Anyone else track the value of their investments by discounting the value of equities?

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TheTimeLord
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Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Fri May 19, 2017 11:53 am

I track the worth my investable assets 2 ways. One, the traditional way, adding everything up and seeing what the total is. The second way is by discounting the value of equities by 40% and adding them up giving me a "Bear Market" value for my investable assets. This way I feel I truly understand the financial risk I am taking with my portfolio. Anyone else do something similar?
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by KlingKlang » Fri May 19, 2017 11:59 am

Are you also discounting your bonds 20% to account for the risk of a bond bear market?

http://awealthofcommonsense.com/2015/05/a-history-of-bond-market-corrections/

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Fri May 19, 2017 12:13 pm

KlingKlang wrote:Are you also discounting your bonds 20% to account for the risk of a bond bear market?

http://awealthofcommonsense.com/2015/05/a-history-of-bond-market-corrections/


Nope, don't hold any long term bonds or long term bond funds and probably incorrectly assume any losses in bonds will be covered by gains in equities. I also assume that the equity collapse would be greater in magnitude than a bond collapse so the value calculated by discounting bonds 10% would fall into between my current value and the value with equities discounted 40%.
Last edited by TheTimeLord on Fri May 19, 2017 12:20 pm, edited 1 time in total.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by taguscove » Fri May 19, 2017 12:16 pm

Once a year i'll run an exercise where I discount all financial assets at 0% to simulate a complete financial collapse.
A home, 6 months of food, water filtration, medicine and shotgun are a good offset to this scenario.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by JoMoney » Fri May 19, 2017 12:19 pm

Not exactly like that... but I do look at the distribution I would get if I started taking withdrawals through a RMD like life time expectancy method, then consider how comfortable I would be if I was living on that as an income stream and that amount was halved... then consider how much I have in cash/bonds/other FI and how long I could make up any difference.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by keystone » Fri May 19, 2017 12:21 pm

Whenever I get excited about my portfolio size, I do calculate how much I would have if the stock market were to drop 50% and bonds by 10%. I usually end up feeling pretty good afterwards, knowing that I won't be homeless. It also helps me to determine if I am comfortable with my asset allocation.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by sport » Fri May 19, 2017 12:23 pm

I just have an allocation that is consistent with my risk tolerance. Because of that, I do not concern myself with possible market declines. IMO if you are concerned about the effect of market declines, your allocation is too aggressive.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TravelforFun » Fri May 19, 2017 12:27 pm

No. I put 10 years worth of living expenses in CDs and bonds and hence, I don't care how widely the market fluctuates.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Fri May 19, 2017 12:28 pm

sport wrote:I just have an allocation that is consistent with my risk tolerance. Because of that, I do not concern myself with possible market declines. IMO if you are concerned about the effect of market declines, your allocation is too aggressive.


From my vantage point if you don't understand the potential real dollar ramifications of the AA you have selected you can't be sure your AA matches your risk tolerance or your need and ability to take risk. I am not one who believes percentages alone tell you everything you need to know about the risk inherent in your AA. I feel you must translate that into actual dollar amounts for a full view. But everyone is different.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Fri May 19, 2017 12:30 pm

TravelforFun wrote:No. I put 10 years worth of living expenses in CDs and bonds and hence, I don't care how widely the market fluctuates.


As have I but still doesn't make me feel I shouldn't fully understand the risk my portfolio is exposed to during a downturn. Maybe once SS and a pension are adding into the equation I will share your viewpoint.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by DaftInvestor » Fri May 19, 2017 12:31 pm

This might be a good exercise when I'm close to retirement. At this point - not sure what it would do for me.
(In any case - I can easily do this math in my head - a bit easier if I discount by a more severe 50% versus 40%).

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by David Jay » Fri May 19, 2017 12:31 pm

I discount my future distributions of company stock (I work in an ESOP company and will receive a significant payout at age 65). I am discounting 40% as this is the largest 3-year drop in the 28 year history of the ESOP.

Is this the correct discount rate? See the first quotation in my signature line...
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by iamlucky13 » Fri May 19, 2017 3:39 pm

Not quite like that, but I like the suggestion and may periodically do so in the future, at least for my taxable account, which I would more likely have cause to rely on in the future (25+ years from retirement).

Part of what I consider my emergency fund is in intermediate bonds, and I've looked at what 5-10% drops there do to emergency cash availability, how frequently they have happened in the past, and how long it usually takes to recover to the prior peak value. I just want to have an idea where I might be if I end up needing that money, so I can decide if I'm comfortable with the risk.

I think I'm probably being more conservative than I should be, but since I don't have any compelling reason to take more risk, I don't worry about it too much.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by aj76er » Fri May 19, 2017 3:57 pm

I do stress test the portfolio occasionally by discounting my equity holdings. Last time I did this, I felt as if I would rebalance down to about 30% loss in value. Anything more than that, I'd have a hard time buying more.

That probably means my AA is slightly too aggressive, but I'm still young-ish and have a need to take some risk if I'm gonna have a reasonable shot at retirement.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by Johnnie » Fri May 19, 2017 4:43 pm

Probably not day goes by that I don't mentally calculate what I would be worth after a 50 percent stock decline and how it would make me feel.

With (hopefully) a few years of accumulating in front of me, the current answer to the latter is mostly "philosophical." When the pile stops being added-to and begins getting drawn-on I suspect that may be more challenging.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Fri May 19, 2017 9:40 pm

Johnnie wrote:Probably not day goes by that I don't mentally calculate what I would be worth after a 50 percent stock decline and how it would make me feel.

With (hopefully) a few years of accumulating in front of me, the current answer to the latter is mostly "philosophical." When the pile stops being added-to and begins getting drawn-on I suspect that may be more challenging.


It was a great feeling when the value of my investments with the equities discounted 40% exceeded my number. To me it was a signal I could consider increasing the percentage of equities I hold.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by EnjoyIt » Fri May 19, 2017 11:32 pm

TravelforFun wrote:No. I put 10 years worth of living expenses in CDs and bonds and hence, I don't care how widely the market fluctuates.


I plan to do similar but in a 5 year CD ladder as I start getting close to retirement.

Although I just calculated by discounted value by 50% from equities and realize that I have enough to cover my basic essentials. Very reassuring. thanks for the nudge to look at my portfolio that way TimeLord.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by AlohaJoe » Fri May 19, 2017 11:54 pm

Why 40%? Why not 80%?

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by aj76er » Sat May 20, 2017 12:45 am

AlohaJoe wrote:Why 40%? Why not 80%?

Probably because the odds of that happening are too remote to worry about. And if it did happen to a global diversified portfolio of equities; well, it's probably gonna be game over no matter what you're holding.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by AlohaJoe » Sat May 20, 2017 1:02 am

aj76er wrote:
AlohaJoe wrote:Why 40%? Why not 80%?

Probably because the odds of that happening are too remote to worry about. And if it did happen to a global diversified portfolio of equities; well, it's probably gonna be game over no matter what you're holding.


The OP has repeatedly stated he doesn't believe in international diversification for US investors. US stocks have dropped 80% before. So why assume they will never drop that much again? 40% seems like such a totally random number to choose. 50% of bear markets are worse than that.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by in_reality » Sat May 20, 2017 1:50 am

TheTimeLord wrote:I track the worth my investable assets 2 ways. One, the traditional way, adding everything up and seeing what the total is. The second way is by discounting the value of equities by 40% and adding them up giving me a "Bear Market" value for my investable assets. This way I feel I truly understand the financial risk I am taking with my portfolio. Anyone else do something similar?


Yes. I use:

10% equity loss
25% equity loss
50% equity loss
70% equity loss

sport wrote:I just have an allocation that is consistent with my risk tolerance. Because of that, I do not concern myself with possible market declines. IMO if you are concerned about the effect of market declines, your allocation is too aggressive.


I'm only about 55-45 so not to aggressive.

If the market crashed and we're out of work, I'd like some idea where we'd stand. Older people have a tougher time reducing expenses and finding new employment, and also would have lost more. At 70 equity and job loss, I still am obligated to get a special needs kid through college in a few years.
[60% US _ 26% DEV _ 14% EM] | (-16% LC _ +8% MC _ +8% SC) | [47% FND/VAL _ 40% MKT _ 7% MOM _ 6% REIT] | (+/- 5% or *25% rebalancing bands)

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by NiceUnparticularMan » Sat May 20, 2017 7:16 am

To be honest, to me this seems like the sort of information tracking that has little practical value and for many investors could create heightened risk of emotional stress and behavioral errors.

We know one of the biggest causes of such stress and errors is myopic loss aversion, which is exacerbated by higher frequency information. This appears to be suggesting deliberately thinking about possible losses all the time, which is basically the opposite of what one would recommend to deal with this issue.

Indeed, imagine stocks actually do go down by 40%. From an emotional/behavioral perspective, ideally you wouldn't even know about this drop, and certainly you wouldn't dwell on it. Given this program, not only would you be thinking about the actual drop, you'd also be thinking about what if stocks drop another 40%? And of course the whole world is going to be shouting about exactly that--that stocks are in free fall, you better get out, and on and on.

At a minimum I would think this would be unnecessarily stressful. And it would also seem to be increasing the risk of failing to follow plan, such as by not rebalancing on schedule, or perhaps even more dramatic responses to such market events such as "defensive" shifts out of stocks while you "wait for the bottom", and so on.

So personally, as a rule I try to track my portfolio's gains and losses as little as possible. And I am not at all tempted to add on a layer of hypothetical losses which I would also track.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by Daryl » Sat May 20, 2017 7:30 am

Yes. My equity allocation is twice my gross annual salary. I'll discount that by 50% periodically - it makes the math very easy. I have a pretty good idea how that would feel, and I pray that I'd have the courage to rebalance under this scenario. I'm fairly confident that I'd at least be able to hold on to what I have. The fixed income part of my portfolio should be adequate.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by in_reality » Sat May 20, 2017 7:32 am

NiceUnparticularMan wrote:To be honest, to me this seems like the sort of information tracking that has little practical value and for many investors could create heightened risk of emotional stress and behavioral errors.

We know one of the biggest causes of such stress and errors is myopic loss aversion, which is exacerbated by higher frequency information. This appears to be suggesting deliberately thinking about possible losses all the time, which is basically the opposite of what one would recommend to deal with this issue.


Not at all. I also have expected returns displayed below it. I use Research Affiliates data for US, Dev Int, Emerging and what's expected for my fixed income. Then I also use another source's estimate.

So I'm looking at both a range of expected returns and possible drawdowns and thinking - yeah that's where I want to be.
[60% US _ 26% DEV _ 14% EM] | (-16% LC _ +8% MC _ +8% SC) | [47% FND/VAL _ 40% MKT _ 7% MOM _ 6% REIT] | (+/- 5% or *25% rebalancing bands)

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by midareff » Sat May 20, 2017 7:36 am

TheTimeLord wrote:I track the worth my investable assets 2 ways. One, the traditional way, adding everything up and seeing what the total is. The second way is by discounting the value of equities by 40% and adding them up giving me a "Bear Market" value for my investable assets. This way I feel I truly understand the financial risk I am taking with my portfolio. Anyone else do something similar?



If my retirement was 100% supported by my portfolio I think this can be a useful tool. Having a pension (cola'd) and SS that combined pay the bills it becomes less meaningful for me. If equities drop 40% I would simply decrease my discretionary WR.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by afan » Sat May 20, 2017 8:19 am

I don't do this for monitoring networth, but that monitoring I do in the back of my head every time I hear how the markets have done. With all financial assets indexed, I don't have to look anything up to know where I stand. Since high valuations have implications for estate planning I cannot simply assume big losses and forget about estate taxes.

For retirement planning I discount the total value of my portfolio by progressively larger amounts until I get to the point that we would have to reduce spending below current levels. I do this both assuming current levels of Social Security and assuming zero from SS. I figure this brackets the range of possible changes.

Since I do it by discounting the entire portfolio it is not an explicit drop in the stock component, but it would be equivalent to drops in stocks of 50-90%, given our asset allocation.

For all of the simulations I assume "normal" market returns thereafter. That includes assuming normal levels of inflation. I do not assume interest rates would fall if stocks collapsed.
I do not model stagflation. I do keep my bond positions in the intermediate term, which reduces but hardly eliminates the inflation risk. I run this using all the money we have and also run it excluding assets we have earmarked for our heirs, hoping never to touch those funds or the income from them.

I model very long lifetimes for us (100 for me, 115 for dear spouse). Given family histories, I am quite unlikely to make it to 90 while spouse comes from a family where dying at 90 is considered cut down in the prime of life.

I plan to work as long as I can, which limits the length of retirement. Planning targets being net savers throughout retirement, never dipping into capital.

We are not big spenders now, but we are holding on to our empty nest house. At some point, if we make it that long, we will probably downsize and covert some of the house value to financial assets. I don't model that in, figuring I have no idea when that would happen or what house prices will be at that point. But if things got tight, it would be an option.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by NiceUnparticularMan » Sat May 20, 2017 8:26 am

in_reality wrote:
NiceUnparticularMan wrote:To be honest, to me this seems like the sort of information tracking that has little practical value and for many investors could create heightened risk of emotional stress and behavioral errors.

We know one of the biggest causes of such stress and errors is myopic loss aversion, which is exacerbated by higher frequency information. This appears to be suggesting deliberately thinking about possible losses all the time, which is basically the opposite of what one would recommend to deal with this issue.


Not at all. I also have expected returns displayed below it. I use Research Affiliates data for US, Dev Int, Emerging and what's expected for my fixed income. Then I also use another source's estimate.

So I'm looking at both a range of expected returns and possible drawdowns and thinking - yeah that's where I want to be.


I'm not sure why you think this is contradicting what I wrote.

Myopic loss aversion doesn't depend on the idea you somehow forget that stocks have higher expected returns in the long run. Instead it depends on the psychological mechanism that we tend to feel short-term losses much more acutely than we appreciate the prospect of long-term gains--hence the "myopia" in myopic loss aversion.

If the information in question is not actually actionable--SHOULD not be acted on in fact--then the best advice is simply not to track any of this at all. Ramping up your observations of your actual losses and compounding those observations by deliberately imagining further possible losses has no benefit if that information is not actionable, and instead it introduces a lot of emotional and behavioral risk for no purpose, at least for most people.

And just thinking about future possible long term gains at the same time is, for most people, going to do very little if anything to reduce those risks at times of significant actual losses. And that's because of the "myopia" in myopic loss aversion.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by alex_686 » Sat May 20, 2017 8:29 am

I don't think this method would generate much value.

What I do is figure out my minimum required goals - barebones. I then discount those future cash flows using TIPS yields. This give me a good idea of the minimum floor where my investments need to be. IIf I breach that floor I know I have issues.

This ties back to another discussion that the Time Lord and I have had, multiple portfolios v a single portfolio and mental accounting. This method makes sure I can meet my minimum goals regardless of what account they are held in allowing me to build a more efficient portfolio.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by WolfgangPauli » Sat May 20, 2017 8:36 am

TravelforFun wrote:No. I put 10 years worth of living expenses in CDs and bonds and hence, I don't care how widely the market fluctuates.


That is absolutely the way I do it... I figure as long as I have 7-10 years then I could care less about the fluctuations of the market...
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by Johnnie » Sat May 20, 2017 9:26 am

TheTimeLord wrote:
Johnnie wrote:Probably not day goes by that I don't mentally calculate what I would be worth after a 50 percent stock decline and how it would make me feel.

With (hopefully) a few years of accumulating in front of me, the current answer to the latter is mostly "philosophical." When the pile stops being added-to and begins getting drawn-on I suspect that may be more challenging.


It was a great feeling when the value of my investments with the equities discounted 40% exceeded my number. To me it was a signal I could consider increasing the percentage of equities I hold.


That's IT! That explains why I frequently run this little equation inside my head: It provides the REAL answer to "How am I doing?"

Meaning among other things that if the balance after a 50 percent hit to equities still exceeds the "Enough to Stop Working" figure then I'm free to ring that bell at my pleasure.

NiceUnparticularMan wrote:To be honest, to me this seems like the sort of information tracking that has little practical value and for many investors could create heightened risk of emotional stress and behavioral errors....


It could, it could - but what I wrote above suggests a flip side. I imagine it depends on each person's psychology/attitudes; the approach you suggest is probably recommended as a general rule.

Personally, I've been mugged by Mr. Market often and badly enough to be fairly relaxed about it. During those times this investor becomes a non-peeker.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Sat May 20, 2017 10:10 am

AlohaJoe wrote:
aj76er wrote:
AlohaJoe wrote:Why 40%? Why not 80%?

Probably because the odds of that happening are too remote to worry about. And if it did happen to a global diversified portfolio of equities; well, it's probably gonna be game over no matter what you're holding.


The OP has repeatedly stated he doesn't believe in international diversification for US investors. US stocks have dropped 80% before. So why assume they will never drop that much again? 40% seems like such a totally random number to choose. 50% of bear markets are worse than that.


I am testing for something worst than the average bear market but not exactly the Great Depression since I believe betting on the end of the world is a fool's bet no one wants to win and would so skew my investing it would prove counter productive in the vast majority of likely scenarios while proving little benefit in such a severe financial crisis. Also, with the average bear market only lasting 15 months, even if the market drops 50+% you won't be at that level long enough for it to matter if you have any sort of Fixed Income cushion (which I do).

The average bear market lasts for 15 months, with stocks declining 32 percent. The most recent bear market lasted 17 months, from October 2007 to March 2009, and shaved 54 percent off of the Dow Jones Industrial Average.

http://www.cnbc.com/2015/08/24/8-things ... rkets.html
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Sat May 20, 2017 10:30 am

NiceUnparticularMan wrote:Indeed, imagine stocks actually do go down by 40%. From an emotional/behavioral perspective, ideally you wouldn't even know about this drop, and certainly you wouldn't dwell on it. Given this program, not only would you be thinking about the actual drop, you'd also be thinking about what if stocks drop another 40%? And of course the whole world is going to be shouting about exactly that--that stocks are in free fall, you better get out, and on and on.


That is an excellent observation. The proper methodology in my mind is probably using a percentage calculated as follows (if I have the math right) since as I understand it bear market are measured peak to trough:

1 - ((Post Previous Bear Market High*.6)/Current Market) = Discount Percentage


So if the high for the S&P was say 2400 but we had dropped to 2000 here is how I would figure out the percentage to use in discounting my equities;

1 - ((2400*.6)/2000) = .28 or 28%


2400 * 0.60 = 1440
2000 * 0.72 = 1440


But with the market sitting a all time highs I don't worry about the current variance.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Sat May 20, 2017 10:45 am

NiceUnparticularMan wrote:
in_reality wrote:
NiceUnparticularMan wrote:To be honest, to me this seems like the sort of information tracking that has little practical value and for many investors could create heightened risk of emotional stress and behavioral errors.

We know one of the biggest causes of such stress and errors is myopic loss aversion, which is exacerbated by higher frequency information. This appears to be suggesting deliberately thinking about possible losses all the time, which is basically the opposite of what one would recommend to deal with this issue.


Not at all. I also have expected returns displayed below it. I use Research Affiliates data for US, Dev Int, Emerging and what's expected for my fixed income. Then I also use another source's estimate.

So I'm looking at both a range of expected returns and possible drawdowns and thinking - yeah that's where I want to be.


I'm not sure why you think this is contradicting what I wrote.

Myopic loss aversion doesn't depend on the idea you somehow forget that stocks have higher expected returns in the long run. Instead it depends on the psychological mechanism that we tend to feel short-term losses much more acutely than we appreciate the prospect of long-term gains--hence the "myopia" in myopic loss aversion.

If the information in question is not actually actionable--SHOULD not be acted on in fact--then the best advice is simply not to track any of this at all. Ramping up your observations of your actual losses and compounding those observations by deliberately imagining further possible losses has no benefit if that information is not actionable, and instead it introduces a lot of emotional and behavioral risk for no purpose, at least for most people.

And just thinking about future possible long term gains at the same time is, for most people, going to do very little if anything to reduce those risks at times of significant actual losses. And that's because of the "myopia" in myopic loss aversion.


The information is actionable from my standpoint because I believe it can allow the investor to have a more accurate view of the risk they have in their portfolio by translating it into actual dollars instead of percentages. To me this is especially important as investor nears retirement or financial independence and have won the game and need to determine to what level they want to continue to participate in the market. Personally I do not believe risk inherent in an AA of 60/40 for a portfolio of $10,000 and $1 million dollars are the same yet I constantly hear people stating an AA of such and such is consistent with their risk tolerance without seeming to understand exactly what is at risk, at least in the short term, by choosing that AA. I also would presume this exercise is more valuable for people nearing Financial Independence or Retirement than individuals early in the accumulation phase. But this is my methodology and I am not a financial professional nor is it backed up by any exhaustive research so it could very well be wrong minded and no one should take this for more than what it is, one single ignorant individual trying to find a way to quantify the risk inherent in their portfolio. For all I know every assumption I have made it totally wrong or inaccurate.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Sat May 20, 2017 10:46 am

WolfgangPauli wrote:
TravelforFun wrote:No. I put 10 years worth of living expenses in CDs and bonds and hence, I don't care how widely the market fluctuates.


That is absolutely the way I do it... I figure as long as I have 7-10 years then I could care less about the fluctuations of the market...


Do you plan to maintain that level of fixed income assets throughout your retirement?
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TheTimeLord
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Sat May 20, 2017 11:02 am

Johnnie wrote:Personally, I've been mugged by Mr. Market often and badly enough to be fairly relaxed about it. During those times this investor becomes a non-peeker.


As I believe I have said before, having experienced Black Monday early in my investing life has given me a different perspective or calm about pullbacks. Combine that with my belief that betting on the end of the world is a sucker's bet and investing indeed becomes pretty straightforward. But I have found it became complicated again once my age came into play (or my mortality). Not so much the question of would I have enough, that seemed well settled, but would I have enough in a specific time frame since I was now also considering my inevitable physical deterioration also. In other words I may feel very secure what I have is enough to take us through a 30, 35 or 40 years of retirement but still be worried about the dangers of sequence of returns to my abilities to do what I want in my late 50s or early 60s when I am most likely to still be healthy and vibrant. Focusing on how to best plan so that the years we have between retirement and about 70 are not constrained by finances has become my North star. From my perspective one of the keys to laying out a productive and effective financial plan is understanding what is truly important to you specifically. These priorities need to be recognized, cherished and supported both mentally and financially and they are unique to you, do not expect others to necessary share or understand what you value.

I would easily give up a potential million dollars or more in my 80s in return for the guarantee of being on a liveaboard one week of every year (hopefully two) until I am 70 and returning to the plains of Africa a couple more times. Others might find this foolish or wasteful, and for them it likely would be.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by Valuethinker » Sat May 20, 2017 11:54 am

TheTimeLord wrote:I track the worth my investable assets 2 ways. One, the traditional way, adding everything up and seeing what the total is. The second way is by discounting the value of equities by 40% and adding them up giving me a "Bear Market" value for my investable assets. This way I feel I truly understand the financial risk I am taking with my portfolio. Anyone else do something similar?


I discount those investments which are illiquid and hold them at book value or written down. Discount on unquoted investments of 40%.

Otherwise I can see the merits of your approach BUT

Adrian Nenu here had a rule of thumb:

- assume your equities can go down by 50%
- assume your bonds can go down by 10%

And then assess your risk tolerance vis-a-vis bonds v. equities.

It seems to me that's a reasonably thing to do in polling yourself v. personal risk tolerance.

Not the same thing as you are doing.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Sat May 20, 2017 12:00 pm

Valuethinker wrote:Adrian Nenu here had a rule of thumb:

- assume your equities can go down by 50%
- assume your bonds can go down by 10%

And then assess your risk tolerance vis-a-vis bonds v. equities.

It seems to me that's a reasonably thing to do in polling yourself v. personal risk tolerance.

Not the same thing as you are doing.


Help me understand the difference from your perspective. Not debating there is a difference but I thinking I am missing the way you see them differing.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by NibbanaBanana » Sat May 20, 2017 12:30 pm

This wouldn't be too hard a calculation for me as I'm just about 100% equity.

I like to keep track of things this way. I compare my dividends each year with the previous year and compare the number of shares I own of stock (split adjusted) and funds with the previous year. That helps me filter out the noise of the market and get a better long term picture of how my investments are doing.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by NiceUnparticularMan » Sat May 20, 2017 3:00 pm

TheTimeLord wrote:The information is actionable from my standpoint because I believe it can allow the investor to have a more accurate view of the risk they have in their portfolio by translating it into actual dollars instead of percentages. To me this is especially important as investor nears retirement or financial independence and have won the game and need to determine to what level they want to continue to participate in the market.


You can do that once, more or less. No need to actually track it frequently. Moreover, this is a pretty well-discussed problem (how to construct a withdrawal portfolio), and there are tools available to test a withdrawal plan that are more comprehensive. If all you are interested in is translating those scenarios from percentages into dollar figures, again that is a one-time math exercise.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by MnD » Sat May 20, 2017 4:15 pm

No. If the market on day one of my retirement in 15 months dropped 40% we would spend 14% less than planned under a % of annual portfolio balance approach, as portfolio income is 50% of planned retirement income and we are 70/30AA. Our plan (to retire with the same effective financial lifestyle as now) is about 8% overfunded so the actual "hit" would be retiring with ~94% of our pre-retirement take-home income. We are not even remotely frugal now so I think we could swing it somehow. :beer

Deep discounting seems to be popular here for retirement portfolio, social security, pensions, stock and bond returns......
i find in life that unexpected good things often balance out with bad things. I would find tracking some discounted lousy world to be stress-inducing and if I really bought into it, a reason to work many years longer than I plan to. Yuck!

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by IlliniDave » Sat May 20, 2017 8:42 pm

TheTimeLord wrote:I track the worth my investable assets 2 ways. One, the traditional way, adding everything up and seeing what the total is. The second way is by discounting the value of equities by 40% and adding them up giving me a "Bear Market" value for my investable assets. This way I feel I truly understand the financial risk I am taking with my portfolio. Anyone else do something similar?


I don't do that but I do keep a second "net worth" calculation where I estimate what I would get if I sold everything and stuffed my mattress with cash. In it I account for taxes and sales costs.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by in_reality » Sat May 20, 2017 9:04 pm

Johnnie wrote:
TheTimeLord wrote:
Johnnie wrote:Probably not day goes by that I don't mentally calculate what I would be worth after a 50 percent stock decline and how it would make me feel.

With (hopefully) a few years of accumulating in front of me, the current answer to the latter is mostly "philosophical." When the pile stops being added-to and begins getting drawn-on I suspect that may be more challenging.


It was a great feeling when the value of my investments with the equities discounted 40% exceeded my number. To me it was a signal I could consider increasing the percentage of equities I hold.


That's IT! That explains why I frequently run this little equation inside my head: It provides the REAL answer to "How am I doing?"

Meaning among other things that if the balance after a 50 percent hit to equities still exceeds the "Enough to Stop Working" figure then I'm free to ring that bell at my pleasure.

NiceUnparticularMan wrote:To be honest, to me this seems like the sort of information tracking that has little practical value and for many investors could create heightened risk of emotional stress and behavioral errors....


It could, it could - but what I wrote above suggests a flip side. I imagine it depends on each person's psychology/attitudes; the approach you suggest is probably recommended as a general rule.

Personally, I've been mugged by Mr. Market often and badly enough to be fairly relaxed about it. During those times this investor becomes a non-peeker.


Me too. In times of volatility, I stop looking. I already have an idea of what I might be looking at anyway so there's no point in watching it play out. I've already accepted whatever end-game.

To the degree that myopia is a problem for any individual and this approach makes that worse, definitely don't use it. In my case, I will only commit to a course I am prepared to see through.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by nisiprius » Sat May 20, 2017 10:03 pm

TheTimeLord wrote:I track the worth my investable assets 2 ways. One, the traditional way, adding everything up and seeing what the total is. The second way is by discounting the value of equities by 40% and adding them up giving me a "Bear Market" value for my investable assets. This way I feel I truly understand the financial risk I am taking with my portfolio. Anyone else do something similar?
Yes. I didn't and don't do it formally, but I've long done it as a kind of mental arithmetic. I always used 50% because it was easier mental arithmetic, but interestingly enough (or dangerously enough) that was about the right number, both for 2000-2003 and for 2008-2009. I've also felt that if I start believing in the "market value" total on my brokerage statement and thinking of it as real money that truly matters to me, then I'd better sell and turn it into real money.
KlingKlang wrote:Are you also discounting your bonds 20% to account for the risk of a bond bear market?

http://awealthofcommonsense.com/2015/05/a-history-of-bond-market-corrections/
Personally, no, because my "bond" investments don't resemble the "long-term U.S. treasuries" on which that article is based. My "bond" investments are mostly Vanguard Total Bond Market Index Fund, which is intermediate-term. It didn't drop by anything even close to 20% during 2008-2009, and it didn't drop by anything even close to 20%--it was more like 4%--during the "bond massacre" of 1994.
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by WolfgangPauli » Sun May 21, 2017 6:11 am

TheTimeLord wrote:
WolfgangPauli wrote:
TravelforFun wrote:No. I put 10 years worth of living expenses in CDs and bonds and hence, I don't care how widely the market fluctuates.


That is absolutely the way I do it... I figure as long as I have 7-10 years then I could care less about the fluctuations of the market...


Do you plan to maintain that level of fixed income assets throughout your retirement?


Yes.. I do... My goal is to have the income stream from investments pay for retirement, not touch the cash or principle..
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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by EnjoyIt » Sun May 21, 2017 12:32 pm

The Trinity Study includes market downturns and shows 4% has succeeded in almost every scenario. Keeping that in mind do we really need to discount our investments? By doing this we are decreasing the risk of running out of money, but replacing that risk with wasting our time in accumulating more money unnecessarily. That time can be used on something much more enjoyable. Considering our time on this planet is finite we need to decide what risk is more important.

Note: The above does not include people who find work more enjoyable than other pastimes.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by Youngblood » Sun May 21, 2017 2:13 pm

Emotions cause humans to make all sorts of mistakes regardless of all cerebral cortex activity.

Fear and greed can affect most of us given the right conditions.

I do mentally subtract 50% of the equity portion of my net worth just to attempt to determine how I would cope and feel about that amount of dollar loss.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by galectin » Sun May 21, 2017 3:43 pm

Having just retired, I am currently dealing with this question in calculating what our withdrawals from our retirement accounts should be for my wife and me. We are 50:50 equities:bonds in a three fund portfolio and I am using 4% as per the Trinity study. We are both age 67, so this seems somewhat conservative. Social Security will provide about 40% of the final total.

I am informally using a possibility of a 20% decrease in equities, so I am multiplying my final number by 0.9. I understand my bonds(Intermediate term Vanguard ETFs) might go down, as well. I also recognize that a bear market could be well above 20%. This is probably needlessly conservative since the Trinity study found that 4% was good over a lot of market scenarios, but the final number is more than we are currently spending, so I am comfortable with this process.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by TheTimeLord » Tue May 23, 2017 7:59 am

EnjoyIt wrote:The Trinity Study includes market downturns and shows 4% has succeeded in almost every scenario. Keeping that in mind do we really need to discount our investments? By doing this we are decreasing the risk of running out of money, but replacing that risk with wasting our time in accumulating more money unnecessarily. That time can be used on something much more enjoyable. Considering our time on this planet is finite we need to decide what risk is more important.

Note: The above does not include people who find work more enjoyable than other pastimes.


https://earlyretirementnow.com/2016/12/ ... t-1-intro/

viewtopic.php?f=1&t=219423

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by dbr » Tue May 23, 2017 8:52 am

TheTimeLord wrote:I track the worth my investable assets 2 ways. One, the traditional way, adding everything up and seeing what the total is. The second way is by discounting the value of equities by 40% and adding them up giving me a "Bear Market" value for my investable assets. This way I feel I truly understand the financial risk I am taking with my portfolio. Anyone else do something similar?


Considering the chart you posted just above, it would seem that having too much in bonds is more risky than having too much in stocks. I would say your computation makes little sense. If you had $1M in bonds, your "safe" asset base would be $1M. If instead all that money would be invested in stocks, your "safe" asset base would be $600K. Yet the chart says the bond asset allocation has a 46% failure rate at 4%WD and 30 years and the stock asset allocation has a 3% failure rate.

I think a more sensible way to approach the problem is to allow for contingency in how much you spend. This also relates to the concept that retirement is not about how much you have or how it is invested but rather to what is the adequacy and security of your income. The chart shows that adopting a more conservative withdrawal rate has a larger effect on safety than jiggering around with real or imagined asset allocation.

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Re: Anyone else track the value of their investments by discounting the value of equities?

Post by Da5id » Tue May 23, 2017 9:06 am

My spreadsheet of my holdings/asset allocation/net worth (mainly used for rebalancing, I also use Quicken) has a table that shows
* effect of stock market declines from 10-70% on net worth (assumes bonds stay the same and I don't rebalance on way down, not quite Kosher)
* what 3% and 4% withdrawals from the resulting total would be
* what the % withdrawal rate is for my target amount I'd like to take annually

Not sure this table is highly useful, but it helps keeps me in the mindset of being mentally prepared as much as possible for things to come. The years since 2009 have been really good. The next correction/bear market will start sooner or later, question is just when and how bad.
Last edited by Da5id on Tue May 23, 2017 9:32 am, edited 1 time in total.

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