Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

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willthrill81
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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by willthrill81 » Tue Mar 06, 2018 7:17 pm

GibsonL6s wrote:
Tue Mar 06, 2018 4:19 pm
So you are sure that analyzing the past world series winners and using this data is going to beat picking a name out of a hat or having someone who has no idea about the game pick the winner?
No one can be sure of anything related to finance or sports, but yes, using historical data is very likely to do better than random chance.

If you're trying to argue that historical data are irrelevant for investment decisions going forward, there is a huge onus on you to support your case.
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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by GibsonL6s » Tue Mar 06, 2018 8:43 pm

willthrill81 wrote:
Tue Mar 06, 2018 7:17 pm
GibsonL6s wrote:
Tue Mar 06, 2018 4:19 pm
So you are sure that analyzing the past world series winners and using this data is going to beat picking a name out of a hat or having someone who has no idea about the game pick the winner?
No one can be sure of anything related to finance or sports, but yes, using historical data is very likely to do better than random chance.

If you're trying to argue that historical data are irrelevant for investment decisions going forward, there is a huge onus on you to support your case.
I have looked at the Callan table of returns and don't see much in the way of predictive value in it. I can look at the market's current dividend yield or a stock's current ROE and decide to invest or not. The fact the dividend yield ROE or an asset classes historical returns have bounced around doesn't add anything to the decision IMHO.

My point was that current data alone can be used to make investment decisions. Would you rather look at the current Dodgers roster or the one from 1910 to make your World series prediction? Would you rather know a team's current seed in the NCAA tournament or how many wins the school has historically had in the tournament?

Are you referring to mean reversion? I guess I would ask what specifically do you get from historical financial data that helps make your current decisions?

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"The enemy of a good plan."

Post by Taylor Larimore » Tue Mar 06, 2018 8:47 pm

Larry Swedroe wrote:Once a person has a set belief it is very hard to change (like indexing is best and three fund portfolios are best).

Bogleheads:

Our mentor, Jack Bogle knows more about investing than any of us. He wrote:
"The enemy of a good plan is the dream of a perfect" plan." -- Jack Bogle
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Tue Mar 06, 2018 8:53 pm

GibsonL6s wrote:
Tue Mar 06, 2018 4:19 pm
So you are sure that analyzing the past world series winners and using this data is going to beat picking a name out of a hat or having someone who has no idea about the game pick the winner?

In investing there are plenty of people who invest based on today's reality and do no look at the past. I have bought lots of stocks looking at the current ROE and Dividend yield with no regard for the last 50 years of ROEs, dividend yields, stock prices, squiggly lines or any other past piece of information.
Has not looking at the past made you commit more, or less of your investable money in equities?

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by GibsonL6s » Tue Mar 06, 2018 10:56 pm

Since finding this site I have worked to simplify to as few funds as possible and have stuck to 60/40. I plan to stay there and no longer buy individual stocks. Hoping like all of us that the plan works out. :sharebeer

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by rj49 » Tue Mar 06, 2018 10:58 pm

--I think Larry's best belief is investing with the ability, willingness, and need to take risk.

--Experts change their investment portfolios over time, depending on market changes--did anybody here invest in REITS, value funds, TIPS, ibonds, and emerging markets prior to 2000? It was only after the tech collapse and the gains in other asset classes that gurus started becoming popular for recommending them, and many of us started investing in them. The same goes for the Harry Browne portfolio after 2007, because that's when lt treasuries and gold skyrocketed, but then people suddenly decided it was an ideal permanent portfolio. Even a Bogle protege like Burton Malkiel advocated REITS and investing in China when they were outperforming, and if you have the first Bogle book on mutual funds he recommends both value funds and equity income funds for a retiree, since those funds were yielding over 5% at the time. Like another poster, I switched from bond funds to p2p and real estate crowdsourcing for higher yield and a high certainty of a positive return, just as I invested my fixed income in 6.25% CDs in 2007, for the high yield and safety. '

--Those of us who have been around here a long time remember the vituperative fights between Larry and Rick over slice-n-dice vs total markets and different bond approaches, which made neither of them look good and it seemed to me they were trolling here for clients, shilling DFA funds, and selling their books. I much prefer the genial genius Dr. Bill Bernstein, with his clever articles and books and who went from being an asset class junkie to telling most investors just to invest in a total markets portfolio, and to giving sound advice about investing at different stages of life. His "Investor Manifesto" book is as good as it gets for sensible investing and dealing with our own weaknesses.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by venkman » Tue Mar 06, 2018 11:23 pm

GibsonL6s wrote:
Tue Mar 06, 2018 8:43 pm
My point was that current data alone can be used to make investment decisions. Would you rather look at the current Dodgers roster or the one from 1910 to make your World series prediction? Would you rather know a team's current seed in the NCAA tournament or how many wins the school has historically had in the tournament?
How would knowing the name of the players on the current Dodgers roster help you predict anything?

Unless, of course, you were also factoring in the past performance of all those players.... :happy

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by GibsonL6s » Wed Mar 07, 2018 12:36 am

venkman wrote:
Tue Mar 06, 2018 11:23 pm
GibsonL6s wrote:
Tue Mar 06, 2018 8:43 pm
My point was that current data alone can be used to make investment decisions. Would you rather look at the current Dodgers roster or the one from 1910 to make your World series prediction? Would you rather know a team's current seed in the NCAA tournament or how many wins the school has historically had in the tournament?
How would knowing the name of the players on the current Dodgers roster help you predict anything?

Unless, of course, you were also factoring in the past performance of all those players.... :happy
You got me :D

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by HomerJ » Wed Mar 07, 2018 1:15 am

rj49 wrote:
Tue Mar 06, 2018 10:58 pm
--I think Larry's best belief is investing with the ability, willingness, and need to take risk.
I agree.

I use that quote all the time. It's a very simple, yet elegant, phrase that has helped me and many others determine an appropriate Asset Allocation.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Da5id » Wed Mar 07, 2018 7:05 am

GibsonL6s wrote:
Tue Mar 06, 2018 8:43 pm
My point was that current data alone can be used to make investment decisions.
Based on current data, will the equity premium persist? Or does that need historic data?

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Re: "The enemy of a good plan."

Post by saltycaper » Wed Mar 07, 2018 8:21 am

Taylor Larimore wrote:
Tue Mar 06, 2018 8:47 pm
Larry Swedroe wrote:Once a person has a set belief it is very hard to change (like indexing is best and three fund portfolios are best).

Bogleheads:

Our mentor, Jack Bogle knows more about investing than any of us. ...
This demonstrates Larry's point. One can't possibly know who knows the most about investing, whatever that means, since you don't even know the identities of the people who post here. And someone who knows less about a topic isn't qualified to determine who in a more knowledgeable group is the most knowledgeable. Further, just because someone knows a lot about something doesn't mean they are right about anything. People seem to have an innate sense about this--their own lack of qualifications--and so when the person or persons they look to for advice say things are internally inconsistent, dubious, or in opposition to some widely held view, the dissonance is worked out in a public exchange that often results in people retreating to their original views, regardless of what logical concessions they are forced to make. You're really just picking favorites at this point. Then people have a hard time admitting they or their mentors are wrong, or even allowing for the possibility, especially if their views have been commercially published. Foolish consistency indeed.
Quod vitae sectabor iter?

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AtlasShrugged?
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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by AtlasShrugged? » Wed Mar 07, 2018 8:42 am

I am a pretty big fan of Larry Swedroe, though there are things he writes about that go right over my head. I know I am not that smart. And I was especially sorry to see him leave the forum. He was very willing to share his knowledge and experience and it was because of the personal attacks that he threw in the towel. Our forum is lessened with his absence.

But I have a question. Can you really 'mitigate' a black swan? Personally, I don't think you can. My chief takeaway from reading Larry's detailed response was the method he is using (partly) is 'hyperdiversification' (his term). Scatter those eggs, and keep them in separate baskets. Seems reasonable and common sense to me. Even at that....are you really mitigating all that much risk? My gut tells me, "Nope". But it is better than nothing.

I'll definitely be checking out that book from my local library when we get it. I already asked our library to put it on the purchasing list.
“If you don't know, the thing to do is not to get scared, but to learn.”

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Wed Mar 07, 2018 8:46 am

HomerJ wrote:
Wed Mar 07, 2018 1:15 am
rj49 wrote:
Tue Mar 06, 2018 10:58 pm
--I think Larry's best belief is investing with the ability, willingness, and need to take risk.
I agree.

I use that quote all the time. It's a very simple, yet elegant, phrase that has helped me and many others determine an appropriate Asset Allocation.
I love the "need" to take risk part? So it's basically, ""I'm already falling short, so I'll risk becoming even more far behind by having a higher equity allocation." It's like those state pension funds that are taking on more equities to paper over their funding shortfalls. It's less a solution than a recipe for disaster.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Wed Mar 07, 2018 9:04 am

AtlasShrugged? wrote:
Wed Mar 07, 2018 8:42 am
But I have a question. Can you really 'mitigate' a black swan? Personally, I don't think you can. My chief takeaway from reading Larry's detailed response was the method he is using (partly) is 'hyperdiversification' (his term). Scatter those eggs, and keep them in separate baskets. Seems reasonable and common sense to me. Even at that....are you really mitigating all that much risk? My gut tells me, "Nope". But it is better than nothing.
Taleb's Black Swan is unmitigatable because it is unforeseeable by definition. So if it can be mitigated, it's not really a Black Swan. However, Taleb himself contradicts himself to some degree with his barbell strategy. So it's now come to mean closer to a catastrophic low probability event, which is more of counterparty risk issue -- ie., can you really trust an "AIG" to bail you out?

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by thx1138 » Wed Mar 07, 2018 9:10 am

gmaynardkrebs wrote:
Wed Mar 07, 2018 8:46 am
HomerJ wrote:
Wed Mar 07, 2018 1:15 am
rj49 wrote:
Tue Mar 06, 2018 10:58 pm
--I think Larry's best belief is investing with the ability, willingness, and need to take risk.
I agree.

I use that quote all the time. It's a very simple, yet elegant, phrase that has helped me and many others determine an appropriate Asset Allocation.
I love the "need" to take risk part? So it's basically, ""I'm already falling short, so I'll risk becoming even more far behind by having a higher equity allocation." It's like those state pension funds that are taking on more equities to paper over their funding shortfalls. It's less a solution than a recipe for disaster.
I think you are only looking at it from the “old” and “behind” scenario.

For a “young” scenario there is a definite need to take on risk so that in the long run you don’t end up “old” and “behind”. Investing in short term treasuries at 25 isn’t a winning strategy.

For “old” and “ahead” there is no longer a good reason to take a lot of risk. So important to realize you no longer “need” to take risk.

Sadly though I do see some people follow exactly the course you criticize so I understand where you are coming from!

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Wed Mar 07, 2018 9:27 am

thx1138 wrote:
Wed Mar 07, 2018 9:10 am
gmaynardkrebs wrote:
Wed Mar 07, 2018 8:46 am
HomerJ wrote:
Wed Mar 07, 2018 1:15 am
rj49 wrote:
Tue Mar 06, 2018 10:58 pm
--I think Larry's best belief is investing with the ability, willingness, and need to take risk.
I agree.

I use that quote all the time. It's a very simple, yet elegant, phrase that has helped me and many others determine an appropriate Asset Allocation.
I love the "need" to take risk part? So it's basically, ""I'm already falling short, so I'll risk becoming even more far behind by having a higher equity allocation." It's like those state pension funds that are taking on more equities to paper over their funding shortfalls. It's less a solution than a recipe for disaster.
I think you are only looking at it from the “old” and “behind” scenario.
For a “young” scenario there is a definite need to take on risk so that in the long run you don’t end up “old” and “behind”. Investing in short term treasuries at 25 isn’t a winning strategy.
For “old” and “ahead” there is no longer a good reason to take a lot of risk. So important to realize you no longer “need” to take risk.
Sadly though I do see some people follow exactly the course you criticize so I understand where you are coming from!
It probably does make sense to take on more equity risk when you are young, but only because you have more years to make up any shortfall by saving more or working longer. TIPS ladders, which many people use here, mitigate or eliminate this risk. If you can't meet your "need" amount with TIPS, you need to save more. Taking on more risk increases your risk of falling short, at any age.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by GibsonL6s » Wed Mar 07, 2018 10:50 am

Da5id wrote:
Wed Mar 07, 2018 7:05 am
GibsonL6s wrote:
Tue Mar 06, 2018 8:43 pm
My point was that current data alone can be used to make investment decisions.
Based on current data, will the equity premium persist? Or does that need historic data?
Who knows, my point was that using current data one can invest, do we know that historical data has more predictive value than current data. If we knew historic patterns were a lock to repeat, investing would be easy. That is why we diversify and some of us hold emergency funds.

Again to use the baseball analogy using historical data you could conclude the Yankees who have won the most world series have the best chance to be next year's world series champion, or you could using recent historical data assume the Astros repeat since the 36 times the WS champ has repeated, or you could analyze the current data such as this years spring training records and make a prediction. Given that the future is uncertain no method has any more validity or chance of being right than the other.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Random Walker » Wed Mar 07, 2018 11:07 am

Atlas shrugged wrote
Can you really 'mitigate' a black swan? Personally, I don't think you can. My chief takeaway from reading Larry's detailed response was the method he is using (partly) is 'hyperdiversification' (his term). Scatter those eggs, and keep them in separate baskets. Seems reasonable and common sense to me. Even at that....are you really mitigating all that much risk? My gut tells me, "Nope".
I think the answer is yes. And Larry’s coined term “hyperdiversification” is the answer. Assume the equity portion of the portfolio can lose 50% in any given year. In the worst of cases, there will be some flight to quality or flight to liquidity so bonds will rise a bit. An 80/20 portfolio may lose say 35%, a 50/50 portfolio may lose say 20%, a 30/70 portfolio may lose 10%. Diversifying even further across uncorrelated sources of return can mitigate perhaps more: factors and alts. In real crisis times correlations do tend to go to 1, and the safest bet is high quality bonds. Anything one can do to decrease overall equity allocation and maintain (or at least not decrease too much) expected return can mitigate Black swan risk lots. I think one of the things Larry showed in his factor book is that when a portfolio diversified across factors underperforms, it doesn’t underperform by much at all. When it outperforms, the outperformance is significant. The more I read, the more intrigued I am by risk parity portfolios.

Dave

P.S. and this is why I have become a big fan of Monte Carlo Simulation. People can use this to really get a feel of how much risk they need to take. In many cases, people will find they don’t need to take nearly as much risk as they think or that taking the extra risk just isn’t worth it.

Dave
Last edited by Random Walker on Wed Mar 07, 2018 11:11 am, edited 1 time in total.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by thx1138 » Wed Mar 07, 2018 11:08 am

gmaynardkrebs wrote:
Wed Mar 07, 2018 9:27 am
Taking on more risk increases your risk of falling short, at any age.
That absolutism is wrong and trivially proved as such with a brief visit to any historically based or Monte Carlo based AA evaluation tool. Taking on too little risk (e.g all TIPS) at a young age can result in nearly a 100% chance of portfolio failure while taking on more risk (i.e. an appropriate allocation to equities) in fact dramatically reduces the chance of portfolio failure. That’s the whole point of the “need” to take risk. If you can’t stomach short term portfolio drops you will guarantee long term portfolio failure if you refuse to take equity based risk at a young age.

Of course the best way to increase portfolio success in the region of very low probability of failure is to save lots all the time and spend little in retirement!

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Da5id » Wed Mar 07, 2018 11:19 am

GibsonL6s wrote:
Wed Mar 07, 2018 10:50 am
Who knows, my point was that using current data one can invest, do we know that historical data has more predictive value than current data. If we knew historic patterns were a lock to repeat, investing would be easy. That is why we diversify and some of us hold emergency funds.

Again to use the baseball analogy using historical data you could conclude the Yankees who have won the most world series have the best chance to be next year's world series champion, or you could using recent historical data assume the Astros repeat since the 36 times the WS champ has repeated, or you could analyze the current data such as this years spring training records and make a prediction. Given that the future is uncertain no method has any more validity or chance of being right than the other.
While I'm not much into predictions, without using past data in some form I believe it is basically impossible to do much of anything useful in terms of investing. What asset allocation should one pick? How much money is enough to retire? While there is no certainty, imperfect historic data is better than no data. If you think you can a priori analyze current market data with no regard to any historic information and make useful predictions that dynamically guide your investing strategy, go to it. I don't believe that is very doable myself.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Top99% » Wed Mar 07, 2018 11:41 am

Da5id wrote:
Wed Mar 07, 2018 11:19 am
GibsonL6s wrote:
Wed Mar 07, 2018 10:50 am
Who knows, my point was that using current data one can invest, do we know that historical data has more predictive value than current data. If we knew historic patterns were a lock to repeat, investing would be easy. That is why we diversify and some of us hold emergency funds.

Again to use the baseball analogy using historical data you could conclude the Yankees who have won the most world series have the best chance to be next year's world series champion, or you could using recent historical data assume the Astros repeat since the 36 times the WS champ has repeated, or you could analyze the current data such as this years spring training records and make a prediction. Given that the future is uncertain no method has any more validity or chance of being right than the other.

While I'm not much into predictions, without using past data in some form I believe it is basically impossible to do much of anything useful in terms of investing. What asset allocation should one pick? How much money is enough to retire? While there is no certainty, imperfect historic data is better than no data. If you think you can a priori analyze current market data with no regard to any historic information and make useful predictions that dynamically guide your investing strategy, go to it. I don't believe that is very doable myself.
I agree. To take an extreme case to make a point: Let's say I claimed: The equity risk premium over short term bonds from now on will only be the average dividend/earnings growth rate because <insert your favorite reason here> equities are not any more risky than short term bonds. After all, if I own a broad index fund most of the companies won't go out of business and if they all did that would mean the economy had totally collapsed. Therefore, owning a broad equity index has no risk relative to short term government bonds.
Adapt or perish

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Wed Mar 07, 2018 11:57 am

thx1138 wrote:
Wed Mar 07, 2018 11:08 am
gmaynardkrebs wrote:
Wed Mar 07, 2018 9:27 am
Taking on more risk increases your risk of falling short, at any age.
That absolutism is wrong and trivially proved as such with a brief visit to any historically based or Monte Carlo based AA evaluation tool. Taking on too little risk (e.g all TIPS) at a young age can result in nearly a 100% chance of portfolio failure while taking on more risk (i.e. an appropriate allocation to equities) in fact dramatically reduces the chance of portfolio failure. That’s the whole point of the “need” to take risk. If you can’t stomach short term portfolio drops you will guarantee long term portfolio failure if you refuse to take equity based risk at a young age.

Of course the best way to increase portfolio success in the region of very low probability of failure is to save lots all the time and spend little in retirement!
I think you may be equating failure to maximize the expected total returns, which does require more risk than TIPs, with failing to meet your own the minimal acceptable level of money for retirement. With TIPS, there is a virtually 100% certainty of meeting that minimum goal. You just need to save more than most people would like to. (That's not the case in Japan or Germany, BTW, but they have a different culture.) BTW, I didn't invent this view, nor can I claim I completely understand all the fine points. I think it dates back to a Paul Samuelson article "The Long Term Case for Equities and How it Can Be Oversold," expanded in more recent work by Robert Merton and others. Merton's work has been discussed quite a lot here, and you might want to take a look if you are interested. It think Zvi Bodie is also big on this. I have run Monte Carlo simulations, but even these have their limitations, as they are based on historic returns. As Samuelson points out in his article, the history of modern capitalism is still very short.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by thx1138 » Wed Mar 07, 2018 2:13 pm

gmaynardkrebs wrote:
Wed Mar 07, 2018 11:57 am
I think you may be equating failure to maximize the expected total returns, which does require more risk than TIPs, with failing to meet your own the minimal acceptable level of money for retirement.
No I'm not, maximizing expected returns is entirely different. Minimizing portfolio failure (i.e. running out of money) is what I'm talking about. The confusion I think lies in you assuming everyone has an elastic savings rate and spending rate and thus can actually achieve a 0% failure rate. What I'm saying is that if say trying to move your chance of portfolio failure down from say 10% to 5% for a given savings rate and looking at your AA profile starting from a young age that exactly the *wrong* thing to do is push towards TIPS early in life. And past history shows this pretty clearly.

What you seem to be saying, and I agree with, is that if you instead make the savings rate totally unconstrained you can of course always tell folks to invest in TIPS from birth but just save more and more. But that's because you've put no constraints on savings - not a particularly practical real world model.

In the more real world case where savings is constrained the "need" to take risk is in fact dependent on that savings rate. For that given savings rate a portfolio might require less or *more* equities to *minimize* the chance of portfolio failure. Those fortunate enough to be able to save at a high rate of course have a variety of ways to achieve near 100% portfolio success. Those less fortunate are going to be operating in the 5, 10 or even 20% portfolio failure rates. For those folks investing in TIPS from birth will actually drive that failure rate close to 100% while investing in a large fraction of equities early in life will drive that failure rate down. Not to zero, but to a far lower failure rate than sticking to 100% TIPS would.

This is a classic case of the search for "perfect" being the enemy of "good enough". Recommending folks with a constrained savings rate restrict their investments to TIPS from birth is in fact indisputably *increasing* the chance of portfolio failure (i.e. running out of money, eating Alpo, etc.). In fact for many scenarios it guarantees portfolio failure.

One thing that always increases the chance of portfolio success is saving more or planning on spending less. However for any given choice of savings and spending rates there is a particular AA profile and associated risk that minimizes the possibility of portfolio failure. As savings rates go way up that AA tends more towards TIPS. At more modest savings rates though the opposite is true and too much TIPS begins to increase the probability of portfolio failure.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Scooter57 » Wed Mar 07, 2018 2:48 pm

I would only venture to attempt to predict a world series winner by watching the teams playing during the last month of the season. Any reference to statistics will only mislead. We Red Sox fans knew we were doomed going into the last two playoffs despite all appearances because we saw the team flagging through that last month, but more importantly lacking that indefinable team spirit we saw in our winning teams. Soft data told the story here, not the quantitative stuff you get from analyzing stats.

Companies are no different, and stock and corporate bond investments are nothing more than shares or loans to companies. People who spend a great deal of time following specific niches do have expertese in the soft stuff that can give them the ability to pick winning stocks. But as soon as you rise to the fund level you are looking at composites of lots and lots of stocks that aren't picked by people with that kind of deep expertise.

I sincerely doubt that diversifying across funds holding baskets of quantitatively selected stocks or bonds gives you much more advantage over a plain vanilla approach when it matters. Alts looks like another iteration of all the other failed past strategies that are supposed to give you an edge. These diversification strategies suggested by the likes of Swedroe change every so often not because of wonderful new knowledge they've acquired but because the schemes promoted by guys who make their living selling advice fail to prove out so they need new ones. It's like what you see in the diet book industry.

One last thing. I keep seeing people saying that Swedroe is so wonderful though they can't really follow his brilliant arguments. That's a huge red flag to me. Writers whose intent is to inform rather than dazzle are able to explain very complex subjects in ways that leave the reader understanding what they write about. The best science writers like Nick Lane do this all the time. When I read Swedroe I come away with the feeling he is more intent on dazzling, which makes sense given that he is arguing against a simple investment approach and earns money from a company that sells investment services.

It's always a good idea to never invest in anything you don't understand. When someone is pitching something in a way that leaves you feeling dumb, unless you know that you are seriously mentally challenged, it's probably a good idea to give them a miss.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Wed Mar 07, 2018 3:29 pm

thx1138 wrote:
Wed Mar 07, 2018 2:13 pm
gmaynardkrebs wrote:
Wed Mar 07, 2018 11:57 am
I think you may be equating failure to maximize the expected total returns, which does require more risk than TIPs, with failing to meet your own the minimal acceptable level of money for retirement.
No I'm not, maximizing expected returns is entirely different. Minimizing portfolio failure (i.e. running out of money) is what I'm talking about. The confusion I think lies in you assuming everyone has an elastic savings rate and spending rate and thus can actually achieve a 0% failure rate. What I'm saying is that if say trying to move your chance of portfolio failure down from say 10% to 5% for a given savings rate and looking at your AA profile starting from a young age that exactly the *wrong* thing to do is push towards TIPS early in life. And past history shows this pretty clearly.

What you seem to be saying, and I agree with, is that if you instead make the savings rate totally unconstrained you can of course always tell folks to invest in TIPS from birth but just save more and more. But that's because you've put no constraints on savings - not a particularly practical real world model.

In the more real world case where savings is constrained the "need" to take risk is in fact dependent on that savings rate. For that given savings rate a portfolio might require less or *more* equities to *minimize* the chance of portfolio failure. Those fortunate enough to be able to save at a high rate of course have a variety of ways to achieve near 100% portfolio success. Those less fortunate are going to be operating in the 5, 10 or even 20% portfolio failure rates. For those folks investing in TIPS from birth will actually drive that failure rate close to 100% while investing in a large fraction of equities early in life will drive that failure rate down. Not to zero, but to a far lower failure rate than sticking to 100% TIPS would.

This is a classic case of the search for "perfect" being the enemy of "good enough". Recommending folks with a constrained savings rate restrict their investments to TIPS from birth is in fact indisputably *increasing* the chance of portfolio failure (i.e. running out of money, eating Alpo, etc.). In fact for many scenarios it guarantees portfolio failure.

One thing that always increases the chance of portfolio success is saving more or planning on spending less. However for any given choice of savings and spending rates there is a particular AA profile and associated risk that minimizes the possibility of portfolio failure. As savings rates go way up that AA tends more towards TIPS. At more modest savings rates though the opposite is true and too much TIPS begins to increase the probability of portfolio failure.
First, I appreciate your thoughtful reply, and read it with great interest. In particular, your insight that I have "put no constraints on savings - not a particularly practical real world model," That is primarily where I disagree with you. I do believe, excluding those who truly are at or near the poverty level, that it is eminently practical for most Americans to save much more than they do. Americans, unlike citizens of many other countries, are terrible savers. Why that is, I leave up to the social critics.

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Simple vs. Complex portfolios

Post by Taylor Larimore » Wed Mar 07, 2018 3:37 pm

Bogleheads:

We are discussing a simple Three-Fund Portfolio vs. a complex portfolio. This is what experts say:

"Simplicity":

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by thx1138 » Wed Mar 07, 2018 4:34 pm

gmaynardkrebs wrote:
Wed Mar 07, 2018 3:29 pm
First, I appreciate your thoughtful reply, and read it with great interest. In particular, your insight that I have "put no constraints on savings - not a particularly practical real world model," That is primarily where I disagree with you. I do believe, excluding those who truly are at or near the poverty level, that it is eminently practical for most Americans to save much more than they do. Americans, unlike citizens of many other countries, are terrible savers. Why that is, I leave up to the social critics.
While I completely agree with you that the vast majority of American's need to save more and can save more I have to object to your claim that people can save enough to be 100% TIPS from the start of their careers and have any chance of portfolio success. That is why I suggested running a few simulations on your assumptions.

I bothered to take the time to do this just now. Obviously TIPS don't exist in the past and the closest thing in FireCalc is the 5yr treasury so we will use that for a TIPS stand in. FireCalc will let us plot the probability of portfolio success versus AA for a given savings/retirement scenario. To keep things relatively simple and real world these results are for a 40 accumulation period and a 30 year retirement. Everything inflation adjusted of course. I varied the savings rate where savings rate in this case means what percent of your planned retirement spending you save in a year of accumulation. For example if you assume in retirement you will spend $10,000/year then a 15% savings rate in this case means you save $1,500 each year of your accumulation (again, everything inflation adjusted to real dollars).

15% savings rate 0% success for less than a 45% allocation to equities, over 90% success for more than 80% allocation to equities
25% savings rate 25% or below success for less than a 25% allocation to equities, 100% success for more than 45% allocation to equities
35% savings rate 50% or below success for less than a 15% allocation to equities, 100% success for more than 25% allocation to equities.
50% savings rate 48% success at 0% allocation to equities, 100% success for more than 10% allocation to equities.

So that's why young investors "need" to take risk and why any claim that investing in risk free assets early in accumulation is ridiculous advice. Someone can save 15% of their expected retirement savings and with a proper equity allocation have near certainly of not running out of money. Meanwhile someone else can save three times as much and if they stick to risk free assets have less than a 50/50 chance of having enough money.

So while I agree that people could certainly save more, the reality is that *everyone* needs to take *some* risk in their asset allocation early in their accumulation cycle or else they are guaranteed to fail short of what is a massive savings rate in any country.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by abuss368 » Wed Mar 07, 2018 4:39 pm

With all due respect to Larry, in my opinion, his investment portfolio's can be a little on the complexity side.

Keep investing simple.
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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Wed Mar 07, 2018 5:50 pm

thx1138 wrote:
Wed Mar 07, 2018 4:34 pm
<For example if you assume in retirement you will spend $10,000/year then a 15% savings rate in this case means you save $1,500 each year of your accumulation>
Thank you very much for taking the time to do this. Trying to understand what you mean by the above: is that the same as plugging in 15/25/35/50% of a $10K income (real dollars) over 40 years, in order to achieve $10K a year in retirement for 30 years? That is the way I visualize the problem. Perhaps it's the same thing, but I'm confused a bit. Thanks!

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by HomerJ » Wed Mar 07, 2018 6:08 pm

gmaynardkrebs wrote:
Wed Mar 07, 2018 8:46 am
HomerJ wrote:
Wed Mar 07, 2018 1:15 am
rj49 wrote:
Tue Mar 06, 2018 10:58 pm
--I think Larry's best belief is investing with the ability, willingness, and need to take risk.
I agree.

I use that quote all the time. It's a very simple, yet elegant, phrase that has helped me and many others determine an appropriate Asset Allocation.
I love the "need" to take risk part? So it's basically, ""I'm already falling short, so I'll risk becoming even more far behind by having a higher equity allocation." It's like those state pension funds that are taking on more equities to paper over their funding shortfalls. It's less a solution than a recipe for disaster.
I use "need' in the opposite direction... As in, I'm coasting to the finish line here, I have no need to take this much risk, and can dial back my stock allocation.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Wed Mar 07, 2018 6:53 pm

HomerJ wrote:
Wed Mar 07, 2018 6:08 pm

I use "need' in the opposite direction... As in, I'm coasting to the finish line here, I have no need to take this much risk, and can dial back my stock allocation.
That's an interesting interpretation, which escaped me. I think Swedroe is pretty clear about "once you've won the game" in his articles, which is admirable.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by thx1138 » Wed Mar 07, 2018 8:18 pm

gmaynardkrebs wrote:
Wed Mar 07, 2018 5:50 pm
thx1138 wrote:
Wed Mar 07, 2018 4:34 pm
<For example if you assume in retirement you will spend $10,000/year then a 15% savings rate in this case means you save $1,500 each year of your accumulation>
Thank you very much for taking the time to do this. Trying to understand what you mean by the above: is that the same as plugging in 15/25/35/50% of a $10K income (real dollars) over 40 years, in order to achieve $10K a year in retirement for 30 years? That is the way I visualize the problem. Perhaps it's the same thing, but I'm confused a bit. Thanks!
Yes that's the same thing, you got it!

Of course all very simplified scenarios just to illustrate how strong the influence of at least some equities are to portfolio success when we consider the entire accumulation and retirement period.

A lot of the recent articles and thinking from Wade Pfau, Bernstein and others have made very though provoking assertions about keeping risk very low once we are mostly done with the accumulation phase. Things like TIPS ladders and annuities that many think of as "too low a return" appear to be very important parts of avoiding failure.

It is when nearing retirement that I think the flawed thinking some people have about "needing to take risk" comes into play. If you are way behind in saving as you point out cranking up the risk isn't necessarily a sensible way to "catch up". But if you are just starting out saving then you really do want to take equity risk.

And again, of course the very best way to reduce risk at any age is to save more and plan to spend less!

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by abuss368 » Wed Mar 07, 2018 8:56 pm

Bogleheads -

I wanted to follow up with clarification. Larry sent a message to me that stated he typically recommends two equity funds - one domestic and one international. If he includes alternative funds, that can add an additional four funds for a total of six equity funds. For some investors that is not complex at all and easy to manage.

Best wishes.
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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by FamousWalrus » Wed Mar 07, 2018 10:16 pm

Looking forward to reading!
I have just described to you the Lochness Monster, and the reward for its capture? All the riches in Scotland. So I have one question, why are you here?

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by HomerJ » Wed Mar 07, 2018 10:22 pm

abuss368 wrote:
Wed Mar 07, 2018 8:56 pm
Bogleheads -

I wanted to follow up with clarification. Larry sent a message to me that stated he typically recommends two equity funds - one domestic and one international. If he includes alternative funds, that can add an additional four funds for a total of six equity funds. For some investors that is not complex at all and easy to manage.

Best wishes.
Well, as long as he's picking the funds for you sure, it's easy to manage. But if I had to pick the four funds myself, I'd have to learn a lot about alternative investments. Which are complex.

When new information comes in, and he changes his mind again on what constitutes a good portfolio, will he tell us then which of the four funds to sell, and which new funds to buy? I suppose his next book will tell us, so I guess that could work as a financial plan.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Thu Mar 08, 2018 12:03 am

thx1138 wrote:
Wed Mar 07, 2018 8:18 pm
gmaynardkrebs wrote:
Wed Mar 07, 2018 5:50 pm
thx1138 wrote:
Wed Mar 07, 2018 4:34 pm
<For example if you assume in retirement you will spend $10,000/year then a 15% savings rate in this case means you save $1,500 each year of your accumulation>
Thank you very much for taking the time to do this. Trying to understand what you mean by the above: is that the same as plugging in 15/25/35/50% of a $10K income (real dollars) over 40 years, in order to achieve $10K a year in retirement for 30 years? That is the way I visualize the problem. Perhaps it's the same thing, but I'm confused a bit. Thanks!
Yes that's the same thing, you got it!
So, if it really is the same thing, it seems to me that the reason TIPS fail in all of your scenarios (even your 50% scenario) is that you are significantly raising the standard of living in retirement, by failing to take into account that no more savings are being deducted in retirement. Just to take the simplest example, suppose you work for 30 years with a steady $10K (real) salary, and will then be retired for 30 years. If you put away 50% of your income every year for thirty years in TIPS, it seems to me that there is a 100% certainty that you will have the same disposable income in retirement as you did during your working years ($5,000/year). It cannot be otherwise, can it? So, if the Monte Carlo simulation is giving you an answer anything other than 100%, I would surmise that you may be addressing a different question, or perhaps that the 5-year note is not a good proxy for TIPS. Note also, that under the original 40/30 hypothetical, putting away 43% of your income every year gets you a disposable income of $5,700 over the 70 year period with 100% certainty. Now, I have not done the math on the following, but if one considers that 30 year TIPS have historically earned about 2% real interest vs 0% in my hypothetical, and that one's expenses often go down in retirement (the kids are gone, no more tuition etc), we probably get closer to saving 25%-30% of one's income during 40 working years to still have 100% certainty of maintaining one's former living standard for 30 years in retirement, at least in our hypothetical.

I now have this terrible feeling that what I've said is incredibly stupid; my math skills have severely eroded over the years (I was once pretty good.) So can you show me where I have erred, in this admittedly simple model?

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Random Walker » Thu Mar 08, 2018 12:21 am

Homer,
I don’t really see Larry changing his mind or his recommendations over time at all. His common theme has consistently been what we recently read as “hyperdiversification”. He has asked us to look at diversification another way: not just geographically or elimination of single stock risk. First he showed us diversification across the size and value risk factors for equities. Next other factors, both risk and behavioral based. And most recently alternatives which provide more unique and independent sources of risk and return. Larry has consistently provided a substantial scaffolding of portfolio efficiency and diversification as the basis for solid portfolio construction. As investing has evolved, data developed, new instruments become available, the specific investments to place on that scaffolding have evolved as well.
When I left residency, my director imparted some thoughts on us. He said we needed to leave residency with solid core beliefs and philosophy of how to treat patients. He said the worst docs change what they do week to week according to the most recent journal article they’ve read. The good docs selectively pick and choose from what they’ve read and incorporate it within their core beliefs and philosophy. The core belief here is modern portfolio theory: how investments affect a portfolio. Larry has consistently made recommendations all pointed towards one goal: more efficient portfolios. How an investment affects a portfolio depends on its expected return, volatility, correlations, when correlations tend to change, and of course costs. The question is always the same. How will this new investment vehicle affect the portfolio as a whole?

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Re: Simple vs. Complex portfolios

Post by Morse Code » Thu Mar 08, 2018 9:21 am

Taylor Larimore wrote:
Wed Mar 07, 2018 3:37 pm
Bogleheads:

We are discussing a simple Three-Fund Portfolio vs. a complex portfolio. This is what experts say:

"Simplicity":

Best wishes
Taylor
I have a variation of a "Larry Portfolio" and it consists of three funds. How is your three fund portfolio less complex than mine?
Livin' the dream

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by thx1138 » Thu Mar 08, 2018 10:52 am

gmaynardkrebs wrote:
Thu Mar 08, 2018 12:03 am
thx1138 wrote:
Wed Mar 07, 2018 8:18 pm
gmaynardkrebs wrote:
Wed Mar 07, 2018 5:50 pm
thx1138 wrote:
Wed Mar 07, 2018 4:34 pm
<For example if you assume in retirement you will spend $10,000/year then a 15% savings rate in this case means you save $1,500 each year of your accumulation>
Thank you very much for taking the time to do this. Trying to understand what you mean by the above: is that the same as plugging in 15/25/35/50% of a $10K income (real dollars) over 40 years, in order to achieve $10K a year in retirement for 30 years? That is the way I visualize the problem. Perhaps it's the same thing, but I'm confused a bit. Thanks!
Yes that's the same thing, you got it!
So, if it really is the same thing, it seems to me that the reason TIPS fail in all of your scenarios (even your 50% scenario) is that you are significantly raising the standard of living in retirement, by failing to take into account that no more savings are being deducted in retirement. Just to take the simplest example, suppose you work for 30 years with a steady $10K (real) salary, and will then be retired for 30 years. If you put away 50% of your income every year for thirty years in TIPS, it seems to me that there is a 100% certainty that you will have the same disposable income in retirement as you did during your working years ($5,000/year). It cannot be otherwise, can it? So, if the Monte Carlo simulation is giving you an answer anything other than 100%, I would surmise that you may be addressing a different question, or perhaps that the 5-year note is not a good proxy for TIPS. Note also, that under the original 40/30 hypothetical, putting away 43% of your income every year gets you a disposable income of $5,700 over the 70 year period with 100% certainty. Now, I have not done the math on the following, but if one considers that 30 year TIPS have historically earned about 2% real interest vs 0% in my hypothetical, and that one's expenses often go down in retirement (the kids are gone, no more tuition etc), we probably get closer to saving 25%-30% of one's income during 40 working years to still have 100% certainty of maintaining one's former living standard for 30 years in retirement, at least in our hypothetical.

I now have this terrible feeling that what I've said is incredibly stupid; my math skills have severely eroded over the years (I was once pretty good.) So can you show me where I have erred, in this admittedly simple model?
Your math is spot on. The reason I wrote the savings rate as percentage of required spending in retirement is precisely because we expect retirement spending to go down and by how much is completely a personal choice. That's why I decoupled the two. For instance, for a frugal person with a high salary their retirement spending could be as little as 20% of their income while working. That's what all the early retirement folks are doing.

For more modest incomes options are more limited but the standard recommendation of 70% spending in retirement is probably not a bad guess so if we need to save 50% of our retirement spending that would be 35% of our income before retirement.

So the above were all just very simplified examples to show the scenarios in which "risk free" investing can actually result in lower chances of portfolio success where "success" is meeting a predicted spending requirement over a 30 year retirement with a 40 year savings period. And indeed, the more you save the more you can drive "success" to 100% using a "risk free" asset like TIPS.

There is a huge elephant in the room though. These simple "success" scenarios all only look at one half of the equation - the uncertainty of what your investments will return and the distribution of those returns. They all assume that you have 100% certainty of what retirement expenses will be. What if there is a 1% chance that your retirement expenses will be say double what you expected? And what if there is a 5% chance your expenses will be 50% more than you expected? If TIPS allow you to hit your "number" perfectly with 100% certainty but also make it 100% certain you won't have any *more* than that this creates a problem. There is uncertainty in your expenses too. With the above numbers the "risk free" use of TIPS actually fails at least 5% of the time because there was at least a 5% chance that your estimate of your expenses was wrong by 50% and there is a 0% chance that TIPS might have returned 50% more than expected.

Consider equities now, what if at a given savings rate my optimal equities included portfolio has a 99% chance of returning three times as much as the TIPS portfolio based on historical data? Let's be a bit pessimistic because of course the future isn't history, but still say that there is a 97% chance an equities included portfolio will support just two times the spending rate of a TIPS only portfolio and there is a 2% chance that in fact it will support less than the TIPS only portfolio (again, based on the simulations run before this is actually a significantly pessimistic estimate compared to past history).

If we assume we know our expenses perfectly then it appears that TIPS is the winner. It has a 100% chance of meeting our spending requirements while the equities included has 2% chance of failing. But again, there is uncertainty in the expenses too. Small probabilities of *large* errors in that estimate (see later for examples). So using our example above, assume a 5% chance our expenses are 50% above what we expected. Now things look different. Now the TIPS portfolio fails 5% of the time. The equities portfolio has a 97% chance of meeting this unexpected extra spending which might occur in 5% of the cases. Combining both the return and expense uncertainties the equities portfolio actually has a slightly lower chance of failing than the TIPS option. (EDIT: For clarity the approximate combined probability for the equities included profile is 2% failure to meet the expected expenses plus a 3% chance of failing to meet the 5% chance that expenses are 50% more than expected which is an additional 0.03*0.05 = 0.15% chance of failure for a total failure rate of about 2.15% for an equities included portfolio compared to a 5% failure rate for just TIPS. Depending on interpretation that difference might be "slight" as in 95% success vs. 97.85% success or rather extreme as in more than twice as likely to fail!).

The main issue that I think you are missing though is that by going TIPS only from the start the *cost* for a retirement success of greater than 99% or any other high probability number is more than three times as high for TIPS compared to "taking risk" with equities. That means for a given savings rate, whatever savings rate you choose, the equities person is going to have a 99% chance of having *at least* three times as much money to work with over their retirement as the person who stuck to the "risk free" all TIPS portfolio from the start. Three times as much is *the minimum* the equities person will have with a 99% probability based on historical data. They will likely have even more than that. Indeed they are taking a very small risk they might end up with less than the TIPS person. Based on historical data that risk is 0% which is of course silly, but the risk is still quite small. And they expect with very high (but not 100%) confidence that they will have *at least* three times the assets of the TIPS saver.

And this is where the whole "TIPS are risk free" thing completely falls apart. They are "risk free" only in the sense that you can perfectly predict your retirement expenses and all of your other life events from the age of say 22 when you start working and saving. Even if we say we can't predict capitalism and equity markets that factor of three is *huge*. Having three times as much money to spend over retirement gives you far, far, far more flexibility to deal with *spending* uncertainty that is very real.

The presumption that retirement spending is always lower is not actually true. Talk to anyone that has a spouse with Alzheimers. Costs of more the $4K/month for a period of 6-10 years is not unheard of. Because of our broken LTC system most retirees have been facing steadily increasing LTC insurance premiums leaving them the option of either significantly increasing their retirement expenses to cover the premiums or accept the risk of all of the retirement money meant for the surviving spouse to have to be paid for the end of life care of the deceased spouse. Not a pleasant choice.

Consider as well other late in life "unexpected" expenses. You mentioned kids being out of the house lower expenses. When do kids leave the house? Around mid-twenties typically. When do most debilitating mental health issues arise? Also mid-twenties. Hmmm... looks like there is a finite risk, one of around 1% or so (see https://www.nami.org/learn-more/mental- ... he-numbers), that if you have kids when you expected your expenses to drop they will actually shoot through the roof. You always have the option of leaving your child's adult mental health care to the state of course - in most US locations that means prison these days. So most folks are going to have to pay for that themselves if they don't feel criminal incarceration of their mentally ill loved one is what they are looking for. The "risk free" TIPS saver is at this point up a creek with no options. They had a 100% "risk free" guarantee of meeting their expected spending requirements. Unfortunately they didn't have a 100% risk free estimate of those spending requirements. The "risky" equities holder, the one that now has a 99% chance of having three times the assets to work with actually has a lot of options now.

So we are *always* taking risks. We are trying to keep those risks as small as possible. The key point of "need to take risk" is illustrated above. When you add up all the uncertainties one of the biggest factors in reducing the risk of failure is higher returns over that long investment horizon. TIPS from birth gives a false sense of certainty. It minimizes only one aspect of volatility, the volatility of your returns. While it guarantees those returns to a high degree it also guarantees those returns will be very low compared to the alternatives with very high probability. Once we factor in the real uncertainties of expenses over that 70 year period we find that the "riskier" returns of equities actually result in a lower overall probability of failure when we properly account for the uncertainties in both *returns* and *expenses*.
Last edited by thx1138 on Thu Mar 08, 2018 12:05 pm, edited 1 time in total.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Ketawa » Thu Mar 08, 2018 11:58 am

Scooter57 wrote:
Wed Mar 07, 2018 2:48 pm
I would only venture to attempt to predict a world series winner by watching the teams playing during the last month of the season. Any reference to statistics will only mislead. We Red Sox fans knew we were doomed going into the last two playoffs despite all appearances because we saw the team flagging through that last month, but more importantly lacking that indefinable team spirit we saw in our winning teams. Soft data told the story here, not the quantitative stuff you get from analyzing stats.
As a Red Sox fan who watches a massive number of games, and as someone who consumes a lot of baseball sabermetric analysis, I disagree with this and think it's a terrible analogy. The "soft factors" or narrative in 2017 for the Red Sox was that players acquired at the deadline like Eduardo Nunez and call-ups like Rafael Devers energized the team last year. Personally, I was very optimistic about the Red Sox chances in the playoffs. The data backs up that the team was on a roll in August and September heading into the playoffs. From Baseball-Reference:

Code: Select all

        Month by Month
Split     W   L   RS   RA   W-L%
April     13  11  93   93   .542
May       16  12  159  125  .571
June      16  12  125  116  .571
July      13  14  122  101  .481
August    18  9   143  118  .667
September 17  10  140  111  .630
October   0   1   3    4    .000
Regardless, research has shown that the last couple months are not more predictive than data from the entire season. The simple fact is that outcomes of a short series or a single game are random. The best models use player-level projections that are aggregated to estimate overall team strength and create a probabilistic forecast, whether it's for an entire season or a single game.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Ketawa » Thu Mar 08, 2018 12:15 pm

GibsonL6s wrote:
Wed Mar 07, 2018 10:50 am
Who knows, my point was that using current data one can invest, do we know that historical data has more predictive value than current data. If we knew historic patterns were a lock to repeat, investing would be easy. That is why we diversify and some of us hold emergency funds.

Again to use the baseball analogy using historical data you could conclude the Yankees who have won the most world series have the best chance to be next year's world series champion, or you could using recent historical data assume the Astros repeat since the 36 times the WS champ has repeated, or you could analyze the current data such as this years spring training records and make a prediction. Given that the future is uncertain no method has any more validity or chance of being right than the other.
The future is uncertain, but that doesn't mean that three bad ways of predicting the next WS winner are equivalent, i.e. "no method has any more validity or chance of being right than the other".

This example of trying to pick the WS winner is terrible all around, because if it was the case that nobody knows anything, one could make a lot of money at Vegas by betting on the long shots every year.

Historical data in baseball is used extensively in baseball to inform player projection models, which are the building blocks for team projection models, which are the best estimates (along with market forecasts like Vegas odds) of team strength. Analysts examine the best way to measure the individual contributions of a player, which aspects of player performance age well or poorly, which aspects of past performance are predictive of future results, etc. Historical data from a long time again can be useful with respect to things like aging curves for particular player skills.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Thu Mar 08, 2018 2:06 pm

thx1138 wrote:
Thu Mar 08, 2018 10:52 am

Your math is spot on. The reason I wrote the savings rate as percentage of required spending in retirement is precisely because we expect retirement spending to go down and by how much is completely a personal choice. That's why I decoupled the two. For instance, for a frugal person with a high salary their retirement spending could be as little as 20% of their income while working. That's what all the early retirement folks are doing.

For more modest incomes options are more limited but the standard recommendation of 70% spending in retirement is probably not a bad guess so if we need to save 50% of our retirement spending that would be 35% of our income before retirement.

So the above were all just very simplified examples to show the scenarios in which "risk free" investing can actually result in lower chances of portfolio success where "success" is meeting a predicted spending requirement over a 30 year retirement with a 40 year savings period. And indeed, the more you save the more you can drive "success" to 100% using a "risk free" asset like TIPS.

There is a huge elephant in the room though. These simple "success" scenarios all only look at one half of the equation - the uncertainty of what your investments will return and the distribution of those returns. They all assume that you have 100% certainty of what retirement expenses will be. What if there is a 1% chance that your retirement expenses will be say double what you expected? And what if there is a 5% chance your expenses will be 50% more than you expected? If TIPS allow you to hit your "number" perfectly with 100% certainty but also make it 100% certain you won't have any *more* than that this creates a problem. There is uncertainty in your expenses too. With the above numbers the "risk free" use of TIPS actually fails at least 5% of the time because there was at least a 5% chance that your estimate of your expenses was wrong by 50% and there is a 0% chance that TIPS might have returned 50% more than expected.

Consider equities now, what if at a given savings rate my optimal equities included portfolio has a 99% chance of returning three times as much as the TIPS portfolio based on historical data? Let's be a bit pessimistic because of course the future isn't history, but still say that there is a 97% chance an equities included portfolio will support just two times the spending rate of a TIPS only portfolio and there is a 2% chance that in fact it will support less than the TIPS only portfolio (again, based on the simulations run before this is actually a significantly pessimistic estimate compared to past history).

If we assume we know our expenses perfectly then it appears that TIPS is the winner. It has a 100% chance of meeting our spending requirements while the equities included has 2% chance of failing. But again, there is uncertainty in the expenses too. Small probabilities of *large* errors in that estimate (see later for examples). So using our example above, assume a 5% chance our expenses are 50% above what we expected. Now things look different. Now the TIPS portfolio fails 5% of the time. The equities portfolio has a 97% chance of meeting this unexpected extra spending which might occur in 5% of the cases. Combining both the return and expense uncertainties the equities portfolio actually has a slightly lower chance of failing than the TIPS option. (EDIT: For clarity the approximate combined probability for the equities included profile is 2% failure to meet the expected expenses plus a 3% chance of failing to meet the 5% chance that expenses are 50% more than expected which is an additional 0.03*0.05 = 0.15% chance of failure for a total failure rate of about 2.15% for an equities included portfolio compared to a 5% failure rate for just TIPS. Depending on interpretation that difference might be "slight" as in 95% success vs. 97.85% success or rather extreme as in more than twice as likely to fail!).

The main issue that I think you are missing though is that by going TIPS only from the start the *cost* for a retirement success of greater than 99% or any other high probability number is more than three times as high for TIPS compared to "taking risk" with equities. That means for a given savings rate, whatever savings rate you choose, the equities person is going to have a 99% chance of having *at least* three times as much money to work with over their retirement as the person who stuck to the "risk free" all TIPS portfolio from the start. Three times as much is *the minimum* the equities person will have with a 99% probability based on historical data. They will likely have even more than that. Indeed they are taking a very small risk they might end up with less than the TIPS person. Based on historical data that risk is 0% which is of course silly, but the risk is still quite small. And they expect with very high (but not 100%) confidence that they will have *at least* three times the assets of the TIPS saver.

And this is where the whole "TIPS are risk free" thing completely falls apart. They are "risk free" only in the sense that you can perfectly predict your retirement expenses and all of your other life events from the age of say 22 when you start working and saving. Even if we say we can't predict capitalism and equity markets that factor of three is *huge*. Having three times as much money to spend over retirement gives you far, far, far more flexibility to deal with *spending* uncertainty that is very real.

The presumption that retirement spending is always lower is not actually true. Talk to anyone that has a spouse with Alzheimers. Costs of more the $4K/month for a period of 6-10 years is not unheard of. Because of our broken LTC system most retirees have been facing steadily increasing LTC insurance premiums leaving them the option of either significantly increasing their retirement expenses to cover the premiums or accept the risk of all of the retirement money meant for the surviving spouse to have to be paid for the end of life care of the deceased spouse. Not a pleasant choice.

Consider as well other late in life "unexpected" expenses. You mentioned kids being out of the house lower expenses. When do kids leave the house? Around mid-twenties typically. When do most debilitating mental health issues arise? Also mid-twenties. Hmmm... looks like there is a finite risk, one of around 1% or so (see https://www.nami.org/learn-more/mental- ... he-numbers), that if you have kids when you expected your expenses to drop they will actually shoot through the roof. You always have the option of leaving your child's adult mental health care to the state of course - in most US locations that means prison these days. So most folks are going to have to pay for that themselves if they don't feel criminal incarceration of their mentally ill loved one is what they are looking for. The "risk free" TIPS saver is at this point up a creek with no options. They had a 100% "risk free" guarantee of meeting their expected spending requirements. Unfortunately they didn't have a 100% risk free estimate of those spending requirements. The "risky" equities holder, the one that now has a 99% chance of having three times the assets to work with actually has a lot of options now.

So we are *always* taking risks. We are trying to keep those risks as small as possible. The key point of "need to take risk" is illustrated above. When you add up all the uncertainties one of the biggest factors in reducing the risk of failure is higher returns over that long investment horizon. TIPS from birth gives a false sense of certainty. It minimizes only one aspect of volatility, the volatility of your returns. While it guarantees those returns to a high degree it also guarantees those returns will be very low compared to the alternatives with very high probability. Once we factor in the real uncertainties of expenses over that 70 year period we find that the "riskier" returns of equities actually result in a lower overall probability of failure when we properly account for the uncertainties in both *returns* and *expenses*.
You make so many good points, and have given me so much new to think about, that what I most want to say at this point is Thank You! One thought keeps coming back to me, however, from the well-known Paul Samuelson article <The Long-Term Case for Equities> I think he would say there is a serious problem with what you say here, at least for the more risk averse <Indeed they are taking a very small risk they might end up with less than the TIPS person.> Samuelson showed that the decreased probability of equities losing out to the safe (e.g., TIPS-type) portfolio, which he agrees with comes vanishingly close to 0 with N to infinity years, is exactly offset by the increase in the potential magnitude of loss on those rare occasions when equities do lose out. In other words, with TIPS, when you lose, you lose by a a little; with equities, you always run the risk of losing by a lot. Moreover, he shows that the risk of catastrophic losses increases with N+ years, rather than decreasing, as many folks (not you I think) seem to believe. Perhaps this is all a tempest in a teapot type of thing. But, I wonder how one would reconcile his views with yours.

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Taylor Larimore
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Re: Simple vs. Complex portfolios

Post by Taylor Larimore » Thu Mar 08, 2018 8:14 pm

Morse Code wrote:
Thu Mar 08, 2018 9:21 am
Taylor Larimore wrote:
Wed Mar 07, 2018 3:37 pm
Bogleheads:

We are discussing a simple Three-Fund Portfolio vs. a complex portfolio. This is what experts say:

"Simplicity":

Best wishes
Taylor
I have a variation of a "Larry Portfolio" and it consists of three funds. How is your three fund portfolio less complex than mine?
Morse Code:

Mr. Bogle would be pleased with the simplicity of both our portfolios.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Broken Man 1999 » Fri Mar 09, 2018 11:50 am

I ordered Larry's new book, Reducing the Risk of Black Swans: Using the Science of Investing to Capture Returns with Less Volatility, 2018 Edition a few days ago, and checked Amazon to see when it was expected. Turns out the book is out of stock. :(

I'm looking forward to reading the new book, I just finished reading his prior book, Your Complete Guide to Factor-Based Investing: The Way Smart Money Invests Today.

IMHO, Larry makes a pretty good case for factor investing. However, the thing that I believe will trip up many who try to capture some of the benefits is the fact that it is possible to have periods of underperformance in comparison to indexes. Depending on the length of underperformance, I think many initial believers would bail out. Factor investing might be a possibility for a legacy account for my grandchildren.

Broken Man1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Random Walker » Fri Mar 09, 2018 12:16 pm

Broken man,
Good point. Need to be committed and stick to the plan. Strong argument for diversifying across the factors because each will have long periods underperformance. I think it’s somewhat ironic that perhaps most important to diversify over shorter time periods. One of the most powerful points in the factor book is the look at 1/n portfolios.

Dave

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by thx1138 » Fri Mar 09, 2018 3:28 pm

gmaynardkrebs wrote:
Thu Mar 08, 2018 2:06 pm
You make so many good points, and have given me so much new to think about, that what I most want to say at this point is Thank You! One thought keeps coming back to me, however, from the well-known Paul Samuelson article <The Long-Term Case for Equities> I think he would say there is a serious problem with what you say here, at least for the more risk averse <Indeed they are taking a very small risk they might end up with less than the TIPS person.> Samuelson showed that the decreased probability of equities losing out to the safe (e.g., TIPS-type) portfolio, which he agrees with comes vanishingly close to 0 with N to infinity years, is exactly offset by the increase in the potential magnitude of loss on those rare occasions when equities do lose out. In other words, with TIPS, when you lose, you lose by a a little; with equities, you always run the risk of losing by a lot. Moreover, he shows that the risk of catastrophic losses increases with N+ years, rather than decreasing, as many folks (not you I think) seem to believe. Perhaps this is all a tempest in a teapot type of thing. But, I wonder how one would reconcile his views with yours.
Samuelson is of course not wrong - as far as analysis goes based on his starting assumptions. It is those assumptions that can be, and have been, endlessly debated ever since! The very same comes down to current debate regarding things like Wade Pfau's excellent papers on withdrawal schemes and annuitization and so forth. If you look at William Bernstein's writing over the years you can see a continuing evolution of the starting assumptions or conditions and how they effect his conclusions.

To me there are two essentially unresolvable problems.

The first is coming up with a figure of merit to judge "success". In the Samuelson and related papers this is down to defining the "utility" of wealth. There are endless ways to define such. A particularly awful one would be "expected" wealth meaning just the average of potential outcomes with no regard for the distribution of outcomes. In my earlier posts this figure of merit of "success" was defined as failure to meet a spending goal over 30 years, which is a pretty common choice. It is still fraught though, since as you point out shouldn't we consider by "how much we miss" that goal rather than just whether we miss that goal? Missing by 10% is not so bad, missing by 90% is catastrophic. Similarly I pointed out that since the spending goal is uncertain we should probably also allocate at least some utility to greatly exceeding that goal. Fine, how shall we quantify that? Well if you look at the literature that is still an ongoing debate. Most disturbingly what seem like fundamental conclusions that need to be drawn (what should your AA be and should it change with age, etc. etc.) are remarkably sensitive to how one defines the "utility of wealth/income". Fundamentally smart folks running all sorts of models still can't decide and agree on whether a retiree should have an AA that remains constant, decreases equity exposure over time or increases equity exposure over time!

The second I've already alluded to which is the fundamental interrelation of different parts of the lifetime saving/retirement scenario. While fundamental questions are already sensitive to the "utility of wealth" they are even more sensitive to estimates of returns of asset classes. As we try to move towards higher percentages of "success" suddenly that remaining few percent of "failure" become dominated by things rarely included in any model. Most "certain" scenarios that account for the "risk" of longevity either require massive amounts of savings if going for something like a TIPS ladder, or taking on equity risk or using an annuity. Introducing the annuity includes its own risks because the "cost" of the life annuity stream is not predictable in advance since it is very sensitive to interest rates. These interactions get really confusing because any model that might claim a strategy has "99% success" is likely to find certain of its assumptions are more than 1% likely to be wrong on their own. Will the US never default on its debt in the next 70 years? Boy I sure hope not, but is that really 99% certain? Is that company I purchased my life annuity from really going to be solvent 40 years from now? If they do go insolvent how much of my income stream will remain after (hopefully) intervention from either the state or federal government? What if the US becomes the next Japan market wise, are we 99% certain that can't happen?

So it is really easy to get into "paralysis by analysis" while not recognizing all these other uncertainties and interactions!

For that reason our wise and most illustrious member Taylor has more than once chimed in over the years to point out that most folks' saving and spending plans are essentially dynamic and common sense based. They follow some general rules/advice regarding AA and what to insure or not insure and monitor how they are doing and adjust accordingly. It does not require a Ph.D. in economics and pretty much works.

Taylor's point is spot on in my opinion. In a complicated system it is nearly impossible to reach a goal without "mid-course corrections" as it were. For instance you simply can not get a space probe from here to say Saturn by pre-programming all your burns. Despite our knowledge of the masses and locations of the planets and the spacecraft and its motors to almost unimaginable precision we are forced to measure what the spacecraft is doing after each propellant burn or planet encounter and adjust a bit. It is a typical freshman/sophomore physics exercise to discover the impossibility of doing this without measurement and subsequent minor corrections. And it isn't like if you don't do the mid-course corrections you "miss" by a little bit, you actually can miss by a surprising amount despite a seemingly small correction.

Unfortunately a large fraction of the economics analysis of saving/retirement often ignore this fundamental tenant of "adjusting as you go" and the few that do (for instance modeling returns based withdrawal methods) give us a hint of how huge an effect it has on getting to high probability of "success".

I certainly don't necessarily have a better answer than Samuelson or anyone else that actually does this stuff "for a living". But it is worth noting that they all fundamentally often disagree and in some cases their older self disagrees with their younger self!

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by heyyou » Sat Mar 10, 2018 5:47 pm

Having recently sold my commodities futures fund, I'm wary of newly minted, specialty funds.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Random Walker » Sat Mar 10, 2018 6:24 pm

Thx1138,
Good analogy on the spaceship. I think a good approach is to repeat Monte Carlo simulations every couple-few years or when circumstances, personal or external, change significantly.

Dave

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Sat Mar 10, 2018 7:34 pm

Random Walker wrote:
Sat Mar 10, 2018 6:24 pm
Thx1138,
Good analogy on the spaceship. I think a good approach is to repeat Monte Carlo simulations every couple-few years or when circumstances, personal or external, change significantly.

Dave
For me, the question is what to make of them at all. The answers change so much with just slight change in assumptions.

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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by nedsaid » Sat Mar 10, 2018 8:57 pm

Random Walker wrote:
Thu Mar 08, 2018 12:21 am
Homer,
I don’t really see Larry changing his mind or his recommendations over time at all. His common theme has consistently been what we recently read as “hyperdiversification”. He has asked us to look at diversification another way: not just geographically or elimination of single stock risk. First he showed us diversification across the size and value risk factors for equities. Next other factors, both risk and behavioral based. And most recently alternatives which provide more unique and independent sources of risk and return. Larry has consistently provided a substantial scaffolding of portfolio efficiency and diversification as the basis for solid portfolio construction. As investing has evolved, data developed, new instruments become available, the specific investments to place on that scaffolding have evolved as well.
When I left residency, my director imparted some thoughts on us. He said we needed to leave residency with solid core beliefs and philosophy of how to treat patients. He said the worst docs change what they do week to week according to the most recent journal article they’ve read. The good docs selectively pick and choose from what they’ve read and incorporate it within their core beliefs and philosophy. The core belief here is modern portfolio theory: how investments affect a portfolio. Larry has consistently made recommendations all pointed towards one goal: more efficient portfolios. How an investment affects a portfolio depends on its expected return, volatility, correlations, when correlations tend to change, and of course costs. The question is always the same. How will this new investment vehicle affect the portfolio as a whole?

Dave
Dave, as you know I am a Larry Swedroe fan. I like the concept of "hyperdiversification" and I have most everything but the Kitchen Sink in my portfolio. I bought TIPS and REIT funds when they became available. I have owned Value investments and also owned mutual funds that practice a discipline of earnings/price momentum. I also liked Mid-Cap/Small-Cap stocks. In the mid-2000's, I bought International Bonds. So I have thrown asset classes and factors at the volatility problem, crossed my fingers and hoped that it would work.

I think the alts are worth trying, a 20% commitment to them in a portfolio is probably about right. My take is that the market always seems to find the Achilles Heel in well-designed portfolios. There is always that one thing that the experts didn't think of. Not an argument against alts, just saying that the best weapon against volatility is simply waiting it out. My guess is that the alts will help in some really bad markets and be ineffective in others. We all want to have straight line portfolio growth of 8% a year but we know that in real life this doesn't happen. Pretty much what happens is that in a crisis, those "non-correlating assets" correlate at the wrong possible time. You can take comfort that if you own good stuff that it should all bounce back once sanity returns.

I base my comments on my experience with the twin bear markets of 2000-2002 and 2008-2009. During that first bear market, owning volatile non-correlating assets really helped a portfolio. During the financial crisis of 2008-2009, most everything crashed. The Small/Value tilting that helped during 2000-2002 didn't help in 2008-2009. In the face of economic and market risk, I would rather have greater diversification than less diversification. But there are times when greater diversification doesn't seem to work.

Probably the alts will help a portfolio a bit and probably won't hurt. I have been looking for the secret sauce for 30 years and haven't found it yet. If you buy good stuff and keep it, you should do well over time. The reinsurance and alternative lending expose you to economic risk and the portfolio insurance and the factor funds that use leverage and shorting expose you to market risk. I get nervous with shorting and leverage as markets do unexpected things but in the proportions Larry recommends are probably okay.

I will get Larry's new book and read it.
A fool and his money are good for business.

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