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Re: Black Monday

Posted: Tue Aug 25, 2015 3:29 pm
by dualstow
From Tyler’s article:
Recently, a 100% stock market investor starting in 2000 experienced 13 years of negative real returns before finally breaking even.
I wish there were a tool out there — and maybe there is — that lets you add in ongoing cash infusions. I didn’t start really investing until 2004. However, I was able to put a significant amount into stocks on really bad days in 2009. Not the absolute bottom, but really bad days.

I have seen tools that let you input regular, automatic investments. Buys at specific prices, though- it gets complicated.

Re: Black Monday

Posted: Tue Aug 25, 2015 5:34 pm
by Tyler
mathjak107 wrote: if you want to know about the past you want cagr returns as they account for sequence risk .

if you are projecting forward you want  to use average returns since sequences are unknown .
IMHO, switching measures to the more rosy one looking forward is exactly what gets many investors in trouble and sets them up for disappointment. Years later they'll look back at their returns and say the portfolio no longer works as it was sold to them, when in reality they were using unrealistic projections to begin with.

Since 1900, the compound real return of the S&P500 trails the average real return by 22% per year (6.6% vs. 8.5%).  http://www.moneychimp.com/features/market_cagr.htm  Those choosing to invest in stocks based on average returns would have accumulated (on average) 41% less money than they expected 30 years later.  Most investors would agree that's a big difference but are completely unaware of that fact.  Invest however you please, but ignore the effect of volatility in your own future projections at your own risk.

@Jack Jones -- Thanks!  If you find it helpful, please spread the word.

Re: Black Monday

Posted: Tue Aug 25, 2015 7:33 pm
by mathjak107
it is so important to understand i will say it again    lol .for looking at things in the past you use cagr returns . projecting in to the future you use average since sequence risk can be big .

vanguard quotes average returns  on their site while morningstar is cagr .

think about it ,  if you go 100%  the first year and down  50% the second year your cagr is zero % return but that could be expressed as a 25% average return .

a sly advisor could get away saying that was a 25% average return even though you got zero

Re: Black Monday

Posted: Tue Aug 25, 2015 11:09 pm
by AnotherSwede
mathjak107 wrote: it is so important to understand i will say it again    lol .for looking at things in the past you use cagr returns . projecting in to the future you use average since sequence risk can be big .
Say it again. Louder and slower. I still don't understand what use I have for average returns.

Re: Black Monday

Posted: Wed Aug 26, 2015 1:51 am
by Tyler
Tyler wrote: Those choosing to invest in stocks based on average returns would have accumulated (on average) 41% less money than they expected 30 years later. 
Following up, I wanted to point out that after more research this part of my previous statement is likely incorrect.  Volatility drag is absolutely real, but that particular factoid is from an inappropriately simplified calculation. 

Also, Mathjak's point about future returns and averages is not unfounded but does require a caveat.  Long story short:  Looking at history (where the order of returns is certain) compound returns always trail the average and are the more useful measure of performance.  Projecting into the future (where order of returns is unknown), averages are helpful because they are order of returns neutral.  However, volatility still matters.  Volatility does not mean you will always earn less than the historic average (you could get lucky and hit a hot run), but higher volatility does lower the median endpoint, reducing your odds of an enjoyable outcome.

Ain't math fun?  ;)

Re: Black Monday

Posted: Wed Aug 26, 2015 3:48 am
by mathjak107
also the less volatile the asset the less the spread . the spread between cagr and average  is greater for the s&p 500 vs a balanced fund , vs bonds vs cash .

even the mix of the portfolio matters so like the pp volatile assets can be tempered down to a point the spread is reduced  far more than the assets reflect .

that is why it is hard to use cagr for projecting out .

Re: Black Monday

Posted: Wed Aug 26, 2015 8:49 am
by dualstow
Tyler, as I wrote in my PM reply, I am really taken with the Hurricane calculator at portfoliocharts. Thanks for mentioning it!
The Max and Min are good enough, so forget about the wrestling Really Bad Days data.
Also....from the results of the hurricane calc, it looks like I'm going to be rich when I'm old. Huzzah!

Re: Black Monday

Posted: Wed Aug 26, 2015 9:19 am
by lordmetroid
It would be cool if the hurricane calculator could show how many paths ended up as positive and how many ended up negative relative to the starting value

Re: Black Monday

Posted: Wed Aug 26, 2015 12:05 pm
by mukramesh
AnotherSwede wrote:
mathjak107 wrote: it is so important to understand i will say it again    lol .for looking at things in the past you use cagr returns . projecting in to the future you use average since sequence risk can be big .
Say it again. Louder and slower. I still don't understand what use I have for average returns.
Actually I have the same question. What is the point of using average returns at all? In the Year 1 100%, Year 2 -50% case, isn't it somewhat irrelevant that the average return is 25%? I don't see why average returns would be useful for projecting forward.

Re: Black Monday

Posted: Wed Aug 26, 2015 2:08 pm
by Tyler
mukramesh wrote: I don't see why average returns would be useful for projecting forward.
I lost many hours of my life reading about this last night that I'll never get back.  It's boring and confusing.  Let me see if I can summarize so you don't suffer the same fate.

Let's look at an extreme example of playing roulette and always betting on black. You have a 50% chance of doubling your money and a 50% chance of losing everything with every spin (for the gamblers looking at me funny, let's ignore the zeros for now).  That's about as volatile as you can get.  Now let's say you spin twice. There's a 25% chance you have quadrupled your money, and a 75% chance you lost everything.  Plan to do it ten times in a row, and there's a 0.1% chance you will increase your original bet by 1024x but I can pretty much guarantee that won't happen.  Because of that small chance of a big gain, the average return for trying the same methodology repeatedly is not zero even if you will almost assuredly never achieve it. 

Now let's say someone has an insane run and you watch them do it.  Looking at their end wheelbarrow of chips and counting the spins, you calculate that their CAGR is 100%.  Pretty great!  But that's for something that already happened and ignores the low odds of that exact pattern repeating.

When trying to decide whether putting it all on black is a good retirement strategy for yourself and 10k of your closest friends, the average return is technically more accurate for projecting future average balances than a single (potentially anomalous) CAGR.  However, it is still deceptive in that it does not convey your personal odds of achieving that average.  Depending on how diverse your data set is, a long term CAGR can be a decent estimate for median return looking forward, and for conservative planning I personally prefer it to average returns if you insist on using one number. Watch the wheel spin 30 times after the lucky winner is long since gone (scooped up by suspicious casino personnel, probably), you would have figured that the CAGR/median for the future is most likely zero and stayed far away.

If that's all exhausting and confusing, I totally understand.  Basically, predicting the future is hard and both average returns and CAGRs are imperfect for returns projections as neither tell the whole story.  A math-free alternative is to ignore both numbers and play with the Hurricane calculator at PortfolioCharts (or Firecalc if you only care about broad stocks and bonds but want more history).  It will help you see the full range of account balances using annual contributions or withdrawals and real-life historic returns that cover all kinds of economic conditions.  Look at the max and min for your timeframe, and realize that the returns in the future will likely be somewhere in between. 

Re: Black Monday

Posted: Wed Aug 26, 2015 2:21 pm
by mathjak107
mukramesh wrote:
AnotherSwede wrote:
mathjak107 wrote: it is so important to understand i will say it again    lol .for looking at things in the past you use cagr returns . projecting in to the future you use average since sequence risk can be big .
Say it again. Louder and slower. I still don't understand what use I have for average returns.
Actually I have the same question. What is the point of using average returns at all? In the Year 1 100%, Year 2 -50% case, isn't it somewhat irrelevant that the average return is 25%? I don't see why average returns would be useful for projecting forward.
the answer is average returns should never be used to judge the past .

sequence risk is a bigger risk than market return risk is especially if retired and spending down .

trying to project forward can't really use sequence risk (cagr ) since results can be way skewed compared to outcome .

Re: Black Monday

Posted: Wed Aug 26, 2015 3:11 pm
by Cortopassi
Are these swings the new normal for a while?  -500, -500, -200, +600?

This is insane. 

Re: Black Monday

Posted: Wed Aug 26, 2015 4:22 pm
by buddtholomew
Cortopassi wrote: Are these swings the new normal for a while?  -500, -500, -200, +600?

This is insane.
Is the PP positive on any of those days?

Re: Black Monday

Posted: Wed Aug 26, 2015 5:03 pm
by mathjak107
nope but it was a whole lot less volatile and did have less losses although the pp lost ground from that point the last 2 days . but it still did not lose as much .

of course when the recovery happens in equity's  i  will guess and say i do expect  it will happen before my hypothetical  pp shows a profit again since it is hard to come back from that 44k loss with the assets fighting each other . retracements in equitys tend to happen fairly quicker .

Re: Black Monday

Posted: Wed Aug 26, 2015 5:37 pm
by Tortoise
Cortopassi wrote: Are these swings the new normal for a while?  -500, -500, -200, +600?

This is insane.
In finance, it's known that volatility tends to cluster in time rather than being nice and spread out over time. The term they use is volatility clustering.

Re: Black Monday

Posted: Wed Aug 26, 2015 5:56 pm
by mukramesh
Tyler wrote:
mukramesh wrote: I don't see why average returns would be useful for projecting forward.
I lost many hours of my life reading about this last night that I'll never get back.  It's boring and confusing.  Let me see if I can summarize so you don't suffer the same fate.
Thanks for the response, Tyler! Though, I still don't see the point of ever using 'average' returns instead of CAGR because it seems like in practically every case you would be overstating your expected return. But... your PortfolioCharts website is awesome and definitely gives a useful way of visualizing and understanding various portfolios.  :)

Re: Black Monday

Posted: Wed Aug 26, 2015 7:02 pm
by Cortopassi
mathjak107 wrote: nope but it was a whole lot less volatile and did have less losses although the pp lost ground from that point the last 2 days . but it still did not lose as much .

of course when the recovery happens in equity's  i  will guess and say i do expect  it will happen before my hypothetical  pp shows a profit again since it is hard to come back from that 44k loss with the assets fighting each other . retracements in equitys tend to happen fairly quicker .
My main reason for the PP was to minimize chances to jump ship during periods like the one shown below.  I had to use SPY to go back that far.  To your point of retracing faster, it took SPY approx 7 years each of those up down cycles to recover what it lost from the previous high.  And since it was actually two up down cycles, it reall took from Aug 2000 peak to about Feb 2013 to get back to that point, without factoring in inflation.  That is quite a long rollercoaster to nowhere.  I am not sure I would call that quick.

And just in general I got sick (and am sick) of how the news universe revolves around the stock market, as if that's the best gauge of the economy.  The breathless anticipation of the next Fed meeting.  Yada yada.  If an 1/8 or 1/4 point increase from 0 will derail this recovery, well, it isn't a recovery.  Days like the past few lead me to put my tin foil hat on, believing it is all smoke and mirrors and can fall apart at the drop of a hat.  At least the PP has pulled me away from that, although I do admit the past week has got me looking at Zerohedge again, dammit!

Image

Re: Black Monday

Posted: Thu Aug 27, 2015 5:38 am
by mathjak107
7 years for spy is fine ,  another 40 years for an interest rate cycle or decades for gold if it runs it's typical long self is not fine . in all cases rebalancing would shorten things up a bit .

i think we can cherry pick big drops in all assets that took longer than typical time frames to recover . but the facts are more typically certain assets take way longer normally to run their cycles .

as peter lynch said when asked about his prediction on where rates were headed  he would rather bet on the market cycle repeating any day  than tying to figure out if and when  interest rate cycles were repeating . that is true of commodity's too. they just tend to take a very long time to have their day in the sun.

sure you can have temporary runs to safety from black swan events but usually when the smoke clears if it isn't that assets time it goes back down again .
.

Re: Black Monday

Posted: Thu Aug 27, 2015 7:43 am
by Cortopassi
Smaller drawdowns are the most compelling feature for me of the PP diversification.

You can say rebalance will shorten things up, but that's if you successfully made it through those terrifying drops in 2001/2008.  I made it through the first one because I was oblivious (maybe I should have stayed that way!)  I did not make it through 2008/2009.

Re: Black Monday

Posted: Thu Aug 27, 2015 8:12 am
by mathjak107
well it is only natural to run for the exit when there is a fire . while we all know  staying the course is the best deal always even seasoned investors question that when the crap hits the fan .

that is because we hate losing money more than we like making it as a default ..

while i like the low volatility in the pp i am not convinced it is the right thing for me to do at this stage as  my investment philosophy changes with the big picture . i think with stocks likely being the only horse to hitch to i do not want opposing asset classes hurting what ever weak gains they may produce . but that is my thinking as related to me .

i do hold lots of bond funds but nothing rate sensitive , basically i hold them for no other reason then they are not stock and if i am lucky i may see some interest and positive returns  after nav is considered .

i think the pp dug itself in to a hole by having so many parts go south at the same time that unless we have some calamity it can take quite a while to pull out of under normal conditions .

the other parts at this point in time with rates so low  depend on not normal times but either long cycles or an EXTENDED  black swan event since those assets correct back so quickly when the fear dies .

today  the long treasury bond is fear driven at this level , and we still do not have a clue what drives gold , but so far nothing we have seen in years .