Managing Sequence of Return Risk - Ben Carlson

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Nodrog
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Managing Sequence of Return Risk - Ben Carlson

Post by Nodrog » Mon Aug 21, 2017 6:31 pm

Another excellent article by Carlson:
http://awealthofcommonsense.com/2017/08 ... turn-risk/

I found this remark interesting:
(Sidenote: A dirty little secret about compound interest is that the majority of the results come once you’ve built a larger capital base.)

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One Ping
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Re: Managing Sequence of Return Risk - Ben Carlson

Post by One Ping » Mon Aug 21, 2017 7:16 pm

They don't call it exponential growth for nothing. :happy :moneybag
"Re-verify our range to target ... one ping only."

james22
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Re: Managing Sequence of Return Risk - Ben Carlson

Post by james22 » Mon Aug 21, 2017 10:36 pm

This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

pkcrafter
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Re: Managing Sequence of Return Risk - Ben Carlson

Post by pkcrafter » Tue Aug 22, 2017 8:25 am

Thanks to Nodrog and James for links to very good articles.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Portfolio7
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Re: Managing Sequence of Return Risk - Ben Carlson

Post by Portfolio7 » Tue Aug 22, 2017 11:41 am

Nodrog wrote:
Mon Aug 21, 2017 6:31 pm
Another excellent article by Carlson:
http://awealthofcommonsense.com/2017/08 ... turn-risk/

I found this remark interesting:
(Sidenote: A dirty little secret about compound interest is that the majority of the results come once you’ve built a larger capital base.)
Since I started investing I've tracked the usual return data plus a calculated weighted avg returns in an attempt to try to get my arms around the impact of very recent results:
Arithmetic Average Return - 9.7%
CAGR (Geometrice Average Return) - 8.9%
Weighted Average Return - 7.4% (sum of annual calculations (balance/sum of balances*annual rate of return))
Since there is compounding activity that I didn't try to isolate, I think my formula is statistically a bit suspect (someone with a stat background is welcome to weigh in.) It's a little different from what's usually called a money-weighted rate of return, which is likely what i should be calculating instead.

I track this to help understand if I'm swimming upstream or not, and I seem to be doing just that - as Ben's article suggests. I've had many different portfolios over that time, so (unlike Ben's calculation) my investing mistakes are part of my personal results (i.e. it's not just market return.)
An investment in knowledge pays the best interest.

bigred77
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Re: Managing Sequence of Return Risk - Ben Carlson

Post by bigred77 » Tue Aug 22, 2017 11:58 am

General rule of thumb:

While accumulating, you want the best returns at the end of this phase.
While in retirement, you want the best returns at the beginning of this phase.

Sequence of returns matters to anyone whose portfolio is subject to cash flows. If I'm contributing over time, sequence of returns makes an impact. If I'm making withdrawals over time, sequence of returns matters.

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