IPS Loss Limits Seem Like Bad Idea

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IPS Loss Limits Seem Like Bad Idea

Post by Middle » Thu May 09, 2013 6:18 pm

I'm just reviewing some IPSs out there and I see some examples where they state, "willing to accept 20% loss with a 60% equity portfolio" or something to that effect. This strikes me as a bad idea. I'm just imaging someone getting down about their slumping portfolio, then seeing that the losses for the year have reached the loss limit (say 21 or 25%), then what? Sell your equities? At what could be the worst time to do so? I understand that one needs to still sleep at night, but isn't the purpose of the IPS to remind you not to panic? Am I missing something?

I like the idea of being reminded that losses could occur, but I would prefer to include actionable direction (like take no action, or rebalance, or wait a week before doing anything, go to the Boglehead board, something).

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Re: IPS Loss Limits Seem Like Bad Idea

Post by momar » Thu May 09, 2013 6:30 pm

The market can drop more than 33%, not everyone is a young investor with a long time horizon to ride out the possible recovery, and many have a minimum floor they need to maintain a minimum acceptable standard of living.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep

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Re: IPS Loss Limits Seem Like Bad Idea

Post by larryswedroe » Thu May 09, 2013 6:32 pm

Done correctly that concept only allows one to help determine the right AA, how much beta risk to take. But that doesn't tell you that you should not treat the unlikely as impossible or believe that just because something hasn't happened before (a drop of more than x percent) that it cannot or will not. Thus you should be prepared for even worse to happen, and have a Plan B to implement in case it does.

And it certainly doesn't mean that one should sell if that worst case occurs.

I hope that is helpful


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