A time to EVALUATE your jitters

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Lancelot
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Re: A time to EVALUATE your jitters

Post by Lancelot » Fri Aug 11, 2017 7:35 pm

Jeff Albertson wrote:from the Economist's Buttonwood:
Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School are the acknowledged experts on global investment returns, having compiled data covering 22 countries over more than a century. As of February 2013, the longest period of negative real returns from US equities was 16 years. But it was 19 years for global equities (and 37 for world ex-US), 22 for Britain, 51 for Japan, 55 for Germany and 66 for France. Such periods are much longer than most small investors would have the patience to wait.
http://www.economist.com/blogs/buttonwo ... /investing
Thanks so much for posting this!

I've pretty much stopped debating with friends about the merits of having a bond/cash cushion to soften a significant market pull back. They usually quote "Average S&P returns since 1926 are 10%; Aren't you enjoying this rally? and I'd rather be an owner than a lender" (Bond reference) I have the majority of my portfolio in equities but I've never forgotten the quote from William J. O'Neal, IBD, "All stocks are bad." :sharebeer :sharebeer

I think many of us have -mostly- enjoyed fantastic equity returns since the 1980s and see this as a given.

Maybe its true, but then maybe its not :D

For me the example of France is especially sobering.
No Where for Very Long...

John1960
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Re: A time to EVALUATE your jitters

Post by John1960 » Sat Aug 12, 2017 3:59 am

This is an excellent post. Risk tolerance is a very interesting issue. In the long bull markets, investors think they have high risk tolerance. I remember bear markets. In bear markets all of a sudden people's risk tolerance quickly changes.

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LadyGeek
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Re: A time to EVALUATE your jitters

Post by LadyGeek » Sat Aug 12, 2017 6:03 am

The wiki has some background info: Risk tolerance
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nedsaid
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Re: A time to EVALUATE your jitters

Post by nedsaid » Sat Aug 12, 2017 10:26 am

John1960 wrote:
Sat Aug 12, 2017 3:59 am
This is an excellent post. Risk tolerance is a very interesting issue. In the long bull markets, investors think they have high risk tolerance. I remember bear markets. In bear markets all of a sudden people's risk tolerance quickly changes.
I agree 100%. I am amazed that people who ought to know better, and people who ought to remember the 2000-2002 and the 2008-2009 bear markets, are amazingly aggressive with their asset allocation. It goes to show that memories are short and the recency bias does exist.
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Re: A time to EVALUATE your jitters

Post by slipp1229 » Tue Aug 15, 2017 10:32 am

Great post...

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Re: A time to EVALUATE your jitters

Post by nervousnovice » Wed Aug 16, 2017 10:16 am

This is an excellent thread! I have a question and apologies if it is answered elsewhere. If we have invested in bonds and mostly US treasury bonds to reduce risks, what is the effect if the congress does not raise the debt ceiling? Does that automatically mean the US defaults on its debt and does that affect bonds? Thank you in advance for any insight!

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Re: A time to EVALUATE your jitters

Post by LadyGeek » Thu Aug 24, 2017 6:19 pm

I removed an off-topic reply and follow-up related to economic policy actions. As a reminder, see: Non-actionable (Trolling) Topics
If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:
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nervousnovice - Your question is answered elsewhere. See: A Question About Bonds and Risk (the topic is locked)
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Re: A time to EVALUATE your jitters

Post by Sandtrap » Fri Oct 20, 2017 10:52 am

Thanks, "nisprius" for taking the time to make such an exhaustive post.
Is it in a "wiki?
This thread should be one of those that keeps going on and on to "infinity and beyond".

Not withstanding discussions of "geo-politics, cultural dynamics, etc. and the economic impact of such things that will lock this wonderful thread. . .

Actionably and "on topic":

Doesn't this reinforce the importance of adjusting one's allocation so conservatively that one's "sleep factor" remains intact no matter the noise, the downturn, the market adjustment, . . et al ??

If so, wouldn't most folks tend to have a more aggressive optimistic allocation because it is arrived at from a more comfortable setting (living room, brokerage office, lazyboy recliner. . . ) than during hard economic times?

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Re: A time to EVALUATE your jitters

Post by dbr » Fri Oct 20, 2017 11:15 am

Sandtrap wrote:
Fri Oct 20, 2017 10:52 am

Doesn't this reinforce the importance of adjusting one's allocation so conservatively that one's "sleep factor" remains intact no matter the noise, the downturn, the market adjustment, . . et al ??

My one comment about "sleep factor" is that it is just as possible to be irrational or ignorant about sleeping well at night as it is to use that intelligently to guide investing. Surely we want to avoid getting into situations where we do stupid things due to anxiety or panic, but it is also necessary to learn enough about investing to not be so nervous and also to manage to discipline our emotions enough to stay the course when objectively the course is the right course. In Larry Swedroe's concept of "willingness" I sometimes wonder of that should not be a contract with ourselves to manage our emotions and stick to our plan.

Short version: Adjusting the allocation so conservatively that we can sleep well at night may not be the right solution to the problem where understanding our plan, ignoring noise, and controlling our emotions would be a better idea.

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Re: A time to EVALUATE your jitters

Post by kathyauburn » Fri Oct 20, 2017 1:24 pm

dbr wrote:
Fri Oct 20, 2017 11:15 am
Sandtrap wrote:
Fri Oct 20, 2017 10:52 am

Doesn't this reinforce the importance of adjusting one's allocation so conservatively that one's "sleep factor" remains intact no matter the noise, the downturn, the market adjustment, . . et al ??

Short version: Adjusting the allocation so conservatively that we can sleep well at night may not be the right solution to the problem where understanding our plan, ignoring noise, and controlling our emotions would be a better idea.
This doesn't have to be about guesswork, personal fortitude, ignoring noise, etc. It's about numbers. Here, do this: Pull up your stock allocation, and imagine you just retired. The market tanks 25% one year and, oh, 16% the next. Returns are mediocre for the next decade. How does the value of your 3 or 4 percent withdrawal look over the rest of your life now that you're no longer contributing to your investments? Pick an asset allocation: 60/40 maybe. How much was it down in 2008-09?

Now do the same thing but assume a conservative porfolio that lost, say, just 5% during 2008-09. How does your withdrawal rate look then?

My spreadsheet has me breathing (and sleeping) easy over the next 30 years with the latter scenario. With the former? My standard of living plummets and stays down for the rest of my life.

http://www.investopedia.com/terms/s/sequence-risk.asp

https://www.blackrock.com/cl/literature ... -va-us.pdf

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Re: A time to EVALUATE your jitters

Post by Abe » Fri Oct 20, 2017 2:11 pm

Things looked pretty grim when nisiprius first posted this. Out of courisity, I went to the S&P 500 return calculator to see what the return has been since he posted this in August 2011. The S&P 500 has had an annualized return of 15.26% with dividends reinvested.
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dbr
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Re: A time to EVALUATE your jitters

Post by dbr » Fri Oct 20, 2017 5:22 pm

kathyauburn wrote:
Fri Oct 20, 2017 1:24 pm
dbr wrote:
Fri Oct 20, 2017 11:15 am
Sandtrap wrote:
Fri Oct 20, 2017 10:52 am

Doesn't this reinforce the importance of adjusting one's allocation so conservatively that one's "sleep factor" remains intact no matter the noise, the downturn, the market adjustment, . . et al ??

Short version: Adjusting the allocation so conservatively that we can sleep well at night may not be the right solution to the problem where understanding our plan, ignoring noise, and controlling our emotions would be a better idea.
This doesn't have to be about guesswork, personal fortitude, ignoring noise, etc. It's about numbers. Here, do this: Pull up your stock allocation, and imagine you just retired. The market tanks 25% one year and, oh, 16% the next. Returns are mediocre for the next decade. How does the value of your 3 or 4 percent withdrawal look over the rest of your life now that you're no longer contributing to your investments? Pick an asset allocation: 60/40 maybe. How much was it down in 2008-09?

Now do the same thing but assume a conservative porfolio that lost, say, just 5% during 2008-09. How does your withdrawal rate look then?

My spreadsheet has me breathing (and sleeping) easy over the next 30 years with the latter scenario. With the former? My standard of living plummets and stays down for the rest of my life.

http://www.investopedia.com/terms/s/sequence-risk.asp

https://www.blackrock.com/cl/literature ... -va-us.pdf
Well, withdrawal model data show that the only really serious asset allocation mistake for retirees is to have too little in stocks. Having more than optimum in stocks does does not severely increase the chances of portfolio failure. It seems that the problem with sequence of returns is roughly offset by the higher prospective return of stocks so that it doesn't matter very much what one has as long as one has enough in stocks. What does result from having a lot in stocks is more wealth at death but with a great deal of uncertainty regarding how much that is. Sequence of return risk is exactly why people can't rely on excessively high withdrawal rates like 6%, 7%, 8% as some advisors might once have thought. But the other side of this problem is that low returning portfolios that don't have much volatility also do not allow high withdrawal rates. You can't withdraw 4% from bonds yielding 2% unless inflation is considerably less than 2%. At 1% real you can do 3.8% from TIPS for example (for 30 years) and 4.4% at 2% real.

But that was not really my point. The point is that when you have arrived at a decision for asset allocation that makes sense on financial grounds and there is a problem with whether or not you can sleep at night, one should decide if one should adopt a less than desirable asset in order to sleep at night or adopt a more correct asset allocation and learn to live with it. To repeat, none of this urges anyone to be aggressive willy nilly.

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