I have had a couple of posts up lately saying the low octane is great and all but going all low octane is probably a bad idea for most folks.
That being said there are some people who learn along the way that they simply cannot stomach normal stock market volatility--all of the numbers about how markets work notwithstanding. I imagine that with each correction and bear market quite a few people have this sort of revelation about what they can cope with or not as the case may be.
The simplest response to this is save more money. Your plan calls for a certain number (or range) on a certain date and then that number needs to do something for you after retirement so that it grows enough to offset inflation and allow you to deal with the unexpected things that are often discounted in financial plans.
If you need $1.5 million 17 years from now and have $400,000 now you know that the $400k will about double in 15 years if it can average 5% interest over that time (maybe this is a bad assumption?). So that means you need to come up with $700,000 in 17 years which works out to $41,000 per year (it will come out to be less than that as the amount saved now will earn interest but lets keep it simple). So in applying your numbers this either makes sense or is like the TD Ameritrade commercial where DA McCoy makes the joke about needing to save more than you earn.
My little scenario above probably ignores growing enough during retirement to have enough money.
Sort of tying in with this is the Nassim Taleb idea of putting 90% of the kitty in t-bills from many different countries and then going berserk with the other 10% (he doesn't say berserk, I just think it is a funny way to think of it).
If 10% is your crazy-go-for-it money, maybe allocating that 10% between four or five themes out of maybe eight or so that you study could be a viable plan? If you can find any ETF for these themes then the chance of buying something that goes to zero pretty much (no guarantee) goes away.
If you can find two themes that go up 50% each in a year (not insane in this context, but not easy either) you might add 200 or 250 basis points of return for the entire portfolio which combined with the interest on the 90% and assuming the other themes picked to completely flop you might get close to a normal return.
Candidly I don't think this is a great substitute for just building a diversified portfolio and I question whether the person who decides they do not want to ride the normal ups and downs of the market will have the confidence and the time to study and then pick four aggressive themes to buy as I do no think the totality of this idea would mean less work.
In addition to the themes there needs to be some study devoted to the countries selected for t-bill investing. I do think it is interesting from a theoretical standpoint but will reserve final judgment for another time.
Proud Member Of
Random Roger
© 2009 | Gadget Theme Blogger Template
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
11 comments:
Maybe I'm an optimist, but I believe more people can be "conditioned" (educated) to accept normal stock market volatility. I'm not saying this is easy, but most investors are ignorant of what normal is and what should be expected.
I could be wrong, but it seems the advisor community takes the most risk-adverse route of simply measuring the emotional tendencies of their clients and creating portfolios accordingly. It seems there is little effort put into educating consumers, to conditioning them to expect bear markets and big sell-offs as a normal condition on the road to success.
My wife has a cousin who loves his utility stocks. Isn't this a good route for those that do not like the market turmoil.
I hate market turmoil, but I live with it because I love the returns :)
TomK i can tell you that some clients are not willing to learn.
as far as utilities; Bespoke just had a piece out that had the average sector declines in a bear market and I believe utilities were in the area of down 20% versus 30% for the market.
Further, every so often something funky happens with utilities commissions and rate setting, rates going up often hurts utilities too.
Roger, I still think this leaves room for a portfolio with a diversified approach heavy in various absolute return strategies (NARFX, RYMFX, NCHPX, merger strategies, etc.), some bonds and maybe energy trusts sprinkled with some REIT's (acknowledging that they may have further to fall), THEN using maybe 30-40% in a combination of a PBP buy-write vehicle and various domestic and foreign vehicles to boost returns.
Thoughts? Thanks.
Jim
some exposure to vehicles with those traits; i'm on board.
the specifics of what you say seem reasonable but, big but, the thing that maybe I should have mentioned earlier is that the way the market averages 10% (or whatever) is with the occasional up 25% or up 30% year.
i think missing one of those creates the potential for big problems unless you can actually save a lot more than you do now.
Roger, another question. Pls note, not trying to argue, just trying to get a complete picture.
In an article on TSCM 1/22/08, you wrote about low-vol portfolios. This portfolio had 30% to PBP, 20% DNH and 5% to IGF. The rest of the portfolio was bonds and commodities. Thus, seems like you were saying 35% US (assuming infra was US, which a lot was not), 20% foreign, etc. Just wondering if this contradicts your comment at 10.47am. Thanks for your always helpful articles and comments.
Jim
Interesting news on the wires from the Pension Benefit Guarantee Corporation. They're adopting a new asset allocation strategy that "will offer lower risk through broader diversification."
Previously, the PBGC had 28% of its assets in stocks; they're bumping that up to 45%, with 45% in a diversified set of fixed income investments, and 10% in "alternative investment classes like private equity funds."
I looked for the part of the article where they credit you, Roger, but couldn't find it. Just doesn't seem fair.
Sounds like government-speak for "we're $14 billion in the hole so we'd better get more aggressive and try to goose our returns!"
jim, in the third paragraph of that article i say it will lag up a lot. also the last paragraph reiterates the sentiment that the portfolio written about would lag an up market which is the direction the market goes most of the time.
it was more of an academic study in portfolio construction and to illustrate some of the effect that can be created with certain ETFs.
if my saying twice it would lag an up market wasn't clear enough that is not a portfolio i would ever implement for someone with normal market tolerances.
the PBGC news is interesting. allocating more to stocks with SPX 200 points from its high doesn't seem that dumb.
I am hearing a lot of reccomendations for DD. Is this a stock that does well in this type atmosphere? Global exposure and so forth.
BWJR
i have heard DD get some positive chatter due to its ag business.
as a chemical company it is likely vulnerable one way or another to high energy prices.
Post a Comment