchange the money market fund for simi...
by danbek
Tue Nov 17, 2009 12:32 pm
Forum: Personal Consumer Issues
Topic: Classical music suggestions
Replies: 73
Views: 10119

I second the Tchaikovsky violin concerto (The Heifitz is great) and symphony suggestions. Also the Bernstein recording of Mussorgsky: Pictures at an Exhibition and Night on Bald Mountain. And Finlandia. These should fit right in with what you like already.

I recall being blown away by the final movement of the Shostakovich 11th symphony in a live performance 15 years ago, it will be a little different but probably also right up your alley.

The classical CD I'm listening to the most lately is the Hillary Hahn recoding of Bach sonatas and partitas. In some ways at the other end of the spectrum from what the OP currently likes (just a single solo violin playing), so it will be a big change of pace. But no less passionate, IMO.
by danbek
Tue Nov 17, 2009 11:37 am
Forum: Personal Investments
Topic: Question on holding Emergency Fund in tax advantaged account
Replies: 56
Views: 12436

Very interesting thread. I'm glad to see that at least a few others agree that it is reasonable to keep "emergency" funds in something other than CDs or money market funds. I participated in a thread several weeks ago where the wisdom of this was debated, and as a result I've been planning on moving my "emergency" funds from money market funds to some type of bond fund (perhaps it would be more accurate to say that I'm planning to eliminate my emergency fund by adding that money to my overall asset allocation, but at the same time make that allocation more conservative). On the tax side, I'll have to think about the details of this a bit more. But is this just another way of saying that, given that your savings are sprea...
by danbek
Wed Oct 28, 2009 11:05 am
Forum: Personal Consumer Issues
Topic: What Book Are YOU Currently Reading? PART II
Replies: 1043
Views: 312023

A Coffin For Dimitrios by Eric Ambler Set in pre-war Europe, written in 1939. I guess you would call it a thriller, though Ambler is after more than just twists and suspense. A naive English writer of detective novels becomes obsessed with the story of a real-life criminal whose body he has seen in a Constantinople morgue, and decides to do some detecting himself. Not really a spy novel, though it does has some of those aspects. I think it's clearly the best novel of it's type that I've read - outstanding pacing, memorable characters, well written. I picked up this book because Alan Furst has been compared to Ambler, and recommends Ambler himself. As much as I like Furst, A Coffin For Dimitrios is much better. I'd highly recommend this book...
by danbek
Thu Oct 22, 2009 3:53 pm
Forum: Personal Consumer Issues
Topic: Hats off to the Phillies
Replies: 32
Views: 4691

I love the phillies, and I love this phillies team, but the 1929-1931 Philadelphia Athletics won three pennants, 2 world series, and won 104, 102, & 107 games in the regular season. I think you have to consider them the best Philadelphia team ever (what's strange is that the WSJ article mentions the A's, but almost just in passing).

I hate to admit it, I'm kinda hoping for a yankees-phils series. The pain will be oh so great if the yanks win, but if the phils win it will be oh so sweet ...
by danbek
Wed Oct 21, 2009 5:53 pm
Forum: Investing - Theory, News & General
Topic: Updated Modification of Harry Browne Permanent Portfolio
Replies: 3555
Views: 1465629

How has the PP done historically if you set it up and then *never* rebalance?

I know that rebalancing is a critical part of the PP, so I ask this purely out of curiosity. A non-rebalanced stock-bond portfolio will have higher expected return than the rebalanced portfolio, at the cost of higher expected risk. But with the large allocation to gold, I'm curious whether/how this changes with the PP.
by danbek
Sun Oct 18, 2009 11:10 pm
Forum: Investing - Theory, News & General
Topic: Bond fund versus individual bonds, definitive answer
Replies: 149
Views: 55313

RobG, I realized I wasn't as clear above as I could have been. I think that linuxizer's point is that if two bond portfolios have the same duration, then they will behave *exactly* the same under any interest rate change that doesn't change the shape of the yield curve. This basically *has* to be true, because the term "duration" is defined so as to make it true. Someone please correct me if I'm wrong here. The problems that I see with using this fact to replace individual bonds with bond funds are: 1) The yield curve shape *does* change 2) Practically speaking it's a huge pain in the a** to keep the duration of your collection of funds the right length all the time, so you will slip an introduce risk (this is my interpretation of...
by danbek
Sun Oct 18, 2009 10:52 pm
Forum: Investing - Theory, News & General
Topic: Bond fund versus individual bonds, definitive answer
Replies: 149
Views: 55313

I got to thinking, and this idea can't possibly work like a individual bond because it fails in a simple example: consider the case were the scheme works perfectly until the very last transfer from the LT bond to the ST bond. The final value will fluctuate in accordance with the fluctuation of the LT bond value. I'm sorry, this can't possible be as "safe" as an indi bond. I'm pretty sure this is wrong, because by the time you reach the very last transfer, almost all of your money is in the short term fund. So fluctuations in the long term fund matter only very little. No, you missed the subtle point. Supposedly this technique is equivalent to a single bond. This is a simple case that shows it clearly isn't the same. Also, I just ...
by danbek
Sat Oct 17, 2009 10:54 pm
Forum: Investing - Theory, News & General
Topic: Bond fund versus individual bonds, definitive answer
Replies: 149
Views: 55313

RobG wrote:I got to thinking, and this idea can't possibly work like a individual bond because it fails in a simple example: consider the case were the scheme works perfectly until the very last transfer from the LT bond to the ST bond. The final value will fluctuate in accordance with the fluctuation of the LT bond value. I'm sorry, this can't possible be as "safe" as an indi bond.
I'm pretty sure this is wrong, because by the time you reach the very last transfer, almost all of your money is in the short term fund. So fluctuations in the long term fund matter only very little.
by danbek
Sat Oct 17, 2009 3:30 pm
Forum: Investing - Theory, News & General
Topic: Bond fund versus individual bonds, definitive answer
Replies: 149
Views: 55313

Risks for those plans are very different. Thanks for the clarification. So I think you are saying the following: * If you need the money in 10 years, using a bond fund with duration 5 years is totally fine. * But 6 years from now, when your need is only 4 years away, the bond fund will still have a duration of 5 years. So you have a mismatch, and should manage this by selling some of the 5 year bond fund and replacing with, say, a 1 yr bond fund. * Repeat as needed, etc. etc. This totally makes sense to me. But I think you made some other statements on the other tread that could be interpreted as: * If you need the money in 10 years, using a bond fund with duration 5 years is totally fine, and will be totally fine until the day you need th...
by danbek
Sat Oct 17, 2009 2:46 pm
Forum: Investing - Theory, News & General
Topic: Bond fund versus individual bonds, definitive answer
Replies: 149
Views: 55313

RobG,

I'd also love to see a detailed answer to the question of what individual bond strategy you think is appropriate for a person saving for retirement.
by danbek
Sat Oct 17, 2009 2:42 pm
Forum: Investing - Theory, News & General
Topic: Bond fund versus individual bonds, definitive answer
Replies: 149
Views: 55313

Linuxer, even the BH wiki says that if you need the money at a certain date then a non-rolling ladder is the way to go. (For me it would make sense just to buy a single bond, or a zero if you must). Actually, on the last thread I was chastised for suggesting anyone here had a different opinion, yet you persist. That is not to say that indi-bonds is the only way to go. I was the one who chastised you, and it seems that I owe you an apology! But just to make sure we are all on the same page, let me ask Linuxizer a question. Linuxizer, Say I have a chunk of money saved for my child's first year college tuition, that will be due in 4.4 years, and I want to make sure that money is "safe" when I need it, but also get a little return (t...
by danbek
Wed Oct 14, 2009 10:54 am
Forum: Investing - Theory, News & General
Topic: Bond Funds v. Bonds
Replies: 50
Views: 10209

Maybe a constructive way forward is to ask the "pro individual bond" people what set of individual bonds you would recommend for savings intended to be used in retirement, when retirement is a long time away (10+ years). This is a very common scenario, and most people have much more money saved for these types of needs than for date-specific needs like a house downpayment, college tuition, roof replacement, etc. In retirement you do have a set of date-specific needs, but you don't know what all of the dates are, because you don't know when you will retire and you don't know how long you are going to live. So can't buy a set of bonds maturing on the "correct" dates. And of course some of those possible dates are so far in...
by danbek
Wed Oct 14, 2009 10:52 am
Forum: Investing - Theory, News & General
Topic: Bond Funds v. Bonds
Replies: 50
Views: 10209

You lose when you make the jump from the long to short fund. For example, say you are in the long term index with a duration of 12.1 years and you want to switch to intermediate (duration 6.3 years). If the interest rates jump 1% the LT fund will drop 12.1% and you will be buying into a fund that only dropped 6.3%. You just had 6% of your money vaporize as you were trying to shorten the duration 1. The scenario I had in mind was an environment in which rates rise gradually over a long period of time, not just a one-time rise; I should have made that clear. I believe that in this environment, going to shorter duration early on will better preserve your principal, because each subsequent rise in rates will hurt less. Am I incorrect about thi...
by danbek
Tue Oct 13, 2009 6:25 pm
Forum: Investing - Theory, News & General
Topic: Bond Funds v. Bonds
Replies: 50
Views: 10209

Actually there is a good portion of people who point out that you can lose principal as you shorten the duration (e.g. going from long to intermediate) during a rising rate environment. This won't happen if you buy the individual bonds since they shorten the duration automatically. Could you expand on this? It doesn't make sense to me: 1. In a rising rate environment, won't shortening the duration help you save principal, not lose principal? 2. "This won't happen if you buy the individual bonds since they shorten the duration automatically" ... I'm having a hard time understanding what is meant by this ... exactly what strategy is being comparing to what particular bond fund here? It's true that the duration of an individual bond...
by danbek
Tue Oct 13, 2009 6:12 pm
Forum: Investing - Theory, News & General
Topic: Bond Funds v. Bonds
Replies: 50
Views: 10209

Re: Bond Funds v. Bonds

... compare a lump sum invested in a bond fund with a lump sum invested in individual bonds (or a ladder constructed over say a year or two) ... I don't think you can even begin to discuss whether a particular bond strategy is better than a bond fund until you answer (at least) two questions: 1. What are you trying to accomplish with this investment? Saving for retirement 30 years from now? Downpayment on a house 5 years from now? Funding ongoing retirement? etc. 2. What strategy do you propose to use in place of the bond fund? Rolling ladder of the same duration? Shorter duration, longer duration? Buy a single bond due in X years? Buy a bond due in Y years, roll it over every Y years? Etc. etc. etc. The reason that so many people use bond...
by danbek
Thu Oct 08, 2009 10:18 pm
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

But how *likely* is it that deciding to put all of your "emergency savings" into stock will cause you to "run out of money"? I agree that it does increase the chances of this, but unless the only savings you have are "emergency savings", then the increase in probability is going to be very small. And Drain has stated several times that when you have only a small amount of savings, you should be more conservative with it. The probability itself is irrelevant. It is the expectations that matters, which is probability times magnitude. Since the results are asymmetrical, the probability itself isn't the main concern. Look. No matter how you have your assets allocated, there's always a chance that an emergency will...
by danbek
Thu Oct 08, 2009 10:34 am
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

Just to clarify, I'm not taking the position on this thread that everyone should put their emergency savings into stocks.

I'm taking the position that if someone has lot of savings (say, enough to live on for 5 years), then there really isn't anything wrong with them taking their "emergency savings" and allocating it just like the rest of their savings. Perhaps more conservatively, and taxes have to be considered. But at the end of the day, I don't think that doing the above should count as a boneheaded disastrous financial move.
by danbek
Thu Oct 08, 2009 10:28 am
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

It isn't an emotional decision at all. It's a rational decision based on what's MOST LIKELY to succeed for them based on how much risk they are willing to take. There's no more emotion involved than with any other decision, and much less than what you're proposing. Well, as I argued above, to the extent that you believe that "emergencies" are independent events, it *is* irrational, because after you spend your emergency cash, you have effectively switched your emergency savings to stocks and bonds. So you can't consistently believe the following things at the same time: 1. Emergency savings should only be held in cash 2. In case of emergency, you should spend the cash first 3. Emergencies are independent events I agree this last ...
by danbek
Wed Oct 07, 2009 6:28 pm
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

jeffyscott wrote:
Drain wrote:But if I'm FORCED to liquidate something in order to cover an unanticipated expense, I have to make a choice, even if I'm not as confident as I'd like to be.
Not really, you could liquidate a proportionate share of each "asset class" that you own. Or, if you are a rebalancer and you are over allocated to something, you could sell some of whatever that something is.
If you choose not to decide you still have made a choice

:P
by danbek
Wed Oct 07, 2009 6:28 pm
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

Bob, this by no means fully answers your questions, but right now the "average length of official unemployment" is about 6 months, and the "unemployment rate" is about 10%. A 10% unemployment rate is basically saying that if you are "average", you will spend 10% of your working career unemployed. At 6 months per unemployed stretch, that comes out to being out of work for 6 months once every 5 years. That's pretty often, if you ask me! On the other hand, unemployment rates can very considerable from industry to industry, as well as from state to state, so I'm not sure how useful it is to look only at aggregate statistics. And of course the employment situation is really really really bad right now, so in "n...
by danbek
Wed Oct 07, 2009 11:26 am
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

(edited to fix quoting) But if you are forced to liquidate 50k of your savings while stocks are down, then this 25k loss is locked in permanently, and you can't recover from it. So this *is* a real risk in addition to my risk (a) from above. Wait a second. I guess you're saying that in the mixed portfolio, you'd just liquidate the $50K in cash, so you don't lock in a loss. But now your emergency savings are back to 100% stocks, so you have to replenish the cash. In the meantime, you are facing that horrible risk of relying on stocks to cover a shortfall. Or, if you want to maintain some sort of constant risk, you can sell $25K of stock to get to $25K/$25K...and then you've locked in $25K of losses. Here's what I'm saying: Starting portfolio...
by danbek
Wed Oct 07, 2009 11:15 am
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

No, your initial assumption is incorrect. If your car completely breaks and you buy a new one for $20k using emergency funds, you now needs less emergency funds, because the chance that your new car will break is now much much less. True, but on the other hand we all know that eventually we *will* have to replace our cars (similarly roofs, water heaters, etc), and we usually have a pretty good idea of when this is likely to be required. In that sense these aren't really emergencies, though of course they may happen earlier than we anticipated. So once your car gets pretty old, then yes, it is probably prudent to dedicate some savings towards replacing the car, and to put this savings into low-risk assets. And if you lose your job and spend...
by danbek
Wed Oct 07, 2009 10:53 am
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

2) The risk of holding emergency funds as stocks isn't really that you are forced to sell them at a loss. I think there are two risks: a) The risk that when you need them the value has dropped so much that you are forced to borrow to meet your obligations. b) The risk that when you buy them back with your ongoing savings, you pay a higher price than you sold them for. The former clearly *is* a risk, but I think this argues for *always* keeping a minimum amount of cash on hand, and funding emergencies out of sales of stock or bonds. And if your savings are large enough, this risk can be made very low. The later is also a risk, but as I argued in my previous post, I think this is a risk that you can't actually avoid unless you are willing to...
by danbek
Wed Oct 07, 2009 2:04 am
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

Two other points tonight: 1) Stocks are not the only alternative to cash. Bonds exist. 2) The risk of holding emergency funds as stocks isn't really that you are forced to sell them at a loss. I think there are two risks: a) The risk that when you need them the value has dropped so much that you are forced to borrow to meet your obligations. b) The risk that when you buy them back with your ongoing savings, you pay a higher price than you sold them for. The former clearly *is* a risk, but I think this argues for *always* keeping a minimum amount of cash on hand, and funding emergencies out of sales of stock or bonds. And if your savings are large enough, this risk can be made very low. The later is also a risk, but as I argued in my previou...
by danbek
Wed Oct 07, 2009 1:43 am
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

Another way to look at it is that spending your emergency funds doesn't reduce your need for emergency funds. If you believe that the only sensible place to keep "emergency funds" is cash, then as soon as you spend your emergency funds, shouldn't you sell enough stocks and bonds to replenish those emergency funds? But of course that defeats the entire purpose of holding them in cash, doesn't it?
by danbek
Tue Oct 06, 2009 6:51 pm
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

I think the interesting point that Drain is making is that it's really strange to set aside a particular bucket of money, the size of has been set in an arbitrary way (i.e. there's no reason to prefer 6 months vs 5 months vs 7 months salary), and claim that you are totally 100% unwilling to ever lose even 1 penny of this money. All the while happily investing the rest of your money in stocks and bonds, apparently not worrying at all about what might happen if you end up needing more "emergency" money than you anticipated, and are forced to liquidate some of those stocks and bonds.

I agree with him that this is very strange. It does help me sleep at night, but I agree that it is very strange that I am behaving this way.
by danbek
Tue Oct 06, 2009 4:23 pm
Forum: Investing - Theory, News & General
Topic: WSJ: Put your emergency money in blue-chip stocks
Replies: 109
Views: 12082

Personally I do keep "emergency" funds in money market accounts and CDs, but I've wondered in the past whether this really makes sense, for basically the same reasons that Drain is arguing.

For those who think he's clearly wrong, what about what about putting the "emergency savings" in a total bond market fund? Yields should be consistently higher than money market funds, often higher than CDs, with NAV volatility much lower than stocks. Critically, the NAV fluctuations should also be poorly correlated with high unemployment.