Investing for the paranoid risk averse ones!!?

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Topic Author
mimiesg
Posts: 63
Joined: Wed Dec 11, 2019 2:03 pm

Investing for the paranoid risk averse ones!!?

Post by mimiesg » Sun Jan 12, 2020 10:22 am

So what's the wiki for the newbies who are paranoid like me about first most not losing money, worried about starting thier taxable investing when they think the market is at an all time high, having watched Enron, learnt about the lost decade and overall not being the one who can sleep well with 100% stocks.

Is there a checklist like:

1/ keep a conservative portfolio 60/40
2/ DCA so you are not buying at an all time high assuming a 10- 15 year time window for when I will need the funds

Note that this is for taxable account, I am doing a set it and forget it Target date so I don't do stupid things on my 401k

Thank you!

PS- till now my aim has just been to pay off debt, funds 529, 401k etc, now I am at a stage in life where I am finally debt free so am thinking of investing in a taxable ac, I live modesty, see myself as a BH, and will be doing indexing, I am realizing I am driven more by the 'fear' aspects of the stock market than the 'greed' one
Last edited by mimiesg on Sun Jan 12, 2020 10:55 am, edited 1 time in total.

snailderby
Posts: 694
Joined: Thu Jul 26, 2018 11:30 am

Re: Investing for the paranoid risk averse ones!!?

Post by snailderby » Sun Jan 12, 2020 10:43 am

1. Write down an Investment Policy Statement.

2. Put everything in a balanced fund with an asset allocation that you feel comfortable with. You might lose out a little bit on tax optimization, but if this protects you from your worst impulses, it might be worth it.

3. Train yourself not to read financial news or check your investment account balances. See this link: Forgetful Investors Performed Best.
Last edited by snailderby on Sun Jan 12, 2020 10:45 am, edited 2 times in total.

dbr
Posts: 31328
Joined: Sun Mar 04, 2007 9:50 am

Re: Investing for the paranoid risk averse ones!!?

Post by dbr » Sun Jan 12, 2020 10:44 am

A first piece of advice, actually a principle, is to consider all one's investments as a whole unless a subset has a distinctly different purpose. In my opinion even an emergency fund is part of the AA, but, for example, savings to buy a house next year are not.

The next and most important principal is to determine your need, ability, and willingness to take risk, a concept advocated by Larry Swedroe in his books. Asset allocation is a matter of personal judgement and preference for the situation of each individual.

DCA is a complete misunderstanding of risk and 60/40 is a plausible answer for many people that should only be accepted after one understands why that would be right for them, or at least after one has looked at a model of the consequences of different asset allocations for themselves.

Topic Author
mimiesg
Posts: 63
Joined: Wed Dec 11, 2019 2:03 pm

Re: Investing for the paranoid risk averse ones!!?

Post by mimiesg » Sun Jan 12, 2020 10:57 am

snailderby wrote:
Sun Jan 12, 2020 10:43 am
1. Write down an Investment Policy Statement.

2. Put everything in a balanced fund with an asset allocation that you feel comfortable with. You might lose out a little bit on tax optimization, but if this protects you from your worst impulses, it might be worth it.

3. Train yourself not to read financial news or check your investment account balances. See this link: Forgetful Investors Performed Best.
Thank you, I agree, I am actually doing my IPS, I have taken care of my tax advantaged parts and think I understand myself enough that I will do well only if I do a set it and forget it on my taxable a/c (for example I login once every few years into my 401k only)

Topic Author
mimiesg
Posts: 63
Joined: Wed Dec 11, 2019 2:03 pm

Re: Investing for the paranoid risk averse ones!!?

Post by mimiesg » Sun Jan 12, 2020 11:00 am

dbr wrote:
Sun Jan 12, 2020 10:44 am
A first piece of advice, actually a principle, is to consider all one's investments as a whole unless a subset has a distinctly different purpose. In my opinion even an emergency fund is part of the AA, but, for example, savings to buy a house next year are not.

The next and most important principal is to determine your need, ability, and willingness to take risk, a concept advocated by Larry Swedroe in his books. Asset allocation is a matter of personal judgement and preference for the situation of each individual.

DCA is a complete misunderstanding of risk and 60/40 is a plausible answer for many people that should only be accepted after one understands why that would be right for them, or at least after one has looked at a model of the consequences of different asset allocations for themselves.
Thank you! I am clear that I don't like risk that much!

I am not able to understand why DCA doesn't control risk, I have been struggling with this concept and thus am in analysis paralysis mode at the moment!

MathWizard
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Joined: Tue Jul 26, 2011 1:35 pm

Re: Investing for the paranoid risk averse ones!!?

Post by MathWizard » Sun Jan 12, 2020 11:01 am

I am actually very risk averse.

However, I was 100% stocks through the 2008/2009 50% stock market drop.

To me these are not in opposition.

Did every business shutter its doors doors during that time?
If you had owned a business during that time would you have shut the doors? I would have cut what expenses that I could have, but would not have gone out of business. This is an important viewpoint, as I believe that owning stocks means that I own a piece of those businesses, so I act in that manner.

The issue is that I take a long-term viewpoint.

The news makes a big report when the stock market takes a nosedive of 25 or, in the great recession, 50%. The problem with this is that it ignores the incredible gains that were made up to that point,only concentrating on the shape drop. It also ignores the roughly 2% dividends that VTSAX supplies each year.

If I don't take the volatility risk, then I take on other risks, in particular the risk that I will never be able to retire.

snailderby
Posts: 694
Joined: Thu Jul 26, 2018 11:30 am

Re: Investing for the paranoid risk averse ones!!?

Post by snailderby » Sun Jan 12, 2020 11:04 am

mimiesg wrote:
Sun Jan 12, 2020 10:57 am
snailderby wrote:
Sun Jan 12, 2020 10:43 am
1. Write down an Investment Policy Statement.

2. Put everything in a balanced fund with an asset allocation that you feel comfortable with. You might lose out a little bit on tax optimization, but if this protects you from your worst impulses, it might be worth it.

3. Train yourself not to read financial news or check your investment account balances. See this link: Forgetful Investors Performed Best.
Thank you, I agree, I am actually doing my IPS, I have taken care of my tax advantaged parts and think I understand myself enough that I will do well only if I do a set it and forget it on my taxable a/c (for example I login once every few years into my 401k only)
Sounds like a plan! :beer

Topic Author
mimiesg
Posts: 63
Joined: Wed Dec 11, 2019 2:03 pm

Re: Investing for the paranoid risk averse ones!!?

Post by mimiesg » Sun Jan 12, 2020 11:06 am

MathWizard wrote:
Sun Jan 12, 2020 11:01 am
I am actually very risk averse.

However, I was 100% stocks through the 2008/2009 50% stock market drop.

To me these are not in opposition.

Did every business shutter its doors doors during that time?
If you had owned a business during that time would you have shut the doors? I would have cut what expenses that I could have, but would not have gone out of business. This is an important viewpoint, as I believe that owning stocks means that I own a piece of those businesses, so I act in that manner.

The issue is that I take a long-term viewpoint.

The news makes a big report when the stock market takes a nosedive of 25 or, in the great recession, 50%. The problem with this is that it ignores the incredible gains that were made up to that point,only concentrating on the shape drop. It also ignores the roughly 2% dividends that VTSAX supplies each year.

If I don't take the volatility risk, then I take on other risks, in particular the risk that I will never be able to retire.
extremely good points I completely agree with this.

This is actually what made me think about starting my investing journey into taxable since I had already been doing my 401k 529 etc before and mostly been paying debt first.

I was debating between buying a rental but was clear that that is not my thing..

Luckily, I happened to stumble upon the bogleheads and I could immediately relate to this philosophy.

I am sold on the fact that invest I must else I'm taking the other risk that you mention!

dbr
Posts: 31328
Joined: Sun Mar 04, 2007 9:50 am

Re: Investing for the paranoid risk averse ones!!?

Post by dbr » Sun Jan 12, 2020 11:08 am

mimiesg wrote:
Sun Jan 12, 2020 11:00 am


I am not able to understand why DCA doesn't control risk, I have been struggling with this concept and thus am in analysis paralysis mode at the moment!
Assuming we are talking about selling low risk assets to buy high risk assets, DCA means one has a lower risk portfolio for a little bit longer than if one simply made the change at once. So, obviously, for a little while for a little bit, one is at less risk. Once the transactions are completed one is fully at risk in any case. Of course an option is to DCA over infinite time, meaning never selling the low risk assets and never buying the high risk assets. That would indeed control risk. The issue is all about asset allocation and DCA does not immunize a portfolio from risk.

Topic Author
mimiesg
Posts: 63
Joined: Wed Dec 11, 2019 2:03 pm

Re: Investing for the paranoid risk averse ones!!?

Post by mimiesg » Sun Jan 12, 2020 11:12 am

dbr wrote:
Sun Jan 12, 2020 11:08 am
mimiesg wrote:
Sun Jan 12, 2020 11:00 am


I am not able to understand why DCA doesn't control risk, I have been struggling with this concept and thus am in analysis paralysis mode at the moment!
Assuming we are talking about selling low risk assets to buy high risk assets, DCA means one has a lower risk portfolio for a little bit longer than if one simply made the change at once. So, obviously, for a little while for a little bit, one is at less risk. Once the transactions are completed one is fully at risk in any case. Of course an option is to DCA over infinite time, meaning never selling the low risk assets and never buying the high risk assets. That would indeed control risk. The issue is all about asset allocation and DCA does not immunize a portfolio from risk.
I think I get it...and I suppose this is what I am trying right now by starting my taxable with a 25-75 lumpsum and aiming to build towards say 60-40 (0r maybe 70-30) eventually.

I know it is irrational but I feel I won't have as much regrets about losing money that I would make in the stock market than I would if it's my hard earned money ...really weird behavior pitiful but I just am not able to get around this!

KlangFool
Posts: 14709
Joined: Sat Oct 11, 2008 12:35 pm

Re: Investing for the paranoid risk averse ones!!?

Post by KlangFool » Sun Jan 12, 2020 11:17 am

OP,

Are you prepared?

If you are unemployed in a recession and the stock market drops 50%, how long can you survive? What is your emergency plan?

How much money will you lose if you are

A) 6 months

B) 1 year

C) 2 year

D) N years

At which point, you will capitulate? You will lose your house and so on. Do you calculate this ahead of time?

1) Do you rebalance while you are unemployed?

2) Do you stop rebalancing when you reach a limit? Is it automated?

In summary,

A) Are you prepared?

B) Do you have an emergency plan?

C) Do you know when you will be wiped out?

Can you "Sleep Well At Night" after reviewing your emergency plan? If not, you need to change your plan.

I am prepared for 5 years with no permanent damage to my financial health. How about you?

I do not believe that you are paranoid enough. You still fund the 529. That only happened to people that are not paranoid.

KlangFool

dbr
Posts: 31328
Joined: Sun Mar 04, 2007 9:50 am

Re: Investing for the paranoid risk averse ones!!?

Post by dbr » Sun Jan 12, 2020 11:26 am

mimiesg wrote:
Sun Jan 12, 2020 11:12 am
dbr wrote:
Sun Jan 12, 2020 11:08 am
mimiesg wrote:
Sun Jan 12, 2020 11:00 am


I am not able to understand why DCA doesn't control risk, I have been struggling with this concept and thus am in analysis paralysis mode at the moment!
Assuming we are talking about selling low risk assets to buy high risk assets, DCA means one has a lower risk portfolio for a little bit longer than if one simply made the change at once. So, obviously, for a little while for a little bit, one is at less risk. Once the transactions are completed one is fully at risk in any case. Of course an option is to DCA over infinite time, meaning never selling the low risk assets and never buying the high risk assets. That would indeed control risk. The issue is all about asset allocation and DCA does not immunize a portfolio from risk.
I think I get it...and I suppose this is what I am trying right now by starting my taxable with a 25-75 lumpsum and aiming to build towards say 60-40 (0r maybe 70-30) eventually.

I know it is irrational but I feel I won't have as much regrets about losing money that I would make in the stock market than I would if it's my hard earned money ...really weird behavior pitiful but I just am not able to get around this!
Correct, you will have less regret because loss aversion behaviorally trumps reward from wealth acquisition. There is nothing wrong with that, but a better approach would be to understand your need, ability, and willingness to take risk, which is not a shortcut exercise.

Topic Author
mimiesg
Posts: 63
Joined: Wed Dec 11, 2019 2:03 pm

Re: Investing for the paranoid risk averse ones!!?

Post by mimiesg » Sun Jan 12, 2020 11:39 am

KlangFool wrote:
Sun Jan 12, 2020 11:17 am
OP,

Are you prepared?

If you are unemployed in a recession and the stock market drops 50%, how long can you survive? What is your emergency plan?

How much money will you lose if you are

A) 6 months

B) 1 year

C) 2 year

D) N years

At which point, you will capitulate? You will lose your house and so on. Do you calculate this ahead of time?

1) Do you rebalance while you are unemployed?

2) Do you stop rebalancing when you reach a limit? Is it automated?

In summary,

A) Are you prepared?

B) Do you have an emergency plan?

C) Do you know when you will be wiped out?

Can you "Sleep Well At Night" after reviewing your emergency plan? If not, you need to change your plan.

I am prepared for 5 years with no permanent damage to my financial health. How about you?

I do not believe that you are paranoid enough. You still fund the 529. That only happened to people that are not paranoid.

KlangFool
I didn't fully comprehend your comments but I believe I am trying to prepare :happy

I don't want to worry about rebalancing thus I choose a target-date fund for my 401k.

so far I've just been paying down debt and I don't have anything else in the stock market beyond that, so perhaps I would be happy with a downturn since I'm just starting out and still in my accumulation phase

To be prepared for recessions /job loss , I have my emergency fund and I have just done a lump sum to my bond component and I'm doing a DCA towards my stock component. (Starting with 25-75, fully funded mini bond in taxable that should cover me for 3 yrs of living)

Topic Author
mimiesg
Posts: 63
Joined: Wed Dec 11, 2019 2:03 pm

Re: Investing for the paranoid risk averse ones!!?

Post by mimiesg » Sun Jan 12, 2020 11:41 am

dbr wrote:
Sun Jan 12, 2020 11:26 am
mimiesg wrote:
Sun Jan 12, 2020 11:12 am
dbr wrote:
Sun Jan 12, 2020 11:08 am
mimiesg wrote:
Sun Jan 12, 2020 11:00 am


I am not able to understand why DCA doesn't control risk, I have been struggling with this concept and thus am in analysis paralysis mode at the moment!
Assuming we are talking about selling low risk assets to buy high risk assets, DCA means one has a lower risk portfolio for a little bit longer than if one simply made the change at once. So, obviously, for a little while for a little bit, one is at less risk. Once the transactions are completed one is fully at risk in any case. Of course an option is to DCA over infinite time, meaning never selling the low risk assets and never buying the high risk assets. That would indeed control risk. The issue is all about asset allocation and DCA does not immunize a portfolio from risk.
I think I get it...and I suppose this is what I am trying right now by starting my taxable with a 25-75 lumpsum and aiming to build towards say 60-40 (0r maybe 70-30) eventually.

I know it is irrational but I feel I won't have as much regrets about losing money that I would make in the stock market than I would if it's my hard earned money ...really weird behavior pitiful but I just am not able to get around this!
Correct, you will have less regret because loss aversion behaviorally trumps reward from wealth acquisition. There is nothing wrong with that, but a better approach would be to understand your need, ability, and willingness to take risk, which is not a shortcut exercise.
Thank you dbr, extremely helpful advice! I truly appreciate it. :thumbsup

Topic Author
mimiesg
Posts: 63
Joined: Wed Dec 11, 2019 2:03 pm

Re: Investing for the paranoid risk averse ones!!?

Post by mimiesg » Mon Jan 13, 2020 8:47 pm

dbr, thanks again for your comments, I thought more and based on your comments, went and read the Asset Allocation wiki page and it was very helpful. That pointed me to Larry Swedroe's articles about need, willingness and ability to take risk part so I feel a bit better about my strategy.

https://www.bogleheads.org/wiki/Asset_allocation

https://www.cbsnews.com/news/asset-allo ... -you-take/

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