Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
sambb
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by sambb » Wed Aug 29, 2018 10:16 pm

myths/misunderstandings:
vanguard has good customer service
international is bad
bogle is always right
three fund is better than target date, etc in the future
individual stocks should be sold
bonds in tax deferred (for high income)
expense ratio difference of 0.1 matters in the long term
all financial advisors are bad
doctors are the ones billing you
HCOL areas is a choice
public school is same as private school
ivy league education doesnt matter
fidelity is bad
a 1999 camry is a good choice
a "fun" car is a sedan
BMWs are always expensive to maintain
better to save money rather than have experiences in ones 20s, and blow the $

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by gwrvmd » Wed Aug 29, 2018 11:01 pm

Volatility is good. If there was no volatility the market would never go up......Gordon
Disciple of John Neff

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obafgkm
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by obafgkm » Thu Aug 30, 2018 12:10 am

obafgkm wrote:
Wed Aug 29, 2018 9:21 am
"I invested my IRA contribution on January 1."
FIREchief wrote:
Wed Aug 29, 2018 2:18 pm
Because the markets aren't open until at least January 2? Or because the contribution and investment of the contribution can be two different transactions?
Well, I meant the former, but thinking about the latter, the contribution can't happen on January 1, either. Nothing happens on January 1: the postal service will not accept (or at least move) your mailed contribution and no institution is going to withdraw or accept money on January 1 electronically.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by typical.investor » Thu Aug 30, 2018 12:37 am

JoeRetire wrote:
Wed Aug 29, 2018 1:50 pm
Lots of folks seem to use the non-word "alot" when they mean "a lot". That really grinds my gears. A lot.
Do understand that accepted usage is determined by convention.

Surely some went kicking and screaming as old English was gradually replaced, and surely there are those who adopted what seemed like linguistic change only to see it ultimately fall out of favor.

“a lot” is a physical place, or area of land where you can put a large quantity of something. Alot would seem to be an adjective describing a large quantity. Perhaps it’s premature to say it’s been adopted or maybe we are seeing the early signs.

Anyway, language is a snapshot in time of convention and accepted conventions change.

“I like her alot” actually seems better as in this case we are not talking about something you actually need a physical place to put. Certainly though, “atruckload of xyz” would not be accepted usage by anyone.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Dasnyc » Thu Aug 30, 2018 2:41 am

willthrill81 wrote:
Wed Aug 29, 2018 1:56 pm
siamond wrote:
Wed Aug 29, 2018 12:28 pm
And it matches the way I always interpreted it:
short-term past results do not predict future short-term performance

Then it makes sense. But when it's generalized to a variation of 'nobody knows nothing', I cringe. Ignore history at your peril is good solid wisdom.

PS. 'nobody knows nothing': really? How do you know that? :wink:
:sharebeer

"All generalizations are false, including this one."
- Mark Twain
+1

SavageAmusement
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by SavageAmusement » Thu Aug 30, 2018 3:01 am

Simplicity is misunderstood on this forum. For a group that espouses simplicity as a core principle, things get complicated around here in a hurry.

Dasnyc
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Dasnyc » Thu Aug 30, 2018 3:22 am

typical.investor wrote:
Thu Aug 30, 2018 12:37 am
JoeRetire wrote:
Wed Aug 29, 2018 1:50 pm
Lots of folks seem to use the non-word "alot" when they mean "a lot". That really grinds my gears. A lot.
Do understand that accepted usage is determined by convention.

Surely some went kicking and screaming as old English was gradually replaced, and surely there are those who adopted what seemed like linguistic change only to see it ultimately fall out of favor.

“a lot” is a physical place, or area of land where you can put a large quantity of something. Alot would seem to be an adjective describing a large quantity. Perhaps it’s premature to say it’s been adopted or maybe we are seeing the early signs.

Anyway, language is a snapshot in time of convention and accepted conventions change.

“I like her alot” actually seems better as in this case we are not talking about something you actually need a physical place to put. Certainly though, “atruckload of xyz” would not be accepted usage by anyone.
I agree with JoeRetire on this particular word misuse, as well as the other posts that address misspelled words and incorrect usage. After all, isn’t this whole thread about clearing up how we communicate in this forum? Why perpetuate errors of thought or word? Many of us have made typos, but errors are errors.

‘Alot. The word alot is a misspelling of a lot (unless you mean the Indian town of Alot).
A Lot. A lot means a large extent or to a large extent.’
Grammar-monster.com

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BeBH65
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by BeBH65 » Thu Aug 30, 2018 5:02 am

delamer wrote:
Wed Aug 29, 2018 5:37 pm
Nate79 wrote:
Wed Aug 29, 2018 4:28 pm
latesaver wrote:
Wed Aug 29, 2018 3:56 pm
"I have no debt...and my current annual living expenses are $150K/year"
I'm not sure I understand your point here. Certainly this statement could be true.

I disagree slightly — I know I don’t understand the point.

If the implication is that someone with no debt should have expenses less than $150K/year, why would that be true? That is purely a lifestyle judgment and has nothing to do with investing terms or concepts.
I understand it in the context of:
Net worth and human capital combined are not sufficient to cover the lifestyle debt.

I like it.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

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munemaker
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by munemaker » Thu Aug 30, 2018 5:19 am

smectym wrote:
Wed Aug 29, 2018 1:08 am
Add the supposedly bedrock principle that “CD’s offer higher yields than treasuries.” This assertion has been bandied about in several threads. Upon interrogation, it turns out that proponents of this maxim have in mind solely *brokered* CD’s (and only of certain maturities); not the typical bank CD most investors buy, and a fraction of the overall CD market. And of course additional caveats, including the impact of transaction costs on brokered CD purchases and the possible impact of state income taxes, must also be borne in mind.

Smectym
Not sure this is misused.

The highest yielding bank CDs pay higher than the highest brokered CDs. For example, Ally Bank and Capital One 360 are paying higher rates on 1 year CDs than the highest brokered 1 year CD at Vanguard. Not only that, but some credit unions also pay higher rates than brokered CDs, e.g. PenFed currently pays higher rates on the 1 year CD than brokered CDs.

There are no transaction costs to buy brokered CDs, at least not on Vanguard.

If you just go to the corner branch in your neighborhood, I agree the CD rates may not be competitive. But that is true of any commodity...you have to shop around to get the best deal.

Agree on the state income taxes --> Yes, you do have to pay state income tax on CDs if they are in a taxable account.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by GrowthSeeker » Thu Aug 30, 2018 7:22 am

Standard deviation.
It's not that the term "standard deviation" is misunderstood, but drawing conclusions based on an assumed underlying Normal Distribution when the actual data is not really distributed normally can lead to faulty conclusions and bad decisions. Another unstated assumption is that all the data observations are independent and random, whereas real market data isn't either; not completely.

It is true mathematically that if you average a large enough number of random variables which have some other probability distribution, that as "n" goes to infinity, the distribution of the average becomes a Normal Distribution. But we aren't dealing with infinite data.
Just because you're paranoid doesn't mean they're NOT out to get you.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by acegolfer » Thu Aug 30, 2018 7:55 am

GrowthSeeker wrote:
Thu Aug 30, 2018 7:22 am
It's not that the term "standard deviation" is misunderstood, but drawing conclusions based on an assumed underlying Normal Distribution when the actual data is not really distributed normally can lead to faulty conclusions and bad decisions.
example of faulty conclusions and bad decisions?
Last edited by acegolfer on Thu Aug 30, 2018 10:54 am, edited 1 time in total.

bgf
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by bgf » Thu Aug 30, 2018 7:56 am

GrowthSeeker wrote:
Thu Aug 30, 2018 7:22 am
It is true mathematically that if you average a large enough number of random variables which have some other probability distribution, that as "n" goes to infinity, the distribution of the average becomes a Normal Distribution. But we aren't dealing with infinite data.
that is also assuming finite mean and finite variance, which may or may not be true of financial markets. you can't use standard deviations, regression analysis, etc. unless you make those assumptions. and if you aren't doing that kind of math then you aren't winning a Nobel, so voila! assumptions made, papers written, Nobels awarded. clean and tidy.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by bgf » Thu Aug 30, 2018 8:04 am

acegolfer wrote:
Thu Aug 30, 2018 7:55 am
GrowthSeeker wrote:
Thu Aug 30, 2018 7:22 am
It's not that the term "standard deviation" is misunderstood, but drawing conclusions based on an assumed underlying Normal Distribution when the actual data is not really distributed normally can lead to faulty conclusions and bad decisions.
example?
if returns were normally distributed then you would not see large jumps in prices as frequently as has been observed across financial markets, regardless of whether you are studying US stocks or commodities like cotton. When Mandelbrot was studying wealth distribution, which is not normally distributed, he mistook Houthakker's work on cotton prices as the same subject matter. the data looked the same. Houthakker corrected him, that he was not studying wealth distribution but commodity prices. The returns appeared to be random but were not explained by the normal distribution and not subject to standard statistical tools.

so if you assume the phenomena, in this case market returns, is normally distributed when it is not, you are going to be very wrong in assuming that large changes in returns are as incredibly unlikely as one would expect given a normal distribution with thin tails. they aren't. if the variance is actually infinite, then you are going to have a bit of a difficult time even determining the mean from observations.

im no expert, i just read that in a book.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by azanon » Thu Aug 30, 2018 8:12 am

If I had to pick one, it would be the notion that stocks are less risky the longer an investor plans to hold them. For me, that one rises to the top because a lot of major financial decisions (e.g. portfolio composition) are often made solely because, or primarily because, one mistakenly believes that this is true when in reality, the opposite is true.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by triceratop » Thu Aug 30, 2018 8:15 am

sambb wrote:
Wed Aug 29, 2018 10:16 pm
myths/misunderstandings:
...
expense ratio difference of 0.1 matters in the long term
...
This is true though. Over a 60-year investing career, a 5% CAGR differs from a 5.1% CAGR by 6%. That is not an insignificant amount of chow!
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Cartographer » Thu Aug 30, 2018 8:24 am

bgf wrote:
Thu Aug 30, 2018 7:56 am
GrowthSeeker wrote:
Thu Aug 30, 2018 7:22 am
It is true mathematically that if you average a large enough number of random variables which have some other probability distribution, that as "n" goes to infinity, the distribution of the average becomes a Normal Distribution. But we aren't dealing with infinite data.
that is also assuming finite mean and finite variance, which may or may not be true of financial markets. you can't use standard deviations, regression analysis, etc. unless you make those assumptions. and if you aren't doing that kind of math then you aren't winning a Nobel, so voila! assumptions made, papers written, Nobels awarded. clean and tidy.
Also crucially assuming that the random variables are independent, which is probably not completely true of stock market returns.

Even assuming independence and finite mean, variance, the normal distribution is the wrong distribution anyway for returns since they compound. The correct average really is a geometric average. In this case, the Central Limit Theorem would say that returns would become the log-normal distribution.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by bgf » Thu Aug 30, 2018 8:56 am

Cartographer wrote:
Thu Aug 30, 2018 8:24 am
bgf wrote:
Thu Aug 30, 2018 7:56 am
GrowthSeeker wrote:
Thu Aug 30, 2018 7:22 am
It is true mathematically that if you average a large enough number of random variables which have some other probability distribution, that as "n" goes to infinity, the distribution of the average becomes a Normal Distribution. But we aren't dealing with infinite data.
that is also assuming finite mean and finite variance, which may or may not be true of financial markets. you can't use standard deviations, regression analysis, etc. unless you make those assumptions. and if you aren't doing that kind of math then you aren't winning a Nobel, so voila! assumptions made, papers written, Nobels awarded. clean and tidy.
Also crucially assuming that the random variables are independent, which is probably not completely true of stock market returns.

Even assuming independence and finite mean, variance, the normal distribution is the wrong distribution anyway for returns since they compound. The correct average really is a geometric average. In this case, the Central Limit Theorem would say that returns would become the log-normal distribution.
agreed on the other assumptions.

but how is it that returns would be log-normal? that would place a bound at 0, which can't be correct as stock returns can be negative.
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Cartographer » Thu Aug 30, 2018 9:20 am

bgf wrote:
Thu Aug 30, 2018 8:56 am
Cartographer wrote:
Thu Aug 30, 2018 8:24 am
bgf wrote:
Thu Aug 30, 2018 7:56 am
GrowthSeeker wrote:
Thu Aug 30, 2018 7:22 am
It is true mathematically that if you average a large enough number of random variables which have some other probability distribution, that as "n" goes to infinity, the distribution of the average becomes a Normal Distribution. But we aren't dealing with infinite data.
that is also assuming finite mean and finite variance, which may or may not be true of financial markets. you can't use standard deviations, regression analysis, etc. unless you make those assumptions. and if you aren't doing that kind of math then you aren't winning a Nobel, so voila! assumptions made, papers written, Nobels awarded. clean and tidy.
Also crucially assuming that the random variables are independent, which is probably not completely true of stock market returns.

Even assuming independence and finite mean, variance, the normal distribution is the wrong distribution anyway for returns since they compound. The correct average really is a geometric average. In this case, the Central Limit Theorem would say that returns would become the log-normal distribution.
agreed on the other assumptions.

but how is it that returns would be log-normal? that would place a bound at 0, which can't be correct as stock returns can be negative.
I was being slightly inaccurate. 1+r will be log-normal, where r is the return. This is because you don't take the geometric average of r, but rather 1+r.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by bgf » Thu Aug 30, 2018 9:25 am

Cartographer wrote:
Thu Aug 30, 2018 9:20 am
bgf wrote:
Thu Aug 30, 2018 8:56 am
Cartographer wrote:
Thu Aug 30, 2018 8:24 am
bgf wrote:
Thu Aug 30, 2018 7:56 am
GrowthSeeker wrote:
Thu Aug 30, 2018 7:22 am
It is true mathematically that if you average a large enough number of random variables which have some other probability distribution, that as "n" goes to infinity, the distribution of the average becomes a Normal Distribution. But we aren't dealing with infinite data.
that is also assuming finite mean and finite variance, which may or may not be true of financial markets. you can't use standard deviations, regression analysis, etc. unless you make those assumptions. and if you aren't doing that kind of math then you aren't winning a Nobel, so voila! assumptions made, papers written, Nobels awarded. clean and tidy.
Also crucially assuming that the random variables are independent, which is probably not completely true of stock market returns.

Even assuming independence and finite mean, variance, the normal distribution is the wrong distribution anyway for returns since they compound. The correct average really is a geometric average. In this case, the Central Limit Theorem would say that returns would become the log-normal distribution.
agreed on the other assumptions.

but how is it that returns would be log-normal? that would place a bound at 0, which can't be correct as stock returns can be negative.
I was being slightly inaccurate. 1+r will be log-normal, where r is the return. This is because you don't take the geometric average of r, but rather 1+r.
gotcha.
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vested1
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by vested1 » Thu Aug 30, 2018 9:53 am

#1 Using ticker symbols or acronyms without identifying what they stand for.

#2 Threads that exist only to voice complaints. (Oops) :oops:

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by willthrill81 » Thu Aug 30, 2018 9:55 am

azanon wrote:
Thu Aug 30, 2018 8:12 am
If I had to pick one, it would be the notion that stocks are less risky the longer an investor plans to hold them. For me, that one rises to the top because a lot of major financial decisions (e.g. portfolio composition) are often made solely because, or primarily because, one mistakenly believes that this is true when in reality, the opposite is true.
It depends on how you define "risky." If you define it in terms of selling your investment for less than you paid for it, then history is clear that the longer you hold stocks, the less likely that is to happen. If you define it in terms of volatility, that does not go down over time.
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by bgf » Thu Aug 30, 2018 10:23 am

willthrill81 wrote:
Thu Aug 30, 2018 9:55 am
azanon wrote:
Thu Aug 30, 2018 8:12 am
If I had to pick one, it would be the notion that stocks are less risky the longer an investor plans to hold them. For me, that one rises to the top because a lot of major financial decisions (e.g. portfolio composition) are often made solely because, or primarily because, one mistakenly believes that this is true when in reality, the opposite is true.
It depends on how you define "risky." If you define it in terms of selling your investment for less than you paid for it, then history is clear that the longer you hold stocks, the less likely that is to happen. If you define it in terms of volatility, that does not go down over time.
you could also define it as failure to match the performance of some benchmark/goal. if that is the case, your risk is dependent on the investor's performance over those years. if your average annual outperformance of your benchmark/goal is 5% over a period of 30 years... it makes little sense to say your portfolio is just as risky as the day you bought it. you could suffer substantial losses and still come out ahead.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by azanon » Thu Aug 30, 2018 10:55 am

willthrill81 wrote:
Thu Aug 30, 2018 9:55 am
azanon wrote:
Thu Aug 30, 2018 8:12 am
If I had to pick one, it would be the notion that stocks are less risky the longer an investor plans to hold them. For me, that one rises to the top because a lot of major financial decisions (e.g. portfolio composition) are often made solely because, or primarily because, one mistakenly believes that this is true when in reality, the opposite is true.
It depends on how you define "risky." If you define it in terms of selling your investment for less than you paid for it, then history is clear that the longer you hold stocks, the less likely that is to happen. If you define it in terms of volatility, that does not go down over time.
Rephrased, the probability of a disastrous result increases with stock holding period, not decreases. That is a statement of fact, not opinion. If it were somehow possible to lock in, or fully secure, the average expected result, then it would be a completely different reality. But that is not possible.

For those wanting more background on my choice of statement, i would reference Zvi Bodie's body of work which is readily available on the internet and his books.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by acegolfer » Thu Aug 30, 2018 11:01 am

bgf wrote:
Thu Aug 30, 2018 8:04 am
so if you assume the phenomena, in this case market returns, is normally distributed when it is not, you are going to be very wrong in assuming that large changes in returns are as incredibly unlikely as one would expect given a normal distribution with thin tails. they aren't. if the variance is actually infinite, then you are going to have a bit of a difficult time even determining the mean from observations.

im no expert, i just read that in a book.
I agree that actual returns have fatter tail distribution than a normal distribution suggests. But I'm curious about what is the implication of this to investing (the topic of this thread)? Specifically, explain how should we change the strategy?

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by JoeRetire » Thu Aug 30, 2018 11:35 am

typical.investor wrote:
Thu Aug 30, 2018 12:37 am
Do understand that accepted usage is determined by convention.

Surely some went kicking and screaming as old English was gradually replaced, and surely there are those who adopted what seemed like linguistic change only to see it ultimately fall out of favor.

“a lot” is a physical place, or area of land where you can put a large quantity of something. Alot would seem to be an adjective describing a large quantity. Perhaps it’s premature to say it’s been adopted or maybe we are seeing the early signs.

Anyway, language is a snapshot in time of convention and accepted conventions change.

“I like her alot” actually seems better as in this case we are not talking about something you actually need a physical place to put. Certainly though, “atruckload of xyz” would not be accepted usage by anyone.
Sorry, you are confused. Just because a lot (see what I did there) of people make a mistake doesn't make it an accepted convention.

"alot" is not a word.

As I'm fairly sure you know, "a lot" clearly has more than one meaning, and the meaning in this context is not a physical place.

If you think "Ilikeheralot" makes sense, go for it. I prefer to use actual words, but ucndowutulyk.
Very Stable Genius

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by bgf » Thu Aug 30, 2018 12:03 pm

acegolfer wrote:
Thu Aug 30, 2018 11:01 am
bgf wrote:
Thu Aug 30, 2018 8:04 am
so if you assume the phenomena, in this case market returns, is normally distributed when it is not, you are going to be very wrong in assuming that large changes in returns are as incredibly unlikely as one would expect given a normal distribution with thin tails. they aren't. if the variance is actually infinite, then you are going to have a bit of a difficult time even determining the mean from observations.

im no expert, i just read that in a book.
I agree that actual returns have fatter tail distribution than a normal distribution suggests. But I'm curious about what is the implication of this to investing (the topic of this thread)? Specifically, explain how should we change the strategy?
that's a great question, and i think is THE question that I've been dealing with since i got interested in investing and finance. its practical and its critical. i have a lot of thoughts on this question, but it would take a lot of effort for me to organize them, support them with evidence/argument, and make them altogether clear. in short though, despite a lot of thought, i think index investing should be the backbone of my portfolio.

but to your question, most importantly, i think it should affect how you perceive the market and investing. i do not see investing as an optimization problem using variables and data sets. markets are about people placing bets on the future performance of companies. that is what investing is about. it is about the companies themselves, and it is also about the expectations of the individuals within that market, and how they react to real world outcomes in relation to those expectations. it isn't about regression analysis, sharpe ratios, and covariances.

so i think lesson 1 is - don't try to "optimize a portfolio." you can't do it. if attempted and taken to its extreme conclusion, you get the fall of LTCM. a group of incredibly intelligent people that acted upon the assumption that a data set comprised of a few years of transactions, despite being an admittedly large data set, could be analyzed as essentially a complete sample space and relied upon almost absolutely and without limitation. this attempt at optimization led them to take on too much leverage. they were then, not surprisingly, smacked in the face by the fat tail and went to zero. poof. which they totally deserved. imo.

we do not know or understand the generator of market returns, and all the returns and data compiled so far in history do not create a complete sample space. things WILL happen in the future that have never happened before.

so i dont pay much attention, for example, to historical variance between asset A and asset B, and trying to optimize the correct allocations to maximize my sharpe ratio. i guess its good fun to kill some time like a crossword puzzle...

lesson 2 is diversification is good primarily because the nature of equity returns is asymmetric (a company can't go worse than bankrupt and their future returns are essentially limitless). this means you are greatly benefited by the massive HUGE outperformance of those few companies that end up providing the majority of the market return. See the Bessembinder paper. I think this same idea also ties in to Taleb's emphasis on a "barbell strategy" and "optionality." The goal of the investor should be to, first, limit downside and insure survival, and, second, expose yourself to as large an upside as possible. essentially, you are looking for asymmetric payoffs. you can get that by literally buying treasuries and cheap options, sure, but you also, i think, get that by being a long term buy and hold investor in equity markets. the asymmetry is this - the effect of Enron going bankrupt is absolutely dwarfed by the long term return of MSFT or Amazon. Many many companies can perform horribly yet, because of the asymmetry of equity returns, a few companies can MORE than make up for that. the problem is, you can't know ahead of time which few this is, so you want to be invested in as many companies as possible. Missing out on these outliers is the primary risk of being an active investor.

so, you DO NOT need MPT to support index fund investing, you just need a simple understanding of markets and the nature of equity returns.

if i could have anyone manage my money, it wouldn't be samuelson, markowitz, or fama. it wouldn't even be buffett. it would be edward thorp. how he viewed the market and certainly the results of his career show without a doubt that he understood markets, he understood what it took to get an "edge," and he made a ton of money.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Earl Lemongrab » Thu Aug 30, 2018 1:04 pm

Earl Lemongrab wrote:
Wed Aug 29, 2018 1:59 pm
Wash sales - Particularly "substantially identical", where people substitute their own phrases like "substantially similar" or "substantially different".
Here's a new one from today: "substantially equivant". (sic)

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by bgf » Thu Aug 30, 2018 1:08 pm

Earl Lemongrab wrote:
Thu Aug 30, 2018 1:04 pm
Earl Lemongrab wrote:
Wed Aug 29, 2018 1:59 pm
Wash sales - Particularly "substantially identical", where people substitute their own phrases like "substantially similar" or "substantially different".
Here's a new one from today: "substantially equivant". (sic)
what i find funny is that none of those is any more absurd than the proper term "substantially identical."

identical - "similar in every detail; exactly alike"

the qualifier "substantially" doesn't do anything. something is either identical, or it is not. there is no in between. clearly written by a lawyer, or probably 12.

reminds me of the quote from The Princess Bride - "It just so happens that your friend here is only MOSTLY dead. There's a big difference between mostly dead and all dead."
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by acegolfer » Thu Aug 30, 2018 2:07 pm

bgf wrote:
Thu Aug 30, 2018 12:03 pm
so, you DO NOT need MPT to support index fund investing, you just need a simple understanding of markets and the nature of equity returns.
True. One doesn't need lots of assumptions behind MPT, CAPM to support index fund investing. Even if
1. stdev is not the right measure of risk
2. return doesn't have normally distribution,

the conclusion of index investing still holds.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Nate79 » Thu Aug 30, 2018 2:20 pm

Complete misunderstanding how to calculate the actual long term cost impact (tax inefficiency) of index mutual funds for providers other than Vanguard vs ETF/Vanguard mutual funds. I've commented on this in multiple threads but continues to be misunderstood. Index mutual funds are highly tax efficient and the impact of capital gain and dividend distributions is highly exaggerated due to the increase in cost basis due to reinvestment. You actually need to know the tax bracket now vs retirement to even know if there was any negative tax impact in the first place.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Helo80 » Thu Aug 30, 2018 2:47 pm

For lack of a better term... Expense Ratio (ER) Hypersensitivity (or Hyperaccuity or hyperawareness)

I have seen several threads (and comments in threads) about Vanguard's Investor vs. Admiral classes... and sometimes people "saving up" for Admiral and/or playing ER games to keep ER as low as possible... I think the clearest example is a guy had like $10k in assets... and was asking if he should do a 100% S&P500 domestic equities until he sufficient assets to do like a 80/20 domestic/international balance between domestic and international indices and not have to jump up to "higher" cost investor shares.

When you do the math...

$9,999 of S&P500 at 14 bp = $13.99
$10,000 of S&P500 at 4 bp = $4.00


$10/yr in fees is not going to make or break your retirement account and goes completely against the goal of a long-term investing horizon. Effectively, the literature of being aware of how much fees and ERs can add up and blunt your retirement nest egg is out there and now having the opposite of its intended effect.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by willthrill81 » Thu Aug 30, 2018 2:52 pm

azanon wrote:
Thu Aug 30, 2018 10:55 am
willthrill81 wrote:
Thu Aug 30, 2018 9:55 am
azanon wrote:
Thu Aug 30, 2018 8:12 am
If I had to pick one, it would be the notion that stocks are less risky the longer an investor plans to hold them. For me, that one rises to the top because a lot of major financial decisions (e.g. portfolio composition) are often made solely because, or primarily because, one mistakenly believes that this is true when in reality, the opposite is true.
It depends on how you define "risky." If you define it in terms of selling your investment for less than you paid for it, then history is clear that the longer you hold stocks, the less likely that is to happen. If you define it in terms of volatility, that does not go down over time.
Rephrased, the probability of a disastrous result increases with stock holding period, not decreases.
So if someone holds stocks for 30 years, they're just as likely to lose their original investment as if they held them for 1 year?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by HEDGEFUNDIE » Thu Aug 30, 2018 3:01 pm

Helo80 wrote:
Thu Aug 30, 2018 2:47 pm
For lack of a better term... Expense Ratio (ER) Hypersensitivity (or Hyperaccuity or hyperawareness)

I have seen several threads (and comments in threads) about Vanguard's Investor vs. Admiral classes... and sometimes people "saving up" for Admiral and/or playing ER games to keep ER as low as possible... I think the clearest example is a guy had like $10k in assets... and was asking if he should do a 100% S&P500 domestic equities until he sufficient assets to do like a 80/20 domestic/international balance between domestic and international indices and not have to jump up to "higher" cost investor shares.

When you do the math...

$9,999 of S&P500 at 14 bp = $13.99
$10,000 of S&P500 at 4 bp = $4.00


$10/yr in fees is not going to make or break your retirement account and goes completely against the goal of a long-term investing horizon. Effectively, the literature of being aware of how much fees and ERs can add up and blunt your retirement nest egg is out there and now having the opposite of its intended effect.
+1.

One topic I rarely see is how “total market index funds” tracking (slightly) different indicies perform against each other. I bet this has a much bigger effect than the differences in ER, which gets a ton of attention on BH.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by siamond » Thu Aug 30, 2018 4:15 pm

bgf wrote:
Thu Aug 30, 2018 12:03 pm
acegolfer wrote:
Thu Aug 30, 2018 11:01 am
I agree that actual returns have fatter tail distribution than a normal distribution suggests. But I'm curious about what is the implication of this to investing (the topic of this thread)? Specifically, explain how should we change the strategy?
That's a great question, and i think is THE question that I've been dealing with since i got interested in investing and finance. its practical and its critical. i have a lot of thoughts on this question, but it would take a lot of effort for me to organize them, support them with evidence/argument, and make them altogether clear. in short though, despite a lot of thought, i think index investing should be the backbone of my portfolio. [...]
This is a really good topic. I think it would deserve its own thread. Bgf, you don't have to explain all your thoughts on the matter in one post... What you explained with Lesson#1 and Lesson#2 was already quite fascinating. Please open a new thread and tell us a bit more...

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by dogagility » Thu Aug 30, 2018 4:29 pm

azanon wrote:
Thu Aug 30, 2018 8:12 am
If I had to pick one, it would be the notion that stocks are less risky the longer an investor plans to hold them. For me, that one rises to the top because a lot of major financial decisions (e.g. portfolio composition) are often made solely because, or primarily because, one mistakenly believes that this is true when in reality, the opposite is true.
Hmm. What is the hazard you are writing about here? That the balance at the end of your investing timeline will be lower than when you started investing? If so (or something similar), then I think exposure to that hazard (and therefore risk) decreases within an increasing timeline.
"The stock market is a device for transferring money from the impatient to the patient" -- Warren Buffett

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by arcticpineapplecorp. » Thu Aug 30, 2018 5:40 pm

CAPE

need I say more?
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by nps » Thu Aug 30, 2018 6:09 pm

dogagility wrote:
Thu Aug 30, 2018 4:29 pm
azanon wrote:
Thu Aug 30, 2018 8:12 am
If I had to pick one, it would be the notion that stocks are less risky the longer an investor plans to hold them. For me, that one rises to the top because a lot of major financial decisions (e.g. portfolio composition) are often made solely because, or primarily because, one mistakenly believes that this is true when in reality, the opposite is true.
Hmm. What is the hazard you are writing about here? That the balance at the end of your investing timeline will be lower than when you started investing? If so (or something similar), then I think exposure to that hazard (and therefore risk) decreases within an increasing timeline.
This goes back to a misunderstanding of risk, or at least the use of the term in two different contexts.

If "risk" is the eventual loss of a substantial portion of the portfolio from its prior high, then it goes up over time.

If "risk" is stocks returning less than bonds over longer time periods, that's very different.

I would suggest that having an ever larger portfolio especially after a long bull run might make investors more mindful of the first risk - even though as pointed out earlier a better risk to worry about is the risk of financial ruin.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by willthrill81 » Thu Aug 30, 2018 6:40 pm

nps wrote:
Thu Aug 30, 2018 6:09 pm
dogagility wrote:
Thu Aug 30, 2018 4:29 pm
azanon wrote:
Thu Aug 30, 2018 8:12 am
If I had to pick one, it would be the notion that stocks are less risky the longer an investor plans to hold them. For me, that one rises to the top because a lot of major financial decisions (e.g. portfolio composition) are often made solely because, or primarily because, one mistakenly believes that this is true when in reality, the opposite is true.
Hmm. What is the hazard you are writing about here? That the balance at the end of your investing timeline will be lower than when you started investing? If so (or something similar), then I think exposure to that hazard (and therefore risk) decreases within an increasing timeline.
This goes back to a misunderstanding of risk, or at least the use of the term in two different contexts.

If "risk" is the eventual loss of a substantial portion of the portfolio from its prior high, then it goes up over time.

If "risk" is stocks returning less than bonds over longer time periods, that's very different.

I would suggest that having an ever larger portfolio especially after a long bull run might make investors more mindful of the first risk - even though as pointed out earlier a better risk to worry about is the risk of financial ruin.
The other "risk" could be whether your investments have a cumulative loss over time, which is obviously not unique to stocks. History has been very clear that that risk declines over time.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by azanon » Fri Aug 31, 2018 7:11 am

dogagility wrote:
Thu Aug 30, 2018 4:29 pm
azanon wrote:
Thu Aug 30, 2018 8:12 am
If I had to pick one, it would be the notion that stocks are less risky the longer an investor plans to hold them. For me, that one rises to the top because a lot of major financial decisions (e.g. portfolio composition) are often made solely because, or primarily because, one mistakenly believes that this is true when in reality, the opposite is true.
Hmm. What is the hazard you are writing about here? That the balance at the end of your investing timeline will be lower than when you started investing? If so (or something similar), then I think exposure to that hazard (and therefore risk) decreases within an increasing timeline.
What hazard has Zvi Bodie written about? It increases with time, not decreases. That's why I chose that as my contribution to this thread.

Do you have 5 minutes? Zvi explains and addresses perfectly the point I'm trying to make in this youtube video: https://www.youtube.com/watch?v=vXtoAgmpeBA

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by azanon » Fri Aug 31, 2018 7:14 am

willthrill81 wrote:
Thu Aug 30, 2018 2:52 pm
azanon wrote:
Thu Aug 30, 2018 10:55 am
willthrill81 wrote:
Thu Aug 30, 2018 9:55 am
azanon wrote:
Thu Aug 30, 2018 8:12 am
If I had to pick one, it would be the notion that stocks are less risky the longer an investor plans to hold them. For me, that one rises to the top because a lot of major financial decisions (e.g. portfolio composition) are often made solely because, or primarily because, one mistakenly believes that this is true when in reality, the opposite is true.
It depends on how you define "risky." If you define it in terms of selling your investment for less than you paid for it, then history is clear that the longer you hold stocks, the less likely that is to happen. If you define it in terms of volatility, that does not go down over time.
Rephrased, the probability of a disastrous result increases with stock holding period, not decreases.
So if someone holds stocks for 30 years, they're just as likely to lose their original investment as if they held them for 1 year?
The distribution of possible outcomes after 30 years (including those at the negative tail) are greater than after 1 year. So when you conceptualize your risk in the stock market over longer periods of time, it's more accurate to think that risk increases with time, not decreases. Again, I'd encourage you to research Zvi Bodie if you want more background, I'm only the messenger and passing along something that professor Bodie taught me. Bodie summarizes my point in the video I linked above.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by acegolfer » Fri Aug 31, 2018 7:56 am

azanon wrote:
Fri Aug 31, 2018 7:14 am
willthrill81 wrote:
Thu Aug 30, 2018 2:52 pm
azanon wrote:
Thu Aug 30, 2018 10:55 am
willthrill81 wrote:
Thu Aug 30, 2018 9:55 am
azanon wrote:
Thu Aug 30, 2018 8:12 am
If I had to pick one, it would be the notion that stocks are less risky the longer an investor plans to hold them. For me, that one rises to the top because a lot of major financial decisions (e.g. portfolio composition) are often made solely because, or primarily because, one mistakenly believes that this is true when in reality, the opposite is true.
It depends on how you define "risky." If you define it in terms of selling your investment for less than you paid for it, then history is clear that the longer you hold stocks, the less likely that is to happen. If you define it in terms of volatility, that does not go down over time.
Rephrased, the probability of a disastrous result increases with stock holding period, not decreases.
So if someone holds stocks for 30 years, they're just as likely to lose their original investment as if they held them for 1 year?
The distribution of possible outcomes after 30 years (including those at the negative tail) are greater than after 1 year. So when you conceptualize your risk in the stock market over longer periods of time, it's more accurate to think that risk increases with time, not decreases. Again, I'd encourage you to research Zvi Bodie if you want more background, I'm only the messenger and passing along something that professor Bodie taught me. Bodie summarizes my point in the video I linked above.
To sum, we are talking about 2 different risk measurements here that lead to 2 opposite conclusions on whether risk increases or decreases over time. Here's the right conclusion for each risk measurement.

1. Stdev (dispersion of cumulative investment returns): The longer the investment, the larger the stdev. (Statistically, the stdev increases at sqrt(T) rate, not linearly)
2. Prob(cumulative return < 0) (the probability of losing original investment): The longer the investment, the less likely one will lose the original investment. This is because the mean of cumulative return increases faster than stdev.)

For anyone who is familiar with stats: To "conceptually simplify", suppose 1-yr stock return distribution ~ N ( 7%, 20%). Then 10-yr cumulative return ~ N (10 * 7%, sqrt(10) * 20%)

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by azanon » Fri Aug 31, 2018 8:02 am

acegolfer wrote:
Fri Aug 31, 2018 7:56 am
azanon wrote:
Fri Aug 31, 2018 7:14 am
willthrill81 wrote:
Thu Aug 30, 2018 2:52 pm
azanon wrote:
Thu Aug 30, 2018 10:55 am
willthrill81 wrote:
Thu Aug 30, 2018 9:55 am


It depends on how you define "risky." If you define it in terms of selling your investment for less than you paid for it, then history is clear that the longer you hold stocks, the less likely that is to happen. If you define it in terms of volatility, that does not go down over time.
Rephrased, the probability of a disastrous result increases with stock holding period, not decreases.
So if someone holds stocks for 30 years, they're just as likely to lose their original investment as if they held them for 1 year?
The distribution of possible outcomes after 30 years (including those at the negative tail) are greater than after 1 year. So when you conceptualize your risk in the stock market over longer periods of time, it's more accurate to think that risk increases with time, not decreases. Again, I'd encourage you to research Zvi Bodie if you want more background, I'm only the messenger and passing along something that professor Bodie taught me. Bodie summarizes my point in the video I linked above.
To sum, we are talking about 2 different risk measurements here that lead to 2 opposite conclusions on whether risk increases or decreases over time. Here's the right conclusion for each risk measurement.

1. Stdev (dispersion of cumulative investment returns): The longer the investment, the larger the stdev. (Statistically, the stdev increases at sqrt(T) rate, not linearly)
2. Prob(cumulative return < 0) (the probability of losing original investment): The longer the investment, the less likely one will lose the original investment. This is because the mean of cumulative return increases faster than stdev.)

For anyone who is familiar with stats: To "conceptually simplify", suppose 1-yr stock return distribution ~ N ( 7%, 20%). Then 10-yr cumulative return ~ N (10 * 7%, sqrt(10) * 20%)
And if both conclusions are statistically valid, It would be my opinion that prudence/logic would dictate that the one mathematically demonstrating the potentially more disastrous outcome would be given more weight, given the importance of one's retirement savings.

I saw it recently posted that bogleheads as a whole, are generally conservative, or not optimistic, or something to that effect. In that regard, I guess i fit the mold.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by KlangFool » Fri Aug 31, 2018 8:18 am

Folks,

I will throw some woods in the fire:

A) I am 20 years to 30 years from retirement. Hence, I can afford to be 100/0.

i) Unless a person can see his/her future, how would he/she know he/she is 20 to 30 years from retirement?

ii)"Man plan, God laughs". Life happened. There is always a possibility that some life event occurred that wiped out the emergency fund and the person needs to sell his/her investment. And, sometimes right in the stock market crash.

B) I am young and I have too little investment. Hence, I can be 100/0 and it won't matter anyhow. A young person has less money and investment. Probably smaller emergency fund too. Hence, the amount of investment that survived the stock market crash is significant. It could mean feeding the family for one extra month or stay off the street for one more month.

C) You need to survive in order to succeed. Too many folks understated that the possibility of a recession/economy crisis destroying them financially. They consider that as a "Black Swan" event instead of a normal recurring event like a hurricane. But, the USA recession occured at least once every 10 years since 1836.

KlangFool

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by acegolfer » Fri Aug 31, 2018 8:20 am

azanon wrote:
Fri Aug 31, 2018 8:02 am
And if both conclusions are statistically valid, It would be my opinion that prudence/logic would dictate that the one mathematically demonstrating the potentially more disastrous outcome would be given more weight, given the importance of one's retirement savings.

I saw it recently posted that bogleheads as a whole, are generally conservative, or not optimistic, or something to that effect. In that regard, I guess i fit the mold.
This is "one" reason why we make normal distribution assumption for stock returns. With normal distribution, one can calculate risk measurements including yours. Without making this assumption, finding the probability of losing original investment becomes much harder.

Is normal distribution assumption true? Not 100%. But the benefit of simplification outweighs. IMO, until someone can come up with a simpler methodology that can answer a lot of questions such as explaining cross section of expected returns, we will continue to rely on traditional assumptions.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by bgf » Fri Aug 31, 2018 8:28 am

acegolfer wrote:
Fri Aug 31, 2018 8:20 am
azanon wrote:
Fri Aug 31, 2018 8:02 am
And if both conclusions are statistically valid, It would be my opinion that prudence/logic would dictate that the one mathematically demonstrating the potentially more disastrous outcome would be given more weight, given the importance of one's retirement savings.

I saw it recently posted that bogleheads as a whole, are generally conservative, or not optimistic, or something to that effect. In that regard, I guess i fit the mold.
This is "one" reason why we make normal distribution assumption for stock returns. With normal distribution, one can calculate risk measurements including yours. Without making this assumption, finding the probability of losing original investment becomes much harder.

Is normal distribution assumption true? Not 100%. But the benefit of simplification outweighs. IMO, until someone can come up with a simpler methodology that can answer a lot of questions such as explaining cross section of expected returns, we will continue to rely on traditional assumptions.
the problem comes when people do not understand the limitations and likely breaking points of the assumptions and methodology. there is nothing inherently wrong with making assumptions and using standard deviation to arrive at estimations. to use it as one tool, among others. the problem comes when people lose sight of those assumptions, and seek answers to questions that are inherently beyond the scope of that method. i think everyone will agree with that theoretically. for whatever reason, we are predisposed to act otherwise in practice.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by jdb » Fri Aug 31, 2018 9:06 am

Interest rates are sure to rise.
The corollary: Bond Bubble.
Been seeing predictions of both for ten years on this site. Not even sure what a bond bubble is. Kind of like a soap bubble? Anyway, has been good reason for me to stay the course with fixed income allocation.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by siamond » Fri Aug 31, 2018 9:32 am

azanon wrote:
Fri Aug 31, 2018 7:14 am
The distribution of possible outcomes after 30 years (including those at the negative tail) are greater than after 1 year. So when you conceptualize your risk in the stock market over longer periods of time, it's more accurate to think that risk increases with time, not decreases. Again, I'd encourage you to research Zvi Bodie if you want more background, I'm only the messenger and passing along something that professor Bodie taught me. Bodie summarizes my point in the video I linked above.
The little I've read from Zvi Bodie never made any sense to me. The video you posted didn't exactly change my mind, to say the least. Yes, sure, if you geometrically combine a bunch of negative returns, you get a big negative return after a long period of time, but what does this has to do with real life? As far as I know, absolutely nothing. As to the argument that wide dispersion means increased risk, well, this is non-sensical. Take every possible positive number between 10 and 10,000. Such distribution is way better for your financial health than a single flat line at zero.

Still... for the sake of being open-minded, better informed and do justice to an eminent professor... What book or detailed paper from Zvi Bodie would you recommend to get a more in-depth grasp of his views while getting enough details about the underlying rationale?

PS. back to the OP's question, I would vote for 'risk' being the most commonly misused/misunderstood concept... Hands down...

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by willthrill81 » Fri Aug 31, 2018 9:44 am

azanon wrote:
Fri Aug 31, 2018 8:02 am
acegolfer wrote:
Fri Aug 31, 2018 7:56 am
azanon wrote:
Fri Aug 31, 2018 7:14 am
willthrill81 wrote:
Thu Aug 30, 2018 2:52 pm
azanon wrote:
Thu Aug 30, 2018 10:55 am


Rephrased, the probability of a disastrous result increases with stock holding period, not decreases.
So if someone holds stocks for 30 years, they're just as likely to lose their original investment as if they held them for 1 year?
The distribution of possible outcomes after 30 years (including those at the negative tail) are greater than after 1 year. So when you conceptualize your risk in the stock market over longer periods of time, it's more accurate to think that risk increases with time, not decreases. Again, I'd encourage you to research Zvi Bodie if you want more background, I'm only the messenger and passing along something that professor Bodie taught me. Bodie summarizes my point in the video I linked above.
To sum, we are talking about 2 different risk measurements here that lead to 2 opposite conclusions on whether risk increases or decreases over time. Here's the right conclusion for each risk measurement.

1. Stdev (dispersion of cumulative investment returns): The longer the investment, the larger the stdev. (Statistically, the stdev increases at sqrt(T) rate, not linearly)
2. Prob(cumulative return < 0) (the probability of losing original investment): The longer the investment, the less likely one will lose the original investment. This is because the mean of cumulative return increases faster than stdev.)

For anyone who is familiar with stats: To "conceptually simplify", suppose 1-yr stock return distribution ~ N ( 7%, 20%). Then 10-yr cumulative return ~ N (10 * 7%, sqrt(10) * 20%)
And if both conclusions are statistically valid, It would be my opinion that prudence/logic would dictate that the one mathematically demonstrating the potentially more disastrous outcome would be given more weight, given the importance of one's retirement savings.

I saw it recently posted that bogleheads as a whole, are generally conservative, or not optimistic, or something to that effect. In that regard, I guess i fit the mold.
I'm not sure that most investors would agree that dispersion of final outcome is the most important risk they face with stocks. When examined over long-term (e.g. 30+ year) periods, the outcomes seem to range from "That's not too bad" to "WOW! Honey, we're rich!" As long as investing in stocks over the long-term allows us to meet our investment goals at a minimum, the upside potential is just 'gravy'.
siamond wrote:
Fri Aug 31, 2018 9:32 am
Yes, sure, if you geometrically combine a bunch of negative returns, you get a big negative return after a long period of time, but what does this has to do with real life? As far as I know, absolutely nothing. As to the argument that wide dispersion means increased risk, well, this is non-sensical. Take every possible positive number between 10 and 10,000. Such distribution is way better for your financial health than a single flat line at zero.
That's my take as well. If someone invested in stocks for 40 years and then experienced a 40% drop, they would be likely to lose many dollars, but that's not the most relevant risk for this investor. Even with the 40% drop, the investor could still be far ahead of their contributions in terms of real value, and they could still be far ahead any prudent alternative. The 40% drop wouldn't 'feel good', but in no way does that mean that a different investment with a smaller dispersion of results would have been superior.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by tadamsmar » Fri Aug 31, 2018 10:30 am

MJW wrote:
Tue Aug 28, 2018 5:03 pm
Reversion to the mean – This one shows up continually and in almost every case the “mean” and corresponding timeframe are quite nebulous. It begs the question practically every time I see it used. It seems to be communicated more as an idea of the eventuality of shifting tides, or the pendulum swinging the other way, or some other metaphorical comparison.
Actually, I am not sure it is always meant to communicate the idea that the pendulum swings the other way. But think you are right that some seem to hear it that way. In this talk by John Bogle entitled "Performance and the Law of Gravity: Reversion to the Mean—Sir Isaac Newton Comes to Wall Street":

https://www.vanguard.com/bogle_site/lib/sp19980129.html

he speaks of relative and absolute reversion to the mean.

Absolute reversion: The overall stock market yearly real returns go back to 6.7%. That does not communicate a swing in the other direction. It communicates a memoryless expectation of a 6.7% return next year.

Relative reversion: This communicates not a swing in the other direction, but a memoryless tendency for two assets to have the same return next year (or the same risk-adjusted return or conform to some other norm).

That seems to be a reasonable interpretation of what Bogle is saying.

If there was some predictable swing in the other direction then that would argue in favor of timing and against staying the course.

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willthrill81
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by willthrill81 » Fri Aug 31, 2018 6:16 pm

tadamsmar wrote:
Fri Aug 31, 2018 10:30 am
MJW wrote:
Tue Aug 28, 2018 5:03 pm
Reversion to the mean – This one shows up continually and in almost every case the “mean” and corresponding timeframe are quite nebulous. It begs the question practically every time I see it used. It seems to be communicated more as an idea of the eventuality of shifting tides, or the pendulum swinging the other way, or some other metaphorical comparison.
Actually, I am not sure it is always meant to communicate the idea that the pendulum swings the other way. But think you are right that some seem to hear it that way. In this talk by John Bogle entitled "Performance and the Law of Gravity: Reversion to the Mean—Sir Isaac Newton Comes to Wall Street":

https://www.vanguard.com/bogle_site/lib/sp19980129.html

he speaks of relative and absolute reversion to the mean.

Absolute reversion: The overall stock market yearly real returns go back to 6.7%. That does not communicate a swing in the other direction. It communicates a memoryless expectation of a 6.7% return next year.

Relative reversion: This communicates not a swing in the other direction, but a memoryless tendency for two assets to have the same return next year (or the same risk-adjusted return or conform to some other norm).

That seems to be a reasonable interpretation of what Bogle is saying.

If there was some predictable swing in the other direction then that would argue in favor of timing and against staying the course.
Part of the problem may lie in different experts using very similar, if not identical, terminology to describe different phenomena.

For instance, Jeremy Siegel's use of the term "return to the mean" seems to fly in the face of Bogle's characterization of "reversion to the mean" because Siegel says that returns do not follow a random walk, whereas the 'memoryless-ness' that Bogle refers to results in a random walk.
Jeremy Siegel uses the term “return to the mean” to describe a financial time series in which "returns can be very unstable in the short run but very stable in the long run." More quantitatively, it is one in which the standard deviation of average annual returns declines faster than the inverse of the holding period, implying that the process is not a random walk, but that periods of lower returns are systematically followed by compensating periods of higher returns, in seasonal businesses for example.
https://en.wikipedia.org/wiki/Regressio ... ite_note-8
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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