Risk Lies Within

Research on Safe Withdrawal Rates

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hocus2004
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Risk Lies Within

Post by hocus2004 »

Here is an article by Jason Zweig (becoming a favorite) that was published in Money magazine some time ago. I learned of it from a link recently posted to the Berkshire-Hathaway board at Motley Fool.

Link to the Money article:

http://money.cnn.com/best/magazine_arch ... 5/KAH.html

Link to the Berkshire board discussion:

http://boards.fool.com/Message.asp?mid= ... e#21961912

Juicy Quote: "Risk doesn't reside only in the market. It lurks inside ourselves--in the way we misinterpret information, fool ourselves into thinking we know more than we do or overreact to the market's swings."
JWR1945
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Post by JWR1945 »

--Use mad money. If you can't resist the temptation to trade
stocks, put the bulk of your portfolio in a broad stock-index
fund; then take a little (10% tops) to "play the market"
yourself. This way, you keep your hunches on the fringe, where
they belong. "It's like going to the casino with only $200," says
Kahneman. "It helps protect you from regret."
This sounds like unclemick.

OTOH, unclemick has done very well with his mad money. He has earned the right to increase his allocation above 10%.

Have fun.

John R.
hocus2004
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Post by hocus2004 »

Here is a link to a post that PeteyPerson put to the raddr-pages.com board this morning. The post sets forth a good bit of the language of one of the posts that was put to the Berkshire-Hathaway thread that I linked to in my post up above.

http://www.raddr-pages.com/forums/viewtopic.php?t=957

I noticed that PeteyPerson had a few posts at NFB today. So I thought that by putting this link here perhaps I could entice him to share with us why he views the words set forth in his post from this morning as compelling ones. Anyone else who cares to comment is of course also welcome to do so.
hocus2004
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Post by hocus2004 »

Here's a link to an examination of how the brain works, and how the manner in which the brain works affects the results that the owners of those brains (that's us!) obtain from their investments.

http://www.investorsinsight.com/print_p ... motb013105

Juicy Quote #1: "Because of the way X-system deals with information it can handle vast amounts of data simultaneously. To computer nerds it is a rapid parallel processing unit. In order for the X-system to believe something is valid it may simply need to wish that it were so. System C is the "Vulcan" part of the brain. To use it requires deliberate effort. It is logical and deductive in the way in which it handles information. Because it is logical, it can only follow one step at a time, and hence in computing terms it is a slow serial processing unit. In order to convince the C-system that something is true, logical argument and empirical evidence will be required."

Juicy Quote #2: "This evolutionary age edge helps to explain why the X-system is the default option for information processing. We needed emotions far before we needed logic. "

Juicy Quote #3: "We are momentary realists. That is to say, we have a tendency to trust our initial emotional reaction and correct that initial view "only subsequently, occasionally and effortfully."

Juicy Quote #4: "So emotion can both help and hinder us. Without emotion we are unable to sense risk, with emotion we can't control the fear that risk generates! Welcome to the human condition! "
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Post by peteyperson »

hocus2004 wrote:Here is a link to a post that PeteyPerson put to the raddr-pages.com board this morning. The post sets forth a good bit of the language of one of the posts that was put to the Berkshire-Hathaway thread that I linked to in my post up above.

http://www.raddr-pages.com/forums/viewtopic.php?t=957

I noticed that PeteyPerson had a few posts at NFB today. So I thought that by putting this link here perhaps I could entice him to share with us why he views the words set forth in his post from this morning as compelling ones. Anyone else who cares to comment is of course also welcome to do so.
Hi Rob,

I haven't read the linked article of yours as I have spent a good deal of my afternoon posting on NFB today and I need to move on. I have bookmarked the article for later reading however.

The wording. I thought it was an exception piece. I thought it was illustrative that humans have a deeper core than we usually think and we have a greater capacity than we usually believe. We often don't wish to dig that deep to need to use it preferring to rebuff approaches and things we dislike instead rather than being taken to the core of our being. Thinking about it, it reminds me of the excellent movie "The Edge" starring Anthony Hopkins as a knowledgable billionaire and Alec Baldwin as his antagonist. Originally entitled "Bookworm" (much more appropriate title), this David Mamet piece focused on the innate inner core of the billionaire who whilst possessing the trappings of wealth particularly enjoyed the simple things in life and acquired knowledge for fun & profit. His own determination and resilience was more than a match for the brash Alec Baldwin character who just didn't cut the mustard when the chips were down (as we say here). Alec Baldwin's character, "You rich people make me sick..... Put you in a crisis and you bloom!"

I think the piece also shows that being contrarian from the perspective of spending time on planning investment strategy & learning about such, as well as from the perspective of the way one lives, works and survives is not especially about fitting in. One can excel and yet not appear to do so because one is financially successful in a way that broadcasts that "fact" to everyone around you. I would consider someone who saves $5k a year to be more successful than someone who spends $20k a year on luxuries / high living and saves nothing. That is indicative of my own POV. That is not to say that I don't enjoy nice things - I certainly do - but I have tried to evolve to a point where I have a big picture view. This is now in confict with the way the world generally works and what others - men & women - expect others to behave. Possibly an interesting case of most people doing it all wrong.

I think it is also probably a piece that has different meaning for different readers.

As for my posting here in the last handful of days, I think I've been putting out my best stuff in quite sometime. I also nailed down the index returns for a range of small, micro and tiny-micro historical returns today along with the return makeup of the large/mid-cap UK stocks over time which aids planning & creating realistic future return expectations considerably. Small cap, small cap value, micro cap and tiny-micro cap premiums have been demonstrably proven and the news is exceptional.

The smallest 0.50% of the UK market has a tiny-micro cap premium of 8.1%. Small cap premium of 3.4%. Top quartile small cap active managers achieve in excess of 2% value premium/alpha and top decile have demonstrated 5.6% value premium/alpha. The former is available for an e/r of 1.22%, the latter 0.82%, all no load. Large/Mid cap index returns from 1955 to 2004 of 12.7%, comprised of 7.9% capital return & 4.8% dividends. Inflation was 6% over the period, so real returns were 1.9%. Interestingly when one removes inflation from the capital return, one gets a real capital return of 1.9%. Very much in line with the US experience with historical S&P 500 earnings growth of 5%, 3.1% CPI inflation and 1.9% real (ex-dividends). This kind of thing helps to be able to break down future expectations based on inflation, dividends and growth today, along with applying relevant size premiums. Caution is also warranted with indications in the UK that small cap has had both decade long high double-digit returns and poor returns than persisted for years as large-cap stocks stormed ahead. If one were accumulating for 30 years prior to FIRE then one possibly could afford to run that risk and ride it out, but with shorter accumulation timeframes coupled with the need to be ready-diversified when reaching FI/FIRE in order to not need to sell to switch allocations late in the day triggering early capital gains taxes, then one is well advised to follow the DFA model of wide diversification by size, style and geography through most of the accumulation phase. One can still be concentrated within each asset class/sub-asset class to deliver value across the portfolio without damaging diversification as a whole. Yale Endowment do this very successfully. I am not averse to avoiding investing in an asset class that is overvalued with substantially lower dividends than historically offered (the S&P 500 and FTSE 100 UK comparative index have this same issue) and switching out would have to be considered very carefully. There would be risks with staying put and risks with any market timing even when based on solid historical evidence. I am rereading Shiller's Irrational Exhuberance at the moment too, so that is quite prescient to my focus.

Petey
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