The Stock Market Is Always Risky

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Random Walker
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The Stock Market Is Always Risky

Post by Random Walker » Fri Sep 01, 2017 9:24 am

Many of us have the view that time is on our side; that over enough time the market will rise. But we are subject to our own psychological quirks. I believe that one is we don't anchor on the starting value of our portfolio. I believe most of us anchor on the current level of our portfolio or the highest level it has ever attained. If this is the way we view our portfolio's, then the portfolio is always at risk.

Dave

mcraepat9
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Re: The Stock Market Is Always Risky

Post by mcraepat9 » Fri Sep 01, 2017 9:27 am

Isn't the portfolio always at risk even if you anchor it to the starting value?
Amateur investors are not cool-headed logicians.

smitcat
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Re: The Stock Market Is Always Risky

Post by smitcat » Fri Sep 01, 2017 10:59 am

Random Walker wrote:
Fri Sep 01, 2017 9:24 am
Many of us have the view that time is on our side; that over enough time the market will rise. But we are subject to our own psychological quirks. I believe that one is we don't anchor on the starting value of our portfolio. I believe most of us anchor on the current level of our portfolio or the highest level it has ever attained. If this is the way we view our portfolio's, then the portfolio is always at risk.

Dave

FWIW - one of the things we do is chart the past 20 years of our portfolio value and fit an average straight line through those points.
Right now our straight line is under the value of our portfolio totals - but within bounds of our goals.

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Toons
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Re: The Stock Market Is Always Risky

Post by Toons » Fri Sep 01, 2017 11:23 am

Keep Investing :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

Levett
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Re: The Stock Market Is Always Risky

Post by Levett » Fri Sep 01, 2017 11:29 am

As Mark Twain wrote:

"October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” ;-)

Lev

avalpert
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Re: The Stock Market Is Always Risky

Post by avalpert » Fri Sep 01, 2017 1:27 pm

Anchoring on starting value is much worse than anchoring on current value - at least the current value actually means something.

Your portfolio is always at risk when invested in equities - deluding yourself into thinking that you are playing with house money (as opposed to your own) because it is now worth more than when you initially invested 10 years ago will not help you accurately determine your need and ability for taking the risk today.

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DaftInvestor
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Re: The Stock Market Is Always Risky

Post by DaftInvestor » Fri Sep 01, 2017 1:35 pm

I don't anchor on the starting value of my portfolio because I wouldn't know how to define it (When you invest a little per year for over 30 years - how do you define "start"). I could look at dollars I put in and take out an inflation component - but why bother?
I just look at goals and current values. When I look at current value I don't get caught up with comparing it to what it is compared to yesterday's current value or last month's or last year's (which is what I think you are alluding to). I just look at it as compared to where I want it to go.

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whodidntante
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Re: The Stock Market Is Always Risky

Post by whodidntante » Fri Sep 01, 2017 1:40 pm

I like risk. I like it more when I win.

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VictoriaF
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Re: The Stock Market Is Always Risky

Post by VictoriaF » Fri Sep 01, 2017 3:02 pm

avalpert wrote:
Fri Sep 01, 2017 1:27 pm
Anchoring on starting value is much worse than anchoring on current value - at least the current value actually means something.

Your portfolio is always at risk when invested in equities - deluding yourself into thinking that you are playing with house money (as opposed to your own) because it is now worth more than when you initially invested 10 years ago will not help you accurately determine your need and ability for taking the risk today.
The most dangerous anchoring is on the future value displayed in your model. You enter your present portfolio data into your model, assume returns for various asset classes, and derive a large sum ten years from now. If the market deviates from its historic performance to the worse, you feel a loss even if the resulting sum is still adequate for your needs. If the market has an unusually good run you reset your anchor to a higher value, which is now more likely to decline. In both cases you unnecessarily delay your retirement--not because you don't have enough money but because your distorted anchor pushes you to get more.

An even more dangerous consequence of future anchors is the resistance to making your portfolio safer. Your model assumes some returns from stocks and bonds, and re-allocating to bonds would change the model's output to something less than your anchor. Perversely, you would rather lose a lot of money in a bear market than give up some returns by moving to safer investments.

Victoria
Last edited by VictoriaF on Fri Sep 01, 2017 3:18 pm, edited 1 time in total.
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Munir
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Re: The Stock Market Is Always Risky

Post by Munir » Fri Sep 01, 2017 3:14 pm

Toons wrote:
Fri Sep 01, 2017 11:23 am
Keep Investing :happy
When should we start spending? :happy

Random Walker
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Re: The Stock Market Is Always Risky

Post by Random Walker » Fri Sep 01, 2017 3:27 pm

Totally agree with everything Victoria wrote above.

I do think it is good to estimate future expected returns based on current valuations rather than just use historical returns. One can use discount dividend model or E\P. I wrote a post a while back on Murphy's Law of Retirement. People see portfolio swell, and ponder retirement just when future expected returns least and potential for a bad bear greatest. They subject themselves to terrible sequence of returns risk during earthly withdrawal phase.

Dave

avalpert
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Re: The Stock Market Is Always Risky

Post by avalpert » Fri Sep 01, 2017 3:53 pm

VictoriaF wrote:
Fri Sep 01, 2017 3:02 pm
avalpert wrote:
Fri Sep 01, 2017 1:27 pm
Anchoring on starting value is much worse than anchoring on current value - at least the current value actually means something.

Your portfolio is always at risk when invested in equities - deluding yourself into thinking that you are playing with house money (as opposed to your own) because it is now worth more than when you initially invested 10 years ago will not help you accurately determine your need and ability for taking the risk today.
The most dangerous anchoring is on the future value displayed in your model. You enter your present portfolio data into your model, assume returns for various asset classes, and derive a large sum ten years from now. If the market deviates from its historic performance to the worse, you feel a loss even if the resulting sum is still adequate for your needs. If the market has an unusually good run you reset your anchor to a higher value, which is now more likely to decline. In both cases you unnecessarily delay your retirement--not because you don't have enough money but because your distorted anchor pushes you to get more.

An even more dangerous consequence of future anchors is the resistance to making your portfolio safer. Your model assumes some returns from stocks and bonds, and re-allocating to bonds would change the model's output to something less than your anchor. Perversely, you would rather lose a lot of money in a bear market than give up some returns by moving to safer investments.

Victoria
That's an interesting point but I would still say anchoring on the past is worse - well, at least I would say tracking to the past is worse, you should try to avoid anchoring to any.

An estimate or target future value is at least a relevant data point for decision making whereas cost basis (save for tax impact) is not. What you need is to design your model visualization to mitigate the tendency to anchor - using ranges instead of points, present it as alternative scenarios instead of expected outcomes, pre-define rule-based actions when actuals deviate from the plan etc.

thangngo
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Re: The Stock Market Is Always Risky

Post by thangngo » Fri Sep 01, 2017 4:28 pm

Random Walker wrote:
Fri Sep 01, 2017 9:24 am
Many of us have the view that time is on our side; that over enough time the market will rise. But we are subject to our own psychological quirks. I believe that one is we don't anchor on the starting value of our portfolio. I believe most of us anchor on the current level of our portfolio or the highest level it has ever attained. If this is the way we view our portfolio's, then the portfolio is always at risk.

Dave
Stock market is risky. Period. Regardless of where you anchor the value of the portfolio.

Risk and rewards go hand-in-hand. You can't get one without the other. You can't eliminate one or the other - has to be both.

thangngo
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Re: The Stock Market Is Always Risky

Post by thangngo » Fri Sep 01, 2017 4:42 pm

Toons wrote:
Fri Sep 01, 2017 11:23 am
Keep Investing :happy
Keep saving* :sharebeer

When I buy index or actively managed funds, I'd rather call it "saving" than "investing".

In my dictionary:
"Saving" is the act that I can control -- Knowing that the more I save, the better chance I have for financial freedom in the future.
"Investing" is the act of picking companies that have potential, put $ in them and actively participate in management. -- it's not my day job -- not even remotely close to what I do.

Keep saving :sharebeer

avalpert
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Re: The Stock Market Is Always Risky

Post by avalpert » Fri Sep 01, 2017 4:48 pm

thangngo wrote:
Fri Sep 01, 2017 4:28 pm
Random Walker wrote:
Fri Sep 01, 2017 9:24 am
Many of us have the view that time is on our side; that over enough time the market will rise. But we are subject to our own psychological quirks. I believe that one is we don't anchor on the starting value of our portfolio. I believe most of us anchor on the current level of our portfolio or the highest level it has ever attained. If this is the way we view our portfolio's, then the portfolio is always at risk.

Dave
Stock market is risky. Period. Regardless of where you anchor the value of the portfolio.

Risk and rewards go hand-in-hand. You can't get one without the other. You can't eliminate one or the other - has to be both.
Not really, you can get plenty of risk with no expectation of returns - not all risks are compensated by the market.

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Toons
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Re: The Stock Market Is Always Risky

Post by Toons » Fri Sep 01, 2017 4:49 pm

Munir wrote:
Fri Sep 01, 2017 3:14 pm
Toons wrote:
Fri Sep 01, 2017 11:23 am
Keep Investing :happy
When should we start spending? :happy

Well,,I can only relate to my situation.
After 35 years of steady investing and reinvesting,,,,
I now get what I want ,when I want it,,
Whether for me or family.
Can't forget charity causes either.
Retired....
: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

staythecourse
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Re: The Stock Market Is Always Risky

Post by staythecourse » Fri Sep 01, 2017 5:04 pm

I think one aspect is what folks concentrate on during the accumulation period. One is NOT accumulating $$ they are accumulating SHARES of companies that have a legal right to future dividends and capital appreciation (if any). I would say the focus on one's VALUE is the problem. The only time value even matter is when buying (unfortunately can't change that as it is what the current market offers) and selling (that can be controlled). Any value outside those 2 don't matter. I have no clue why we even talk about value of our portfolios during the accumulation period. What should be important during the accumulation period is how much money one can invest each and every month to accumulate as many shares as possible.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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inittowinit
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Re: The Stock Market Is Always Risky

Post by inittowinit » Fri Sep 01, 2017 5:15 pm

staythecourse wrote:
Fri Sep 01, 2017 5:04 pm
I think one aspect is what folks concentrate on during the accumulation period. One is NOT accumulating $$ they are accumulating SHARES of companies that have a legal right to future dividends and capital appreciation (if any). I would say the focus on one's VALUE is the problem. The only time value even matter is when buying (unfortunately can't change that as it is what the current market offers) and selling (that can be controlled). Any value outside those 2 don't matter. I have no clue why we even talk about value of our portfolios during the accumulation period. What should be important during the accumulation period is how much money one can invest each and every month to accumulate as many shares as possible.

Good luck.
Agreed. I wish it were easier to have my NW displayed in shares rather than dollars...

avalpert
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Re: The Stock Market Is Always Risky

Post by avalpert » Fri Sep 01, 2017 5:16 pm

staythecourse wrote:
Fri Sep 01, 2017 5:04 pm
I think one aspect is what folks concentrate on during the accumulation period. One is NOT accumulating $$ they are accumulating SHARES of companies that have a legal right to future dividends and capital appreciation (if any). I would say the focus on one's VALUE is the problem. The only time value even matter is when buying (unfortunately can't change that as it is what the current market offers) and selling (that can be controlled). Any value outside those 2 don't matter. I have no clue why we even talk about value of our portfolios during the accumulation period. What should be important during the accumulation period is how much money one can invest each and every month to accumulate as many shares as possible.

Good luck.
I disagree with that. Shares are a very artificial construct - we wouldn't say when a company splits its shares that you have accumulated anything meaningful. And value matters even when you are not selling because every day you make (even if passively) the choice not to sell at the available price. That is the entire reason why there is a relationship between price and interest rate in bonds - the market adjusts the price as people move to the better alternative with the higher rate. If the value of your portfolio went up much more than expected you should consider whether you need the same amount of risk - whether it is the time you were planning to sell or not - that is why we track value of our portfolio during all periods, it is a critical driver of our decision making. During accumulation the goal isn't to accumulate as many shares as possible - it is to best use your available assets to accomplish your financial goals at the lowest risk necessary.

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Blue
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Re: The Stock Market Is Always Risky

Post by Blue » Fri Sep 01, 2017 5:26 pm

We attempt to anchor on two numbers, i) the total dividend dollars per year thrown off by our portfolio and ii) our total dollars saved per year (relative to our annual savings goal).

thangngo
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Re: The Stock Market Is Always Risky

Post by thangngo » Fri Sep 01, 2017 5:29 pm

avalpert wrote:
Fri Sep 01, 2017 4:48 pm
thangngo wrote:
Fri Sep 01, 2017 4:28 pm
Random Walker wrote:
Fri Sep 01, 2017 9:24 am
Many of us have the view that time is on our side; that over enough time the market will rise. But we are subject to our own psychological quirks. I believe that one is we don't anchor on the starting value of our portfolio. I believe most of us anchor on the current level of our portfolio or the highest level it has ever attained. If this is the way we view our portfolio's, then the portfolio is always at risk.

Dave
Stock market is risky. Period. Regardless of where you anchor the value of the portfolio.

Risk and rewards go hand-in-hand. You can't get one without the other. You can't eliminate one or the other - has to be both.
Not really, you can get plenty of risk with no expectation of returns - not all risks are compensated by the market.
If you buy an asset class with certain level of risk, you should expect a corresponding return. High risk - high rewards; low risk - low rewards. It's foolish to put $ in a high risk asset class with no expectation of returns.

avalpert
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Re: The Stock Market Is Always Risky

Post by avalpert » Fri Sep 01, 2017 5:29 pm

Blue wrote:
Fri Sep 01, 2017 5:26 pm
We attempt to anchor on two numbers, i) the total dividend dollars per year thrown off by our portfolio and ii) our total dollars saved per year (relative to our annual savings goal).
I would advise backing away from i - anchoring on dividends could motivate chasing yield when total returns are what matters. Dividends are just one component of return and, other than for tax management, you should give them a special place in your mental accounting.

avalpert
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Re: The Stock Market Is Always Risky

Post by avalpert » Fri Sep 01, 2017 5:32 pm

thangngo wrote:
Fri Sep 01, 2017 5:29 pm
avalpert wrote:
Fri Sep 01, 2017 4:48 pm
thangngo wrote:
Fri Sep 01, 2017 4:28 pm
Random Walker wrote:
Fri Sep 01, 2017 9:24 am
Many of us have the view that time is on our side; that over enough time the market will rise. But we are subject to our own psychological quirks. I believe that one is we don't anchor on the starting value of our portfolio. I believe most of us anchor on the current level of our portfolio or the highest level it has ever attained. If this is the way we view our portfolio's, then the portfolio is always at risk.

Dave
Stock market is risky. Period. Regardless of where you anchor the value of the portfolio.

Risk and rewards go hand-in-hand. You can't get one without the other. You can't eliminate one or the other - has to be both.
Not really, you can get plenty of risk with no expectation of returns - not all risks are compensated by the market.
If you buy an asset class with certain level of risk, you should expect a corresponding return. High risk - high rewards; low risk - low rewards. It's foolish to put $ in a high risk asset class with no expectation of returns.
That isn't how it works, risks that can be diversified away are not compensated by the market and risks that can't are. The discussion with the risk explanations for the small and value factors is whether they have found distinct risks from beta that you would expect to be compensated for by the market.

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Blue
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Re: The Stock Market Is Always Risky

Post by Blue » Fri Sep 01, 2017 5:47 pm

avalpert wrote:
Fri Sep 01, 2017 5:29 pm
Blue wrote:
Fri Sep 01, 2017 5:26 pm
We attempt to anchor on two numbers, i) the total dividend dollars per year thrown off by our portfolio and ii) our total dollars saved per year (relative to our annual savings goal).
I would advise backing away from i - anchoring on dividends could motivate chasing yield when total returns are what matters. Dividends are just one component of return and, other than for tax management, you should give them a special place in your mental accounting.
Good reminder. We have a static portfolio allocation and would never want to make portfolio decisions because of dividends.

That said, we find the volatility of dividends per year to be less than the volatility of the portfolio actual value such that it can provide reassurance to stay the course when the market is swooning.

smitcat
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Re: The Stock Market Is Always Risky

Post by smitcat » Sat Sep 02, 2017 8:09 am

Random Walker wrote:
Fri Sep 01, 2017 3:27 pm
Totally agree with everything Victoria wrote above.

I do think it is good to estimate future expected returns based on current valuations rather than just use historical returns. One can use discount dividend model or E\P. I wrote a post a while back on Murphy's Law of Retirement. People see portfolio swell, and ponder retirement just when future expected returns least and potential for a bad bear greatest. They subject themselves to terrible sequence of returns risk during earthly withdrawal phase.

Dave
Interesting - If we retire into a bad bear market where we will be doing extensive Roth conversions will this not actually work out better?
I have not modeled that yet but these thoughts prompted that thought.

Random Walker
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Re: The Stock Market Is Always Risky

Post by Random Walker » Sat Sep 02, 2017 8:37 am

The problem with retiring into a bear is that money withdrawn from the portfolio is spent and never gets a chance to recover.

Dave

Johnnie
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Re: The Stock Market Is Always Risky

Post by Johnnie » Sat Sep 02, 2017 9:03 am

DaftInvestor wrote:
Fri Sep 01, 2017 1:35 pm
I don't anchor on the starting value of my portfolio because I wouldn't know how to define it (When you invest a little per year for over 30 years - how do you define "start"). I could look at dollars I put in and take out an inflation component - but why bother?
I just look at goals and current values. When I look at current value I don't get caught up with comparing it to what it is compared to yesterday's current value or last month's or last year's (which is what I think you are alluding to). I just look at it as compared to where I want it to go.
Roger all that. However, there is a truth embedded in the OP for retirement investors who need to accept risk to reach their goals: Simple dumb luck is a big part of this project. I'm thinking of sequence of returns risk, extended bear starting on the eve of retirement risk, etc.

In the long run equities will probably remain the only game in town for such folks (including moi). But beyond a certain age it's each individual's portion of the Keynesian "long term" that is more relevent: "In the long term we're all dead."

~~~~~~~

Looking back at some horror-story examples from the past, like retiring in the late 1960s, the term "year of conception risk" popped into my head. :wink:
Last edited by Johnnie on Sat Sep 02, 2017 9:09 am, edited 2 times in total.
"I know nothing."

MnD
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Re: The Stock Market Is Always Risky

Post by MnD » Sat Sep 02, 2017 9:07 am

So is dating attractive and desireable people, high compensation employment by others, travel to strange far away lands, very active sports etc.
You can't make something that's risky but rewarding "safe". No guts no glory.
I now have "enough" after 30+ years in part because of risk. With a 40-year retirement horizon on the doorstep, risk is staying on.
I could care less about anchoring. If the market drops 50% and never recovers I'll spend 35% less from portfolio at 70/30.
All the hand wringing by the two-comma club about needing moat, drawbridge, belt and suspenders to dare retire cracks me up.
The median household has $5K in retirement account savings, and $17K for age 56-61. There's your real risk-takers.

SGM
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Re: The Stock Market Is Always Risky

Post by SGM » Sat Sep 02, 2017 9:53 am

The stock market is always risky, but you will have a much greater difficulty reaching your goals without investing in the stock market. After 35+ years of investing with every paycheck, I have reached my goals early and retired at full retirement age because I liked what I was doing. One should prefer valuations to be lower when you are accumulating and higher when you are retired. I have cut back from my 100% stock allocation, but will continue to have some % in stocks always.

Toons expresses it well.

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Top99%
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Re: The Stock Market Is Always Risky

Post by Top99% » Sat Sep 02, 2017 11:01 am

There is no "risk free" place to invest money in my opinion. Bonds and CDs may have less volatility than stocks but they risk lagging inflation especially in periods of *unexpected* inflation. Alternatives come with alternative risks :oops: Let's face it: retirement is risky for us folks with a nest egg of <50x expenses. While I could theoretically work long enough to get a nest egg of 50x our expenses I would face risks of an unhealthy and/or short retirement doing that. So, I plan on approaching things with a combination of diversification, flexibility to reduce spending and the knowledge that others who have gone before us have made it work through some pretty rough times (WW2, 1970s).
Adapt or perish

avalpert
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Re: The Stock Market Is Always Risky

Post by avalpert » Sat Sep 02, 2017 11:47 am

smitcat wrote:
Sat Sep 02, 2017 8:09 am
Random Walker wrote:
Fri Sep 01, 2017 3:27 pm
Totally agree with everything Victoria wrote above.

I do think it is good to estimate future expected returns based on current valuations rather than just use historical returns. One can use discount dividend model or E\P. I wrote a post a while back on Murphy's Law of Retirement. People see portfolio swell, and ponder retirement just when future expected returns least and potential for a bad bear greatest. They subject themselves to terrible sequence of returns risk during earthly withdrawal phase.

Dave
Interesting - If we retire into a bad bear market where we will be doing extensive Roth conversions will this not actually work out better?
I have not modeled that yet but these thoughts prompted that thought.
No, the most dangerous scenarios are retiring into a bear market or high inflation - saving some tax expense because you now have a lot less to be taxed doesn't do much to mitigate the loss.

rgs92
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Re: The Stock Market Is Always Risky

Post by rgs92 » Sat Sep 02, 2017 11:48 am

Random Walker wrote:
Fri Sep 01, 2017 9:24 am
I believe most of us anchor on the current level of our portfolio or the highest level it has ever attained. If this is the way we view our portfolio's, then the portfolio is always at risk.
Good point here. Thank you. I try to think about my portfolio as simply the right to an earnings stream (or profit stream).
The daily total market value of my portfolio at any time is basically irrelevant.

I think of my portfolio as one giant bond that pays income at a decent rate. If the market value of the bond changes due to interest rates (or other factor), I ignore it because I take it on faith that the income stream (or "profit stream" for stocks) will continue indefinitely (and even keep up with inflation -- I hope --.)

At least that's what I tell myself to stay sane and stay the course.

ValueInvestor99
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Re: The Stock Market Is Always Risky

Post by ValueInvestor99 » Sat Sep 02, 2017 11:54 am

I believe Isaac Newton discovered stocks are risky after he lost much of his wealth from his investments.

The stock market is a gambling house and doesn't reflect on the profitability of the companies issuing stock.

Upper management and board of directors are effective of extracting money from the profits of the corporations.

Competition from other corporations can reduce the profits of a corporation when competitors can improve the quality and reduce the cost of their products.

Governments can change profitability of companies through tariffs, copyright law, and trademark law.

smitcat
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Re: The Stock Market Is Always Risky

Post by smitcat » Sat Sep 02, 2017 12:20 pm

avalpert wrote:
Sat Sep 02, 2017 11:47 am
smitcat wrote:
Sat Sep 02, 2017 8:09 am
Random Walker wrote:
Fri Sep 01, 2017 3:27 pm
Totally agree with everything Victoria wrote above.

I do think it is good to estimate future expected returns based on current valuations rather than just use historical returns. One can use discount dividend model or E\P. I wrote a post a while back on Murphy's Law of Retirement. People see portfolio swell, and ponder retirement just when future expected returns least and potential for a bad bear greatest. They subject themselves to terrible sequence of returns risk during earthly withdrawal phase.

Dave
Interesting - If we retire into a bad bear market where we will be doing extensive Roth conversions will this not actually work out better?
I have not modeled that yet but these thoughts prompted that thought.
No, the most dangerous scenarios are retiring into a bear market or high inflation - saving some tax expense because you now have a lot less to be taxed doesn't do much to mitigate the loss.
So converting at a lower expense level does not help even though you will then have it grow tax free and not utilize it until the market recovers?
That would then mean that converting at any market position makes no difference.

avalpert
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Re: The Stock Market Is Always Risky

Post by avalpert » Sat Sep 02, 2017 12:23 pm

smitcat wrote:
Sat Sep 02, 2017 12:20 pm
avalpert wrote:
Sat Sep 02, 2017 11:47 am
smitcat wrote:
Sat Sep 02, 2017 8:09 am
Random Walker wrote:
Fri Sep 01, 2017 3:27 pm
Totally agree with everything Victoria wrote above.

I do think it is good to estimate future expected returns based on current valuations rather than just use historical returns. One can use discount dividend model or E\P. I wrote a post a while back on Murphy's Law of Retirement. People see portfolio swell, and ponder retirement just when future expected returns least and potential for a bad bear greatest. They subject themselves to terrible sequence of returns risk during earthly withdrawal phase.

Dave
Interesting - If we retire into a bad bear market where we will be doing extensive Roth conversions will this not actually work out better?
I have not modeled that yet but these thoughts prompted that thought.
No, the most dangerous scenarios are retiring into a bear market or high inflation - saving some tax expense because you now have a lot less to be taxed doesn't do much to mitigate the loss.
So converting at a lower expense level does not help even though you will then have it grow tax free and not utilize it until the market recovers?
That would then mean that converting at any market position makes no difference.
The future growth is no more guaranteed the day after a bear market than the day before. Converting based on market position does make no difference - converting based on current and anticipated tax rates does.

Think about it this way, when you first invested it in the IRA you had a long future of anticipated growth - if market price today vs tomorrow was a driver of conversion, why wouldn't you convert it then?

smitcat
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Re: The Stock Market Is Always Risky

Post by smitcat » Sat Sep 02, 2017 12:38 pm

avalpert wrote:
Sat Sep 02, 2017 12:23 pm
smitcat wrote:
Sat Sep 02, 2017 12:20 pm
avalpert wrote:
Sat Sep 02, 2017 11:47 am
smitcat wrote:
Sat Sep 02, 2017 8:09 am
Random Walker wrote:
Fri Sep 01, 2017 3:27 pm
Totally agree with everything Victoria wrote above.

I do think it is good to estimate future expected returns based on current valuations rather than just use historical returns. One can use discount dividend model or E\P. I wrote a post a while back on Murphy's Law of Retirement. People see portfolio swell, and ponder retirement just when future expected returns least and potential for a bad bear greatest. They subject themselves to terrible sequence of returns risk during earthly withdrawal phase.

Dave
Interesting - If we retire into a bad bear market where we will be doing extensive Roth conversions will this not actually work out better?
I have not modeled that yet but these thoughts prompted that thought.
No, the most dangerous scenarios are retiring into a bear market or high inflation - saving some tax expense because you now have a lot less to be taxed doesn't do much to mitigate the loss.
So converting at a lower expense level does not help even though you will then have it grow tax free and not utilize it until the market recovers?
That would then mean that converting at any market position makes no difference.
The future growth is no more guaranteed the day after a bear market than the day before. Converting based on market position does make no difference - converting based on current and anticipated tax rates does.

Think about it this way, when you first invested it in the IRA you had a long future of anticipated growth - if market price today vs tomorrow was a driver of conversion, why wouldn't you convert it then?
We would anticipate the same (similar) future tax rate in retirement after a market drop and recovery than if the market was to stay stable.
We have not Roth converted any funds as of yet because we still have large earnings with matching large taxes - does not make sense.
But shortly when we retire we will begin conversion as we will have much lower taxes for a number of reasons.
Converting while the market is up will limit conversions more than when the market is down.
While I have not modeled the affects of these potentials I find the possibilities interesting.

In general I do not fully understand the early retirement concern with sequence of returns as long as you are pulling from the funds selected for just that reasons while the market is down. We did not touch our stock assets during that last downturn and would not behave differently in retirement.

avalpert
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Re: The Stock Market Is Always Risky

Post by avalpert » Sat Sep 02, 2017 12:59 pm

smitcat wrote:
Sat Sep 02, 2017 12:38 pm
avalpert wrote:
Sat Sep 02, 2017 12:23 pm
smitcat wrote:
Sat Sep 02, 2017 12:20 pm
avalpert wrote:
Sat Sep 02, 2017 11:47 am
smitcat wrote:
Sat Sep 02, 2017 8:09 am


Interesting - If we retire into a bad bear market where we will be doing extensive Roth conversions will this not actually work out better?
I have not modeled that yet but these thoughts prompted that thought.
No, the most dangerous scenarios are retiring into a bear market or high inflation - saving some tax expense because you now have a lot less to be taxed doesn't do much to mitigate the loss.
So converting at a lower expense level does not help even though you will then have it grow tax free and not utilize it until the market recovers?
That would then mean that converting at any market position makes no difference.
The future growth is no more guaranteed the day after a bear market than the day before. Converting based on market position does make no difference - converting based on current and anticipated tax rates does.

Think about it this way, when you first invested it in the IRA you had a long future of anticipated growth - if market price today vs tomorrow was a driver of conversion, why wouldn't you convert it then?
We would anticipate the same (similar) future tax rate in retirement after a market drop and recovery than if the market was to stay stable.
We have not Roth converted any funds as of yet because we still have large earnings with matching large taxes - does not make sense.
But shortly when we retire we will begin conversion as we will have much lower taxes for a number of reasons.
Converting while the market is up will limit conversions more than when the market is down.
Sure as a percent of your portfolio but not in absolute terms. Contributing more to the IRA/401k today will limit future conversions as a percent of your portfolio too.
In general I do not fully understand the early retirement concern with sequence of returns as long as you are pulling from the funds selected for just that reasons while the market is down. We did not touch our stock assets during that last downturn and would not behave differently in retirement.
Because you are no longer contributing new money to the portfolio - it is a huge difference between accumulation and withdrawing phases. It doesn't matter which funds you are pulling from, your portfolio value is less and you have no means to prop it back up.

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JamalJones
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Re: The Stock Market Is Always Risky

Post by JamalJones » Sat Sep 02, 2017 1:00 pm

Top99% wrote:
Sat Sep 02, 2017 11:01 am
There is no "risk free" place to invest money in my opinion. Bonds and CDs may have less volatility than stocks but they risk lagging inflation especially in periods of *unexpected* inflation. Alternatives come with alternative risks :oops: Let's face it: retirement is risky for us folks with a nest egg of <50x expenses. While I could theoretically work long enough to get a nest egg of 50x our expenses I would face risks of an unhealthy and/or short retirement doing that. So, I plan on approaching things with a combination of diversification, flexibility to reduce spending and the knowledge that others who have gone before us have made it work through some pretty rough times (WW2, 1970s).
+1 :sharebeer
TSP + Vanguard Roth IRA: 80% equities (C, S, I Funds and VTSAX,VTIAX, VEMAX) / 20% bonds (F and G Funds) | MOTBH!

staythecourse
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Re: The Stock Market Is Always Risky

Post by staythecourse » Sat Sep 02, 2017 5:59 pm

avalpert wrote:
Fri Sep 01, 2017 5:16 pm
staythecourse wrote:
Fri Sep 01, 2017 5:04 pm
I think one aspect is what folks concentrate on during the accumulation period. One is NOT accumulating $$ they are accumulating SHARES of companies that have a legal right to future dividends and capital appreciation (if any). I would say the focus on one's VALUE is the problem. The only time value even matter is when buying (unfortunately can't change that as it is what the current market offers) and selling (that can be controlled). Any value outside those 2 don't matter. I have no clue why we even talk about value of our portfolios during the accumulation period. What should be important during the accumulation period is how much money one can invest each and every month to accumulate as many shares as possible.

Good luck.
I disagree with that. Shares are a very artificial construct - we wouldn't say when a company splits its shares that you have accumulated anything meaningful. And value matters even when you are not selling because every day you make (even if passively) the choice not to sell at the available price. That is the entire reason why there is a relationship between price and interest rate in bonds - the market adjusts the price as people move to the better alternative with the higher rate. If the value of your portfolio went up much more than expected you should consider whether you need the same amount of risk - whether it is the time you were planning to sell or not - that is why we track value of our portfolio during all periods, it is a critical driver of our decision making. During accumulation the goal isn't to accumulate as many shares as possible - it is to best use your available assets to accomplish your financial goals at the lowest risk necessary.
You do realize you are buying shares of bonds when buying a mutual bond fund. So shares are NOT just stocks.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

avalpert
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Re: The Stock Market Is Always Risky

Post by avalpert » Sat Sep 02, 2017 8:13 pm

staythecourse wrote:
Sat Sep 02, 2017 5:59 pm
avalpert wrote:
Fri Sep 01, 2017 5:16 pm
staythecourse wrote:
Fri Sep 01, 2017 5:04 pm
I think one aspect is what folks concentrate on during the accumulation period. One is NOT accumulating $$ they are accumulating SHARES of companies that have a legal right to future dividends and capital appreciation (if any). I would say the focus on one's VALUE is the problem. The only time value even matter is when buying (unfortunately can't change that as it is what the current market offers) and selling (that can be controlled). Any value outside those 2 don't matter. I have no clue why we even talk about value of our portfolios during the accumulation period. What should be important during the accumulation period is how much money one can invest each and every month to accumulate as many shares as possible.

Good luck.
I disagree with that. Shares are a very artificial construct - we wouldn't say when a company splits its shares that you have accumulated anything meaningful. And value matters even when you are not selling because every day you make (even if passively) the choice not to sell at the available price. That is the entire reason why there is a relationship between price and interest rate in bonds - the market adjusts the price as people move to the better alternative with the higher rate. If the value of your portfolio went up much more than expected you should consider whether you need the same amount of risk - whether it is the time you were planning to sell or not - that is why we track value of our portfolio during all periods, it is a critical driver of our decision making. During accumulation the goal isn't to accumulate as many shares as possible - it is to best use your available assets to accomplish your financial goals at the lowest risk necessary.
You do realize you are buying shares of bonds when buying a mutual bond fund. So shares are NOT just stocks.

Good luck.
Mutual fund 'shares' are even less interesting than shares of stocks or etfs since they are completely arbitrary units - but yes, if you buy bond mutual funds you are buying 'shares' of them - so what? That doesn't change any of what I said - number of shares are irrelevant absent price of shares, value is what matters.

am
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Re: The Stock Market Is Always Risky

Post by am » Sun Sep 03, 2017 1:34 pm

After buying some cryptocurrencies for fun and watching the value zig zag, makes the stock market a calm breeze :)

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CyclingDuo
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Re: The Stock Market Is Always Risky

Post by CyclingDuo » Sun Sep 03, 2017 2:34 pm

avalpert wrote:
Sat Sep 02, 2017 11:47 am
No, the most dangerous scenarios are retiring into a bear market or high inflation - saving some tax expense because you now have a lot less to be taxed doesn't do much to mitigate the loss.
The 4% SWR has gotcha covered.

https://www.kitces.com/blog/how-has-the ... al-crisis/

avalpert
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Re: The Stock Market Is Always Risky

Post by avalpert » Sun Sep 03, 2017 3:13 pm

CyclingDuo wrote:
Sun Sep 03, 2017 2:34 pm
avalpert wrote:
Sat Sep 02, 2017 11:47 am
No, the most dangerous scenarios are retiring into a bear market or high inflation - saving some tax expense because you now have a lot less to be taxed doesn't do much to mitigate the loss.
The 4% SWR has gotcha covered.

https://www.kitces.com/blog/how-has-the ... al-crisis/
Well that was a non-sequitur.

Actually though, if you look at the numbers for the 2000 retiree and combine with the trinity study data you see that it isn't guaranteed that 4% rule will work out - they have 15 years to go to hit the '30 year' retirement and currently are starting with a withdrawal rate above 6%, in the original trinity data they are looking at a 5-10% failure rate.

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