Analysis Paralysis: Can you get to the bottom of things?

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TD2626
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Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Sat Nov 25, 2017 3:25 pm

Although I have no formal background in this area, I have been reading the forum a lot trying to get to the bottom of investing in hopes of better managing my own investments and better being able to help family members when they have questions.

I told myself about 6 months ago I’d get to the bottom of investing – and took a deep, deep dive, reading an enormous number of historical threads on this site, reading Vanguard white papers, academic papers, the wiki, books, etc. I’ve been primarily focused on wrapping my head around theory and finding the ideal, perfect portfolio.

Unfortunately, it’s just not working. The more I learn, the more I realize how little I know compared to all there is to learn. I’ve gained some familiarity with many topics, and I had hoped that by now I would be able to find perfection. However, I am not able to find anything that I can prove beyond a reasonable doubt would improve upon a simple portfolio like the Three Fund portfolio (or a similar portfolio involving things like Lifestrategy or Target date options, or Total World + Total bond two fund portfolios, etc).

The issue is that there are plenty of things that I could reasonably and defensibly add to a three fund portfolio. Some of them I could even argue meet a “preponderance of evidence” standard for inclusion. But if I try to tilt towards everything I’d end up with an unmanageable mess. And none of this would meet my high standards for perfection and quantitative rigor when coming up with allocations.

I see several options. Each has pros and cons. They are below:

Option A: Continue on my quest to get to the bottom of investing. Don’t stop until I know everything there is to know. At this stage, the next things I need to learn about involve coskewness and cokurtosis matrices, and seeing if I can integrate these into my models and simulations. I’ve also heard that academics have discovered many factors beyond the few most commonly discussed. Pros of this strategy include that I would eventually work through the “know enough to know how little I know” stage and get to the “actual knowledge” stage – and then everything would be easy. Any decision could be made quickly and would be based solely on quantitative data and rational reasoning, with no need to make gut decisions or contend with the messy realities of the real world. Cons include that this appears to be impractical given the amount of time it would take and I am realizing that the benefits to an individual amateur investor are probably not worth the time cost. Another con is that the chance that even if I do get to the bottom of things it may turn out that the three fund portfolio actually is the perfect, ideal portfolio and I’d just be wasting my energy. (I doubt this… surely the true perfect answer must be highly complex…)

Option B: Honestly admit to myself that the real world is messy and I will never be able to perfectly describe it even with complicated equations and lengthy simulations. Recognize that the benefits of further learning do not outweigh the time costs and therefore, further investigations are not rationally justified. Invest all funds using a simple strategy (e.g. Three Fund, LifeStrategy, Total World, etc and suggest family do the same. Pros of this strategy include less hassle and headache, and less effort needed. Cons are numerous. First, it seems like capitulation. I would feel that I would be giving up on all my knowledge of things like tilting if I didn’t at least give due consideration to all factors researched by academics. Second, it wouldn’t be perfection – it would only be good enough. Third, I have “legacy” assets that are complex and that likely can’t or shouldn’t be sold, so I would have a relatively complex portfolio anyways.

Option C: As in Option B, admit to myself I’ll never get to the bottom of things. Transition to a mostly index based portfolio, but allow ~30% of the portfolio in legacy assets and/or complex strategies (tilts, active funds, etc). Acknowledge that any investments beyond broad market funds are unlikely to provide tangible benefits and are instead more based on legacy holdings, emotional considerations, or intellectual interest in the theory behind investing. Pros: Has most of the benefits of the three-fund portfolio (well, except simplicity) while still allowing me to save face and have a small chance of outperformance. Cons: Would require me to accept that I can’t have perfection, only an approximation of it.

I think Option C is best, because even though it’s probably missing the point of the three fund portfolio (e.g. simplicity), it has many benefits.

Any suggestions? Is there an option D?

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by LadyGeek » Sat Nov 25, 2017 4:32 pm

This thread is now in the Personal Finance (Not Investing) forum (behavioral finance).

Option B: Keep it simple and never look at your portfolio until the end of the year.
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Sandtrap » Sat Nov 25, 2017 4:50 pm

A...There’s no gain in complexity.
C...You are market timing.

Option B
3-4 Fund or Balanced Funds (Target or fund of funds, etc) applies to a variety of asset sizes.
Simplicity, low cost, stay the course, etc.
Have you formulated an IPS yet?
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by pkcrafter » Sat Nov 25, 2017 5:08 pm

TD2626 wrote:
Sat Nov 25, 2017 3:25 pm
Although I have no formal background in this area, I have been reading the forum a lot trying to get to the bottom of investing in hopes of better managing my own investments and better being able to help family members when they have questions.

95% of us don't have formal training, but where else can folks like us beat 80% of all investors?

There is no bottom, you will just go around in circles. You are trying to focus on the bark of a tree when you should be standing back and looking at the forest.
I told myself about 6 months ago I’d get to the bottom of investing – and took a deep, deep dive, reading an enormous number of historical threads on this site, reading Vanguard white papers, academic papers, the wiki, books, etc. I’ve been primarily focused on wrapping my head around theory and finding the ideal, perfect portfolio.
There is no ideal, perfect portfolio. All decisions and all portfolios involve some sort of compromise.
Unfortunately, it’s just not working. The more I learn, the more I realize how little I know
Along time ago, after doing what you are doing, it suddenly dawned on me: the more I learned, the more I realized the less I really needed to know. It still holds true. Ah, sweet simplicity. I've been following Taylor Larimore's unwavering guidance for almost 20 years. Oh, I still read up on the latest fads and new ideas, but I have not been lured away.
compared to all there is to learn. I’ve gained some familiarity with many topics, and I had hoped that by now I would be able to find perfection.
There is no perfection. The market is a chameleon and changes it's look all the time. Being a perfectionist is not a good trait when it comes to investing.
However, I am not able to find anything that I can prove beyond a reasonable doubt would improve upon a simple portfolio like the Three Fund portfolio (or a similar portfolio involving things like Lifestrategy or Target date options, or Total World + Total bond two fund portfolios, etc).
Exactly. It it were lots of smart investors would identify it and the market would eat it up. Any outlying strategy is outlying for a reason. The BH method will get you returns close to 80% of all investors, including fund managers. If you decide that's not good enough, then you not only risk not achieving better returns, but also the market return as well.
The issue is that there are plenty of things that I could reasonably and defensibly add to a three fund portfolio. Some of them I could even argue meet a “preponderance of evidence” standard for inclusion. But if I try to tilt towards everything I’d end up with an unmanageable mess. And none of this would meet my high standards for perfection and quantitative rigor when coming up with allocations.

Get rid of the idea of perfection and you may be able to see the writing on the wall. :happy If it makes you feel smarter, tilt to small, but you will complicate your portfolio and be tested by long lengths of underperfomance and tracking error.
I see several options. Each has pros and cons. They are below:

Option A: Continue on my quest to get to the bottom of investing. Don’t stop until I know everything there is to know. At this stage, the next things I need to learn about involve coskewness and cokurtosis matrices, and seeing if I can integrate these into my models and simulations. I’ve also heard that academics have discovered many factors beyond the few most commonly discussed. Pros of this strategy include that I would eventually work through the “know enough to know how little I know” stage and get to the “actual knowledge” stage – and then everything would be easy. Any decision could be made quickly and would be based solely on quantitative data and rational reasoning, with no need to make gut decisions or contend with the messy realities of the real world. Cons include that this appears to be impractical given the amount of time it would take and I am realizing that the benefits to an individual amateur investor are probably not worth the time cost. Another con is that the chance that even if I do get to the bottom of things it may turn out that the three fund portfolio actually is the perfect, ideal portfolio and I’d just be wasting my energy. (I doubt this… surely the true perfect answer must be highly complex…)

Option B: Honestly admit to myself that the real world is messy and I will never be able to perfectly describe it even with complicated equations and lengthy simulations. Recognize that the benefits of further learning do not outweigh the time costs and therefore, further investigations are not rationally justified. Invest all funds using a simple strategy (e.g. Three Fund, LifeStrategy, Total World, etc and suggest family do the same. Pros of this strategy include less hassle and headache, and less effort needed. Cons are numerous. First, it seems like capitulation. I would feel that I would be giving up on all my knowledge of things like tilting if I didn’t at least give due consideration to all factors researched by academics. Second, it wouldn’t be perfection – it would only be good enough. Third, I have “legacy” assets that are complex and that likely can’t or shouldn’t be sold, so I would have a relatively complex portfolio anyways.

Option C: As in Option B, admit to myself I’ll never get to the bottom of things.
Ah, now you are on to something.
Transition to a mostly index based portfolio, but allow ~30% of the portfolio in legacy assets and/or complex strategies (tilts, active funds, etc). Acknowledge that any investments beyond broad market funds are unlikely to provide tangible benefits and are instead more based on legacy holdings, emotional considerations, or intellectual interest in the theory behind investing.
In the end, all these decisions are up to you, but none are ever going to be perfect. As you are really discovering, there is simply no perfect or even optimal portfolio, and I don't even know if choosing one that makes you feel clever or smart is going to produce higher returns.
Pros: Has most of the benefits of the three-fund portfolio (well, except simplicity) while still allowing me to save face and have a small chance of outperformance. Cons: Would require me to accept that I can’t have perfection, only an approximation of it.
Save face? If you really want to understand the market, you will have to admit you don't and never will truly understand it.
I think Option C is best, because even though it’s probably missing the point of the three fund portfolio (e.g. simplicity), it has many benefits.

OK, if that's your choice, it's fine. Is it perfect? No, but it will work as long as you don't keep fooling with it.

Paul
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Jacotus » Sat Nov 25, 2017 5:40 pm

You must embrace, or at least accept, the unpredictability and uncertainty of the future. There's a certain bliss that comes once you internalize that nobody knows what's going to happen, and it's all a series of more or less educated guesses.

Rather than there being some kind of market-return function that you could optimize, getting incrementally closer to the optimum as you get ever more sophisticated, think of the function as blurred by unpredictability, veiled behind a haze of Heisenberg uncertainty. You simply cannot precisely optimize ahead of time --- only in hindsight.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by ved » Sat Nov 25, 2017 5:45 pm

OP, what is your definition of a perfect portfolio? - Maximum return (regardless of risk)? Minimum risk (regardless of return)? Or, some combination of the two?
What will you measure this perfect portfolio against, to determine it is perfect or needs further tweaking?

More importantly, what are you trying to achieve? Is it a theoretical/academic exercise to come up with financial models or publish papers in journals? Or is it to fund your retirement or other objectives?

Based on the answers to the above, you can continue on this quest. Or, you can say the portfolio is good enough and move on.

Your choice.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by nisiprius » Sat Nov 25, 2017 6:07 pm

Option B for me. I "capitulated" long ago.

I don't know if you've ever read any of Patrick O'Brian's Aubrey/Maturin novels, but I would draw an analogy between investing and medicine as of 1800. Back then, there was an extraordinary amount to "know" and the fictional surgeon Stephen Maturin knew an extraordinary amount. Not all of it was useless. He repaired hernias, he once saved a sailor's life by trepanning his skull. But most of it was nonsense; he balanced humors, he bled the crew before crossing the equator, he gave Captain Aubrey an antimony pill (a violent purge...)

Or perhaps another analogy might be Dow Theory and technical analysis. There is an awful lot to "know" about them. But it is not necessary to know any of it, because it's all nonsense.

The factor stuff is all in the strange grey area of "there might be something to it," but if there is, its robustness and magnitude are greatly exaggerated by people who have something to sell. Consider "Rekenthaler's Rule:" "If the bozos know about it, it doesn't work anymore." I'm a bozo and I know it. It is amazing how many seemingly credible effects happen to fade just about the time they start getting widely applied; I'd point to "commodities" (or CCFs) as a good case in point. With factors, the first factor to be discovered--the size factor--has been close to discredited, although the factor mavens will talk around that a bit. And the value factor has been described as "missing in action" for at least ten years, although the factor mavens have not given up hope that it will return. I think an important reason why so many people are touting the newer factors like momentum, quality, low volatility, investment, profitability, nascence, and heterochromaticity is that the old ones have gotten shopworn.
Third, I have “legacy” assets that are complex and that likely can’t or shouldn’t be sold, so I would have a relatively complex portfolio anyways.
Sure. Nowadays that's almost normal. Classify them as "stocks, bonds, or cash" and include them when calculating your asset allocation, and nibble away at them slowly as opportunity presents itself.
Last edited by nisiprius on Sat Nov 25, 2017 6:35 pm, edited 2 times in total.
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by cfs » Sat Nov 25, 2017 6:08 pm

All engines stop.

Option B is a no brainer!

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by steve roy » Sat Nov 25, 2017 6:14 pm

Here's the secret: Set up a Three Fund Portfolio, dump a bunch of money in it, then ignore it for thirty-five years. Pretend you don't have it. Three and a half decades from now you'll discover you're a quite successful investor. And you've avoided all the Deep Diving.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Tyler Aspect » Sat Nov 25, 2017 6:15 pm

The strategy of tilting that you can find is mostly about historical out-performance. But regression to the means would indicate a trend toward below average. You never see actively proposed tilting toward historical under-perform sectors. Therefore I tend to dismiss tilting as driving by looking at the rear-view mirror.
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by radiowave » Sat Nov 25, 2017 6:20 pm

I second the motion for Option B. Keep things as simple as you can, diversify your portfolio, keep costs low. I will admin to a certain amount of personal quantitative analysis, not for market timing, but for better understanding future scenarios like when I can retire, "what if" for early retirement buyout, etc. I update the spreadsheet every month or two to keep track of everything.
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by badbreath » Sat Nov 25, 2017 6:50 pm

Option B is the way to go. You are looking for the perfect portfolio and have realized that its hard to get better then the Three Fund. You are thinking it should not be that easy but really it is.
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by edge » Sat Nov 25, 2017 7:24 pm

I don’t even know what rigor means in this context.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Sat Nov 25, 2017 8:21 pm

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LadyGeek wrote:
Sat Nov 25, 2017 4:32 pm
This thread is now in the Personal Finance (Not Investing) forum (behavioral finance).

Option B: Keep it simple and never look at your portfolio until the end of the year.
Thanks for the recommendation. Sorry for not putting it in the right forum to begin with.
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Sandtrap wrote:
Sat Nov 25, 2017 4:50 pm
A...There’s no gain in complexity.
The problem is that I can't prove that there isn't a gain from complexity - and intuitively believe there must be one. There are some special cases where complexity would be of benefit. If one accepts that there is a n% chance per year that a money market mutual fund will fail,
(reasonable given the history of the Reserve Primary Fund) then to reduce risk, one would want to spread assets among many, many funds. Similarly, buying a large number of individual stocks and holding each one for decades could create a diy index fund with no ER and lower tax drag than an index fund at the expense of complexity. I guess time costs of complexity could reduce the benefits of this complexity.

C...You are market timing.
I wouldn't be market timing as anything in option C's 30% non-simple box would mostly be buy and hold. I guess a small amount of tactical asset allocation (which is ultimately market timing) could be considered but my IPS does not allow for more than a few percent of that.

Option B
3-4 Fund or Balanced Funds (Target or fund of funds, etc) applies to a variety of asset sizes.
Simplicity, low cost, stay the course, etc.
Have you formulated an IPS yet?
Yes, I do have an IPS. I wrote an in depth one myself. It is about 25 pages long and describes nearly every asset or investment strategy I could think of and my views on investing in (or avoiding) each one. It provides concrete limits for implementation.
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*********************************************************
pkcrafter wrote:
Sat Nov 25, 2017 5:08 pm
TD2626 wrote:
Sat Nov 25, 2017 3:25 pm
Although I have no formal background in this area, I have been reading the forum a lot trying to get to the bottom of investing in hopes of better managing my own investments and better being able to help family members when they have questions.

95% of us don't have formal training, but where else can folks like us beat 80% of all investors?

There is no bottom, you will just go around in circles. You are trying to focus on the bark of a tree when you should be standing back and looking at the forest.
Yeah, I'm realizing that it's hard to even keep up with the volume of news pouring out of various outlets day by day - much less read up on old papers, research long term market history, etc.
I told myself about 6 months ago I’d get to the bottom of investing – and took a deep, deep dive, reading an enormous number of historical threads on this site, reading Vanguard white papers, academic papers, the wiki, books, etc. I’ve been primarily focused on wrapping my head around theory and finding the ideal, perfect portfolio.
There is no ideal, perfect portfolio. All decisions and all portfolios involve some sort of compromise.
Good point. I was hoping that Option C would be a compromise position - where I didn't have to decide whether or not buy a large tilt, or what tilts to get. I could instead get a 3 fund style portfolio for most of the portfolio and then add on around the margins with a large number of small tilts (tilting towards nearly everything).
Unfortunately, it’s just not working. The more I learn, the more I realize how little I know
Along time ago, after doing what you are doing, it suddenly dawned on me: the more I learned, the more I realized the less I really needed to know. It still holds true. Ah, sweet simplicity. I've been following Taylor Larimore's unwavering guidance for almost 20 years. Oh, I still read up on the latest fads and new ideas, but I have not been lured away.
How do you know when the latest idea is durable and needed? Small-value tilting isn't exactly a recent idea, it's been around for a good while. Something like cat bonds, or the most recent factors, are much newer.
compared to all there is to learn. I’ve gained some familiarity with many topics, and I had hoped that by now I would be able to find perfection.
There is no perfection. The market is a chameleon and changes it's look all the time. Being a perfectionist is not a good trait when it comes to investing.
If being a perfectionist is not a good trait, is being a rationalist a good trait? I really do aspire to be the rational investor that theory assumes me to be - making decisions only based on logical and quantitative arguments instead of emotional considerations. I believe I am fairly good at being rational.
However, I am not able to find anything that I can prove beyond a reasonable doubt would improve upon a simple portfolio like the Three Fund portfolio (or a similar portfolio involving things like Lifestrategy or Target date options, or Total World + Total bond two fund portfolios, etc).
Exactly. It it were lots of smart investors would identify it and the market would eat it up. Any outlying strategy is outlying for a reason. The BH method will get you returns close to 80% of all investors, including fund managers. If you decide that's not good enough, then you not only risk not achieving better returns, but also the market return as well.
Good point. At some point I have to fully realize that any chance of outperformance comes with a chance of underperformance. I also need to question why I am so focused on outperformance. What do I really get if I outperform the 3-fund portfolio by 0.1% per year? Bragging rights? An enjoyable hobby? A small amount of money, maybe, but not enough to matter (probably).
The issue is that there are plenty of things that I could reasonably and defensibly add to a three fund portfolio. Some of them I could even argue meet a “preponderance of evidence” standard for inclusion. But if I try to tilt towards everything I’d end up with an unmanageable mess. And none of this would meet my high standards for perfection and quantitative rigor when coming up with allocations.

Get rid of the idea of perfection and you may be able to see the writing on the wall. :happy If it makes you feel smarter, tilt to small, but you will complicate your portfolio and be tested by long lengths of underperfomance and tracking error.
I see several options. Each has pros and cons. They are below:

Option A: Continue on my quest to get to the bottom of investing. Don’t stop until I know everything there is to know. At this stage, the next things I need to learn about involve coskewness and cokurtosis matrices, and seeing if I can integrate these into my models and simulations. I’ve also heard that academics have discovered many factors beyond the few most commonly discussed. Pros of this strategy include that I would eventually work through the “know enough to know how little I know” stage and get to the “actual knowledge” stage – and then everything would be easy. Any decision could be made quickly and would be based solely on quantitative data and rational reasoning, with no need to make gut decisions or contend with the messy realities of the real world. Cons include that this appears to be impractical given the amount of time it would take and I am realizing that the benefits to an individual amateur investor are probably not worth the time cost. Another con is that the chance that even if I do get to the bottom of things it may turn out that the three fund portfolio actually is the perfect, ideal portfolio and I’d just be wasting my energy. (I doubt this… surely the true perfect answer must be highly complex…)

Option B: Honestly admit to myself that the real world is messy and I will never be able to perfectly describe it even with complicated equations and lengthy simulations. Recognize that the benefits of further learning do not outweigh the time costs and therefore, further investigations are not rationally justified. Invest all funds using a simple strategy (e.g. Three Fund, LifeStrategy, Total World, etc and suggest family do the same. Pros of this strategy include less hassle and headache, and less effort needed. Cons are numerous. First, it seems like capitulation. I would feel that I would be giving up on all my knowledge of things like tilting if I didn’t at least give due consideration to all factors researched by academics. Second, it wouldn’t be perfection – it would only be good enough. Third, I have “legacy” assets that are complex and that likely can’t or shouldn’t be sold, so I would have a relatively complex portfolio anyways.

Option C: As in Option B, admit to myself I’ll never get to the bottom of things.
Ah, now you are on to something.
Transition to a mostly index based portfolio, but allow ~30% of the portfolio in legacy assets and/or complex strategies (tilts, active funds, etc). Acknowledge that any investments beyond broad market funds are unlikely to provide tangible benefits and are instead more based on legacy holdings, emotional considerations, or intellectual interest in the theory behind investing.
In the end, all these decisions are up to you, but none are ever going to be perfect. As you are really discovering, there is simply no perfect or even optimal portfolio, and I don't even know if choosing one that makes you feel clever or smart is going to produce higher returns.
Pros: Has most of the benefits of the three-fund portfolio (well, except simplicity) while still allowing me to save face and have a small chance of outperformance. Cons: Would require me to accept that I can’t have perfection, only an approximation of it.
Save face? If you really want to understand the market, you will have to admit you don't and never will truly understand it.
I think Option C is best, because even though it’s probably missing the point of the three fund portfolio (e.g. simplicity), it has many benefits.

OK, if that's your choice, it's fine. Is it perfect? No, but it will work as long as you don't keep fooling with it.
That's the thing - I need to find a good portfolio and settle on it -- and never fool with it. The issue is since the decision must be permanent (e.g. buy and hold forever) it's hard to ever make any decision since it can't be reversed.

Paul
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*********************************************************
Jacotus wrote:
Sat Nov 25, 2017 5:40 pm
You must embrace, or at least accept, the unpredictability and uncertainty of the future. There's a certain bliss that comes once you internalize that nobody knows what's going to happen, and it's all a series of more or less educated guesses.

Rather than there being some kind of market-return function that you could optimize, getting incrementally closer to the optimum as you get ever more sophisticated, think of the function as blurred by unpredictability, veiled behind a haze of Heisenberg uncertainty. You simply cannot precisely optimize ahead of time --- only in hindsight.
I generally do think in terms of " getting incrementally closer to the optimum as you get ever more sophisticated" - e.g. there is a theoretical optimum portfolio, with return x, and one's actual portfolio's return (for a given level of risk) asymptotically approaches x as number of hours studying investing approaches N, where N is the number of hours of study it takes to learn everything there is to know. Of course, the optimum portfolio is unknowable until the number of hours studying investing hits N at least according to this (overly simplified) model. My main issue is that the Three Fund requires almost no investing knowledge and has a return very close to x.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by sambb » Sat Nov 25, 2017 8:25 pm

just put it all into lifestrategy moderate growth, and be done with it for a few decades... if you dont want to ponder it further. Youll be fine.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Sat Nov 25, 2017 9:14 pm

ved wrote:
Sat Nov 25, 2017 5:45 pm
OP, what is your definition of a perfect portfolio? - Maximum return (regardless of risk)? Minimum risk (regardless of return)? Or, some combination of the two?
I wish it could be maximum expected return regardless of risk, but after reading Market Timer's historical thread for the third time (and conducting a few reductio ad absurdum thought experiments) it became clear that this strategy is untenable. That being said, as someone that aims to be purely rational and invest without emotional or behavioral biases, (and as someone with a long term perspective / time horizon), I do have high willingness/ability/need to take risk.

I generally look to Sharpe Ratio, but I have been reading more and more and realize that it doesn't take into higher moments, and particularly investor preferences for positive odd central moments and minimal even central moments. I am looking into the Adjusted Sharpe Ratio (by Pezier and White, 2006) in hopes that by taking into account skewness and kurtosis of return distributions, one can find a better risk-adjusted return metric.



What will you measure this perfect portfolio against, to determine it is perfect or needs further tweaking?
My benchmark portfolio is the simple portfolio: the Three fund portfolio or a similar simple strategy (like the LifeStrategy funds)

More importantly, what are you trying to achieve? Is it a theoretical/academic exercise to come up with financial models or publish papers in journals? Or is it to fund your retirement or other objectives?
I would like to know how to best invest personally for myself and my family. I have a background in a quantitative, but non-finance related, field. The mathematical theory behind investing comes easy to me (fewer differential equations and less calculus than I'm used to) and is intellectually stimulating, but likely would never evolve beyond an amateur/hobby interest.

Based on the answers to the above, you can continue on this quest. Or, you can say the portfolio is good enough and move on.

Your choice.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by bottlecap » Sat Nov 25, 2017 9:27 pm

Target date retirement fund.

JT

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Sandtrap » Sat Nov 25, 2017 9:42 pm

. . . That's the thing - I need to find a good portfolio and settle on it -- and never fool with it. The issue is since the decision must be permanent (e.g. buy and hold forever) it's hard to ever make any decision since it can't be reversed.
Paul
There is no "never fool with it" or "permanency" or "irreversible actions".
You can fool with it. You can adjust allocation. You can consolidate funds. You can tilt along the way. As long as it is within your IPS and as long as you are "staying the course". Perhaps in 5 years there's a windfall. Adjust again. Tweak the IPS. Go.

As in golf: get a gameplay for the hole. Tee off toward the first target spot which is a layup before the dogleg on a par 5. Second shot: reassess and go. Third shot: wedge to the tight green or layup just on the fringe? It's a tough hole so bogey is a good personal best. Go for it? Your call.
j :D

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Sat Nov 25, 2017 9:53 pm

Thanks so much for all the responses! A few replies:
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cfs wrote:
Sat Nov 25, 2017 6:08 pm
All engines stop.

Option B is a no brainer!

Good luck, Merry Christmas, and thanks for reading.
Yes, at some point I do realize that I need to stop the analysis paralysis and simplify.
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steve roy wrote:
Sat Nov 25, 2017 6:14 pm
Here's the secret: Set up a Three Fund Portfolio, dump a bunch of money in it, then ignore it for thirty-five years. Pretend you don't have it. Three and a half decades from now you'll discover you're a quite successful investor. And you've avoided all the Deep Diving.
If I would have done this months/years ago I would have avoided all the deep diving. At this point, I'm trying to figure out whether the best way out of this rabbit hole is either to continue deep diving or just capitulate. So I want to know if I'm close to getting to the bottom of things, and a little more learning will be enough.... or if giving up on all I've learned is instead best. I guess I'm realizing that there is no bottom to this endless black hole.
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Tyler Aspect wrote:
Sat Nov 25, 2017 6:15 pm
The strategy of tilting that you can find is mostly about historical out-performance. But regression to the means would indicate a trend toward below average. You never see actively proposed tilting toward historical under-perform sectors. Therefore I tend to dismiss tilting as driving by looking at the rear-view mirror.
I don't expect tilting would increase risk-adjusted returns. Things like small and value are often theorized to be more risk, more expected return propositions that increase both risk (as measured by standard deviation) and expected return (as measured by historical CAGR). Thus, by tilting it could be possible to, for example, have the same expected return as a 100% equity portfolio without having 100% in equities. Of course, I must not forget that expected returns aren't guaranteed, history may not repeat itself, risk is not simply the standard deviation of a hypothetical probability distribution but instead is the risk of actually loosing money, and so forth - e.g. the tilts may not work if the risk shows up.
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radiowave wrote:
Sat Nov 25, 2017 6:20 pm
I second the motion for Option B. Keep things as simple as you can, diversify your portfolio, keep costs low. I will admin to a certain amount of personal quantitative analysis, not for market timing, but for better understanding future scenarios like when I can retire, "what if" for early retirement buyout, etc. I update the spreadsheet every month or two to keep track of everything.
Good point - maybe I should redirect my analyses,and simulations toward personal budgeting and savings projections instead of personal portfolio design and maintenance.
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badbreath wrote:
Sat Nov 25, 2017 6:50 pm
Option B is the way to go. You are looking for the perfect portfolio and have realized that its hard to get better then the Three Fund. You are thinking it should not be that easy but really it is.
I am surprised that I haven't actually been able to convince myself that there's anything better than a 3-fund portfolio. The problem is, I haven't been able to prove beyond any doubt that the 3 fund portfolio is perfect - and I don't want to do something that may be sub-optimal.

I'm beginning to realize that the answer probably doesn't involve running more simulations and backtests. I've run an estimated 100,000,000 Monte Carlo simulations in the past months varying a large number of input parameters. I've also run a large number of backtests using Portfolio Visualizer, the Simba spreadsheet, and similar tools. If only the computer could tell me what to do, though!
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edge wrote:
Sat Nov 25, 2017 7:24 pm
I don’t even know what rigor means in this context.
I generally view rigor as quantitative or logical/empirical/rational rigor, e.g. proving that what you're doing is correct (perfect) with math, simulations, citations, and so forth.
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sambb wrote:
Sat Nov 25, 2017 8:25 pm
just put it all into lifestrategy moderate growth, and be done with it for a few decades... if you dont want to ponder it further. Youll be fine.
I've always thought that Lifestrategy funds were for investors who knew very little about investing, and it would seem like capitulation and cruel irony if I ended up in one. I am realizing that that may be a very reasonable option, though.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by edge » Sat Nov 25, 2017 9:56 pm

Ya so rigor has no meaning in this context.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by badbreath » Sat Nov 25, 2017 10:44 pm

badbreath wrote: ↑Sat Nov 25, 2017 7:50 pm
Option B is the way to go. You are looking for the perfect portfolio and have realized that its hard to get better then the Three Fund. You are thinking it should not be that easy but really it is.
I am surprised that I haven't actually been able to convince myself that there's anything better than a 3-fund portfolio. The problem is, I haven't been able to prove beyond any doubt that the 3 fund portfolio is perfect - and I don't want to do something that may be sub-optimal.

I'm beginning to realize that the answer probably doesn't involve running more simulations and backtests. I've run an estimated 100,000,000 Monte Carlo simulations in the past months varying a large number of input parameters. I've also run a large number of backtests using Portfolio Visualizer, the Simba spreadsheet, and similar tools. If only the computer could tell me what to do, though!
Again you are looking for the perfect portfolio which does not exist and is different for all. I hold my portfolio at 75/25, a lot in retirement folks hold 50/50, I tell my 20s kid 100% stock. To me to create a Prefect Portfolio just depends on where you are in life and what type of risk you are willing to take.
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by venkman » Sat Nov 25, 2017 11:00 pm

TD2626 wrote:
Sat Nov 25, 2017 3:25 pm
Option A: Continue on my quest to get to the bottom of investing. Don’t stop until I know everything there is to know. At this stage, the next things I need to learn about involve coskewness and cokurtosis matrices, and seeing if I can integrate these into my models and simulations. I’ve also heard that academics have discovered many factors beyond the few most commonly discussed. Pros of this strategy include that I would eventually work through the “know enough to know how little I know” stage and get to the “actual knowledge” stage – and then everything would be easy. Any decision could be made quickly and would be based solely on quantitative data and rational reasoning, with no need to make gut decisions or contend with the messy realities of the real world. Cons include that this appears to be impractical given the amount of time it would take and I am realizing that the benefits to an individual amateur investor are probably not worth the time cost. Another con is that the chance that even if I do get to the bottom of things it may turn out that the three fund portfolio actually is the perfect, ideal portfolio and I’d just be wasting my energy. (I doubt this… surely the true perfect answer must be highly complex…)
You could do Option A, and you'd probably have a leg up on most of the people here. The problem is that we aren't your competition. Your competition is a cadre of finance professionals, backed up by the best analysts and endless computing power. They already know all the things you're talking about learning, and they have a lot more experience doing them. And pretty much none of them can consistently beat the market, after expenses.

Option B is the the baseline. There's nothing wrong with starting there and tilting a bit, based on the idea that riskier asset classes should offer higher expected returns over time. But anything more than that is speculating. Not to say that it's impossible to speculate and win, just that any outperformance may be more attributable to luck than to anything else.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Sat Nov 25, 2017 11:02 pm

Thank you for your response and ideas.
nisiprius wrote:
Sat Nov 25, 2017 6:07 pm
Option B for me. I "capitulated" long ago.

I don't know if you've ever read any of Patrick O'Brian's Aubrey/Maturin novels, but I would draw an analogy between investing and medicine as of 1800. Back then, there was an extraordinary amount to "know" and the fictional surgeon Stephen Maturin knew an extraordinary amount. Not all of it was useless. He repaired hernias, he once saved a sailor's life by trepanning his skull. But most of it was nonsense; he balanced humors, he bled the crew before crossing the equator, he gave Captain Aubrey an antimony pill (a violent purge...)
Interesting analogy. I wonder if investment theory will ever reach the current precision of modern medicine -- and if so, will the conclusion be that everyone should use a 3-fund portfolio?

Or perhaps another analogy might be Dow Theory and technical analysis. There is an awful lot to "know" about them. But it is not necessary to know any of it, because it's all nonsense.
Yes, I agree that due to efficient market theory, technical analysis is useless and knowledge about it is pointless. Other investment related knowledge is also probably pointless... for example, one could memorize the daily or weekly performance in the 1920s of random (long bankrupt) individual stocks.

Indeed, the amount of investment related information to learn is probably infinite. For example, I could run a backtest telling me what a half stock, half bond portfolio did over the last 30 years. Then, I could backtest a 3/4 stock portfolio and memorize the results. Then I could backtest a 7/8ths stock portfolio. Then a 15/16ths stock portfolio. Then a 31/32nds stock portfolio. (This sort of reminds me of Zeno's paradox). Since there are an infinite number of portfolios I could backtest, there are an infinite number of discrete datapoints (e.g. backtest results) I could learn about investing. Given that I am a mortal and thus have a finite amount of time to learn an infinite number of datapoints, it would thus be mathematically impossible to learn everything about investing (did I do this math right?)


The factor stuff is all in the strange grey area of "there might be something to it," but if there is, its robustness and magnitude are greatly exaggerated by people who have something to sell. Consider "Rekenthaler's Rule:" "If the bozos know about it, it doesn't work anymore." I'm a bozo and I know it. It is amazing how many seemingly credible effects happen to fade just about the time they start getting widely applied; I'd point to "commodities" (or CCFs) as a good case in point. With factors, the first factor to be discovered--the size factor--has been close to discredited, although the factor mavens will talk around that a bit. And the value factor has been described as "missing in action" for at least ten years, although the factor mavens have not given up hope that it will return. I think an important reason why so many people are touting the newer factors like momentum, quality, low volatility, investment, profitability, nascence, and heterochromaticity is that the old ones have gotten shopworn.
Maybe this could be an issue of me reading a lot of historical threads from 10 years ago and somewhat dated academic papers. It seems as though fewer people are talking about REITs nowadays than earlier (and isn't it the case that many who suggest a tilt towards REITs may actually come to investing after being a successful landlord and are biased toward overweighting REITs because of that?) That's why I generally don't like REIT tilts in my opinion.

I do think that "classic factors" seem to be a more-risk, more expected reward -- but roughly equal Sharpe ratio -- proposition. It's reasonable that small caps are - and really, really are - riskier and that the excess volatility is over many, many decades compensated by extra expected return. I am always suspicious of behavioral explanations because behaviors are subject to change. Risk, though, isn't. If small companies are by their nature less stable and more prone to bankruptcy in a recession, then the market will make sure only those who need the higher risk get the higher expected return. Risk based explanations would be self-correcting. Yes, people can pile into small caps and this could temporarily depress returns. Those who unwisely tilt towards small caps in excess of their willingness, ability, or need to take risk could get forced from the market at the bottom of the next crash. The remaining investors in small caps would then be able to enjoy a less crowded space.

Note I am "expected return" in the technical sense (e.g. return as based on historical data -- and history is no guarantee).

Also good (humorous) point about nascence and heterochromaticity. It is almost certain that Larry or someone else will, in the future, publish an article suggesting pursuing a currently unheard of factor or using a currently uninvestible strategy. If I go with a simple portfolio, like a 3 fund portfolio or a portfolio with a small number of tilts, how would I evaluate such articles? I previously posted a long discussion on that topic in this thread but am worried my conclusions (wait many years to modify AA at all based on a new opportunity, and if that new factor/opportunity appears to be standing the test of time change AA slowly - over may decades) may be overly conservative. Classic factors do seem to, at least according to some proponents, be standing the test of time at least somewhat, so wouldn't it be reasonable to consider a very small allocation based on that framework?

Third, I have “legacy” assets that are complex and that likely can’t or shouldn’t be sold, so I would have a relatively complex portfolio anyways.
Sure. Nowadays that's almost normal. Classify them as "stocks, bonds, or cash" and include them when calculating your asset allocation, and nibble away at them slowly as opportunity presents itself.
Yes, that's probably the best way to deal with things. Sticking my head in the sand and pledging to do nothing until I find the perfect portfolio won't solve the problem and may be harmful.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by gips » Sat Nov 25, 2017 11:09 pm

anything but B is a fool's mission. I've been a consultant to large asset managers. Their fund and portfolio managers attended top schools, they have every imaginable tool, virtually unlimited resources, years of experience and most will not beat the three fund portfolio's performance. Anything that you're likely to discover had been discovered and on a risk-adjusted basis, will not outperform the broad market indices.

If nothing else, get your portfolio into a three-fund portfolio (or life strategy fund) now and let your analysis paralysis play out over the next n years.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by technovelist » Sat Nov 25, 2017 11:43 pm

I would recommend the Harry Browne Permanent Portfolio (HBPP), which uses a fixed allocation of 25% in each of four sectors: stocks, long government bonds, cash, and gold.

There are a number of threads here on this approach. It can handle situations in which the three fund portfolio performs poorly for quite awhile, e.g., the 1970's, with relatively low volatility, while not giving up too much performance compared to a stock-heavy portfolio.

If you can't stand the idea of having a significant gold position (as many here can't), then a simple stock/bond portfolio with infrequent rebalancing will probably outperform anything you can do on your own, with much less time investment.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by delamer » Sat Nov 25, 2017 11:48 pm

You may be letting the tail wag the dog.

Figure out what your goal is, or goals are, for your portfolio.

Then figure out a level of risk that makes you comfortable. For instance, can you handle a 75% drop in stocks without selling in a panic if your portfolio is 70% stocks? What about a 50% drop with a 50% stock exposure?

Finally, come up with a 3- or 4-fund portfolio that will let you reach your goal with your preferred level of risk. If there are legacy assets involved, incorporate those into your plan (keep or sell as needed).

If you can't find a portfolio that meets your goals and risk level, then adjust either your goals or risk level. Repeat.

Once you are satisfied, implement and rebalance annually.

This may seem a bit simplistic, given all of your anxiety. But no one else cares how your portfolio performed and you should not care how it compares to others' or some ideal.

Keep your eye on the real end-game -- will I have enough to meet my goals?

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Fallible » Sun Nov 26, 2017 12:33 am

Here's Morgan Housel, one of the better financial writers, on "Why Rules of Thumb Beat Precision." It was originally posted on the forum some time ago by Taylor Larimore. Housel notes that some fields work with amazing precision and are "governed by pure math and physics and aren't burdened by the whims of human emotion." Investing, he says, "is not one of those fields."

https://www.fool.com/investing/general/ ... nough.aspx
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TG2 » Sun Nov 26, 2017 12:35 am

badbreath wrote:
Sat Nov 25, 2017 10:44 pm
badbreath wrote: ↑Sat Nov 25, 2017 7:50 pm
Option B is the way to go. You are looking for the perfect portfolio and have realized that its hard to get better then the Three Fund. You are thinking it should not be that easy but really it is.
I am surprised that I haven't actually been able to convince myself that there's anything better than a 3-fund portfolio. The problem is, I haven't been able to prove beyond any doubt that the 3 fund portfolio is perfect - and I don't want to do something that may be sub-optimal.

I'm beginning to realize that the answer probably doesn't involve running more simulations and backtests. I've run an estimated 100,000,000 Monte Carlo simulations in the past months varying a large number of input parameters. I've also run a large number of backtests using Portfolio Visualizer, the Simba spreadsheet, and similar tools. If only the computer could tell me what to do, though!
Again you are looking for the perfect portfolio which does not exist and is different for all. I hold my portfolio at 75/25, a lot in retirement folks hold 50/50, I tell my 20s kid 100% stock. To me to create a Prefect Portfolio just depends on where you are in life and what type of risk you are willing to take.
Exactly. It is said that "the perfect is the enemy of the good." Looking for the perfect will blind you to all of the other perfectly good options. There are way too many variables to even attempt to find "perfect" and you have little to no control over many of them. Find the best you can for your own situation, recognizing that what is best for you may be terrible for someone else. Adjust when necessary. Enjoy the results.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by MJW » Sun Nov 26, 2017 12:53 am

I have spent more time than I would care to admit deep-diving into the subject of investing. In spite of all of the countless hours of research, I hold no strong convictions. Because I happen to be someone who thinks too much anyway, it would be very easy for me to analyze my investing options to death, so I personally value the merits of a disciplined approach focused on low costs and simplicity.

I have also found that I enjoy reading and learning about investing to the extent that I consider it a hobby, but have no such sentiment when it comes to my own investing. It's strictly a means to an end. I'm fascinated with the many slice and dice portfolios I read about, but my own is and likely will always be plain and boring. I would be happy to recommend a more complex portfolio for you, though. :)
Last edited by MJW on Sun Nov 26, 2017 2:22 am, edited 1 time in total.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Jacotus » Sun Nov 26, 2017 1:32 am

TD2626 wrote:
Sat Nov 25, 2017 8:21 pm
Jacotus wrote:
Sat Nov 25, 2017 5:40 pm
You must embrace, or at least accept, the unpredictability and uncertainty of the future. There's a certain bliss that comes once you internalize that nobody knows what's going to happen, and it's all a series of more or less educated guesses.

Rather than there being some kind of market-return function that you could optimize, getting incrementally closer to the optimum as you get ever more sophisticated, think of the function as blurred by unpredictability, veiled behind a haze of Heisenberg uncertainty. You simply cannot precisely optimize ahead of time --- only in hindsight.
I generally do think in terms of " getting incrementally closer to the optimum as you get ever more sophisticated" - e.g. there is a theoretical optimum portfolio, with return x, and one's actual portfolio's return (for a given level of risk) asymptotically approaches x as number of hours studying investing approaches N, where N is the number of hours of study it takes to learn everything there is to know. Of course, the optimum portfolio is unknowable until the number of hours studying investing hits N at least according to this (overly simplified) model. My main issue is that the Three Fund requires almost no investing knowledge and has a return very close to x.
Like you, I come from a non-finance quantitative field. The more I learn, the more convinced I am that all the best investing rules of thumb can fit on a single page. My advice: take option B in terms of your portfolio, but if you are driven to maximize your total return by increasing your sophistication, effective outlets exist for you to do so. Unlike the future behavior of the market, they involve things that are actually under your control. I'm referring to possibilities such as:
  • Minimizing expense ratios
  • Tax loss harvesting
  • Backdoor Roth IRA
  • Mega backdoor Roth IRA
  • Making full use of other tax-advantaged accounts including 529 and HSA
After making this list I realized they mostly revolve around minimizing taxes :D.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by randomizer » Sun Nov 26, 2017 1:49 am

Everything you need to know can be found in The Boglehead's Guide to Investing. Implement that. Everything else is an intellectual circus game, to be enjoyed if that's your cup of tea. But don't let that get in the way of making real money.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by JoMoney » Sun Nov 26, 2017 2:14 am

Keep it simple. How to win the 'losers game'.
If you were determined to become a successful trader or professional securities investor, I think you need to have a certain passion and desire for it where I don't think you would be coming here looking for people to talk you out of it. Even among the people who do vie for it, very few people achieve any meaningful success at it, and I don't think it's something you'd be successful at with a half-hearted approach. Like in sports, securities investing is an extremely competitive field. People don't become Olympic gymnasts or professional sports stars as a part time hobby while they pursue some other full time career. There are no handicaps or little-league versions of securities investing. If you're not going after it as a primary goal you feel compelled to achieve, forget the active investing and take the market averages for what they offer at the lowest costs and effort on your part.
Some wisdom offered by Benjamin Graham:
Benjamin Graham in The Intelligent Investor wrote:Investment policy, as it has been developed here, depends in the first place on a choice by the investor of either the defensive (passive) or aggressive (enterprising) role. The aggressive investor must have a considerable knowledge of security values—enough, in fact, to warrant viewing his security operations as equivalent to a business enterprise. There is no room in this philosophy for a middle ground, or a series of gradations, between the passive and aggressive status. Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement. As an investor you cannot soundly become “half a business-man,” expecting thereby to achieve half the normal rate of business profits on your funds.
It follows from this reasoning that the majority of security owners should elect the defensive classification. They do not have the time, or the determination, or the mental equipment to embark upon investing as a quasi-business. They should therefore be satisfied with the excellent return return now obtainable from a defensive portfolio (and with even less), and they should stoutly resist the recurrent temptation to increase this return by deviating into other paths.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Sun Nov 26, 2017 11:36 am

Sandtrap wrote:
Sat Nov 25, 2017 9:42 pm
. . . That's the thing - I need to find a good portfolio and settle on it -- and never fool with it. The issue is since the decision must be permanent (e.g. buy and hold forever) it's hard to ever make any decision since it can't be reversed.
Paul
There is no "never fool with it" or "permanency" or "irreversible actions".
You can fool with it. You can adjust allocation. You can consolidate funds. You can tilt along the way. As long as it is within your IPS and as long as you are "staying the course". Perhaps in 5 years there's a windfall. Adjust again. Tweak the IPS. Go.

As in golf: get a gameplay for the hole. Tee off toward the first target spot which is a layup before the dogleg on a par 5. Second shot: reassess and go. Third shot: wedge to the tight green or layup just on the fringe? It's a tough hole so bogey is a good personal best. Go for it? Your call.
j :D
Good analogy - I think individuals need to spend much of their effort focusing on tweaks based on personal circumstances changing (new job, moving, salary changing, marriages and divorces, changes in number of kids, etc). These things aren't easily forseeable and can have a significant impact on one's ideal portfolio. This is the main reason for IPS reviews every so often.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Sun Nov 26, 2017 11:41 am

delamer wrote:
Sat Nov 25, 2017 11:48 pm
You may be letting the tail wag the dog.

Figure out what your goal is, or goals are, for your portfolio.

Then figure out a level of risk that makes you comfortable. For instance, can you handle a 75% drop in stocks without selling in a panic if your portfolio is 70% stocks? What about a 50% drop with a 50% stock exposure?

Finally, come up with a 3- or 4-fund portfolio that will let you reach your goal with your preferred level of risk. If there are legacy assets involved, incorporate those into your plan (keep or sell as needed).

If you can't find a portfolio that meets your goals and risk level, then adjust either your goals or risk level. Repeat.

Once you are satisfied, implement and rebalance annually.

This may seem a bit simplistic, given all of your anxiety. But no one else cares how your portfolio performed and you should not care how it compares to others' or some ideal.

Keep your eye on the real end-game -- will I have enough to meet my goals?
My family has never really had specific, quantifiable investment goals beyond investing generally for the long term future. Some assets need to be in safer investments (e.g. cash and bonds) but otherwise most can be invested in a relatively risky high equity portfolio. Since no one intends to sell anything ever, the time horizon is indefinite (e.g. effectively infinity). It's hard to come up with a perfect portfolio for an infinite time horizon.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Sun Nov 26, 2017 11:43 am

randomizer wrote:
Sun Nov 26, 2017 1:49 am
Everything you need to know can be found in The Boglehead's Guide to Investing. Implement that. Everything else is an intellectual circus game, to be enjoyed if that's your cup of tea. But don't let that get in the way of making real money.
I remember when reading this how much was not mentioned - so many different strategies were ignored or not discussed. It was actually quite surprising.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Sun Nov 26, 2017 11:52 am

Fallible wrote:
Sun Nov 26, 2017 12:33 am
Here's Morgan Housel, one of the better financial writers, on "Why Rules of Thumb Beat Precision." It was originally posted on the forum some time ago by Taylor Larimore. Housel notes that some fields work with amazing precision and are "governed by pure math and physics and aren't burdened by the whims of human emotion." Investing, he says, "is not one of those fields."

https://www.fool.com/investing/general/ ... nough.aspx
Thanks for the link too the article - it was quite interesting. Yes, I recognize that theories in financial economics are approximations - the Efficient Market hypothteis is an approximation, and risk metrics like the Sharpe Ratio are all less than idea. Risk isn't standard deviation and won't be even if I want it to be so. Taylor expansions are used in some of the more complicated mathematical formulas. I do need to keep reminding myself of this - the theory here is not as precise as in other sciences.

Still, I think the approximations are good enough to be useful - and approximations are used in disciplines other than economics, of course. Although I admit the approximations are so bad that they make the economy look like a spherical cow, the equations do help one see deeper meaning and are a good starting point.

I'm just hoping that adding more and more terms to the equations to correct for the non-spherical nature of the cow, friction, air resistance, etc -- one can find perfection and then gain true understanding of the world.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by delamer » Sun Nov 26, 2017 11:56 am

TD2626 wrote:
Sun Nov 26, 2017 11:41 am
delamer wrote:
Sat Nov 25, 2017 11:48 pm
You may be letting the tail wag the dog.

Figure out what your goal is, or goals are, for your portfolio.

Then figure out a level of risk that makes you comfortable. For instance, can you handle a 75% drop in stocks without selling in a panic if your portfolio is 70% stocks? What about a 50% drop with a 50% stock exposure?

Finally, come up with a 3- or 4-fund portfolio that will let you reach your goal with your preferred level of risk. If there are legacy assets involved, incorporate those into your plan (keep or sell as needed).

If you can't find a portfolio that meets your goals and risk level, then adjust either your goals or risk level. Repeat.

Once you are satisfied, implement and rebalance annually.

This may seem a bit simplistic, given all of your anxiety. But no one else cares how your portfolio performed and you should not care how it compares to others' or some ideal.

Keep your eye on the real end-game -- will I have enough to meet my goals?
My family has never really had specific, quantifiable investment goals beyond investing generally for the long term future. Some assets need to be in safer investments (e.g. cash and bonds) but otherwise most can be invested in a relatively risky high equity portfolio. Since no one intends to sell anything ever, the time horizon is indefinite (e.g. effectively infinity). It's hard to come up with a perfect portfolio for an infinite time horizon.
So you are having this angst over money that you don't need to support your goals?

That means investing is just an intellectual exercise.

In that case, divvy up the money into several pots, and try a different investment strategy for each pot. Compare and revise to your heart's content. And give up the idea of a "perfect" portfolio; even if there was such a thing, the next black swan event will change it.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by donall » Sun Nov 26, 2017 12:08 pm

I remember feeling the same way a while back. I actually bought individual stocks thinking I would try various strategies. I spent a year on the strategies and realized I needed to know the future to get the best results. I gave up as the time commitment was too high. Luckily I found this site as well as other related sites and books. Not sure I would have accepted the Boglehead philosophy unless I went through that year of analysis and trying different techniques. Interestingly I made excellent returns on the individual stocks I bought, as I bought in 2010, but realized it was pure luck.

"Less is more"

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by chevca » Sun Nov 26, 2017 12:13 pm

Step one - take the word perfect and replace it with good in your investing language and mind.

Step two - repeat all the research you have done and see if you come up with a good plan and portfolio.

Your search for perfection is causing the paralysis. It doesn't exist in investing, and you won't jump in until you find perfection. See the issue there?

Optimal will only be known when it's over. Until then..... we can tell you what is almost certainly not optimal... sitting on the sidelines. :happy

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by DrGoogle2017 » Sun Nov 26, 2017 12:17 pm

I rather not. I like the simplicity of 3-fund or Lifestyle Strategy fund.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by NotWhoYouThink » Sun Nov 26, 2017 12:24 pm

I'm just hoping that adding more and more terms to the equations to correct for the non-spherical nature of the cow, friction, air resistance, etc -- one can find perfection and then gain true understanding of the world.
Can't provide the original citation, but my understanding was improved by reading the comment that "Economics is history trying to be physics."

In physics, you can predict the outcome if you know enough about the initial conditions and the mathematical descriptions of the physical phenomena. In economics, or investing, you have all these irrational people running around making decisions and changing their minds, or creating innovative products and systems and changing the rules along the way. Equations won't ever cover all of it, and it is a waste of effort to try to perfect things.

That doesn't mean there aren't some useful heuristics, but it does mean that the predictive nature of economic equations is limited. You'll be better off accepting the limitation than pretending it doesn't exist. Start with a plan, observe the results along the way, adjust as needed. Your income and savings rate will swamp your investment performance as determinants of the size of your portfolio.

Remember the collapse of the collateralized debt obligations (CDOs)? Investment firms were actively encouraging lenders to lend increasingly large amounts of money to clearly unqualified borrowers, because the ratings firms were willing to provide high ratings to slices of those loans. Any rational actor could tell the house of cards would fall, but few were able to predict exactly what the timing of the fall would be. And most of us lost money as many markets collapsed at once. There was no math to predict that, and there is no math to predict the next bubble or what will collapse it.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by dbr » Sun Nov 26, 2017 12:24 pm

TD2626 wrote:
Sat Nov 25, 2017 3:25 pm


Unfortunately, it’s just not working. The more I learn, the more I realize how little I know compared to all there is to learn. I’ve gained some familiarity with many topics, and I had hoped that by now I would be able to find perfection. However, I am not able to find anything that I can prove beyond a reasonable doubt would improve upon a simple portfolio like the Three Fund portfolio (or a similar portfolio involving things like Lifestrategy or Target date options, or Total World + Total bond two fund portfolios, etc).

Why on earth would you think there is perfection to be found? With a miss-perception this severe you are doomed. If you can't find anything that you can prove beyond a reasonable doubt would improve on a simple portfolio, then why not adopt the simple portfolio and move on with more important things. If a bunch of people on the Internet want to worry about these things that doesn't have to be your problem.

The issue is that there are plenty of things that I could reasonably and defensibly add to a three fund portfolio. Some of them I could even argue meet a “preponderance of evidence” standard for inclusion. But if I try to tilt towards everything I’d end up with an unmanageable mess. And none of this would meet my high standards for perfection and quantitative rigor when coming up with allocations.

Looking for perfection and quantitative rigor in this area is a fool's errand. If you are a person who relishes those things, what do you do in other areas where such things are also not obtainable?


Any suggestions? Is there an option D?

Option D: Do whatever you want and learn to stop worrying about it. You could even author a script on the topic "How I Learned to Stop Worrying and Love the Market"

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"The Enemy of a Good Plan"

Post by Taylor Larimore » Sun Nov 26, 2017 12:33 pm

TD2626:
The enemy of a good plan is the dream of a perfect plan. -- Jack Bogle
Consider The Three-Fund Portfolio

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by dbr » Sun Nov 26, 2017 2:15 pm

I think the origin of a lot of this hope that finance can be made into a precise science might lie in the fact that the raw data is exact. The price at which I buy a security is exactly what I pay; the dividend paid out per share is exactly the dividend paid; the number of shares I own is exactly the number of shares, and so on. Even physics in which theory is successful at accounting for phenomena to incredible exactness is at heart always subject to error in making any actual measurement and also plagued by all sorts of logical conundrums such as the uncertainty relationship and many others.

But the exactness of the data in finance is not connected to any systematically precise and accurate theoretical accounting or ability to predict outcomes. Finance is not building a bridge or designing an airplane, or maybe even constructing a house, except by rough approximation.

Other inexact sciences, psychology for example, are already imprecise and ambiguous on the surface in that it is not clear and precise what the raw data of observed human behavior, thoughts, and feelings even are. We might be in less consternation over than we might be over finance.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by pkcrafter » Sun Nov 26, 2017 2:30 pm

TD2626 wrote:
Sun Nov 26, 2017 11:43 am
randomizer wrote:
Sun Nov 26, 2017 1:49 am
Everything you need to know can be found in The Boglehead's Guide to Investing. Implement that. Everything else is an intellectual circus game, to be enjoyed if that's your cup of tea. But don't let that get in the way of making real money.
I remember when reading this how much was not mentioned - so many different strategies were ignored or not discussed. It was actually quite surprising.
Wow, you missed the whole point of the book. You are simply not understanding, or just refusing to understand, what all the post replies are trying to tell you. Is that not a behavioral issue? I have one more suggestion--

I know you have dismissed behavior, but there is one behavior book that is geared toward the technical side, so maybe you can connect. The book is Meir Statman's "Behavior for Normal People". Statman has an incredible number of references in this book. I think you should add it to your wealth of information to at least have some balance in your thoroughness to do research.

https://www.amazon.com/Finance-Normal-P ... bc?ie=UTF8



Paul
Last edited by pkcrafter on Sun Nov 26, 2017 2:37 pm, edited 1 time in total.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by PFInterest » Sun Nov 26, 2017 2:33 pm

well, youll never know as much as i do....but i will never know if you would have been correct.

and both of those statements cant be proven.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by tadamsmar » Sun Nov 26, 2017 2:34 pm

Rick Ferri once said "Investing is easy, taxes are hard."

Keep studying till you realized that you will never be able to prove that a randomly selected life cycle fund is not the best strategy.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by nedsaid » Sun Nov 26, 2017 5:11 pm

TD2626 wrote:
Sat Nov 25, 2017 3:25 pm
Although I have no formal background in this area, I have been reading the forum a lot trying to get to the bottom of investing in hopes of better managing my own investments and better being able to help family members when they have questions.

I told myself about 6 months ago I’d get to the bottom of investing – and took a deep, deep dive, reading an enormous number of historical threads on this site, reading Vanguard white papers, academic papers, the wiki, books, etc. I’ve been primarily focused on wrapping my head around theory and finding the ideal, perfect portfolio.

Nedsaid: Hate to break it to you, there is no ideal, perfect portfolio. It is sort of like Juan Ponce de Leon's search for the Fountain of Youth. A myth.

Unfortunately, it’s just not working. The more I learn, the more I realize how little I know compared to all there is to learn. I’ve gained some familiarity with many topics, and I had hoped that by now I would be able to find perfection.

Nedsaid: Join the club. You are discovering what the rest of us have discovered. Actually, this can be quite liberating to know that you will never know everything. I have been investing for over 30 years. When the markets do well, I am just utterly brilliant. When the markets don't do so well, I wonder what the heck I was thinking. Truth be told, I have been fumbling along the whole way.

However, I am not able to find anything that I can prove beyond a reasonable doubt would improve upon a simple portfolio like the Three Fund portfolio (or a similar portfolio involving things like Lifestrategy or Target date options, or Total World + Total bond two fund portfolios, etc).

Nedsaid: The Taylor Larimore Three Fund portfolio is hard to improve on. LifeStrategy or Target Date options are also very good options. I know that I have thrown everything but the kitchen sink at my portfolio hoping to increase returns and reduce volatility. Hard to say if I have succeeded.


The issue is that there are plenty of things that I could reasonably and defensibly add to a three fund portfolio. Some of them I could even argue meet a “preponderance of evidence” standard for inclusion. But if I try to tilt towards everything I’d end up with an unmanageable mess. And none of this would meet my high standards for perfection and quantitative rigor when coming up with allocations.

Nedsaid: Perfection just doesn't exist. Investing is not really a science. We can use scientific and statistical techniques to help us understand the markets but the wild card of human nature and behavior throw a clink into the perfect plans devised by the quants. Markets just have a way of doing what you don't expect, and they do this unexpected thing at the worse possible time. All you can do is use your knowledge of market history to tilt the odds in your favor as much as possible. Obviously no guarantees.

I see several options. Each has pros and cons. They are below:

Option A: Continue on my quest to get to the bottom of investing. Don’t stop until I know everything there is to know. At this stage, the next things I need to learn about involve coskewness and cokurtosis matrices, and seeing if I can integrate these into my models and simulations. I’ve also heard that academics have discovered many factors beyond the few most commonly discussed. Pros of this strategy include that I would eventually work through the “know enough to know how little I know” stage and get to the “actual knowledge” stage – and then everything would be easy. Any decision could be made quickly and would be based solely on quantitative data and rational reasoning, with no need to make gut decisions or contend with the messy realities of the real world. Cons include that this appears to be impractical given the amount of time it would take and I am realizing that the benefits to an individual amateur investor are probably not worth the time cost. Another con is that the chance that even if I do get to the bottom of things it may turn out that the three fund portfolio actually is the perfect, ideal portfolio and I’d just be wasting my energy. (I doubt this… surely the true perfect answer must be highly complex…)

Nedsaid: I would recommend Larry Swedroe's new book on factor investing.

Option B: Honestly admit to myself that the real world is messy and I will never be able to perfectly describe it even with complicated equations and lengthy simulations. Recognize that the benefits of further learning do not outweigh the time costs and therefore, further investigations are not rationally justified. Invest all funds using a simple strategy (e.g. Three Fund, LifeStrategy, Total World, etc and suggest family do the same. Pros of this strategy include less hassle and headache, and less effort needed. Cons are numerous. First, it seems like capitulation. I would feel that I would be giving up on all my knowledge of things like tilting if I didn’t at least give due consideration to all factors researched by academics. Second, it wouldn’t be perfection – it would only be good enough. Third, I have “legacy” assets that are complex and that likely can’t or shouldn’t be sold, so I would have a relatively complex portfolio anyways.

Option C: As in Option B, admit to myself I’ll never get to the bottom of things. Transition to a mostly index based portfolio, but allow ~30% of the portfolio in legacy assets and/or complex strategies (tilts, active funds, etc). Acknowledge that any investments beyond broad market funds are unlikely to provide tangible benefits and are instead more based on legacy holdings, emotional considerations, or intellectual interest in the theory behind investing. Pros: Has most of the benefits of the three-fund portfolio (well, except simplicity) while still allowing me to save face and have a small chance of outperformance. Cons: Would require me to accept that I can’t have perfection, only an approximation of it.

I think Option C is best, because even though it’s probably missing the point of the three fund portfolio (e.g. simplicity), it has many benefits.

Nedsaid: The problem is that markets do weird things, the reason being is that people are weird. Markets are mostly rational but they do suffer from the extremes of human emotion, human behavior, and human nature. You will never figure it all out. Buy good stuff and keep it.

Any suggestions? Is there an option D?
A fool and his money are good for business.

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TD2626
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Sun Nov 26, 2017 5:48 pm

donall wrote:
Sun Nov 26, 2017 12:08 pm
I remember feeling the same way a while back. I actually bought individual stocks thinking I would try various strategies. I spent a year on the strategies and realized I needed to know the future to get the best results. I gave up as the time commitment was too high.
MJW wrote:
Sun Nov 26, 2017 12:53 am
I have spent more time than I would care to admit deep-diving into the subject of investing. In spite of all of the countless hours of research, I hold no strong convictions. Because I happen to be someone who thinks too much anyway, it would be very easy for me to analyze my investing options to death, so I personally value the merits of a disciplined approach focused on low costs and simplicity.
Thank you to everyone (including donall and MJW) who has gone through this sort of experience before and described it. I recognize that I probably need to end up being OK with simplicity, but I don't think I'm fully there yet. I am probably going to need to go through every single one of the stages of grief to get there.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Sun Nov 26, 2017 5:56 pm

dbr wrote:
Sun Nov 26, 2017 2:15 pm
I think the origin of a lot of this hope that finance can be made into a precise science might lie in the fact that the raw data is exact. The price at which I buy a security is exactly what I pay; the dividend paid out per share is exactly the dividend paid; the number of shares I own is exactly the number of shares, and so on. Even physics in which theory is successful at accounting for phenomena to incredible exactness is at heart always subject to error in making any actual measurement and also plagued by all sorts of logical conundrums such as the uncertainty relationship and many others.

But the exactness of the data in finance is not connected to any systematically precise and accurate theoretical accounting or ability to predict outcomes. Finance is not building a bridge or designing an airplane, or maybe even constructing a house, except by rough approximation.

Other inexact sciences, psychology for example, are already imprecise and ambiguous on the surface in that it is not clear and precise what the raw data of observed human behavior, thoughts, and feelings even are. We might be in less consternation over than we might be over finance.
Good point. When valuing a stock, you might say it should be $140 a share and I might say it should be $160 a share, and someone else might say it should be $150 a share, and so on and so forth. There's a range of reasonable prices for a particular stock, and it is a pretty wide range (+/- $20 per share, say). However, brokerage statements are always so precise - they'd say things like $152.74/share and so forth. Why do brokers compute out to 5 significant figures when humans can only work with about 2?

I do think that the process of describing behavior using equations that contain approximations, and adding complicated corrections to these equations if the approximations aren't good enough, is valid and useful in many sciences, including economics (e.g. investment theory). If the corrections aren't good enough, you can always add corrections to your corrections in your equations.

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