Or "commando". It's the BH way - do the most with the least :lol: ...tsturbo wrote:Briefs or Boxers?
- Ron
What do bogleheads *not* agree on?
Disagreement about how to manage investment risk
IMO the main disagreement among Bogleheads is about how, and how tightly, investment risk should be managed. Most of the rest of the disagreements are either relatively minor or some subset of this managing risk disagreement.
Much financial risk is handled by risk transfer techniques. The three risk transfer techniques are hedging, insuring, and diversifying. A hedging risk technique means giving up upside potential in return for locking in a known value. For example, when you purchase a life annuity you are hedging retirement income risk. An insuring risk technique means paying a premium to insure a floor, but, unlike hedging, keep some upside potential. A diversifying risk technique does not lock in anything, but you don’t pay a premium and you have unlimited upside potential.
Risk strategies that rely on hedging and insuring are called matching strategies because they match assets to liabilities. Risk strategies based on diversifying are simply called diversification strategies.
Most Bogleheads handle investment risk solely thru diversification strategies. The minority of Bogleheads that employ matching strategies typically rely on all three risk transfer techniques, but emphasize hedging and insuring over diversifying when handling investment risk.
For many households the two main financial goals are paying for a child’s college education and providing for adequate income in retirement to meet their retirement living standard goal. Here are examples between the two schools of risk management on meeting those two primary financial goals.
1.) Saving and investing for a child’s college education.
The diversification only risk management Bogleheads save and invest in 529 college cost plans and are concerned about which plans offer the best combination of risky and low risk mutual funds at low cost.
The matching strategy first risk management Bogleheads emphasize pre-paid tuition plans, College Sure CDs, TIPS, and Ibonds when saving and investing for college costs. While they may use some equity mutual funds in the investment plan, such mutual fund products are secondary in the overall college cost investment plan.
2.) Saving and investing for retirement.
The diversification only risk management Bogleheads set an AA strategy in their retirement portfolio between risky and less risky assets that they believe will maximize their expected return given the amount of portfolio volatility they are willing to tolerate. They then rebalance to this AA over time, or rebalance the AA and also adjust the AA for age over time.
The matching strategy first Bogleheads set an annual income target for retirement. They then decide how much of that income target should be met by a combination of relatively safe matching strategy assets such as SS, DB pensions, life annuities, and TIPS ladders. In pre-retirement they set aside a part of their portfolio in safe assets such as TIPS to hedge and insure that they will reach the level of assets they will need at retirement to purchase safe retirement income assets, e.g. a life annuity, to meet their retirement matching income sub-target. The remainder of the retirement portfolio uses diversification strategies among risky and less risky investment assets in an effort to fund retirement income above the matching income sub-target.
Matching strategies using hedging and insuring risk management techniques control downside financial risk much more tightly than diversification strategies, but at the cost of giving up most or all upside potential above the target level of financial assets required to meet a financial goal. Diversification strategies offer unlimited upside potential, but much less downside risk control compared to matching strategies. There is a fundamental disagreement about how this risk/return tradeoff should be managed among Bogleheads.
BobK
PS - The Wiki appears to be particularly weak when discussing investment risk management. For instance, if there are any discussions of the three risk transfer techniques outside of the very cursory discussion in the Wiki post on matching strategies, I can't find them or it.
Much financial risk is handled by risk transfer techniques. The three risk transfer techniques are hedging, insuring, and diversifying. A hedging risk technique means giving up upside potential in return for locking in a known value. For example, when you purchase a life annuity you are hedging retirement income risk. An insuring risk technique means paying a premium to insure a floor, but, unlike hedging, keep some upside potential. A diversifying risk technique does not lock in anything, but you don’t pay a premium and you have unlimited upside potential.
Risk strategies that rely on hedging and insuring are called matching strategies because they match assets to liabilities. Risk strategies based on diversifying are simply called diversification strategies.
Most Bogleheads handle investment risk solely thru diversification strategies. The minority of Bogleheads that employ matching strategies typically rely on all three risk transfer techniques, but emphasize hedging and insuring over diversifying when handling investment risk.
For many households the two main financial goals are paying for a child’s college education and providing for adequate income in retirement to meet their retirement living standard goal. Here are examples between the two schools of risk management on meeting those two primary financial goals.
1.) Saving and investing for a child’s college education.
The diversification only risk management Bogleheads save and invest in 529 college cost plans and are concerned about which plans offer the best combination of risky and low risk mutual funds at low cost.
The matching strategy first risk management Bogleheads emphasize pre-paid tuition plans, College Sure CDs, TIPS, and Ibonds when saving and investing for college costs. While they may use some equity mutual funds in the investment plan, such mutual fund products are secondary in the overall college cost investment plan.
2.) Saving and investing for retirement.
The diversification only risk management Bogleheads set an AA strategy in their retirement portfolio between risky and less risky assets that they believe will maximize their expected return given the amount of portfolio volatility they are willing to tolerate. They then rebalance to this AA over time, or rebalance the AA and also adjust the AA for age over time.
The matching strategy first Bogleheads set an annual income target for retirement. They then decide how much of that income target should be met by a combination of relatively safe matching strategy assets such as SS, DB pensions, life annuities, and TIPS ladders. In pre-retirement they set aside a part of their portfolio in safe assets such as TIPS to hedge and insure that they will reach the level of assets they will need at retirement to purchase safe retirement income assets, e.g. a life annuity, to meet their retirement matching income sub-target. The remainder of the retirement portfolio uses diversification strategies among risky and less risky investment assets in an effort to fund retirement income above the matching income sub-target.
Matching strategies using hedging and insuring risk management techniques control downside financial risk much more tightly than diversification strategies, but at the cost of giving up most or all upside potential above the target level of financial assets required to meet a financial goal. Diversification strategies offer unlimited upside potential, but much less downside risk control compared to matching strategies. There is a fundamental disagreement about how this risk/return tradeoff should be managed among Bogleheads.
BobK
PS - The Wiki appears to be particularly weak when discussing investment risk management. For instance, if there are any discussions of the three risk transfer techniques outside of the very cursory discussion in the Wiki post on matching strategies, I can't find them or it.
In finance risk is defined as uncertainty that is consequential (nontrivial). |
The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
Discussions concerning leverage usually relate to real estate (mortgages are a form of leverage).verygoodthings wrote:I admit not having been here as long as most others, but in my scouring the boards:
2) Use of Margin or leverage
Use of margin (or leverage) as a long-term investment strategy is strongly discouraged. You may see threads where someone posts a question, or links to an article, on margin as an investment strategy. The thread can contain several pages of "discussion" on why it is wrong. There are always some cases in which the use of margin is acceptable, but they are few and far between.
In this context, I don't think it's a subject of controversy. Debate yes, controversy no.
Wiki article link: Leverage
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.Re: What do bogleheads *not* agree on?
I think there is a general tendency to assume that given the EMH there is no point in having a point of view on valuations and certainly there is little point on acting on them. I tend to not be as doctrinaire and have not been shy about making large changes in my equity allocation or even choice of fixed income funds. Granted, large swings in my equity allocation have only been made a couple of times in now over 12 years of investing.nydad wrote:This page http://www.bogleheads.org/wiki/Boglehea ... Philosophy is a great overview of the areas on which there is general consensus amongst Bogleheads - including highly experienced authors, and denizens of this forum - stay the course, passive vs. active, index approach, asset allocation, low cost, diversify, be tax efficient, don't try to market time, don't try to predict interest rate changes...
However, much of the fun in this forum to me, and challenge, is when highly intelligent people disagree about fundamental things. So I wonder if we could try to catalog those here, and eventually create a wiki page for it.
This should not be every single little nitpicky disagreement - but rather big areas of disagreement.
Here are a few I've thought of:
Commodities futures and their role in portfolio (Swedroe vs Ferri)
Adding international/developed market bonds
Total Bond Market Index (Bogle says buy, Swedroe says no)
TIPS as inflation hedge, market timing on TIPS purchases
Whether small/value premiums will persist
Recommended allocation to international/emerging market equity
Any other thoughts? What questions do you have that the experienced members of this board don't agree on (leaving you, the poor individual, to have to make their own decision!)
I also am not as skeptical of investment skill and fundamental analysis as the mainstream tends to be. If I had the assets, I would absolutely invest in long-short equity hedge funds. I feel that being restricted to long-only investing is a major limitation in terms of risk control.
In short I think valuation based timing of exposure to various asset classes (done infrequently and at what one views to be market extremes) and security selection within each asset class is of tremendous importance. Lacking the assets to access what I consider to be superior strategies I chose to invest passively (for the most part, I am managing a non-trivial chunk of my equity portfolio on my own).
Personal preference. Lump sum wins expectantly financially 2/3rds time. But behaviorally DCA is much better than lump sum. For huge life altering amounts of money, the better financial case can be made for DCA.manuvns wrote:is DCA generally agreed upon ( may be lump sum for small amount ? )
oh BTW used vs new car
Other than the obvious posts asking "How do I ....", all other posts involve people giving their views. Thus there are thousands of examples of "Boglehead disagreements". The beauty of this forum is that it is generally conducted in a civil and polite manner. Sharing ideas is the most important commonality among Bogleheads.
Jerry
Jerry
"I was born with nothing and I have most of it left."
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ruralavalon
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The most significant, IMO, of the areas of disagreement --
(1) use of international equities and the allocation;
(2) TIPs use and allocation; and
(3) total market vs slice/dice aka tilting to small - value.
(1) use of international equities and the allocation;
(2) TIPs use and allocation; and
(3) total market vs slice/dice aka tilting to small - value.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link:Getting Started
For reference: Chuck Norris's Own (Index) Portfolio Revealed [Humor]. Please post responses in that thread, not here.gatorking wrote:But Chuck Norris can divide by zero.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.-
investorjunkie
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Virajith Wijeweera
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Right. I don't see this as a controversy.RonV wrote:Leaving the smartest to be Phillies fans, right?friar1610 wrote:Baseball.
The smarter Bogleheads (like me) are Red Sox fans. Others are Yankee fans. javascript:emoticon(':)')
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
This observation can be generalized into a sort of meta-observation.Morgan wrote:Not only is timing the Bond market hard, but it is more difficult than timing the stock market.Opponent Process wrote:bond market timing. Bogleheads tend to agree that successfully timing the stock market is impossible, but are unsure about bond markets.
Bogleheads who time bond markets can't really have understood the principal of market efficiency in the first place. IMHO of course...
There's not even agreement on what it means to understand a whole array of fundamental concepts. In addition to what you've mentioned above, there's risk, corporate finance, stock pricing, debt, etc.
Here's one I haven't seen mentioned in this thread yet: Whether or not it was tacky or otherwise socially unacceptable to have a mortgage burning party. Perhaps I should qualify: ...once its paid off. 
Some folks thought it smacked of braggery or flaunting one's good fortune.
I was in the opposite, "I'm gonna throwdown!", camp, and I will feed my friends free steaks to help them get past me being so obnoxious.
Some folks thought it smacked of braggery or flaunting one's good fortune.
I was in the opposite, "I'm gonna throwdown!", camp, and I will feed my friends free steaks to help them get past me being so obnoxious.