Staying the course

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Cpadave
Posts: 214
Joined: Wed Nov 22, 2017 11:53 am

Staying the course

Post by Cpadave »

Supposed you have enough money for retirement, lets say 10m. And you decide to pick 80-90% equity as part of your investment plan. Would you stay the course in extreme risk event such as ww3, infectious disease completely out of control like in movies or other similar situations?

Is there a situation where staying the course would not be wise. Thanks for your input.
Gufomel
Posts: 548
Joined: Sat Feb 14, 2015 9:52 pm

Re: Staying the course

Post by Gufomel »

I think in the case where you’ve “won the game” but you still have a desire to invest for growth (perhaps for legacy reasons), you should choose a $ amount that you are comfortable living off of if equities go to 0 and put that amount in low risk investments**. Everything else you put in riskier investments (i.e. equities).

In your example if someone with $10m is willing to live with a $2m portfolio if it truly came to that, then 80% in equities seems reasonable to me.

But investing at 80/20 with the intention that you’d sell out if you start getting worried would not be wise. Either the market has already priced in ww3 (in your example) before you realize it and you’ve already lost more than you were willing to, or you’re constantly worrying ahead of time whether “this” event is the black swan to pull out of the market in fear of.

**In a world where equities truly went to 0 or near 0, I think it’s probably safe to say that there’s not many risk-free investments out there so your $2m probably isn’t safe either. But the point is, if you’ve won the game, only invest in risky assets what you’re willing to lose.
User avatar
David Jay
Posts: 9372
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Staying the course

Post by David Jay »

You have created what I consider to be a false dilemma. At BH we teach that one should put their effort into selecting an appropriate asset allocation in advance of future extreme risks. It should be an AA that one can hold through thick and thin.

Selecting the wrong AA and selling out after a substantial market drop is the worst of all outcomes. Author William Bernstein has discussed this in a booklet entitled “Deep Risk”, quoting as follows: "...mistiming the market is probably the most frequent and severe form of permanent capital loss."

To rephrase the original question more appropriately:
Cpadave wrote: Thu Jun 25, 2020 10:46 amIs there a situation where staying the course an 80%-90% equity allocation would not be wise?
The answer is clearly “Yes”
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
Cpadave
Posts: 214
Joined: Wed Nov 22, 2017 11:53 am

Re: Staying the course

Post by Cpadave »

Thanks for the comments. So the equity allocation should be set at a level that no matter the worse outcome, one will never sell due to even extreme risk. So I just need to find out what the % is :)
User avatar
David Jay
Posts: 9372
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Staying the course

Post by David Jay »

Cpadave wrote: Thu Jun 25, 2020 11:16 am Thanks for the comments. So the equity allocation should be set at a level that no matter the worse outcome, one will never sell due to even extreme risk. So I just need to find out what the % is :)
Exactly.

One tool I like is this Vanguard chart, focusing specifically on the “Worst Year” number as a stress test of one’s intestinal fortitude: https://vanguard.com/us/insights/saving ... llocations

80/20 maximum one year loss was 43%
20/80 maximum one year loss was 10%
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Gufomel
Posts: 548
Joined: Sat Feb 14, 2015 9:52 pm

Re: Staying the course

Post by Gufomel »

Cpadave wrote: Thu Jun 25, 2020 11:16 am Thanks for the comments. So the equity allocation should be set at a level that no matter the worse outcome, one will never sell due to even extreme risk. So I just need to find out what the % is :)
For someone who has “won the game”, yes I think that’s how it should be approached.

For someone who is still accumulating or has “just enough” at retirement, you have to be careful to not so overweight the risk of the worst outcome that you end up going too conservative to meet your long-term goals.

You can never know at exactly at what point you might end up selling out, but setting up a portfolio with the intention from the beginning of selling out if things get bad down the road does not sound wise.
Fallible
Posts: 7514
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: Staying the course

Post by Fallible »

Cpadave wrote: Thu Jun 25, 2020 10:46 am ...
Is there a situation where staying the course would not be wise. ...
The answer to your question is a simple Yes! Staying the course implies the RIGHT course for the individual investor. If there are changes in circumstances on which a course (asset allocation) was based, the course may no longer be the right one. And, as you said, it's up to you to find the new right one for you.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
Topic Author
Cpadave
Posts: 214
Joined: Wed Nov 22, 2017 11:53 am

Re: Staying the course

Post by Cpadave »

Thanks. All great points to keep in mind.
Robot Monster
Posts: 1522
Joined: Sun May 05, 2019 11:23 am
Location: New York

Re: Staying the course

Post by Robot Monster »

David Jay wrote: Thu Jun 25, 2020 11:27 am
Cpadave wrote: Thu Jun 25, 2020 11:16 am Thanks for the comments. So the equity allocation should be set at a level that no matter the worse outcome, one will never sell due to even extreme risk. So I just need to find out what the % is :)
Exactly.

One tool I like is this Vanguard chart, focusing specifically on the “Worst Year” number as a stress test of one’s intestinal fortitude: https://vanguard.com/us/insights/saving ... llocations

80/20 maximum one year loss was 43%
20/80 maximum one year loss was 10%
This is a good graphic (from an old article, unfortunately) for visualizing historical S&P returns.
http://archive.nytimes.com/www.nytimes. ... aphic.html
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
Gufomel
Posts: 548
Joined: Sat Feb 14, 2015 9:52 pm

Re: Staying the course

Post by Gufomel »

Robot Monster wrote: Thu Jun 25, 2020 1:06 pm
David Jay wrote: Thu Jun 25, 2020 11:27 am
Cpadave wrote: Thu Jun 25, 2020 11:16 am Thanks for the comments. So the equity allocation should be set at a level that no matter the worse outcome, one will never sell due to even extreme risk. So I just need to find out what the % is :)
Exactly.

One tool I like is this Vanguard chart, focusing specifically on the “Worst Year” number as a stress test of one’s intestinal fortitude: https://vanguard.com/us/insights/saving ... llocations

80/20 maximum one year loss was 43%
20/80 maximum one year loss was 10%
This is a good graphic (from an old article, unfortunately) for visualizing historical S&P returns.
http://archive.nytimes.com/www.nytimes. ... aphic.html
Thanks for sharing. So it looks like a lump sum invested in the S&P anywhere between about 1955 to 1975 had a negative real return in 2010? And a negative real return throughout practically the entire holding period except a small gap in the late 90’s. That’s.....sobering.
reln
Posts: 446
Joined: Fri Apr 19, 2019 4:01 pm

Re: Staying the course

Post by reln »

Cpadave wrote: Thu Jun 25, 2020 10:46 am Supposed you have enough money for retirement, lets say 10m. And you decide to pick 80-90% equity as part of your investment plan. Would you stay the course in extreme risk event such as ww3, infectious disease completely out of control like in movies or other similar situations?

Is there a situation where staying the course would not be wise. Thanks for your input.
I think staying the course refers to avoiding panic selling and greedy buying. I don't think it refers to sticking with a particular asset\product allocation in a static fashion. Your allocation "should" reflect your need to take risk.
Post Reply