from nisiprius, a 'greatest post' in case you missed it

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Valuethinker
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from nisiprius, a 'greatest post' in case you missed it

Post by Valuethinker » Thu Mar 22, 2012 3:27 am

Valuethinker » Thu Mar 22, 2012 8:25 am

From Nisiprius


rrosenkoetter wrote:And it's very hard to save enough to retire just using Treasury bonds and TIPs.

Statistically, stocks may not return much more than that over an individual investors' retirement-savings period. The great thing about stocks versus bonds is that historically the distribution of outcomes over long holding periods has been almost all upside. But the thing stock enthusiasts continually miss is that the lower end of that distribution is about the same as bonds. Not just the worst-case scenario, but the lower tenth percentile or something like that.

What this means is that you need to save about the same amount no matter what your asset allocation is. You cannot use the fact that you're investing in stocks to justify a lower savings rate. What I find inexcusable about the mainstream advisory wisdom is that they are constantly saying that, or are being misunderstood as having said that. Is this a straw man? Consider this direct quotation from a pair of credentialed idiots: "A smarter allocation can improve your nest egg by 50%. That's a lot easier than increasing your savings by 50%."

I really feel that the asset allocation choice is best formulated in this way:

1) You must save enough to fund your retirement "needs," however that is defined.

2) The amount you need to save is the same no matter what your asset allocation is. To say "it's very hard to save enough to retire just using Treasury bonds and TIPs" is just to say that it's very hard to save enough. If you aren't saving enough to retire just using Treasury bonds and TIPs, you aren't saving enough if you add stocks. You're counting on luck, and luck is not a strategy.

3) Because in the past adding stocks almost never impaired final outcomes much, and often improved them a lot, everyone should hold some stocks.

4) Everyone has a limited risk tolerance, and it is usually lower than people think. When one's risk tolerance is exceeded, one does foolish things that really do impair your final outcome. Therefore, one should not add more stocks than one's risk tolerance allows.

5) The above imply that savings rate is determined by financial considerations alone, independent of allocation choice; and that allocation choice is determined by risk tolerance alone, independent of financial situations. Notice that this is exactly what Adrian Nenu used to post in his rule of thumb, "Equity allocation = twice maximum tolerable risk, but never more than 50%." Incidentally, Charles Jaffe had a throwaway in one of his columns, and I'd love to know the source. He said that a study showed that the average investor sold when his total portfolio had dropped by about 20%. That would imply that stock allocation should not exceed about 40%.




Any way we can get this set out as a 'greatest post of all time on Bogleheads?'

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Kevin M » Thu Mar 22, 2012 3:55 am

If we want to discuss this, shall we do it here, or in the original thread? Overall this is quite good, but point #2 doesn't sound quite right to me.

I think the main thrust, that you should save as much as possible, is right on. However I tend to agree with rrosenkoetter's comment as well.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Verde » Thu Mar 22, 2012 5:19 am

nisiprius wrote: The great thing about stocks versus bonds is that historically the distribution of outcomes over long holding periods has been almost all upside. But the thing stock enthusiasts continually miss is that the lower end of that distribution is about the same as bonds.
What this means is that you need to save about the same amount no matter what your asset allocation is.

This sounds like a free option- so if your reasoning is true the optimal strategy is:
Save the amount you would need to save to reach your goals with an all bond portfolio, but allocate those savings 100% to stocks. If the option pays off – stocks outperform bonds- you will reach your goal earlier and therefore you end up saving less. If the option does not pay off, you end up with the lower end of the stock return distribution which is ‘about the same as bonds’ in your words, and you end up retiring at the same time as you would have with an all bond portfolio.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by LH » Thu Mar 22, 2012 5:26 am

To me this whole tips thing is a myth.


One has very little idea of what one will need.

One may die tomorrow.

One may live to 100.

One may need a ton if money for a life saving procedure.

Any minimum one might pick as safe, for a reasonable person, you may end up needing more.

That one can match a single persons needs, to a tips income stream is false. Utterly false. They talk about excess savings as inefficient and unneeded. If you go tips, die tomorrow, well guess what. You have excess savings......

There is no match.

The concept, is ludicrous to its core. A single human family needs are unknown and unpredictable from now to 30 years hence, as an income stream.

The concept of excess money, to me, Seems silly. The concept of any precise match to a single humans life, is statistically nonsensensical.


Even ignoring all that.

Let's take an average American. Average income. Let's have him go the tips route........

How much does he have to save on the average income of what 40-50k??? While living his life? Paying for family, investing via tips???

I mean spit out some numbers, for the average person, via tips method.

Let's talk reality. I would love to see some numbers spit out here, just like I would love to see an actual tips ladder yield the mythical 3 percent......


I doubt I will see them.

If the average person saves via tips, he will live a disminished life, expectantly, compared to a person who invests via stock bond traditional portfolio. The person who invests via stock bonds, needs to save less expectantly than a tips investor over 30 years.

There is no guarantee. Saving more = cost in the present.

Be frugal, save tips to whatever number someone comes up with for the average American to swing it, work hard, do it for 20 years, then drop dead at 50...... Great stuff. Just brilliant. perfect match. Perfect life???? It's farcical. There is no match. Not only did you live frugal, to hit he tips minimum number, but you also in brutal reality ended up with excess money when you died, talk about inefficiency......


1)There is no match. A human life is variable.

2)There is no tips ladder yielding much at all current reality. There really isn't even a tips ladder that can be made.

3)I bet no one can even come up with the number the average 30 year old American making the average salary should save via tips...... It would probably be a completely laughable amount.

Would love to see someone spit out the financial plan for the average 30 year old American via tips investing, if that's what the putative minimum is, then lets see it.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by KlangFool » Thu Mar 22, 2012 6:06 am

I agree that this is one of the GREATEST post that I had read across many many years from all over.

How much to save for retirement should be INDEPENDENT from asset allocation decision.

KlangFool

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by richard » Thu Mar 22, 2012 6:22 am

LH wrote:To me this whole tips thing is a myth.

One has very little idea of what one will need.

That would apply to any financial planning, not just TIPS.

LH wrote:Let's take an average American. Average income. Let's have him go the tips route........

You have basically two choices (1) follow a course with a more or less known outcome or (2) follow a course with an unknown outcome, it may do better, it may do worse. For those following the second course, what do you suggest they do if they do worse?

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Leesbro63 » Thu Mar 22, 2012 6:25 am

LH questions matching TIPS to income needs. I second the motion from this perspective: taxation. Unless you can get enough TIPS into a ROTH IRA, hyperinflation, which looks more possible than before 2008, will cause a tax spiral for TIPS that very laegely negates the "protected from inflation" purpose.

I agree that Nisiprius' post clearly makes a very good point: The only way to save "enough" is to incur the probable risk of having saved too much. And LH makes the good point that until we know exactly (or even approximately) when we're gonna die, saving for retirement is very dismal guesswork.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by richard » Thu Mar 22, 2012 6:25 am

Verde wrote:
nisiprius wrote: The great thing about stocks versus bonds is that historically the distribution of outcomes over long holding periods has been almost all upside. But the thing stock enthusiasts continually miss is that the lower end of that distribution is about the same as bonds.
What this means is that you need to save about the same amount no matter what your asset allocation is.

This sounds like a free option- so if your reasoning is true the optimal strategy is:
Save the amount you would need to save to reach your goals with an all bond portfolio, but allocate those savings 100% to stocks. If the option pays off – stocks outperform bonds- you will reach your goal earlier and therefore you end up saving less. If the option does not pay off, you end up with the lower end of the stock return distribution which is ‘about the same as bonds’ in your words, and you end up retiring at the same time as you would have with an all bond portfolio.

The problem is that the historical distribution may not be a reliable guide to the future. An all stock portfolio may well end up doing worse than an all bond portfolio, perhaps by a large margin.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by richard » Thu Mar 22, 2012 6:34 am

Leesbro63 wrote:LH questions matching TIPS to income needs. I second the motion from this perspective: taxation. Unless you can get enough TIPS into a ROTH IRA, hyperinflation, which looks more possible than before 2008, will cause a tax spiral for TIPS that very laegely negates the "protected from inflation" purpose.

Stocks are not free from taxes and there is no guarantee that stocks will be taxed on a more favorable basis than TIPS in the future.

I would have thought recent years would reassure people that hyperinflation is not at all likely in major industrial nations. In the US, the Fed is willing to ignore its mandate to minimize the worst unemployment and economic conditions since the great depression in order to maintain a 2% inflation target. In Europe, the central banks sole goal is low inflation, despite low growth and high unemployment. Before 2008, I doubt many would think central banks and governments would be willing to endure these conditions rather than follow the course everyone had expected under these condition - use monetary policy to spur growth. If they're holding down inflation under these conditions, when would you think they'd allow higher inflation?

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Leesbro63 » Thu Mar 22, 2012 6:42 am

Richard you make a good point. But I guess with stocks we know going in that returns will be variable and some will be taxed eventually (unless you die leaving a stepped up basis). And with stocks you can time the taxable events to some degree. TIPS, however, are thought to be inflation proof and I am just pointing out that if the very thing that TIPS are bot to hedge happens in a virulent way, much of the insurance policy proceeds will go to Uncle Sam.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by tadamsmar » Thu Mar 22, 2012 7:07 am

The evidence indicates that point #2 is false. I think that disqualifies it as the greatest post.

This Boglehead wiki article cites a number of studies that show you would need to save more if you plan to have an all bond portfolio or even less than 30% stocks:

http://www.bogleheads.org/wiki/Trinity_study_update

If point #2 is not false, then this wiki article needs to be edited to include the evidence in favor of point #2 if there is any.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by tadamsmar » Thu Mar 22, 2012 7:13 am

Verde wrote:
nisiprius wrote: The great thing about stocks versus bonds is that historically the distribution of outcomes over long holding periods has been almost all upside. But the thing stock enthusiasts continually miss is that the lower end of that distribution is about the same as bonds.
What this means is that you need to save about the same amount no matter what your asset allocation is.

This sounds like a free option- so if your reasoning is true the optimal strategy is:
Save the amount you would need to save to reach your goals with an all bond portfolio, but allocate those savings 100% to stocks. If the option pays off – stocks outperform bonds- you will reach your goal earlier and therefore you end up saving less. If the option does not pay off, you end up with the lower end of the stock return distribution which is ‘about the same as bonds’ in your words, and you end up retiring at the same time as you would have with an all bond portfolio.


This wiki article points to evidence that you would have to save more if you want to be at 100% stocks because your safe withdrawal rate will become lower:

http://www.bogleheads.org/wiki/Trinity_study_update

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by etarini » Thu Mar 22, 2012 7:18 am

Valuethinker, thanks for reviving this. I am in complete agreement, though I am very sympathetic to the difficulty it implies for those with average or lower incomes. This has been my working assumption for the last five years: don't count on expected return; reduce risk; and save, save, save.

Would you post a link to the original thread?

Thanks,
Eric

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Dude2 » Thu Mar 22, 2012 7:41 am

LH wrote:To me this whole tips thing is a myth.


One has very little idea of what one will need.

One may die tomorrow.

One may live to 100.

One may need a ton if money for a life saving procedure.

Any minimum one might pick as safe, for a reasonable person, you may end up needing more.

That one can match a single persons needs, to a tips income stream is false. Utterly false. They talk about excess savings as inefficient and unneeded. If you go tips, die tomorrow, well guess what. You have excess savings......

There is no match.

The concept, is ludicrous to its core. A single human family needs are unknown and unpredictable from now to 30 years hence, as an income stream.

The concept of excess money, to me, Seems silly. The concept of any precise match to a single humans life, is statistically nonsensensical.


Even ignoring all that.

Let's take an average American. Average income. Let's have him go the tips route........

How much does he have to save on the average income of what 40-50k??? While living his life? Paying for family, investing via tips???

I mean spit out some numbers, for the average person, via tips method.

Let's talk reality. I would love to see some numbers spit out here, just like I would love to see an actual tips ladder yield the mythical 3 percent......


I doubt I will see them.

If the average person saves via tips, he will live a disminished life, expectantly, compared to a person who invests via stock bond traditional portfolio. The person who invests via stock bonds, needs to save less expectantly than a tips investor over 30 years.

There is no guarantee. Saving more = cost in the present.

Be frugal, save tips to whatever number someone comes up with for the average American to swing it, work hard, do it for 20 years, then drop dead at 50...... Great stuff. Just brilliant. perfect match. Perfect life???? It's farcical. There is no match. Not only did you live frugal, to hit he tips minimum number, but you also in brutal reality ended up with excess money when you died, talk about inefficiency......


1)There is no match. A human life is variable.

2)There is no tips ladder yielding much at all current reality. There really isn't even a tips ladder that can be made.

3)I bet no one can even come up with the number the average 30 year old American making the average salary should save via tips...... It would probably be a completely laughable amount.

Would love to see someone spit out the financial plan for the average 30 year old American via tips investing, if that's what the putative minimum is, then lets see it.


I don't see why it is so difficult to envision what one is currently making in salary and use that as a basis for what one will need in retirement. You were able to live most of your life on that amount and manage, so hopefully that will continue going forward. One can subtract some from that amount in anticipation of social security benefits. That number can then be what you are shooting toward in retirement for a ballpark number of 30 years.

Why the negative TIPS comments? In the past bonds have been known to be killed by inflation, so somebody thought inventing an inflation adjusted bond was a good idea. The way I see it, TIPS become the reference frame. $10 in TIPS bought today will be a real $10 whenever we withdraw it. This is what makes it easier to compute what you need for retirement. Your needs of tomorrow can be directly determined by your needs of today. If that isn't a good technique, then what is? You seem to suggest the answer is nothing because nothing is known going forward. I think we can do better than that.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Aptenodytes » Thu Mar 22, 2012 7:53 am

I usually find myself in agreement with nisiprius and in admiration of his ability to turn a clever phrase, but in this case I'm a bit baffled. If all that mattered were the amount one saved, then why would one ever invest in risky assets? It seems intuitively obvious to me that an ability to grab a piece of the equity premium, compounded over a few decades, can make a big difference in quality of life during retirement.

I think what he's saying is that if you want some virtually guaranteed minimum amount to retire on you need to take into account the lower end of the stock return distribution, in which case he's right -- the rate of savings is all that matters.

But almost nobody operates that way; certainly I don't and judging from what is posted in this forum very few people here do either. If all I cared about was a guaranteed minimum, I would have gone 100% TIAA guaranteed annuity from day 1, which for me started in 1992. Actually, If I had been able to predict the future I might have done just that, earning a steady 4% per year with no risk. But since I cannot predict the future I go with a strategy that makes sense given the distribution of probabilities.

Because we have a reasonable chance at bumping our returns up a few percentage points, over the long term, we take a calculated risk and invest in equities. In other words, we care about not just about how we might fare if the market does badly, but we care about the chance for upside gains as well. Under those circumstances, what affects our success is a) our savings rate, b) our investment strategy, and c) luck. Nisiprius says that (a) is all that matters. I think in fact it is both (a) and (b), except in the special circumstance of an investor who cares only about maximizing the lowest plausible amount of money they will have to retire on. For that kind of investor, nisiprius is right, (a) is all that matters.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Cosmo » Thu Mar 22, 2012 8:01 am

etarini wrote:Valuethinker, thanks for reviving this. I am in complete agreement, though I am very sympathetic to the difficulty it implies for those with average or lower incomes. This has been my working assumption for the last five years: don't count on expected return; reduce risk; and save, save, save.

Would you post a link to the original thread?

Thanks,
Eric


viewtopic.php?f=10&t=91667

Cosmo

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Leesbro63 » Thu Mar 22, 2012 8:12 am

Dude2 wrote: $10 in TIPS bought today will be a real $10 whenever we withdraw it.


Not really true (unless in a Roth IRA), if hyperinflation occurs and Uncle Sam takes part of that real $10.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Aptenodytes » Thu Mar 22, 2012 8:23 am

Aptenodytes wrote:I think what he's saying is that if you want some virtually guaranteed minimum amount to retire on you need to take into account the lower end of the stock return distribution, in which case he's right -- the rate of savings is all that matters.

But almost nobody operates that way; certainly I don't and judging from what is posted in this forum very few people here do either.

I just wanted to pull back a bit from my initial reaction to the OP on this. I have now read the original thread, and see that it is a discussion of Zvi Bodie's new book, which I have not yet read. As I understand it the behavior that I say nobody engages in is more or less the behavior Bodie is trying to get people to engage in. So we pretty much agree that people don't act this way, but we disagree on whether we should act this way. From the summaries I've read Bodie's argument is careful and thoughtful and not to be dismissed out of hand.

So I want to reserve the right to come back and say "yes, nisiprius, you were right and I was wrong."

This is somewhat game-changing stuff for me so I need some time to think it through, including reading Bodies' book.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by HomerJ » Thu Mar 22, 2012 8:29 am

Aptenodytes wrote:I usually find myself in agreement with nisiprius and in admiration of his ability to turn a clever phrase, but in this case I'm a bit baffled. If all that mattered were the amount one saved, then why would one ever invest in risky assets? It seems intuitively obvious to me that an ability to grab a piece of the equity premium, compounded over a few decades, can make a big difference in quality of life during retirement.


I agree (especially that I also admire nisiprius's posts).

But I don't like point #2 either, because luck IS a strategy. Playing the odds is definitely a strategy. The original thread that post came from advocated going 100% in TIPS to generate your base-line retirement needs, and THEN (presumably after saving for 30 years) investing "extra" money in stocks.

I say a healthy mix of stocks/bonds from the very start is a better strategy even with the extra risk, even having to depend a little on "luck". Going 100% TIPS is just guarenteeing poor returns. I'd rather take the 95% chance that I have significantly better returns with stocks/bonds over the long-term, even if it means there's a 5% chance that I may have to work longer or save more when I'm older or accept a lesser lifestyle in retirement.

Because we have a reasonable chance at bumping our returns up a few percentage points, over the long term, we take a calculated risk and invest in equities. In other words, we care about not just about how we might fare if the market does badly, but we care about the chance for upside gains as well. Under those circumstances, what affects our success is a) our savings rate, b) our investment strategy, and c) luck. Nisiprius says that (a) is all that matters. I think in fact it is both (a) and (b), except in the special circumstance of an investor who cares only about maximizing the lowest plausible amount of money they will have to retire on. For that kind of investor, nisiprius is right, (a) is all that matters.


Exactly.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Harold » Thu Mar 22, 2012 8:33 am

Aptenodytes wrote:I usually find myself in agreement with nisiprius and in admiration of his ability to turn a clever phrase, but in this case I'm a bit baffled. If all that mattered were the amount one saved, then why would one ever invest in risky assets? It seems intuitively obvious to me that an ability to grab a piece of the equity premium, compounded over a few decades, can make a big difference in quality of life during retirement.

As someone to whom nisiprius's quote made perfect sense, I'll comment.

Most people invest in risky assets because someone else says they should. Of those who invest in risky assets based on considered thought, the reason is that they may very well profit handsomely from the equity risk premium. That is, the risk may pay off, and the investor is deciding the risk is worth taking. That's different from saying the risk will pay off -- and there's nothing even approaching a guarantee that over an investor's time horizon a reasonable equity risk premium will persist.

If someone decides to save less as a younger person, and take on more risk in hopes of grabbing that equity risk premium, he is effectively transferring risk from the younger self to the older self. The younger person isn't at risk -- he gets all the additional consumption that his choice gives him. The older person is at risk -- the best case is that he ends up where prudent saving would have brought him (and doesn't fully benefit from the risk he was exposed to); the worst case is that the risk the younger person foisted on him showed up and the older person is left with limited means of dealing with it.

It's really a straightforward principle that nisiprius has insightfully and articulately expressed, one that strikes to the core of what this forum should be about. But it's a way of thinking that is counterintuitive to huge numbers of investors and posters.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by MossySF » Thu Mar 22, 2012 8:37 am

LH wrote:Let's take an average American. Average income. Let's have him go the tips route........


Yes, let's take the average American. Saves nothing. Invests in stocks. Earns 500% on nothing. Invests in bonds. Earns 250% on nothing. Either path gives us the same result which matches the original premise.

The reality is everybody will adjust to the income they have. Save little, save lots -- high returns, low returns -- big dreams, conservative dreams. After 30-40 years, all the original assumptions will be forgotten -- overridden by day-to-day life.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by The Wizard » Thu Mar 22, 2012 8:42 am

Stocks have higher returns than bonds, on average.
Everybody knows that, right?
So the only minor issue is dealing with the "on average" part...
Attempted new signature...

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by cjking » Thu Mar 22, 2012 8:44 am

The great thing about stocks versus bonds is that historically the distribution of outcomes over long holding periods has been almost all upside. But the thing stock enthusiasts continually miss is that the lower end of that distribution is about the same as bonds. Not just the worst-case scenario, but the lower tenth percentile or something like that.

What this means is that you need to save about the same amount no matter what your asset allocation is.



Let's push this to an extreme. If someone wants to retire for a period of infinity by investing during retirement in assets returning 1% real then they need more assets on the eve of retirement than someone investing during retirement in 100% equities.

The infinity retirement does exist: it's the person who wants to live off capital and bequeath all of it.

It's also the person who wants to counter various risks over a 50 year retirement by keeping withdrawal rate below portfolio return.

It is true that for a given asset allocation in retirement, these people need the same balance on the eve of retirement, regardless of their asset allocation during accumulation. But if we assume it doesn't really make sense to be more conservative during accumulation than during retirement, then it follows that the person who chooses a less volatile allocation does need to save more.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by dbr » Thu Mar 22, 2012 8:47 am

I think the message that one cannot invest oneself out of saving inadequately is a critical point. The tendency of the industry to try to convince someone otherwise is, indeed, deplorable.

The stated implications that asset allocation does not matter with the implicit assumption that stocks should be avoided can hardly be what one really wants to say. The statements presented would imply that 100% stocks is just as advisable as 0% stocks. I think in reality that we all believe a judicious investment in both is the right thing to do most of the time.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Aptenodytes » Thu Mar 22, 2012 8:59 am

Seems like what you want to do to think this through is run some Monte Carlo simulations under the following different scenarios:

1) Low Savings Rate, Conservative investment (e.g. 10% savings rate, 100% bonds)

2) Low savings rate, aggressive investment (10% s.r.; investment path that tracks a target-date fund)

3) High Savings rate, Conservative investment (e.g. 35% savings; 100% bonds)

4) High savings rate, aggressive investment (you get the picture)

Then you could chart the spread of these runs over time, and get a sense of the relative contribution of savings rate and investment strategy, and where the different combinations overlap.

I'm sure someone more clever with more time could mine such simulations more systematically and summarize the findings more completely.

But that work has probably already been done. My guess is Bodie's book must surely have something like this at the heart, given the questions he's asking and the conclusions he's reaching.

This thread is mainly about a comparison between scenarios (2) and (3). But I can't imagine there's anyone here who wants to argue that (2) beats (3). People on this forum are largely, I think, fretting over the comparison between scenarios (3) and (4). That is, we are mostly all high savers already, and are struggling to manage our savings prudently. The question for us is where on the continuum from (3) to (4) do we find the right balance?

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by dbr » Thu Mar 22, 2012 9:07 am

Aptenodytes wrote:Seems like what you want to do to think this through is run some Monte Carlo simulations under the following different scenarios:

1) Low Savings Rate, Conservative investment (e.g. 10% savings rate, 100% bonds)

2) Low savings rate, aggressive investment (10% s.r.; investment path that tracks a target-date fund)

3) High Savings rate, Conservative investment (e.g. 35% savings; 100% bonds)

4) High savings rate, aggressive investment (you get the picture)

Then you could chart the spread of these runs over time, and get a sense of the relative contribution of savings rate and investment strategy, and where the different combinations overlap.

I'm sure someone more clever with more time could mine such simulations more systematically and summarize the findings more completely.

But that work has probably already been done. My guess is Bodie's book must surely have something like this at the heart, given the questions he's asking and the conclusions he's reaching.

This thread is mainly about a comparison between scenarios (2) and (3). But I can't imagine there's anyone here who wants to argue that (2) beats (3). People on this forum are largely, I think, fretting over the comparison between scenarios (3) and (4). That is, we are mostly all high savers already, and are struggling to manage our savings prudently. The question for us is where on the continuum from (3) to (4) do we find the right balance?


Excellent. I think your last observation is astute. The audience that most needs to see Nisi's presentation most likely never will. I see Bodie also primarily engaging 3) vs. 4). A background to much of Bodie's interest is as an advisor to his own insitution's (Boston University) retirement plan where the concern might be more about what to do with savings than how much to save, though the latter is hardly ignored.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by yobria » Thu Mar 22, 2012 9:27 am

What this means is that you need to save about the same amount no matter what your asset allocation is. You cannot use the fact that you're investing in stocks to justify a lower savings rate.


That certainly isn't my plan! I expect to save far less as a 100% stock investor than if I were a 100% bond investor.

What happens on those 10% of cases where stocks have very low long term returns? I'll simply increase my working years, retiring at 50 (or whatever) instead of 40.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by pkcrafter » Thu Mar 22, 2012 9:36 am

dbr wrote:I think the message that one cannot invest oneself out of saving inadequately is a critical point. The tendency of the industry to try to convince someone otherwise is, indeed, deplorable.

The stated implications that asset allocation does not matter with the implicit assumption that stocks should be avoided can hardly be what one really wants to say. The statements presented would imply that 100% stocks is just as advisable as 0% stocks. I think in reality that we all believe a judicious investment in both is the right thing to do most of the time.


+1


There are few investors, or should I say savers, that are capable of saving enough for retirement without the possibility of some boost from compounding those savings. This is where Larry Swedroe's need for risk comes into play. However, the risk one needs to take should always be reasonable and balanced. Stock allocations do matter. Of course, the 100% stock believers will argue with any of these assertions.
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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Dude2 » Thu Mar 22, 2012 9:38 am

Leesbro63 wrote:
Dude2 wrote: $10 in TIPS bought today will be a real $10 whenever we withdraw it.


Not really true (unless in a Roth IRA), if hyperinflation occurs and Uncle Sam takes part of that real $10.

Understood, but I was thinking that if using today's salary as the basis for what we need in retirement and since we pay taxes today and can live on that amount, it all comes out in the wash. The real net amount today in TIPS equals the real net amount in retirement IOW, if that makes sense.

Based on LH's post, I was very curious to crunch a few numbers -- not a Monte Carlo analysis, just some Excel work, assuming dollars in real terms and the need in retirement based on the need of today in real terms, nothing more than a compound interest in play.

Using 40 years of savings at 15% savings rate and 30 years of withdrawals, neglecting social security benefits, I needed 4.5% real.
With social security benefits (used 30% of current salary), I needed 3.5% real.
Increasing savings rate to 20% resulted in a need of 2.75% real with social security benefits and 3.7% real without.
Increasing savings rate to 25% resulted in a need of 2.10% real with social security benefits and 3.1% real without.

Reducing the amount needed to live to 0.75 of current salary at 15% savings rate yielded (with social security benefits) need of 2.3% real.

Anyway, detractors' points are well taken when we do not believe that it is realistic to achieve 2.3% real with TIPS using a 15% savings rate over 40 years.

What savings rate did I need with social security benefits at 75% of current salary and assuming a real rate of return of 0%? Answer is 35%.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Aptenodytes » Thu Mar 22, 2012 9:44 am

Leesbro63 wrote:
Dude2 wrote: $10 in TIPS bought today will be a real $10 whenever we withdraw it.


Not really true (unless in a Roth IRA), if hyperinflation occurs and Uncle Sam takes part of that real $10.

That seems like a pretty remote possibility. Veering into catastrophic asteroid territory. It is hard to get hyperinflation in an industrial country without a major war or other form of major political crisis. I think most U.S. investors can safely put this fear aside when it comes to designing their portfolio.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by fishndoc » Thu Mar 22, 2012 9:50 am

Lots of excellent posts in this thread.

I tend to find myself agreeing with both Nisi:
savings rate is determined by financial considerations alone, independent of allocation choice; and that allocation choice is determined by risk tolerance alone, independent of financial situations.

and also with LH:
That one can match a single persons needs, to a tips income stream is false. Utterly false...
A single human family needs are unknown and unpredictable from now to 30 years hence, as an income stream.


I think a more reasonable approach to saving and investing for retirement goes something like:

Save as much as one reasonably can without too severe restrictions on current lifestyle; if I have to shortchange my retirement accounts to give my children a good education, good healthcare, or provide a safe place to live, so be it. I'll get by with less later, or work longer.

Invest in a diversified manner that suits my risk tolerance; no more in stocks than I could live with suffering a 50% loss (thanks Adrian!). Risk tolerance is a very personal decision that can't be determined or quantified by some questionnaire or detailed financial statement.

This approach is pretty much what my parents and most of their generation used - they were not educated in finance or investing, but used common sense to raise their family and reach a secure retirement.
Last edited by fishndoc on Thu Mar 22, 2012 9:58 am, edited 1 time in total.
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Re: from nisiprius, a 'greatest post' in case you missed it

Post by tadamsmar » Thu Mar 22, 2012 9:52 am

I did a quick spreadsheet calculation of theminimum inflation-adjusted 30-year 100% safe withdrawal rates for different fixed real return rates:

rate safe withdrawal rate
0.8% 3.8%
1.1 4.0

Looks like the current real return on long duration TIPS is about 0.8% (if I checked correctly, I know little about TIPS)

I guess Nisiprius' claim close to correct, given the fuzzy math of investing.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by letsgobobby » Thu Mar 22, 2012 10:13 am

nisi has many great and entertaining posts, but I disagree with the thrust of this one.

I would not call it 'luck' to say that one is hoping for beter than bond returns. I would call it 'expectations' or 'hope' based on the historical equity risk premium. And while one might not achieve those expected returns 10% of the time, 90% of the time one will (or better, one has). All the stuff about risk tolerance is still true, but it is not unreasonable to knowingly increase one's risk on the 9/10 chance that one will achieve those higher returns. And to do so would not be called 'lucky.'

If the breaks don't go our way, so be it. It is not possible for most middle-income families with children to save enough for retirement and college without taking some equity risk, not without momentous downgrades in lifestyle and expectations. That's not even, like, American!

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by tadamsmar » Thu Mar 22, 2012 10:21 am

tadamsmar wrote:I did a quick spreadsheet calculation of theminimum inflation-adjusted 30-year 100% safe withdrawal rates for different fixed real return rates:

rate safe withdrawal rate
0.8% 3.8%
1.1 4.0

Looks like the current real return on long duration TIPS is about 0.8% (if I checked correctly, I know little about TIPS)

I guess Nisiprius' claim close to correct, given the fuzzy math of investing.


But, there are a number of problems:

1) The TIPS mutual fund yields are negative now, so I am not sure how to do a real world plan based on TIPS.

2) Instead of going this route, you might as well use an inflation-adjusted annuity and eliminate the significant longevity risk that still remain.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by Grt2bOutdoors » Thu Mar 22, 2012 1:39 pm

It is so good of a post, that I copied one of his sentences and made it my signature.

We follow the "save as much as you can strategy" - not sure if it will be enough, but at least I know we did the best we could.
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Re: from nisiprius, a 'greatest post' in case you missed it

Post by yobria » Thu Mar 22, 2012 1:50 pm

letsgobobby wrote:I would not call it 'luck' to say that one is hoping for beter than bond returns. I would call it 'expectations' or 'hope' based on the historical equity risk premium. And while one might not achieve those expected returns 10% of the time, 90% of the time one will (or better, one has). All the stuff about risk tolerance is still true, but it is not unreasonable to knowingly increase one's risk on the 9/10 chance that one will achieve those higher returns. And to do so would not be called 'lucky.'


Right, there may be a X% chance that driving from Portland to LA will be faster than flying. But I'm still not going to expect the flight to take 15 hours. The presence of the driving option doesn't make the flying time any slower.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by nisiprius » Thu Mar 22, 2012 3:12 pm

Let me address point #2, because a) it's been challenged, b) I think it's important, and c) perhaps I exaggerated slightly. I shouldn't have said "just Treasury bonds and TIPS." 100% of anything sucks. Let me weasel it:

"The amount you need to save is the same no matter what your asset allocation is over a broad range. To say "it's very hard to save enough to retire on a portfolio heavily weighted to Treasury bonds and TIPs" is just to say that it's very hard to save enough. If you aren't saving enough to retire using 80% bonds, you aren't saving enough if you use 80% stocks. You're counting on luck, and luck is not a strategy."

I'm talking about the broad pattern of the data, which is amazingly consistent. To pick a convenient source, the 2010 SBBI yearbook. There are the usual problems here. The "bonds" allocation is represented by long-term government bonds, which is probably not a typical Boglehead practice, and these are real, not nominal returns. But, here's the data, and I insist that this is the broad pattern. Asset allocation makes a large difference if you are lucky, makes a difference on the average, but makes a surprisingly small difference if you are not.
Image
I haven't given Otar's book more than a glance, but I think this is essentially the same conclusion he came to. And the general pattern--asset allocation matters if you're lucky, matters on the average, doesn't matter much if you're unlucky--not black-swan, worst-case, just unlucky.

The philosophical question is if you accept the general pattern of the data, how do you act? Do you "plan for success," plan for the average, or plan pessimistically?

"Therefore, since the world has still
Much good, but much less good than ill ,
And while the sun and moon endure
Luck's a chance, but trouble's sure,
I'd face it as a wise man would,
And train for ill and not for good," says A. E. Housman.

The advocates of aggressive investing say the data shows that stocks pretty much have always beaten bonds, so, 100% stocks, 130% stocks, 200% stocks, whatever, the more the better. I say, first of all, you have to make some judgements about what happens at the tail of the distribution at the low end, even though there is not enough data and will never be enough data to get reliable statistics. But I believe that that tail is fat. Second of all, some aggressive investors see any assessment of risk tolerance as being pretty much beside the point--it's assumed to be an indication of weakness; the data seems to show that aggressive allocation is objectively right; so that is how a rational investor should act. I can't really argue that point. I can say only that I know what my risk tolerance is and there is absolutely no benefit to me in kidding myself.
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Re: from nisiprius, a 'greatest post' in case you missed it

Post by SimpleGift » Thu Mar 22, 2012 3:24 pm

nisiprius wrote:The philosophical question is if you accept the general pattern of the data, how do you act? Do you "plan for success," plan for the average, or plan pessimistically?

Nisi, I don't believe anyone can quibble with your point about the importance of savings over investment returns during the accumulation stage. But when investing those savings, the expected return between stocks and bonds, or the equity risk premium (ERP), is a critical consideration. A negative ERP implies that the investor should favor allocations to fixed income, whereas a positive ERP indicates an allocation to equities. How do things look today?

BONDS: Over the past 40 years, bond investors have enjoyed abundant returns because of a high yield environment at the beginning of the period followed by a steady decline in yields. Going forward, these conditions are not likely to repeat; we are currently experiencing a much lower-yield environment with a higher likelihood of yield increases than decreases. Looking at the evidence, do you think bonds will outperform stocks over the next thirty years?

STOCKS: Earnings, dividends, and capital gains are supplied by corporate profitability. Earnings and dividends have historically grown in tandem with the overall economy (GDP per capita), adjusting for inflation. So, if one believes that the global economy will continue to grow, dividends and earnings should also continue to grow, thus continuing to drive stock performance.

In sum: Nothing is guaranteed, but IMO a long term investor today would be ill-advised to ignore a healthy and balanced allocation to stocks in their portfolio (within their risk tolerance and need).
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Re: from nisiprius, a 'greatest post' in case you missed it

Post by bob90245 » Thu Mar 22, 2012 3:30 pm

nisiprius wrote:To pick a convenient source, the 2010 SBBI yearbook. There are the usual problems here. The "bonds" allocation is represented by long-term government bonds, which is probably not a typical Boglehead practice, and these are real, not nominal returns. But, here's the data, and I insist that this is the broad pattern. Asset allocation makes a large difference if you are lucky, makes a difference on the average, but makes a surprisingly small difference if you are not.
Image

Let's assume this represents future probabilities. The odds of seeing yourself at the extremes, the blue lines, is extremely remote. However, there is very good chance you'll see yourself somewhere in the broad middle and a bit away from the extremes.
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Re: from nisiprius, a 'greatest post' in case you missed it

Post by nisiprius » Thu Mar 22, 2012 3:36 pm

bob90245, do you agree that the data I've presented is reasonably accurate and reasonably objective, and that the issue is not the fact but how to act on them? That is, would you say I'm correct that during periods when the stock market performs poorly, outcome is almost independent of asset allocation? The disagreement is, "if so, so what?"

The question I ask is: what happens if you factor in risk tolerance? The answer is: as far as I know, nobody seriously tries to. It's assumed that the likelihood that an investor follows a plan is independent of how aggressive the plan is. All the theory assumes that investors will actually stay the course, whatever course they've chosen. Yet Chuck Jaffe claims in a throwaway remark for which I can't find a source, that in reality the average investor bails on a 20% loss. And the evidence from Morningstar investor returns is, unequivocally, that investors in most mutual funds a) earn returns significantly lower than the hypothetical return of an investor who stayed the course, and b) that, therefore, most mutual fund investors are not staying the course.

Also, I do not believe the data represents future probabilities, because I believe "fat tails" and "black swans" and "the misbehavior of markets" show up at the extremes. That relates to risk tolerance. The reason why people aren't as risk tolerant as they think is that their judgement of how fat the tails are increases as they actually get close to those tails.

I think it's fair to ask: given what you've said, do you reject 130% stocks (moderate leverage) as a reasonable allocation, and, if so, on what basis?

I should let Market Timer speak for himself, but I think an economist would say that on the numbers, what happened to him was no big deal and the damage was negligible due to his large holding of secure human capital. However, I think Market Timer was traumatized and that what happened to him was a big deal.
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Re: from nisiprius, a 'greatest post' in case you missed it

Post by ilmartello » Thu Mar 22, 2012 3:47 pm

Let's put some numbers here.

The most generous TIPS yield right now is on the 30 yr, with a real rate of 0.80. Plug in expected rate of inflation you get a 30 yr return of 3.8 percent.

Jack Bogle, recently has said a conservative estimate of stock growth is about 6 percent a year.

Over 30 years, $100,000 compounded at 3.8 percent over 30 years is $306,140.00
Over 30 years, $100,000 compounded at 6 percent over 30 years is $574,349.00

That's a big freaken difference.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by baw703916 » Thu Mar 22, 2012 3:48 pm

I've never really quantified my thinking, but I have the following thought a propos of #2:

An aggressive asset allocation should not be a substitute for an adequate savings rate. In fact, an aggressive asset allocation requires an adequate savings rate, because there will inevitably be a large drop in asset prices at some point in time, and you need an adequate savings rate to take advantage of the price drop.

My larger thinking is that short of being a billionaire, you can never know that you might not need more money than you have at some point in time. So accumulate as much as you can, and don't worry about "efficiency". With that in mind, I have a really high savings rate and a really aggressive asset allocation. I also set my psychological risk tolerance to be compatible with that approach. As Rick Ferry says, "Pain is good. Extreme pain is extremely good."

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by richard » Thu Mar 22, 2012 4:10 pm

nisiprius wrote:The question I ask is: what happens if you factor in risk tolerance? The answer is: as far as I know, nobody seriously tries to. It's assumed that the likelihood that an investor follows a plan is independent of how aggressive the plan is. All the theory assumes that investors will actually stay the course, whatever course they've chosen. Yet Chuck Jaffe claims in a throwaway remark for which I can't find a source, that in reality the average investor bails on a 20% loss. And the evidence from Morningstar investor returns is, unequivocally, that investors in most mutual funds a) earn returns significantly lower than the hypothetical return of an investor who stayed the course, and b) that, therefore, most mutual fund investors are not staying the course.[/i]

Remember that for every share sold there is a share bought. If the average investor is selling when the market is down 20%, who's buying?

There are lots of studies showing that investors earn low returns due to selling at the wrong time. I can't recall one of these studies that didn't have significant flaws. For the most part, they are prepared by those with a financial interest in showing that individual investors need paid guidance.

The risk tolerance line of thinking often leads one to believe risk is psychological and that if we only had the will to persevere, then we would be rewarded with investment riches. Risk is a much more serious matter than that.

If it's hard to make money by market timing, it should be hard to lose money by market timing.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by richard » Thu Mar 22, 2012 4:23 pm

Nisiprius wrote:What this means is that you need to save about the same amount no matter what your asset allocation is. You cannot use the fact that you're investing in stocks to justify a lower savings rate.

The general reason this is true is that in a somewhat efficient market, the risk adjusted expected returns of all reasonable portfolios are the same. If some portfolio had a higher risk adjusted return, people would buy more of it, raising its price and lowering its expected return until we were at equilibrium. Risk means whatever market participants regard as risk.

This is hard to see for at least two reasons. One, we don't have a good quantifiable measure of risk. Two, we don't have very much useful market history and we don't know if even this limited amount of history is a useful guide to the future, so we don't know the odds. There are less than 100 years of reliable US history and US history is not representative of the rest of the world's history.

As an aside, expected return is an unfortunate phrase. People interpret it as meaning the most likely outcome. What it means is the probability weighted outcome. For example, if there is a 10% chance of ending up with $1,000,000 and a 90% chance of ending up with nothing, the expected return is $100,000 ($1,000,000 * 10% plus $0 * 90%). In the case of market returns, we can only speculate as to the odds regarding future performance, making the exercise somewhat less helpful than might be hoped.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by bob90245 » Thu Mar 22, 2012 4:31 pm

nisiprius wrote:bob90245, do you agree that the data I've presented is reasonably accurate and reasonably objective, and that the issue is not the fact but how to act on them? That is, would you say I'm correct that during periods when the stock market performs poorly, outcome is almost independent of asset allocation? The disagreement is, "if so, so what?"

I'll repeat what I wrote above. I think it is very unlikely someone will find themself at either the lower extreme (what you are describing above), nor at the upper extreme. Rather, it is highly likely that the investor will find themself somewhere in the broad middle and a bit away from the extremes.

nisiprius wrote:The question I ask is: what happens if you factor in risk tolerance? The answer is: as far as I know, nobody seriously tries to. It's assumed that the likelihood that an investor follows a plan is independent of how aggressive the plan is. All the theory assumes that investors will actually stay the course, whatever course they've chosen. Yet Chuck Jaffe claims in a throwaway remark for which I can't find a source, that in reality the average investor bails on a 20% loss. And the evidence from Morningstar investor returns is, unequivocally, that investors in most mutual funds a) earn returns significantly lower than the hypothetical return of an investor who stayed the course, and b) that, therefore, most mutual fund investors are not staying the course.

Well, this is a separate issue that is behavioral in nature. And I don't disagree that investors as a whole are poor at staying the course. Read Bill Bernstein's Investor's Manifesto, and you find that he is now highly skeptical that most investors are capable of do-it-yourself investing. Bogleheads are a unique minority in that regard.

nisiprius wrote:I think it's fair to ask: given what you've said, do you reject 130% stocks (moderate leverage) as a reasonable allocation, and, if so, on what basis?

Good grief! I just got through agreeing with poor investing behaviors you cited. How can the average investor possibly handle leverage? Good luck with that. I think we both know that will not turn out well.
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Re: from nisiprius, a 'greatest post' in case you missed it

Post by SimpleGift » Thu Mar 22, 2012 4:58 pm

nisiprius wrote:Also, I do not believe the data represents future probabilities, because I believe "fat tails" and "black swans" and "the misbehavior of markets" show up at the extremes. That relates to risk tolerance. The reason why people aren't as risk tolerant as they think is that their judgement of how fat the tails are increases as they actually get close to those tails.

The data is the data. As do-it-yourself investors, most Bogleheads have read the history of maximum historical losses in equity markets around the world and have presumably made rational calculations about their ability to sustain a 50% or larger drop in their equity allocations.

But your concern about risk tolerance is a behavioral issue. In practice, I believe that Bogleheads are made, not born. Every do-it-yourself investor ultimately learns their true capacity for risk by "on the job" training. Every Boglehead becomes acquainted with the emotion of financial fear at some point. If an investor didn't learn their risk tolerance during the financial crisis and market drop of 2008 — and subsequently adjust their risk levels accordingly — then they weren't paying attention!

Finally, if you're suggesting that investors should shun equities because a black swan event may occur — well, disaster scenarios are always a possibility in life and yet we learn to proceed every day in the face of many potential dangers, whether it be earthquake, tornado, wildfire or financial meltdown. Each person plays the odds whenever they get out of bed — "preparing for the worst, but hoping for the best." Reasonable and prudent risks are just a part of living.
Cordially, Todd

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by letsgobobby » Thu Mar 22, 2012 5:21 pm

nisi, I think we differ in one small way, which is important: you think the fat tail is really fat, while I think it's just a bit plump.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by GregLee » Thu Mar 22, 2012 5:27 pm

Simplegift wrote:Finally, if you're suggesting that investors should shun equities because a black swan event may occur — well, disaster scenarios are always a possibility in life and yet we learn to proceed every day in the face of many potential dangers, whether it be earthquake, tornado, wildfire or financial meltdown.

Yes, I agree with this. To put it another way, it's not fully rational to assume that a 1-in-10 worst situation will actually happen and that, therefore, stocks will provide you no advantage. It's simply pandering to a common fallacy, which Larry Swedroe reviews in the article referenced in this recent thread: http://www.bogleheads.org/forum/viewtopic.php?f=10&t=92836&p=1338359#p1338359.

I remarked there, quoting Larry:
GregLee wrote:
Research shows that the pain of a loss is much greater than the joy of an equal sized gain. This leads investors to overpay in order to eliminate even the small possibility of losing money ...

This fallacy of thought is evident in many discussions here of how to guarantee that you don't run out of money in retirement.
Greg, retired 8/10.

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by VictoriaF » Thu Mar 22, 2012 6:14 pm

baw703916 wrote:I've never really quantified my thinking, but I have the following thought a propos of #2:

An aggressive asset allocation should not be a substitute for an adequate savings rate. In fact, an aggressive asset allocation requires an adequate savings rate, because there will inevitably be a large drop in asset prices at some point in time, and you need an adequate savings rate to take advantage of the price drop.


Hi Brad,

To take advantage of the price drop it is more important to have a lot of cash ("dry powder") than a high savings rate. In 2008-2009 both stocks and TIPS were cheap. I bought some high-real-rate TIPS, but I wish I had more cash.

baw703916 wrote:My larger thinking is that short of being a billionaire, you can never know that you might not need more money than you have at some point in time.


Your patronizing attitude towards billionaires is unjustified; they also might need more money at some point in time. :greedy

baw703916 wrote:So accumulate as much as you can, and don't worry about "efficiency". With that in mind, I have a really high savings rate and a really aggressive asset allocation. I also set my psychological risk tolerance to be compatible with that approach. As Rick Ferry says, "Pain is good. Extreme pain is extremely good."

Brad


Risk tolerance is an even more complex concept than that of risk. Could it be a matter of imagination? There are some good books on alternative histories. People should start writing books on the alternative market histories. What would have happened if certain economic measures had not been taken, and the global economy had not recovered from 2008-2009 the way it had?

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Re: from nisiprius, a 'greatest post' in case you missed it

Post by bertilak » Thu Mar 22, 2012 6:39 pm

VictoriaF wrote:To take advantage of the price drop it is more important to have a lot of cash ("dry powder") than a high savings rate. In 2008-2009 both stocks and TIPS were cheap. I bought some high-real-rate TIPS, but I wish I had more cash.

Victoria,

I have been silently following this thread and that's the ONE thing that made me wonder if I have my asset allocation right.

I always considered my bonds to be the "dry powder" that I would use to buy stocks in a down market -- expecting a rebalance to my target stock/bond ratio would get me some o' them cheap stocks. Note that I am retired and don't have a fresh stream of income so my low savings rare is pretty much a given.

My cash allocation is basically zero. Perhaps I need to go to something like 10%. You've got me thinking!
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