Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

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conundrum
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by conundrum » Thu Dec 29, 2016 8:27 pm

Thank you Larry and all for a very enlightening and interesting thread.

Drum :sharebeer

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by FIREchief » Thu Dec 29, 2016 8:46 pm

mcgarrett wrote:I am very interested in SRRIX, and maybe a bit less so in LENDX, as diversifiers in my Larry Portfolio. However, although the SD's are low, and the expected returns are similar to equities with presumably very low correlation to equities, the ER's for these funds is rather high (SSRX 2.42%, LENDX 1.5%). Is this taken into consideration in projecting the expected returns? And I was hoping to ask Larry if the ~10% allocation to these funds was taken from his equity allocation, or by harvesting gains, or by some of the muni's reaching maturity.

Thanks to all for a very interesting thread.

McGarrett


Okay, now they sound really, REALLY, scary!! What is it that we're always told? There is no "free lunch?" :confused
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by Rodc » Thu Dec 29, 2016 9:27 pm

larryswedroe wrote:ignition
When I've looked at MCS results they almost always show lower odds of success (not running out of money) at high equity allocations, though higher odds of success than at very low levels. So typically will need to have at least a moderate equity allocation. Of course higher allocations to equity provide greater odds of having more wealth at death.

Also don't need a Japan which started at very high valuations, can just have very bad economic outcomes.

Larry


I might add, like Larry, that typically in my experience building and running different types of MCS, at low withdrawal rates every allocation works and at high withdrawal rates every allocation fails (in the sense of not achieving some high enough success rate that one might use it) and there is a rather narrow range where you see what Larry reports. The challenge is it is very hard to know the correct inputs to the simulation to really model reality so hard to know you are even in the middle ground in practice. Fortunately most on the forum will have spending flexibility to adjust as reality unfolds.

If I am remembering the Kites paper Larry is referring to on rising stock allocations in retirement, the reported "benefits" were extraordinarily small. As is in not just not statistically significant, but like pennies. I could not understand how the paper got past the peer review process.
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by Inframan4712 » Thu Dec 29, 2016 10:02 pm

I didn't read the last 10 posts but I haven't seen this mentioned yet.

Why do some people take risk they don't need to take? Because they have an appetite for risk. They *want* to take risks. Entrepreneurs especially. It isn't possible to win the game because the game itself is the point. Successful people are risk takers who probably failed a lot but eventually (or more than once) succeeded wildly.

These folks can benefit from advice to "take some winnings off the table." But they aren't going to want to leave the table.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by 2015 » Thu Dec 29, 2016 11:43 pm

larryswedroe wrote:Dognose
Might be a nice short chapter or appendix, but don't think merits a full book

But thought you might enjoy this piece I wrote a while back on the subject

Author Kurt Vonnegut related this story about fellow author Joseph Heller: “Heller and I were at a party given by a billionaire on Shelter Island. I said, ‘Joe, how does it make you feel to know that our host only yesterday may have made more money than your novel Catch-22 has earned in its entire history?’ Joe said, ‘I’ve got something he can never have.’ And I said, ‘What on earth could that be, Joe?’ And Joe said, ‘The knowledge that I’ve got enough.’”

In 2009, I was asked to do an investment seminar for the Tiger 21 Group. According to their website, “Tiger 21 is the nation’s premier peer-to-peer learning group for high-net-worth investors. We help members build the skill set to successfully transition from focused entrepreneurs to disciplined managers of wealth. Participating in professionally-facilitated, 12-14 person groups, our members meet monthly to harness the varied expertise and collective intelligence of their peers in high-energy, day-long sessions.”

One of the issues the group asked me to address was: How do the rich think about risk and how should they think about it? What follows is my answer.

Unless one inherits their wealth, the most common way large fortunes are created is by taking lots of risk, often concentrating that risk in a personally owned business. Thus, high net worth individuals are typically successful entrepreneurs. By definition, they are risk takers who have known success. That provides them with confidence in their ability to take risk. That confidence often creates the willingness to take risks. In addition, given that they have large fortunes, they also have the ability to take risk. And that combination typically leads people to continue to take risks.

However, the ability and willingness to take risk are only two of the three criteria one should consider when deciding on an investment policy. There is a third, often overlooked, criterion — the need to take risk. A great irony is that the very people who have the most ability and willingness to take risk, have the least need to take it.

Those with sufficient wealth to meet all their needs should consider that the strategy to get rich is entirely different than the strategy to stay rich. The strategy to get rich is to take risks, typically in one’s own business. But the strategy to stay rich is to minimize risk, diversify the risks you take and to avoid spending too much.

I explained that given that the objective of the Tiger 21 members was now to stay rich, it was important to create a new investment plan incorporating that goal. The new plan should be based on the fact that the inconvenience of going from rich to poor is unthinkable.

When deciding on the appropriate asset allocation, investors should consider their marginal utility of wealth — how much any potential incremental wealth is worth relative to the risk that must be accepted in order to achieve a greater expected return. While more money is always better than less, at some point most people achieve a lifestyle with which they are very comfortable. At that point, taking on incremental risk to achieve a higher net worth no longer makes sense: the potential damage of an unexpected negative outcome far exceeds the potential benefit gained from incremental wealth.
Each investor needs to decide at what level of wealth their unique utility of wealth curve starts flattening out and begins bending sharply to the right. Beyond this point there is little reason to take incremental risk to achieve a higher expected return. Many wealthy investors have experienced devastating losses (Does the name Madoff ring a bell?) that could easily have been avoided if they had the wisdom to know what author Joseph Heller knew.

The lesson about knowing when enough is enough can be learned from the following incident. In early 2003, I met with a 71-year old couple with financial assets of $3 million. Three years earlier their portfolio was worth $13 million. The only way they could have experienced that kind of loss was if they had held a portfolio that was almost all equities and heavily concentrated in U.S. large-cap growth stocks, especially technology stocks. They confirmed this. They then told me they had been working with a financial advisor during this period — demonstrating that while good advice does not have to be expensive, bad advice almost always costs you dearly.

I asked the couple if, instead of their portfolio falling almost 80 percent, doubling it to $26 million would have led to any meaningful change in the quality of their lives? The response was a definitive no. I stated that the experience of watching $13 million shrink to $3 million must have been very painful and they probably had spent many sleepless nights. They agreed. I then asked why they had taken the risks they did, knowing the potential benefit was not going to change their lives very much but a negative outcome like the one they experienced would be so painful. The wife turned to the husband and punched him, exclaiming, “I told you so!”

Some risks are not worth taking. Prudent investors don’t take more risk than they have the ability, willingness or need to take. The important question to ask yourself is: If you’ve already won the game, why are you still playing?

Needs vs. Desires
One reason people continue to play a game they have already won is that they convert what were once desires (nice things to have, but not necessary to enjoy life) into needs. That increases the need to take risk. That causes an increase in the required equity allocation. And, that can lead to problems when the risks show up, as they did in 1973–74, 2000–02 and again in 2007–08.

Moral of the Tale
Failing to consider the need to take risk is a mistake common to many wealthy people, especially those who became wealthy by taking large risks. However, the mistake of taking more risk than needed is not limited to the very wealthy. The question you need to ask yourself is how much money buys happiness? Most people would be surprised to find that the figure is a lot less than they think. For example, psychologists have found that once you have enough money to meet basic needs like food, shelter and safety, incremental increases have little effect on your happiness. Once you have met those requirements the good things in life (the really important things) are either free or cheap. For example, taking a walk in a park with your significant other, riding a bike, reading a book, playing bridge with friends, or playing with your children/grandchildren doesn’t cost very much if anything. And whether you drink a $10 or a $100 bottle of wine, or eat in a restaurant that costs $50 or $500 for dinner for two won’t really make you any happier.

When developing your investment policy statement make sure that you have differentiated between needs and desires and then carefully considered the marginal utility of incremental wealth so that you can determine if those desires are worth the incremental risks that you will have to accept. Knowing when you have enough is one of the keys to playing the winner’s game in both life and investing.

Hope you find it helpful
Larry


Finally!! The most intelligent thoughts I think I've ever read on the "willingness, ability, and need" to take risk. Larry, thank you very much for such an instructive post. I am grateful for your contributions to this forum.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by livesoft » Fri Dec 30, 2016 12:05 am

^That passage is from one of Larry Swedroe's books, so I think you should read the whole book. :)

I believe (but I am not certain) that Larry published back in 1993 about need, willingness, and ability. It's been around a long time.
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by TomP10 » Fri Dec 30, 2016 9:09 am

No need for Larry to write a book on the concept of diminishing marginal utility of money --- Jonathan Clement's new book "How to think about money" has an excellent and thorough discussion of the issue and how it could influence how you spend and invest your money!

FWIW, Clement's book was my favorite book for 2016. I highly recommend it to all.

Tom
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by dognose » Fri Dec 30, 2016 10:45 am

Thanks for the tip, TomP10. I will order the Clements book this morning.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by Peculiar_Investor » Fri Dec 30, 2016 10:54 am

Jcraz13 wrote:Great article I often refer to in terms of risk. For those of you advocating a higher percentage in stocks in retirement, what say you ?

http://www.wsj.com/articles/how-to-tell ... 1421726456

For continuity sake, the article has been previously discussed in viewtopic.php?t=156151, viewtopic.php?t=190856 and viewtopic.php?t=172059.
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by TomP10 » Fri Dec 30, 2016 11:38 am

dognose wrote:Thanks for the tip, TomP10. I will order the Clements book this morning.


I'm confident you will like it. Full of good info and insight.
"It is remarkable how much long term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." -- Charlie Munger

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by garlandwhizzer » Fri Dec 30, 2016 2:10 pm

Larry's comments are, as usual, insightful and cogent but I'll offer a few points to consider.

For those lucky ones who have an asset base large enough to allow for a very high allocation to safe but low return bond investments and take less overall equity risk, concentrating it in higher expected return instruments (INTL, EM, factor investing), the Larry Portfolio is ideal. The problem is that most do not have a portfolio of 50+ times annual expenses and therefore the choice of having total emotional comfort plus complete financial security is not available for a long retirement. For many of us the choices are different: saving and investing more, spending less, working longer and delaying retirement, and, finally, picking a portfolio that finds the difficult risk/reward tradeoff between sleeping well at night and having sufficient portfolio return to not run out of money in the long term.

The Larry Portfolio prepares beautifully for a Black Swan event but in the absence of one, allocating 70% - 80% of your portfolio to bonds starting now in this low yielding post-bond-bull environment, that portfolio may not produce sufficient positive real returns for many. It is very likely to have a high Sharpe ratio and to protect the wealthy from the only thing that amounts to a serious risk to them, Black Swans. I don't believe it's the ideal portfolio of everyone unless it is individualized to their own circumstances, like deciding what annual portfolio return is necessary to cover future anticipated retirement expenses and adjusting the bond/stock allocation accordingly which for some of us means 50/50 or 60/40 or even more equity exposure if that's what the arithmetic requires.

One final point, estimating future spending needs. There are some serious questions and uncertainties here. First, how long are you going to live? Longevity has increased so much in our lifetimes that one might be well advised to plan to live to age 90 or more not the 65 year level which was the case when SS started. Also in anticipating future living costs--are those costs going to be covered by the inflation rate which for example SS, inflation adjusted annuities, and TIPS provide. A substantial portion of senior living costs is health care expenses which has increased at more than double the inflation rate for more than a decade with no end in sight. Another significant cost is long term care which has also increased in cost faster than inflation. Insurance companies have relentlessly been increasing long term care premiums because they have consistently underestimated its true costs. So it is entirely possible that keeping up with inflation and a modest real return may not keep up with your real future costs.

Until relatively recently inflation has been consistently decreasing for about 35 years, but it is now showing a modest uptick. Whether it will settle down in a comfortable range or at some point in the future become relentlessly progressive as it did in the late 60s, 70s, and early 80s, is unknown. Everything suffers to some extent in an inflationary environment, even TIPS which get hit by duration risk to principal value, but nominal bonds and fixed pay out annuities may suffer most when it comes to real returns. This poses a risk to bond dominated portfolios and to totally annuitized nominal portfolios, both of which seem now on the surface to be entirely safe. It is important to recall that from 1940 to 1980, 40 years, 10 year rollingTreasuries had a negative real return. Inflation at one time was close to 15%/year.

So in sum, there is uncertainty in projecting what your spending needs are going to be over a 20 or 30 or 40 year retirement. What looks today like a sufficient annual future income may turn out not be. It is best I believe to create a plan that has a fudge factor, overstating anticipated future financial needs in case the unexpected happens. It may turn out to be better to deal with taking some modest degree of increased equity risk now than to run out of money 25 years from now when no options other than poverty are available. Whether you do that with a Larry type approach (more bonds, less equity exposure concentrated in high expected return instruments) or in a more traditional format (3 fund, 2 fund, 4 fund etc.) is a personal choice.

Garland Whizzer

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by nedsaid » Fri Dec 30, 2016 2:17 pm

Levett wrote:AlohaJoe commented: "I'm not sure anyone would call "basic living expenses" having "won the game"."

Speaking as a longtime retiree, I sure wouldn't identify "basic" with having "won the game."

"Basic" certainly keeps you in the game (it's a useful planning tool), but the retirees I know aim to live their lives in a manner greater than "basic" (to be defined by the individual's desired standard of living).

Just one man's view from the bleachers. :wink:

Lev


If you get disabled to the point where you need Long Term Care in a nursing home, the definition of "basic" will change. Nursing homes can be very, very expensive. "Basic" when you and spouse are active and healthy can change in a hurry. Hard to say what our "basic" expenses will be in the future and thus it makes it harder to determine if one has truly one the game. It is the old moving of the goalposts thing.
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by Levett » Fri Dec 30, 2016 2:54 pm

Nedsaid commented:

"Basic" when you and spouse are active and healthy can change in a hurry."

For sure (and this is understood by both Dr. Bernstein and Larry Swedroe).

Just two days ago, I learned that an acquaintance has been diagnosed with Alzheimer's. He and his wife are comfortably retired, and fortunately have long term care insurance.

Nevertheless, they are downsizing and moving near to children. Their life together has changed permanently. It could happen to any of us.

Lev

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by CULater » Fri Dec 30, 2016 3:56 pm

garlandwhizzer wrote:Larry's comments are, as usual, insightful and cogent but I'll offer a few points to consider.

For those lucky ones who have an asset base large enough to allow for a very high allocation to safe but low return bond investments and take less overall equity risk, concentrating it in higher expected return instruments (INTL, EM, factor investing), the Larry Portfolio is ideal. The problem is that most do not have a portfolio of 50+ times annual expenses and therefore the choice of having total emotional comfort plus complete financial security is not available for a long retirement. For many of us the choices are different: saving and investing more, spending less, working longer and delaying retirement, and, finally, picking a portfolio that finds the difficult risk/reward tradeoff between sleeping well at night and having sufficient portfolio return to not run out of money in the long term.

The Larry Portfolio prepares beautifully for a Black Swan event but in the absence of one, allocating 70% - 80% of your portfolio to bonds starting now in this low yielding post-bond-bull environment, that portfolio may not produce sufficient positive real returns for many. It is very likely to have a high Sharpe ratio and to protect the wealthy from the only thing that amounts to a serious risk to them, Black Swans. I don't believe it's the ideal portfolio of everyone unless it is individualized to their own circumstances, like deciding what annual portfolio return is necessary to cover future anticipated retirement expenses and adjusting the bond/stock allocation accordingly which for some of us means 50/50 or 60/40 or even more equity exposure if that's what the arithmetic requires.

One final point, estimating future spending needs. There are some serious questions and uncertainties here. First, how long are you going to live? Longevity has increased so much in our lifetimes that one might be well advised to plan to live to age 90 or more not the 65 year level which was the case when SS started. Also in anticipating future living costs--are those costs going to be covered by the inflation rate which for example SS, inflation adjusted annuities, and TIPS provide. A substantial portion of senior living costs is health care expenses which has increased at more than double the inflation rate for more than a decade with no end in sight. Another significant cost is long term care which has also increased in cost faster than inflation. Insurance companies have relentlessly been increasing long term care premiums because they have consistently underestimated its true costs. So it is entirely possible that keeping up with inflation and a modest real return may not keep up with your real future costs.

Until relatively recently inflation has been consistently decreasing for about 35 years, but it is now showing a modest uptick. Whether it will settle down in a comfortable range or at some point in the future become relentlessly progressive as it did in the late 60s, 70s, and early 80s, is unknown. Everything suffers to some extent in an inflationary environment, even TIPS which get hit by duration risk to principal value, but nominal bonds and fixed pay out annuities may suffer most when it comes to real returns. This poses a risk to bond dominated portfolios and to totally annuitized nominal portfolios, both of which seem now on the surface to be entirely safe. It is important to recall that from 1940 to 1980, 40 years, 10 year rollingTreasuries had a negative real return. Inflation at one time was close to 15%/year.

So in sum, there is uncertainty in projecting what your spending needs are going to be over a 20 or 30 or 40 year retirement. What looks today like a sufficient annual future income may turn out not be. It is best I believe to create a plan that has a fudge factor, overstating anticipated future financial needs in case the unexpected happens. It may turn out to be better to deal with taking some modest degree of increased equity risk now than to run out of money 25 years from now when no options other than poverty are available. Whether you do that with a Larry type approach (more bonds, less equity exposure concentrated in high expected return instruments) or in a more traditional format (3 fund, 2 fund, 4 fund etc.) is a personal choice.

Garland Whizzer

Many excellent points. Especially the concern about the return from bonds going forward. Do you take the risk that fixed-income will provide meager returns, or do you take the risk of holding a higher allocation to equities than you might otherwise? And, at current valuation levels, equities are kinda risky too for retirees. I guess this is the fork in the road that Yogi was talking about taking.
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by larryswedroe » Fri Dec 30, 2016 5:13 pm

CULATER
Your point on the "Hobson's choice" of low bond yields and high equity risk is why I was so pleased when Stone Ridge introduced their two new products as both have equity like expected returns with far less than equity like risks, and no correlation with equities or bonds for the reinsurance fund and generally low (except when UE is high) for the alternative lending fund (which trades credit risk for reduced duration/inflation risk). So that is why my entire tax advantaged accounts are now in these two funds
Larry

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by Johnnie » Fri Dec 30, 2016 5:42 pm

rapporteur wrote:The overwhelming weight of the historical evidence, spanning more than a century across 19 developed countries, is that an equity-heavy portfolio is LESS risky, in terms of the two risk measures that actually matter in terms of life outcomes: how much money you can spend, and the chance of running out of money prematurely. (…there’s yet a third positive outcome, a bigger estate) Not only has an equity-heavy portfolio been best (by gigantic amounts) in good times (which is nice) but it has been BETTER than an FI-heavy portfolio EVEN in bad times, and EVEN in the worst of times (which is essential!).

Yes, an equity-heavy portfolio has had lots of ups and downs, but, compared to an FI-heavy portfolio, that variance has overall been to the UPSIDE. In NO CASE was an equity allocation of less than 50% best, and most of the time higher equity allocations of 70-100% were much better, not falling noticeably short even in bad or very bad times.


OK, over 30 or 40 years the risk of heavy-equity is pretty nil, but what about the sequence of returns risk described in the article for those who start distribution on the threshold of a nasty bear and extended period of mediocre returns?

For example, the period described in this thread, "1966-82: Worst Bear Market's 16 lost years: What's your risk tolerance, really really?"
viewtopic.php?f=10&t=201490&p=3087488&hilit=1966#p3087488

That's an interesting period for your thesis because it also featured a nasty bout of what I assume you regard as the more serious risk, inflation.

These discussions always make me think of a Heinlein story where Lazarus Long gets zapped back to the time and place of his youth in the 1890s. He tells family members to buy Impressionist paintings, which some do. Decades later he runs into one of them who asks, "Thanks for the tip on Impressionists - they made me rich in my golden years - but why didn't you also tell us about the Great Depression?"
:oops: Now that's a vicious "sequence of returns" problem!
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by larryswedroe » Fri Dec 30, 2016 5:48 pm

Johnnie, I strongly disagree with the conclusions of rapporteur. I don't agree that you can draw any such conclusion from the data. And that isn't even true in the US, let alone in other countries where the ERP has been much lower. And of course you have the sequences risk.
Larry

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by FIREchief » Fri Dec 30, 2016 6:15 pm

larryswedroe wrote:Your point on the "Hobson's choice" of low bond yields and high equity risk is why I was so pleased when Stone Ridge introduced their two new products as both have equity like expected returns with far less than equity like risks, and no correlation with equities or bonds for the reinsurance fund and generally low (except when UE is high) for the alternative lending fund (which trades credit risk for reduced duration/inflation risk). So that is why my entire tax advantaged accounts are now in these two funds
Larry


Larry - I hope this works out for you. This sounds a lot like the "too good to be true" situation. I've been hearing for decades about investments that "have equity like returns," but "far less than equity risks." The fact that they come with an ER well above 1% would raise red flags for many of us. Where exactly is the free lunch coming from?? :confused
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by burt » Fri Dec 30, 2016 6:41 pm

[/quote]

Finally!! The most intelligent thoughts I think I've ever read on the "willingness, ability, and need" to take risk. Larry, thank you very much for such an instructive post. I am grateful for your contributions to this forum.[/quote]

++1
I reached my goal. I have enough.
I have no idea why people choose high equity allocations in retirement.

Retired at 60 with 30% stock/ 70% bonds-TIPS.

burt

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by FIREchief » Fri Dec 30, 2016 7:13 pm

burt wrote:
++1
I reached my goal. I have enough.
I have no idea why people choose high equity allocations in retirement.

Retired at 60 with 30% stock/ 70% bonds-TIPS.

burt


Great to hear. Perhaps you could share some of your wisdom....

viewtopic.php?f=10&t=206548
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by larryswedroe » Fri Dec 30, 2016 7:52 pm

Firechief
The reason the expenses are higher than "normal" is that the funds are NOT index funds in any way. You are basically paying Stone Ridge to in one case manage a bank and in the other case to manage a reinsurance company. The costs of doing so are much greater than running an index fund. Now do I wish the costs were lower? Of course. And hopefully competition will arrive and drive down prices. But in both cases these are not in any ways commodities as are index funds where costs should be of great importance. Instead you are paying for talent to manage risks.

I have lots of experience in both these areas and wish I could put more money in both. Just don't have the room in tax advantaged accounts.

In fact the LENDX returns are in fact almost too good to be true relative to returns expected and if I were a betting man I would bet the margins will come down quite a bit over time, which I would hate to see, though will take the K gains that come with them. I'm "pounding on the table" on this in the same way I pounded on the table in 2000 urging people to buy TIPS with 4% yields.And again when the liquidity crisis hit and TIPS yields rose during the Lehman crisis.
Larry

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by rapporteur » Fri Dec 30, 2016 8:11 pm

Dear Mr Swedroe,

You said,
I strongly disagree with the conclusions of rapporteur. I don't agree that you can draw any such conclusion from the data. And that isn't even true in the US….

Here is a graph by the noted academic and retirement researcher, Dr Wade Pfau:

Image
Maximum Sustainable Withdrawal Rates
For Various Asset Allocations, 30-Year Retirement, Inflation Adjustments
Using SBBI Data, 1926-2015, S&P 500 and Intermediate-Term Government Bonds


Does Asset Allocation Affect Withdrawal Rates?
https://retirementresearcher.com/asset-allocation-affect-withdrawal-rates/

First, please note that, in recognition of your objection cited above, this graph I adduce is specifically based on US data only, an utterly conventional (even simplistic) portfolio allocation.

Now do be so good as to tell me why I can’t draw the following conclusions from that data:

1) Based on the historical US record, an equity-heavy portfolio (50% plus) has *always* been "better" than an FI-heavy portfolio (Well, it did fall short in 29 but only by 1/10 of a percent or so in terms of SWR)
2) Based on the historical US record, a very-equity-heavy portfolio (75%) has *almost always* been "markedly better" than an FI-heavy allocation (i.e., underperforming FI-heavy only in the late 20s and then by only 0.5 percent or so in terms of SWR)
3) Based on the historical US record, an EXTREMELY-equity-heavy portfolio (100%) has *almost always* been "very markedly better" than an FI-heavy allocation (i.e., underperforming FI-heavy by 2/10 of a percent in the late 60s but, a tad more worryingly, by about 1.5 percent in the late 20s in terms of SWR)

In short, Mr Swedroe, you have mistakenly overstated your case. There may be OTHER valid reasons for arguing against an equity-heavy retirement portfolio but the *historical US record* sure ISN’T one of them!

Remember, my conclusions are *conditional* based on the *historical record*.
Summarizing, they are: For a conventional portfolio, FI-heavy (50%+) has *always* been a mediocre-to-bad choice. 75% equity has almost always been *markedy* better, and the very few times it has fallen short of being better, it has been by the slimmest of margins. And 100% equity has also been an excellent choice, arguably the best, but tempered by the concession that one had to have the wits not to embark on it at a time of insanely high valuations.

Note that my conclusions are predicated on them being implemented by rational beings who won’t sabotage themselves by pandering to their emotions (e.g., selling out on a strong downturn). A very big ‘if’ I’ll grant, but nonetheless…

*****
Moving in a slightly different direction, why am I pushing this point so hard?

Well, aggrandizing my already enormous ego is one aspect, as I'll unreservedly grant. But the other aspect is that I'm inviting people to *seriously reconsider* what risk means during retirement. And, in that context, variance is NOT risk. Correspondingly, equity shouldn't be feared. Not only is daily, monthly, or even yearly variance not risk, even *some* crashes aren't! More particularly, flash crashes aren't. And even 2008, while a nasty one, can be seen as not much more than a flash crash. It's long sideways grinds that'll kill equity portfolios and it's inflation that'll kill FI. Heavily weighting FI (especially in current circumstances) is choosing a nice smooth comfortable path to disaster. Counterintuitively, the bumpy equity path is safer - the variance is likely to be mostly to the upside. (Less likely in the US, of course, given current valuations, but I'm a citizen of the world and invest accordingly)

And in trying to get folks to seriously consider what risk means during retirement I'm trying to be thought-provoking. But, more than that, I'm trying to be *very* provoking - provoking in multiple senses, not just in thought. It takes a lot to jar people out of conventional ways of thinking about things.

And if, as a byproduct, that results in me being the poster that people love to hate, then so be it :-)

Regards,

PS I'm painting with a broad brush, speaking of conventional portfolios. Special approaches, such as the Larry Portfolio, require more focussed attention.

PPS I'm completely open to people having differing levels of aversion to risk and investing accordingly. Real risk, that is! But overreactions to false misperceptions of simulacra of risk, well...

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by stemikger » Fri Dec 30, 2016 8:52 pm

Thanks for posting, I'll read it later.
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by larryswedroe » Fri Dec 30, 2016 9:03 pm

rapporteur
You made the claim that the data showed this was the case for not just US but developed markets. The mistake is there. While it might have worked in US that can be called the triumph of the optimists, one set of data for one period, without considering what alternative universes might have shown up.

Certainly it would not be the case for example in Japan which has had negative equity returns for last 28 years while bond returns were strong.

And of course just because something hasn't happened doesn't mean it cannot or will not. Only fools look at the results of strategies without considering what alternative universes might have shown up. So you point about only relying on the US data isn't really prudent. Especially since we now start with very equity valuations in US, much higher than historical average which means expected returns are now much lower, as even Bogle has forecasted. Thus one cannot rely on the historical data anyway.

Hence my strong objection.

As to your claim that variance isn't risk, anyone who has ever worked with PEOPLE would know that statement is patently false. Humans are highly risk averse and react much more negatively to negative returns than they feel the joy of equal gains. That puts pressure on them to sell. And of course at that point no one knows if markets will recover and relying on past recoveries to make certain claims is just wrong.

Best wishes
Larry
Last edited by larryswedroe on Fri Dec 30, 2016 9:25 pm, edited 1 time in total.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by FIREchief » Fri Dec 30, 2016 9:15 pm

rapporteur wrote:And if, as a byproduct, that results in me being the poster that people love to hate, then so be it :-)


I may be in the minority (1?), but I appreciate your posts and will encourage you to continue on. :sharebeer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by Rodc » Fri Dec 30, 2016 9:18 pm

rapporteur wrote:Dear Mr Swedroe,

You said,
I strongly disagree with the conclusions of rapporteur. I don't agree that you can draw any such conclusion from the data. And that isn't even true in the US….

Here is a graph by the noted academic and retirement researcher, Dr Wade Pfau:

Image
Maximum Sustainable Withdrawal Rates
For Various Asset Allocations, 30-Year Retirement, Inflation Adjustments
Using SBBI Data, 1926-2015, S&P 500 and Intermediate-Term Government Bonds


Does Asset Allocation Affect Withdrawal Rates?
https://retirementresearcher.com/asset-allocation-affect-withdrawal-rates/

First, please note that, in recognition of your objection cited above, this graph I adduce is specifically based on US data only, an utterly conventional (even simplistic) portfolio allocation.

Now do be so good as to tell me why I can’t draw the following conclusions from that data:

1) Based on the historical US record, an equity-heavy portfolio (50% plus) has *always* been "better" than an FI-heavy portfolio (Well, it did fall short in 29 but only by 1/10 of a percent or so in terms of SWR)
2) Based on the historical US record, a very-equity-heavy portfolio (75%) has *almost always* been "markedly better" than an FI-heavy allocation (i.e., underperforming FI-heavy only in the late 20s and then by only 0.5 percent or so in terms of SWR)
3) Based on the historical US record, an EXTREMELY-equity-heavy portfolio (100%) has *almost always* been "very markedly better" than an FI-heavy allocation (i.e., underperforming FI-heavy by 2/10 of a percent in the late 60s but, a tad more worryingly, by about 1.5 percent in the late 20s in terms of SWR)

In short, Mr Swedroe, you have mistakenly overstated your case. There may be OTHER valid reasons for arguing against an equity-heavy retirement portfolio but the *historical US record* sure ISN’T one of them!

Remember, my conclusions are *conditional* based on the *historical record*.
Summarizing, they are: For a conventional portfolio, FI-heavy (50%+) has *always* been a mediocre-to-bad choice. 75% equity has almost always been *markedy* better, and the very few times it has fallen short of being better, it has been by the slimmest of margins. And 100% equity has also been an excellent choice, arguably the best, but tempered by the concession that one had to have the wits not to embark on it at a time of insanely high valuations.

Note that my conclusions are predicated on them being implemented by rational beings who won’t sabotage themselves by pandering to their emotions (e.g., selling out on a strong downturn). A very big ‘if’ I’ll grant, but nonetheless…

*****
Moving in a slightly different direction, why am I pushing this point so hard?

Well, aggrandizing my already enormous ego is one aspect, as I'll unreservedly grant. But the other aspect is that I'm inviting people to *seriously reconsider* what risk means during retirement. And, in that context, variance is NOT risk. Correspondingly, equity shouldn't be feared. Not only is daily, monthly, or even yearly variance not risk, even *some* crashes aren't! More particularly, flash crashes aren't. And even 2008, while a nasty one, can be seen as not much more than a flash crash. It's long sideways grinds that'll kill equity portfolios and it's inflation that'll kill FI. Heavily weighting FI (especially in current circumstances) is choosing a nice smooth comfortable path to disaster. Counterintuitively, the bumpy equity path is safer - the variance is likely to be mostly to the upside. (Less likely in the US, of course, given current valuations, but I'm a citizen of the world and invest accordingly)

And in trying to get folks to seriously consider what risk means during retirement I'm trying to be thought-provoking. But, more than that, I'm trying to be *very* provoking - provoking in multiple senses, not just in thought. It takes a lot to jar people out of conventional ways of thinking about things.

And if, as a byproduct, that results in me being the poster that people love to hate, then so be it :-)

Regards,

PS I'm painting with a broad brush, speaking of conventional portfolios. Special approaches, such as the Larry Portfolio, require more focussed attention.

PPS I'm completely open to people having differing levels of aversion to risk and investing accordingly. Real risk, that is! But overreactions to false misperceptions of simulacra of risk, well...


Interesting.

90 years provides three non-overlapping 30-year data periods so three more or less independent data points. The other data points are derived from the same data as two of these three independent data points. And thus at some level bring no additional information.

Seems like a strong opinion to hang on three data points.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by sperry8 » Fri Dec 30, 2016 9:23 pm

rapporteur wrote:It's long sideways grinds that'll kill equity portfolios and it's inflation that'll kill FI. Heavily weighting FI (especially in current circumstances) is choosing a nice smooth comfortable path to disaster. Counterintuitively, the bumpy equity path is safer - the variance is likely to be mostly to the upside. (Less likely in the US, of course, given current valuations, but I'm a citizen of the world and invest accordingly)


Agreed on the bolded part (bolding mine).

Everyone seems to feel that a Great Depression could happen again. Perhaps. But let's not forget that after 11 years with dividends reinvested you were whole again.

The only event that killed was the Japanese style "L" that never came back up. It happened in one country, one time. A truly international investor across US, Developed and Emerging is highly diversified against such an event (unless this happens to the World in which case I'd posit, ammo, foodstuffs and shelter would be a better investment hedge against this outcome).

Some said they could "dream up" black swan scenarios that were worse than the Great Depression. If true, again, foodtsuffs, ammo, fresh water and shelter would be our priority then.

So really - the issue is another Great Depression in the US when not properly diversified AND in combination with a short lifespan remaining. Perhaps people at 75 years old and above who have "won the game" should consider dialing back equity portions.

But for many... if you have 2+ or more expected decades remaining high equity allocations are the way to go (with of course enough dry powder to get you through the possible poor sequence of returns event and let you ride out a decade by spending your non-equity portion).

I just never get becoming so defensive for black swan events that rarely (or never happen). A 2nd Great Depression? Worse than that? Protecting against these sorts of outcomes isn't prudent. It leaves too much upside on the table for you retired years. Only those in the latter half of retirement must protect against such miniscule possibilities imo.

larryswedroe wrote:rapporteur
You made the claim that the data showed this was the case for not just US but developed markets. The mistake is there. While it might have worked in US that can be called the triumph of the optimists, one set of data for one period, without considering what alternative universes might have shown up.

Certainly it would not be the case for example in Japan which has had negative equity returns for last 28 years while bond returns were strong.

And of course just because something hasn't happened doesn't mean it cannot or will not. Only fools look at the results of strategies without considering what alternative universes might have shown up. So you point about only relying on the US data isn't really prudent. Especially since we now start with very equity valuations in US, much higher than historical average which means expected returns are now much lower, as even Bogle has forecasted. Thus one cannot rely on the historical data anyway.

Hence my strong objection.

Best wishes
Larry


Larry - just because it happened in Japan doesn't mean it will or can happen here. Further, it happened 1x. In Japan. And this can be hedged not by reducing equity allocations to markets (hey, it happened there so it can happen anywhere!). But rather by diversifying Internationally to remove single country risk.

As for your second argument, I find it specious. All sorts of things can happen that have not. But that is quite different from them actually occurring in the future and at a level high enough that one should make significant modifications to their portfolio to hedge against it. For hundreds of years the equity markets (as a diversified whole) have been the best investment over other types. Suddenly in 2017 that changes? And remains so for a generation? Suggesting someone hedge against that sort of "risk" is not helpful imo. Lower returns than the past for a generation, possible. But to suggest that Japan style "L"s or as others have suggested a 2nd Great Depression... these sorts of things go to a human's fear/flight response and make it difficult and sometimes impossible to "stay the course".
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by hudson » Fri Dec 30, 2016 9:30 pm

larryswedroe wrote:b) the arguments should always consider the marginal utility of wealth which for most people, the vast majority, tends to decline very rapidly once they have "enough"--whatever that means to them, generally supporting a lifestyle that they are comfortable with. That means they become more and more risk averse and the benefits of likely ending up with more money from a high equity allocation are FAR outweighed by the risk of the ending up with far less, and running out of money, which increase as you raise the equity allocation. In other words both tails increase as you raise equity allocations but investors care much more generally about the risk of the left tail then the opportunity for the right tail
larry

Thanks Larry! The bolded/underlined statement fits my thoughts.

My retirement plan...
I like to live conservatively with no debt as possible.
I like CDs/treasuries/AAA/AA funds.
I postpone large purchases until after a good year...if possible.
I like to live tightly during lean years.
I'm starting to sound like my grandmother

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by larryswedroe » Fri Dec 30, 2016 9:41 pm

Sperry, where did I say that because it happened in Japan that it can or will happen here? But of course it CAN happen here. Also there are many other countries where high equity allocations would have failed because the ERP was much lower than in US. The US has had one of the highest ERPs of all developed countries, though not the highest. But as examples since 1966 the ERP in Austria was just 1.4% and in Italy just 1.5% and in Canada just 2.3%. In US was 6.1%. Likely would get very different answers when the premiums are much lower. And certainly those type premiums could happen here, let alone a negative premium

As to the second argument, again valuations are much higher here now and returns have been much lower in other countries and could be much lower here. And concerns over that risk is exactly why the ERP has been high and is still relatively high.
In fact one of the puzzles in finance has been why has the ERP been so high. To me the simple answer is that the risks are high and investors are risk averse. And the risks can show up. Being concerned about those risks doesn't mean at all investors should avoid equity risks, in fact those risks are exactly why one should take equity risks. But the risks also mean that one should not take more risk than they have need to take, let alone the ability or willingness to take. And arguing for high allocations to equities in retirement for most people would be about as imprudent as one could get IMO. Again anyone working with real people would not IMO make such arguments, knowing the pressure that bear markets can put on people, even the most rational and disciplined investors.

Larry

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by rapporteur » Sat Dec 31, 2016 1:02 am

Johnnie asked,
OK, over 30 or 40 years the risk of heavy-equity is pretty nil, but what about the sequence of returns risk described in the article for those who start distribution on the threshold of a nasty bear and extended period of mediocre returns?
....
For example ... 1966-82

The nifty thing is we don't have to speculate, we have the data (at least for a 'vanilla' portfolio).

The late 60s were among 'the worst of times' for retirees, as Pfau's graph shows:

Image
Does Asset Allocation Affect Withdrawal Rates?
https://retirementresearcher.com/asset-allocation-affect-withdrawal-rates/

So what was the best allocation at that time? Once again, Pfau has the answer for us (at lest in terms of conventional Equity/FI portfolios):

Image

In short, to a good first approximation (and even a second :-) ), it didn't matter at all what your portfolio allocation was - as long as equity was over 30%!

At other times, of course (other than the late 20s) the more equity the merrier. But even in those worst of times, the late 60s, a 90%-equity portfolio would have served you well (and 100% not much worse)!

Regards,

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by skjoldur » Sat Dec 31, 2016 7:32 am

rapporteur wrote:Dear Rodc,
Seems like a strong opinion to hang on three data points..

The historical facts are unassailable: equity-heavy has been the way to go. What inferences to draw from that regarding the future I leave to your refined judgment. :happy (1)

Regards,

(1) I admire your 'reductionist' argumentation stratagem of dismissively condensing and characterizing nearly 100 years of US investment history as merely 'three data points'. Well done! But also, as we both know, utter b*ll*cks!

PS Per Estrada, not just the US: 19 developed countries!


Rodc didn't reductively characterize 100 years of investment history into three data points. You did.

You framed the issue as one of a sustainable withdrawal rate from a portfolio over a retirement span. This leads directly to Rodc's point about the limits of the data.

Backtesting withdrawal rates over this short time period (with only a few non-overlapping periods) and treating the results as some kind of reliable, concrete property of the financial system is a weak position. This is another version of the point that Larry is making that the outcomes we've had were not the only possible outcomes. 3 results, which themselves were not pre-ordained, is not much.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by Quark » Sat Dec 31, 2016 8:24 am

Johnnie wrote:OK, over 30 or 40 years the risk of heavy-equity is pretty nil, but what about the sequence of returns risk described in the article for those who start distribution on the threshold of a nasty bear and extended period of mediocre returns? ...

Be careful about your grammatical tenses. Over 30 or 40 years heavy-equity has done well. Using "is" implies something about the future.

That something has done well does not mean it was low risk. The reason equities have done better is that they are riskier. Otherwise, no one would be bonds - why get lower returns and no better risk? Either that or markets are irrational.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by Quark » Sat Dec 31, 2016 8:33 am

skjoldur wrote:
rapporteur wrote:Dear Rodc,
Seems like a strong opinion to hang on three data points..

The historical facts are unassailable: equity-heavy has been the way to go. What inferences to draw from that regarding the future I leave to your refined judgment. :happy (1)

Regards,

(1) I admire your 'reductionist' argumentation stratagem of dismissively condensing and characterizing nearly 100 years of US investment history as merely 'three data points'. Well done! But also, as we both know, utter b*ll*cks!

PS Per Estrada, not just the US: 19 developed countries!

Rodc didn't reductively characterize 100 years of investment history into three data points. You did.

You framed the issue as one of a sustainable withdrawal rate from a portfolio over a retirement span. This leads directly to Rodc's point about the limits of the data.

Backtesting withdrawal rates over this short time period (with only a few non-overlapping periods) and treating the results as some kind of reliable, concrete property of the financial system is a weak position. This is another version of the point that Larry is making that the outcomes we've had were not the only possible outcomes. 3 results, which themselves were not pre-ordained, is not much.

I just read Michael Lewis's The Undoing Project about Kahneman and Tversky and the cognitive biases they studied. One consistent theme is that people don't have an intuitive feel for statistics. They make judgments based on sample sizes much to small to justify their conviction, as you and Rod explain here.

Another point, very frequently seen here, is that people don't understand the importance of independent data points. We don't have a large number of independent 30 year data points, we have don't have more than about three. That's just not enough. Pointing to 100 years of US history totally misses the point.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by sperry8 » Sat Dec 31, 2016 9:14 am

I'm just stunned to read that people feel 100 years of history is too small to extrapolate. How long do you think Capitalism has been around? Does this mean what happened over the past 100 years will happen in the future? Of course not. But to assume that the past 100 years has no correlation to the future is just silly imo. Stocks go up because we are in a capitalistic world where companies earnings continue and we pay to invest in that. Yes, what we pay changes over time. Sometimes we pay more for future earnings, sometimes less. But we always pay something. And as long as capitalism continues alongside human procreation (neither of which are stopping anytime soon barring an event that makes this whole conversation pointless), I'll stick with the significant majority of my monies in equities. I just don't see what everyone is arguing here. Is it a guarantee? No. But does that mean something else has more likelihood to outperform equities? Absolutely not. The only reason we invest outside of equities is to lower our volatility so we can sleep at night and stay the course. And secondarily for those of us who are retired and at an age where we are unlikely to have a 30+ yr time horizon. That's it.
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by sperry8 » Sat Dec 31, 2016 9:20 am

HomerJ wrote:
rapporteur wrote:Yes, an equity-heavy portfolio has had lots of ups and downs, but, compared to an FI-heavy portfolio, that variance has overall been to the UPSIDE. In NO CASE was an equity allocation of less than 50% best, and most of the time higher equity allocations of 70-100% were much better, not falling noticeably short even in bad or very bad times.

Counterintuitive, even paradoxical? Perhaps. But’s that’s what the evidence says.

Now some might say, “‘I can’t handle an equity-heavy portfolio – I won’t sleep at night.” Or even worse, “I would sabotage myself and sell out in a strong downturn.” Fair enough, don’t use one. As Dirty Harry said, “A man’s gotta know his limitations.” So, if one is psychologically crippled, of course one must pander to that limitation. But that does not weaken the *rational basis* for an equity-heavy portfolio one whit!


Let me ask you two questions...

(1) Do you really believe you've proven it's impossible for stocks to go down a significant amount and stay down for an extended period of time? Are you actually saying that it's IMPOSSIBLE for that to happen? Just because it hasn't happened yet? (in this country)

(2) Are you going to personally make up my losses if the above (1) actually does happen?


If your answer to #1 or #2 is No, then I suggest you stop calling others psychologically crippled and irrational.

As for Pascal’s wager, where to begin, where to begin?

I spoke in a related thread about casuistry and the jesuitical, and I could, I suppose, talk now about Kolmogorov complexity vs a sparse prior – but luckily for the readership here, I have chosen not to go in that direction.

Instead I will do the conventional counterargument: What weight should we apply to an infinitesimal risk multiplied by a huge consequence.

Figuratively, what is epsilon times infinity? [Figuratively because the question is not well-posed mathematically.] And, of course, restricting Pascal's Wager to a dyadic choice is an unjustifiable restriction. But my arm tires from beating dead horses.

So. I'll simply give the usual answer regarding Pascal’s wager, which is, that intriguing and provoking as it may seem, it is ultimately bovine excrement.

If you *seriously* wish to advance some form of Pascal’s Wager argument, I will be happy to demolish it.


Ugh, my first impression is that there's not going to be any kind of discussion here. You are presenting yourself as one of those lovely people who think you must WIN when talking to others.

I will take one second to suggest that you don't know if the risk of stocks doing something different in the future than they have in the past is "infinitesimal".

I will have enough when I retire to meet all my needs and wants. There will be no reason for me to try to maximize returns, because MORE will mean nothing to me. I will already have enough to meet all my needs and wants. My only interest will be protection of my assets. Since I do not know that the risk of stocks going down and staying down for an extended period is "infinitesimal", I will protect myself from that possibility.


Homer - you ask the wrong question. No, no one is going to just make you whole because of their beliefs. But I'll tell you what can be done. We find someone to underwrite insurance against a Japanese style L occurring in the US for 30 years. You pay premiums to insure you against this scenario. And I'll bet there will be many takers. In fact, I'll bet Warren Buffett himself would insure that and earn quite a lot of money doing it. The fear that people have against this event is shocking to me. If I could insure this on your behalf I would. I'd love to earn those premium payments.
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by sabhen » Sat Dec 31, 2016 9:22 am

Thanks Rapporteur for your posts. I appreciate your thought process. Other authors like Jeremy Siegel, Ken Fisher have argued in favor of heavy equity allocation with well diversified portfolios (domestic and international). Frankly,the portfolio does not know if you are retired or not and it does not care. Even in retirement the investment horizon is long (+20 years), so that logically means a heavy equity portfolio. Even after 2000 (the lost decade), a heavy equity portfolio did well when including US, developed and emerging markets. The key point is not to let emotions drive decisions. Larry's point is that some investors are not always rational. I also understand his point. In the end it is an individual decision. For me, although not yet retired, I intend to keep my heavy equity portfolio after retirement.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by protagonist » Sat Dec 31, 2016 11:32 am

[quote="larryswedroe"

b) the arguments should always consider the marginal utility of wealth which for most people, the vast majority, tends to decline very rapidly once they have "enough"--whatever that means to them, generally supporting a lifestyle that they are comfortable with. That means they become more and more risk averse and the benefits of likely ending up with more money from a high equity allocation are FAR outweighed by the risk of the ending up with far less, and running out of money, which increase as you raise the equity allocation. In other words both tails increase as you raise equity allocations but investors care much more generally about the risk of the left tail then the opportunity for the right tail[/quote]


+1. This is very important.


d) Taleb said it best that only fools judge a strategy by its outcome without considering what alternative universe might have shown up. So those who rely on US only data for example and fail to consider say the 1930s or that we might have lost WWII and the world might have looked very different for US investors are IMO making the mistake which has been called the Triumph of the Optimists. Rising equity allocations in retirement for Japanese investors would likely have turned out extremely poorly for the past 30 years. That can happen here as well.


This as well. +1 And the assumption that what happened in the 1930s is the worst thing that could happen to you, or even that the odds of something worse happening in the next 30 or 40 years are very low, is statistically invalid.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by BlueEars » Sat Dec 31, 2016 11:55 am

As a retiree I have to make a decision on spending versus portfolio safety. I think many on the forum get this and make choices that are balanced.

Some on the forum are going to seriously underspend in retirement out of extreme conservatism. I guess that is not the worst fate.

Random Walker
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by Random Walker » Sat Dec 31, 2016 12:43 pm

Larry,
Regarding LENDX and SRRIX, can you explain why you wouldn't use these in your taxable account as well. I believe you have said that your taxable account is dominated by munis. Even though LENDX and SRRIX are tax inefficient, if the alternative is munis, wouldn't the after tax return still be superior and worthwhile? Would it make sense to sacrifice optimal tax location for achieving the asset allocation you desire? Thanks,

Dave

CULater
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by CULater » Sat Dec 31, 2016 1:07 pm

They Each Get Only One Whack at the Cat ~ Mike Zwecher

https://retirementresearcher.com/mike-zwecher-they-each-get-only-one-whack-at-the-cat/
I’ve only heard this expression used in the Midwest, Wisconsin to be precise, but I love it for its shock value and for the simple way that it conveys a truth: Each client gets only one chance at retirement, and they want to preserve a lifestyle.

It’s important to recognize that just because something works in the typical case or has always worked in the past, it will do your client no good if they are in the unlucky tail of the distribution. With risky prospects, the word risk is there for a reason.

Man cannot live on backtesting alone. At some point, a bit of logic needs to be applied.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

larryswedroe
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by larryswedroe » Sat Dec 31, 2016 1:36 pm

Random
I hold some of AQR's funds (like QSPRX) in taxable and these in tax advantage.
You might consider holding these in taxable but IMO only as replacements for safe income, given very low real yields on munis, but those have risen quite a bit recently.
Larry

rapporteur
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by rapporteur » Sat Dec 31, 2016 2:02 pm

Dear skjoldur and dear Quark,

Only 3 nonoverlapping 30-year periods? Pointing to 100 years of US history totally misses the point?

I feel your pain. You long for a tame, tractable, consistent world. A world where all financial series are i.i.d, totally stationary, we know what underlying distribution they’re drawn from, there are no shocks or step changes, no Levy flights, none of the nasty stuff that might inhibit you playing little statistical games. Oh, and most of all, century upon century upon century of consistent, accurate, detailed data too, of course. Wouldn’t that be nice – a world where risk can be simply magicked away with data and statistics?

Put down the pipe – we don’t live in such a world.

We have the history we have (warts and all, as it were). We must take from it what we can.

And what we have is pretty damned good even if the detailed data spans ‘only’ a century or so, and ‘only’ in 19 developed countries! Data spanning two world wars and many lesser ones (including both winners and losers), several stock market crashes including the all-time champ, a monster depression and several ‘just big’ ones, deflation, inflation, and even runaway hyperinflation, revolutions, major social, cultural, technological, and economic changes, transition from fixed to fiat currencies, and on and on…

But it’s too sparse and irregular to draw conclusions from? Pull the other one for it has bells on!

Not enough nonoverlapping 30-year periods, you complain. Only 57 – 3 each in 19 countries. Oh, but they may not be i.i.d! Correlation, you say, has poisoned the well. Aww, too bad, isn’t it? And if we had hundreds of independent nonoverlapping sequences spanning many centuries, you’d complain that the earlier ones were out of date and inapplicable – the series weren’t stationary! Isn’t real life just so annoying? So let’s not draw any conclusions until we have more data – much, much more! Jam tomorrow but never jam today.

Get some perspective! We’ve only had statistics itself in anything resembling its modern form for 150 years or so (let’s say since Pierce although there were bits and pieces before then).

Finance and investment is a very human activity with all the messiness that entails. Mathematics is only a thin veneer we put over the messiness to try to comfort ourselves for our ignorance. History is at least as good a guide, arguably better.

In short, there is an irreducible level of risk and uncertainty about the future as it applies to human affairs, including investment. Mathematically tinkering with 5% probabilities 40 years out from now, however comforting the illusory precision, is working way, way below the ‘noise floor’ of our knowledge. It’s seeking a chimera.

Oh, and Happy New Year!

Regards,

PS My conclusions about the superiority of equity-heavy retirement portfolios were confined to the historical data. I was careful not to project them into the future; instead I left drawing the (rather obvious) inferences to others. To use statistical jargon, my conclusions applied ‘in sample’. And they're about as close to being bombproof as this vale of tears permits!

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by freebeer » Sat Dec 31, 2016 3:09 pm

larryswedroe wrote:Freebeer
We didn't publish anything, was just an internal analysis
...


Larry, with respect, you made a very strong statement: "We examined their claims and found that the ENTIRE benefit they found was due to starting with a low equity allocation, not from the rising equity allocation". I realize you do proprietary research for your firm and clients, and I appreciate, very much, your contributing generously on this forum. But, how would you feel if someone publicly attacked something you published so emphatically, without offering any supporting evidence at all? It seems to me if you are going to contradict a published conclusion, providing at least some data would be respectful to the authors. And, it would certainly be helpful to us here who are trying to make decisions about our futures.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by Rodc » Sat Dec 31, 2016 6:05 pm

rapporteur wrote:Dear Rodc,
Seems like a strong opinion to hang on three data points..

The historical facts are unassailable: equity-heavy has been the way to go. What inferences to draw from that regarding the future I leave to your refined judgment. :happy (1)

Regards,

(1) I admire your 'reductionist' argumentation stratagem of dismissively condensing and characterizing nearly 100 years of US investment history as merely 'three data points'. Well done! But also, as we both know, utter b*ll*cks!

PS Per Estrada, not just the US: 19 developed countries!


Not to mention the overlapping data method uses 1929 four times and the years in the 1950s 30 times.

Your data are not only highly correlated (not independent) they are biased.

Your opening posts were entertaining. I had high hopes for you. But you do not even understand the difference in information content of 100 highly correlated data values and 100 independent data values.

We have the history we have (warts and all, as it were). We must take from it what we can.


That I agree with. Unfortunately you take more than it has to give.

So sad. I really did hope there was more to you than bluster. But here I sit disappointed.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by larryswedroe » Sat Dec 31, 2016 6:16 pm

freebeer
We told them about our analysis and showed what we found!!!!
We know these guys quite well and Kitces has even presented many times with us and our annual conference
Larry

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by larryswedroe » Sat Dec 31, 2016 6:18 pm

freebeer
We told them about our analysis and showed what we found!!!!
We know these guys quite well and Kitces has even presented many times with us and our annual conference
Larry

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by zwzhang » Sun Jan 01, 2017 12:01 pm

larryswedroe wrote:Being able to enjoy life is far more important than dying with more assets!


Thanks, Larry!

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by Quark » Sun Jan 01, 2017 12:18 pm

Rodc wrote:...So sad. I really did hope there was more to you than bluster. But here I sit disappointed.

Those who fail to learn statistics are condemned to bluster, as Santayana no doubt meant to say.

rapporteur
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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by rapporteur » Sun Jan 01, 2017 12:29 pm

Rodc said,
But you do not even understand the difference in information content of 100 highly correlated data values and 100 independent data values.

Oh, but I do!(1) And what I understand, apparently far better than you, about such long strings of uncorrelated values, is that they don’t exist, they aren’t available. Not in investment matters. Desirable as they might be, dozens (let alone hundreds) of completely independent 30-year series are as mythical as unicorns.

Now I’m as fond of wishful thinking as the next man. For instance, I wish 18-year-old blonde beauties still found me irresistible. But they don’t! (Truthfully, they never did :( )

Similarly, I can’t suspend investment life indulging in wishful thinking, waiting for some of those mythical data unicorns to show up. Someone who refuses to act until he has dozens of independent 30-year financial series is going to – how did you put it? – ‘sit disappointed’ for a very, very long time.

Life cannot be deferred while we wait on perfect data – perfect data that will never come. Decisions, including investment decisions, must be made - made with whatever we can bring to bear. A non-decision, postponing real decisions for a very silly reason, waiting for multiple 30 year series to somehow appear, is still a decision – and a very bad one to boot.

So instead, in the meantime, may I suggest you look at history :happy

Oh, and a Happy New Year!

Regards,

(1) May I remind you once again (I have said it multiple times already) that I specifically restricted my conclusions to being based on the historical data, to being ‘in sample’. They are not forecasts, predictions, projections, or advice. So, regardless of correlation or non-correlation within that historical data, my conclusions remain unshakably true. Once again, with feeling: Based on the historical data, a high equity retirement portfolio *has been* best.

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Re: Bernstein-"To Make Money They Didn't Need".....and Pascal's Wager

Post by saltycaper » Sun Jan 01, 2017 12:53 pm

rapporteur wrote:
(1) May I remind you once again (I have said it multiple times already) that I specifically restricted my conclusions to being based on the historical data, to being ‘in sample’. They are not forecasts, predictions, projections, or advice. So, regardless of correlation or non-correlation within that historical data, my conclusions remain unshakably true. Once again, with feeling: Based on the historical data, a high equity retirement portfolio *has been* best.


Either you're going to do something with an observation (or allow the observation to do something to you), or you're not. If not, you're just wasting time by making observations.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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