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

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

Post by Random Walker » Sat Mar 10, 2018 9:54 pm

Nedsaid,
Totally agree that markets have a way of finding the Achilles heel. I’m a huge believer in efficient markets. The evolution to factor addict took better part of a decade. The best diversifier is also the cheapest: high quality, short maturity bonds.

Dave

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

Post by fennewaldaj » Sat Mar 10, 2018 10:43 pm

thx1138 wrote:
Fri Mar 09, 2018 3:28 pm
gmaynardkrebs wrote:
Thu Mar 08, 2018 2:06 pm
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?


I would guess the chance the current US government does not exist in 70 years is probably greater than 1%. (this comment is not appearing under my name for some reason)

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

Post by Random Walker » Sat Mar 17, 2018 8:45 pm

Nearly finished with the book. In the appendix there is a section that reviews Monte Carlo Simulation and shows the effect on results if one creates a 15% or 25% alternatives position from the equities in a 60/40 portfolio. Odds of success increase first when one goes from 60% TSM equities to SV tilted equities, then increase more if one takes from the SV equities to create the alternatives position.

Dave

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

Post by gmaynardkrebs » Sun Mar 18, 2018 9:25 am

Random Walker wrote:
Sat Mar 17, 2018 8:45 pm
Nearly finished with the book. In the appendix there is a section that reviews Monte Carlo Simulation and shows the effect on results if one creates a 15% or 25% alternatives position from the equities in a 60/40 portfolio. Odds of success increase first when one goes from 60% TSM equities to SV tilted equities, then increase more if one takes from the SV equities to create the alternatives position. Dave
I can't help wondering if the name of Larry's book is misleading? (I have not read the book.) You mention the Monte Carlo simulations. Does Larry discuss that Nathan Taleb, who made the Black Swan concept popular and explained it so well, completely rejects such Gaussian derived models as Monte Carlo simulations? In fact, it's the core of Taleb's argument. So, perhaps, Larry's title is a mis-approriation of the concept. Again, I have not read the book, so I'm really just raising the issue.

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

Post by Random Walker » Sun Mar 18, 2018 1:28 pm

I would think that any changes to a portfolio that keep expected return constant and minimize standard deviation would also be relatively beneficial for the really bad financial market events that occur in the far left tails or 6 standard deviations from the mean. I think it is reasonable to work with assumptions of normal distribution, standard deviation, correlations, but to appreciate that financial history shows that there are many more extreme events than normal distribution represents, correlations tend to go to one at really bad times, the correlation for safest most liquid bonds tends to go negative in those bad times, and that one has a plan B in place for really bad times.

Dave

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

Post by golfCaddy » Sun Mar 18, 2018 2:05 pm

Random Walker wrote:
Sun Mar 18, 2018 1:28 pm
I would think that any changes to a portfolio that keep expected return constant and minimize standard deviation would also be relatively beneficial for the really bad financial market events that occur in the far left tails or 6 standard deviations from the mean. I think it is reasonable to work with assumptions of normal distribution, standard deviation, correlations, but to appreciate that financial history shows that there are many more extreme events than normal distribution represents, correlations tend to go to one at really bad times, the correlation for safest most liquid bonds tends to go negative in those bad times, and that one has a plan B in place for really bad times.

Dave
It depends on what those alternatives are. If we had a 1930s Great Depression, consumer lending would get killed as defaults spiked with rising unemployment. If you're short volatility, you're going to get killed in a sudden market crash. Taleb might even say being short volatility makes you more susceptible to black swans. If you're in the reinsurance business, then that should be uncorrelated with just about everything else. Factors should have a low or even negative correlation to beta.

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

Post by Random Walker » Sun Mar 18, 2018 3:27 pm

I agree that one needs to take on variance risk premium in equities understanding that it can take it on the chin when the equity markets go down. But the variance risk premium fund invests in the premium across multiple asset classes which should help mute the decline.

Dave

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

Post by Kevin K » Wed Mar 21, 2018 5:33 pm

Just finished reading the book on the basis of both this thread and nothing but excellent previous experience with Mr. Swedroe's writing (including the first edition of this book).

I think the authors provide a great service by explaining these alternative investments about so clearly and concisely. It was interesting though to read the P2P lending chapter and then "bookend" it with two from-the-trenches posts from the well-regarded White Coat Investor site:

https://www.whitecoatinvestor.com/4-yea ... relations/

https://www.whitecoatinvestor.com/why-i ... b-account/

The experience documented in those two posts separated by just a few years really underlines what so many here have said about "skating where the puck was" by getting into these types of investments years after they become known, and of course about market efficiency altogether.

After looking at the specific alternative investment funds recommended in the appendix of this book I've come to the conclusion that while the general principles are invaluable the alternative investments recommended are most suitable for very high net-worth "won the game" investors who are already working with a financial advisor with access to both DFA funds and the esoteric (and expensive!) alternative funds recommended.

Since I'm not in that world the benefit of the book for me is good advice on diversifying my equities using the Fama-French 3 factor model, a reminder to keep bonds high-quality and short duration and good incentive to keep a chunk of money invested in illiquid assets like rental property. Heck just the section cautioning about the dangers of REIT over-exposure is worth the modest price of the book. And as the forward by Ross Stevens of Stone Ridge makes abundantly clear we're obviously going to see a lot more focus on these alternative asset classes (and hopefully more affordable ways to access them) going forward given the dangers and high likelihood of historically low returns in both the equity and bond markets.

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

Post by Angst » Wed Mar 21, 2018 11:48 pm

Random Walker wrote:
Sat Mar 10, 2018 9:54 pm
Nedsaid,
Totally agree that markets have a way of finding the Achilles heel. I’m a huge believer in efficient markets. The evolution to factor addict took better part of a decade. The best diversifier is also the cheapest: high quality, short maturity bonds.

Dave
I'm confused here. (Nothing unusual, really) Of course, it's not my nature to go through the effort to gather data and review charts to prove or invalidate the various spontaneous assumptions I come up with, so I'm just relying on my general notion of what I've read here on the board over the years and hoping for the usual, understanding and accommodation from the community. But I've always somehow thought it was Long Term Govt Bonds that were "the best diversifier" for an equity portfolio. Did I miss the memo that this had changed, or is my recollection just foggy? That's a real possibility, but then again with today's "inevitable" rise in interest rates, perhaps conventional wisdom has shifted? Seriously, is it ST or LT bonds that is the superior diversifier? I've always had this notion it was LT bonds.

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

Post by Theoretical » Thu Mar 22, 2018 12:00 am

High quality Short term bonds (and tbills) are basically uncorrellated to anything, so they are excellent diversifiers to equities regardless of economic conditions.

Long treasuries historically have been moderately positively correlated to equity returns; however for the last 30-odd years, they've been sharply negatively correlated to equity returns. In more inflationary times, especially if we ever got something like the 1970s, they'd get massacred at the same time as stocks (probably worse).

In a global crisis or deflationary type recession, long treasuries are great diversifiers as flight to quality assets. This is more than anything due to the deep liquidity in the treasury market. The next most liquid debt issue is Japan.

Rising rates and inflation were bloody murder on long bond holders in both the US and UK in the aftermath of WWII.

Intermediates offer a nice middle ground

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

Post by fennewaldaj » Thu Mar 22, 2018 12:42 am

gmaynardkrebs wrote:
Sun Mar 18, 2018 9:25 am
Random Walker wrote:
Sat Mar 17, 2018 8:45 pm
Nearly finished with the book. In the appendix there is a section that reviews Monte Carlo Simulation and shows the effect on results if one creates a 15% or 25% alternatives position from the equities in a 60/40 portfolio. Odds of success increase first when one goes from 60% TSM equities to SV tilted equities, then increase more if one takes from the SV equities to create the alternatives position. Dave
I can't help wondering if the name of Larry's book is misleading? (I have not read the book.) You mention the Monte Carlo simulations. Does Larry discuss that Nathan Taleb, who made the Black Swan concept popular and explained it so well, completely rejects such Gaussian derived models as Monte Carlo simulations? In fact, it's the core of Taleb's argument. So, perhaps, Larry's title is a mis-approriation of the concept. Again, I have not read the book, so I'm really just raising the issue.
I have also wondered about the use of the term black swan in this book. 50% equity declines aren't really black swans as Taleb defined them. They are expected events (though the actually proximate cause of the large decline may be unexpected). The alts mentioned on the other hand all seem like things that could be prone to black swans. Something more or less unexpected could totally wreck one of these strategies and at least reinsurance, volatility insurance and P2P lending seem to be potentially negatively skewed. I suppose having 4 of them helps with that as it would be quite the black swan to wreck all 4 at the same time. That said I have not read the book though I have read some of Larry's other books and many etf.com articles.

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

Post by Angst » Thu Mar 22, 2018 12:44 am

Theoretical wrote:
Thu Mar 22, 2018 12:00 am
High quality Short term bonds (and tbills) are basically uncorrellated to anything, so they are excellent diversifiers to equities regardless of economic conditions.

Long treasuries historically have been moderately positively correlated to equity returns; however for the last 30-odd years, they've been sharply negatively correlated to equity returns. In more inflationary times, especially if we ever got something like the 1970s, they'd get massacred at the same time as stocks (probably worse).

In a global crisis or deflationary type recession, long treasuries are great diversifiers as flight to quality assets. This is more than anything due to the deep liquidity in the treasury market. The next most liquid debt issue is Japan.

Rising rates and inflation were bloody murder on long bond holders in both the US and UK in the aftermath of WWII.

Intermediates offer a nice middle ground
Thank you T for putting this all in perspective. So although LT bonds actually have been the ideal diversifier for the last 30 years or so, it looks like ST bonds are much safer now that rates appear to be bottoming out, perhaps even rising, after their slow 30-yr decline. Now, if rates end up stagnating, or even creeping down further... not likely, even I'd admit that, but it's still unknown. (I keep thinking of Japan.) I can accept the notion though that ST bonds are the safer diversifier, but only time will tell which is best.

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

Post by randomizer » Thu Mar 22, 2018 1:04 am

Oh, seems the kindle version is now available.
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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by Kevin K » Thu Mar 22, 2018 11:11 am

[/quote]
Thank you T for putting this all in perspective. So although LT bonds actually have been the ideal diversifier for the last 30 years or so, it looks like ST bonds are much safer now that rates appear to be bottoming out, perhaps even rising, after their slow 30-yr decline. Now, if rates end up stagnating, or even creeping down further... not likely, even I'd admit that, but it's still unknown. (I keep thinking of Japan.) I can accept the notion though that ST bonds are the safer diversifier, but only time will tell which is best.
[/quote]

The Forward to the new edition of Larry's book addresses the dangers of the current bond market briefly but this article by Todd Tresidder (a few years old but intentionally not updated by him - see his note at the beginning) goes into more detail about just how dangerous longer-duration and/or lower-quality bonds are in the current environment.

https://financialmentor.com/investment- ... ubble/9064

Tresidder grudgingly admits (in the comments to the above article) that very short-term bonds offer some safety in the current environment but won't own them himself due to their paltry yields. The more important take-away though is that given just how low interest rates are we are very unlikely to see long Treasuries save a portfolio as they did with, say, the Permanent Portfolio (which holds 25% thirty-year Treasuries) in '08.

In a very recent article Tresidder addresses not just the overvalued nature of all the major conventional asset classes but also the worrisome root causes that have allowed Bitcoin and other cryptocurrencies to emerge as today's hottest fads:

https://financialmentor.com/investment- ... here/21479

If you're like me you'll find Tresidder's website a bit irritating - too much selling going on - but I think both articles are worth a skim as they offer a more detailed sketch of the market conditions that have so many defensive-minded investors looking for alternatives to plain vanilla stock-and-bond portfolios. I think both articles strongly support the value of the alternative investment categories in Larry's book, as well as other more common illiquid investments such as privately-held businesses and rental property.

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

Post by woof755 » Sun Apr 01, 2018 4:17 pm

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.
I have read both versions of Black Swan, as well as the new factor based investing book. I freely cop to some of this being over my head.

But I do feel like I understand something having read these books that many comments on this board, like this one, are inconsistent with. The main thrust of Larry's recs is that you invest in these assets that are *expected* to bring higher returns in order to decrease one's overall equty stake, and increase allocation to bonds.

So, yes, in this way, black swans are mitigated. 40% bonds versus 30% bonds will help mitigate a terrible year.

Even this article that has me thinking https://www.institutionalinvestor.com/a ... egist-sick (and is *not* the only topic the updated Black Swans is about) seems to focus on returns and not risk mitigation.

I'm learning with the rest of you, and learning from you.
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

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

Post by nedsaid » Sun Apr 01, 2018 5:07 pm

Angst wrote:
Wed Mar 21, 2018 11:48 pm
Random Walker wrote:
Sat Mar 10, 2018 9:54 pm
Nedsaid,
Totally agree that markets have a way of finding the Achilles heel. I’m a huge believer in efficient markets. The evolution to factor addict took better part of a decade. The best diversifier is also the cheapest: high quality, short maturity bonds.

Dave
I'm confused here. (Nothing unusual, really) Of course, it's not my nature to go through the effort to gather data and review charts to prove or invalidate the various spontaneous assumptions I come up with, so I'm just relying on my general notion of what I've read here on the board over the years and hoping for the usual, understanding and accommodation from the community. But I've always somehow thought it was Long Term Govt Bonds that were "the best diversifier" for an equity portfolio. Did I miss the memo that this had changed, or is my recollection just foggy? That's a real possibility, but then again with today's "inevitable" rise in interest rates, perhaps conventional wisdom has shifted? Seriously, is it ST or LT bonds that is the superior diversifier? I've always had this notion it was LT bonds.
Most often, but not always, bear markets are connected with recessions. When the economy goes South, the Fed will try to rev things up by lowering short term interest rates. In an environment where interest rates are falling, you will get the biggest bang for your diversification buck with Long Term Treasuries. You are probably aware of the inverse relationship between bond values and interest rates, the longer the maturities the greater the effect. So most of the time, Long Treasuries are a great diversifier to stocks.

But what happens if you get a Stagflation scenario like 1973-1974? Slow growth economy and higher inflation? Interest rates will not fall in that environment as the Fed will want to subdue inflation. If inflation is a problem, the direction of interest rates would be up. We had a 50% down bear market in 1973-1974 during which such a Stagflation scenario occurred and in this environment Long Term Treasuries just got killed. The Fed kept raising rates until the early 1980's to kill off inflation. Stocks and Long Term Treasuries both just got killed. In that environment, Short Treasuries would be much safer.

Hope this helps your understanding.
A fool and his money are good for business.

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

Post by gmaynardkrebs » Sun Apr 01, 2018 6:00 pm

nedsaid wrote:
Sun Apr 01, 2018 5:07 pm
Angst wrote:
Wed Mar 21, 2018 11:48 pm
Random Walker wrote:
Sat Mar 10, 2018 9:54 pm
Nedsaid,
Totally agree that markets have a way of finding the Achilles heel. I’m a huge believer in efficient markets. The evolution to factor addict took better part of a decade. The best diversifier is also the cheapest: high quality, short maturity bonds.

Dave
I'm confused here. (Nothing unusual, really) Of course, it's not my nature to go through the effort to gather data and review charts to prove or invalidate the various spontaneous assumptions I come up with, so I'm just relying on my general notion of what I've read here on the board over the years and hoping for the usual, understanding and accommodation from the community. But I've always somehow thought it was Long Term Govt Bonds that were "the best diversifier" for an equity portfolio. Did I miss the memo that this had changed, or is my recollection just foggy? That's a real possibility, but then again with today's "inevitable" rise in interest rates, perhaps conventional wisdom has shifted? Seriously, is it ST or LT bonds that is the superior diversifier? I've always had this notion it was LT bonds.
Most often, but not always, bear markets are connected with recessions. When the economy goes South, the Fed will try to rev things up by lowering short term interest rates. In an environment where interest rates are falling, you will get the biggest bang for your diversification buck with Long Term Treasuries. You are probably aware of the inverse relationship between bond values and interest rates, the longer the maturities the greater the effect. So most of the time, Long Treasuries are a great diversifier to stocks.

But what happens if you get a Stagflation scenario like 1973-1974? Slow growth economy and higher inflation? Interest rates will not fall in that environment as the Fed will want to subdue inflation. If inflation is a problem, the direction of interest rates would be up. We had a 50% down bear market in 1973-1974 during which such a Stagflation scenario occurred and in this environment Long Term Treasuries just got killed. The Fed kept raising rates until the early 1980's to kill off inflation. Stocks and Long Term Treasuries both just got killed. In that environment, Short Treasuries would be much safer.

Hope this helps your understanding.
I have a more fundamental lack of understanding of what is meant by diversification nowadays. Doesn't effective diversification require a similarly effective level of inverse correlation between equities and bonds? It looks to me that while equities have had some serious ups and downs over the last 30 years, we've basically seen a bull market in both during over the last 3 decades. With all the leveraged carry trade in long bonds, which tends to correlate with speculative equity markets, it seems to me that neither is a truly a great diversifier anymore. There's just too much hot money ready to unwind too fast in both asset classes. We live in a speculation driven world today, and probably will for a long time. Maybe the old rules are just that -- old and dying, if not dead already.

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

Post by Angst » Sun Apr 01, 2018 6:10 pm

Kevin K wrote:
Thu Mar 22, 2018 11:11 am
Angst wrote:
Thu Mar 22, 2018 12:44 am
Thank you T for putting this all in perspective. So although LT bonds actually have been the ideal diversifier for the last 30 years or so, it looks like ST bonds are much safer now that rates appear to be bottoming out, perhaps even rising, after their slow 30-yr decline. Now, if rates end up stagnating, or even creeping down further... not likely, even I'd admit that, but it's still unknown. (I keep thinking of Japan.) I can accept the notion though that ST bonds are the safer diversifier, but only time will tell which is best.
The Forward to the new edition of Larry's book addresses the dangers of the current bond market briefly but this article by Todd Tresidder (a few years old but intentionally not updated by him - see his note at the beginning) goes into more detail about just how dangerous longer-duration and/or lower-quality bonds are in the current environment.

https://financialmentor.com/investment- ... ubble/9064

Tresidder grudgingly admits (in the comments to the above article) that very short-term bonds offer some safety in the current environment but won't own them himself due to their paltry yields. The more important take-away though is that given just how low interest rates are we are very unlikely to see long Treasuries save a portfolio as they did with, say, the Permanent Portfolio (which holds 25% thirty-year Treasuries) in '08.
Thanks Kevin. I enjoyed reading Tresidder's article. Given current rates and history, it's hard to argue with anyone regarding the apparent dangers in holding long bonds exclusively today. Also, a lot of this I think simply revolves around the semantics of "ideal" and then "diversifier". All points are well-taken.
nedsaid wrote:
Sun Apr 01, 2018 5:07 pm
Most often, but not always, bear markets are connected with recessions. When the economy goes South, the Fed will try to rev things up by lowering short term interest rates. In an environment where interest rates are falling, you will get the biggest bang for your diversification buck with Long Term Treasuries. You are probably aware of the inverse relationship between bond values and interest rates, the longer the maturities the greater the effect. So most of the time, Long Treasuries are a great diversifier to stocks.

But what happens if you get a Stagflation scenario like 1973-1974? Slow growth economy and higher inflation? Interest rates will not fall in that environment as the Fed will want to subdue inflation. If inflation is a problem, the direction of interest rates would be up. We had a 50% down bear market in 1973-1974 during which such a Stagflation scenario occurred and in this environment Long Term Treasuries just got killed. The Fed kept raising rates until the early 1980's to kill off inflation. Stocks and Long Term Treasuries both just got killed. In that environment, Short Treasuries would be much safer.

Hope this helps your understanding.
Thank you nedsaid for your observations. Wouldn't it be interesting if we could look back to the 1970's and see how both ST & LT TIPS would have performed? As much as we can speculate about it, I wouldn't daresay we could be sure. I don't think UK index-linked Gilts came around until the 1980's.

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

Post by larryswedroe » Sun Apr 01, 2018 6:16 pm

To help out here, First, happy to always answer questions from readers You can email me at lswedroe@bamadvisor.com
Second, sometimes, as noted Treasuries, especially longer ones, help, as in in 2008. Sometimes they make the problem worse, as mentioned. That is why you might want to consider adding assets that have little to no correlation to either stocks or bonds, like reinsurance and risk premium funds (AQR). Also lendx has almost no inflation risk, though some economic cycle risk. And AVRPX has SOME correlation with stocks (very low) but none with bonds. And all four of the funds have equity like expected returns for very logical reasons. As explained in the book.
Best wishes
larry

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

Post by nedsaid » Sun Apr 01, 2018 7:23 pm

gmaynardkrebs wrote:
Sun Apr 01, 2018 6:00 pm

I have a more fundamental lack of understanding of what is meant by diversification nowadays. Doesn't effective diversification require a similarly effective level of inverse correlation between equities and bonds? It looks to me that while equities have had some serious ups and downs over the last 30 years, we've basically seen a bull market in both during over the last 3 decades. With all the leveraged carry trade in long bonds, which tends to correlate with speculative equity markets, it seems to me that neither is a truly a great diversifier anymore. There's just too much hot money ready to unwind too fast in both asset classes. We live in a speculation driven world today, and probably will for a long time. Maybe the old rules are just that -- old and dying, if not dead already.
Diversification, I suppose, means somewhat different things to different people. Ideally, you would diversify with asset classes that would have similar returns but which would deliver that similar return at different times. If X has a bear market and is down 30%, the hope is that Y will be up 30% at the same time. You would have that growth in your portfolio with little volatility. Unfortunately, real life and real investing just don't work that way.

During the 2000-2002 bear market, such things as REITs, Commodities, and Precious Metals were doing well while the stock market fell. International stocks, Value stocks, and smaller US stocks fell, but less than the broad US Market. Bonds in this environment did really well. You had some things that zigged while other things zagged. So the common diversifiers worked and adding certain asset classes really helped in a bad stock market.

During the 2008-2009 financial crisis and bear market, the diversifiers that worked in 2000-2002 did not work. REITs, which were up smartly in 2000-2002 fell hard in 2008-2009. Pretty much, most everything crashed. Even TIPS and Investment Grade Corporates fell by 10-11% or so. So even bonds, except for nominal Treasuries and certain Government Agency bonds did not perform as hoped in a crisis. The US Government slapped its guarantee on money market funds.

So your comment is actually a good one. Yes, we have seen twin bull markets in both stocks and bonds. And yes, bonds are expensive and likely will have diminished diversification benefits during the next bear market. One reason the Fed is raising rates now so that it will have some ammunition to deal with the next recession. So the portfolio theory of diversifying with non-correlating asset classes worked great in one bear market and failed in the next. In crisis, assets tend to correlate, correlate at the worst possible time, and correlate in a downward direction.

No guarantees obviously.
A fool and his money are good for business.

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

Post by nedsaid » Sun Apr 01, 2018 7:36 pm

Angst wrote:
Sun Apr 01, 2018 6:10 pm
nedsaid wrote:
Sun Apr 01, 2018 5:07 pm
Most often, but not always, bear markets are connected with recessions. When the economy goes South, the Fed will try to rev things up by lowering short term interest rates. In an environment where interest rates are falling, you will get the biggest bang for your diversification buck with Long Term Treasuries. You are probably aware of the inverse relationship between bond values and interest rates, the longer the maturities the greater the effect. So most of the time, Long Treasuries are a great diversifier to stocks.

But what happens if you get a Stagflation scenario like 1973-1974? Slow growth economy and higher inflation? Interest rates will not fall in that environment as the Fed will want to subdue inflation. If inflation is a problem, the direction of interest rates would be up. We had a 50% down bear market in 1973-1974 during which such a Stagflation scenario occurred and in this environment Long Term Treasuries just got killed. The Fed kept raising rates until the early 1980's to kill off inflation. Stocks and Long Term Treasuries both just got killed. In that environment, Short Treasuries would be much safer.

Hope this helps your understanding.
Thank you nedsaid for your observations. Wouldn't it be interesting if we could look back to the 1970's and see how both ST & LT TIPS would have performed? As much as we can speculate about it, I wouldn't daresay we could be sure. I don't think UK index-linked Gilts came around until the 1980's.
In a 1973-74 environment, one would expect that TIPS and UK Inflation-linked Gilts would have done well. No way to know for sure. I suppose some hedge fund out there could be taking some crazy leveraged position causing TIPS to fall during an inflation spike rather than rise dramatically. You just never know what those adrenalin junkies who control trillions of dollars with the click of the mouse are up to. This is why asset classes don't always act as expected during a crisis. During 2008-2009, there was a liquidity issue with TIPS and they fell pretty hard, something frankly that I did not expect. What I expected was for TIPS to go up in a crisis, they are US Treasury Instruments after all. I also didn't expect a crisis with money market funds which caused Uncle Sam to step in pretty quickly.

This is why I am not an "always" or "never" investor. Markets can do exceedingly weird things at times for no explainable reason. Sometimes panic overcomes reason and the baby, the bathwater, and the tub all go sailing out the window. We never know for sure what will happen, even with "safe" asset classes. Normally, sanity returns within a few months and asset classes revert to their historical relationships with each other. In the short run, about anything can happen.
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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Sun Apr 01, 2018 10:01 pm

nedsaid wrote:
Sun Apr 01, 2018 7:36 pm
Angst wrote:
Sun Apr 01, 2018 6:10 pm
nedsaid wrote:
Sun Apr 01, 2018 5:07 pm
Most often, but not always, bear markets are connected with recessions. When the economy goes South, the Fed will try to rev things up by lowering short term interest rates. In an environment where interest rates are falling, you will get the biggest bang for your diversification buck with Long Term Treasuries. You are probably aware of the inverse relationship between bond values and interest rates, the longer the maturities the greater the effect. So most of the time, Long Treasuries are a great diversifier to stocks.

But what happens if you get a Stagflation scenario like 1973-1974? Slow growth economy and higher inflation? Interest rates will not fall in that environment as the Fed will want to subdue inflation. If inflation is a problem, the direction of interest rates would be up. We had a 50% down bear market in 1973-1974 during which such a Stagflation scenario occurred and in this environment Long Term Treasuries just got killed. The Fed kept raising rates until the early 1980's to kill off inflation. Stocks and Long Term Treasuries both just got killed. In that environment, Short Treasuries would be much safer.

Hope this helps your understanding.
Thank you nedsaid for your observations. Wouldn't it be interesting if we could look back to the 1970's and see how both ST & LT TIPS would have performed? As much as we can speculate about it, I wouldn't daresay we could be sure. I don't think UK index-linked Gilts came around until the 1980's.
In a 1973-74 environment, one would expect that TIPS and UK Inflation-linked Gilts would have done well. No way to know for sure. I suppose some hedge fund out there could be taking some crazy leveraged position causing TIPS to fall during an inflation spike rather than rise dramatically. You just never know what those adrenalin junkies who control trillions of dollars with the click of the mouse are up to. This is why asset classes don't always act as expected during a crisis. During 2008-2009, there was a liquidity issue with TIPS and they fell pretty hard, something frankly that I did not expect. What I expected was for TIPS to go up in a crisis, they are US Treasury Instruments after all. I also didn't expect a crisis with money market funds which caused Uncle Sam to step in pretty quickly.

This is why I am not an "always" or "never" investor. Markets can do exceedingly weird things at times for no explainable reason. Sometimes panic overcomes reason and the baby, the bathwater, and the tub all go sailing out the window. We never know for sure what will happen, even with "safe" asset classes. Normally, sanity returns within a few months and asset classes revert to their historical relationships with each other. In the short run, about anything can happen.
What were real rates doing in 2008-2009?

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

Post by nedsaid » Sun Apr 01, 2018 11:28 pm

gmaynardkrebs wrote:
Sun Apr 01, 2018 10:01 pm
What were real rates doing in 2008-2009?
Wikipedia defines real interest rate as the rate of interest an investor expects to receive after allowing for inflation.

I believe you were asking the question with TIPS in mind. Great question. I suspected strongly that both nominal and real rates fell but I didn't know for certain. So I went to the World Bank website and looked it up. Here is what I found:

2007 5.249%
2008 3.066%
2009 2.472%
2010 2.004%
2011 1.161%

Here is my source:

https://data.worldbank.org/indicator/FR ... cations=US
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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by woof755 » Sun Apr 01, 2018 11:36 pm

nedsaid wrote:
Sat Mar 10, 2018 8:57 pm

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.
I agree 99.9%.

But Larry also recommends increased bond allocation; i.e. increased term risk. This type of risk diversification (treasury bonds, short-to- intermediate term) does work. It's a drag during the good times, to be sure. I look longingly at the past several years and wish I wasn't 60/40. But when the next bad one comes, I'll know I prepared my portfolio as well as I could.
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

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

Post by nedsaid » Sun Apr 01, 2018 11:48 pm

woof755 wrote:
Sun Apr 01, 2018 11:36 pm
nedsaid wrote:
Sat Mar 10, 2018 8:57 pm

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.
I agree 99.9%.

But Larry also recommends increased bond allocation; i.e. increased term risk. This type of risk diversification (treasury bonds, short-to- intermediate term) does work. It's a drag during the good times, to be sure. I look longingly at the past several years and wish I wasn't 60/40. But when the next bad one comes, I'll know I prepared my portfolio as well as I could.
Thank you. That is a point that I did not cover. Bonds over time have less return than stocks but also have a lot less volatility. To get more stability to a portfolio, you add bonds though you sacrifice some return. When I say "bonds", I mean investment grade bonds. It seems that the "sweet spot" for bonds is in the intermediate maturities of 5-7 years or so. You decrease the volatility in comparison to long term bonds but still get most of the return. Larry would say that SAFE bonds, like US Treasuries, give the most diversification potential in a crisis.

In many cases, stocks and bonds have a bit of a zigging vs. zagging effect. Stocks will tend to zig while bonds zag, particularly with high quality bonds like US Treasuries. But this is often not true. The 1970's were tough on both stocks and bonds for example. Another example is that both stocks and bonds did well from about 1984 through 1999. During the bear market of 2000-2002, bonds did very well and during 2008-2009, only the SAFE bonds like nominal US Treasuries and US Government Agency Bonds did well. Other investment grade bonds rebounded fairly quickly after the financial crisis.

So both the average maturity and the credit quality of bonds matter a lot.
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Re: Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

Post by gmaynardkrebs » Mon Apr 02, 2018 7:43 am

woof755 wrote:
Sun Apr 01, 2018 11:36 pm
nedsaid wrote:
Sat Mar 10, 2018 8:57 pm

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.
I agree 99.9%.

But Larry also recommends increased bond allocation; i.e. increased term risk. This type of risk diversification (treasury bonds, short-to- intermediate term) does work. It's a drag during the good times, to be sure. I look longingly at the past several years and wish I wasn't 60/40. But when the next bad one comes, I'll know I prepared my portfolio as well as I could.
How much should anyone with a reasonably long time horizon, ie, saving for a retirement, care about that type of volatility? Little or not none, IMHO, if what we mean by "volatility" are the usual dips and recoveries in asset values on a generally upward trajectory, like we have had the last thirty years or so. That's why I think the discussion of diversification to weather "bear" or "bull" markets is rather irrelevant to the real issues. Diversifying to minimize that type of volatility, while worthwhile, strikes me as fighting the wrong war. Yet, that is the war most, if not all, of the target date funds are built on. The diversification I want is one that minimizes the risk of having less savings than I need or want when I'm 65-100 yrs old. And, I have no idea how you get that -- I'm not even sure the model BH portfolios are really aimed at achieving that type of diversification? Do they?

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

Post by woof755 » Mon Apr 02, 2018 11:49 pm

GMaynardKrebs,

Couple things that came to my mind as I read your post:

1. Black Swan events are not the usual dips in the market, and it's important to consider their importance. The behavioral finance aspect of this is important--mitigating fat tails and avoiding Black Swan events will keep people from making drastic (probably bad, we opine) decisions.

The first one I lived through, in 2007-8, I was aghast, but fortunate that I had just begun my actual career literally at that time, so I had little to lose. Still, it wasn't easy to stomach 50% losses in equities.

2. All of the BN portfolios are well-considered options to achieve the goal you mention, esp because the savings rate and expenses you pay are the biggest determinants of the future portfolio.
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

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

Post by dcabler » Tue Apr 03, 2018 5:58 am

gmaynardkrebs wrote:
Sun Mar 18, 2018 9:25 am
Random Walker wrote:
Sat Mar 17, 2018 8:45 pm
Nearly finished with the book. In the appendix there is a section that reviews Monte Carlo Simulation and shows the effect on results if one creates a 15% or 25% alternatives position from the equities in a 60/40 portfolio. Odds of success increase first when one goes from 60% TSM equities to SV tilted equities, then increase more if one takes from the SV equities to create the alternatives position. Dave
I can't help wondering if the name of Larry's book is misleading? (I have not read the book.) You mention the Monte Carlo simulations. Does Larry discuss that Nathan Taleb, who made the Black Swan concept popular and explained it so well, completely rejects such Gaussian derived models as Monte Carlo simulations? In fact, it's the core of Taleb's argument. So, perhaps, Larry's title is a mis-approriation of the concept. Again, I have not read the book, so I'm really just raising the issue.
Monte Carlo does not require that the models be Gaussian. One can choose any distribution one wants. For Stocks, lognormal is often used, but even it's not the only one. Jim Otar has a good discussion on this on his website including the effects of long-term secular trends, correlation of market events, and momentum effects. He also has a simulator available that includes all of these effects. Of course the old quote "All models are wrong. Some are useful." still applies. :D

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

Post by Random Walker » Mon May 14, 2018 5:12 pm

Here’s a review of the book from Financial Analysts Journal

https://www.cfapubs.org/doi/full/10.246 ... 74.issue-2

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

Post by Dead Man Walking » Mon May 14, 2018 11:00 pm

Having read the posts in this thread, I am reminded of Alvin Toffler's Future Shock which was a best seller in 1970. I think investors have been overwhelmed by the proliferation of information in the 21st century. I enjoy Larry Swedroe's theories; however, I have two problems with them: One is the short history of the funds that implement them. The other is that many dyi investors have difficulty implementing them without using an advisor. I live in the boondocks and don't have easy access to advisors who can implement his theories. Of course, I could use the services of advisors via the internet. I'm not convinced that my risk adjusted returns would be justified by the fees of an advisor. I may be suffering from future shock!

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

Post by Theoretical » Fri May 18, 2018 1:17 pm

@Dead Man Walking

I agree with you that some of these are hard to implement apart from an advisor, though some of the alts do have mutual fund availability or alternatives to the AQR universe.

For Alt Lending, there's a few other Interval funds that may be available without an advisor.

Insurance Linked Securities so far don't have a fund without advisor or a $1MM limit.

Volatility Risk Premium does have a couple of options, one of which is also the Alt Risk Premia option. There's also an Eaton Vance Parametric VRP+Equities fund with a $50K minimum.

Risk premia, the best options are from Goldman Sachs, Columbia Threadneedle, JP Morgan, and Janus Henderson. Others in the field are very low factor loading funds, and GS and Columbia funds are recent to their strategy relative to the funds' existence.

Managed Futures, this one has a lot of options, depending on the volatility you like. The main things I do when evaluating these is to divide the expense ratio by the volatility targeted and realized (2 separate calculations). Why is this important: because a "cheap" fund (say .75 ER) with 5% volatility is not going to be the same kind of potential diversifier as one that's got 10, 15 or even 25% volatility, even if the latter is more expensive. The other factor is whether you are looking for something great responds on a hair twitch to market disruptions or something that's more oriented to general bear markets.

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