For those that think the current selloff is normal

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hdas
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For those that think the current selloff is normal

Post by hdas » Sat Oct 27, 2018 5:12 pm

Let us notice that 21 out of the last 27 trading days have been down (looking at sp500). This behavior is atypical....

October 2000
Feb 1984
June 1982
Aug 1975
Sep 1974
Dec 1973
May 1970
Dec 1969
May 1962

On average a year later, the market is up 75% of the time about 15%, with a t-score of 2.03% [1]

Addendum # 1

Here's something interesting, looking at those similar occurrences, one notices that the market was in a drawdown of an average of 28%. So the takeaway of this, is that the market is selling off with the intensity and persistence of a serious bear market, even though we are barely down 10%.

Stay the course :beer

NOTE: This post was updated to reflect Oct-29 drop

[1] Very likely this is not predictive of future returns, as it suffers severely from the multiple comparisons problem but it feels ok while is painful to hold.
Last edited by hdas on Mon Oct 29, 2018 4:36 pm, edited 2 times in total.
Stay the course and buy some more.

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JoMoney
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Re: For those that think the current selloff is normal

Post by JoMoney » Sat Oct 27, 2018 5:17 pm

Every downturn is "atypical".
It could probably be argued analogous to the Anna Karenina principal
"All happy families are alike; each unhappy family is unhappy in its own way."
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

hdas
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Re: For those that think the current selloff is normal

Post by hdas » Sat Oct 27, 2018 5:34 pm

JoMoney wrote:
Sat Oct 27, 2018 5:17 pm
Every downturn is "atypical".
It could probably be argued analogous to the Anna Karenina principal
"All happy families are alike; each unhappy family is unhappy in its own way."
You win the comment of the day.

On the other hand, if one models the changes up or down as a binomial distribution, the probability of getting 20 heads out of 26 tosses is small but not crazy small....~0.3%. However this is not counting the stock market coin drift. H
Stay the course and buy some more.

drk
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Location: Seattle

Re: For those that think the current selloff is normal

Post by drk » Sat Oct 27, 2018 5:41 pm

JoMoney wrote:
Sat Oct 27, 2018 5:17 pm
Every downturn is "atypical".
It could probably be argued analogous to the Anna Karenina principle
"All happy families are alike; each unhappy family is unhappy in its own way."
Kudos.

:sharebeer

Ron Scott
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Re: For those that think the current selloff is normal

Post by Ron Scott » Sat Oct 27, 2018 5:49 pm

hdas wrote:
Sat Oct 27, 2018 5:12 pm

Unfortunately this type of stuff is not predictive of forward returns.
Nothing is...
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

hdas
Posts: 387
Joined: Thu Jun 11, 2015 8:24 am

Re: For those that think the current selloff is normal

Post by hdas » Sat Oct 27, 2018 6:08 pm

Ron Scott wrote:
Sat Oct 27, 2018 5:49 pm
hdas wrote:
Sat Oct 27, 2018 5:12 pm

Unfortunately this type of stuff is not predictive of forward returns.
Nothing is...
Good to have skepticism, while you are at it, let us look at the monthly sp changes (index). We are on track on having a terrible month, say down more than 5% (but anything can happen in 2 days)......anyways. Since 1950 this has happened 69 times, here's the scorecard for the returns of the following month:

N= 69
mean =-1.14%
stdev=6.84%
median=-0.54%
%Positive=46.38%
T-Score=-2.20

This is what they call 'Momentum'.....
Stay the course and buy some more.

Whakamole
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Re: For those that think the current selloff is normal

Post by Whakamole » Sat Oct 27, 2018 6:38 pm

hdas wrote:
Sat Oct 27, 2018 5:12 pm
First, let us notice that 20 out of the last 26 trading days have been down (looking at sp500). This behavior is atypical....

October 2000
Feb 1984
June 1982
March 1980
Sep 1974
Dec 1973
May 1970
Dec 1969
May 1962

Unfortunately this type of stuff is not predictive of forward returns. Stay the course :beer
Weren't the early '80s a good time to buy stocks?

heyyou
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Re: For those that think the current selloff is normal

Post by heyyou » Sat Oct 27, 2018 8:06 pm

It is normal for the stock market to fluctuate while slowly rising for a long period, then fluctuate as it quickly falls significantly before repeating the initial situation. The numbers, 2018 GAINS ERASED!!!, don't seem bad yet, relative to the gains from the recent decade.

There is currently great uncertainty due to be somewhat lessened in November. Are we surprised that the stock market is reflecting uncertainty about the near future? Stock ownership has always been profitable for periods of 20+ years, so maybe we are due for a bad decade.

Retirees with sizable bond fund holdings could spend from them for numerous years to avoid selling from still highly appreciated stock funds. Those who have limited their necessary expenses will be able to reduce their discretionary spending when their remaining portfolio balance indicates for lower annual withdrawal amounts.

More succinctly: It is normal for the stock market to move in some unexpected way, direction, amplitude, or both combined.

Dead Man Walking
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Re: For those that think the current selloff is normal

Post by Dead Man Walking » Sat Oct 27, 2018 8:38 pm

hdas wrote:
Sat Oct 27, 2018 5:12 pm
First, let us notice that 20 out of the last 26 trading days have been down (looking at sp500). This behavior is atypical....

October 2000
Feb 1984
June 1982
March 1980
Sep 1974
Dec 1973
May 1970
Dec 1969
May 1962

Unfortunately this type of stuff is not predictive of forward returns. Stay the course :beer
The distressing thing about your list is that I was alive and owned equities in each of these years. I don't recall doing anything special during any of them. I was a DCA investor during all of them. Thanks for reminding me that I am nearly as old as dirt!

DMW

JackoC
Posts: 349
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Re: For those that think the current selloff is normal

Post by JackoC » Sat Oct 27, 2018 8:59 pm

hdas wrote:
Sat Oct 27, 2018 6:08 pm
Ron Scott wrote:
Sat Oct 27, 2018 5:49 pm
hdas wrote:
Sat Oct 27, 2018 5:12 pm

Unfortunately this type of stuff is not predictive of forward returns.
Nothing is...
Good to have skepticism, while you are at it, let us look at the monthly sp changes (index). We are on track on having a terrible month, say down more than 5% (but anything can happen in 2 days)......anyways. Since 1950 this has happened 69 times, here's the scorecard for the returns of the following month:

N= 69
mean =-1.14%
stdev=6.84%
median=-0.54%
%Positive=46.38%
T-Score=-2.20

This is what they call 'Momentum'.....
IOW it is mildly predictive. As are other simple measures of momentum*, like where the market is relative to where it was a year ago. Also when volatility has been high, a given % in stocks is taking more risk of losses than when it's low, because future short term volatility is strongly predicted by recent volatility**. Neither of these considerations are major enough to use as a crystal ball to dry constant and large tactical allocation changes. But the two together pose a bit of an anomaly/conundrum for the idea that it's optimum to have a fixed % in stocks regardless of market conditions and to rebalance it back to that % frequently**.

*momentum of the whole market/index varying over time, as opposed to where you pick stocks with relatively better momentum than others at a given time.
**there's not 100% autocorrelation between short term recent and short term future volatility or else volatility could never change, but the correlation is pretty high, much higher than the correlation betwen short term recent and short term future returns.
***the effect you cite is among the reasons some personal finance guru types say you shouldn't rebalance that often.

Ron Scott
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Re: For those that think the current selloff is normal

Post by Ron Scott » Sun Oct 28, 2018 7:27 am

JackoC wrote:
Sat Oct 27, 2018 8:59 pm
hdas wrote:
Sat Oct 27, 2018 6:08 pm
Ron Scott wrote:
Sat Oct 27, 2018 5:49 pm
hdas wrote:
Sat Oct 27, 2018 5:12 pm

Unfortunately this type of stuff is not predictive of forward returns.
Nothing is...
Good to have skepticism, while you are at it, let us look at the monthly sp changes (index). We are on track on having a terrible month, say down more than 5% (but anything can happen in 2 days)......anyways. Since 1950 this has happened 69 times, here's the scorecard for the returns of the following month:

N= 69
mean =-1.14%
stdev=6.84%
median=-0.54%
%Positive=46.38%
T-Score=-2.20

This is what they call 'Momentum'.....
IOW it is mildly predictive. As are other simple measures of momentum*, like where the market is relative to where it was a year ago. Also when volatility has been high, a given % in stocks is taking more risk of losses than when it's low, because future short term volatility is strongly predicted by recent volatility**. Neither of these considerations are major enough to use as a crystal ball to dry constant and large tactical allocation changes. But the two together pose a bit of an anomaly/conundrum for the idea that it's optimum to have a fixed % in stocks regardless of market conditions and to rebalance it back to that % frequently**.

*momentum of the whole market/index varying over time, as opposed to where you pick stocks with relatively better momentum than others at a given time.
**there's not 100% autocorrelation between short term recent and short term future volatility or else volatility could never change, but the correlation is pretty high, much higher than the correlation betwen short term recent and short term future returns.
***the effect you cite is among the reasons some personal finance guru types say you shouldn't rebalance that often.
Interesting... Unfortunately this type of stuff is not predictive of forward returns.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

staythecourse
Posts: 6199
Joined: Mon Jan 03, 2011 9:40 am

Re: For those that think the current selloff is normal

Post by staythecourse » Sun Oct 28, 2018 7:38 am

how about 19 of 26 days? Or 20 of 28 days? Or.... What is so special of 20 of last 26 days?

The point is data mining can come up with whatever numbers you are looking for. As someone else said before anyone can torture the data until it tells you what you want. Picking random data is not predictive of anything.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

srt7
Posts: 291
Joined: Mon Sep 29, 2014 12:19 pm

Re: For those that think the current selloff is normal

Post by srt7 » Sun Oct 28, 2018 8:01 am

hdas wrote:
Sat Oct 27, 2018 5:12 pm
Unfortunately this type of stuff is not predictive of forward returns.
Ha! Nothing is and life would be predictable and boring if it did.
I can't think of anything more luxurious than owning my time. - remomnyc

hdas
Posts: 387
Joined: Thu Jun 11, 2015 8:24 am

Re: For those that think the current selloff is normal

Post by hdas » Sun Oct 28, 2018 8:06 am

staythecourse wrote:
Sun Oct 28, 2018 7:38 am
how about 19 of 26 days? Or 20 of 28 days? Or.... What is so special of 20 of last 26 days?

The point is data mining can come up with whatever numbers you are looking for. As someone else said before anyone can torture the data until it tells you what you want. Picking random data is not predictive of anything.

Good luck.
Thanks. Always a good reminder!!. However, the point of the comment was not to find a predictive relationship but to highlight that such a skewed number of down days it's rare in the historical record. You can try all the other combinations, they all say the same.

The month is not over yet, but sP is down 8.75% in October which ranks 15th worst in recent history. Here's the rank of bad months since 1950

10/30/1987 -21.76%
10/31/2008 -16.94%
8/31/1998 -14.58%
9/30/1974 -11.93%
11/30/1973 -11.39%
9/30/2002 -11.00%
2/27/2009 -10.99%
3/31/1980 -10.18%
8/31/1990 -9.43%
2/28/2001 -9.23%
10/31/1978 -9.16%
9/30/2008 -9.08%
4/30/1970 -9.05%
8/30/1974 -9.03%
Stay the course and buy some more.

staythecourse
Posts: 6199
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Re: For those that think the current selloff is normal

Post by staythecourse » Sun Oct 28, 2018 8:14 am

hdas wrote:
Sun Oct 28, 2018 8:06 am
staythecourse wrote:
Sun Oct 28, 2018 7:38 am
how about 19 of 26 days? Or 20 of 28 days? Or.... What is so special of 20 of last 26 days?

The point is data mining can come up with whatever numbers you are looking for. As someone else said before anyone can torture the data until it tells you what you want. Picking random data is not predictive of anything.

Good luck.
Thanks. Always a good reminder!!. However, the point of the comment was not to find a predictive relationship but to highlight that such a skewed number of down days it's rare in the historical record. You can try all the other combinations, they all say the same.

The month is not over yet, but sP is down 8.75% in October which ranks 15th worst in recent history. Here's the rank of bad months since 1950

10/30/1987 -21.76%
10/31/2008 -16.94%
8/31/1998 -14.58%
9/30/1974 -11.93%
11/30/1973 -11.39%
9/30/2002 -11.00%
2/27/2009 -10.99%
3/31/1980 -10.18%
8/31/1990 -9.43%
2/28/2001 -9.23%
10/31/1978 -9.16%
9/30/2008 -9.08%
4/30/1970 -9.05%
8/30/1974 -9.03%
No doubt it is bad. If you were investing for that 1 month you would be quite disappointed. If one invests for 10+ years (which is what you would expect if you are investing in equities) who cares what happens before that time?

After all the years of studying, reading, and discussing equities. The only 2 things I know for sure are: 1. Markets go up, down, and sideways all the time and 2. Who knows when one happens. Once one accepts that it makes investing a piece of cake.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

JackoC
Posts: 349
Joined: Sun Aug 12, 2018 11:14 am

Re: For those that think the current selloff is normal

Post by JackoC » Sun Oct 28, 2018 11:49 am

Ron Scott wrote:
Sun Oct 28, 2018 7:27 am
JackoC wrote:
Sat Oct 27, 2018 8:59 pm
hdas wrote:
Sat Oct 27, 2018 6:08 pm
Ron Scott wrote:
Sat Oct 27, 2018 5:49 pm
hdas wrote:
Sat Oct 27, 2018 5:12 pm

Unfortunately this type of stuff is not predictive of forward returns.
Nothing is...
Good to have skepticism, while you are at it, let us look at the monthly sp changes (index). We are on track on having a terrible month, say down more than 5% (but anything can happen in 2 days)......anyways. Since 1950 this has happened 69 times, here's the scorecard for the returns of the following month:

N= 69
mean =-1.14%
stdev=6.84%
median=-0.54%
%Positive=46.38%
T-Score=-2.20

This is what they call 'Momentum'.....
IOW it is mildly predictive. As are other simple measures of momentum*, like where the market is relative to where it was a year ago. Also when volatility has been high, a given % in stocks is taking more risk of losses than when it's low, because future short term volatility is strongly predicted by recent volatility**. Neither of these considerations are major enough to use as a crystal ball to dry constant and large tactical allocation changes. But the two together pose a bit of an anomaly/conundrum for the idea that it's optimum to have a fixed % in stocks regardless of market conditions and to rebalance it back to that % frequently**.

*momentum of the whole market/index varying over time, as opposed to where you pick stocks with relatively better momentum than others at a given time.
**there's not 100% autocorrelation between short term recent and short term future volatility or else volatility could never change, but the correlation is pretty high, much higher than the correlation betwen short term recent and short term future returns.
***the effect you cite is among the reasons some personal finance guru types say you shouldn't rebalance that often.
Interesting... Unfortunately this type of stuff is not predictive of forward returns.
But the actual numbers posted don't show that in the particular case given. They show that very bad returns one month have been somewhat predictive of less than average returns the following month. And as I mentioned, you can also see in general historically that various momentum/trend measures in stock markets have had non-zero predictive power. It's just not very strong predictive power. While OTOH again, recently past volatility is quite strongly predictive of near term future volatility. That says nothing about return, but it does say something about risk, and return is measured relative to risk. High recent volatility fairly strongly predicts relatively high volatility for a while. Therefore the idea that a constant % in stocks means constant risk (as far as can be predicted) is fairly clearly in error. But there's no substitute strategy nearly as simple. It's a dilemma, and a little more than just 'interesting'. :happy

Ron Scott
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Joined: Tue Apr 05, 2016 5:38 am

Re: For those that think the current selloff is normal

Post by Ron Scott » Sun Oct 28, 2018 12:17 pm

JackoC wrote:
Sun Oct 28, 2018 11:49 am
Ron Scott wrote:
Sun Oct 28, 2018 7:27 am
JackoC wrote:
Sat Oct 27, 2018 8:59 pm
hdas wrote:
Sat Oct 27, 2018 6:08 pm
Ron Scott wrote:
Sat Oct 27, 2018 5:49 pm


Nothing is...
Good to have skepticism, while you are at it, let us look at the monthly sp changes (index). We are on track on having a terrible month, say down more than 5% (but anything can happen in 2 days)......anyways. Since 1950 this has happened 69 times, here's the scorecard for the returns of the following month:

N= 69
mean =-1.14%
stdev=6.84%
median=-0.54%
%Positive=46.38%
T-Score=-2.20

This is what they call 'Momentum'.....
IOW it is mildly predictive. As are other simple measures of momentum*, like where the market is relative to where it was a year ago. Also when volatility has been high, a given % in stocks is taking more risk of losses than when it's low, because future short term volatility is strongly predicted by recent volatility**. Neither of these considerations are major enough to use as a crystal ball to dry constant and large tactical allocation changes. But the two together pose a bit of an anomaly/conundrum for the idea that it's optimum to have a fixed % in stocks regardless of market conditions and to rebalance it back to that % frequently**.

*momentum of the whole market/index varying over time, as opposed to where you pick stocks with relatively better momentum than others at a given time.
**there's not 100% autocorrelation between short term recent and short term future volatility or else volatility could never change, but the correlation is pretty high, much higher than the correlation betwen short term recent and short term future returns.
***the effect you cite is among the reasons some personal finance guru types say you shouldn't rebalance that often.
Interesting... Unfortunately this type of stuff is not predictive of forward returns.
But the actual numbers posted don't show that in the particular case given. They show that very bad returns one month have been somewhat predictive of less than average returns the following month. And as I mentioned, you can also see in general historically that various momentum/trend measures in stock markets have had non-zero predictive power. It's just not very strong predictive power. While OTOH again, recently past volatility is quite strongly predictive of near term future volatility. That says nothing about return, but it does say something about risk, and return is measured relative to risk. High recent volatility fairly strongly predicts relatively high volatility for a while. Therefore the idea that a constant % in stocks means constant risk (as far as can be predicted) is fairly clearly in error. But there's no substitute strategy nearly as simple. It's a dilemma, and a little more than just 'interesting'. :happy
Look at it this way: Assessments of short-term volatility don't really help the longer-term investor looking to build a retirement portfolio or living in retirement. It's like studying water molecules to predict wave patterns. At best, it may bolster their confidence that they are likely to be fine if they don't try to time the market.

These people are either fragile or robust with regard to volatility and that's what they need to focus on. Those who need to spend a relatively high % of assets for living expenses, rely on higher returns from equities, and who may need to sell equities at a low to fund living expenses are relativity fragile to market volatility. Those who spend a relatively low % of assets for living expenses, can live with relatively low returns, and who will not need to sell equities at a low to fund living expenses are relativity robust.

You can't predict returns but you can prepare for low returns. The rest is noise.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

JackoC
Posts: 349
Joined: Sun Aug 12, 2018 11:14 am

Re: For those that think the current selloff is normal

Post by JackoC » Sun Oct 28, 2018 12:56 pm

Ron Scott wrote:
Sun Oct 28, 2018 12:17 pm
JackoC wrote:
Sun Oct 28, 2018 11:49 am


But the actual numbers posted don't show that in the particular case given. They show that very bad returns one month have been somewhat predictive of less than average returns the following month. And as I mentioned, you can also see in general historically that various momentum/trend measures in stock markets have had non-zero predictive power. It's just not very strong predictive power. While OTOH again, recently past volatility is quite strongly predictive of near term future volatility. That says nothing about return, but it does say something about risk, and return is measured relative to risk. High recent volatility fairly strongly predicts relatively high volatility for a while. Therefore the idea that a constant % in stocks means constant risk (as far as can be predicted) is fairly clearly in error. But there's no substitute strategy nearly as simple. It's a dilemma, and a little more than just 'interesting'. :happy
Look at it this way: Assessments of short-term volatility don't really help the longer-term investor looking to build a retirement portfolio or living in retirement. It's like studying water molecules to predict wave patterns. At best, it may bolster their confidence that they are likely to be fine if they don't try to time the market.

These people are either fragile or robust with regard to volatility and that's what they need to focus on. Those who need to spend a relatively high % of assets for living expenses, rely on higher returns from equities, and who may need to sell equities at a low to fund living expenses are relativity fragile to market volatility. Those who spend a relatively low % of assets for living expenses, can live with relatively low returns, and who will not need to sell equities at a low to fund living expenses are relativity robust.

You can't predict returns but you can prepare for low returns. The rest is noise.
The great majority of people should keep everything as simple as possible, no argument there. And the simple philosophies outlined on this forum are in general (with a few possible exceptions) not things that will get naive investors in trouble. So good. But the problem comes in excessively projecting that simplistic view as if were the complete market reality, which it's often not.

This case is an example. Simply keeping a fixed % of financial assets in stocks and only changing it due to personal circumstances is probably the way to go for most people most of the time, with some question in my mind whether average investors should really keep shoveling money into stocks if things really melt down just to keep some arbitrary %. And it *is* arbitrary, because the market does tell you what volatility is likely to be in the short term. 60% stocks is way more risky when the VIX is at 50 then when it's at 10. The fixed % idea simplistically ignores that reality. But again, if average investors started changing things around every time market conditions changed, in general and on average they would screw themselves, as is well demonstrated.

So it's some kind of balance between market reality and psychology of investors who are not market oriented. The problem again is just when the pro-simple view goes overboard to projecting the simplistic ideas onto the market, insisting everything about the market itself is completely simple ('returns are 100% non predictable', 'predictability of volatility doesn't matter *at all*', etc). Rather than staying with the valid area of 'this simplistic approach is best all things considered because a more complicated one is too likely to trip up the naive investor'. I'm completely on board with the latter kind of statement.

wootwoot
Posts: 193
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Re: For those that think the current selloff is normal

Post by wootwoot » Sun Oct 28, 2018 1:18 pm

This reads like another market timing thread. There is no investing theory or news here just pure opinion and speculation.

Shut it down!

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Earl Lemongrab
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Re: For those that think the current selloff is normal

Post by Earl Lemongrab » Sun Oct 28, 2018 3:02 pm

There's no point in worrying about it because there's not much you can do. Your portfolio and investing plan should already be set up to tell you what to do when the market goes down.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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willthrill81
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Location: USA

Re: For those that think the current selloff is normal

Post by willthrill81 » Sun Oct 28, 2018 3:10 pm

If an investor in stocks finds themselves the least bit worried by a ~10% market correction in a fairly brief period of time, there is a strong probability that they should revisit their IPS. They may have too much stock exposure, are checking the markets too frequently, both, etc.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Ron Scott
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Re: For those that think the current selloff is normal

Post by Ron Scott » Sun Oct 28, 2018 4:23 pm

JackoC wrote:
Sun Oct 28, 2018 12:56 pm
Ron Scott wrote:
Sun Oct 28, 2018 12:17 pm
JackoC wrote:
Sun Oct 28, 2018 11:49 am


But the actual numbers posted don't show that in the particular case given. They show that very bad returns one month have been somewhat predictive of less than average returns the following month. And as I mentioned, you can also see in general historically that various momentum/trend measures in stock markets have had non-zero predictive power. It's just not very strong predictive power. While OTOH again, recently past volatility is quite strongly predictive of near term future volatility. That says nothing about return, but it does say something about risk, and return is measured relative to risk. High recent volatility fairly strongly predicts relatively high volatility for a while. Therefore the idea that a constant % in stocks means constant risk (as far as can be predicted) is fairly clearly in error. But there's no substitute strategy nearly as simple. It's a dilemma, and a little more than just 'interesting'. :happy
Look at it this way: Assessments of short-term volatility don't really help the longer-term investor looking to build a retirement portfolio or living in retirement. It's like studying water molecules to predict wave patterns. At best, it may bolster their confidence that they are likely to be fine if they don't try to time the market.

These people are either fragile or robust with regard to volatility and that's what they need to focus on. Those who need to spend a relatively high % of assets for living expenses, rely on higher returns from equities, and who may need to sell equities at a low to fund living expenses are relativity fragile to market volatility. Those who spend a relatively low % of assets for living expenses, can live with relatively low returns, and who will not need to sell equities at a low to fund living expenses are relativity robust.

You can't predict returns but you can prepare for low returns. The rest is noise.
Simply keeping a fixed % of financial assets in stocks and only changing it due to personal circumstances is probably the way to go for most people most of the time, with some question in my mind whether average investors should really keep shoveling money into stocks if things really melt down just to keep some arbitrary %. And it *is* arbitrary, because the market does tell you what volatility is likely to be in the short term. 60% stocks is way more risky when the VIX is at 50 then when it's at 10. The fixed % idea simplistically ignores that reality. But again, if average investors started changing things around every time market conditions changed, in general and on average they would screw themselves, as is well demonstrated.
I agree that choosing an AA and rebalancing according to some personal plan is a strange business. But timing schemes are too. Rather than going through some psychological exercise on risk tolerance, it's better to educate yourself about volatility IMO and learn to live with it intelligently.

To my mind, my "plan", it's better to keep unnecessary money in equities and either leave it to the kids or try to add to it for giggles when you think everybody has bailed. You need to have money to do this however or you underweight equities. I look at equity risk level in terms of need, not volatility. If you NEED most of your worth, don't put yourself in a position to have to sell equities in a downturn and use a conservative time period like 10 years to make the determination.

Regarding my FRAGILE vs. ROBUST paradigm above, you're lifestyle (level of desired expense/flexibility in spending), net worth, and AA are confounded and need to be considered as a system. Talking about one or two in isolation doesn't get to the heart of the matter.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: For those that think the current selloff is normal

Post by Ron Scott » Sun Oct 28, 2018 5:30 pm

willthrill81 wrote:
Sun Oct 28, 2018 3:10 pm
If an investor in stocks finds themselves the least bit worried by a ~10% market correction in a fairly brief period of time, there is a strong probability that they should revisit their IPS. They may have too much stock exposure, are checking the markets too frequently, both, etc.
I've thought a lot about the financial-advisor-as-armchair-psychologist paradigm so popular today (assessing your fear of market loss with quick introspection or some Seventeen Magazine-like questionnaire) and I just do not like it. The storyline goes something like this: "You belong to a class of people who get nervous when their equity investments drop by X% or $Y, therefore you need to keep your allocation in equities below 30%. Sorry..."

I'd prefer to see intelligent people use reason and rationality to recognize self-defeating thinking, and learn a more appropriate set of emotions when dealing with adversity. I really believe this is the better approach.

To give you an idea what might lead to more rational behavior consider that this excellent post by BH hdas might have real educational value to someone who would otherwise freak at a common market downturn:
hdas wrote:
Thu Oct 25, 2018 6:56 am
Excellent presentation from former Ren-Tech managing director Robert Fray.

Here's the video https://www.youtube.com/watch?v=27x632vOjXk
Here's the write-up https://www.fqscapital.com/Documents/Va ... wdowns.pdf

First, Remember this:

One spends about 75% in a draw-down state. And more than half the time in a major draw-down.

Some Quotes:
The most important
lesson from the history of drawdowns is to be in a position with the required patience
to get through them.
It is surprising just how often an investor is in a drawdown, “a valley of
regret”. Over this almost two centuries an investor was in a drawdown 74% of the
time, and over 40% of those drawdowns ended up being large ones exceeding 20%.
Despite advances in regulation, management and economic theory, coupled
with a model that was based only on post War drawdowns, there is no convincing
statistical evidence across more than 183 years examined to prove that the character
of market drawdowns has not changed.
If you randomize the order of actual market returns, then the drawdowns are
much shallower. This indicates a deeper structure within the returns that is not well
modeled by standard time series analyses and, therefore, will not be adequately
dealt with in many market simulations used in stress testing. Hence, the size of
potential future drawdowns in many analyses will be underestimated and the
consequent risks of being underfunded will be much greater than one would expect.
Main Takeaways:

> Importance of draw-downs as regret input.
> Market seems to behave very similar to the distant past. There's no reason to believe the market is more stable than 100+ years ago.
> It's been impossible to adequate model market behavior to reproduce observed behavior
> It would be a mistake to categorize Great Depression as outlier
> Any study of this type has survivor-ship bias
If I begin my investing journey with the understanding that I will...
a) spend almost half my life living with equities that are 20% or more BELOW their latest highs, and
b) still have an excellent chance at enjoying long-term success, so long as I
c) don't put money I NEED during the next 10 years in equities,
...then I may be able to calm my nerves without revisiting my IPS.

This is obviously NOT a panacea and may only work with a small percentage of people, but it's better IMO than the pseudo-psych being practiced in the business today.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

User avatar
willthrill81
Posts: 6445
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: For those that think the current selloff is normal

Post by willthrill81 » Sun Oct 28, 2018 8:24 pm

Ron Scott wrote:
Sun Oct 28, 2018 5:30 pm
willthrill81 wrote:
Sun Oct 28, 2018 3:10 pm
If an investor in stocks finds themselves the least bit worried by a ~10% market correction in a fairly brief period of time, there is a strong probability that they should revisit their IPS. They may have too much stock exposure, are checking the markets too frequently, both, etc.
I've thought a lot about the financial-advisor-as-armchair-psychologist paradigm so popular today (assessing your fear of market loss with quick introspection or some Seventeen Magazine-like questionnaire) and I just do not like it. The storyline goes something like this: "You belong to a class of people who get nervous when their equity investments drop by X% or $Y, therefore you need to keep your allocation in equities below 30%. Sorry..."

I'd prefer to see intelligent people use reason and rationality to recognize self-defeating thinking, and learn a more appropriate set of emotions when dealing with adversity. I really believe this is the better approach.

To give you an idea what might lead to more rational behavior consider that this excellent post by BH hdas might have real educational value to someone who would otherwise freak at a common market downturn:
hdas wrote:
Thu Oct 25, 2018 6:56 am
Excellent presentation from former Ren-Tech managing director Robert Fray.

Here's the video https://www.youtube.com/watch?v=27x632vOjXk
Here's the write-up https://www.fqscapital.com/Documents/Va ... wdowns.pdf

First, Remember this:

One spends about 75% in a draw-down state. And more than half the time in a major draw-down.

Some Quotes:
The most important
lesson from the history of drawdowns is to be in a position with the required patience
to get through them.
It is surprising just how often an investor is in a drawdown, “a valley of
regret”. Over this almost two centuries an investor was in a drawdown 74% of the
time, and over 40% of those drawdowns ended up being large ones exceeding 20%.
Despite advances in regulation, management and economic theory, coupled
with a model that was based only on post War drawdowns, there is no convincing
statistical evidence across more than 183 years examined to prove that the character
of market drawdowns has not changed.
If you randomize the order of actual market returns, then the drawdowns are
much shallower. This indicates a deeper structure within the returns that is not well
modeled by standard time series analyses and, therefore, will not be adequately
dealt with in many market simulations used in stress testing. Hence, the size of
potential future drawdowns in many analyses will be underestimated and the
consequent risks of being underfunded will be much greater than one would expect.
Main Takeaways:

> Importance of draw-downs as regret input.
> Market seems to behave very similar to the distant past. There's no reason to believe the market is more stable than 100+ years ago.
> It's been impossible to adequate model market behavior to reproduce observed behavior
> It would be a mistake to categorize Great Depression as outlier
> Any study of this type has survivor-ship bias
If I begin my investing journey with the understanding that I will...
a) spend almost half my life living with equities that are 20% or more BELOW their latest highs, and
b) still have an excellent chance at enjoying long-term success, so long as I
c) don't put money I NEED during the next 10 years in equities,
...then I may be able to calm my nerves without revisiting my IPS.


This is obviously NOT a panacea and may only work with a small percentage of people, but it's better IMO than the pseudo-psych being practiced in the business today.
I'm a big proponent that financial education goes a long way toward stomaching the inevitable downturns of stocks.

And if you do all of that, then you won't be "the least bit worried about a 10% market correction." :wink:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Wakefield1
Posts: 867
Joined: Mon Nov 14, 2016 10:10 pm

Re: For those that think the current selloff is normal

Post by Wakefield1 » Mon Oct 29, 2018 1:53 pm

The people who worry about a 10% market correction may be the same people who cause the 10% market correction
Bogle said something about hoping that (during a past correction) that perhaps after the correction was over the stocks would be in stronger hands?

hdas
Posts: 387
Joined: Thu Jun 11, 2015 8:24 am

Re: For those that think the current selloff is normal

Post by hdas » Mon Oct 29, 2018 2:30 pm

Updated the stats in the first post to reflect today's mess. Stay the course :greedy
Stay the course and buy some more.

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