What's wrong with volatility if buy&hold

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azumz
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What's wrong with volatility if buy&hold

Post by azumz » Mon Jan 26, 2015 3:07 am

I read that fiance professor Dr. Andrew Lo said that the markets are getting so volatile these days, that the buy and hold strategies don't work anymore. I don't exactly understand why this is the case. I thought that the whole purpose of the buy and hold strategy was to avoid caring about volatility and just get long term returns, which would be the same regardless of volatility. Can someone help clear this up for me? Thanks.

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Re: What's wrong with volatility if buy&hold

Post by noyopacific » Mon Jan 26, 2015 3:33 am

Nothing to clear up really. I'd say that you appear to have a better understanding of the use of buy and hold investment strategies than does Dr. Andrew Lo, Professor of Finance, and Director of the Laboratory for Financial Engineering at MIT's Sloan School Of Management. On the other hand, Dr. Lo may have simply been making a silly comment to see if anyone even noticed.
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Re: What's wrong with volatility if buy&hold

Post by bonn » Mon Jan 26, 2015 3:35 am

One might argue that it's easy or at least possible to predict market swings - that's an approach that works better the more volatility there is, if you can really do it, so that may be what he is referring to. The consensus here is that predicting the market is not possible, though some people (like Bogle) argue for e.g. using valuations to adjust one's asset allocation a bit.

Buy and hold is psychologically harder the more volatility there is, so that could also be what he was referring to. The main challenge is to not over-weight stocks in good times and then go out of the market when your stocks tank, missing the up-swing. So that could also be what he was referring to.

Though note that while buy and hold does reduce the impact of volatility, it doesn't eliminate it. The reason is that you (or your heirs) won't hold everything forever because if you did then you'd have no use of the funds. If you hold for 30 years, then you'll care about volatility over 30 year spans and also during the period where you withdraw. It'll be less than volatility over 1 year spans, but it'll still not be zero.

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Re: What's wrong with volatility if buy&hold

Post by asset_chaos » Mon Jan 26, 2015 6:05 am

azumz wrote:What's wrong with volatility if buy&hold
Nothing. Dial up the expected volitility for your portfolio of stocks and bonds that you can live with, and by definition you live with it and accept the returns of stocks and bonds that the markets give.
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Re: What's wrong with volatility if buy&hold

Post by YDNAL » Mon Jan 26, 2015 7:04 am

azumz wrote:I read that fiance professor Dr. Andrew Lo said that the markets are getting so volatile these days, that the buy and hold strategies don't work anymore. I don't exactly understand why this is the case. I thought that the whole purpose of the buy and hold strategy was to avoid caring about volatility and just get long term returns, which would be the same regardless of volatility. Can someone help clear this up for me? Thanks.
The quote originates from a Money Magazine article in October 2012.
- Is volatility in 2012 consistently the same (similar) to 2013, 2014.... 2022, 2032?
- Given any level of volatility, can we effectively and consistently exploit it so it is more valuable and viable than a Buy & Hold a strategy?

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Re: What's wrong with volatility if buy&hold

Post by nisiprius » Mon Jan 26, 2015 10:07 am

Warning #1: whenever reading something attributed to a professor, always check to make sure what other hats he is wearing. Is Andrew Lo better described as

"Dr. Andrew Lo, Professor of Finance at MIT's Sloan School" or
"Andrew Lo, Ph.D. Chairman of the Board of Directors and Chief Investment Strategist of AlphaSimplex Group, LLC?"

Warning #2: beware of the phrase "does not work." It is rhetoric. It does not actually mean anything, or it means whatever the speaker wants it to mean. It is convenient because it is imprecise. You could contribute to a three-fund portfolio, buy and hold for thirty years, retire and live happily ever after and someone could still say your strategy "did not work" because in hindsight something else would have outperformed what you did.

Warning #3: beware of the phrase "anymore." It, too, is sales rhetoric. Imagine you are a salesperson and you want to sell something new to a client who is perfectly happy with what he has. You could say "you are an idiot, a poopy-head, and your investment strategy sucks," but that might not get you the sale. Much better to say "I am very impressed with your knowledge of investing. You are smart. Also well-dressed and good-looking. And you have been doing all the right things. What you have been doing used to work, but it won't work anymore."

Warning #4: as nearly as I can tell--I can't find the original article--numerous financial news media carried articles about a 2011 interview with Lo in Money Magazine. One of the secondary reports is Andrew Lo: Buy and Hold Doesn't Work Any More. There are numerous, numerous references to it on the websites of advisory firms. The message that "Buy and hold doesn't work any more" is obviously useful propaganda for anyone promoting other strategies. But notice--he gave the interview in 2011, when a 19% correction had given everyone (including me) the jitters. Nevertheless, if you had ignored his advice in 2011 and continued to buy and hold, it is hard to say that buy and hold hasn't "worked" since then.

Warning #5: What the heck does he mean by a "new era of volatility?" When was that golden age when the stock market was not volatile? The crash of 2008-2009? The dot-bomb decline of 2000-2002? The 25%-in-one-day drop of 1987? The crash of 1929? The often-forgotten crash of 1937? The panic of 1907?

Warning #6: Andrew Lo was one of many voices proclaiming the virtues of 130/30 funds. Many confidently predicted they would become a $2 trillion market by 2010. Lo did not go that far, but he called them "the new long-only," that is to say he expected them to all but displace traditional long-only mutual funds. If you are not sure what a 130/30 fund is, that should tell you something. They failed grotesquely and were promptly and completely forgotten.
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Re: What's wrong with volatility if buy&hold

Post by nedsaid » Mon Jan 26, 2015 11:26 am

Volatility comes and goes. It depends on the collective nervousness of investors, particularly the big institutions. It amazes me that the investing public which is often derided for being naïve about the markets often stay relatively calm while it is often the institutions that get jittery. The articles I have seen about individual investors and their 401k's showed that most investors stayed the course during the 2008-2009 and did not panic out of the market.

Taylor Larimore did okay with buy and hold. In his 91st birthday message, he said that during his investing lifetime that the S&P 500 went from about 20 to over 2000! And that didn't include dividends! That is not bad!

The key is to stay invested and not get obsessed with news headlines and market predictions. The news from our media outlets is skewed negative so you have to learn to deal with relentless pessimism. Just remember that the future belongs to the optimists. You need optimism to see opportunity where others just see problems.
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Re: What's wrong with volatility if buy&hold

Post by nisiprius » Mon Jan 26, 2015 11:46 am

Bobcat2 in this forum introduced me to the concept of volatility clustering. I liked the comment "I understand volatility clustering, but I don't see where you tell me what I'm supposed to do about it. Can I time the market with it?" As I read on in that thread I am not at all sure I like where bobcat2 goes with it. Personally I think what you do with volatility clustering to know that it happens, shrug, stay the course, volatility clustering happens, "this too shall pass."

But I don't think we're in a volatility cluster now anyway.

(The late Lee Hays of the famous folk quartet, the Weavers, used to say "This too shall pass. And I've had kidney stones, and I know.")
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Re: What's wrong with volatility if buy&hold

Post by staythecourse » Mon Jan 26, 2015 11:48 am

Oddly enough I LOVE volatility. It all matters how you look at it. Volatility on the upside is what we call return and volatility on the downside is what we risk/ loss. It is the same thing. What makes something go up a lot is the same that makes the same asset go down a lot. You can't have high ups without severe lows.

Good luck.
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Re: What's wrong with volatility if buy&hold

Post by Chan_va » Mon Jan 26, 2015 11:56 am

Here is the rub about volatility.

We all invest in the belief that the markets show short range disorder (volatility), but long range order (stuff goes up). That has held true so far. But what if this long range behavior is but a pimple of order on the face of ugly "very-long range" volatility? And what if that pimple is about to pop?

Anyways, not much we can do about it, so shrug and soldier on.

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Re: What's wrong with volatility if buy&hold

Post by nisiprius » Mon Jan 26, 2015 12:02 pm

In any case, this is when Lo gave that interview. The chart is the VIX index, which is supposed to be a measure of "volatility."

Source

Image

By the way, "Most of us didn't sign up for the kind of volatility we're seeing right now?" What the heck is that supposed to mean? Most of us didn't think we would ever see a 19% correction?
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Re: What's wrong with volatility if buy&hold

Post by garlandwhizzer » Mon Jan 26, 2015 12:16 pm

nedsaid wrote:
The key is to stay invested and not get obsessed with news headlines and market predictions. The news from our media outlets is skewed negative so you have to learn to deal with relentless pessimism. Just remember that the future belongs to the optimists. You need optimism to see opportunity where others just see problems.
1+

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Re: What's wrong with volatility if buy&hold

Post by nisiprius » Mon Jan 26, 2015 12:18 pm

Chan_va wrote:Here is the rub about volatility.

We all invest in the belief that the markets show short range disorder (volatility), but long range order (stuff goes up). That has held true so far. But what if this long range behavior is but a pimple of order on the face of ugly "very-long range" volatility? And what if that pimple is about to pop?

Anyways, not much we can do about it, so shrug and soldier on.
+1
I agree with you. It raises a very serious philosophical question about how we look at "the long term." I think most of us would agree that for personal investment decisions, we don't worry much about what will happen in the year 2200. Similarly, I think most of us agree that for planning purposes, there's some point at which we shrug and say "if THAT happens, I won't be worrying about my Vanguard statements."

Of 23 national stock market investigated by Dimson & al., two of them literally went to zero. The problem is that while such "black swan" events are really not all that rare, you can't do sensible planning for them. (Some people think they can, by investing in gold or whatever, but I don't think so). In any case, you can't deal with them by looking at semilog charts of the U.S. stock market since 1870. And you don't have good statistics for "the average number of world wars per century" or "the standard deviation of the number of global thermonuclear wars per century."

On the other hand, it's cheating to say "Let's not count the Great Depression because it was a long time ago and things were different then."

We plan for "normal" conditions, but what range of things counts as "normal?"

Which of these statements is actionable?

"It won't matter because I'll be dead?"

"It won't matter because I'll be worrying about personal survival, not Vanguard statements?"

"This plan is fine because the only way it could fail would be to have something worse than the Great Depression?"
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Re: What's wrong with volatility if buy&hold

Post by livesoft » Mon Jan 26, 2015 12:30 pm

Maybe the buy and hold investors are buying more on average at the top prices in a volatility cluster than at the bottom prices?
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Re: What's wrong with volatility if buy&hold

Post by Beliavsky » Mon Jan 26, 2015 12:41 pm

azumz wrote:I read that fiance professor Dr. Andrew Lo said that the markets are getting so volatile these days, that the buy and hold strategies don't work anymore. I don't exactly understand why this is the case. I thought that the whole purpose of the buy and hold strategy was to avoid caring about volatility and just get long term returns, which would be the same regardless of volatility. Can someone help clear this up for me? Thanks.
The variance of stock market returns is additive over time, if stock prices follow a random walk, so buy&hold does not insulate you from volatility.

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Re: What's wrong with volatility if buy&hold

Post by flyingaway » Mon Jan 26, 2015 12:42 pm

The professor may be right. Volatility is good for traders (who trade other people's money). If you trade correctly with volatility, you make money. Unfortunately, most of us do not have the talent to do correct trading all the time.

No volatility means no trading.

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Re: What's wrong with volatility if buy&hold

Post by bobcat2 » Mon Jan 26, 2015 1:07 pm

nisiprius wrote:Bobcat2 in this forum introduced me to the concept of volatility clustering. I liked the comment "I understand volatility clustering, but I don't see where you tell me what I'm supposed to do about it. Can I time the market with it?" As I read on in that thread I am not at all sure I like where bobcat2 goes with it. Personally I think what you do with volatility clustering to know that it happens, shrug, stay the course, volatility clustering happens, "this too shall pass."

But I don't think we're in a volatility cluster now anyway.

(The late Lee Hays of the famous folk quartet, the Weavers, used to say "This too shall pass. And I've had kidney stones, and I know.")
Hi Nisi,
To answer the question you posed above, Bobcat2 agrees with Andrew Lo. Here's a short explanation Lo gave to Forbes Magazine a several weeks ago that seems sensible to me. So sensible in fact that I alluded too it briefly at a presentation at a recent DC Bogleheads meeting.
Lo offers this free advice: Accept you are a mortal who can panic, and adjust your portfolio to the risk in the marketplace, moving to bonds and cash when volatility goes up (as measured by the VIX) and moving back to equities when it subsides. The case for this approach is stronger since the increased tendency of different asset classes to move downward together in a crisis has weakened the power of diversification as a sleep-at-night prescription.
And this from the same article.
Truth is, buying and selling according to the VIX isn’t so stupid. “When the VIX spikes,” Lo says, “equities are almost never your friend.”
Link to the article, Down-To-Earth Investing Ideas From Ivory-Tower Finance Profs.
http://www.forbes.com/sites/danielfishe ... nce-profs/

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Re: What's wrong with volatility if buy&hold

Post by nedsaid » Mon Jan 26, 2015 1:10 pm

azumz wrote:I read that fiance professor Dr. Andrew Lo said that the markets are getting so volatile these days, that the buy and hold strategies don't work anymore. I don't exactly understand why this is the case. I thought that the whole purpose of the buy and hold strategy was to avoid caring about volatility and just get long term returns, which would be the same regardless of volatility. Can someone help clear this up for me? Thanks.
There are a couple really big problems with this. First, the track record of market forecasters is very poor. Coin flips would do a better job. You run the risk of being out of the market when you should be in the market. The US Stock Market is up every two years for every year it is down. If you just buy and hold the US Stock Market, the odds are that you will be right two out of every three times. Those are good odds and I will take them. If you follow market forecasts, you have less than a 50/50 chance of being right. The more times you are in or out of the market, the greater odds that you will be wrong.

Second is the issue with incorrect buy/sell decisions. For the most part, I have found that investments that I have sold tend to do better than what I bought to replace them. I have made a few good sell decisions but that is the exception to the rule. If you want to make your investment go up, sell it first! Works like a charm. The odds are against you on the sell decision and seem to be better on the buy side. The more you buy and sell, the greater the odds of making incorrect buy/sell decisions. You also have the friction costs of spreads, commissions, and taxes.

The professors comments are in my opinion a bunch of baloney. Trading strategies do not work for most people. Now there are professional traders out there and traders who are quite successful. Remember that the trading mentality is a lot different than an investor's mentality. Two different worlds. I want to be a business owner and to own investment real estate. I do this with stocks and stocks of REITs. I also want to own debt obligations which I own through bond funds. I want to be an owner not a trader.
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Re: What's wrong with volatility if buy&hold

Post by nedsaid » Mon Jan 26, 2015 1:21 pm

Really, being in or out of the market when the VIX is high? I don't know about that.

The trouble is with that thinking is that it does not protect you from unexpected events. Let's say that volatility was very low and VIX was low. It looks safe to be in the water. Tell me what would happen if Vladimir Putin's tanks rolled into Lithuania the next day? My guess is that the markets would tank (no pun intended) regardless of what the volatility indicators say the day before.

I just can't believe that someone here in this forum would recommend being in or out of the stock market according to volatility measures. It seems like pretty dangerous advice to me. It really is a measurement of the jitters of big institutions who should know better and be focused on the long term. It is also a measurement of the nervousness of professional traders to which long term investors should ignore anyway. Not only that, but the VIX itself can be pretty volatile. It smacks too much of tea leaves.

This is different from making adjustments to your portfolio based on valuations and future expected returns of asset classes. It is also different from reacting to extremes in market sentiment and market valuations. The things here that I refer to build slowly over time. It takes time for investor euphoria to develop and for bubbles to form. It takes time for asset classes to get greatly overvalued. The VIX is much more volatile than that, it seems it opens a big risk of the investor getting whipsawed.
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Re: What's wrong with volatility if buy&hold

Post by Beliavsky » Mon Jan 26, 2015 1:55 pm

nedsaid wrote:Really, being in or out of the market when the VIX is high? I don't know about that.

The trouble is with that thinking is that it does not protect you from unexpected events. Let's say that volatility was very low and VIX was low. It looks safe to be in the water. Tell me what would happen if Vladimir Putin's tanks rolled into Lithuania the next day? My guess is that the markets would tank (no pun intended) regardless of what the volatility indicators say the day before.

I just can't believe that someone here in this forum would recommend being in or out of the stock market according to volatility measures. It seems like pretty dangerous advice to me.
After Putin invaded Crimea, Russian stocks fell and volatility rose. If you owned Russian stocks, it would have been a good idea to sell after the invasion, even after prices had fallen, because they have continued to fall.
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Re: What's wrong with volatility if buy&hold

Post by kolea » Mon Jan 26, 2015 2:37 pm

I cannot address what Prof. Lo might have meant, but to answer your title question - there is a problem with volatility beyond its association with risk. Volatility produces a drag on compounded returns. So while the annual average return may remain constant, the greater the volatility, the greater the loss in compounded return over time. A buy-and-holder (like myself) will suffer from greater volatility.
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Re: What's wrong with volatility if buy&hold

Post by ResearchMed » Mon Jan 26, 2015 3:26 pm

TwoByFour wrote:I cannot address what Prof. Lo might have meant, but to answer your title question - there is a problem with volatility beyond its association with risk. Volatility produces a drag on compounded returns. So while the annual average return may remain constant, the greater the volatility, the greater the loss in compounded return over time. A buy-and-holder (like myself) will suffer from greater volatility.
Right.

The "loss" in lower compounded return is compared with... what?
There's not an alternate universe stock market to use, one with lower volatility and higher compounded returns during the same time period.

And a buy-and-holder will also "suffer" when there are a few years of less than stellar returns.

What's the choice, if one doesn't want to become a trader (NOT something I recommend or am planning to do)?

It sounds too much like Lo is advocating selling at a low (if not a near-bottom), once one notices that volatility has spiked, unless we can find our predictive glasses (now... why doesn't Google Glass come in *that* choice?).
Sounds an awful lot like relatively simple market timing, but not necessarily in a helpful way (even if a helpful way exists).

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Re: What's wrong with volatility if buy&hold

Post by staythecourse » Mon Jan 26, 2015 3:40 pm

Beliavsky wrote:After Putin invaded Crimea, Russian stocks fell and volatility rose. If you owned Russian stocks, it would have been a good idea to sell after the invasion, even after prices had fallen, because they have continued to fall.
Who cares if they fall and continue to fall unless you think the Russian markets will never go back up. This example is more of a highlight of 1. Needing a long time horizon to weather the eventual downturns of equity markets and 2. Geographical diversification of equity markets.

Good luck.
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Re: What's wrong with volatility if buy&hold

Post by bobcat2 » Mon Jan 26, 2015 5:31 pm

A Lo strategy for an individual investor would look something like this. If the market falls at least 15% and the VIX is high (say 28 or more) sell some percent of your equity holdings (perhaps 10% or 15%). If the market continues to drop and has fallen say more than 25% and the VIX remains high, or has risen, sell another 10% or 15%. This would continue by some preset plan you set in place with your IPS or similar personal plan. Once the market has recovered at least 15% from the trough and the VIX has fallen from its peak, then buy in 10% and continue to buy into the market in increments as the market recovers.

Such a policy will keep you from ruin in a situation like Japan where market recovery takes decades. In cases where recovery does not take decades you will usually do better than the guy who holds, and even better than the go who rebalances on the way down and, if the market drops 50%, needs more than a 100% recovery just to get back to even.

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Re: What's wrong with volatility if buy&hold

Post by bobcat2 » Mon Jan 26, 2015 5:57 pm

nisiprius wrote:In any case, this is when Lo gave that interview. The chart is the VIX index, which is supposed to be a measure of "volatility."

Source

Image

By the way, "Most of us didn't sign up for the kind of volatility we're seeing right now?" What the heck is that supposed to mean? Most of us didn't think we would ever see a 19% correction?
The VIX average is about 20%. The VIX median is about 17%. When Lo gave that interview the VIX had recently been between 45% and 48%. When something has a median of about 17% and its recently been flirting with 50%, I would say that's outside of the range we normally expect. What would you say?

The annual volatility of the stock market as measured by annual standard deviation is about 20%. But that 20% is an average over long periods. GARCH models of daily volatility and the VIX are measures of current volatility. When those measures are well above their median and mean that is telling you the equity market currently has a great deal more risk in it than it normally does.

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Re: What's wrong with volatility if buy&hold

Post by MathWizard » Mon Jan 26, 2015 6:20 pm

TwoByFour wrote:I cannot address what Prof. Lo might have meant, but to answer your title question - there is a problem with volatility beyond its association with risk. Volatility produces a drag on compounded returns. So while the annual average return may remain constant, the greater the volatility, the greater the loss in compounded return over time. A buy-and-holder (like myself) will suffer from greater volatility.

You want volatility in the equities market if you
are a buy and holder.

The volatility risk is why you don't want to use them
for short term investments, because you might
need the money after a downturn which might wipe
out years of returns. Longterm, the extra return you
get will make up for even a large drop.

You don't get a risk premium if there is no
risk. If there were no volatility risk, stocks would not
return any more than bonds.

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Re: What's wrong with volatility if buy&hold

Post by nedsaid » Mon Jan 26, 2015 7:08 pm

bobcat2 wrote:A Lo strategy for an individual investor would look something like this. If the market falls at least 15% and the VIX is high (say 28 or more) sell some percent of your equity holdings (perhaps 10% or 15%). If the market continues to drop and has fallen say more than 25% and the VIX remains high, or has risen, sell another 10% or 15%. This would continue by some preset plan you set in place with your IPS or similar personal plan. Once the market has recovered at least 15% from the trough and the VIX has fallen from its peak, then buy in 10% and continue to buy into the market in increments as the market recovers.

Such a policy will keep you from ruin in a situation like Japan where market recovery takes decades. In cases where recovery does not take decades you will usually do better than the guy who holds, and even better than the go who rebalances on the way down and, if the market drops 50%, needs more than a 100% recovery just to get back to even.

BobK
My take on all of this is that the VIX would be another tool in the toolbox. Not infallible but useful.

I remember Dick Fabian and his use of trend lines and moving averages as buy and sell signals. It actually was a relatively simple system and from what I have read it actually seemed to work. The idea of the whole thing was "the trend is your friend."

Wouldn't moving averages accomplish much the same thing? It would seem your timing signals would be based on longer term data with moving averages. It seems to me that market volatility can turn on a dime, it just seems too short term to base an asset allocation decision on.

I also would say that markets can feel placid but underneath the calm more risk than what is apparent to the eye. If markets are volatile, it seems to me that it is a measurement of nervousness of the institutions and traders. The volatility in the market might have nothing to do with valuation, it might just reflect current events. Again, if an unexpected bad world event happens all the volatility statistics go out the window. When people want to sell, they will sell regardless of what the VIX index was the day before.
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Re: What's wrong with volatility if buy&hold

Post by bobcat2 » Mon Jan 26, 2015 7:32 pm

nedsaid wrote.
It seems to me that market volatility can turn on a dime, it just seems too short term to base an asset allocation decision on.
Market volatility usually doesn't change on a dime. That's why it's called "volatility clustering." Unusually large market moves in either direction tend to be followed by additional large market moves in either direction. The same goes for unusually small market moves in either direction and typical market moves in either direction.

Below I provide a link to the Volatility Institute at NYU headed by Nobel Prize winner Rob Engle. Engle won the Nobel Prize in Economics in 2003 primarily for his work in measuring volatility in financial markets. Nose around the graphs and data at the linked cite and notice the volatility persistence both when volatility is high and when it is low. I certainly wouldn't be moving money around until the market had lost at least 15% and the measures of volatility such as the VIX and GARCH model estimates had been high for at least two weeks.

http://www.stern.nyu.edu/experience-ste ... -institute

BobK

PS - I have a personal bias in favor of Engle's work. In the 1980s I worked with him for a short time when he was an advisor to EPRI. I came away very impressed with both his competence and his good nature.
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Re: What's wrong with volatility if buy&hold

Post by nedsaid » Mon Jan 26, 2015 7:48 pm

Bob, I will learn more about VIX and look at the link you posted. It looks interesting.

If memory serves me right, you do tend to see a lot of volatility near market tops.
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Re: What's wrong with volatility if buy&hold

Post by nisiprius » Mon Jan 26, 2015 7:50 pm

First, bobcat2, the big question. In your opinion, are we in a volatility cluster now? Should we be cutting back on stock allocation now? How does an ordinary guy know?

It doesn't matter to me, though, because I think the right strategy for me is to keep my stock allocation adjusted to my risk tolerance at all times--a stock allocation I can live with in 2011, a stock allocation I can live with in 2008-2009. If I understand you, you say Lo advocates using VIX to market time risk, so you can enjoy the benefits of a high equity allocation when it is safe to do so and cut back when it is not. I know many people would like to do this, but I doubt that you can time the VIX any more than you can time the market itself.

On a separate topic, do you see any validity to Lo's statements that "buy-and-hold doesn't work any more?" Or that "130/30 is the new long-only?"
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Re: What's wrong with volatility if buy&hold

Post by Beliavsky » Mon Jan 26, 2015 8:32 pm

nisiprius wrote:First, bobcat2, the big question. In your opinion, are we in a volatility cluster now? Should we be cutting back on stock allocation now? How does an ordinary guy know?
VIX closed at 15.52 today, below its historical median, so the options market does not believe we are in a high volatility state.

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Re: What's wrong with volatility if buy&hold

Post by Wildebeest » Mon Jan 26, 2015 8:33 pm

IMHO there is nothing wrong with volatility in the stock market if you buy and hold and diversify.

Volatility clustering may win somebody a Nobel prize ( Not Professor Lo ( Disclosure: the Nobel committee did not ask me to for nominees or to vote) and I still believe that John C Bogle would have been the econonomics Nobel prize winner most deserving).

More likely it may be an enticing concept to take money out of pockets of hedgefund investeors.

As long as you hold index funds and can outlast a major down turn for 10-20 years, volatility is your friend, it has worked in the past and may work in the future.

This presumes a return to the mean. I am not sold on that either. It is my best bet at this time.

What else am I going to invest money in? CD's, Gold, rental properties, collectables such as Barbie dolls?
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Re: What's wrong with volatility if buy&hold

Post by bobcat2 » Mon Jan 26, 2015 8:36 pm

nisiprius wrote:First, bobcat2, the big question. In your opinion, are we in a volatility cluster now? Should we be cutting back on stock allocation now? How does an ordinary guy know?
First of all, I wouldn't consider cutting back until the market has dropped at least 15% and the market certainly has not done that. At that point I would consider cutting back if measures of volatility had been high for at least a period of two weeks and showed no sign of declining.

Is the stock market (currently) in a volatility cluster? Definitely not.

The GARCH estimate of volatility at the NYU Volatility Lab shows that volatility has rarely been above 20% at any time in the last three years and is currently about 15%.

Check it out here
http://www.stern.nyu.edu/experience-ste ... -institute

and here
http://vlab.stern.nyu.edu/

The VIX measure of the same thing is currently about 15.5 and it too shows hardly any out of the ordinary volatility since late 2012.

Look here for the current VIX value and check out the different price charts at the bottom of the page for the VIX graphs going back as far as 10 years.
https://www.cboe.com/micro/vix/pricecharts.aspx

The ordinary guy can look at these charts just as well as you and I can. :)

BobK

Edited for leaving out the word "guy" in the last sentence. :(
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Re: What's wrong with volatility if buy&hold

Post by Jaxfann » Mon Jan 26, 2015 8:43 pm

nisiprius wrote:Warning #1: whenever reading something attributed to a professor, always check to make sure what other hats he is wearing. Is Andrew Lo better described as

"Dr. Andrew Lo, Professor of Finance at MIT's Sloan School" or
"Andrew Lo, Ph.D. Chairman of the Board of Directors and Chief Investment Strategist of AlphaSimplex Group, LLC?"

Warning #2: beware of the phrase "does not work." It is rhetoric. It does not actually mean anything, or it means whatever the speaker wants it to mean. It is convenient because it is imprecise. You could contribute to a three-fund portfolio, buy and hold for thirty years, retire and live happily ever after and someone could still say your strategy "did not work" because in hindsight something else would have outperformed what you did.

Warning #3: beware of the phrase "anymore." It, too, is sales rhetoric. Imagine you are a salesperson and you want to sell something new to a client who is perfectly happy with what he has. You could say "you are an idiot, a poopy-head, and your investment strategy sucks," but that might not get you the sale. Much better to say "I am very impressed with your knowledge of investing. You are smart. Also well-dressed and good-looking. And you have been doing all the right things. What you have been doing used to work, but it won't work anymore."

Warning #4: as nearly as I can tell--I can't find the original article--numerous financial news media carried articles about a 2011 interview with Lo in Money Magazine. One of the secondary reports is Andrew Lo: Buy and Hold Doesn't Work Any More. There are numerous, numerous references to it on the websites of advisory firms. The message that "Buy and hold doesn't work any more" is obviously useful propaganda for anyone promoting other strategies. But notice--he gave the interview in 2011, when a 19% correction had given everyone (including me) the jitters. Nevertheless, if you had ignored his advice in 2011 and continued to buy and hold, it is hard to say that buy and hold hasn't "worked" since then.

Warning #5: What the heck does he mean by a "new era of volatility?" When was that golden age when the stock market was not volatile? The crash of 2008-2009? The dot-bomb decline of 2000-2002? The 25%-in-one-day drop of 1987? The crash of 1929? The often-forgotten crash of 1937? The panic of 1907?

Warning #6: Andrew Lo was one of many voices proclaiming the virtues of 130/30 funds. Many confidently predicted they would become a $2 trillion market by 2010. Lo did not go that far, but he called them "the new long-only," that is to say he expected them to all but displace traditional long-only mutual funds. If you are not sure what a 130/30 fund is, that should tell you something. They failed grotesquely and were promptly and completely forgotten.
Nisiprius - I don't know where you get the time to research and comment as much as you do on this site but I just want you to know that I really appreciate it and I have and continue to learn a lot. Thank you very much.

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Re: What's wrong with volatility if buy&hold

Post by nedsaid » Mon Jan 26, 2015 9:21 pm

Another thing that I wonder is that if VIX gets to be used more as a market timing indicator, if VIX will lose its predictive powers. It is the old saying that strategies work until they don't.

I think this is a useful "tool in the toolbox" but I would not make market timing decisions solely based on this. I am also dubious about the statement about selling if VIX is still high and after the market is down 15%. I wonder if this is a strategy for locking in losses.

This is why Peter Lynch was against stop loss orders. That is you would be sold out of a stock after it dropped by lets say 10%. He said there was enough volatility in the market that one could lock in 10% losses rather than just putting a floor under a stock. He said that stocks often drop 10% or more and then rebound!

I am also against "all in" or "all out" strategies.

I don't know. This has probably worked really well in the past. Dr. Lo has probably thought this through. But you know, markets have a way of doing the one thing that you don't expect. It seems that these type of strategies designed to limit losses tend to blow up at the worst possible time. Color me skeptical.

If one is skittish enough about the market to resort to these type of defensive strategies, it is a sure sign that his or her allocation to stocks is too high. I would question if such a person should be in the stock market at all. This also conflicts with all the advice to not market time. I have done very mild versions of market timing but not anything like this.

Another thing I saw was that the VIX index was created in 1993. So we have 21 years of data to work with. Are we going back and calculating what VIX would have been before then? I don't think this is enough to build a market-timing strategy on.
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Re: What's wrong with volatility if buy&hold

Post by bobcat2 » Mon Jan 26, 2015 9:24 pm

Here's a clip of Rob Engle discussing market volatility last October with Fox News. Engle's real time assessment of the slight hiccup in volatility in October looks quite sound in retrospect today.

http://video.foxbusiness.com/v/38496290 ... news-clips

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Re: What's wrong with volatility if buy&hold

Post by Random Musings » Mon Jan 26, 2015 9:28 pm

Volatility can be tough on a buy and holder if it shakes the mettle of one and causes them not to stay the course.

The last bear was probably a good example.

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Re: What's wrong with volatility if buy&hold

Post by bobcat2 » Mon Jan 26, 2015 9:40 pm

There are those who rebalance when stocks have fallen and the percentage of stocks in the portfolio is some percentage below their target equity percentage. Buy on the dip. This is a market strategy that doubles down on risk when markets are declining and typically market risk measures are high. What is being proposed here is that when the stock market has fallen significantly and risk measures are high, you do the opposite and somewhat de-risk your portfolio. The second strategy is no more market timing than the first "rebalancing strategy" is market timing.

Once the market is recovering and risk is falling, you re-risk the portfolio when using the second strategy.

I know of no reason that measures of daily conditional risk such as GARCH models cannot be taken back as far as we have daily data.

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Re: What's wrong with volatility if buy&hold

Post by pkcrafter » Mon Jan 26, 2015 10:22 pm

We have moved from the main topic, but I wanted to address this:
Dr. Andrew Lo said that the markets are getting so volatile these days, that the buy and hold strategies don't work anymore.
My answer to this is buy and hold does not work when investors don't hold. Investors don't handle volatility very well, even though they chisel their intention in a stone IPS. The issue is simply one of behavior.

I did some searching, but the original article is apparently no longer available. I did find this one on Lo's comments.

http://jlcollinsnh.com/2012/04/15/stock ... -save-you/

I guess we could say that volatility is not really a primary market risk, but it definitely is a behavioral risk that needs to be addressed. The problem is it can't be truly addressed in a cool state because when the panic button is pushed, the hot state is activated along with powerful endorphins. That changes everything.

Endorphins can trigger the self-preservation response. When triggered in a financial situation it may trigger the asset preservation response. Don't kid yourself in thinking you can ignore it. We are talking about very powerful chemicals that can override any crossed fingers declaration. The successful investor must face this and never have sufficient equity exposure that will trigger it.

To take this one step further, two investors may have far different trigger levels. Some investors even carry a risk-taking gene. Imagine what happens when an investor who carries the risk-taking gene has an AA discussion with someone who not only does not posses the gene, but is also quite risk averse--however that many be defined. Each will probably think the other is completely nuts. There can be no common ground although both can be successful if they can tip-toe their own emotional trigger line.

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Re: What's wrong with volatility if buy&hold

Post by asset_chaos » Mon Jan 26, 2015 10:56 pm

bobcat2 wrote:A Lo strategy for an individual investor would look something like this. If the market falls at least 15% and the VIX is high (say 28 or more) sell some percent of your equity holdings (perhaps 10% or 15%). If the market continues to drop and has fallen say more than 25% and the VIX remains high, or has risen, sell another 10% or 15%. This would continue by some preset plan you set in place with your IPS or similar personal plan. Once the market has recovered at least 15% from the trough and the VIX has fallen from its peak, then buy in 10% and continue to buy into the market in increments as the market recovers.

Such a policy will keep you from ruin in a situation like Japan where market recovery takes decades. In cases where recovery does not take decades you will usually do better than the guy who holds, and even better than the go who rebalances on the way down and, if the market drops 50%, needs more than a 100% recovery just to get back to even.
To my untutored ear, it sounds like the idea of "portfolio insurance" except for selling and buying of actual stocks instead of through a futures market overlay. I recall that portfolio insurance was popular in the 80s until the crash of 87 when it suddenly became unpopular.
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Re: What's wrong with volatility if buy&hold

Post by nedsaid » Wed Jan 28, 2015 11:40 am

bobcat2 wrote:There are those who rebalance when stocks have fallen and the percentage of stocks in the portfolio is some percentage below their target equity percentage. Buy on the dip. This is a market strategy that doubles down on risk when markets are declining and typically market risk measures are high. What is being proposed here is that when the stock market has fallen significantly and risk measures are high, you do the opposite and somewhat de-risk your portfolio. The second strategy is no more market timing than the first "rebalancing strategy" is market timing.

Once the market is recovering and risk is falling, you re-risk the portfolio when using the second strategy.

I know of no reason that measures of daily conditional risk such as GARCH models cannot be taken back as far as we have daily data.

BobK
Bob, I partly agree with you on this point. Particularly when you get older. Since 2000 any rebalancing or reallocation has been from stocks to bonds. During the 2008-2009 financial crisis I did not rebalance as I was pretty scared, I held fast with what I had. I did for a year put 100% of my new monies into stocks and then went back to putting in 60% stocks and 40% bonds. I did not want to double down on risk. On the other hand, I knew that if I sold stocks near the bottom that I would probably not meet my financial objectives for retirement.

Where I disagree is that the time to "panic" is when the market is nearing new highs. I don't get the logic of selling after the market has already fallen 15%. Is the VIX indicator that infallible? My take is that an investor should have an allocation that they can live with through thick and thin. If a person is uncomfortable with their stock position the time to lighten up is on the way up and not on the way down. This just seems like a strategy to lock in losses. I just don't like the idea of placing your bets on just one indicator. These type of strategies work great until they don't. Perhaps the relationships you cite have held in past markets, what guarantees are there that the markets will continue to act this way in the future.

More money has been lost trying to avoid volatility than from the volatility itself.
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Re: What's wrong with volatility if buy&hold

Post by bobcat2 » Wed Jan 28, 2015 3:58 pm

nedsaid writes.
Where I disagree is that the time to "panic" is when the market is nearing new highs. I don't get the logic of selling after the market has already fallen 15%. Is the VIX indicator that infallible? My take is that an investor should Where I disagree is that the time to "panic" is when the market is nearing new highs. I don't get the logic of selling after the market has already fallen 15%. Is the VIX indicator that infallible? My take is that an investor should have an allocation that they can live with through thick and thin..
I don't think there is ever a good time to panic. :happy But It does seem prudent to me to take some money off the table when the market is down and there are strong indications that the market could continue to drop. What good does it do an investor to "have an allocation that they can live with through thick and thin" if the market takes more than 15 years to simply get back to even. You will have managed to live with a disaster. Congratulations. :)

Twenty-five years after the Japanese stock market peaked in late 1989 that market is still nowhere back to its level of 1989. It would appear that reversion to the mean in Japan will take at least 30 years and could take 40 years or more. Therefore, ruling out mean reversion of 15-20 years in the US seems odd. Even holding a global portfolio may not save you. I believe a German investor investing in the global market equity portfolio suffered negative real returns over a recent 20 year period because of relatively poor German returns and a strong DM for the early part of the period and a strong Euro in the second part of the period.

The VIX and and GARCH models are modeling volatility (a measure of risk) on a day to day basis as compared to annual standard deviation, which gives you average annual volatility over a period of decades. The VIX and GARCH models are simply giving you estimates of standard deviation on a day to day basis where the daily volatility has been annualized. So when the VIX is at 30 here is what is being reported. Annual standard deviation of the stock market (volatility) over long periods is about 20%. But today's annualized standard deviation of the stock market is 30% (as measured by the VIX)- which is 50% higher than LR average volatility.

BTW volatility has a zero absolute lower bound and a practical lower bound of about 8% or 9%. Try to find any daily values below 8%. There is no upper bound and the VIX reached a peak of about 80% one day in the autumn of 2008. But shouldn't it have done that then, when we stood on the precipice of a second Great Depression? LT average daily volatility is about the same 20% as annual volatility measured as annual standard deviation over decades. (Which is what should be happening. :D ) But the skewness in volatility means daily median volatility is less than average daily volatility. Median daily volatility is about 17%-18%. Thus a VIX daily average of 30% or more for an extended period of days is way above the median.

It's important to note that the VIX and GARCH estimates of daily volatility give very similar results although the methods are quite different. GARCH are simple statistical models that estimate daily volatility based on the daily actual returns compared to the daily mean returns. The VIX uses call option pricing to estimate the same daily volatility. The fact that they give similar estimates of daily volatility is reassuring to me.

If you look at the VIX over roughly the last 20 years or GARCH estimates over that same time period you see the same thing. Mainly periods where daily volatility is below the mean, some periods where volatility is near the mean, and a few volatility clusters, usually lasting several months, where volatility is typically well above the mean. Those periods of volatility clustering are almost always associated with market downturns, usually significant downturns. Don't take my word for it. Look at the the CBOE VIX graphs or the GARCH estimate graphs at the NYU Volatility Lab!

Why shouldn't the above be the case? The volatility being high is simply recording the obvious. There is much more uncertainty in the market and the economy than there usually is. Wasn't there more uncertainty in 2000 after it became apparent that many dot.com companies had seen their market values rise very fast even though they were reporting no earnings and very little revenues. In the third trimester of 2001, wasn't there much more uncertainty than usual in financial markets and the economy in the aftermath of the 9/11 attacks? In October of 2008 wasn't there much more market uncertainty than usual when it appeared several major banks might go belly up? In late 2008 and early 2009 wasn't there much more market uncertainty than usual when it appeared AIG and major US automakers might go belly up? What is surprising about the VIX reaching approximately 80% in November of 2008?

Counterfactuals are always difficult to assess, but in the autumn of 2008 the potential for things playing out much worse than they actually did for both the US economy and stock market was high. What would have happened to the economy and the stock market if the government had not bailed out the large banks, AIG, and the automakers, and had not embarked on a large spending program to buoy the economy, and the Fed hadn't been very accommodating in supplying much liquidity to the economy and cutting ST interest rates to just above zero? We don't know, but it's conceivable things could have been much worse for the US stock market. None of these actions by the government were sure things in the fall of 2008.

Given this situation why wouldn't it have been prudent to cut back on stock holdings as the market dropped first 20%, then 40%, and finally close to 60% before reaching the market trough in March of 2009, at which time these government actions to stabilize the economy were in place. Then in 2009 as the stock market was rising buy back into the market in chunks as the market continued to rise and the VIX continued to drop. You would probably done much better than the buy and hold investor because you would have been selling at relatively high prices relative to the trough and buying at relative low prices as the market picked up. The market had to rise over 100% from the trough for the buy and hold investor to get back to the October 2007 stock market peak prior to the market decline. In relation to the market timing rebalancing by bands investor you would almost surely have done significantly better. She would have been buying repeatedly into the market in the autumn of 2008 and early winter of 2008-09 at prices that would have proceeded to drop precipitously. For her the market would have to exceed the trough by well over 100% just to get back to the peak of October 2007. In addition you would have protected yourself from ruin if the stock market (and the economy) would have gotten stuck and in that eventuality even today the market would be far below its high of October 2007. - Sort of a mini US version of the terrible Japanese stock market returns over the last quarter century.

For another way to think about this take a look at this article by Michael Edesess in Advisor Perspectives and pay particular attention to the graph labeled, Figure 1 - The legendary irrational investor, and also the text that discusses the graph.

Link - http://www.advisorperspectives.com/news ... evert4.php

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Re: What's wrong with volatility if buy&hold

Post by nedsaid » Thu Jan 29, 2015 12:37 pm

Bob, I think you are on to something. I am not denying what you are seeing.

But my gosh, isn't this technical analysis? Isn't this market timing? I thought these were two things that we have been warned over and over again not to do.

I also think you are not the only person who has seen this. I commend you for bringing this up, I have not seen anything on this beforehand. But how long will it be before this gets more widely published and this gets to be more widely known?

As far back as I can remember, there has been the search for the perfect market timing indicator and also the search for the perfect strategy to protect against market volatility. And as far back as I can remember, the search for both has been in vain. Have you succeeded where others have failed?

You have made a valuable contribution in pointing out the normal ranges of volatility measures. There are a lot of things in financial markets that operate in historic ranges and it is good for investors to heed warning signs when certain relationships between asset classes or numerical ranges get seriously out of whack. So yes, a volatility measure of 30 when normally it is 20 is a warning signal. There are other such warning signals out there.

But isn't this stating the obvious? We know the markets are nervous. There are pretty big world events going on now. The Greek election and nervousness about the Euro. The Charlie Hebdo attacks in Paris. Instability in the Middle East. A whiff of deflation in Europe. All this after a five plus year bull market in US stocks. This is a reflection that there are scary things going on out there in the world. Would we expect the VIX to do otherwise? Is it really telling us something we don't know already?

So if you sell your stocks after a 15% drop, what indicator is going to tell you to get back in? If the markets stay down, you are a genius. But if the markets rebound smartly, haven't you simply locked in 15% losses?

I guess Bob that it all sounds good. The VIX indicator probably has a near 100% success rate in predicting further drops in the stock market. But my question is have you future tested this? Have you looked 50 years into the future and tested to see if this one indicator will work as well as it did in the past?

I am not being smart. I am just pointing out that this is "too perfect." I just have that sinking feeling that this will end in tears for somebody. I just cannot believe that just one market timing indicator is going to save us all from bear markets.

My take on this is that you are onto something important. I view this as a "tool in the toolbox," another warning light on the dashboard. But no one indicator will be 100% infallible. There will come a time when this doesn't work as advertised.
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Re: What's wrong with volatility if buy&hold

Post by Beliavsky » Thu Jan 29, 2015 12:47 pm

bobcat2 wrote: Given this situation why wouldn't it have been prudent to cut back on stock holdings as the market dropped first 20%, then 40%, and finally close to 60% before reaching the market trough in March of 2009, at which time these government actions to stabilize the economy were in place. Then in 2009 as the stock market was rising buy back into the market in chunks as the market continued to rise and the VIX continued to drop.
Bobcat, I'm pleased to see another GARCH advocate on the board -- I have discussed GARCH models too. I doubt that many people will be agile enough to trade in the manner you suggested above. Maybe a set of trading rules could be tested and adopted. A market crash automatically reduces one's exposure to stocks. The fact that big down moves presage high future volatility (which may be on the up side or down side) suggests that rebalancing by selling bonds and buying stocks will be too risky for many people. I think most people should hold tight and not rebalance, except perhaps with new savings. This is a middle ground between rebalancing (buying more stocks) and selling stocks when volatility increases.
Last edited by Beliavsky on Thu Jan 29, 2015 1:08 pm, edited 1 time in total.

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Re: What's wrong with volatility if buy&hold

Post by nedsaid » Thu Jan 29, 2015 1:00 pm

The other fly in the ointment is human behavior. You have laid out a very sensible strategy. But human emotion is not sensible.

So let's say you sell when the market is down 15% and VIX is still high. The market drops further. You watch for VIX to go down and for the market to start to recover, one still has to pull the trigger. Your rational mind at that point might say "buy" and your indicators are flashing "buy" but your emotional self still feels the pain of losses, a very scary market, and the incessant stream of very bad news. You still have to have the courage and the discipline to execute the strategy.

Nisiprius posted that he almost panicked out of the stock market during the financial crisis. He is a pretty rational person to me and knows the Boglehead principles inside and out. He and his wife had a very hard time staying the course. They did and the markets and history vindicated them.

I was pretty scared myself but I knew that if I sold that a comfortable retirement in the future was out. I had to stay in if I was to have any hope of meeting my objectives. Bob, you are right. The US could have been another Japan. We could have faced a 40 year reversion to the mean. It really could have been economic Armageddon. I didn't know what would happen but I had faith that the markets would rebound and fortunately the markets vindicated me. But no guarantees.

But if I was so worried about a Japan scenario that I had everything in 2% bonds, I wouldn't be able to achieve a comfortable retirement with my alternative strategy either.

As per usual, you gave Boglehead readers food for thought. There is merit to your ideas but again this is "too perfect."
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Re: What's wrong with volatility if buy&hold

Post by tadamsmar » Thu Jan 29, 2015 1:24 pm

The US total stock market has gone up <35% since Andrew Lo claimed buy and hold does not work any more.

So, in fact, buy and hold has worked as well as it ever did.

Here's an old thread on Lo's claim:

http://www.bogleheads.org/forum/viewtop ... 10&t=91349

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bobcat2
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Re: What's wrong with volatility if buy&hold

Post by bobcat2 » Thu Jan 29, 2015 1:28 pm

nedsaid wrote.
But isn't this stating the obvious? We know the markets are nervous. There are pretty big world events going on now. The Greek election and nervousness about the Euro. The Charlie Hebdo attacks in Paris. Instability in the Middle East. A whiff of deflation in Europe. All this after a five plus year bull market in US stocks. This is a reflection that there are scary things going on out there in the world. Would we expect the VIX to do otherwise? Is it really telling us something we don't know already?
I wouldn't describe volatility measures as measures of market nervousness, but rather of the degree of uncertainty in the markets - basically whether the degree of uncertainty is below average (which it usually is because of skewness), about average, or in or entering a volatility cluster of well above average volatility. BTW volatility clusters don't happen that frequently. Three volatility clusters in a ten year period would be a lot. There can be ten year periods with one or zero volatility clusters.

With regard to your inference about market volatility being high right now - ("We know the markets are nervous. There are pretty big world events going on now. The Greek election and nervousness about the Euro. The Charlie Hebdo attacks in Paris. Instability in the Middle East. A whiff of deflation in Europe. All this after a five plus year bull market in US stocks.")

The VIX and GARCH volatility measures do not reflect high volatility right now or in the recent past. The VIX has risen slightly in the last several days, but as I write this the VIX is at 20.5%, barely above the long term average of about 20%. The Volatility lab GARCH estimate of volatility as of yesterday is below 17%. So while you may know that volatility is currently high, the actual measures of current volatility don't agree with your assessment.

Here is a Boglehead thread from about three years ago (late 2011) on whether volatility has increased since the 1990s. The three main discussants on the thread are greyfox, Larry Swedroe, and myself. Read thru the posts by the three of us on the thread.

Link - Fact or Fiction: Increased Volatility viewtopic.php?f=10&t=85172&hilit=garch

Then read greyfox's analysis of this subject from October of 2011. http://www.lagunabeachbikini.com/index. ... -volatile/

Then read Larry Swedroe's analysis of this subject from early November of 2011. http://www.cbsnews.com/news/increased-m ... r-fiction/

Decide for yourself if greyfox and Swedroe appear to be equally knowledgeable about risk in the stock market after reading both of the above analyses.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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bobcat2
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Re: What's wrong with volatility if buy&hold

Post by bobcat2 » Thu Jan 29, 2015 1:42 pm

Hi Beliavsky,
Beliavsky wrote: Bobcat, I'm pleased to see another GARCH advocate on the board -- I have discussed GARCH models too.
I began using ARCH models in early 1986. That year I met with Rob Engle and others including Clive Granger and Mark Watson at I believe three workshops on new time series modeling techniques in general and in particular ARCH models. Later in the 1980s I was at a conference where Tim Bollerslev gave a presentation on GARCH modeling. By the early 1990s I was doing GARCH modeling.

Perhaps because I've been around this stuff so long it seems really obvious to me. Also being able to ask Engle questions about it nearly 30 years ago didn't hurt in my understanding. So given that I am fully dressed when it comes to this subject, it is sometimes difficult for me to see what aspect of volatility measures are tripping up others who are new to the subject. :)

Best,
BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: What's wrong with volatility if buy&hold

Post by Miriam2 » Thu Jan 29, 2015 1:57 pm

bobcat2 wrote:I don't think there is ever a good time to panic. :happy But It does seem prudent to me to take some money off the table when the market is down and there are strong indications that the market could continue to drop. What good does it do an investor to "have an allocation that they can live with through thick and thin" if the market takes more than 15 years to simply get back to even. You will have managed to live with a disaster. Congratulations. :)
Isn't this what happened in 2008 when many of us were closer to retirement. Holding does not work if the markets are clearly going down and we will need the money for retirement. One can buy and hold to the end of days, but if the market does not come back before the end, you're sunk.
Last edited by Miriam2 on Thu Jan 29, 2015 5:29 pm, edited 1 time in total.

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serbeer
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Re: What's wrong with volatility if buy&hold

Post by serbeer » Thu Jan 29, 2015 1:59 pm

While volatility is not the major factor, at least in accumulation state of the portfolio, it is indeed a factor.

Here are several discussions we had on the subject. The first 2 are easy readings, while the 3rd is the most in-depth:
viewtopic.php?t=66601
viewtopic.php?t=60323
viewtopic.php?f=10&t=116038

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