What do you think of this advice?

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danielc
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Re: What do you think of this advice?

Post by danielc » Fri Jan 04, 2019 12:16 am

JackoC wrote:
Thu Jan 03, 2019 11:27 pm
The issue isn't what is 'market timing'. As I said originally, the conceptual problem with an arbitrary fixed % in stocks is that you're taking greatly different risk depending on market conditions. Why should you vary your risk like this?
I honestly don't understand what you mean by this. In which way is a constant allocation "varying risk"? What would a "constant risk portfolio" look like?
JackoC wrote:
Thu Jan 03, 2019 11:27 pm
Even in general, but especially in case of saying you should automatically buy more stock, more shares of stock, when the market crashes and, almost invariably, risk is especially high.
Are you saying that stocks are riskier after a market crash?

JackoC wrote:
Thu Jan 03, 2019 11:27 pm
Again, 'because it worked in the past' has some value as an answer but it's *that* strong an answer. Being 100% (or more) in stocks generally worked in the past too,
No, it hasn't. It is easy to come up with points in history in which a retiree with 100% stocks would have outlived his investments. The only useful way to defined "it worked in the past" is in the sense that "investment returns were acceptable over the investment period that is relevant to me".
JackoC wrote:
Thu Jan 03, 2019 11:27 pm
As to 'BH's rebalance X often' I don't think you can say any rebalancing to a fixed % is a necessary component of Jack Bogle's philosophy.
Is that relevant? Why are we talking about Jack?
Last edited by danielc on Fri Jan 04, 2019 7:02 am, edited 1 time in total.

GoldenFinch
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Re: What do you think of this advice?

Post by GoldenFinch » Fri Jan 04, 2019 12:19 am

Jack FFR1846 wrote:
Thu Jan 03, 2019 3:04 pm
heyyou wrote:
Thu Jan 03, 2019 2:59 pm
There was a study I read of a while back which looked at the retail investors with the best results. They tended to be literally dead.
Last time that I posted that, someone claimed that it had been refuted as urban legend. I think that I attributed it to Fidelity fund company who would find it offensive since Fidelity was founded on active management, but followed the market participants into passive funds.
That was a Fidelity study. I first heard a report of it on the radio and posted here. Someone responded to my post with the link to the Fidelity Study. JL Collins spoke of it last year at his talk at Google. Those who did best were dead. Second place were people who forgot they had an account.

It really drives home Jack Bogle's quote, which is one of my favorite......Don't do something, just stand there.
Definitely drives home the idea that people who never touch their money tend to have more of it. Hmmmm...

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Re: What do you think of this advice?

Post by garlandwhizzer » Fri Jan 04, 2019 12:17 pm

l1am wrote:

A lot of professional traders make a living on TA, so I don't think that's entirely true.
Trading is a zero sum game. For every trader who makes money, another loses money. The idea that trading profits are dominated by technical analysis is not IMO true. Essentially all traders are fully aware of technical analysis patterns and those that do TA tend to pile into the same stocks at the same time and pile out of the same stocks at the same time. This in the end is counter productive. I've known a lot of investors who have gotten wealthy over long time frames investing in the market with a view toward underlying fundamentals and long term over short term thinking. Technical analysis is the ultimate example of short term thinking and high frequency trading, both of which in my view are long term losers on average. I have never personally known anyone who got wealthy doing frequent trading based on technical analysis. Trend following is a refined offshoot of technical analysis and it may reduce losses in a down market but it is unlikely to increase long term gains. If the market were compliant and agreed to follow and repeat its patterns reliably and consistently, TA would work but unfortunately the market seems to enjoy its lack of predictability.

Garland Whizzer

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Re: What do you think of this advice?

Post by JackoC » Fri Jan 04, 2019 1:43 pm

danielc wrote:
Fri Jan 04, 2019 12:16 am
JackoC wrote:
Thu Jan 03, 2019 11:27 pm
The issue isn't what is 'market timing'. As I said originally, the conceptual problem with an arbitrary fixed % in stocks is that you're taking greatly different risk depending on market conditions. Why should you vary your risk like this?
1.I honestly don't understand what you mean by this. In which way is a constant allocation "varying risk"? What would a "constant risk portfolio" look like?
JackoC wrote:
Thu Jan 03, 2019 11:27 pm
Even in general, but especially in case of saying you should automatically buy more stock, more shares of stock, when the market crashes and, almost invariably, risk is especially high.
2. Are you saying that stocks are riskier after a market crash?
JackoC wrote:
Thu Jan 03, 2019 11:27 pm
Again, 'because it worked in the past' has some value as an answer but it's *that* strong an answer. Being 100% (or more) in stocks generally worked in the past too,
3. No, it hasn't. It is easy to come up with points in history in which a retiree with 100% stocks would have outlived his investments. The only useful way to defined "it worked in the past" is in the sense that "investment returns were acceptable over the investment period that is relevant to me".
JackoC wrote:
Thu Jan 03, 2019 11:27 pm
As to 'BH's rebalance X often' I don't think you can say any rebalancing to a fixed % is a necessary component of Jack Bogle's philosophy.
4. Is that relevant? Why are we talking about Jack?
1. In the sense that the expected standard deviation of return of your whole portfolio is greatly different at different times for the same % allocation to stocks. If the expected std deviation of return were constant, option prices would be relatively constant, but they vary enormously over time. And, the normal definition of 'risk' is std deviation of return. Expected Std dev of return isn't the only definition of risk, arguably not the best one but it is the standard definition in modern financial theory.

2. Again, the generally efficient market tells you, via options prices, in general, yes, big time.

3. The point isn't whether 100% stocks has always worked. Rebalancing hasn't either (ask the 'rebalancers' who bought more stock in Russia as the revolution unfolded :happy ). It's that neither 100% stock nor rebalancing have any fundamental argument in their favor other than having *often* worked in the past. Both are products of looking at and extrapolating the past (though in fairness you can't look at the future) as well as personal risk tolerance or outlook. A person who would ask if stock risk is really higher when the VIX goes up by a multiple, as after a crash, however strange that question might seem to me, might as a personal matter believe strongly enough that everything *must* come out OK eventually that it makes sense to always buy more stocks even when the ones you already hold have become more risky. So rebalancing in all cases might be right for them (though still leaving open the question whey they wait for the expected std dev of return to skyrocket before taking on more stocks, why not just take on more risk now by increasing the % of stocks?). Just as 100% stock is the right choice for some others. Neither has any universal preference-free, prediction-free argument in its favor, that I can see.

4. Because an earlier post offered as reasons to rebalance, "Bogleheads rebalance...[on some frequency]" along with "Bernstein says...[to rebalance at some frequency]". So I thought it relevant to note there's nothing inherent to JB's own philosophy that says you'd rebalance, and it would just be an appeal to authority even if he did say it, as it is to offer this guy Bernstein as the reason. Even a justifiably respected person saying you should do something doesn't entirely substitute for a fundamental explanation why you should.

Though note, I'm not saying nobody should rebalance. I just don't think point 3 of the original advice is groundless. There's some food for thought in it, IMO.

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Re: What do you think of this advice?

Post by Fallible » Fri Jan 04, 2019 2:26 pm

JackoC wrote:
Thu Jan 03, 2019 11:27 pm
Fallible wrote:
Thu Jan 03, 2019 5:15 pm
l1am wrote:
Thu Jan 03, 2019 4:57 pm
JackoC wrote:
Thu Jan 03, 2019 4:47 pm
I agree that 3 is the one that's hardest to dismiss. 'Do nothing in a crash' isn't the same as 'rebalance your portfolio to the same % in stocks as prior to the crash'. Rebalancing to an arbitrary % means you're willing to take much more risk at some times than other times.
That's actually a really fair point.

Rebalancing is actually taking action, i.e. buying stocks during a dip/bear. One could argue that it's a form of market timing, since you're taking a different action based on the state of the current market. ...
If rebalancing is simply maintaining an original allocation (which it is), then how is that market timing, which is predicting what the market will do and then investing based on the prediction?
The issue isn't what is 'market timing'. ...
FWIW, my post to the OP was not to say the issue is market timing, but was in response to his comment on rebalancing and to explain the difference between rebalancing and market timing.
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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celia
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Re: What do you think of this advice?

Post by celia » Fri Jan 04, 2019 2:33 pm

columbia wrote:
Wed Jan 02, 2019 9:13 pm
Point 3 isn’t without merit.

Believing that you’re getting some great deal by buying the dips implies that you know the market will soon rebound (and won’t plummet even further).
You don't have to know when you're at the bottom to get a good deal. Yes, the bottom will give you the best deal, but even second or third best is also good. As long as the price is a lot lower than the usual price (whatever that means to you), you can take advantage of the growth that should happen when prices rebound.

Point 3 seems to imply that you would just buy any random holding that lost the most. A better choice would be to buy something that brings you back to your AA since your AA is likely out of whack after a big drop.

l1am wrote:
Wed Jan 02, 2019 9:25 pm
Overall though (given my current knowledge), my actions will just be to maintain AA and ignore market timing.
This sentence sounds contradictory. If you plan to maintain your AA, you need to re-balance after a big drop (or huge gain). That is not market timing. That is re-balancing.

You're taking action not because of "the state of the current market" but because you want to maintain your AA. If a bear market causes your stocks to drop a bigger percentage than your bonds, you no longer have your AA. But if the stocks and bonds (and international or whatever else you hold) all drop the same percentage, then your AA hasn't changed.

But it is rare to see bonds drop the same as stocks. They are generally held to lessen your risk as they tend to be less volatile than stocks.

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Re: What do you think of this advice?

Post by bertilak » Fri Jan 04, 2019 2:49 pm

celia wrote:
Fri Jan 04, 2019 2:33 pm
l1am wrote:
Wed Jan 02, 2019 9:25 pm
Overall though (given my current knowledge), my actions will just be to maintain AA and ignore market timing.
This sentence sounds contradictory. If you plan to maintain your AA, you need to re-balance after a big drop (or huge gain). That is not market timing. That is re-balancing.
Celia, I think that is just what l1am is saying.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

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danielc
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Re: What do you think of this advice?

Post by danielc » Fri Jan 04, 2019 3:05 pm

JackoC wrote:
Fri Jan 04, 2019 1:43 pm
danielc wrote:
Fri Jan 04, 2019 12:16 am
JackoC wrote:
Thu Jan 03, 2019 11:27 pm
The issue isn't what is 'market timing'. As I said originally, the conceptual problem with an arbitrary fixed % in stocks is that you're taking greatly different risk depending on market conditions. Why should you vary your risk like this?
1.I honestly don't understand what you mean by this. In which way is a constant allocation "varying risk"? What would a "constant risk portfolio" look like?
1. In the sense that the expected standard deviation of return of your whole portfolio is greatly different at different times for the same % allocation to stocks.
How so? I am not aware of any investment rule or research that says that the expected standard deviation varies in some way that can be predicted based on what the market has been doing. I treat my asset classes as constant-risk asset classes. I think that's what most bogleheads do, and I'm not familiar with any alternative.

JackoC wrote:
Fri Jan 04, 2019 1:43 pm
And, the normal definition of 'risk' is std deviation of return. Expected Std dev of return isn't the only definition of risk, arguably not the best one but it is the standard definition in modern financial theory.
To be clear, you are the one who brought up std deviation. I've just been using the word "risk".

JackoC wrote:
Fri Jan 04, 2019 1:43 pm
danielc wrote:
Fri Jan 04, 2019 12:16 am
JackoC wrote:
Thu Jan 03, 2019 11:27 pm
Even in general, but especially in case of saying you should automatically buy more stock, more shares of stock, when the market crashes and, almost invariably, risk is especially high.
2. Are you saying that stocks are riskier after a market crash?
2. Again, the generally efficient market tells you, via options prices, in general, yes, big time.
Do you use option prices to decide your asset allocation? I do not think for a minute that option prices reflect real investment risk. I think of them mostly as noise.

JackoC wrote:
Fri Jan 04, 2019 1:43 pm
danielc wrote:
Fri Jan 04, 2019 12:16 am
JackoC wrote:
Thu Jan 03, 2019 11:27 pm
Again, 'because it worked in the past' has some value as an answer but it's *that* strong an answer. Being 100% (or more) in stocks generally worked in the past too,
3. No, it hasn't. It is easy to come up with points in history in which a retiree with 100% stocks would have outlived his investments. The only useful way to defined "it worked in the past" is in the sense that "investment returns were acceptable over the investment period that is relevant to me".
3. The point isn't whether 100% stocks has always worked.
Presumably the point was that 100% stocks has a good probability of working. I dispute that. A portfolio that matches your risk and return needs has a higher probability of "working" than an extreme portfolio. Do I really need to argue that point?

JackoC wrote:
Fri Jan 04, 2019 1:43 pm
It's that neither 100% stock nor rebalancing have any fundamental argument in their favor other than having *often* worked in the past.
Rebalancing is sound advice for managing portfolio risk. 100% stock is one of the riskiest portfolios and has no nuance for investor-specific needs. That makes them different. Are we really going to argue about the merits of a 100% stock allocation vs rebalancing?

JackoC wrote:
Fri Jan 04, 2019 1:43 pm
danielc wrote:
Fri Jan 04, 2019 12:16 am
JackoC wrote:
Thu Jan 03, 2019 11:27 pm
As to 'BH's rebalance X often' I don't think you can say any rebalancing to a fixed % is a necessary component of Jack Bogle's philosophy.
4. Is that relevant? Why are we talking about Jack?
4. Because an earlier post offered as reasons to rebalance, "Bogleheads rebalance...[on some frequency]" along with "Bernstein says...[to rebalance at some frequency]". So I thought it relevant to note there's nothing inherent to JB's own philosophy that says you'd rebalance,
Let's take a step back. People in this forum have said that rebalancing is a good idea, that most of us do it, and we've cited Bernstein. You moved the goal post to "is a necessary component of Jack's philosophy".

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celia
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Re: What do you think of this advice?

Post by celia » Fri Jan 04, 2019 3:07 pm

bertilak wrote:
Fri Jan 04, 2019 2:49 pm
celia wrote:
Fri Jan 04, 2019 2:33 pm
l1am wrote:
Wed Jan 02, 2019 9:25 pm
Overall though (given my current knowledge), my actions will just be to maintain AA and ignore market timing.
This sentence sounds contradictory. If you plan to maintain your AA, you need to re-balance after a big drop (or huge gain). That is not market timing. That is re-balancing.
Celia, I think that is just what l1am is saying.
ignore market timing sounds like "don't buy or sell" (to me).
or "Just stand there and wait."

Or maybe we're just wading into semantics.

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Re: What do you think of this advice?

Post by PrettyCoolWorkshop » Fri Jan 04, 2019 3:25 pm

The most shocking line of the article was this to me:
It is worth noting that, on an inflation adjusted basis, if you bought in 1906, and later missed your brief opportunity to sell at a profit in the late 1920’s, then you didn’t break even for nearly 50 years. It’s pretty dangerous to be “buying the whole way down” when that type of market shows up.
It would be easy to believe this is true, because of the strength of inflation, but it turns out that the author was NOT accounting for dividends. You can see here, if you go between 1906 and 1953 (admittedly using dow jones index data, but it is the best representative data I could find):

https://dqydj.com/dow-jones-return-calculator/

With the results adjusted for inflation, the total DJIA return was -1.1% if you do not reinvest dividends, but it was 1167.7% if you do reinvest dividends. The author was very misleading. Even the 1906 to 1921 period (a continuous, lengthy drop on the author's chart) does not have negative returns with dividends reinvested.


This invalidates the entire thesis of the article in my opinion.
Be greedy and fearful. All the time.

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Re: What do you think of this advice?

Post by JackoC » Fri Jan 04, 2019 6:43 pm

danielc wrote:
Fri Jan 04, 2019 3:05 pm

1. How so? I am not aware of any investment rule or research that says that the expected standard deviation varies in some way that can be predicted based on what the market has been doing. I treat my asset classes as constant-risk asset classes. I think that's what most bogleheads do, and I'm not familiar with any alternative.

2. To be clear, you are the one who brought up std deviation. I've just been using the word "risk".

3. Do you use option prices to decide your asset allocation? I do not think for a minute that option prices reflect real investment risk. I think of them mostly as noise.

4. Presumably the point was that 100% stocks has a good probability of working. I dispute that. A portfolio that matches your risk and return needs has a higher probability of "working" than an extreme portfolio. Do I really need to argue that point?

5. Rebalancing is sound advice for managing portfolio risk.

6. Let's take a step back. People in this forum have said that rebalancing is a good idea, that most of us do it, and we've cited Bernstein. You moved the goal post to "is a necessary component of Jack's philosophy".
1. There's all kinds of investment research that says near term future volatility is highly correlated with recent past volatility. *Return* is not predictable based on past results, but std dev of return is, predictable to an important degree though of course not 100%. I'm not telling anyone they have to pay attention to that fact, but it is a clear fact.

2. I said risk varies. You said you didn't understand. I further clarified that I was using the modern financial theory definition of risk. If there isn't any agreed definition of risk, how can we say it does or doesn't vary?

3. Option prices aren't any more 'noise' than stock prices are, and stock prices are what trigger rebalancing trades. Why pay attention to one and ignore the other? How exactly I run my portfolio isn't the point here, but I don't assume a constant % in stocks is a constant risk...since that's not true.

4. I think this is quibbling about something that's a matter of degree. Your first tangent was to say 100% didn't always work better. You ignore that rebalancing didn't always work better than not either. Now the tangent is that 100% stocks is 'extreme'. But it's not a matter of what's subjectively 'extreme'. A lot of people on this forum don't think 100% stock is 'extreme' (I do, but that's a preference). What 100% stock and rebalancing have in common is both are justified based on past performance and implicit prediction from it 'the stock market will give good returns eventually'. That's not the same as arguing they are equally risky.

5. What is your fundamental argument for that broad statement, applying to most/everyone, that doesn't include 'look at this back test' or 'so and so says'? I don't agree that unlimited commitment to rebalancing in down markets is necessarily sound advice. I think it depends on risk preference, and an implicit prediction 'things will always work out'.

6. No goal posts moved at all. The arguments were given essentially 'because BH do it' and 'so and so says'. I'm just saying those are not terribly convincing arguments, IMO.

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Re: What do you think of this advice?

Post by URSnshn » Fri Jan 04, 2019 8:21 pm

What should I do during a stock market crash?

Quora link: https://qr.ae/TUnNcK

tldr on advice:

Learn how to perform at least basic technical analysis.
Learn how to hedge your portfolio.
Do NOT start buying randomly during a crash, because you can easily lose 50–100% doing that. And keep in mind that even a 50% loss subsequently requires a 100% gain just to break even. If the crash comes in the context of a larger secular bull market, granted, the market will bail you out eventually (presuming you can afford to be underwater indefinitely and don’t need the money).
I didn't read the article either. But I'd have much different advice than posted about what to do in a stock market crash. If someone knew nothing ... the first thing I'd suggest is a good book and this forum. I'm still very grateful to the forum, the books and suggestions I've read.

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bertilak
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Re: What do you think of this advice?

Post by bertilak » Sat Jan 05, 2019 2:27 pm

I'd rate it a "B" -- for Blather. :happy
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

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