conventional BH wisdom you have a lot of $$ take less risk?

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rai
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conventional BH wisdom you have a lot of $$ take less risk?

Post by rai »

I am trying to get this concept straight.

Is it the view of Boglehads that the more you have to invest (which also means the closer to you desired goal) the less risk you want to take?

--as you get older you also have mroe $$ so you take less risks (so age in bonds)--

example, your goal is $4M and you have $1M (from investing over over 10 years of saving) and you wish to grow to $4M in 15-20 years. You already have the first rolling Million which makes the goal easier.

I figure that more risk could make the goal easier to reach (or reach sooner).

My example you have a high savings rate and can re-load after a loss such as we had in 2007-8.

But is the idea to be less risky when you have more money?

This has two points:

1) high investment pile ($1M) to start
2) high savings rate (to reload) ($100K/yr).

The Boglehead rule of thumb (age in bonds) seems to not take into account these two points just age (I don't know).
Last edited by rai on Thu Apr 28, 2011 7:07 pm, edited 1 time in total.
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pauliec84
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Post by pauliec84 »

The standard acaemdic utility curve uses decreasing relative risk aversion.

Per Wikipedia
"If the person experiences an increase in wealth, he/she will choose to increase (or keep unchanged, or decrease) the number of dollars of the risky asset held in the portfolio"
You are right, this does seem to go against standard boglehead advice. Maybe this is because in the real world if you have less money, there is a safety net that prevents you from achieving utilities of zero. Thus you get a free option of sorts, similar to when CEOs are heading a company on the verge of bankruptcy, with the only way to get out by taking enormous amounts of risk.

At the end of the day no two people have the same utility curve and you have to decide for yourself.
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bertie wooster
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Re: conventional BH wisdom you have a lot of $$ take less ri

Post by bertie wooster »

How old are you? If you're saving $100k/year you might be able to hit your target without taking much risk. Or if you have just a few years you've got a very small chance of hitting your goal.
rai wrote:
I figure that more risk could make the goal easier to reach (or reach sooner).
More risk could make your goal easier to reach. Or it could cost you a huge chunk of your principal and make your goal impossible to reach. That's kind of how risk works.
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fishnskiguy
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Re: conventional BH wisdom you have a lot of $$ take less ri

Post by fishnskiguy »

rai wrote:I am trying to get this concept straight.

Is it the view of Boglehads that the more you have to invest (which also means the closer to you desired goal) the less risk you want to take? --as you get older you also have mroe $$ so you take less risks (so age in bonds)--

example, your goal is $4M and you have $1M (from investing over over 10 years of saving) and you wish to grow to $4M in 15-20 years. You already have the first rolling Million which makes the goal easier.

I figure that more risk could make the goal easier to reach (or reach sooner).

My example you have a high savings rate and can re-load after a loss such as we had in 2007-8.

But is the idea to be less risky when you have more money?

This has two points:

1) high investment pile ($1M) to start
2) high savings rate (to reload) ($100K/yr).

The Boglehead rule of thumb (age in bonds) seems to not take into account these two points just age (I don't know).
In a word, yes.

Chris
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jimkinny
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Post by jimkinny »

Why take risks if you do not need to take risk? The thrill?
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Majormajor78
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Post by Majormajor78 »

example, your goal is $4M and you have $1M (from investing over over 10 years of saving) and you wish to grow to $4M in 15-20 years. You already have the first rolling Million which makes the goal easier.

I figure that more risk could make the goal easier to reach (or reach sooner).
The risk needs to be commiserate with both the goal and the investors risk tolerance. If the goal is to hit a certain number sooner for an early retirement then more risk is needed. If the goal is to hit 4 million by 55-60 and you have 1 million at 40 then you do not need more risk. If 4 million no longer seems satisfactory then it sounds like you need to redefine your goal.... Nothing wrong with that but one of the cornerstones of the Boglehead philosophy is the appropriate risk for a suitable goal.

From your statements I suspect that 4 million is no longer the goal you have in your heart even though your head is saying 4 million out of sheer habit. Re-evaluate your goal and choose the investments that will best get you there.
"Oh, M. le Comte, it is only a loss of money which I have sustained... nothing worth mentioning, I assure you."
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stratton
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Post by stratton »

jimkinny wrote:Why take risks if you do not need to take risk? The thrill?
Or as Larry Swedroe says, "If you've won the game why take risk?"

Paul
...and then Buffy staked Edward. The end.
pauliec84
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Post by pauliec84 »

"If you've won the game why take risk?"
Few issues with above posts.

1) A "goal" is a very arbitrary number, and it seems like the thoughts driving the less risk after you achieve your goal, is a kinked utility curve, where you are very very unhappy if you don't reach your goal, and very very happy if you achieve you goal.

I think we can all agree that a dollar when you have less money is worth less then a dollar when you have more money. However this means that when you are below your goal, while a gain of $100 makes you more happy then when you are above, a loss of $100 also makes you less happy. So it is by no means cut and dry.

2) I think part of the less risk when your goal is achieved is a causality confusion with less risk as you get older.

Less risk as you get older makes sense. For many people the stream of income from a job is similar to the stream of income from a bond. Thus as the number of payments for your labor comes to an end, it makes sense to supplement this loss of a safe asset with a higher allocation to other safe assets. Most people are richer at this stage of their life. So I think this "good" reason for taking less risk, gets muddle with the "bad" reason for taking less risk which is more wealth.
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Random Musings
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Post by Random Musings »

When it comes to investing at your need of risk, the goal is to avoid, as best as possible, the "fat tail" that can bite you in the arse. However, there are investors who take excess risk under the belief that those scenarios "won't happen to me" - unfortunately, it does to some of them.

If it does, then you have to save more, work longer, or cut back on one's future financial goals. Or a combination of those.

RM
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madsinger
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Re: conventional BH wisdom you have a lot of $$ take less ri

Post by madsinger »

rai wrote:example, your goal is $4M and you have $1M (from investing over over 10 years of saving) and you wish to grow to $4M in 15-20 years. You already have the first rolling Million which makes the goal easier.
Starting with $1M, saving $100K per year, goal is $4M. How many years will it take at different rates of return?

2% - 21 years
3% - 18 years
4% - 16 years
5% - 14 years
6% - 13 years
7% - 12 years
8% - 11 years
9% - 10.5 years
10% - just under 10 years

So...do you need to take risk? If you want to be "done" in 14 years, you need to get a 5% return. Probably can't do that in 100% bonds now...so you need to take some risk. Willing to wait 18 years? Not much risk is needed (3% return). Want to do it in under 10 years? Load up on risk, hang on for the ride, and have a plan B!

-Brad.
Rodc
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Post by Rodc »

To some degree it may depend on just how much.

If you have 110% of what you need to retire and you want to retire, reduce risk so you are safe.

If you have 1000% of what you need, you can do almost anything and be safe, so it is not at all crazy to put 20% of your money in TIPS and the other 80% in a portfolio of any amount of risk you want. If you lose it all you still have 200% of what you need. Why would you risk the 80%? Maybe because you think if you get lucky you will have enough money to do some serious charity work? Who knows.
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yobria
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Post by yobria »

jimkinny wrote:Why take risks if you do not need to take risk? The thrill?
In reality, there are very few people that truly "don't need to take the risk", that have so much money that they could invest in short term treasuries, retire today, and never have another worry about money.

Even those people can benefit from more risk, eg a larger bequest at death. But it makes no difference what this small minority invests in - 100% bonds or 100% stocks, they'll be fine.

For the other 99% of people, adding risk should be expected improve their future quality of life.

Nick
jmbkb4
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Re: conventional BH wisdom you have a lot of $$ take less ri

Post by jmbkb4 »

madsinger wrote:
rai wrote:example, your goal is $4M and you have $1M (from investing over over 10 years of saving) and you wish to grow to $4M in 15-20 years. You already have the first rolling Million which makes the goal easier.
Starting with $1M, saving $100K per year, goal is $4M. How many years will it take at different rates of return?

2% - 21 years
3% - 18 years
4% - 16 years
5% - 14 years
6% - 13 years
7% - 12 years
8% - 11 years
9% - 10.5 years
10% - just under 10 years

So...do you need to take risk? If you want to be "done" in 14 years, you need to get a 5% return. Probably can't do that in 100% bonds now...so you need to take some risk. Willing to wait 18 years? Not much risk is needed (3% return). Want to do it in under 10 years? Load up on risk, hang on for the ride, and have a plan B!

-Brad.

Being able to save $8,500/month for 20 years might prove very, very difficult
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rai
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Post by rai »

Random Musings wrote:When it comes to investing at your need of risk, the goal is to avoid, as best as possible, the "fat tail" that can bite you in the arse.
RM
what do you mean by 'fat tail'?
"Life is what happens to you while you're busy making other plans" - John Lennon. | | "You say that money, isn't everything | But I'd like to see you live without it." - Silverchair
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SpringMan
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Post by SpringMan »

rai wrote:
Random Musings wrote:When it comes to investing at your need of risk, the goal is to avoid, as best as possible, the "fat tail" that can bite you in the arse.
RM
what do you mean by 'fat tail'?
Rather mathematical but here is a link.
http://en.wikipedia.org/wiki/Fat_tail
Best Wishes, SpringMan
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Post by chicagobear »

I have a different take on this, since I think that the risky asset class is not stocks but bonds. I keep 10 years worth of expenses in short term fixed income, 10 years in gold bullion, and the balance goes into stocks which I will never sell except to replenish the cash or gold. I am pre-retirement and so still adding to my asset base. I personally think the dollar and other currencies will go down over time due to governmenents overspending. Stocks will keep up with inflation over time while long term bonds will get crushed in real terms.
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Re: conventional BH wisdom you have a lot of $$ take less ri

Post by magneto »

rai wrote:I am trying to get this concept straight.

Is it the view of Boglehads that the more you have to invest (which also means the closer to you desired goal) the less risk you want to take?

--as you get older you also have mroe $$ so you take less risks (so age in bonds)--

example, your goal is $4M and you have $1M (from investing over over 10 years of saving) and you wish to grow to $4M in 15-20 years. You already have the first rolling Million which makes the goal easier.

I figure that more risk could make the goal easier to reach (or reach sooner).

My example you have a high savings rate and can re-load after a loss such as we had in 2007-8.

But is the idea to be less risky when you have more money?

This has two points:

1) high investment pile ($1M) to start
2) high savings rate (to reload) ($100K/yr).

The Boglehead rule of thumb (age in bonds) seems to not take into account these two points just age (I don't know).

Suppose you are retired, and have 1) the pile,
but lack 2) fresh income other than the yield from investments.

Then higher risk strategies are not attractive or necessary.

Another scenario, as one approaches retiremenent the total income to recover from mistakes is also diminishing.
magneto
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Post by magneto »

One afterthought, age in Bonds is arguably not a safe position at present for the conservative investor if the Bonds are all fixed interest. After the 30 year secular bull market in Bonds, yields are unattractively low and as from September last we may be seeing the start of a bear market.

Overweight Cash/nearCash and Inflation Protected Bonds could be a better place to be while awaiting bonds and perhaps stocks to fall back to more attractive levels.
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