Why Bull Markets Are Dangerous

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pkcrafter
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Re: Why Bull Markets Are Dangerous

Post by pkcrafter » Sun Sep 09, 2018 4:24 pm

quote="Random Walker" post_id=4110679 time=1536523662 user_id=280]
Regarding dog years and time dilation,
It’s easy to look at graphs of the market over decades, appreciate the overall trend, and think the little downward blips don’t look so bad. But those blips are frequently years in length. When we’re living in the middle of them they feel like forever. With regard to financial data 10 years is only noise. With regard to investor risk tolerance and behavior 3 years feels like 10 years.

Dave


:thumbsup

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Why Bull Markets Are Dangerous

Post by xenochrony » Sun Sep 09, 2018 4:33 pm

Duplicate post deleted.
Last edited by xenochrony on Sun Sep 09, 2018 4:35 pm, edited 1 time in total.

xenochrony
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Re: Why Bull Markets Are Dangerous

Post by xenochrony » Sun Sep 09, 2018 4:33 pm

xenochrony wrote:
Sun Sep 09, 2018 4:33 pm
nedsaid wrote:
Sat Sep 08, 2018 8:18 pm
Yes, RIck, bull markets make us all overconfident. I just laugh when people post here and say they have a high risk tolerance. That just tells me they haven't felt the pain from a bear market.

In late 1999, I felt pretty smart. In mid-2002, I wondered what the heck I was doing. Pretty much went from champ to chump.

Your mom is an indication that we might be getting too confident. But so far, I haven't heard of people quitting their jobs to day trade as they did during the late 1990's. I am not seeing the market euphoria out there but certainly optimism has increased.

I have joked a lot about the "freefall" thread and the "soar" thread. The "soar" thread popped up and almost on cue, the US Stock Market stalled. It seemed that when the "freefall" thread popped up that the markets would rally. Don't get me wrong, Boglehead threads don't move the markets. But I am making a point about market sentiment. If your 86 year old mom is feeling pretty confident about stocks, that is worrisome.
With all due respect, I'm not sure I'd concur with "all" above. With the 2008/2009 Great Recession, I suffered what now seems to be permanent mental scars from having to crawl out from losing it all: the extended unemployment, foreclosure,loss of self-esteem/value, spending down almost all assets, public support, etc. Ten years later, and I'm still very cautious waiting for "the next shoe to drop."

Overconfidence? Not in my case. My A.A has not changed one iota, but I certainly agree with you that many folks are exuding overconfidence in the lengthy bull. :happy

xenochrony

cj2018
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Re: Why Bull Markets Are Dangerous

Post by cj2018 » Sun Sep 09, 2018 4:56 pm

Engineer250 wrote:
Sun Sep 09, 2018 4:01 pm
InvestingGeek wrote:
Sun Sep 09, 2018 7:44 am
Not that it's relevant to anything I do, but I have a vague feeling this market still has a couple more years of upside before stalling. Economy's doing well, company fundamentals are good, inflation is a threat especially with tarriffs on the horizon, and we're nowhere close to the craziness of Y2K or 2006-2008.
This is my feeling as well. I am worried about high inflation (and not sure about what effect that will have on the stock market). I don't see another crash coming until 2020 at the soonest. But it's not changing anything I do. Just a hunch.
+1

Great anecdote shared by Rick, but my hunch also says another 2-3 years of good time ahead of us.

The wildcard this time? A billionaire biz guy in the White House who will not want to see his administration residing over a major crash and will fight the Fed against rate increase :) (public news already)

I’m calling at least after 2020, even after 2024 if he gets re-elected.

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Re: Why Bull Markets Are Dangerous

Post by gmaynardkrebs » Sun Sep 09, 2018 5:04 pm

nedsaid wrote:
Sun Sep 09, 2018 9:53 am
This doesn't have the feeling of euphoria.
I agree, but it does have resignation (among individual investors) and career risk cynicism with OPM ("other peoples' money" among professional investors). It doesn't have to happen for same the reasons as 1929 and the dot.com bubble, which clearly were euphoria driven. Arguably, even 2008 was more about complacency than euphoria, and unlike today, which is a valuations concern, 2008 was a first and foremost a classic run on the payment systems. If there is a crash, which frankly, I doubt, it will not be like the past, for the simple reason that people are looking for those signs.

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Re: Why Bull Markets Are Dangerous

Post by KlingKlang » Sun Sep 09, 2018 6:58 pm

flyingaway wrote:
Sun Sep 09, 2018 11:24 am
z3r0c00l wrote:
Sun Sep 09, 2018 6:00 am
That kind of everyday euphoria was pretty apparent in bitcoin last year. Still have not seen it in stocks just yet.
I felt the market euphoria in January this year and everyone was saying that there was no euphoria. I did not do anything as I was vacationing in Mexico.
For me the January 2 - 26 run-up followed by the decline was a real wakeup call to get serious about rebalancing and not just sit there fat, dumb, and happy watching my stock allocations soar.

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Re: Why Bull Markets Are Dangerous

Post by flyingaway » Sun Sep 09, 2018 7:11 pm

KlingKlang wrote:
Sun Sep 09, 2018 6:58 pm
flyingaway wrote:
Sun Sep 09, 2018 11:24 am
z3r0c00l wrote:
Sun Sep 09, 2018 6:00 am
That kind of everyday euphoria was pretty apparent in bitcoin last year. Still have not seen it in stocks just yet.
I felt the market euphoria in January this year and everyone was saying that there was no euphoria. I did not do anything as I was vacationing in Mexico.
For me the January 2 - 26 run-up followed by the decline was a real wakeup call to get serious about rebalancing and not just sit there fat, dumb, and happy watching my stock allocations soar.
Did you suggest to do some market timing?

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Re: Why Bull Markets Are Dangerous

Post by Fallible » Sun Sep 09, 2018 7:28 pm

Rick, your mom is a lucky investor to have you as an advisor and I'm sure she knows that. Thanks for sharing her concerns and your wise advice.

I also see bull-market overconfidence out there, but also what seems to be increasing bear-market under-confidence in how long the run can last, if only because it's run so long. I think the terrifying magnitude of the global financial crisis has stayed with us all, made us remember how bad things can get. And that's good if we use the experience to find the right investments we can feel confident enough in to stay the course.
"John Bogle has changed a basic industry in the optimal direction. Of very few can this be said." ~Paul A. Samuelson

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Re: Why Bull Markets Are Dangerous

Post by dogagility » Sun Sep 09, 2018 8:33 pm

Elysium wrote:
Sun Sep 09, 2018 10:15 am
siamond wrote:
Sun Sep 09, 2018 9:58 am
once you go past the usual non-sense that risk==volatility and use the proper time horizon (the next generation, not hers) to think about it.
If only it was true that risk is volatility.

Fallacy of Time Diversification:
https://www.slcg.com/pdf/practicenotes/ ... 0_2005.pdf

It seems like Rick's mothers portfolio is following the age in bonds rule based on her son's age and not hers. So after all I guess he knows what he is doing.
The example in the linked pdf shows a 2-year time horizon. This length isn't what siamond was referring to (more like 10 years or longer).
I agree with siamond that risk isn't equal to volatility, and Rick's mom has a good mind for investing.
Taking "risk" since 1995.

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Re: Why Bull Markets Are Dangerous

Post by Elysium » Sun Sep 09, 2018 8:44 pm

dogagility wrote:
Sun Sep 09, 2018 8:33 pm
Elysium wrote:
Sun Sep 09, 2018 10:15 am
siamond wrote:
Sun Sep 09, 2018 9:58 am
once you go past the usual non-sense that risk==volatility and use the proper time horizon (the next generation, not hers) to think about it.
If only it was true that risk is volatility.

Fallacy of Time Diversification:
https://www.slcg.com/pdf/practicenotes/ ... 0_2005.pdf

It seems like Rick's mothers portfolio is following the age in bonds rule based on her son's age and not hers. So after all I guess he knows what he is doing.
The example in the linked pdf shows a 2-year time horizon. This length isn't what siamond was referring to (more like 10 years or longer).
I agree with siamond that risk isn't equal to volatility, and Rick's mom has a good mind for investing.
I just linked one of the samples, there are others with larger time frames and larger data samples. But you do know this is a really well known concept about Fallacy of Time Diversification, I guess.

InvestInLife
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Re: Why Bull Markets Are Dangerous

Post by InvestInLife » Sun Sep 09, 2018 8:59 pm

lostdog wrote:
Sun Sep 09, 2018 6:51 am
Noise. No one knows nothing. Stick to your plan and stay the course. Bye.
+1

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fortyofforty
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Re: Why Bull Markets Are Dangerous

Post by fortyofforty » Sun Sep 09, 2018 9:09 pm

The problem is my barista gave me stock tips in January.

My Uber driver told me about his portfolio in March.

My dog-walker explained options and futures trading to me in May.

My newspaper delivery driver told me about emerging market debt in July.

When do I sell? When is the "top" and when is it too late? Everyone could "feel" the market is toppy, but somehow the market keeps climbing, so it wasn't, really. It's easy after the fact to call a market top. Same with a bear market bottom.

My personal favorite signal of a top is when e*Trade starts advertising examples of great wealth gained through stock trading, so, why not give it a try? "Don't get mad. Get e*Trade", they say. The dumbest guy in high school has a big yacht. How hard can it be? Well, those ads have been running for months. Lucky I didn't cash out when they started.

Nobody knows nothin'.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

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gmaynardkrebs
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Re: Why Bull Markets Are Dangerous

Post by gmaynardkrebs » Sun Sep 09, 2018 9:39 pm

fortyofforty wrote:
Sun Sep 09, 2018 9:09 pm
The problem is my barista gave me stock tips in January.

My Uber driver told me about his portfolio in March.

My dog-walker explained options and futures trading to me in May.

My newspaper delivery driver told me about emerging market debt in July.

When do I sell? When is the "top" and when is it too late? Everyone could "feel" the market is toppy, but somehow the market keeps climbing, so it wasn't, really. It's easy after the fact to call a market top. Same with a bear market bottom.

My personal favorite signal of a top is when e*Trade starts advertising examples of great wealth gained through stock trading, so, why not give it a try? "Don't get mad. Get e*Trade", they say. The dumbest guy in high school has a big yacht. How hard can it be? Well, those ads have been running for months. Lucky I didn't cash out when they started.

Nobody knows nothin'.
My shoeshine boy gave me a stock tip in 1927. Sorry I stayed the course.

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dogagility
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Re: Why Bull Markets Are Dangerous

Post by dogagility » Mon Sep 10, 2018 5:51 am

Elysium wrote:
Sun Sep 09, 2018 8:44 pm
I just linked one of the samples, there are others with larger time frames and larger data samples. But you do know this is a really well known concept about Fallacy of Time Diversification, I guess.
It's an interesting topic. If risk is defined as the hazard of losing principle, one's exposure to that hazard seems to decrease with increasing lengths of investing time. According to the vanguard white paper on the topic, "no 20-year historical period has produced a negative cumulative return". History may not repeat itself, and one's definition of risk may be different. https://www.vanguard.com/pdf/icrtd.pdf?2210045172
Taking "risk" since 1995.

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KlingKlang
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Re: Why Bull Markets Are Dangerous

Post by KlingKlang » Mon Sep 10, 2018 6:59 am

flyingaway wrote:
Sun Sep 09, 2018 7:11 pm
KlingKlang wrote:
Sun Sep 09, 2018 6:58 pm
flyingaway wrote:
Sun Sep 09, 2018 11:24 am
z3r0c00l wrote:
Sun Sep 09, 2018 6:00 am
That kind of everyday euphoria was pretty apparent in bitcoin last year. Still have not seen it in stocks just yet.
I felt the market euphoria in January this year and everyone was saying that there was no euphoria. I did not do anything as I was vacationing in Mexico.
For me the January 2 - 26 run-up followed by the decline was a real wakeup call to get serious about rebalancing and not just sit there fat, dumb, and happy watching my stock allocations soar.
Did you suggest to do some market timing?
I suggest being vigilant about keeping allocations on plan. My planned stock allocation was 55% and market moves had pushed my actual allocation up to 64%. The $500/month that I was transferring from stock funds to fixed income wasn't putting a dent in that. Changed that to $5000/month.

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gmaynardkrebs
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Re: Why Bull Markets Are Dangerous

Post by gmaynardkrebs » Mon Sep 10, 2018 7:27 am

dogagility wrote:
Mon Sep 10, 2018 5:51 am
... If risk is defined as the hazard of losing principle, one's exposure to that hazard seems to decrease with increasing lengths of investing time. ....
Not quite. Although the probability of losing money in stocks is lower over longer investment horizons than shorter ones, the size of the potential loss increases. That is why it is prudent for everyone to have a plan B for highly negative scenarios. Everyone likes the Plan A part, but many are in denial about Plan B, because it's expensive and hard to achieve.

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vineviz
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Re: Why Bull Markets Are Dangerous

Post by vineviz » Mon Sep 10, 2018 8:07 am

Elysium wrote:
Sun Sep 09, 2018 8:44 pm
I just linked one of the samples, there are others with larger time frames and larger data samples. But you do know this is a really well known concept about Fallacy of Time Diversification, I guess.
Time diversification is not a "fallacy".

You could probably go so far as to say there is some controversy or maybe even a puzzle about time diversification in investment returns, but for the most part the controversy boils down to the two camps talking about different things in such a way that even a fairly intelligent non-economist can walk away from the discussion confused.

IMHO, the economists in the "fallacy" camp are generally misspecifying the model of investor preference: they are either measuring variance in a manner that is technically correct but fails to reflect investor objectives, or they are assuming an expected utility function that is at odds with the function exhibited by actual investors.

In their 2016 literature review "The Time Diversification Puzzle: A Survey", Bianchi et al. offers fairly comprehensive and (I think) balanced look at the literature on the topic.

https://core.ac.uk/download/pdf/143904276.pdf
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Why Bull Markets Are Dangerous

Post by jadd806 » Mon Sep 10, 2018 8:30 am

It's worth noting that the S&P 500 almost exactly doubled in the years following Alan Greenspan gave his famous "irrational exuberance" speech in December of 1996.

I'll stick with 100% equities until I approach the point where expected returns eclipse my contributions. Until then I've got time, human capital, and Jack's advice to "stay the course" on my side.

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vineviz
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Re: Why Bull Markets Are Dangerous

Post by vineviz » Mon Sep 10, 2018 8:40 am

gmaynardkrebs wrote:
Mon Sep 10, 2018 7:27 am
dogagility wrote:
Mon Sep 10, 2018 5:51 am
... If risk is defined as the hazard of losing principle, one's exposure to that hazard seems to decrease with increasing lengths of investing time. ....
Not quite. Although the probability of losing money in stocks is lower over longer investment horizons than shorter ones, the size of the potential loss increases. That is why it is prudent for everyone to have a plan B for highly negative scenarios. Everyone likes the Plan A part, but many are in denial about Plan B, because it's expensive and hard to achieve.
That's not what history shows us. Using stock returns from 1930 to present, the largest loss with a holding period of 1 years was 67.5% whereas the largest loss with a holding period of 10 years was just 25.8%.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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gmaynardkrebs
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Re: Why Bull Markets Are Dangerous

Post by gmaynardkrebs » Mon Sep 10, 2018 8:55 am

vineviz wrote:
Mon Sep 10, 2018 8:40 am
gmaynardkrebs wrote:
Mon Sep 10, 2018 7:27 am
dogagility wrote:
Mon Sep 10, 2018 5:51 am
... If risk is defined as the hazard of losing principle, one's exposure to that hazard seems to decrease with increasing lengths of investing time. ....
Not quite. Although the probability of losing money in stocks is lower over longer investment horizons than shorter ones, the size of the potential loss increases. That is why it is prudent for everyone to have a plan B for highly negative scenarios. Everyone likes the Plan A part, but many are in denial about Plan B, because it's expensive and hard to achieve.
That's not what history shows us. Using stock returns from 1930 to present, the largest loss with a holding period of 1 years was 67.5% whereas the largest loss with a holding period of 10 years was just 25.8%.
I know that.

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Re: Why Bull Markets Are Dangerous

Post by KlangFool » Mon Sep 10, 2018 9:14 am

vineviz wrote:
Mon Sep 10, 2018 8:40 am
gmaynardkrebs wrote:
Mon Sep 10, 2018 7:27 am
dogagility wrote:
Mon Sep 10, 2018 5:51 am
... If risk is defined as the hazard of losing principle, one's exposure to that hazard seems to decrease with increasing lengths of investing time. ....
Not quite. Although the probability of losing money in stocks is lower over longer investment horizons than shorter ones, the size of the potential loss increases. That is why it is prudent for everyone to have a plan B for highly negative scenarios. Everyone likes the Plan A part, but many are in denial about Plan B, because it's expensive and hard to achieve.
That's not what history shows us. Using stock returns from 1930 to present, the largest loss with a holding period of 1 years was 67.5% whereas the largest loss with a holding period of 10 years was just 25.8%.
vineviz,

Let's say you plan to retire at year 10, at year 9, you have only 1 more year to go. So, your holding period is only 1 year. If losing 67.5% of the stock portion is not acceptable and you cannot reach your financial goal, the risk is not acceptable.

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Re: Why Bull Markets Are Dangerous

Post by 2015 » Mon Sep 10, 2018 9:17 am

Bear markets are just as dangerous as bull markets because people will always be too busy focusing on markets when they should be busy focusing on increasing self-knowledge.

In investing, personal behavior is vastly more important than market activity. Understanding "Jack's latest prediction" is comical compared to understanding one's own unreliable reactions.

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Re: Why Bull Markets Are Dangerous

Post by KlangFool » Mon Sep 10, 2018 9:25 am

jadd806 wrote:
Mon Sep 10, 2018 8:30 am
It's worth noting that the S&P 500 almost exactly doubled in the years following Alan Greenspan gave his famous "irrational exuberance" speech in December of 1996.

I'll stick with 100% equities until I approach the point where expected returns eclipse my contributions. Until then I've got time, human capital, and Jack's advice to "stay the course" on my side.
jadd806,

How is that supposed to work? What is your expected return? What is your contribution?

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Re: Why Bull Markets Are Dangerous

Post by willthrill81 » Mon Sep 10, 2018 9:26 am

2015 wrote:
Mon Sep 10, 2018 9:17 am
Bear markets are just as dangerous as bull markets because people will always be too busy focusing on markets when they should be busy focusing on increasing self-knowledge.

In investing, personal behavior is vastly more important than market activity. Understanding "Jack's latest prediction" is comical compared to understanding one's own unreliable reactions.
You beat me to it! Bear markets are indeed dangerous because they too can lead to poor investor behavior, especially panic selling, which is arguably worse than only buying at the top as the example of the 'world's worst market timer' demonstrated.

The bottom line is that investing is risky business, in bull and bear markets, in the short- and long-term, with stocks and bonds, etc. There are always risks at play that could really hurt the investor if they reared their ugly head. But even so, a failure to invest is often even more dangerous, especially over the long-term.
“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: Why Bull Markets Are Dangerous

Post by willthrill81 » Mon Sep 10, 2018 9:30 am

siamond wrote:
Sun Sep 09, 2018 9:58 am
I don't know... Maybe the old lady is a bit wiser than her son is giving her credit for... Quite clearly, she's been primarily investing for him and his time horizon ("You’re going to get it all anyway, so you do what’s best.”). Quite clearly, she's been following his advice for a long time (same quote + well-know financial adviser son + 20 years of using such AA, etc). The old lady has a loooong life of experience (86 years old, and clearly still trying hard to think on her own) and her observation that stocks earned much more is obviously based on much more than a few months or years of watching the market (" It always seems to do better").

There is very little question that a sound risk/reward assessment in such context would indicate that a higher stock exposure would have been a better decision, once you go past the usual non-sense that risk==volatility and use the proper time horizon (the next generation, not hers) to think about it. Maybe she was simply expressing some frustration that she could have done better for a bequest goal if she had followed her instincts decades ago. And she would have, irrespective of the recent bull market. The wisdom of my own grandfather (who lived till 99), who had been burned by bonds after WW-II and then the oil crisis, and held a diverse portfolio of stocks for his entire life, impressed me very much. I would never dismiss the wisdom of some old folks. Maybe her son should listen to her a little bit more carefully.
:sharebeer

I know which investment I would have preferred over the last 50 years.

One could argue that a 30+ year bond bull market has lulled some into thinking that they're safer than they really are.
“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: Why Bull Markets Are Dangerous

Post by vineviz » Mon Sep 10, 2018 10:15 am

KlangFool wrote:
Mon Sep 10, 2018 9:14 am
vineviz wrote:
Mon Sep 10, 2018 8:40 am
gmaynardkrebs wrote:
Mon Sep 10, 2018 7:27 am
dogagility wrote:
Mon Sep 10, 2018 5:51 am
... If risk is defined as the hazard of losing principle, one's exposure to that hazard seems to decrease with increasing lengths of investing time. ....
Not quite. Although the probability of losing money in stocks is lower over longer investment horizons than shorter ones, the size of the potential loss increases. That is why it is prudent for everyone to have a plan B for highly negative scenarios. Everyone likes the Plan A part, but many are in denial about Plan B, because it's expensive and hard to achieve.
That's not what history shows us. Using stock returns from 1930 to present, the largest loss with a holding period of 1 years was 67.5% whereas the largest loss with a holding period of 10 years was just 25.8%.
vineviz,

Let's say you plan to retire at year 10, at year 9, you have only 1 more year to go. So, your holding period is only 1 year. If losing 67.5% of the stock portion is not acceptable and you cannot reach your financial goal, the risk is not acceptable.

KlangFool
I think that's exactly my point: the longer your investment horizon, the less likely it is that you'll experience a catastrophic loss over that period of time.

No one here is suggesting what you've described, which is an investor one year from retirement being 100% in stocks.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Why Bull Markets Are Dangerous

Post by KlangFool » Mon Sep 10, 2018 10:19 am

vineviz wrote:
Mon Sep 10, 2018 10:15 am
KlangFool wrote:
Mon Sep 10, 2018 9:14 am
vineviz wrote:
Mon Sep 10, 2018 8:40 am
gmaynardkrebs wrote:
Mon Sep 10, 2018 7:27 am
dogagility wrote:
Mon Sep 10, 2018 5:51 am
... If risk is defined as the hazard of losing principle, one's exposure to that hazard seems to decrease with increasing lengths of investing time. ....
Not quite. Although the probability of losing money in stocks is lower over longer investment horizons than shorter ones, the size of the potential loss increases. That is why it is prudent for everyone to have a plan B for highly negative scenarios. Everyone likes the Plan A part, but many are in denial about Plan B, because it's expensive and hard to achieve.
That's not what history shows us. Using stock returns from 1930 to present, the largest loss with a holding period of 1 years was 67.5% whereas the largest loss with a holding period of 10 years was just 25.8%.
vineviz,

Let's say you plan to retire at year 10, at year 9, you have only 1 more year to go. So, your holding period is only 1 year. If losing 67.5% of the stock portion is not acceptable and you cannot reach your financial goal, the risk is not acceptable.

KlangFool
I think that's exactly my point: the longer your investment horizon, the less likely it is that you'll experience a catastrophic loss over that period of time.

No one here is suggesting what you've described, which is an investor one year from retirement being 100% in stocks.
vineviz,

How does anyone know what their investment horizon is? Since we cannot see the future, a balanced and less risky approach might be prudent.

<<No one here is suggesting what you've described, which is an investor one year from retirement being 100% in stocks.>>

Then, as per your example, the person could not be 100% for the whole 10 years.

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Re: Why Bull Markets Are Dangerous

Post by vineviz » Mon Sep 10, 2018 11:03 am

KlangFool wrote:
Mon Sep 10, 2018 10:19 am
How does anyone know what their investment horizon is?
Obviously no one "knows" the future yet every one of us is constantly planning for the future nonetheless. I don't "know" when I'm going to buy my next car but I save and invest according to my best expectation. I don't "know" what the temperature is going to be this afternoon, but I still managed to get dressed this morning based on the weather forecast (and a quick glance out the window).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Why Bull Markets Are Dangerous

Post by KlangFool » Mon Sep 10, 2018 11:09 am

vineviz wrote:
Mon Sep 10, 2018 11:03 am
KlangFool wrote:
Mon Sep 10, 2018 10:19 am
How does anyone know what their investment horizon is?
Obviously no one "knows" the future yet every one of us is constantly planning for the future nonetheless. I don't "know" when I'm going to buy my next car but I save and invest according to my best expectation. I don't "know" what the temperature is going to be this afternoon, but I still managed to get dressed this morning based on the weather forecast (and a quick glance out the window).
vineviz,

I always leave an umbrella in my car. I do not need to know whether it is going to rain.

Meanwhile, some folks use a sunny day forecast to assume that they have 20 years to 30 years investment horizon. There is no safety margin in their forecast.

<< I save and invest according to my best expectation.>>

Why? A realistic or reasonable expectation is probably better planning. Planning to be lucky is not a good strategy.

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Re: Why Bull Markets Are Dangerous

Post by vineviz » Mon Sep 10, 2018 11:20 am

KlangFool wrote:
Mon Sep 10, 2018 11:09 am
I always leave an umbrella in my car. I do not need to know whether it is going to rain.
Good for you.
KlangFool wrote:
Mon Sep 10, 2018 11:09 am
Planning to be lucky is not a good strategy.
That's probably why no one is suggesting "planning to be lucky" as an investment strategy. I honestly can't tell who or what you are trying to argue against, but I'm pretty sure it's not me or anything I wrote.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Why Bull Markets Are Dangerous

Post by willthrill81 » Mon Sep 10, 2018 11:40 am

vineviz wrote:
Mon Sep 10, 2018 11:20 am
KlangFool wrote:
Mon Sep 10, 2018 11:09 am
I always leave an umbrella in my car. I do not need to know whether it is going to rain.
Good for you.
KlangFool wrote:
Mon Sep 10, 2018 11:09 am
Planning to be lucky is not a good strategy.
That's probably why no one is suggesting "planning to be lucky" as an investment strategy. I honestly can't tell who or what you are trying to argue against, but I'm pretty sure it's not me or anything I wrote.
If you'll pardon my stepping in for the sake of clarification, KlangFool has experienced long periods of unemployment and believes that it is appropriate to always have one's AA set appropriately for the withdrawal phase since one never knows when withdrawals will be necessary.
“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: Why Bull Markets Are Dangerous

Post by KlangFool » Mon Sep 10, 2018 11:42 am

vineviz wrote:
Mon Sep 10, 2018 11:20 am
KlangFool wrote:
Mon Sep 10, 2018 11:09 am
I always leave an umbrella in my car. I do not need to know whether it is going to rain.
Good for you.
KlangFool wrote:
Mon Sep 10, 2018 11:09 am
Planning to be lucky is not a good strategy.
That's probably why no one is suggesting "planning to be lucky" as an investment strategy. I honestly can't tell who or what you are trying to argue against, but I'm pretty sure it's not me or anything I wrote.
vineviz,

Let's take any number of years for discussion. For example, 10 years.

Folks will say that 10 years expected return of 100/0 is X%. But, it is crazy to be 100/0 at year 9. So, the holding period will never be 10 years. Then, the person could not use the X% as per their planning. You could reuse the same argument for 20 years or 30 years.

Whoever is using X% for 10 years as per their planning process is hoping to be lucky. Aka, they enjoy the expected X% return all the way up to year 9 and they get to change their AA to something other than 100/0 right before the possible 50%/60+% drop. They are market timing.

Statistical Expected return failed in the real world of the individual's Sequence of Return Risk.

KlangFool

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Re: Why Bull Markets Are Dangerous

Post by marcopolo » Mon Sep 10, 2018 12:13 pm

KlangFool wrote:
Mon Sep 10, 2018 11:09 am
vineviz wrote:
Mon Sep 10, 2018 11:03 am
KlangFool wrote:
Mon Sep 10, 2018 10:19 am
How does anyone know what their investment horizon is?
Obviously no one "knows" the future yet every one of us is constantly planning for the future nonetheless. I don't "know" when I'm going to buy my next car but I save and invest according to my best expectation. I don't "know" what the temperature is going to be this afternoon, but I still managed to get dressed this morning based on the weather forecast (and a quick glance out the window).
vineviz,

I always leave an umbrella in my car. I do not need to know whether it is going to rain.

Meanwhile, some folks use a sunny day forecast to assume that they have 20 years to 30 years investment horizon. There is no safety margin in their forecast.

<< I save and invest according to my best expectation.>>

Why? A realistic or reasonable expectation is probably better planning. Planning to be lucky is not a good strategy.

KlangFool
Klangfool,

At the risk of putting words into vineviz's mouth, I think you may have misunderstood what he meant by "best expectation". I don't think he meant the "most favorable" outcome, but rather the his best guess/estimate of likely outcomes. Hopefully that has the level of realistic and reasonable expectation that you correctly state is probably better for planning.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Why Bull Markets Are Dangerous

Post by vineviz » Mon Sep 10, 2018 12:30 pm

KlangFool wrote:
Mon Sep 10, 2018 11:42 am
Let's take any number of years for discussion. For example, 10 years.

Folks will say that 10 years expected return of 100/0 is X%. But, it is crazy to be 100/0 at year 9. So, the holding period will never be 10 years. Then, the person could not use the X% as per their planning. You could reuse the same argument for 20 years or 30 years.

Whoever is using X% for 10 years as per their planning process is hoping to be lucky. Aka, they enjoy the expected X% return all the way up to year 9 and they get to change their AA to something other than 100/0 right before the possible 50%/60+% drop. They are market timing.
This example seems to be based on several points of confusion, some of them about the financial concepts involved and some of them about the point we were discussing.

First, "investment horizon" just shorthand for a concept that is roughly equivalent to "average expected holding period". The precision with which an investor can estimate their investment horizon surely varies from situation to situation, but constructing an estimate isn't all that difficult. If you are saving up a down payment for a house you expect to buy in 2024, then your investment horizon is roughly six years. If you are 50 years old and expect to retire at age 70 then your investment horizon is roughly 30 years.

Second, investment horizon is just one factor that an investor would use in constructing their asset allocation but it is an important one. As the investment horizon contracts, I'd expect the rational investor to adjust their asset allocation accordingly. I'd also expect them to do it somewhat smoothly and not wait until T-1 to make a radical change.

Third, nowhere did I or anyone else suggest that 100% equity is a reasonable asset allocation with a 10 year investment horizon. I would, however, feel comfortable suggesting that an investor with a 10 year investment horizon should probably allocate MORE to equities than someone with a 1 year investment horizon. That might be the difference between 0% and 20%, but directionally it's still true: the longer the investment horizon the more equity risk an investor should be able to take on.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: Why Bull Markets Are Dangerous

Post by vineviz » Mon Sep 10, 2018 12:32 pm

marcopolo wrote:
Mon Sep 10, 2018 12:13 pm
At the risk of putting words into vineviz's mouth, I think you may have misunderstood what he meant by "best expectation". I don't think he meant the "most favorable" outcome, but rather the his best guess/estimate of likely outcomes.
Thanks for adding that. I did mean something much more akin to "highest quality" or "most likely" rather than "most optimistic".
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Why Bull Markets Are Dangerous

Post by jadd806 » Mon Sep 10, 2018 12:40 pm

KlangFool wrote:
Mon Sep 10, 2018 9:25 am
jadd806 wrote:
Mon Sep 10, 2018 8:30 am
It's worth noting that the S&P 500 almost exactly doubled in the years following Alan Greenspan gave his famous "irrational exuberance" speech in December of 1996.

I'll stick with 100% equities until I approach the point where expected returns eclipse my contributions. Until then I've got time, human capital, and Jack's advice to "stay the course" on my side.
jadd806,

How is that supposed to work? What is your expected return? What is your contribution?

KlangFool
What do you mean how is it supposed to work? X = some reasonable rate of return, say 7% nominal annually. Y = my contributions as a percentage of the total portfolio value. As Y --> X my contributions become responsible for a smaller portion of the portfolio's growth and market returns take over as the dominant force.

Because my savings rate is high and my portfolio is relatively small, it is growing at 4% per month just based off my contributions. It makes very little difference what my asset allocation is right now.

Rather than using some silly generic rule like "age in bonds" I think this is a better way to determine when I need to consider adding bonds to my portfolio.

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Re: Why Bull Markets Are Dangerous

Post by KlangFool » Mon Sep 10, 2018 12:42 pm

vineviz wrote:
Mon Sep 10, 2018 12:30 pm
KlangFool wrote:
Mon Sep 10, 2018 11:42 am
Let's take any number of years for discussion. For example, 10 years.

Folks will say that 10 years expected return of 100/0 is X%. But, it is crazy to be 100/0 at year 9. So, the holding period will never be 10 years. Then, the person could not use the X% as per their planning. You could reuse the same argument for 20 years or 30 years.

Whoever is using X% for 10 years as per their planning process is hoping to be lucky. Aka, they enjoy the expected X% return all the way up to year 9 and they get to change their AA to something other than 100/0 right before the possible 50%/60+% drop. They are market timing.
This example seems to be based on several points of confusion, some of them about the financial concepts involved and some of them about the point we were discussing.

First, "investment horizon" just shorthand for a concept that is roughly equivalent to "average expected holding period". The precision with which an investor can estimate their investment horizon surely varies from situation to situation, but constructing an estimate isn't all that difficult. If you are saving up a down payment for a house you expect to buy in 2024, then your investment horizon is roughly six years. If you are 50 years old and expect to retire at age 70 then your investment horizon is roughly 30 years.
vineviz ,

<<First, "investment horizon" just shorthand for a concept that is roughly equivalent to "average expected holding period". >>

<< If you are 50 years old and expect to retire at age 70 then your investment horizon is roughly 30 years.>>

Isn't that the problem? "Man plan, God laughs". The whole basis is based on the assumption that the reality matched the assumption. Aka, a person is continuously employed until a certain age. Or, the unemployment period does not last longer than the emergency fund. Not many folks can confidently predict that they could survive multiple recessions and/or the economic crisis over 20 to 30 years without significant unemployment. But, they still assume the investment horizon of 20 to 30 years.

The whole "Investment Horizon" is a flawed concept in the context of personal finance anyhow. It works for the economist since we are just a statistic. But, at the micro/individual level, it failed.

KlangFool

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Re: Why Bull Markets Are Dangerous

Post by KlangFool » Mon Sep 10, 2018 12:54 pm

jadd806 wrote:
Mon Sep 10, 2018 12:40 pm
KlangFool wrote:
Mon Sep 10, 2018 9:25 am
jadd806 wrote:
Mon Sep 10, 2018 8:30 am
It's worth noting that the S&P 500 almost exactly doubled in the years following Alan Greenspan gave his famous "irrational exuberance" speech in December of 1996.

I'll stick with 100% equities until I approach the point where expected returns eclipse my contributions. Until then I've got time, human capital, and Jack's advice to "stay the course" on my side.
jadd806,

How is that supposed to work? What is your expected return? What is your contribution?

KlangFool
What do you mean how is it supposed to work? X = some reasonable rate of return, say 7% nominal annually. Y = my contributions as a percentage of the total portfolio value. As Y --> X my contributions become responsible for a smaller portion of the portfolio's growth and market returns take over as the dominant force.

Because my savings rate is high and my portfolio is relatively small, it is growing at 4% per month just based off my contributions. It makes very little difference what my asset allocation is right now.

Rather than using some silly generic rule like "age in bonds" I think this is a better way to determine when I need to consider adding bonds to my portfolio.
jadd806,

Let's assume that your annual contribution is 30K per year. Based on your system, you should add bond when your portfolio is around 430K. But, if the stock market drops 50%, it will wipe out 7 years of contribution. Do you have another 7 years of earning if that happened?

I was 100% stock about 10+ years ago. Besides 50% stock drops, I lost my job security. I was facing annual and quarterly laid off for 10+ years. I was unemployed for more than 1 years a few times. I capitulated. I lost 50% of my whole life savings 10+ years ago. But, I am still luckier than most of my peers. I was employed long enough to recover. Many of my peers are permanently unemployed and under-employed in their 40s and 50s. They never recovered.

I switched to 70/30 10+ years ago. I made a bad assumption. I assumed that I had job security.

KlangFool

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Re: Why Bull Markets Are Dangerous

Post by CraigTester » Mon Sep 10, 2018 12:55 pm

One of my "clues" came from another thread on this site.

People were really lecturing a commenter who came on this site around 2015 announcing they pulled out of the stock market because of high valuations.

More recently, someone reposted the thread and lots of "experts" jumped in to give this lost soul a stern talking to.

Some went on to do a little math and point out just how big the opportunity cost had grown.

Others chimed in sympathetically nodding how sad it was.

It's going to be interesting when some of these experts figure out that if you start with a $1,

Grow it by 50% to $1.50.

And then go on to lose that same 50%...,

You wind up with $0.75

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Re: Why Bull Markets Are Dangerous

Post by jadd806 » Mon Sep 10, 2018 1:21 pm

KlangFool wrote:
Mon Sep 10, 2018 12:54 pm
jadd806 wrote:
Mon Sep 10, 2018 12:40 pm
KlangFool wrote:
Mon Sep 10, 2018 9:25 am
jadd806 wrote:
Mon Sep 10, 2018 8:30 am
It's worth noting that the S&P 500 almost exactly doubled in the years following Alan Greenspan gave his famous "irrational exuberance" speech in December of 1996.

I'll stick with 100% equities until I approach the point where expected returns eclipse my contributions. Until then I've got time, human capital, and Jack's advice to "stay the course" on my side.
jadd806,

How is that supposed to work? What is your expected return? What is your contribution?

KlangFool
What do you mean how is it supposed to work? X = some reasonable rate of return, say 7% nominal annually. Y = my contributions as a percentage of the total portfolio value. As Y --> X my contributions become responsible for a smaller portion of the portfolio's growth and market returns take over as the dominant force.

Because my savings rate is high and my portfolio is relatively small, it is growing at 4% per month just based off my contributions. It makes very little difference what my asset allocation is right now.

Rather than using some silly generic rule like "age in bonds" I think this is a better way to determine when I need to consider adding bonds to my portfolio.
jadd806,

Let's assume that your annual contribution is 30K per year. Based on your system, you should add bond when your portfolio is around 430K. But, if the stock market drops 50%, it will wipe out 7 years of contribution. Do you have another 7 years of earning if that happened?

I was 100% stock about 10+ years ago. Besides 50% stock drops, I lost my job security. I was facing annual and quarterly laid off for 10+ years. I was unemployed for more than 1 years a few times. I capitulated. I lost 50% of my whole life savings 10+ years ago. But, I am still luckier than most of my peers. I was employed long enough to recover. Many of my peers are permanently unemployed and under-employed in their 40s and 50s. They never recovered.

I switched to 70/30 10+ years ago. I made a bad assumption. I assumed that I had job security.

KlangFool
Okay, and if I'm 70/30 in your example it still wipes out 5 years of contributions in a 50% drop. So the bonds only "save" me 2 years. And I get to suffer the drag on returns of holding 30% of my portfolio in bonds such that I probably end up with less money in the end compared to 100% equities. And none of the above matters if I don't have to sell - bonds have value for liability matching and little else.

I see your point about job loss but it's not worth worrying about in my position. I'm not going to reveal exactly what I do, but it's probably in the top 1% for job security in the country.

I can likely work for 40+ years if need be. I'll also have a pension at retirement. I really don't think 100% equities is that outrageous in my position.

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Re: Why Bull Markets Are Dangerous

Post by WhiteMaxima » Mon Sep 10, 2018 1:26 pm

yes bull are dangerous. We are eating tomorrow's meal today. A bull will be end with a bear. A strong bull will end with a severe bear. That's the nature. I would say keep a balanced AA in any market. for seniors, no more than 50/50.
Last edited by WhiteMaxima on Mon Sep 10, 2018 1:41 pm, edited 1 time in total.

KlangFool
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Re: Why Bull Markets Are Dangerous

Post by KlangFool » Mon Sep 10, 2018 1:26 pm

jadd806 wrote:
Mon Sep 10, 2018 1:21 pm
KlangFool wrote:
Mon Sep 10, 2018 12:54 pm
jadd806 wrote:
Mon Sep 10, 2018 12:40 pm
KlangFool wrote:
Mon Sep 10, 2018 9:25 am
jadd806 wrote:
Mon Sep 10, 2018 8:30 am
It's worth noting that the S&P 500 almost exactly doubled in the years following Alan Greenspan gave his famous "irrational exuberance" speech in December of 1996.

I'll stick with 100% equities until I approach the point where expected returns eclipse my contributions. Until then I've got time, human capital, and Jack's advice to "stay the course" on my side.
jadd806,

How is that supposed to work? What is your expected return? What is your contribution?

KlangFool
What do you mean how is it supposed to work? X = some reasonable rate of return, say 7% nominal annually. Y = my contributions as a percentage of the total portfolio value. As Y --> X my contributions become responsible for a smaller portion of the portfolio's growth and market returns take over as the dominant force.

Because my savings rate is high and my portfolio is relatively small, it is growing at 4% per month just based off my contributions. It makes very little difference what my asset allocation is right now.

Rather than using some silly generic rule like "age in bonds" I think this is a better way to determine when I need to consider adding bonds to my portfolio.
jadd806,

Let's assume that your annual contribution is 30K per year. Based on your system, you should add bond when your portfolio is around 430K. But, if the stock market drops 50%, it will wipe out 7 years of contribution. Do you have another 7 years of earning if that happened?

I was 100% stock about 10+ years ago. Besides 50% stock drops, I lost my job security. I was facing annual and quarterly laid off for 10+ years. I was unemployed for more than 1 years a few times. I capitulated. I lost 50% of my whole life savings 10+ years ago. But, I am still luckier than most of my peers. I was employed long enough to recover. Many of my peers are permanently unemployed and under-employed in their 40s and 50s. They never recovered.

I switched to 70/30 10+ years ago. I made a bad assumption. I assumed that I had job security.

KlangFool
Okay, and if I'm 70/30 in your example it still wipes out 5 years of contributions in a 50% drop. So the bonds only "save" me 2 years. And I get to suffer the drag on returns of holding 30% of my portfolio in bonds such that I probably end up with less money in the end compared to 100% equities. And none of the above matters if I don't have to sell - bonds have value for liability matching and little else.

I see your point about job loss but it's not worth worrying about in my position. I'm not going to reveal exactly what I do, but it's probably in the top 1% for job security in the country.

I can likely work for 40+ years if need be. I'll also have a pension at retirement. I really don't think 100% equities is that outrageous in my position.
jadd806,

<<I probably end up with less money in the end compared to 100% equities. >>

Or not. There were times when bond return higher than stock.

Please note that the real world does not have to meet expectation.

As per the example again, for 100/0, with a 50% drop, you need to double to recover. It may take a very long time. Meanwhile, for 70/30, it is only a 35% drop. It can recover faster.

KlangFool

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Re: Why Bull Markets Are Dangerous

Post by vineviz » Mon Sep 10, 2018 1:40 pm

KlangFool wrote:
Mon Sep 10, 2018 12:42 pm

Isn't that the problem? "Man plan, God laughs". The whole basis is based on the assumption that the reality matched the assumption.
No, the basis is that we make our plans based on the best available information that we have.

Rational people do this every day in all sorts of contexts.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Why Bull Markets Are Dangerous

Post by fortyofforty » Mon Sep 10, 2018 2:05 pm

The fact that everyone "in the know" is expecting a crash, or significant bear market, is a counter-indicator pointing to continued good equity performance. You don't know until you know, and then it's too late. Even the guy on the corner with the sandwich board sign saying "THE END IS NIGH" will eventually be right.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

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Re: Why Bull Markets Are Dangerous

Post by willthrill81 » Mon Sep 10, 2018 2:52 pm

fortyofforty wrote:
Mon Sep 10, 2018 2:05 pm
The fact that everyone "in the know" is expecting a crash, or significant bear market, is a counter-indicator pointing to continued good equity performance. You don't know until you know, and then it's too late. Even the guy on the corner with the sandwich board sign saying "THE END IS NIGH" will eventually be right.
There being a lot of pessimists out there seems like a pretty good sign to me. As nedsaid has pointed out, markets rise on the 'backs' of pessimism. It's when nearly everyone is proclaiming that it's nothing but up and up that I would get worried if I wasn't a trend follower.
“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: Why Bull Markets Are Dangerous

Post by dave_k » Mon Sep 10, 2018 3:02 pm

CraigTester wrote:
Mon Sep 10, 2018 12:55 pm
It's going to be interesting when some of these experts figure out that if you start with a $1,

Grow it by 50% to $1.50.

And then go on to lose that same 50%...,

You wind up with $0.75
Sorry to sound nitpicky, but that's not the "same" 50%. The opposite of gaining 50% is losing 33.3%. A gain of 100% is offset by a 50% loss, etc. If we assume that the long term market trend is upward, then the probability of a 50% gain over a time period must generally be more than the probability of an offsetting 33.3% loss. And the probability of a 50% gain must be much higher than the probability of a 50% loss. I think I must be missing your point, since I'm not sure what it is.

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Re: Why Bull Markets Are Dangerous

Post by jadd806 » Mon Sep 10, 2018 3:03 pm

KlangFool wrote:
Mon Sep 10, 2018 1:26 pm
jadd806,

<<I probably end up with less money in the end compared to 100% equities. >>

Or not. There were times when bond return higher than stock.

Please note that the real world does not have to meet expectation.

As per the example again, for 100/0, with a 50% drop, you need to double to recover. It may take a very long time. Meanwhile, for 70/30, it is only a 35% drop. It can recover faster.

KlangFool
Okay, there were a few periods where bonds outperformed stocks. Those are what those of us who understand statistics refer to as outliers.

You can choose to cherry-pick things such as "double to recover" and totally ignore the fact that the 100% equities portfolio likely had a higher peak value before a crash. Oh boy, your 70/30 portfolio returns to its (lower) peak value 6 months faster and then gets left in the dust during the next bull market. Again, bonds are for liability matching. If you're actively withdrawing, within a decade or two from withdrawing, or you have "enough," fine have some bonds. If you can't stomach market volatility, fine have some bonds. I have no use for them.

We can argue until we're blue in the face, and you can continue replying in circles with platitudes so you can have the last word like you love to do on this forum. Or we can just let the next 2-4 decades of my accumulation play out and see what happens. I know which horse I'm betting on.

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Re: Why Bull Markets Are Dangerous

Post by willthrill81 » Mon Sep 10, 2018 3:10 pm

dave_k wrote:
Mon Sep 10, 2018 3:02 pm
CraigTester wrote:
Mon Sep 10, 2018 12:55 pm
It's going to be interesting when some of these experts figure out that if you start with a $1,

Grow it by 50% to $1.50.

And then go on to lose that same 50%...,

You wind up with $0.75
Sorry to sound nitpicky, but that's not the "same" 50%. The opposite of gaining 50% is losing 33.3%. A gain of 100% is offset by a 50% loss, etc. If we assume that the long term market trend is upward, then the probability of a 50% gain over a time period must generally be more than the probability of an offsetting 33.3% loss. And the probability of a 50% gain must be much higher than the probability of a 50% loss. I think I must be missing your point, since I'm not sure what it is.
Indeed. I believe that in nominal dollars, there have only been two periods with 50% or greater losses in U.S. stocks. In real dollars, I believe that it's happened three or four times. And that's over the course of about 140 years. So yes, a 50% gain has been far more likely than a 50% loss.
“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: Why Bull Markets Are Dangerous

Post by KlangFool » Mon Sep 10, 2018 3:12 pm

jadd806 wrote:
Mon Sep 10, 2018 3:03 pm
KlangFool wrote:
Mon Sep 10, 2018 1:26 pm
jadd806,

<<I probably end up with less money in the end compared to 100% equities. >>

Or not. There were times when bond return higher than stock.

Please note that the real world does not have to meet expectation.

As per the example again, for 100/0, with a 50% drop, you need to double to recover. It may take a very long time. Meanwhile, for 70/30, it is only a 35% drop. It can recover faster.

KlangFool
Okay, there were a few periods where bonds outperformed stocks. Those are what those of us who understand statistics refer to as outliers.

You can choose to cherry-pick things such as "double to recover" and totally ignore the fact that the 100% equities portfolio likely had a higher peak value before a crash. Oh boy, your 70/30 portfolio returns to its (lower) peak value 6 months faster and then gets left in the dust during the next bull market. Again, bonds are for liability matching. If you're actively withdrawing, within a decade or two from withdrawing, or you have "enough," fine have some bonds. If you can't stomach market volatility, fine have some bonds. I have no use for them.

We can argue until we're blue in the face, and you can continue replying in circles with platitudes so you can have the last word like you love to do on this forum. Or we can just let the next 2-4 decades of my accumulation play out and see what happens. I know which horse I'm betting on.
jadd806,

Okay. You believe that 100/0 expected return is better than 70/30. So, could you please tell us what are their expected returns? 100/0 versus 70/30?

KlangFool

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Re: Why Bull Markets Are Dangerous

Post by jadd806 » Mon Sep 10, 2018 3:18 pm

KlangFool wrote:
Mon Sep 10, 2018 3:12 pm
jadd806 wrote:
Mon Sep 10, 2018 3:03 pm
KlangFool wrote:
Mon Sep 10, 2018 1:26 pm
jadd806,

<<I probably end up with less money in the end compared to 100% equities. >>

Or not. There were times when bond return higher than stock.

Please note that the real world does not have to meet expectation.

As per the example again, for 100/0, with a 50% drop, you need to double to recover. It may take a very long time. Meanwhile, for 70/30, it is only a 35% drop. It can recover faster.

KlangFool
Okay, there were a few periods where bonds outperformed stocks. Those are what those of us who understand statistics refer to as outliers.

You can choose to cherry-pick things such as "double to recover" and totally ignore the fact that the 100% equities portfolio likely had a higher peak value before a crash. Oh boy, your 70/30 portfolio returns to its (lower) peak value 6 months faster and then gets left in the dust during the next bull market. Again, bonds are for liability matching. If you're actively withdrawing, within a decade or two from withdrawing, or you have "enough," fine have some bonds. If you can't stomach market volatility, fine have some bonds. I have no use for them.

We can argue until we're blue in the face, and you can continue replying in circles with platitudes so you can have the last word like you love to do on this forum. Or we can just let the next 2-4 decades of my accumulation play out and see what happens. I know which horse I'm betting on.
jadd806,

Okay. You believe that 100/0 expected return is better than 70/30. So, could you please tell us what are their expected returns? 100/0 versus 70/30?

KlangFool
No, I think you can figure that out for yourself.

https://en.wikipedia.org/wiki/Expected_return

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