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

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

Post by technovelist » Sun Nov 26, 2017 6:02 pm

TD2626 wrote:
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.
You can add as many corrections as you want but economics is not a natural science; it is a social science. Thus, the methods of the natural sciences will not produce the relative accuracy that they do in the natural sciences.

Furthermore, any regularity in economics that can be discovered by mathematical analysis can be employed to make money only until it causes enough change in the data that the assumptions are no longer valid, e.g., by driving up the price of the underpriced asset.

So it is hopeless to seek perfection in a realm where it does not exist.
In theory, theory and practice are identical. In practice, they often differ.

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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 6:20 pm

PFInterest wrote:
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.
One issue is that no statements can easily be proven after the fact. You'd think that "how it turns out" would be the final arbiter but that's not the case. Each of these cases is possible:

Case 1: Speculator made stupid, coin flip bet and it turned out well.
Case 2: Speculator made stupid, coin flip bet and got lucky.
Case 3: Investor had actual, genuine foresight and reaped a deserved reward.
Case 4: Investor had actual, genuine foresight but got unlucky.

Not confusing strategy for outcome is important.

Combinations of these extreme cases could also be possible.

For example, say an investor tilts towards small cap, and small outperforms. They wouldn't know if their outperformance was due to luck or foresight, so it wouldn't be honest of them to take credit for 100% of their outperformance. Maybe they could claim it was 60% foresight and 40% luck, in which they could take credit for 60% of their outperformance. (How they'd come up with that 60%, 40% number is beyond me... though I think I might have read somewhere that only 60% of the calls that successful active managers make are right).

So if the small cap tilt is 10% of the portfolio and the investor had 1% outperformance, their portfolio would outperform by 0.1%... but they would in this case only be able to honestly attribute 0.06% outperformance to skill instead of luck. (Did I do this math right??)

So -- 0.06% of a portfolio, say a common Boglehead $1,000,000 portfolio, is $600. It would probably take around 1,000 hours of learning to deeply understand factor tilting. Thus, you'd be making an uncertain $600 dollars / 1000 hours = $0.60 per hour. I guess if you value your time at any reasonable rate factor tilting wouldn't be justifiable due to the time cost. Most people have opportunities to make much more than $0.60/hour through, say, driving an Uber or something, so unless my math is an order of magnitude off I guess complexity can't easily be justified. (Is my example reasonable?)

(Note - the $600 is for the first year. It may be larger in other years, due to compounding. Also the 1000 hours sort of is a "start-up cost" --- managing the excess complexity would likely only take 100 hours a year in subsequent years. Also, if a long recession hits, small caps could dramatically underperform - the $600 is not guaranteed in the same way that taking a second job and using it to make $600 would be a more reliable way of enlarging portfolio size.)

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

Post by TD2626 » Sun Nov 26, 2017 6:42 pm

technovelist wrote:
Sun Nov 26, 2017 6:02 pm

Furthermore, any regularity in economics that can be discovered by mathematical analysis can be employed to make money only until it causes enough change in the data that the assumptions are no longer valid, e.g., by driving up the price of the underpriced asset.
I don't think that this is always the case, as if you take more risk in exchange for more reward, that is reasonably likely to persist. Small caps may be a case of more risk, more reward in my opinion. Yes, the current flows into small caps may overcrowd the segment and temporarily depress returns. However, I try to invest for the ultra-long-term (many decades), and thus a bad decade or two wouldn't be meaningful. True risk based explanations should in theory be enforced by the market if everyone is rational. If small caps are more risky because small companies are inherently more prone to failure in a recession, rational investors will demand more return for that higher risk. If people unwisely crowd into small caps, when the risk shows up and the small caps drop, say, 70-95% (as they did in the Great Depression***) the people who took too much risk (beyond their willingness/ability/need) would be driven from the market and everyone else would then in theory enjoy a less overcrowded small cap space.

***Small caps in the US experienced a nominal 90.78% decline between 1929 and 1932, according to the Bogleheads wiki (https://www.bogleheads.org/wiki/Small_caps). This is some serious risk, and any buyers must honestly be willing to stay the course - and even rebalance into - small caps when they've lost between 90 and 95%. Those who think that the stock market is unlikely to drop more than 50% and use that as a rule of thumb could potentially be in for a rude awakening.

Anyway, the fact that one can change level of expected risk-return by tilting over long periods (if tilting advocates are correct) could be useful in portfolio construction (or is it?)

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

Post by technovelist » Sun Nov 26, 2017 6:49 pm

TD2626 wrote:
Sun Nov 26, 2017 6:42 pm
technovelist wrote:
Sun Nov 26, 2017 6:02 pm

Furthermore, any regularity in economics that can be discovered by mathematical analysis can be employed to make money only until it causes enough change in the data that the assumptions are no longer valid, e.g., by driving up the price of the underpriced asset.
I don't think that this is always the case, as if you take more risk in exchange for more reward, that is reasonably likely to persist. Small caps may be a case of more risk, more reward in my opinion. Yes, the current flows into small caps may overcrowd the segment and temporarily depress returns. However, I try to invest for the ultra-long-term (many decades), and thus a bad decade or two wouldn't be meaningful. True risk based explanations should in theory be enforced by the market if everyone is rational. If small caps are more risky because small companies are inherently more prone to failure in a recession, rational investors will demand more return for that higher risk. If people unwisely crowd into small caps, when the risk shows up and the small caps drop, say, 70-95% (as they did in the Great Depression***) the people who took too much risk (beyond their willingness/ability/need) would be driven from the market and everyone else would then in theory enjoy a less overcrowded small cap space.

***Small caps in the US experienced a nominal 90.78% decline between 1929 and 1932, according to the Bogleheads wiki (https://www.bogleheads.org/wiki/Small_caps). This is some serious risk, and any buyers must honestly be willing to stay the course - and even rebalance into - small caps when they've lost between 90 and 95%. Those who think that the stock market is unlikely to drop more than 50% and use that as a rule of thumb could potentially be in for a rude awakening.

Anyway, the fact that one can change level of expected risk-return by tilting over long periods (if tilting advocates are correct) could be useful in portfolio construction (or is it?)
When you say "more risk, more reward", you should always remember that there is no guarantee that the reward will show up. In fact, there cannot be such a guarantee, because that would mean that there was actually no risk!

So you have to be willing to take risk with just the hope, not the certainty, of reward.

Does that affect your calculations?
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 nisiprius » Sun Nov 26, 2017 6:59 pm

Jason Zweig has an interesting story about Harry Markowitz. Markowitz is the economist who won the Nobel Prize for developing modern portfolio theory. I'm going to quote from a New York Times blog posting; the article, in turn, is referring to Zweig's Your Money or Your Brain:
“There is a story in the book about Harry Markowitz,” Mr. Zweig said the other day. He was referring to Harry M. Markowitz, the renowned economist who shared a Nobel for helping found modern portfolio theory — and proving the importance of diversification. It’s a story that says everything about how most of us act when it comes to investing. Mr. Markowitz was then working at the RAND Corporation and trying to figure out how to allocate his retirement account. He knew what he should do: “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.” (That’s efficient-market talk for draining as much risk as possible out of his portfolio.)

But, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.
Riddle: was Markowitz acting wisely or foolishly?
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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 7:21 pm

Thank you for your in depth reply. I put my a few comments in green.
nedsaid wrote:
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.
I think I realized upthread that perfection is impossible using a "zeno's paradox" argument. As I wrote in my reply to Nisiprius earlier in this thread (viewtopic.php?f=2&t=233045#p3634200),
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?)


If knowing everything is impossible, then getting to the bottom of things and achieving perfection is impossible. As amount of time spent working on optimizing approaches infinity, you get closer and closer to perfection and eventually achieve a state of being "virtually perfect" which would likely be close enough for me.


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.

I have seen your portfolio - e.g. the classic "How do you like my new Doo" thread (viewtopic.php?f=10&t=170697). I think it is one of the more interesting and original ones on this site. I recall you did a lot of analysis comparing it to LifeStrategy funds and similar benchmarks. I believe I recall the conclusion was that you may have overperformed the lifestrategy by 0.5%, and you may have underperformed by 0.5% or so, but the exact number depended on time period chosen and which benchmark lifestrategy or 3-fund option was compared to. (correct me if I'm wrong). I sort of like the kitchen sink approach and that's sort of what I was envisioning with the Option C in my original post in this thread.

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.
Good point - I should make sure I learn Larry's most up to date views.
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?

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

Post by TD2626 » Sun Nov 26, 2017 7:31 pm

JoMoney wrote:
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.
Thank you for your reply and article recommendation. It was an interesting read. I got from the article that it might be reasonable even for a professional "quant" to go with a 3 fund portfolio or similar indexed strategy. (Note: I am not a professional and it's a good point that someone doing this as a part time hobby can't hope to compete).

I would think that a hypothetical genius "quant" (assume a working crystal ball) would want to invest at least partially actively, earning alpha through exploiting market inefficiencies while not needing to pay an expense ratio to a manager. I'd been intending to research this question further, though and possibly write up a post on it. If one can show that even an expert would likely be better off with a simple portfolio, then the answer for amateurs is, case closed, very easy - we'd all be better off indexing (at least as long as everyone didn't index).

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

Post by livesoft » Sun Nov 26, 2017 7:49 pm

A "quant" genius can just use index ETFs and do all the market timing they want to create "alpha". That is, it is possible to actively manage index funds and index ETFs in one's portfolio to take advantage of other investors who require "peace of mind" and "sleeping well at night" with their portfolios.

And if such a "quant" wanted to walk away, they would still have a simple index fund portfolio just without any trading.
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by arcticpineapplecorp. » Sun Nov 26, 2017 8:24 pm

you will always find a better portfolio than the one you currently have designed. Here's 150 portfolios that are better than yours:

https://www.whitecoatinvestor.com/150-p ... han-yours/
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Re: "The Enemy of a Good Plan"

Post by TD2626 » Sun Nov 26, 2017 9:23 pm

Taylor Larimore wrote:
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
My main concern at this point is this basic tenant of common sense: "If it sounds too good to be true, it very likely is".

It's what keeps me from investing in anything that might fleece me. There are a lot of odd schemes out there --- Bitcoin, variable annuities, and all manner of "hot" trends and active funds. Usually my gut cues me in and tells me when to investigate further - if my gut says "this seems too good to be true" my brain then kicks in and I am usually able to quickly identify why the claims are wrong.

I read the prospectuses of all the 3-fund mutual funds a few years ago. It seemed too good to be true. It's an almost audacious proposal - essentially, the funds buy the same percentage stake in every company that's public and never trades. (This is a somewhat oversimplified model but is a good first approximation). It is shockingly simple.

I have, over the past months and years, thrown all I can at trying to find the "chink in the armor" - some reason why indexing wouldn't work. I am largely empty handed. Any ideas that I've been able to come up with so far have been fairly flimsy and easily refutable. For example, in June I came up with nine possible issues with index funds - and Nisiprius was able to fairly easily refute all of them. That occurred in this thread: viewtopic.php?t=221271#p3413621. I have continued to run backtests and read widely and I can't find any reasonable reasons why the 3-fund portfolio isn't optimal. However, an absence of evidence is not evidence of absence. I haven't proven the 3-fund portfolio is perfect.

I recently re-read the entire statutory prospectuses of Vanguard Total Stock, Vanguard Total International Stock, and their Fidelity equivalents. I was still left with the nagging feeling of "this has to be too good to be true" - but I'm not sure why. I have no reason to doubt the incredible backtesting results of this strategy or its theoretical brilliance, but it still seems "too simple".

The "don't put all your eggs in one basket" feeling is also concerning to me. I wouldn't feel right with 100% of my portfolio in a simple strategy. Maybe 70% or so, but beyond that it seems like putting all my eggs in one basket to go with, say, 100% Total World. I want enough funds or individual stocks that if/when one of them has an issue, it won't have as big of an impact. I realize that a lot of overlapping among funds won't solve my problem, though.

This is why I like my framework I proposed in option C in my original post in this thread. 70% indexing, with the rest being in a Nedsaid style "kitchen sink" approach of many different active funds, indexed tilts, and individual stocks. This approach has all of the benefits of a simple portfolio except for the simplicity.






.................
Edit: I know I'm wrong when I'm about to post something and I realize it's a tautology. My post above ended with "This approach has all of the benefits of a simple portfolio except for the simplicity". This sounds ridiculous. :oops:

I've seen this before. I once wrote up a long post discussing whether investors might consider putting a cap weight (a few %) allocation in high yield bond funds. The post would have ended "Just because high yield bonds are by definition below investment grade speculative junk doesn't mean they are not good investments, that they are speculation, or that they are junk". (I closed the browser without posting when I realized how silly that sentence sounded). :oops:

I also once (in a different thread) wrote and got ready to post something along the lines of"Complexity is good because the investor can have the comfort of having diversified among dozens of funds and this comfort can help the investor sleep well at night". I wrote this at 2 AM, which is by definition not sleeping well at night. :oops:

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

Post by badbreath » Sun Nov 26, 2017 9:31 pm

there are a lot of perfect portfolios and a lot documented and evaluated here

https://portfoliocharts.com/portfolios/

some are right to me but alot are wrong to me what do you think
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by delamer » Sun Nov 26, 2017 9:35 pm

"I haven't proven the 3-fund portfolio is perfect."

Until you give up this notion that there is a perfect portfolio, you'll keep spinning your wheels.

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

Post by GoldenFinch » Sun Nov 26, 2017 9:53 pm

I solved this problem by cleaning up my portfolio enough to have a low overall expense ratio (.09) and then just leaving it alone. I don’t have a perfect 3fund, but I got rid of the active funds and made sure everything was tax efficient and then I stopped. I’ve learned that the cliches “less is more” and “paws off” work well over the long run for investments. I like to focus on savings rate since it is the one thing I can control.

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

Post by TD2626 » Sun Nov 26, 2017 10:20 pm

livesoft wrote:
Sun Nov 26, 2017 7:49 pm
A "quant" genius can just use index ETFs and do all the market timing they want to create "alpha". That is, it is possible to actively manage index funds and index ETFs in one's portfolio to take advantage of other investors who require "peace of mind" and "sleeping well at night" with their portfolios.

And if such a "quant" wanted to walk away, they would still have a simple index fund portfolio just without any trading.
I'd prefer a static allocation with only minimal (if any) tactical asset allocation. I've read about your "really bad day" strategy and it is quite interesting, though. Good point.
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pkcrafter wrote:
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
Thanks for the book recommendation. I was a bit surprised by the use of the word "normal" in the title. When I use the word "normal" I usually use it in it's technical sense (definition: normal = of or characterized by a Gaussian probability distribution). Good reminder that the word normal has a more colloquial definition (normal = "typical or average").
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arcticpineapplecorp. wrote:
Sun Nov 26, 2017 8:24 pm
you will always find a better portfolio than the one you currently have designed. Here's 150 portfolios that are better than yours:

https://www.whitecoatinvestor.com/150-p ... han-yours/
Jim Dahle's posts and writings are always interesting. I think I've seen this article bounced around a few times but I read it a third time just now just to be safe. It is worth noting that Portfolio 150 (WCI's personal one, at least when the article was written) has about a dozen investments.

The treadmill of constantly trying to design a perfect portfolio, coming up with several new, unique, and interesting designs, and backtesting it against a 3 fund portfolio to find that I cant' easily beat it on a risk adjusted basis over many decades is exhausting. I'm running out of ideas. I got tired of backtesting slice and dice strategies that separated out large, mid, and small caps and started backtesting ideas separating out mega cap, large cap, mid cap, small cap, and microcap. It isn't working too well.

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

Post by Fallible » Sun Nov 26, 2017 10:48 pm

TD2626 wrote:
Sun Nov 26, 2017 10:20 pm
...
[The treadmill of constantly trying to design a perfect portfolio, coming up with several new, unique, and interesting designs, and backtesting it against a 3 fund portfolio to find that I cant' easily beat it on a risk adjusted basis over many decades is exhausting. I'm running out of ideas. I got tired of backtesting slice and dice strategies that separated out large, mid, and small caps and started backtesting ideas separating out mega cap, large cap, mid cap, small cap, and microcap. It isn't working too well.


Knowing there is no perfection in investing, how about applying all this heavy thinking to something else you can perfect, or at least come close to it? You may have to first understsnd why you've gone so far down the investing road before you can turn back or start looking for a more productive one, but doesn't it seem worth it?
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

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

Post by David Jay » Sun Nov 26, 2017 11:25 pm

TD2626 wrote:
Sun Nov 26, 2017 7:21 pm
If knowing everything is impossible, then getting to the bottom of things and achieving perfection is impossible. As amount of time spent working on optimizing approaches infinity, you get closer and closer to perfection and eventually achieve a state of being "virtually perfect" which would likely be close enough for me.

You are still coming at this from an "engineering" perspective (I say this as a process engineer) and you seem unwilling to even discuss your mindset. Several people have pointed you towards psychology or behavioral finance and you have not even addressed these responses. It is almost as if you don't want to dignify any possibility that the engineering approach might be the wrong reference frame.

As long as you think you can optimize your approach by looking at more backtests, you don't realize what you don't know.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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

Post by TD2626 » Mon Nov 27, 2017 12:22 am

nisiprius wrote:
Sun Nov 26, 2017 6:59 pm
Jason Zweig has an interesting story about Harry Markowitz. Markowitz is the economist who won the Nobel Prize for developing modern portfolio theory. I'm going to quote from a New York Times blog posting; the article, in turn, is referring to Zweig's Your Money or Your Brain:
“There is a story in the book about Harry Markowitz,” Mr. Zweig said the other day. He was referring to Harry M. Markowitz, the renowned economist who shared a Nobel for helping found modern portfolio theory — and proving the importance of diversification. It’s a story that says everything about how most of us act when it comes to investing. Mr. Markowitz was then working at the RAND Corporation and trying to figure out how to allocate his retirement account. He knew what he should do: “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.” (That’s efficient-market talk for draining as much risk as possible out of his portfolio.)

But, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.
Riddle: was Markowitz acting wisely or foolishly?
Very difficult riddle. I had to think about this one for a while.

My answer: There is a 36.43% chance that he was acting wisely.


Methodology:
Here all the possible answers I came up with to respond to the question of "Was Markowitz acting rationally by investing 50/50 instead of using MPT?"

Yes, because he was avoiding taking more risk then he was emotionally willing to take, which must be avoided.
Maybe, because rationally taking emotional issues into account (if you have them) is rational.
No, because emotional issues are ultimately behavioral errors that should be corrected
No, because he was not a purely rational individual as is required by "economic man" theory
No, because his own rationally and mathematically justified theory should have been used, not using it is a behavioral issue.
Yes, because MPT was not fully proven as being perfect and a 50/50 portfolio may have been the best option while theory was still being developed
Maybe, depending on tax considerations, fund availability, etc
Maybe, depending on his beliefs regarding leverage
Maybe, depending on what the output of the MPT model was saying at the time.
No, because he should have taken into account skew and kurtosis of return distributions instead of using MPT alone
No, because he should have invented factor theory and overweighted small caps instead of using MPT alone

Total: 2 yes answers, 4 maybe answers, 5 no answers.

Math:
Assign a value of -1 to no answers, +1 to yes answers, 0 to maybes. Compute a mean and a standard deviation, and find the percentage of the resulting probability distribution function above 0. (I used this calculator: http://onlinestatbook.com/2/calculators ... _dist.html).

Given the probabilities involved, I would say he was not being wise by a preponderance of the evidence standard but there is no proof of this beyond a reasonable doubt.

Do you have any better way to answer the riddle?


........

That riddle is something that puzzles me. Are investing-related emotions (if you have them) behavioral issues that must be corrected, or innate unchangables that must be compensated for?

Essentially, should you change your emotional propensities (if you have them) or your investment strategies?

I think the answer comes from whether the emotional propensities can be corrected for in a manner that still allows for a reasonable portfolio. If one feels that one can't emotionally take any risk beyond 100% cash (despite clear need to take risk in order to have money in retirement) then anxiety is affecting life so much that one should try to "seek help" for this emotional issue. If one is rationally best with 60/40 but is emotionally OK with a 50/50 portfolio, then maybe making allowances by using the 50/50 portfolio is better.

I believe that there is substantial evidence that I am able to be the ideal rational agent that theory requires me to be. I always strive to ensure that intrapersonal emotional considerations do not impact my decisions. Ultimately, it seems as though a uniquely rational individual should be able to find a more complicated, non-3-fund portfolio that better suits their characteristics.

I have studied the willingness/ability/need to take risk framework and find it useful. I believe that average individuals should take it into consideration. However, in my circumstances, I believe that ability to take risk is overwhelmingly the most relevant factor.

Need is always present for me because a) the theories I use require non-satiety (and I must adhere to the theory) and b) I could always in theory give to family members or charity - there's always a need there.

Willingness, for someone who is (or tries to be) fully rational (as theory asks of me) is not really particularly relevant in my situation. It would of course be highly relevant to someone with a propensity to panic-sell.

Thus, I'm trying to develop a long-term portfolio that is overwhelmingly global equities, with 5-15% in safer assets like cash for short or intermediate term spending needs (I include emergency fund assets in my AA). I will accept substantial normal (Gaussian) risk but do not like kurtosis/black swan risk. Presumably, by building a complex portfolio, it may be possible to eliminate the cash drag on the portfolio (increasing returns while increasing risks), while also increasing portfolio skewness and decreasing kurtosis.

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Re: "The Enemy of a Good Plan"

Post by Jacotus » Mon Nov 27, 2017 12:54 am

TD2626 wrote:
Sun Nov 26, 2017 9:23 pm
I have continued to run backtests and read widely and I can't find any reasonable reasons why the 3-fund portfolio isn't optimal. However, an absence of evidence is not evidence of absence. I haven't proven the 3-fund portfolio is perfect.
You can spend eternity trying to prove that something is the perfect portfolio. Much of this thread has been about trying to convince you why such a goal is not possible, but you are free to keep trying.

However, in the here and now you must actually invest in something, and choose from actual existing alternatives based on the knowledge you have. The question is: have you found any evidence to justify going beyond the simple broad index funds? What are you going to do now, even if you continue your deep dive into finding the perfect portfolio?

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

Post by TD2626 » Mon Nov 27, 2017 1:05 am

David Jay wrote:
Sun Nov 26, 2017 11:25 pm
TD2626 wrote:
Sun Nov 26, 2017 7:21 pm
If knowing everything is impossible, then getting to the bottom of things and achieving perfection is impossible. As amount of time spent working on optimizing approaches infinity, you get closer and closer to perfection and eventually achieve a state of being "virtually perfect" which would likely be close enough for me.

You are still coming at this from an "engineering" perspective (I say this as a process engineer) and you seem unwilling to even discuss your mindset. Several people have pointed you towards psychology or behavioral finance and you have not even addressed these responses. It is almost as if you don't want to dignify any possibility that the engineering approach might be the wrong reference frame.

As long as you think you can optimize your approach by looking at more backtests, you don't realize what you don't know.
I discussed some of my mindset in my response to Nisiprius a couple posts above.

Yes, I am approaching this from a natural science/engineering perspective. Being a "rational agent" is effectively needed for my technical work during the day. (The experimenter can not allow emotional biases to affect experimental results or data analysis). Investing as a hobby seemed to initially come easy to me - the math is easy compared to what I usually work with and I'm already the "rational agent" that classical financial economic theory requires (at least I try to be).

I've been reading a bit on behavioral economics lately but admit I don't know much about it, because I do not believe it should exist in an ideal world, and because I believe the ideal world (with correction terms to account for behavioral errors of others) should be a reasonable approximation of the real world (or else more correction terms need added).

I read up some on bounded rationality. Maybe this is a reasonable framework for moving forward. At first glance, it doesn't appear to require any emotional considerations, only proper accounting for the limits of human brainpower and computational power. The wikipedia article suggests that as Moore's law advances, limits on computational power will diminish. I do wish there were fewer limits on computational power (the monte carlo simulations I write sometimes hit 100% CPU on all cores for extended periods).

I realize that sticking my head in the sand for a couple years until they come out with faster processors won't solve my problems. I need an integrated framework to accept limitations on the number of hours of brainpower I can devote to these problems, and ensure I make rational decisions even in light of these limitations. It seems as though this behavioral economics stuff might provide that sort of framework.

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

Post by flyingaway » Mon Nov 27, 2017 1:23 am

If I had the perfect portfolio, I would not tell anyone.

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Re: "The Enemy of a Good Plan"

Post by TD2626 » Mon Nov 27, 2017 1:48 am

Jacotus wrote:
Mon Nov 27, 2017 12:54 am
However, in the here and now you must actually invest in something, and choose from actual existing alternatives based on the knowledge you have. The question is: have you found any evidence to justify going beyond the simple broad index funds? What are you going to do now, even if you continue your deep dive into finding the perfect portfolio?
I think the only responsible thing to do is to invest the overwhelming majority of funds (and particularly new contributions) in broadly diversified, low cost passive mutual funds, such as Total Stock/Total International (or Total World), Total Bond, or LifeStrategy funds. The only responsible thing to do is to do this with all deliberate speed. I can't sit idly by and focus on finding the theoretical perfect portfolio while completely ignoring the actual real portfolio (It turns out that the family has a small amount in an individual stock that has substantially underperformed Sears year-to-date, for example). The family's mostly sold on (and invested in) index funds already, but getting fully out of legacy holdings from pre-indexing days will require me to be more comfortable with the theory behind indexing and also be confident of whether to continue to use a cap weight approach as I currently do or to do something different (like small cap tilting).

Actually, now that I think about it, I actually have been considering small cap tilting for about 5 years. I didn't realize I had heard about it that long ago but I now remember reading about it a bit longer back. I actually remember giving it a lot of serious consideration 3 years ago as well, including reading from the Boglehead wiki. It's only been about 6 months to a year that I've recently spent focusing on a brute force approach to solving things through overwhelming amounts of quantitative analysis, reading, and effort.

I recognize that at this point I'm never going to be able to independently prove that small cap tilting (and other factor tilts) would be beneficial. However, given the credentials and strong evidence and arguments on the side of factor advocates who I respect (such as Larry Swedroe) I won't be able to prove beyond a reasonable doubt that I shouldn't tilt. (Given my stratospheric level of self-doubt, I probably won't be able to prove anything beyond a reasonable doubt to myself -- the conclusion would have to be so obvious it'd have to hit me over the head like a ton of bricks).

So, I guess what I need to do is:
1. Recognize that more thinking and further backtesting won't help
2. Recognize that a final decision is needed
3. Pick a portfolio --- literally any reasonable portfolio is probably better than analysis paralysis at this point
4. Buy & Hold
5. Don't look back

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

Post by JoMoney » Mon Nov 27, 2017 2:10 am

:D Everybody think's they're "rational".
Benjamin Franklin wrote:So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for every thing one has a mind to do.

Maybe the "rational" thing to do, is to decide what portfolio you want to hold, and then filter out all the obviously irrelevant data to just the points that logically point to a conclusive justification for whatever it is you wanted to do. That's the way most humans seem to make decisions.

If you do think you've found the best portfolio optimization method, maybe look this over to see if it can add some questions to your answers:
Portfolio Optimization Theory versus Practice Roy Ballentine, ChFC, CLU, CFP®
"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 livesoft » Mon Nov 27, 2017 7:21 am

Now that I've read that you are going to act today decisively and without delay, I wanted to go back to your statement
My answer: There is a 36.43% chance that he was acting wisely.
How would you answer this?
Best statistics question ever
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Flashes1 » Mon Nov 27, 2017 7:31 am

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.
This. The smartest Harvard trained stock strategist with 20 years as a MD at Goldman Sachs has no idea where the economy and stock market it going next year. Their forecasts sound very intelligent, and often times very logical, however, they're rarely accurate, and if they are, it was due to luck.

Embrace our collective ignorance and invest in broad market index funds.

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

Post by technovelist » Mon Nov 27, 2017 9:57 am

TD2626 wrote:
Mon Nov 27, 2017 1:05 am

I've been reading a bit on behavioral economics lately but admit I don't know much about it, because I do not believe it should exist in an ideal world, and because I believe the ideal world (with correction terms to account for behavioral errors of others) should be a reasonable approximation of the real world (or else more correction terms need added).
See my signature for the real-world answer to this proposition.
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 TD2626 » Mon Nov 27, 2017 9:58 am

livesoft wrote:
Mon Nov 27, 2017 7:21 am
Now that I've read that you are going to act today decisively and without delay, I wanted to go back to your statement
My answer: There is a 36.43% chance that he was acting wisely.
How would you answer this?
Best statistics question ever
I guess I would complain to the test proctor that the question doesn't make rational, logical sense and didn't conform to commonly accepted theories of how questions should be structured. I would then guess randomly from a, b, c, or d. With nothing to guide decision making, I guess a dartboard approach is best.

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

Post by dbr » Mon Nov 27, 2017 10:04 am

TD2626 wrote:
Mon Nov 27, 2017 9:58 am
livesoft wrote:
Mon Nov 27, 2017 7:21 am
Now that I've read that you are going to act today decisively and without delay, I wanted to go back to your statement
My answer: There is a 36.43% chance that he was acting wisely.
How would you answer this?
Best statistics question ever
I guess I would complain to the test proctor that the question doesn't make rational, logical sense and didn't conform to commonly accepted theories of how questions should be structured. I would then guess randomly from a, b, c, or d. With nothing to guide decision making, I guess a dartboard approach is best.
Yes, you are right in some sense. As mentioned by a couple of comments on that page, the issue is not merely to find the correct answer to the test question but to analyze the chance of a random guess being the correct answer, whatever the suitability of the question. I am not sure yet if the chance of a random guess being correct can be determined in a non-paradoxical manner. There might be a problem with the self-referential nature of the question. It is highly unlikely that a question like this would have been formulated in such a way that there is a right answer, as that would not be very interesting even if the right answer turns out not to be obvious. On the other hand, paradoxes, once recognized, are sort of trivial in their own way.

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

Post by pkcrafter » Mon Nov 27, 2017 10:18 am

Nisiprius:
Riddle: was Markowitz acting wisely or foolishly?

Very difficult riddle. I had to think about this one for a while.
My answer (TD2626):
There is a 36.43% chance that he was acting wisely.
Ha-ha, good one.

Another one: what is the probability that you have been out of engineering school for less than 5 years?
Answer: There is a 72.86% chance that this is correct.

You are acting kind of like a kid with a new toy. :happy What is your age?

I suggested option C instead of B because it satisfies your desire to apply your math/engineering knowledge to an investment strategy. It's not unusual, there are many board members who do the same thing.

cheers,

Paul
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 dbr » Mon Nov 27, 2017 10:30 am

TD2626 wrote:
Mon Nov 27, 2017 12:22 am
nisiprius wrote:
Sun Nov 26, 2017 6:59 pm
Jason Zweig has an interesting story about Harry Markowitz. Markowitz is the economist who won the Nobel Prize for developing modern portfolio theory. I'm going to quote from a New York Times blog posting; the article, in turn, is referring to Zweig's Your Money or Your Brain:
“There is a story in the book about Harry Markowitz,” Mr. Zweig said the other day. He was referring to Harry M. Markowitz, the renowned economist who shared a Nobel for helping found modern portfolio theory — and proving the importance of diversification. It’s a story that says everything about how most of us act when it comes to investing. Mr. Markowitz was then working at the RAND Corporation and trying to figure out how to allocate his retirement account. He knew what he should do: “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.” (That’s efficient-market talk for draining as much risk as possible out of his portfolio.)

But, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.
Riddle: was Markowitz acting wisely or foolishly?
Very difficult riddle. I had to think about this one for a while.

My answer: There is a 36.43% chance that he was acting wisely.


Methodology:
Here all the possible answers I came up with to respond to the question of "Was Markowitz acting rationally by investing 50/50 instead of using MPT?"

Yes, because he was avoiding taking more risk then he was emotionally willing to take, which must be avoided.
Maybe, because rationally taking emotional issues into account (if you have them) is rational.
No, because emotional issues are ultimately behavioral errors that should be corrected
No, because he was not a purely rational individual as is required by "economic man" theory
No, because his own rationally and mathematically justified theory should have been used, not using it is a behavioral issue.
Yes, because MPT was not fully proven as being perfect and a 50/50 portfolio may have been the best option while theory was still being developed
Maybe, depending on tax considerations, fund availability, etc
Maybe, depending on his beliefs regarding leverage
Maybe, depending on what the output of the MPT model was saying at the time.
No, because he should have taken into account skew and kurtosis of return distributions instead of using MPT alone
No, because he should have invented factor theory and overweighted small caps instead of using MPT alone

Total: 2 yes answers, 4 maybe answers, 5 no answers.

Math:
Assign a value of -1 to no answers, +1 to yes answers, 0 to maybes. Compute a mean and a standard deviation, and find the percentage of the resulting probability distribution function above 0. (I used this calculator: http://onlinestatbook.com/2/calculators ... _dist.html).

Given the probabilities involved, I would say he was not being wise by a preponderance of the evidence standard but there is no proof of this beyond a reasonable doubt.

Do you have any better way to answer the riddle?
Your answer is flawed by creating an arbitrary list of alternatives and by creating an arbitrary value function. The result is a precise and also meaningless mathematical result. Also, I think your method is flawed in that you created an actual distribution which is not a sample of a hypothetical probability distribution but simply an actual distribution. 2 of 11 answers are yes for a frequency of 18% (.18 repeated). Maybe answers have to be arbitrarily assigned a truth value. The answer to that is that "maybe" is either an illegal answer or is half a yes, leaving us with 4 of 11 answers are yes for a frequency of 36.36% (repeated decimal).

My answer is contained in the following:

The Hatter opened his eyes very wide on hearing this, but all he said
was "Why is a raven like a writing-desk?"

"Have you guessed the riddle yet?" the Hatter said, turning to Alice
again.

"No, I give it up," Alice replied. "What's the answer?"

"I haven't the slightest idea," said the Hatter.

"Nor I," said the March Hare.

Alice gave a weary sigh. "I think you might do something better with the
time," she said, "than wasting it in asking riddles that have no
answers."

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

Post by midareff » Mon Nov 27, 2017 10:48 am

Sandtrap wrote:
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?
J🤓
Yup.. +1

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

Post by Veiled » Mon Nov 27, 2017 10:51 am

delamer wrote:
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.
My family has never really had specific, quantifiable investment goals beyond investing generally for the long term future.
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.
I'm amazed that you have a 25-page IPS but you have no goals. Is your IPS a notebook of how investing works? An IPS should be focused on you, your goals, and how to get there. Lots of people write long and complicated IPSs that are mixed with personal beliefs and lifestyle choices and narratives, but the real purpose should be about goals.

I think delamer's idea of having pots (almost like parallel portfolios) is great if you're undecisive. Just get in the market. If you have to do it by dividing your money in half and using half for Option B (i.e. a simple TDRF) and half for Option C (i.e. typical BH portfolio for 70% and play money for higher-level investing), just do it. If you follow delamer's idea, which is not the ideal BH choice but might allow you to at least start, your total portfolio would look like 85% index, 15% other. As far as I can gather, 15% of your money to use in alternative investments is not inordinate.
Pardon me as I read these one hundred and fifty-seven SP vs LLC vs Scorp threads...

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

Post by goingup » Mon Nov 27, 2017 10:59 am

TD2626:
Jack Bogle has famously said, "Invest we must". He has also said, "Time is your friend and impulse your enemy.". If you do plan to invest, you have all the information you'll ever need to set a course, and get invested.

You started a thread in July called The Quest for Perfection, proposing a portfolio with 60 holdings. viewtopic.php?f=10&t=223675&p=3454467#p3454467 The forum feedback to that was universally in favor of just starting with a few broad index funds instead.

Do you have a 401K? Start with that, choosing either a Target Fund or low-cost SP500 fund. I'm not sure this forum can help you much until you take a few steps forward.

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

Post by goingup » Mon Nov 27, 2017 11:08 am

Since dbr is quoting Alice in Wonderland, I'll add my favorite quote also which seems instructive at this point:

The White Rabbit put on his spectacles. `Where shall I begin, please your Majesty?' he asked. `Begin at the beginning,' the King said gravely, `and go on till you come to the end: then stop.'

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

Post by livesoft » Mon Nov 27, 2017 11:09 am

TD2626 wrote:
Mon Nov 27, 2017 9:58 am
With nothing to guide decision making, I guess a dartboard approach is best.
And you now have figured out investing. Good luck with your future.
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by 22twain » Mon Nov 27, 2017 11:40 am

flyingaway wrote:
Mon Nov 27, 2017 1:23 am
If I had the perfect portfolio, I would not tell anyone.
At least not for free, right? :wink:

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

Post by Sandtrap » Mon Nov 27, 2017 11:45 am

Veiled wrote:
Mon Nov 27, 2017 10:51 am
. . . I'm amazed that you have a 25-page IPS but you have no goals. Is your IPS a notebook of how investing works? An IPS should be focused on you, your goals, and how to get there. Lots of people write long and complicated IPSs that are mixed with personal beliefs and lifestyle choices and narratives, but the real purpose should be about goals.. . . .
+1
Well said as always, "Veiled". (love that avatar :D )

You should be able to boil down an IPS statement into a "statement", such as a "mission statement". Goal, then path to that goal. Or operating statement to reach and maintain that goal. If it can be summed up in 1 or 3 sentences, then you will have clarity and focus.

j :D

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

Post by itstoomuch » Mon Nov 27, 2017 12:11 pm

My basic IPS is simple: Make Money. Don't Lose Money. (Money <=> Wealth)
Sub goals: A/. 10+ annual gains in Discretionary and once attained, control the Risk and Volatility. B/Don't lose in other Investments and Retirement Products.
Ymmv
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by MJW » Mon Nov 27, 2017 12:28 pm

I think that asking the question of whether the 3 fund portfolio is "most optimal" is missing the point of why someone would choose this sort of approach to investing. Aside from the obvious benefit of low cost, I view it as more of a shrug than anything else. It's simply about accepting what the market gives rather than spending time/energy/more money trying to figure out a "better" approach.

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

Post by Taylor Larimore » Mon Nov 27, 2017 1:15 pm

TD2626:

When I am unsure what to do, I seek the advice of experts:

This is what experts say about The Three-Fund Portfolio:
American Association of Individual Investors: "It should come as no surprise that behavioral finance research makes a strong case for buying and holding low-cost, broadly diversified index funds."

Mark Balasa, CPA, CFP: "That three-pronged approach is going to beat the vast majority of the individual stock and bond portfolio that most people have at brokerage firms. There is a certain elegance in the simplicity of it."

Christine Benz, Morningstar Director of Personal Finance: "The Bogleheads' Three-Fund Portfolio is the ultimate in elegant minimalism."

Bill Bernstein, author of The Four Pillars of Investing: "Does this (three fund) portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it."

Jack Bogle, "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk." -- "The odds of outpacing an all-market index fund are, well, terrible."

Warren Buffett, famed investor: “I’d rather be certain of a good return than hopeful of a great one. -- Most investors are better off putting their money in low-cost index funds."

Scott Burns, financial columnist: "The odd are really, really poor than any of us will do better than a low-cost broad index fund."

Jonathan Burton, MarketWatch: "There are plenty of ways to complicate investing, and plenty of people who stand to make money from you as a result. So just think of a three-fund strategy as something you won't have to think about too much."

Ben Carlson, author of A Wealth of Common Sense: "The best investment decisions you make are often the things you don’t invest in."

Andrew Clarke, co-author of Wealth of Experience: "If your stock portfolio looks very different from the broad stock market, you're assuming additional risk that may, or may not, pay off."

Jonathan Clements, author and Wall Street Journal columnist: "Using broad-based index funds to match the market is, I believe, brilliant in its simplicity." -- "You can build a great portfolio with just three index funds: a U.S. total stock market fund, an international fund that buys both developed and emerging stock markets, and a high-quality U.S. bond fund.

John Cochrane, President American Finance Association: "The market in aggregate always gets the allocation of capital right."

Consumer Reports Money Book: "Simply buy the market as a whole."

Aswarth Damodaran, NYU Professor and author of 20+ finance books: "Beating the market is never easy and anyone who argues otherwise is fighting history and ignoring the evidence."

Laura Dugu, co-author of The Bogleheads' Guide to Retirement Planning: "With only these three funds in your investment portfolio you can benefit from low costs and broad diversification and still have a portfolio that is easy to manage."

Charles Ellis, author of Winning the Loser's Game: "The stock market is clearly too efficient for most of us to do better."

Nobel Laureate, Eugene Fama: "Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."

Paul Farrell, author of The Lazy Person's Guide to Investing: "Where does Fama invest his retirement money? 'In index funds. Mostly the Wilshire 5000.' "

Rick Ferri, Forbes columnist and author of six investment books: "The older I get, the more I believe the 3-fund portfolio is an excellent choice for most people. It's simple, cheap, easy to maintain, and has no tracking error that would cause emotional abandonment to the strategy."

Graham/Zweig, authors of The Intelligent Investor: "The single best choice for a lifelong holding is a total stock-market index fund."

Alan Greenspan, former Chairman of the Federal Reserve: "Prices in the marketplace are by definition the right price."

Mark Hebner, author of Index Funds: “A diversified portfolio which captures the right blend of market indexes reaps the benefit of carrying the systematic risk of the entire market while minimizing exposure to the unsystematic and concentrated risk associated with individual stocks and bonds, countries, industries, or sectors.”

Hulbert Financial Digest: "Buying and holding a broad-market index fund remains the best course of action for most investors."

Sheldon Jacobs, author of No-Load Fund Investing: "The best index fund for almost everyone is the Total Stock Market Index Fund.--The fund can only go wrong if the market goes down and never comes back again, which is not going to happen."

Kiplinger's Retirement Report: "You'll beat most investors with just three funds that cover the vast majority of global stock and bond markets: Vanguard Total Stock Market; Vanguard Total International Stock Index and Vanguard Total Bond Market Index."

Lawrence Kudlow, CNBC: "I like the concept of the Wilshire 5000, which essentially gives you a piece of the rock of all actively traded companies."

Prof. Burton Malkiel, author of Random Walk Down Wall Street: "I recommend a total-maket index fund--one that follows the entire U.S. stock market. And I recommend the same approach for the U.S. bond market and international stocks."

Harry Markowitz, Nobel Laureate: "A foolish attempt to beat the market and get rich quickly will make one's broker rich and oneself much less so."

Bill Miller, famed fund manager: "With the market beating 91% of surviving managers since the beginning of 1982, it looks pretty efficient to me."

Money 101: "If you don’t want to leave your stock and bond allocations up to someone else, you can build a low cost portfolio that own most of the global market with just three funds. A “total stock market” index fund will hold over 3000 stocks, ranging from small companies to established corporate giants. Round that out with an international index fund to cover foreign holdings, and bond index fund."

E.F.Moody, author of No Nonsense Finance: "I am increasingly convinced that the best investment advice for both individual and institutional equity investors is to buy a low-cost broad-based index fund that holds all the stocks comprising the market portfolio."

Motley Fools: "Invest your long-term moolah in index mutual funds that are designed to track the performance of a broad market index."

John Norstad, academic: "For total-market investors, the three disciplines of history, arithmetic, and reason all say that they will succeed in the end."

Suzy Orman: "One of my favorite index funds, Vanguard Total Stock Market (VTSAX), has a total expense ratio of 0.06%"

Anna Pryor Wall Street Journal writer: "A simple portfolio of 3 funds. It may sound counter-intuitive, but for the average individual investor, less is actually more."

Jane Bryant Quinn, syndicated columnist and author of Making the Most of Your Money: "The dependable great investment returns come from index funds which invest in the stock market as a whole."

Pat Regnier, former Morningstar Analyst: "We should just forget about choosing fund managers and settle for index funds to mimic the market."

Ron Ross, author of The Unbeatable Market: "Giving up the futile pursuit of beating the market is the surest way to increase your investment efficiency and enhance your financial peace of mind."

Allan Roth, CPA, CFP, adviser and author of "How a Second Grader Beat Wall Street": "The beauty of a 3-fund portfolio is that it automatically builds the global portfolio without having to worry about standard deviations, correlations, Sharpe ratios, and the like."

Paul Samuelson, Nobel Laureate: "The most efficient way to diversify a stock portfolio is with a low-fee index fund. Statistically, a broadly based stock index fund will outperform most actively managed equity portfolios."

Gus Sauter, former Vanguard Chief Investment Officer: "I think a very good way to gain exposure to the stock market is through the Total Stock Market Portfolio on the domestic side."

Bill Schultheis, author of The Coffee House Investor: "You don't need to have eight funds. You can do it with two or three and have a great portfolio."

Charles Schwab: "Only about one out of every four equity funds outperforms the stock market. That's why I'm a firm believer in the power of indexing."

Chandan Sengupta, author of The Only Proven Road to Investment Success: "Use a low-cost, broad-based index fund to passively invest in a little bit of a large number of stocks."

Prof. Jeremy Siegel, author of Stocks For The Long Run: "For most of us, trying to beat the market leads to disastrous results."

Dan Solin, author of The Smartest Portfolio You'll Ever Own: "You can get as simple or as complicated as you'd like. You can keep it very simple by owning just three mutual funds that invests in domestic stocks, foreign stocks, and bonds. That's precisely what I recommend in my model portfolios."

William Spitz, author of Get Rich Slowly: "Few are able to beat a simple strategy of buying and holding the securities that comprise the market."

Prof. Meir Statman, author of What Investors Really Want: "It makes sense to have those three funds. What makes it hard is that it seems too simple to actually be a winner."

Stein & DeMuth, authors of The Affluent Investor: "Buying and holding a few broad market index funds is perhaps the most important move ordinary investors can make to supercharge their portfolios."

"Robert Stovall, investment manager: It's just not true that you can't beat the market. Every year about one-third do it. Of course, each year it is a different group."

Larry Swedroe, author of 17 financial books: "Over the last 75-years, investors who simply invested passively in the total U.S. stock Market would have doubled their investment approximately every seven years."

David Swensen, Yale's chief investment officer and author of Unconventional Success: The fact remains that long odds face the investor who hopes to beat the market."

Peter D. Teresa, Morningstar Sr. Analyst: My recommendation: "A fund that indexes the entire market, such as Vanguard Total Stock Market Index."

Kent Thune, CFP, editor of The Financial Philosopher: "In keeping with the virtues of passive investing, combined with Bogle’s haystack philosophy, we can capture the entire market of securities with Vanguard index funds, investing in just three broad categories: U.S. stocks, foreign stocks and bonds."

Walter Updegrave, author and senior editor of Money magazine: "Simply invest in the following three funds (or their ETF equivalents): a total U.S. stock market fund, a total international stock market fund and a total U.S bond market fund. Do that, and you'll gain exposure to virtually every type of publicly traded stock in the world (large and small, growth and value, domestic and foreign, all industries and sectors), as well as the entire U.S. investment-grade taxable bond market (short- to long-term maturities, corporates, Treasuries and mortgage-backed issues)."

Wilshire Research: "The market portfolio offers the best ratio of return to risk."

John Woerth, Vanguard Director of Public Relations: "We would agree that this three-fund approach offers most investors a prudent, well-balanced, diversified portfolio at a low cost."

Jason Zweig, Wall Street Journal columnist and author of Your Money and Your Brain: "I think a total stock market index fund is not only the simplest, but the very best core investment for most people."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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

Post by Toons » Mon Nov 27, 2017 1:23 pm

Vanguard Balanced Index Fund
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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

Post by steve roy » Mon Nov 27, 2017 2:12 pm

I've likely posted this before (in fact, almost certain I have) but here it is again:

One of my closest friends has a doctorate in economics from Cornell. He's run his own company advising large clients about market strategies, he's taught in universities, he's been a member of the President's Council of Economic Advisors. Years ago he told me:
"You can never know what the economy is going to do at any given moment in time, because you can never know what 350 million people in the U.S. (or the billions on the planet) are going to do with their money at any given moment in time. So you can only make educated guesses about how the economy will perform. You can never know with certainty."
The same is true regarding investments/investors in the market. You can predict future performance, but you can't KNOW, regardless of the papers you read and the studies you dive into. Because people do odd things with their trading dollars from day to day. Analyzing, building models, and staring back in the rear view mirror can be helpful, but it can also be wrong.

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

Post by nedsaid » Mon Nov 27, 2017 9:16 pm

TD2626, there were several reasons for my New 'Doo thread.

First, I wanted to make disclosures about my own portfolio as I give out advice here. People can check and see if I really eat my own cooking. I also provide accountability as far as my own performance.

My conclusion is that my portfolio results have been somewhat disappointing, my factor based investments did not work as well as hoped. But then again, Value has had a tough streak since the 2008-2009 financial crisis. I seem to be doing well compared to the "lazy" portfolios but seem to have lagged the simple 3-fund portfolio held steady at 50% US Stocks/17% International Stocks/33% Bonds. I seem to be doing okay versus Vanguard Moderate Growth, you have to adjust for the fact that I have been at 67-69% stocks where Moderate Growth holds steady at 60% stocks. I also missed out by not rebalancing from bonds to stocks during the 2008-2009 financial crisis. I was pretty relaxed about rebalancing until July 2013, so making comparisons is not easy. Over the last 15 years, my stock allocation has fluctuated from 54% to 72%, the allocation dropped a lot because of the financial crisis, most of the time I was between 67% and 72%. My individual stocks beat US Total Market by 0.10% a year over 15 years, last I looked.

Second, it is an opportunity for me to put my thoughts together regarding my own portfolio. It is a way for me to "think aloud."

Third, it is a way for me to track my progress. It forces me to think step by step as I make changes. Hopefully, it is entertaining to see what a real life person does with his own portfolio.

Fourth, I hope it is instructive to new investors. I want people to become familiar with the wonderful X-Ray tool that Morningstar provides. You have to subscribe to save your portfolio, otherwise you need to re-enter each time. Investors need to know about the stylebox for both the stock and bond portions of the portfolio. It shows you what you really own. I also like the stock intersection feature, I was surprised at a few of my holdings embedded within my various funds. I also wanted to teach about benchmarking and comparing to my actual investment results. I also talk about Portfolio Visualizer. I also came to realize the challenges of calculating my returns. I realized that Quicken did a great job with Internal Rate of Return but had issues with Growth of $10,000. I also did some manual calculations on Excel. I also found that making comparisons against benchmarks wasn't easy.
A fool and his money are good for business.

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

Post by protagonist » Mon Nov 27, 2017 9:57 pm

Option B for sure.

The real world IS messy. You WILL NEVER get to the bottom of things.

If you want to read something valuable, start with complexity theory/chaos theory rather than with arcane investment porn. You will rapidly realize that predicting10,20,30, 50 years into the future is useless, and the more time you spend trying to perfect your crystal ball, the more frustrated you are likely to get.

If you don't believe me, get a copy of "The Book of Predictions" published in 1980. You can get a used hardcover copy on Amazon right now for $3.24, and it will be the best 3.24 you have ever spent. If nothing else, it is good for a laugh.

Most of your fancy models are built on about 90 years of data. Predicting what will be best for the next 30 based on retrospective analysis of 90 years of data (largely by people motivated to find correlations) is like deciding in New Orleans that if it didn't rain on Monday, Tuesday or Wedhesday, don't bother taking an umbrella on Thursday.

Your best bet is to keep it simple. Three fund portfolio for example. It's not perfect but it is probably as good as anything else, it won''t keep you awake at night, and if things go wrong you won't torture yourself with blame for faulty analysis. Because it's really the black swans that you have to worry about, and your analysis won't help you there.

Keep it simple and be happy.

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

Post by TD2626 » Mon Nov 27, 2017 11:18 pm

nedsaid wrote:
Mon Nov 27, 2017 9:16 pm
TD2626, there were several reasons for my New 'Doo thread.
I consider the "New 'Doo thread to be one of the most interesting and important "classic" threads I've seen on this site. It's great that you've done this analysis and tracked things so closely.

Regarding the actual results, it's hard to know what to make of it:
I seem to be doing well compared to the "lazy" portfolios
but seem to have lagged the simple 3-fund portfolio held steady at 50% US Stocks/17% International Stocks/33% Bonds.
I seem to be doing okay versus Vanguard Moderate Growth
My individual stocks beat US Total Market by 0.10% a year over 15 years, last I looked.
Keeping up with the market decently well in and of itself is an accomplishment. Outperforming the Total US stock market, particularly over long periods, on a risk adjusted basis, and due to foresight and not luck, is essentially the holy grail. You've shown long term outperformance - 0.1% a year for 15 years is impressive - but it's hard show it's not due to luck.

It's great to have an actual case study instead of having to guess. Theory suggests that an investor who invests reasonably for long periods should likely be able to roughly keep pace with the market, give or take some tracking error. Seeing this case as a likely example of that helps to substantiate that theory. (It seems like given you're doing well compared to some lazy portfolios, underperforming another, the Three Fund, and doing well compared to LifeStrategy, it probably is a matter of noise and tracking error and the overwhelming signal in the noise is tracking the broad market).

Good luck with your future investing!


.....
On second thought, I guess some could argue that spending a lot of time working on the portfolio for many years and not outperfoming the 3-fund is something I should learn from and avoid. I don't really see things like that - wouldn't the "insurance" benefit of having a multi-strategy approach outweigh that? It isn't bad to pay for insurance and not use it, and by investing in many different approaches maybe that's sort of like insuring against a single approach not working.

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

Post by TD2626 » Mon Nov 27, 2017 11:45 pm

Sandtrap wrote:
Mon Nov 27, 2017 11:45 am
Veiled wrote:
Mon Nov 27, 2017 10:51 am
. . . I'm amazed that you have a 25-page IPS but you have no goals. Is your IPS a notebook of how investing works? An IPS should be focused on you, your goals, and how to get there. Lots of people write long and complicated IPSs that are mixed with personal beliefs and lifestyle choices and narratives, but the real purpose should be about goals.. . . .
+1
Well said as always, "Veiled". (love that avatar :D )

You should be able to boil down an IPS statement into a "statement", such as a "mission statement". Goal, then path to that goal. Or operating statement to reach and maintain that goal. If it can be summed up in 1 or 3 sentences, then you will have clarity and focus.

j :D
Yes, I realize my IPS is a bit wordy. I just wanted to make sure in case I'm temporarily incapacitated in a car accident or something someone would in theory be able to manage things exactly how I would want. Practice is different than theory though. Yes, in theory, they'd be able to follow my 25 page document, but in practice it would be harder to follow.

The IPS is so wordy because it does things like go on and on (for many paragraphs) about alternative investments, before saying with "5% or less should be in alternatives, and preferably less than 1%, as these are not believed to highly important to a portfolio and may not provide efficient exposure to risk-return".

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

Post by TD2626 » Tue Nov 28, 2017 12:38 am

pkcrafter wrote:
Mon Nov 27, 2017 10:18 am
Nisiprius:
Riddle: was Markowitz acting wisely or foolishly?

Very difficult riddle. I had to think about this one for a while.
My answer (TD2626):
There is a 36.43% chance that he was acting wisely.
Ha-ha, good one.

Another one: what is the probability that you have been out of engineering school for less than 5 years?
Answer: There is a 72.86% chance that this is correct.

You are acting kind of like a kid with a new toy. :happy What is your age?

I suggested option C instead of B because it satisfies your desire to apply your math/engineering knowledge to an investment strategy. It's not unusual, there are many board members who do the same thing.

cheers,

Paul
I presume you used a Bayesian approach to come up with your 72.86%. I'm the mathematically inclined one in the family I spend I spend a lot of time helping close family members of varying ages. Regarding math, it's odd how so few people I know want to actually discuss the math underlying their portfolios. It always seems like people get "bored" whenever I use words like "heteroscedasticity", "leptokurtosis", "autocorrelation" and "tensor".

Actually, come to think of it, most people start looking bored when I use words like "portfolio", "municipal", "dividend", and "return". :shock:

I guess for option C, I should, if I take that option, try to limit myself to not getting wound up in things I can't extract myself from. It would be a great folly to, say, invest in a few dozen assets in taxable, realize 5 years later that paperwork is difficult (it doesn't exist in theory) and be forced to pay hefty gains taxes to avoid being stuck in a complex portfolio for the rest of my life. So I should keep non-Total stock/total bond type assets to as little as possible to satisfy my theoretical needs.

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

Post by TD2626 » Tue Nov 28, 2017 12:47 am

goingup wrote:
Mon Nov 27, 2017 11:08 am
Since dbr is quoting Alice in Wonderland, I'll add my favorite quote also which seems instructive at this point:

The White Rabbit put on his spectacles. `Where shall I begin, please your Majesty?' he asked. `Begin at the beginning,' the King said gravely, `and go on till you come to the end: then stop.'
I guess investing might be analogous to chess openings - while novelties may be theoretically interesting, variations from standard sequences (at least for amateurs) are generally inadvisable. I'm usually drawn to come up with something clever, novel, and unusual in life but it seems as though in investing the most boring approach is safest and most reasonable - put most money in the largest traditional mutual fund at the largest traditional mutual fund company, Vanguard Total Stock.

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

Post by TD2626 » Tue Nov 28, 2017 1:02 am

JoMoney wrote:
Mon Nov 27, 2017 2:10 am
:D Everybody think's they're "rational".
Benjamin Franklin wrote:So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for every thing one has a mind to do.

Maybe the "rational" thing to do, is to decide what portfolio you want to hold, and then filter out all the obviously irrelevant data to just the points that logically point to a conclusive justification for whatever it is you wanted to do. That's the way most humans seem to make decisions.

If you do think you've found the best portfolio optimization method, maybe look this over to see if it can add some questions to your answers:
Portfolio Optimization Theory versus Practice Roy Ballentine, ChFC, CLU, CFP®
Thanks for the article reference. While I think your proposed solution is interesting as a "plan D", I don't think it is intellectually honest to do this sort of thing. One crafts a hypothesis and tests the hypothesis based on evidence. One doesn't craft a hypothesis and then try to find evidence to prove it (while ignoring evidence to the contrary) - this isn't how science should work in theory.

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

Post by TD2626 » Tue Nov 28, 2017 1:08 am

protagonist wrote:
Mon Nov 27, 2017 9:57 pm
Option B for sure.

The real world IS messy. You WILL NEVER get to the bottom of things.

If you want to read something valuable, start with complexity theory/chaos theory rather than with arcane investment porn. You will rapidly realize that predicting10,20,30, 50 years into the future is useless, and the more time you spend trying to perfect your crystal ball, the more frustrated you are likely to get.

If you don't believe me, get a copy of "The Book of Predictions" published in 1980. You can get a used hardcover copy on Amazon right now for $3.24, and it will be the best 3.24 you have ever spent. If nothing else, it is good for a laugh.

Most of your fancy models are built on about 90 years of data. Predicting what will be best for the next 30 based on retrospective analysis of 90 years of data (largely by people motivated to find correlations) is like deciding in New Orleans that if it didn't rain on Monday, Tuesday or Wedhesday, don't bother taking an umbrella on Thursday.
I try to avoid basing things solely off 90 years of data. Indeed, I think that is far too short. I've put a lot of effort into understanding much longer-range data. For example, I participated in this thread (viewtopic.php?t=227268) by Simplegift where he discussed stock returns going back to the 1370s.

Your best bet is to keep it simple. Three fund portfolio for example. It's not perfect but it is probably as good as anything else, it won''t keep you awake at night, and if things go wrong you won't torture yourself with blame for faulty analysis. Because it's really the black swans that you have to worry about, and your analysis won't help you there.
Yes, understanding black swan risk is one of the most difficult things to do when taking a quantitative approach. That's why I am considering diving into kurtosis and co-kurtosis tensors.

Keep it simple and be happy.

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

Post by Sandtrap » Tue Nov 28, 2017 1:26 am

TD2626 wrote:
Mon Nov 27, 2017 11:45 pm
Sandtrap wrote:
Mon Nov 27, 2017 11:45 am
Veiled wrote:
Mon Nov 27, 2017 10:51 am
. . . I'm amazed that you have a 25-page IPS but you have no goals. Is your IPS a notebook of how investing works? An IPS should be focused on you, your goals, and how to get there. Lots of people write long and complicated IPSs that are mixed with personal beliefs and lifestyle choices and narratives, but the real purpose should be about goals.. . . .
+1
Well said as always, "Veiled". (love that avatar :D )

You should be able to boil down an IPS statement into a "statement", such as a "mission statement". Goal, then path to that goal. Or operating statement to reach and maintain that goal. If it can be summed up in 1 or 3 sentences, then you will have clarity and focus.

j :D
Yes, I realize my IPS is a bit wordy. I just wanted to make sure in case I'm temporarily incapacitated in a car accident or something someone would in theory be able to manage things exactly how I would want. Practice is different than theory though. Yes, in theory, they'd be able to follow my 25 page document, but in practice it would be harder to follow.

The IPS is so wordy because it does things like go on and on (for many paragraphs) about alternative investments, before saying with "5% or less should be in alternatives, and preferably less than 1%, as these are not believed to highly important to a portfolio and may not provide efficient exposure to risk-return".
Sounds great !
I was referring to the idea of establishing a goal and a theme, sort of a mission statement. Then the rest of the IPS outlines how to achieve it.
Mine is a lot longer than 25 pages and is detailed as well. But it starts with a well defined goal.
j :D

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