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

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

Post by MJW » Fri Aug 31, 2018 7:08 pm

siamond wrote:
Thu Aug 30, 2018 4:15 pm
bgf wrote:
Thu Aug 30, 2018 12:03 pm
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...
Motion seconded. Motion passes.

:!: bgf - Time to rearrange your weekend plans. :P

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

Post by tadamsmar » Fri Aug 31, 2018 7:17 pm

willthrill81 wrote:
Fri Aug 31, 2018 6:16 pm
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
You absolutely right. Siegel is certainly not talking about a random walk.

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

Post by tadamsmar » Fri Aug 31, 2018 7:31 pm

I have the impression that the misuse and misunderstandings are mostly harmless in the Boglehead world, in that they somehow don't lead to really bad investing.

One of the myth is the notion of reversion to the mean (defined as the predictable pendulum swing) does not imply that market timing is a favorable strategy.

Plenty of Bogleheads seem to manage to believe in the predictable pendulum swing while also believing in staying the course.

Somehow all the myths either cancel each other out or are mostly harmless all on their own.

If you roughly follow the operational rules then you don't have to get all the terms and concepts right.

Come to think of it your concepts don't have to be exactly correct. They just need to have the effect of convincing you to roughly follow the rules.

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

Post by Earl Lemongrab » Sat Sep 01, 2018 2:16 pm

Oh, here's one that popped up again in another thread, "gift tax". Many people still think someone, giver or receiver, owes immediate tax on a gift, perhaps over 15k.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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

Post by randomizer » Sun Sep 02, 2018 8:12 am

SavageAmusement wrote:
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.
Sure does. The problem is, simplicity seems boring, so people make things complicated. But what simple really is is hard, darn hard, given our human nature (see raft of behavioral economics research).
87.5:12.5, EM tilt — HODL the course!

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

Post by Earl Lemongrab » Sun Sep 02, 2018 9:58 am

randomizer wrote:
Sun Sep 02, 2018 8:12 am
The problem is, simplicity seems boring, so people make things complicated. But what simple really is is hard, darn hard, given our human nature (see raft of behavioral economics research).
I think simplicity is way overrated. To me it's one of the least important aspects. That has nothing to do with boring or not, as I don't use my investments for entertainment in any fashion.

Modern tools make managing a more complex portfolio about the same effort as a simpler one.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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

Post by acegolfer » Sun Sep 02, 2018 10:20 am

Trying to make a point with "I did ...."

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

Post by GoldStar » Sun Sep 02, 2018 10:27 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.
Well, my android phone doesn't seem to let me say a lot without the space - space auto inserted....

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

Post by Fallible » Sun Sep 02, 2018 12:17 pm

randomizer wrote:
Sun Sep 02, 2018 8:12 am
SavageAmusement wrote:
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.
Sure does. The problem is, simplicity seems boring, so people make things complicated. But what simple really is is hard, darn hard, given our human nature (see raft of behavioral economics research).
Agree. This is what Warren Buffett and Jack Bogle meant when they said "Investing is simple, but it's not easy." And much of what's not easy is achieving and maintaining the discipline, mainly the emotional control, needed to decide on a correct asset allocation and stay with it long term. As some of the best minds in investing tell us, it's all basically about "know yourself," which includes understsnding not only our emotions but also our biases. That's what is really hard about investing, about dealing with money in general.
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by bberris » Sun Sep 02, 2018 3:13 pm

TwstdSista wrote:
Tue Aug 28, 2018 6:40 pm
Often misused:

Adverse - Averse
Advice - Advise
Roth - ROTH
ROTH: Retirement On The Halfshell.

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

Post by bertilak » Sun Sep 02, 2018 3:48 pm

Not sure how common this is but I have seen it more than once: using re-balance to mean reallocate.

"Given today's overpriced stocks, should I re-balance into more bonds?"
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tadamsmar
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by tadamsmar » Wed Sep 05, 2018 9:26 am

H-Town wrote:
Tue Aug 28, 2018 6:57 pm
Misused/Misunderstood:

3) "John Bogle is the second coming of god and let's do 100% U.S. equity like he said"... alright, I'll stop.. but his advice on international equity is misleading at the very least.There should be a lot of asterisks associate with his advice to stay 100% U.S. equity.

*He actually says 20% international is OK.

I think it is misunderstood that Bogle typically provides he own asterisks when he makes pronouncements that seem to be out of the mainstream.

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

Post by lukestuckenhymer » Wed Sep 05, 2018 11:26 am

Starfish wrote:
Tue Aug 28, 2018 8:37 pm
But favorite, the one I cannot understand: insurance against living too long. :?
It means you accidentally lived to 115 (drawing down on your retirement savings for at least 50 years). Whoops!

I'll forgive myself if I'm 115 and broke :)

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

Post by fishandgolf » Wed Sep 05, 2018 11:45 am

carolinaman wrote:
Wed Aug 29, 2018 7:01 am
Investing the Boglehead way is simple. I totally agree that it is simple but the authors promoting this investing style, including John Bogle, write scores of books about this style of investing, and each book is several hundred pages. If it is so simple, why do we need all of those books?
+1
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tadamsmar
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by tadamsmar » Wed Sep 05, 2018 12:06 pm

randomizer wrote:
Sun Sep 02, 2018 8:12 am
SavageAmusement wrote:
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.
Sure does. The problem is, simplicity seems boring, so people make things complicated. But what simple really is hard, darn hard, given our human nature (see raft of behavioral economics research).
I find I end up jumping through hoops to save some taxes. Not sure it is worth the time and effort.

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

Post by acegolfer » Fri Sep 07, 2018 2:14 pm

Discussing risks without considering the investment horizon. Suppose John will retire in 20 years and invests in a 20-yr zero-coupon bond today.

a. after 20-yrs, he will earn a guaranteed risk-free rate of return. It's a risk-free asset.
b. bond price fluctuates year to year. The stdev of annual bond return > 0. It could even be higher than stock returns stdev. It's riskier than stocks.

Even though both could be correct statements, one needs to look at the risk within context.

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

Post by Earl Lemongrab » Sat Sep 08, 2018 7:04 pm

One just came up that I didn't see covered. The fabulous new One Rollover Rule. Highly misunderstood.

To clarify, only indirect rollovers, ones where the account holder takes funds in their name (so the money could be spent) and rolled to a like IRA within 60 days are covered by the rule.

So these things aren't:

1. Any rollover involving a 401(k) or similar company plan, whether indirect or not.
2. Any rollover from a traditional IRA to a Roth IRA.
3. Any custodian-to-custodian transfer, regardless of whether a check is issued to the account holder as long as it's made out to the new custodian.

The reason for this rule is that some people were using their IRAs as to take a series of indirect rollovers to use as loans.
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by triceratop » Sat Sep 08, 2018 7:15 pm

A lot of people don't think you have suffered losses if you do not sell (typically thought of in equities context) or hold to maturity (in bond contexts). This is untrue. One must mark losses to market.

AIG didn't actually have a 'loss' on any of their mortgage insurance business, but they still went bankrupt.
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by willthrill81 » Sun Sep 09, 2018 6:51 pm

triceratop wrote:
Sat Sep 08, 2018 7:15 pm
A lot of people don't think you have suffered losses if you do not sell (typically thought of in equities context) or hold to maturity (in bond contexts). This is untrue. One must mark losses to market.

AIG didn't actually have a 'loss' on any of their mortgage insurance business, but they still went bankrupt.
:thumbsup

Someone on the forum recently called me out for saying that, wondering how I could "say it with a straight face." I asked whether those who still had Enron stock certificates that they hadn't sold had lost anything yet. I'm still awaiting their reply.
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by dougger5 » Tue Sep 11, 2018 5:24 pm

I've often read the phrase "the power of compounding" when the discussion centers around the benefit of the reinvestment of dividends. No question that it's a benefit, but I wonder if "preservation of total return" would be more accurate.

To me, "compounding" is more a feature of interest yield/reinvestment, which of course gets conflated with dividend yield all too often.

Not that it grinds my gears all that much. It's more of a chin-scratcher.
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by willthrill81 » Tue Sep 11, 2018 7:48 pm

dougger5 wrote:
Tue Sep 11, 2018 5:24 pm
I've often read the phrase "the power of compounding" when the discussion centers around the benefit of the reinvestment of dividends. No question that it's a benefit, but I wonder if "preservation of total return" would be more accurate.

To me, "compounding" is more a feature of interest yield/reinvestment, which of course gets conflated with dividend yield all too often.

Not that it grinds my gears all that much. It's more of a chin-scratcher.
It's easy for some to forget that one's total return can be negative for a long time despite receiving dividends. In some cases, dividends are simply a return of your capital to you and nothing more. That's certainly the case with many of the 'junk' REITs out there.
“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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