Testing Your Discipline to Stay the Course

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Helot
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Testing Your Discipline to Stay the Course

Post by Helot »

While I've found the current abundance of discussions regarding the severity and economic significance of the mortgage crisis quite educational (I've learned more about currency devaluation, MBSs, SIVs, and CDOs than I'd care to know), what I've found most interesting is how these discussions have challenged my emotional ability and desire to "Stay the Course."

While I don't see myself abandoning my current allocations and wily nily sinking the entirety of my assets into gold and oil, as one of our brethern recommends, I sure as heck have felt the URGE to do so.

Afterall, how can one read about Morgan Stanley having 251 percent of its equity in Level 3 assets, and not seriously question one's personal asset allocation and exposure to U.S. equities.

Though I've read my required reading (Bogle, Swedroe, Bernstein, Taylor's gems, etc.) regarding the pitfalls and insanity of attempting to time the market, only now have I actually felt the temptation to do so.

Does any one else recall Larry Swedroe commenting once about how valuations prior to the tech market bust led him to alter his own asset allocation (please, correct me if I'm wrong)?

Perhaps our own dbbeebs, of the infamous "I'm out of the market" due to a "housing popped bubble," will be looked at in the coming years as our own Diehard Cassandra. Perhaps not.

Risk, it's nice to meet you again. I hardly knew ya.
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Dale_G
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Post by Dale_G »

No pain - no gain Helot.

If the markets only went up smoothly, the equity premium would be reduced to slightly above MM rates. It is the risk - the fear of loss - and the bumpy ride, that promises higher returns from equities. Of course, these promises are not always be kept, particularly in the short term, otherwise the higher returns would not be justified.

My 50/50 portfolio is up 7.26% YTD. A 67/33 portfolio I manage for a son is up 7.29% as of 11/07/07. Both are close to the historical market averages - where we end up for the year is another matter.

I say, bring on the volatility, it is the only way I can expect to make excess returns in the future.

Dale
Volatility is my friend
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nisiprius
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Post by nisiprius »

Dale_G wrote:No pain - no gain Helot.

If the markets only went up smoothly, the equity premium would be reduced to slightly above MM rates. It is the risk - the fear of loss - and the bumpy ride, that promises higher returns from equities. Of course, these promises are not always be kept, particularly in the short term, otherwise the higher returns would not be justified.

My 50/50 portfolio is up 7.26% YTD. A 67/33 portfolio I manage for a son is up 7.29% as of 11/07/07. Both are close to the historical market averages - where we end up for the year is another matter.

I say, bring on the volatility, it is the only way I can expect to make excess returns in the future.
I agree with you, even though I lean strongly toward the risk-averse end of the spectrum.

The big delusion is idea that you can get the risk premium without the risk. It's so simple: just don't hold any underperforming asset classes...

As an obscure 1920s song said, "If you want the rainbow, you must have the rain."

By the way, I'm sure you can find writers to say anything you want, but I thought some fairly credible people were saying the reasonable expectation for stocks going into the future is more like a 4% real rate of return than the historical "7-8%." Fine if volatility goes down correspondingly, of course.
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Post by livesoft »

We are all a product of our past experiences. My past experience in 1987 tells me to buy when things drop. My past experience tells me that I doubled a 7-figure investment portfolio from 2000 to 2006 because I ignored the "current discussions" of the time. I am trapped by my past experiences, so I cannot believe that "this time it's different."
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Rick Ferri
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Post by Rick Ferri »

.
Are you an investor or a believer? That is the question.

This Bogleheads discussion board is a wonderful tool for long-term buy and hold investors to gain reassurance when markets take short-term tumbles. Nonetheless, there is a wide gap between long-term investors and long-term believers. Long-term believers don't need reassurance.

Stay the course!

Rick Ferri
ajbibi
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Post by ajbibi »

All the discussions about exchange rates, oil, and real estate show how tempting it is to stray from the Diehard line. I have occasionally tried to "beat the market" over the last 20 years. And what I've learned is, on the whole, I can't. So I don't try anymore. But this is a lesson individuals will have to learn for themselves. Furthermore, some fraction of market timers are bound to do well by chance and will therefore convince themselves that they were right to "heed their gut instincts" this time -- whether it's with CCFs, or foreign exchange, or TIPS or gold or what-have-you.
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Post by xenial »

ajbibi wrote:Furthermore, some fraction of market timers are bound to do well by chance and will therefore convince themselves that they were right to "heed their gut instincts" this time -- whether it's with CCFs, or foreign exchange, or TIPS or gold or what-have-you.
Unfortunately, it's exactly these folks who tend to post on discussion forums, bragging about their prowess. This effect contributes to the allure of market timing.

Best wishes,
Ken
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Post by bolt »

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mas
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Post by mas »

My 'Discipline to Stay the Course' is being tested by impulses to make short term aggressive moves. So far I have been able to counter these rationally, because the drops haven't really been that severe. If the market goes down another 20% or more, not sure I can hold out!

nisiprius recently said that he tries to wait at least a month after making a decision to take action. That probably a good rule for most things.
unclemick
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Post by unclemick »

Hmmm

1966 - 1982 a modestly flat market/ a few interesting dips 73-74, 87, 2000 -2003, etc.

'God Looks After Drunkards, Fools and The United States of America.'

Or if you're a Methodist(tongue in cheek) - Stay the course.

Yep - I'm a believer. 1966 - the present/Bogle should have started 500Index earlier but Wellington wasn't too shabby.

heh heh heh - 8)
PatrickS
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Post by PatrickS »

mas wrote:My 'Discipline to Stay the Course' is being tested by impulses to make short term aggressive moves.
I have a similar problem. Instead of wanting to sell equities and get into something "safe" when things head South, I tend to want to buy more of whats going down.

I decided two days ago to take 0.5% of my portfolio (from money market) to play with. I've started buying financials and home builder etfs. Currently down ~4% on those purchases.
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Adrian Nenu
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Post by Adrian Nenu »

Maximum tolerable loss x 2 = Maximum equity allocation

Something to think about now, not when the bear market hits. Be honest with yourself about your risk tolerance.

Adrian
anenu@tampabay.rr.com
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Taylor Larimore
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Jack Bogle gives us the answers

Post by Taylor Larimore »

Hi Helot:
What I've found most interesting is how these discussions have challenged my emotional ability and desire to "Stay the Course."
Mr. Bogle's first Chapter in "Common Sense on Mutual Funds" is titled "On Long-Term Investing--Chance and the Garden." This is an excellent Chapter and appropriate for the moment.

Note particularly the steadily advancing stock line in the Chart on Page 7 (of the Chapter). Also be sure to read Mr. Bogle's six simple rules for investing at the end.

http://media.wiley.com/product_data/exc ... 295434.pdf

Stay-the-course.

Best wishes.
Taylor
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Robert T
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Emotions

Post by Robert T »

.
Helot,
what I've found most interesting is how these discussions have challenged my emotional ability and desire to "Stay the Course.
These may help – they have helped me: In addition, these two books may be useful:
  • Protecting Your Wealth in Goods Times and Bad (particularly the first part which includes 'mistakes we make').
    Rational Investing in Irrational Times (which covers many mistakes investor make, including market timing).
"Without a rock-solid belief in the fundamental principles that undergird an intelligently crafted portfolio, weak-kneed investors face the likelihood of a disastrous whipsaw." David Swensen.

Preparing an investment policy and further education through reading books and articles often recommended on this site can help develop the ‘rock-solid belief’.

Best,

Robert
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Topic Author
Helot
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Thanks for the guidance ...

Post by Helot »

I appreciate the perspective and guidance offered by members of this board.

I suppose what is of benefit during a time such as this when predictive alarms warning that the sky is about to fall are at their loudest and most insistent, is that it encourages us to really begin to ponder our comfort with risk as it relates to our personal portfolio allocation.

I recall how Rick Ferri uses 1973-1974 as a planning tool for his clients to determine how they would react during a bear market. I'm curious how useful this stress test has been for him in determining the future behavior of his clients during rough waters.

My first investment in 1997 after reading Malkiel's Random Walk was Vanguard's Lifestrategy Growth Portfolio in an IRA. Looking at my current slice & dice portfolio and the amount of mental effort I've expended creating it over the years, I'm not sure I'm any smarter or any better off!

Thanks again.

P.S. Taylor and Robert, thanks for the links. Now I have some reading to accompany my afternoon tea.
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Post by leonard »

Sorry, I don't get it. What alternative to Buy and Hold Diehard portfolio is so clearly superior that one would be drawn to it? Not only intellectually, but on an emotional level?

I would like someone to articulate this alternative investment approach. Since it is so clearly better, it should be immediately evident that we should take a harder look.

I am starting to think that - if one is IN THE LEAST prone to reacting to their investment style emotionally - they are probably the perfect candidate for only looking at their investments when they rebalance and completely ignoring financial market press otherwise.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
Latestarter
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Post by Latestarter »

leonard wrote:I am starting to think that - if one is IN THE LEAST prone to reacting to their investment style emotionally - they are probably the perfect candidate for only looking at their investments when they rebalance and completely ignoring financial market press otherwise.
But these are the people least likely, and perhaps able, to take that advice.
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Helot
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Post by Helot »

leonard wrote:I am starting to think that - if one is IN THE LEAST prone to reacting to their investment style emotionally - they are probably the perfect candidate for only looking at their investments when they rebalance and completely ignoring financial market press otherwise.
Well, isn't that the vast majority of us?! I may aspire in some circumstances to be cold, rational, and methodical, but I rarely achieve it.

In regard to my investments, I do have an IPS in place and it has helped to provide the necessary discipline. Still, referencing back to my original thought, I've never quite been so tempted to do otherwise.

Alas, human, all too human.
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baw703916
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Re: Thanks for the guidance ...

Post by baw703916 »

Helot wrote: Rick Ferri uses 1973-1974 as a planning tool for his clients to determine how they would react during a bear market.
1973-74 was actually the year that I first learned about the stock market. My grade school teacher decided to teach us about stocks, arranged a field trip to a brokerage, etc. The stock market's performance in 1973-74 has stuck with me ever since as being "normal". I suppose that unlike some people, I expect things to go badly; it's not a question of if, but when.

I guess it largely depends on when you were born.

Best wishes,
Brad
Most of my posts assume no behavioral errors.
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