Allan Roth: Probabilities, Truth, and Consequences

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Random Walker
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Allan Roth: Probabilities, Truth, and Consequences

Post by Random Walker » Mon Jul 01, 2019 11:23 am

https://www.advisorperspectives.com/art ... nsequences

Found this article by Allan Roth at Advisor Perspectives. Good reminder that in making investment decisions it is likely a good idea to let the consequences of being wrong override the probabilities of being right. He recommends the mind experiment of imagining 60-90% decline in equity prices. We are all subject to behavioral errors.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by 9-5 Suited » Mon Jul 01, 2019 11:35 am

A great reminder, Dave. The 90% decline in equities thought experiment is an interesting one. It's become almost cliche to assume a "50% decline in stocks" is some kind of magic low point. While we don't want to become chicken little with our life run by the fear of low probability events, it's good to at least meditate on how one might react to such an extreme situation.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by livesoft » Mon Jul 01, 2019 11:42 am

OTOH, many people will see "60-90% decline" and think it will happen all at once in a single day. That kind of thinking leads to bad decisions, too.
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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by bgf » Mon Jul 01, 2019 11:51 am

if markets dropped 90% then i'd have a lot less money in retirement accounts, which i have no current access to anyway, and a lot less money in my taxable account, which would suck but again would create no immediate danger.

if the spillover effects of the drop led to my wife losing her job (unlikely but not impossible as a private high school teacher), we'd still be OK but it drastically decrease the amount of money we could save and also decrease my income by having to cover her health insurance and our daughters.

if i lost my job too (also unlikely as an attorney that does work that is uncorrelated to the business cycle), then we'd have about 6 months of expenses in cash and id probably be wishing i had a paid off house and universal healthcare. at that point, i wouldn't much care what my 401k looked like.

its interesting that this exercise hasn't so much affected how i think about my portfolio but placed the ultimate focus on immediate costs, healthcare, home, food.

i dont suppose id look at my 2.875% mortgage rate the same way if it was unknown where the mortgage payment would be coming from...
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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Random Walker » Mon Jul 01, 2019 12:00 pm

I myself use the 50% mind experiment. I haven’t considered the 90% possibility in my planning.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by livesoft » Mon Jul 01, 2019 12:11 pm

I wonder if the 90% number is so far out there that it stops people from even thinking about a 50% drop. That is, Mr. Roth's presentation backfires. Folks might be more reactive to a 40% to 50% loss to start with since it has happened in most of their lifetimes. Then he can get a few more hours of fees when the markets have dropped 50% and talk about another 40% to 50% drop. Rinse. Repeat.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Tycoon » Mon Jul 01, 2019 12:19 pm

For some on this board a 1.5% drop drives fear and negative behavior.
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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Silk McCue » Mon Jul 01, 2019 12:41 pm

Thanks. That was an excellent read. I already follow Allan and get his monthly email.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by nisiprius » Mon Jul 01, 2019 3:00 pm

For years I thought I was using 50% as my "mind experiment."

When it really happened in 2008-2009 I discovered that all those years I hadn't really believed it really could happen, and my reaction was considerably more intense than I had anticpated it would be.
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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by larryswedroe » Mon Jul 01, 2019 3:06 pm

One of Swedroe's rules of prudent investing: The consequences of decisions should always dominate the probabilities of outcomes, no matter what you think the odds ---and understanding that with investing you cannot even know the odds, at best estimate them based on historical evidence.

One also has to understand that money only can buy happiness to a point. Once you have enough to be financially secure there is no marginal benefit in terms of happiness. Sadly people believe otherwise. That results in the idea of once you have enough (whatever that is for you) to be financial secure, you should stop playing the game. Doesn't mean necessarily zero risk, but having enough low risk assets that you can be secure in any scenario.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Taylor Larimore » Mon Jul 01, 2019 3:12 pm

Random Walker wrote:
Mon Jul 01, 2019 11:23 am
https://www.advisorperspectives.com/art ... nsequences

Found this article by Allan Roth at Advisor Perspectives. Good reminder that in making investment decisions it is likely a good idea to let the consequences of being wrong override the probabilities of being right. He recommends the mind experiment of imagining 60-90% decline in equity prices. We are all subject to behavioral errors.
Dave:

We can learn from nearly everything Allan Roth writes. These are "Investment Gems" from his book: "How a Second Grader Beats Wall Street":

viewtopic.php?t=35236

Thank you for the link and best wishes.
Jack Bogle's Words of Wisdom: "Be leery of projections, whether founded in reasonable expectations or just picked out of the proverbial hat. Anything can happen n the stock market."
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Last edited by Taylor Larimore on Tue Jul 02, 2019 8:46 am, edited 1 time in total.
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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Ping Pong » Mon Jul 01, 2019 3:12 pm

If you’re going to have a 90% equity drop in your mind experiment, you also need make a mind experiment with a 95% real bond drop, which is less than what other countries have experienced.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by larryswedroe » Mon Jul 01, 2019 3:47 pm

Ping
And BTw, gold dropped almost 90% in real terms from early 1980s through 03. so these things can happen.
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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by dodecahedron » Mon Jul 01, 2019 3:56 pm

livesoft wrote:
Mon Jul 01, 2019 11:42 am
OTOH, many people will see "60-90% decline" and think it will happen all at once in a single day. That kind of thinking leads to bad decisions, too.
All at once in a single day might not be any easier than taking months or years for the same decline.

All at once in a single day might just numb you with shock and then you adjust. But spiraling down and down and down for months or years on end could be much worse.

My asset allocation is quite conservative. One thing that had a big influence on me was reading accounts from the Depression recommended on this list, particularly the diary. Also thinking about Japan. An extended drop dragging on and on and on with no end in sight seemed very daunting and not the way I wanted to spend my so-called golden years. Jason Zweig´s book, Your Money and Your Brain, was also very helpful.

So I chose a very modest equity allocation after I took over managing finances in the wake of my husband´s death in 2013. In retrospect, my portfolio would be considerably larger if I had been more aggressive but it is more than enough and I have ZERO regrets.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by dodecahedron » Mon Jul 01, 2019 4:02 pm

Ping Pong wrote:
Mon Jul 01, 2019 3:12 pm
If you’re going to have a 90% equity drop in your mind experiment, you also need make a mind experiment with a 95% real bond drop, which is less than what other countries have experienced.
My fixed income follows Bill Bernstein´s and Allan Roth´s guidelines and suggestions, mostly short term liquid stuff like direct CDs with modest early withdrawal penalties, money market accounts, TIAA trad (liquid variety) and a good chunk of intermediate term TIPS and some Ibonds so not too worried about a 95% real bond drop.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Nate79 » Mon Jul 01, 2019 8:31 pm

Excellent article. I believe that most investors highly underestimate the risk of stocks, especially due to the last decade.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Day9 » Mon Jul 01, 2019 8:49 pm

A 90% drop is one reason why I suggest risk seeking investors to hold at least some bonds and not go all-stock. Benjamin Graham said never have more than 75% stocks or less than 25%. A 75/25 or even 90/10 portfolio will have a lot more value after a 90% drop in stock prices than a 100/0 portfolio. Another reason is to get used to having a diversified portfolio and get in the habit of rebalancing when you are in the early accumulation phase.
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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by SGM » Tue Jul 02, 2019 4:31 am

Daniel Kahneman's book Thinking Fast and Slow is an original source for the examples of cognitive illusions and errors in the Allan Roth article. It is a good read, but I had to toss it and a thousand other books as we inherited another 1000 books. I don't consider a 90% loss in my planning.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by bearcub » Tue Jul 02, 2019 5:20 am

In 2008-09 I was terrified. I held balanced funds. This way I did not do anything + turned out ok. Today I hold 2 balanced funds + the 2 Vanguard TIPS Funds.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by AlohaJoe » Tue Jul 02, 2019 5:54 am

Random Walker wrote:
Mon Jul 01, 2019 11:23 am
He recommends the mind experiment of imagining 60-90% decline in equity prices.
He writes an article about probabilities. One the one hand he says
I’ve never developed a financial plan that will withstand the U.S. government going out of business. I can’t tell you the probability is zero, but I know it’s very remote.
and then he says
I do my best to have clients imagine their lives after a 60% - 90% stock plunge where a recovery could take a decade or three
"I can't tell you the probability of global stocks falling 90% and not recovering for three decades, but I know it is very remote, so there is no sense developing a financial plan based on imagining that."

Seems to take some motivated reasoning to argue that the US will never default on bonds (even though it has already done so multiple times) and then argue that a global decline of 90% that takes 30 years to recover (which has never happened) is something everyone should envision.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by alpine_boglehead » Tue Jul 02, 2019 6:39 am

Ping Pong wrote:
Mon Jul 01, 2019 3:12 pm
If you’re going to have a 90% equity drop in your mind experiment, you also need make a mind experiment with a 95% real bond drop, which is less than what other countries have experienced.
In my grandfather's attic there are some pounds of colorful paper, which once must have been worth a small fortune. These Austro-Hungarian war bonds (with some coupons clipped, but most still there) were issued by a respectable empire. They remind me that bonds or any currency-denominated assets also don't offer perfect safety.

If you do mind experiments, do them for several plausible scenarios, there's more than 1 or 2 possible futures. This might lead you e.g. toward something like the all-weather portfolio or the KlangFool (c) portfolio :D

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by livesoft » Tue Jul 02, 2019 6:59 am

Allan Roth wrote:I do my best to have clients imagine their lives after a 60% - 90% stock plunge where a recovery could take a decade or three
Client wrote:OK, thanks! I am cashing in my portfolio and building an underground bunker complete with enough stored water, air, food, medicine, and games to last me 30 years. I will also have some belt-and-suspenders among some extra clothes.
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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by plannerman » Tue Jul 02, 2019 8:18 am

Why 90%. Why not 100%. 100% seems more likely to me than 90%. For either to happen would mean there was some catastrophic event that left every business in world (assuming we all invest internationally) essentially worthless. So other than guns and peanut butter, what do you all suggest we invest in. I doubt that even near riskless TIPs would provide any measure of protection.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Park » Tue Jul 02, 2019 8:32 am

To some extent, this thread is about partial or complete destruction of financial assets. That's what William Bernstein's book "Deep Risk" was about. But historically, nominal bonds are more at risk of that than stocks. About leverage, that's another story. It's not easy to find good sources of leverage. Possibly the only way an investor can go bankrupt is through leverage.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by TonyDAntonio » Tue Jul 02, 2019 10:04 am

So gold, bonds and stocks can go down 90% and if I put cash under my mattress it slowly erodes due to inflation. Where does this information lead me?

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by midareff » Tue Jul 02, 2019 10:06 am

plannerman wrote:
Tue Jul 02, 2019 8:18 am
Why 90%. Why not 100%. 100% seems more likely to me than 90%. For either to happen would mean there was some catastrophic event that left every business in world (assuming we all invest internationally) essentially worthless. So other than guns and peanut butter, what do you all suggest we invest in. I doubt that even near riskless TIPs would provide any measure of protection.

plannerman
Perhaps ammo and canned sardines.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Silk McCue » Tue Jul 02, 2019 10:09 am

It is clear to me that a number of posts provided up thread were made by those that didn't read the entire article. Otherwise context would have influenced their responses here.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by randomguy » Tue Jul 02, 2019 10:31 am

dodecahedron wrote:
Mon Jul 01, 2019 4:02 pm
Ping Pong wrote:
Mon Jul 01, 2019 3:12 pm
If you’re going to have a 90% equity drop in your mind experiment, you also need make a mind experiment with a 95% real bond drop, which is less than what other countries have experienced.
My fixed income follows Bill Bernstein´s and Allan Roth´s guidelines and suggestions, mostly short term liquid stuff like direct CDs with modest early withdrawal penalties, money market accounts, TIAA trad (liquid variety) and a good chunk of intermediate term TIPS and some Ibonds so not too worried about a 95% real bond drop.
When 10000% inflation hits, you are still losing all your money. Obviously not a common event but it does happen. 20s germany is the classic case. Stocks did much better.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Ben Mathew » Tue Jul 02, 2019 11:31 am

It's good to imagine terrible scenarios with equities, but be sure to do so nominal bonds as well.

Someone saving $20K per year (real dollars) for 40 years will end up with

(a) Stocks @ 5% real return: $2,415,995
(b) Nominal bonds @ 2% real return: $1,208,040

If stocks drop 90% at some point in those 40 years and does not recover (in the sense that post-crash returns are not higher than normal), the stock investor will be left with $241,600.

But if the real return of bonds is -2% because inflation came in higher than expected, the bond investor will be left with $554,300. That's better than the stock investor, but the difference is not as large as one might suspect. Both are in pretty bad shape.

My guess is that more people have been hurt in the long run by the slow bleed of high inflation and high fees than by stock market crashes (assuming they are invested in diversified index funds, not day trading hot stocks on margin, etc.)

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Controlling risk

Post by Taylor Larimore » Tue Jul 02, 2019 11:33 am

Bogleheads:

This topic reminds me of what Peter Lynch said: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections."

Jack Bogle's Words of Wisdom: "The single most effective way to control risk is by controlling equity exposure."

Best wishes.
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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by dodecahedron » Tue Jul 02, 2019 1:17 pm

randomguy wrote:
Tue Jul 02, 2019 10:31 am
dodecahedron wrote:
Mon Jul 01, 2019 4:02 pm
Ping Pong wrote:
Mon Jul 01, 2019 3:12 pm
If you’re going to have a 90% equity drop in your mind experiment, you also need make a mind experiment with a 95% real bond drop, which is less than what other countries have experienced.
My fixed income follows Bill Bernstein´s and Allan Roth´s guidelines and suggestions, mostly short term liquid stuff like direct CDs with modest early withdrawal penalties, money market accounts, TIAA trad (liquid variety) and a good chunk of intermediate term TIPS and some Ibonds so not too worried about a 95% real bond drop.
When 10000% inflation hits, you are still losing all your money. Obviously not a common event but it does happen. 20s germany is the classic case. Stocks did much better.
If and when 10000% inflation hits, the social instability and upheaval may be so great that the value of one´s assets is the least of one´s problems, as 1920s Germany illustrates. Whether they held bonds or stocks, many German investors lost their entire net worth when the German government expropriated their assets in the following decade.

For inflation scenarios that are less catastrophic than 1920s German hyperinflation, I think my TIPS should hold up at least as well as stocks, if not better.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by randomguy » Tue Jul 02, 2019 3:58 pm

dodecahedron wrote:
Tue Jul 02, 2019 1:17 pm
randomguy wrote:
Tue Jul 02, 2019 10:31 am
dodecahedron wrote:
Mon Jul 01, 2019 4:02 pm
Ping Pong wrote:
Mon Jul 01, 2019 3:12 pm
If you’re going to have a 90% equity drop in your mind experiment, you also need make a mind experiment with a 95% real bond drop, which is less than what other countries have experienced.
My fixed income follows Bill Bernstein´s and Allan Roth´s guidelines and suggestions, mostly short term liquid stuff like direct CDs with modest early withdrawal penalties, money market accounts, TIAA trad (liquid variety) and a good chunk of intermediate term TIPS and some Ibonds so not too worried about a 95% real bond drop.
When 10000% inflation hits, you are still losing all your money. Obviously not a common event but it does happen. 20s germany is the classic case. Stocks did much better.
If and when 10000% inflation hits, the social instability and upheaval may be so great that the value of one´s assets is the least of one´s problems, as 1920s Germany illustrates. Whether they held bonds or stocks, many German investors lost their entire net worth when the German government expropriated their assets in the following decade.

For inflation scenarios that are less catastrophic than 1920s German hyperinflation, I think my TIPS should hold up at least as well as stocks, if not better.
It took 20 years for the german society to break down. Wouldn't you have liked to have cash during that time frame

Image

versus being broke?:) Obviously we are taking rare events. I have no clue if 90% stock market drops are more or less rare than 90% bond drops (and how often they are correlated. The russian stock market and bond marker performed about the same for the 1917 investor:))

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by dodecahedron » Tue Jul 02, 2019 4:41 pm

randomguy wrote:
Tue Jul 02, 2019 3:58 pm

It took 20 years for the german society to break down.
Venezuela is experiencing hyperinflation and social breakdown simultaneously right now. No guarantees of a decade long delay between the onset of hyperinflation and social breakdown. Preparing for such a scenario is beyond my ability to use any asset class for, since expropriation can potentially make any financial asset worthless. As Bill Bernstein says, it is really not realistic to expect a financial asset plan to deal with that type of risk.

But for more modest levels of inflation of the type one can reasonably prepare for, I feel that the chunk of my portfolio that is in TIPS will help me sleep well at night better than my equity component.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by randomguy » Tue Jul 02, 2019 8:23 pm

dodecahedron wrote:
Tue Jul 02, 2019 4:41 pm
randomguy wrote:
Tue Jul 02, 2019 3:58 pm

It took 20 years for the german society to break down.
Venezuela is experiencing hyperinflation and social breakdown simultaneously right now. No guarantees of a decade long delay between the onset of hyperinflation and social breakdown. Preparing for such a scenario is beyond my ability to use any asset class for, since expropriation can potentially make any financial asset worthless. As Bill Bernstein says, it is really not realistic to expect a financial asset plan to deal with that type of risk.

But for more modest levels of inflation of the type one can reasonably prepare for, I feel that the chunk of my portfolio that is in TIPS will help me sleep well at night better than my equity component.
Sure but can't you also just say that 90% stock market drops aren't worth preparing for the same reasons? It isn't like there is a history of global markets dropping that far and staying there. Unless you start taking on concentrated risk (only a certain sector or country) it just doesn't happen. Much like the bond/cash situation you are far more likely to be done in by political issues (lack of access to accounts) if past history is anything to go by.

You can undoubtedly take on too much risk. Going 130%, putting all your money in 3 stocks, investing in 1 hot country aren't exactly great ideas. But you have to be careful at the other end. Just because 50/50 is "Safer" than 100/0, it doesn't follow that 10/90 is even better. Someone in there is a number that balances out the various risk.

And the question is always how much gain are you willing to give up to avoid risk. I doubt gold is going to make the big bucks for me. I have more faith that if the markets drop 90% and cash goes to 0, then there is some chance gold helps. Do I want to give up a couple percent of return for that safety? I don't. But I can understand why others make that choice.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Allan Roth » Wed Jul 03, 2019 3:22 pm

In the article I wrote, I stated: "There is at least a 10-20% chance of a 60-90% market decline over the next three decades." With two 50%+ off sales since 2000, I don't think this is a remote possibility. There is a chapter in my 10-year old book where my 8-year old son was smart enough not to bet his lunch money. In 2007, I saw many people betting their retirement money and had to dramatically cut back for the rest of their lives. They snatched defeat out of the jaws of victory!

I've also found that the most aggressive of investors sell after a plunge and moderate to conservative investors buy more stock when they go on sale.

I bet on March 9, 2009, not as many people felt a 60-90% decline since the October 9, 2007 high was a remote possibility. We have very short memories!

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by retiringwhen » Wed Jul 03, 2019 3:34 pm

Allan Roth wrote:
Wed Jul 03, 2019 3:22 pm
I bet on March 9, 2009, not as many people felt a 60-90% decline since the October 9, 2007 high was a remote possibility. We have very short memories!
As I've posted in other threads, I was not really paying attention in 2008-09 as real-life was throwing much bigger problems at me than the market, but your simply stating the facts of that time does give me some willies in my stomach... Like many unpleasant things in life, we often need to be reminded of them at appropriate times because we can do a very good job or compartmentalizing them away as the pain/fear would be too great if we held them all in our mind all the time.

You method is a good one!

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Fallible » Wed Jul 03, 2019 6:19 pm

Allan, thanks for the article. More advisors like you are needed who can well explain the role of behavior in investing. If you couldn’t get your client to further lower unnecessary risk, probably no one could (except Kahneman himself?).

Also, a question: You say your client clearly understood the logic of your argument, but "emotions prevented this most logical and mathematical person to lower risk further." Can you say what emotions held the client back? Or did he understand himself what they were and what role they might have played?
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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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Allan Roth » Thu Jul 04, 2019 2:51 pm

Fallible wrote:
Wed Jul 03, 2019 6:19 pm

Also, a question: You say your client clearly understood the logic of your argument, but "emotions prevented this most logical and mathematical person to lower risk further." Can you say what emotions held the client back? Or did he understand himself what they were and what role they might have played?
I'm sorry but I can't without disclosing confidential information. He gave me permission to write in generalities only.

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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Fallible » Fri Jul 05, 2019 11:58 am

Allan Roth wrote:
Thu Jul 04, 2019 2:51 pm
Fallible wrote:
Wed Jul 03, 2019 6:19 pm

Also, a question: You say your client clearly understood the logic of your argument, but "emotions prevented this most logical and mathematical person to lower risk further." Can you say what emotions held the client back? Or did he understand himself what they were and what role they might have played?
I'm sorry but I can't without disclosing confidential information. He gave me permission to write in generalities only.
Understood, and generalities really are sufficient. Thanks to you both.
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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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by Blue » Fri Jul 05, 2019 4:51 pm

Allan Roth wrote:
Wed Jul 03, 2019 3:22 pm
In the article I wrote, I stated: "There is at least a 10-20% chance of a 60-90% market decline over the next three decades." With two 50%+ off sales since 2000, I don't think this is a remote possibility.
I’d love to read more of your thoughts on this possibility. Do you believe this to be a real possibility for a globally diversified equity portfolio that includes a tilt to small and value factors? Or, is this reflecting your view of current valuations of US large blend/growth?

From my perspective, planning for a commonly accepted risk of dropping 50% of equity value is a world of difference from planning for a 90% drop in equity value.

Curious to learn more.

randomguy
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Re: Allan Roth: Probabilities, Truth, and Consequences

Post by randomguy » Fri Jul 05, 2019 5:11 pm

Blue wrote:
Fri Jul 05, 2019 4:51 pm
Allan Roth wrote:
Wed Jul 03, 2019 3:22 pm
In the article I wrote, I stated: "There is at least a 10-20% chance of a 60-90% market decline over the next three decades." With two 50%+ off sales since 2000, I don't think this is a remote possibility.
I’d love to read more of your thoughts on this possibility. Do you believe this to be a real possibility for a globally diversified equity portfolio that includes a tilt to small and value factors? Or, is this reflecting your view of current valuations of US large blend/growth?

From my perspective, planning for a commonly accepted risk of dropping 50% of equity value is a world of difference from planning for a 90% drop in equity value.

Curious to learn more.
To some extent it isn't. If in 2008 we dropped another 20% over 2 months before having the same sharp rebounds, would it have made any difference? If you had the cash to for 6-7 years, the additional drop just didn't matter.

Is it possible for the markets to drop 75% and stay there for a decade? I have a feeling that would require some major social upheavel event. The great depression is the only drop of that magnitude in US history and there was a pretty rapid rebound off those lows.

And as far as conservative investors buying on drops, my experience is the opposite. They were the ones that were panicking and talking about plan B not the high equity investors who accepted that volatility was part of life. The exception is the conservative investors who tilt towards equities when the markets hit peaks.

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