> On Jan 4, 4:52 pm, "John Smyth" <s...@tpg.com.au> wrote:
>>Suppose someone wanted to invest x dollars in an index fund. >>Are you suggesting ("from a quirk in the math") that they would be better in >>terms of risk vs reward to leverage some of that x dollars into the index >>fund with a margin loan and keeping the rest in cash.
Travis Morien wrote: > On Dec 30, 9:18 pm, B J Foster <bjfos...@yahoo.com> wrote:
> ... > Or, in the case of a real person who has access to only a subset of all > available information, and is somewhat fallible in interpreting this > subset of available information, the ability to discern the most > superior investments would be greatly diluted. This would mean a much > wider universe of attractive investments because greater uncertainty > makes it harder to whittle down the universe to the best investments. > ...
That is, one thing diversification does is reduce the probability of Gambler's Ruin. GR says that even if you have an edge, you may well go bankrupt before you get rich.
And, very few investors have a relevant degree of skill. If you are not more skilled than the collective wisdom of the people in the market, plus a margin to pay for your time, costs, and the extra risk of a concentrated portfolio, plus trading costs and taxes, you are better off to index.
Travis, the one thing I miss in this thread , is any sign that you allow the possibility that pago may have a higher risk profile and intend to accept more risk for more potential return. For example I would answer this question "are we overly diversified" by saying we are overdiversified when the portfolio risk moves above or below the target risk. Obviously this will only happen by moving widely among asset classes, or more simply a large change in equity to bond ratio.
I would have thought pago or anyone should first establish clearly which part of the risk return spectrum they intend to invest in. Having done this it makes sense to me to diversify as much as possible within a constant bond equity ratio. The effect of this would be to hold risk at target but increasing diversity would maximise return at that risk.
Jim Watts
"Travis Morien" <travismor...@yahoo.com> wrote in message
> On Jan 2, 10:39 am, pago_b...@yahoo.com.au wrote:
>> I read a lot of Buffet stuff but I do not claim to know everything >> there is to know about it. And having read a lot of his stuff, I think >> the secret of successful investing is that there is no secret and >> anybody with a bit of common sense can do as well as the professional.
> If by that you mean "by investing in a low cost index fund you'll do as > well as a professional", I'd agree.
> If you mean that only a bit of common sense is required to be a > successful stock picker competing against professionals I'd say > probably not.
> According to a number of studies I've seen, professionals do tend on > average to beat the market slightly before costs and professionals > certainly are more skilled at technical things such as valuing > companies.
> They are disadvantaged by some factors such as the imperative to > deliver market beating returns from one quarter to the next (limiting > tracking error tolerance) and having to deal with much larger > portfolios. Their portfolios are often subject to large inflows and > outflows. And, they have the complexity of disclosure and regulatory > requirements when they deal in large positions.
> But I don't think only common sense is required to do well as an active > investor. Stock markets are often counterintuitive to common sense > because they represent the collective wisdom of a lot of individuals. > The current thread "Risk vs Return...I find this illogical" shows how > the application of common sense may lead to incorrect assumptions, > where you treat the market as an unthinking inanimate machine as > opposed to a rather brilliant if occasionally erratic group > intelligence.
>> I think this is what Buffet (and a lot of other people like him) is >> trying very hard to point out to ordinary people like me.
> In his comments recommending index funds to anyone who isn't a skilled > value investor, yes.
On Jan 4, 8:23 pm, "Jim Watts" <jimwa...@bigpond.net.au> wrote:
> Travis, > the one thing I miss in this thread , is any sign that you allow the > possibility that pago may have a higher risk profile and intend to accept > more risk for more potential return.
One thing you'll find me stating repeatedly in this thread and others like it is that there are two kinds of risk: "systemic" risk or "compensated" risk, which is the kind of risk that can't be diversified away which is what investors are paid to take, and "non-systemic", "idiosyncratic" or "uncompensated" risk, which is the kind of risk that people take on by failing to diversify their portfolios.
Systemic risk is proportional to return. Taking on more systemic risk, by investing in a more aggressive balance of asset classes, gives a higher expected return.
Non systemic risk is NOT proportional to return. You do not get paid to take on this kind of risk. It is a completely pointless form of risk to take which sensible investors should do their utmost to avoid.
Since Pago's query involves taking on more non systemic risk, it has nothing to do with return. Taking on more of the kind of risk he wants to take on does NOT lead to higher returns. Since the types of risk which Pago wants to increase in his portfolio are not the kind of risks which lead to higher returns, the issues which you raise have nothing much to do with this conversation!
> For example I would answer this question "are we overly diversified" by > saying we are overdiversified when the portfolio risk moves above or below > the target risk. > Obviously this will only happen by moving widely among asset classes, or > more simply a large change in equity to bond ratio.
Repeated numerous times through this thread has been the concept of "equally attractive asset classes". By this I mean to say that, lacking evidence to the contrary, we would suppose that international shares and property is just as attractive as Australian shares and property, the only real difference being that differences in economic cycles around the world make foreign assets behave slightly differently to our own.
So rather than a purely domestic portfolio, we should consider diluting Australia-specific risks in order to get a portfolio which tracks world growth rather than just local growth. Instead of having our whole portfolio in Australian dollar denominated assets, perhaps we could get some foreign currencies in there as well to protect against falls in the Australian dollar.
Contrary to a point made elsewhere in this or a similar thread, we do not exclusively spend our money in Australian dollars and therefore any exposure to foreign currencies in our portfolio introduces a liability matching risk. In fact Australian consumers are exposed to foreign currency risk because they purchase imported goods, foreign services and use commodities like oil. If the Australian dollar collapsed, many of these things would become extremely expensive to Australians, which is a risk that can be partly hedged out with exposure to assets in other currencies.
A portfolio which consists of a few blue chip shares has the same asset allocation as a domestic index fund, but is significantly more risky due to much greater exposure to individual companies. Without changing the growth asset to income asset ratio you can add small caps, international shares, emerging markets, international property and other things. That won't change the expected return to any significant extent, but it will change the risk profile substantially.
This extra diversification will essentially eliminate any significant exposure you might have to individual corporate scandals. If one of your "blue chips" had been HIH, One Tel or even AWB you may have had significant problems with a direct portfolio, but a globally diversified one would have negligible exposure to that. By diversifying, you eliminate the risk of individual companies and are left with only market risks. Diversify into other asset classes and you blend away much of that risk as well, leaving you with a much steadier growth rate.
> I would have thought pago or anyone should first establish clearly which > part of the risk return spectrum they intend to invest in. > Having done this it makes sense to me to diversify as much as possible > within a constant bond equity ratio. The effect of this would be to hold > risk at target but increasing diversity would maximise return at that risk.
One of the problems of understanding that many people seem to have is thinking that diversification is impossible without stepping down a risk profile. They think that diversification necessarily has to mean a step down from "Aggressive" to "Balanced" or something.
That's not what I'm talking about at all.
I can give you as aggressive a portfolio as you like, but I'd only take on forms of risk which we know are worth taking on. It is easy and inexpensive to access a lot of different asset classes these days via index funds and ETFs.
The concept of risk profiles is different however. While arguably the most aggressive portfolios are less diversified due to the fact that they have little or no exposure to bonds and cash, they can still be enormously diversified because there are lots and lots of asset classes available with "equity-like" returns.
I thought I may have missed something but you have cleared that up.. I see your approach is the same but in discussion you tend to answer in a way which holds return constant but reduces risk rather than hold risk constant and increase return. Either being valid of course. Your points regarding the difference between business risk & market risk are always worth mentioning. Although I could not see Pago's intention as well as you. it is probably because of you previous experience with his questions, and I hope to avoid raising matters outside the conversation in future.
Jim Watts
"Travis Morien" <travismor...@yahoo.com> wrote in message
> On Jan 4, 8:23 pm, "Jim Watts" <jimwa...@bigpond.net.au> wrote: >> Travis, >> the one thing I miss in this thread , is any sign that you allow the >> possibility that pago may have a higher risk profile and intend to accept >> more risk for more potential return.
> One thing you'll find me stating repeatedly in this thread and others > like it is that there are two kinds of risk: "systemic" risk or > "compensated" risk, which is the kind of risk that can't be diversified > away which is what investors are paid to take, and "non-systemic", > "idiosyncratic" or "uncompensated" risk, which is the kind of risk that > people take on by failing to diversify their portfolios.
> Systemic risk is proportional to return. Taking on more systemic risk, > by investing in a more aggressive balance of asset classes, gives a > higher expected return.
> Non systemic risk is NOT proportional to return. You do not get paid > to take on this kind of risk. It is a completely pointless form of > risk to take which sensible investors should do their utmost to avoid.
> Since Pago's query involves taking on more non systemic risk, it has > nothing to do with return. Taking on more of the kind of risk he wants > to take on does NOT lead to higher returns. Since the types of risk > which Pago wants to increase in his portfolio are not the kind of risks > which lead to higher returns, the issues which you raise have nothing > much to do with this conversation!
>> For example I would answer this question "are we overly diversified" by >> saying we are overdiversified when the portfolio risk moves above or >> below >> the target risk. >> Obviously this will only happen by moving widely among asset classes, or >> more simply a large change in equity to bond ratio.
> Repeated numerous times through this thread has been the concept of > "equally attractive asset classes". By this I mean to say that, > lacking evidence to the contrary, we would suppose that international > shares and property is just as attractive as Australian shares and > property, the only real difference being that differences in economic > cycles around the world make foreign assets behave slightly differently > to our own.
> So rather than a purely domestic portfolio, we should consider diluting > Australia-specific risks in order to get a portfolio which tracks world > growth rather than just local growth. Instead of having our whole > portfolio in Australian dollar denominated assets, perhaps we could get > some foreign currencies in there as well to protect against falls in > the Australian dollar.
> Contrary to a point made elsewhere in this or a similar thread, we do > not exclusively spend our money in Australian dollars and therefore any > exposure to foreign currencies in our portfolio introduces a liability > matching risk. In fact Australian consumers are exposed to foreign > currency risk because they purchase imported goods, foreign services > and use commodities like oil. If the Australian dollar collapsed, many > of these things would become extremely expensive to Australians, which > is a risk that can be partly hedged out with exposure to assets in > other currencies.
> A portfolio which consists of a few blue chip shares has the same asset > allocation as a domestic index fund, but is significantly more risky > due to much greater exposure to individual companies. Without changing > the growth asset to income asset ratio you can add small caps, > international shares, emerging markets, international property and > other things. That won't change the expected return to any significant > extent, but it will change the risk profile substantially.
> This extra diversification will essentially eliminate any significant > exposure you might have to individual corporate scandals. If one of > your "blue chips" had been HIH, One Tel or even AWB you may have had > significant problems with a direct portfolio, but a globally > diversified one would have negligible exposure to that. By > diversifying, you eliminate the risk of individual companies and are > left with only market risks. Diversify into other asset classes and > you blend away much of that risk as well, leaving you with a much > steadier growth rate.
>> I would have thought pago or anyone should first establish clearly which >> part of the risk return spectrum they intend to invest in. >> Having done this it makes sense to me to diversify as much as possible >> within a constant bond equity ratio. The effect of this would be to hold >> risk at target but increasing diversity would maximise return at that >> risk.
> One of the problems of understanding that many people seem to have is > thinking that diversification is impossible without stepping down a > risk profile. They think that diversification necessarily has to mean > a step down from "Aggressive" to "Balanced" or something.
> That's not what I'm talking about at all.
> I can give you as aggressive a portfolio as you like, but I'd only take > on forms of risk which we know are worth taking on. It is easy and > inexpensive to access a lot of different asset classes these days via > index funds and ETFs.
> The concept of risk profiles is different however. While arguably the > most aggressive portfolios are less diversified due to the fact that > they have little or no exposure to bonds and cash, they can still be > enormously diversified because there are lots and lots of asset classes > available with "equity-like" returns.
Travis Morien wrote: > On Jan 4, 8:23 pm, "Jim Watts" <jimwa...@bigpond.net.au> wrote: > > Travis, > > the one thing I miss in this thread , is any sign that you allow the > > possibility that pago may have a higher risk profile and intend to accept > > more risk for more potential return.
> One thing you'll find me stating repeatedly in this thread and others > like it is that there are two kinds of risk: "systemic" risk or > "compensated" risk, which is the kind of risk that can't be diversified > away which is what investors are paid to take, and "non-systemic", > "idiosyncratic" or "uncompensated" risk, which is the kind of risk that > people take on by failing to diversify their portfolios.
> Systemic risk is proportional to return. Taking on more systemic risk, > by investing in a more aggressive balance of asset classes, gives a > higher expected return.
> Non systemic risk is NOT proportional to return. You do not get paid > to take on this kind of risk. It is a completely pointless form of > risk to take which sensible investors should do their utmost to avoid.
> Since Pago's query involves taking on more non systemic risk, it has > nothing to do with return. Taking on more of the kind of risk he wants > to take on does NOT lead to higher returns. Since the types of risk > which Pago wants to increase in his portfolio are not the kind of risks > which lead to higher returns, the issues which you raise have nothing > much to do with this conversation!
> > For example I would answer this question "are we overly diversified" by > > saying we are overdiversified when the portfolio risk moves above or below > > the target risk. > > Obviously this will only happen by moving widely among asset classes, or > > more simply a large change in equity to bond ratio.
> Repeated numerous times through this thread has been the concept of > "equally attractive asset classes". By this I mean to say that, > lacking evidence to the contrary, we would suppose that international > shares and property is just as attractive as Australian shares and > property, the only real difference being that differences in economic > cycles around the world make foreign assets behave slightly differently > to our own.
> So rather than a purely domestic portfolio, we should consider diluting > Australia-specific risks in order to get a portfolio which tracks world > growth rather than just local growth. Instead of having our whole > portfolio in Australian dollar denominated assets, perhaps we could get > some foreign currencies in there as well to protect against falls in > the Australian dollar.
> Contrary to a point made elsewhere in this or a similar thread, we do > not exclusively spend our money in Australian dollars and therefore any > exposure to foreign currencies in our portfolio introduces a liability > matching risk. In fact Australian consumers are exposed to foreign > currency risk because they purchase imported goods, foreign services > and use commodities like oil. If the Australian dollar collapsed, many > of these things would become extremely expensive to Australians, which > is a risk that can be partly hedged out with exposure to assets in > other currencies.
> A portfolio which consists of a few blue chip shares has the same asset > allocation as a domestic index fund, but is significantly more risky > due to much greater exposure to individual companies. Without changing > the growth asset to income asset ratio you can add small caps, > international shares, emerging markets, international property and > other things. That won't change the expected return to any significant > extent, but it will change the risk profile substantially.
> This extra diversification will essentially eliminate any significant > exposure you might have to individual corporate scandals. If one of > your "blue chips" had been HIH, One Tel or even AWB you may have had > significant problems with a direct portfolio, but a globally > diversified one would have negligible exposure to that. By > diversifying, you eliminate the risk of individual companies and are > left with only market risks. Diversify into other asset classes and > you blend away much of that risk as well, leaving you with a much > steadier growth rate.
> > I would have thought pago or anyone should first establish clearly which > > part of the risk return spectrum they intend to invest in. > > Having done this it makes sense to me to diversify as much as possible > > within a constant bond equity ratio. The effect of this would be to hold > > risk at target but increasing diversity would maximise return at that risk.
> One of the problems of understanding that many people seem to have is > thinking that diversification is impossible without stepping down a > risk profile. They think that diversification necessarily has to mean > a step down from "Aggressive" to "Balanced" or something.
> That's not what I'm talking about at all.
> I can give you as aggressive a portfolio as you like, but I'd only take > on forms of risk which we know are worth taking on. It is easy and > inexpensive to access a lot of different asset classes these days via > index funds and ETFs.
> The concept of risk profiles is different however. While arguably the > most aggressive portfolios are less diversified due to the fact that > they have little or no exposure to bonds and cash, they can still be > enormously diversified because there are lots and lots of asset classes > available with "equity-like" returns.
At the moment my Vanguard portfolio is comprised of 32% Aust. Listed Property, 27% Aust. Shares and 17% Hedged Internatinal Shares and I intend to top up the International portion to about 35% due to International Shares lower than expected return last year and when the Aust. Shares drops further some time in the near future, I will increae my allocation from 27% to about 40%. 24% of my portfolio is actively managed by Perpetual (Industrial and Aust. Shares). Am I well diversified enough? What is my uncompensated risk?
Should I allocate a portion of my money to International and Aust Bonds as well? (to moderate my portfolio though I don't know how much moderation I can expect from bond.) Again will I be compensated by bond given the inverted yield curve at the moment.
Jim Watts wrote: > Travis, > the one thing I miss in this thread , is any sign that you allow the > possibility that pago may have a higher risk profile and intend to accept > more risk for more potential return. > For example I would answer this question "are we overly diversified" by > saying we are overdiversified when the portfolio risk moves above or below > the target risk. > Obviously this will only happen by moving widely among asset classes, or > more simply a large change in equity to bond ratio.
> I would have thought pago or anyone should first establish clearly which > part of the risk return spectrum they intend to invest in. > Having done this it makes sense to me to diversify as much as possible > within a constant bond equity ratio. The effect of this would be to hold > risk at target but increasing diversity would maximise return at that risk.
> Jim Watts
> Jim, you are right about my tolerance for "risk" as I mainly invest in growth assets like property trusts, intrnational and australian shares. I only invest in what I can afford to lose and so I sleep very soundly at night. A large portion of my portfolio is indexed since they have low cost and mers.
> > On Jan 2, 10:39 am, pago_b...@yahoo.com.au wrote:
> >> I read a lot of Buffet stuff but I do not claim to know everything > >> there is to know about it. And having read a lot of his stuff, I think > >> the secret of successful investing is that there is no secret and > >> anybody with a bit of common sense can do as well as the professional.
> > If by that you mean "by investing in a low cost index fund you'll do as > > well as a professional", I'd agree.
> > If you mean that only a bit of common sense is required to be a > > successful stock picker competing against professionals I'd say > > probably not.
> > According to a number of studies I've seen, professionals do tend on > > average to beat the market slightly before costs and professionals > > certainly are more skilled at technical things such as valuing > > companies.
> > They are disadvantaged by some factors such as the imperative to > > deliver market beating returns from one quarter to the next (limiting > > tracking error tolerance) and having to deal with much larger > > portfolios. Their portfolios are often subject to large inflows and > > outflows. And, they have the complexity of disclosure and regulatory > > requirements when they deal in large positions.
> > But I don't think only common sense is required to do well as an active > > investor. Stock markets are often counterintuitive to common sense > > because they represent the collective wisdom of a lot of individuals. > > The current thread "Risk vs Return...I find this illogical" shows how > > the application of common sense may lead to incorrect assumptions, > > where you treat the market as an unthinking inanimate machine as > > opposed to a rather brilliant if occasionally erratic group > > intelligence.
> >> I think this is what Buffet (and a lot of other people like him) is > >> trying very hard to point out to ordinary people like me.
> > In his comments recommending index funds to anyone who isn't a skilled > > value investor, yes.
In article <1167912054.184809.242...@q40g2000cwq.googlegroups.com>, "Travis Morien" <travismor...@yahoo.com> wrote:
> Contrary to a point made elsewhere in this or a similar thread, we do > not exclusively spend our money in Australian dollars and therefore any > exposure to foreign currencies in our portfolio introduces a liability > matching risk. In fact Australian consumers are exposed to foreign > currency risk because they purchase imported goods, foreign services > and use commodities like oil. If the Australian dollar collapsed, many > of these things would become extremely expensive to Australians, which > is a risk that can be partly hedged out with exposure to assets in > other currencies.
I feel my ears burning!
What I've never had explained to me is :
If it's so important to protect our investment income against the varying import prices that we spend part of it on, why is there no fuss made about likewise protecting our employment income, which for the great majority of people far exceeds their investment income, from these same variations by having our wages denominated in a basket of currencies rather than AUD?
In the absence of any such fuss, the only conclusion that I can see being reasonably drawn is that the great majority of Australians want their income to be denominated entirely in AUD ... and if this is the case with their employment income there is no reason why it should be any different with their investment income.
Jim Watts wrote: > Travis, > the one thing I miss in this thread , is any sign that you allow the > possibility that pago may have a higher risk profile and intend to accept > more risk for more potential return. > For example I would answer this question "are we overly diversified" by > saying we are overdiversified when the portfolio risk moves above or below > the target risk. > Obviously this will only happen by moving widely among asset classes, or > more simply a large change in equity to bond ratio.
> I would have thought pago or anyone should first establish clearly which > part of the risk return spectrum they intend to invest in. > Having done this it makes sense to me to diversify as much as possible > within a constant bond equity ratio. The effect of this would be to hold > risk at target but increasing diversity would maximise return at that risk.
> Jim Watts
> You are right Jim. I am a growth investor since I invest totally in shares and property trusts. My portfolio is indexed to a larger extent and I can tolerate the occassional bumps along the way ( I never invest more than i can afford to lose).
> > On Jan 2, 10:39 am, pago_b...@yahoo.com.au wrote:
> >> I read a lot of Buffet stuff but I do not claim to know everything > >> there is to know about it. And having read a lot of his stuff, I think > >> the secret of successful investing is that there is no secret and > >> anybody with a bit of common sense can do as well as the professional.
> > If by that you mean "by investing in a low cost index fund you'll do as > > well as a professional", I'd agree.
> > If you mean that only a bit of common sense is required to be a > > successful stock picker competing against professionals I'd say > > probably not.
> > According to a number of studies I've seen, professionals do tend on > > average to beat the market slightly before costs and professionals > > certainly are more skilled at technical things such as valuing > > companies.
> > They are disadvantaged by some factors such as the imperative to > > deliver market beating returns from one quarter to the next (limiting > > tracking error tolerance) and having to deal with much larger > > portfolios. Their portfolios are often subject to large inflows and > > outflows. And, they have the complexity of disclosure and regulatory > > requirements when they deal in large positions.
> > But I don't think only common sense is required to do well as an active > > investor. Stock markets are often counterintuitive to common sense > > because they represent the collective wisdom of a lot of individuals. > > The current thread "Risk vs Return...I find this illogical" shows how > > the application of common sense may lead to incorrect assumptions, > > where you treat the market as an unthinking inanimate machine as > > opposed to a rather brilliant if occasionally erratic group > > intelligence.
> >> I think this is what Buffet (and a lot of other people like him) is > >> trying very hard to point out to ordinary people like me.
> > In his comments recommending index funds to anyone who isn't a skilled > > value investor, yes.
On Jan 4, 10:22 pm, "Jim Watts" <jimwa...@bigpond.net.au> wrote:
> Thanks Travis,
> I thought I may have missed something but you have cleared that up.. > I see your approach is the same but in discussion you tend to answer in a > way which holds return constant but reduces risk rather than hold risk > constant and increase return. Either being valid of course.
Proper portfolio construction involves minimising the level of risk you have to take to target a particular expected return.
What you choose to do then is up to you. Take the same return with less risk, or stick with the old level of risk and take a higher expected return. Its a nice choice to have. You might for instance choose to diversify your portfolio to the maximum possible extent and then use a higher level of gearing than you might be able to get away with if you have a single asset class portfolio. Me personally, I'm diversified and geared to the hilt. The last few years have been a great time for that, particularly since every asset class has done well!
On Jan 4, 10:37 pm, Geoff Walker <i...@l.id> wrote:
> In article <1167912054.184809.242...@q40g2000cwq.googlegroups.com>, > I feel my ears burning!
:-)
> What I've never had explained to me is :
> If it's so important to protect our investment income against the > varying import prices that we spend part of it on, why is there no fuss > made about likewise protecting our employment income, which for the > great majority of people far exceeds their investment income, from these > same variations by having our wages denominated in a basket of > currencies rather than AUD?
Actually that's not a bad idea. It probably would be nice if people were given the option of negotiating future salaries linked to other currencies.
If I could take as my salary $50K Aus plus 10K Euro plus 10K USD + 5K Yen and 5K Stirling or some similar balance that probably would be a good thing.
> In the absence of any such fuss, the only conclusion that I can see > being reasonably drawn is that the great majority of Australians want > their income to be denominated entirely in AUD ... and if this is the > case with their employment income there is no reason why it should be > any different with their investment income.
I wouldn't take the great majority of Australian's economic opinions all that seriously. A lot of people are terrible at managing their money, to the extent that they think its the bank's fault that they blew all their money at Harvey Norman on "interest free nothing to pay till July 2008" type deals, only to find that July 2008 comes and they still don't have the money to pay for it.
Hello Jim This thread is about as good an example as exists on ausinvest that there is no awareness in the industry of the importance of time when discussing/assessing risk.
You wrote:
"I would have thought pago or anyone should first establish clearly which part of the risk return spectrum they intend to invest in. "
The relationship between risk and return for assets such as shares and bonds varies depending on one's holding period. Short term risk ( which is what this thread is about if I read the sentiments right) has a very different relationship with return compared to, say, 10 year risk. So before 'establishing clearly which part of the risk spectrum ' they are interested in investors should establish their investment horizon. For many investors this is short term, but for most super investors it is long term.
"Having done this it makes sense to me to diversify as much as possible
within a constant bond equity ratio. The effect of this would be to hold risk at target but increasing diversity would maximise return at that risk. "
Believe ot or not, all our financial market history shows that as the investment horizon increases then the extent of the tradeoff between risk and return falls away. That is, as your horizon increases you dont get as much risk reduction from holding bonds in a bond equity portfolio. This is profound stuff for super investors. If you want to know more I suggest you read Jeremy Siegel's "Stocks for the Long Run" as a start. Everybody else says they have read it- there is a difference between reading it and comprehending what he is saying about long term risk of bonds and shares.What he is talking about in the US markets is observed in our own markets and most others- it is not simply 'time diversification' ( which has the relative riskiness of equity and bonds constant over time) but is an effect caused by the different underlying nature of the assets. This is not captured by the single period thinking that this debate so far is fashioned by. Regards Risko
On Jan 4, 10:23 pm, "Jim Watts" <jimwa...@bigpond.net.au> wrote:
> Travis, > the one thing I miss in this thread , is any sign that you allow the > possibility that pago may have a higher risk profile and intend to accept > more risk for more potential return. > For example I would answer this question "are we overly diversified" by > saying we are overdiversified when the portfolio risk moves above or below > the target risk. > Obviously this will only happen by moving widely among asset classes, or > more simply a large change in equity to bond ratio.
> I would have thought pago or anyone should first establish clearly which > part of the risk return spectrum they intend to invest in. > Having done this it makes sense to me to diversify as much as possible > within a constant bond equity ratio. The effect of this would be to hold > risk at target but increasing diversity would maximise return at that risk.
> > On Jan 2, 10:39 am, pago_b...@yahoo.com.au wrote:
> >> I read a lot of Buffet stuff but I do not claim to know everything > >> there is to know about it. And having read a lot of his stuff, I think > >> the secret of successful investing is that there is no secret and > >> anybody with a bit of common sense can do as well as the professional.
> > If by that you mean "by investing in a low cost index fund you'll do as > > well as a professional", I'd agree.
> > If you mean that only a bit of common sense is required to be a > > successful stock picker competing against professionals I'd say > > probably not.
> > According to a number of studies I've seen, professionals do tend on > > average to beat the market slightly before costs and professionals > > certainly are more skilled at technical things such as valuing > > companies.
> > They are disadvantaged by some factors such as the imperative to > > deliver market beating returns from one quarter to the next (limiting > > tracking error tolerance) and having to deal with much larger > > portfolios. Their portfolios are often subject to large inflows and > > outflows. And, they have the complexity of disclosure and regulatory > > requirements when they deal in large positions.
> > But I don't think only common sense is required to do well as an active > > investor. Stock markets are often counterintuitive to common sense > > because they represent the collective wisdom of a lot of individuals. > > The current thread "Risk vs Return...I find this illogical" shows how > > the application of common sense may lead to incorrect assumptions, > > where you treat the market as an unthinking inanimate machine as > > opposed to a rather brilliant if occasionally erratic group > > intelligence.
> >> I think this is what Buffet (and a lot of other people like him) is > >> trying very hard to point out to ordinary people like me.
> > In his comments recommending index funds to anyone who isn't a skilled > > value investor, yes.
On Jan 5, 8:03 am, "risko" <drmgilli...@gmail.com> wrote:
> Hello Jim > This thread is about as good an example as exists on ausinvest that > there is no awareness in the industry of the importance of time when > discussing/assessing risk.You wrote:"I would have thought pago or anyone should first establish clearly > which > part of the risk return spectrum they intend to invest in. "
Perhaps you'll take a radical change of direction then by providing some useful information this time to help us understand where "the industry" goes wrong. You're not planning on just dumping a bunch of vague claims and then ducking for cover into comments about cricket and ships are you? If you did that again I don't think you'd have any credibility at all left in this newsgroup.
> The relationship between risk and return for assets such as shares and > bonds varies depending on one's holding period. Short term risk ( which > is what this thread is about if I read the sentiments right) has a very > different relationship with return compared to, say, 10 year risk.
Actually the comments I have made are time period independent as they apply just as well to long term risk. I note with interest how you're now back to your "Stocks for the Long Run" viewpoint that stocks are less risky than bonds over long time frames, though just last week you were discussing the opposite viewpoint completely when you were referring to that John Norstad article on risk vs. time.
In addition to failing to be specific enough for anyone to enact any of your advice, it is very hard figuring out what your advice actually is since you seem to switch between advocating one viewpoint to advocating the complete opposite one. If you would only come out clearly and state what your point is in unveiled language perhaps this confusion could be cleared up.
> So before 'establishing clearly which part of the risk spectrum ' they > are interested in investors should establish their investment horizon. > For many investors this is short term, but for most super investors it > is long term.
As pointed out by Norstad in his article, while annualised returns for shares converge to a narrow range over the long term, they are different enough that they compound to wildly different total returns over this period, leading to Norstad's assertion that risk (defined as the uncertainty that exists in whether the portfolio will achieve sufficient returns to fund a financial goal) actually INCREASES over time. The less diversified a portfolio, the more uncertainty will exist in the total cumulative long term return, making it more risky over the long term.
So for a start you could clarify your point a little by telling us whether you agree with Dr Norstad's assertion or not?
And secondly, while many would agree that diversification has a very large impact on reducing short term risk you haven't explained what makes that a bad thing from a long term risk point of view. Diversification reduces long term risk as well. And at any rate, reduction in short term risk is not a bad thing.
> "Having done this it makes sense to me to diversify as much as possible > within a constant bond equity ratio. The effect of this would be to > hold > risk at target but increasing diversity would maximise return at that > risk. "
> Believe ot or not, all our financial market history shows that as the > investment horizon increases then the extent of the tradeoff between > risk and return falls away. That is, as your horizon increases you dont > get as much risk reduction from holding bonds in a bond equity > portfolio.
What's your point, Mike? In this thread I've made it clear that seeking more diversification does not mean stepping down to a portfolio with less equities.
If you are claiming that an all equity portfolio is less risky over long time horizons than an all bond one then:
a) You are contradicting John Norstad, please clarify whether you agree with him or not and if not what parts of his argument do you disagree with? b) what does that have to do with this conversation, which is about diversifying your equity holdings by buying more varied equities rather than diluting them with bonds?
> This is profound stuff for super investors. > If you want to know more I suggest you read Jeremy Siegel's "Stocks for > the Long Run" as a start. Everybody else says they have read it- there > is a difference between reading it and comprehending what he is saying > about long term risk of bonds and shares.What he is talking about in > the US markets is observed in our own markets and most others- it is > not simply 'time diversification' ( which has the relative riskiness of > equity and bonds constant over time) but is an effect caused by the > different underlying nature of the assets. This is not captured by the > single period thinking that this debate so far is fashioned by.
Vague as always, Mike!
Since this topic mainly deals with the wisdom of diversifying WITHIN equities, rather than diversifying OUT OF equities, what are you saying is wrong with the advice I've been giving in this thread?
If you are going to argue against me then presumably you must be arguing that stock investors should not seek to own as many stocks as possible, perhaps that they should focus their portfolios on a narrow slice of the global equity markets. How is it that the kind of diversification I am advocating, which you do not seem to dispute is immensely valuable for reducing short term risk, is bad for long term risk?
And if its not bad for long term risk, what is your problem with it? Are you saying that reducing short term risk per se is a bad thing and that a long term investor not only need ignore short term risk (of the unsystemic, non compensated kind) and actually strive to increase this kind of risk through non-diversification?
Establishing clearly which part of the risk return spectrum they intend to invest in is the critical step for investors. It is also the area I find the least likely to be satisfactory in the long term if it is based on an interview which begins "do you like losing money" This is the point I was making in my previous advice to you, to find a solution to that, rather than another algorithm of risk over time.
Since you have raised risk over time again I will discuss it further.
There are two conflicting issues being confused when time is being considered.
One ... is that the further out in time you go, the more uncertain things must get. This is intuitively so and the John Norstead reference provides plain mathematical evidence of its probable quantity.
Two ... the further out in time you go the more certain it is that you wont lose your money. This is almost intuitively so but not quite. It is supported by data which shows that no previous period of around 15 yrs has produced a result that loses money.
The point of confusion is that one is dealing with the outer boundary of returns eg how much return is possible. It is obviously extremely uncertain. The other is dealing with an exact amount, which is the invested amount. Putting any money into a system which does not take it to zero, (i.e. diversified to remove uncompensated or business risk) and which is self acting to produce a return & also a growth function ( i.e. distributes dividends & retains some for growth) it is inevitable you will certainly without fail get your money back sometime.
I believe I already understand both of those, but the degree of uncertainty is so vague it does no help me sleep as far as my super is concerned. If you think you can produce another piece of maths to assure me, I can assure you you ar wasting your time.
> Hello Jim > This thread is about as good an example as exists on ausinvest that > there is no awareness in the industry of the importance of time when > discussing/assessing risk. > You wrote: > "I would have thought pago or anyone should first establish clearly > which > part of the risk return spectrum they intend to invest in. "
> The relationship between risk and return for assets such as shares and > bonds varies depending on one's holding period. Short term risk ( which > is what this thread is about if I read the sentiments right) has a very > different relationship with return compared to, say, 10 year risk. > So before 'establishing clearly which part of the risk spectrum ' they > are interested in investors should establish their investment horizon. > For many investors this is short term, but for most super investors it > is long term.
> "Having done this it makes sense to me to diversify as much as possible
> within a constant bond equity ratio. The effect of this would be to > hold > risk at target but increasing diversity would maximise return at that > risk. "
> Believe ot or not, all our financial market history shows that as the > investment horizon increases then the extent of the tradeoff between > risk and return falls away. That is, as your horizon increases you dont > get as much risk reduction from holding bonds in a bond equity > portfolio. > This is profound stuff for super investors. > If you want to know more I suggest you read Jeremy Siegel's "Stocks for > the Long Run" as a start. Everybody else says they have read it- there > is a difference between reading it and comprehending what he is saying > about long term risk of bonds and shares.What he is talking about in > the US markets is observed in our own markets and most others- it is > not simply 'time diversification' ( which has the relative riskiness of > equity and bonds constant over time) but is an effect caused by the > different underlying nature of the assets. This is not captured by the > single period thinking that this debate so far is fashioned by. > Regards > Risko
> On Jan 4, 10:23 pm, "Jim Watts" <jimwa...@bigpond.net.au> wrote: >> Travis, >> the one thing I miss in this thread , is any sign that you allow the >> possibility that pago may have a higher risk profile and intend to accept >> more risk for more potential return. >> For example I would answer this question "are we overly diversified" by >> saying we are overdiversified when the portfolio risk moves above or >> below >> the target risk. >> Obviously this will only happen by moving widely among asset classes, or >> more simply a large change in equity to bond ratio.
>> I would have thought pago or anyone should first establish clearly which >> part of the risk return spectrum they intend to invest in. >> Having done this it makes sense to me to diversify as much as possible >> within a constant bond equity ratio. The effect of this would be to hold >> risk at target but increasing diversity would maximise return at that >> risk.
>> > On Jan 2, 10:39 am, pago_b...@yahoo.com.au wrote:
>> >> I read a lot of Buffet stuff but I do not claim to know everything >> >> there is to know about it. And having read a lot of his stuff, I >> >> think >> >> the secret of successful investing is that there is no secret and >> >> anybody with a bit of common sense can do as well as the professional.
>> > If by that you mean "by investing in a low cost index fund you'll do as >> > well as a professional", I'd agree.
>> > If you mean that only a bit of common sense is required to be a >> > successful stock picker competing against professionals I'd say >> > probably not.
>> > According to a number of studies I've seen, professionals do tend on >> > average to beat the market slightly before costs and professionals >> > certainly are more skilled at technical things such as valuing >> > companies.
>> > They are disadvantaged by some factors such as the imperative to >> > deliver market beating returns from one quarter to the next (limiting >> > tracking error tolerance) and having to deal with much larger >> > portfolios. Their portfolios are often subject to large inflows and >> > outflows. And, they have the complexity of disclosure and regulatory >> > requirements when they deal in large positions.
>> > But I don't think only common sense is required to do well as an active >> > investor. Stock markets are often counterintuitive to common sense >> > because they represent the collective wisdom of a lot of individuals. >> > The current thread "Risk vs Return...I find this illogical" shows how >> > the application of common sense may lead to incorrect assumptions, >> > where you treat the market as an unthinking inanimate machine as >> > opposed to a rather brilliant if occasionally erratic group >> > intelligence.
>> >> I think this is what Buffet (and a lot of other people like him) is >> >> trying very hard to point out to ordinary people like me.
>> > In his comments recommending index funds to anyone who isn't a skilled >> > value investor, yes.
I wasn't right because I didn't know what your tolerance was, but could see the question was being answered as if "growth" was your profile. Having established that, Travis' answer is perfectly correct as you would expect. However the terms used appear to have failed to communicate to you that you don't have to lose all you money ever. His point is that if you diversify among only growth stocks, the effect is to lessen your chance of losing it all, but even more magnificently you will increase your return by the correlation effect. eg buying one airline leaves you at risk of it going broke, buying two airlines reduces that risk by half but is not the smartest as one airline and one shipping line will not have their bad days on the same day.( figuratively speaking of course) The more you diversify the better as you can see. (Provided you stay in growth investments)
> Jim Watts wrote: >> Travis, >> the one thing I miss in this thread , is any sign that you allow the >> possibility that pago may have a higher risk profile and intend to accept >> more risk for more potential return. >> For example I would answer this question "are we overly diversified" by >> saying we are overdiversified when the portfolio risk moves above or >> below >> the target risk. >> Obviously this will only happen by moving widely among asset classes, or >> more simply a large change in equity to bond ratio.
>> I would have thought pago or anyone should first establish clearly which >> part of the risk return spectrum they intend to invest in. >> Having done this it makes sense to me to diversify as much as possible >> within a constant bond equity ratio. The effect of this would be to hold >> risk at target but increasing diversity would maximise return at that >> risk.
>> Jim Watts
>> Jim, you are right about my tolerance for "risk" as I mainly invest in >> growth assets like property trusts, intrnational and australian shares. >> I only invest in what I can afford to lose and so I sleep very soundly at >> night. A large portion of my portfolio is indexed since they have low >> cost and mers.
>> > On Jan 2, 10:39 am, pago_b...@yahoo.com.au wrote:
>> >> I read a lot of Buffet stuff but I do not claim to know everything >> >> there is to know about it. And having read a lot of his stuff, I >> >> think >> >> the secret of successful investing is that there is no secret and >> >> anybody with a bit of common sense can do as well as the professional.
>> > If by that you mean "by investing in a low cost index fund you'll do as >> > well as a professional", I'd agree.
>> > If you mean that only a bit of common sense is required to be a >> > successful stock picker competing against professionals I'd say >> > probably not.
>> > According to a number of studies I've seen, professionals do tend on >> > average to beat the market slightly before costs and professionals >> > certainly are more skilled at technical things such as valuing >> > companies.
>> > They are disadvantaged by some factors such as the imperative to >> > deliver market beating returns from one quarter to the next (limiting >> > tracking error tolerance) and having to deal with much larger >> > portfolios. Their portfolios are often subject to large inflows and >> > outflows. And, they have the complexity of disclosure and regulatory >> > requirements when they deal in large positions.
>> > But I don't think only common sense is required to do well as an active >> > investor. Stock markets are often counterintuitive to common sense >> > because they represent the collective wisdom of a lot of individuals. >> > The current thread "Risk vs Return...I find this illogical" shows how >> > the application of common sense may lead to incorrect assumptions, >> > where you treat the market as an unthinking inanimate machine as >> > opposed to a rather brilliant if occasionally erratic group >> > intelligence.
>> >> I think this is what Buffet (and a lot of other people like him) is >> >> trying very hard to point out to ordinary people like me.
>> > In his comments recommending index funds to anyone who isn't a skilled >> > value investor, yes.
Travis Morien wrote: > ... > Repeated numerous times through this thread has been the concept of > "equally attractive asset classes". By this I mean to say that, > lacking evidence to the contrary, we would suppose that international > shares and property is just as attractive as Australian shares and > property, the only real difference being that differences in economic > cycles around the world make foreign assets behave slightly differently > to our own. > ... > Travis > www.travismorien.com
It should also be pointed out that even diversification to less attractice classes, within moderation, can increase expected return and reduce expected risk.
So it is not necessary to find a set of asset classes that are entirely equally attractive.
Tim Josling wrote: > It should also be pointed out that even diversification to less > attractice classes, within moderation, can increase expected return and > reduce expected risk.
> So it is not necessary to find a set of asset classes that are entirely > equally attractive.
Its worth clarifying for those reading this who may be a bit mystified by that that the above assumes the portfolio is rebalanced. The inherently contrarian market timing effect of rebalancing can improve returns in the manner described. Not over every time frame, but its common enough for the term "rebalancing bonus" to be in common use among portfolio builders.
Jim Watts wrote: > Since you have raised risk over time again I will discuss it further.
> There are two conflicting issues being confused when time is being > considered.
> One ... is that the further out in time you go, the more uncertain things > must get. This is intuitively so and the John Norstead reference provides > plain mathematical evidence of its probable quantity.
One important question which hasn't been addressed by Risko is this:
Are portfolios which have been designed to reduce volatility via combinations of asset classes using traditional (post Markowitz) portfolio construction methods actually worse than portfolios containing only domestic equities over the very long term from the point of view of variability of compound returns, as per Norstead's argument?
Or are they better?
I think that a multi asset class portfolio which gives more consistent returns over short and medium terms will also give more consistent returns over the very long term. The long term is after all just a string of short and medium terms, and if those are less volatile then a string of them also ought to be less volatile.
If Risko has conducted some original research showing that in fact diversified portfolios have greater variability in their long term outcomes, I'd love to see it. Even better, if he's developed some useful tools for measuring or estimating risk over these very long terms that would be most welcome and no doubt go a long way toward rectifying the credibility problems he's build up in aus.invest.
If Risko hasn't conducted any such research, and is just assuming that anything you do which improves short term volatility is counterproductive in the long term, then he needs to carry it out. You can't just go assuming these things, especially when they are counterintuitive and counters conventional wisdom. To overturn conventional wisdom requires empirical research and some kind of theory, and Risko has given no hint at either here.
> Two ... the further out in time you go the more certain it is that you wont > lose your money. This is almost intuitively so but not quite. It is > supported by data which shows that no previous period of around 15 yrs has > produced a result that loses money.
And portfolios which are more diversified than 100% S&P500 index don't even have to go for that many years to avoid losing money.
> The point of confusion is that one is dealing with the outer boundary of > returns eg how much return is possible. It is obviously extremely uncertain. > The other is dealing with an exact amount, which is the invested amount. > Putting any money into a system which does not take it to zero, (i.e. > diversified to remove uncompensated or business risk) and which is self > acting to produce a return & also a growth function ( i.e. distributes > dividends & retains some for growth) it is inevitable you will certainly > without fail get your money back sometime.
The question raised by this thread is "does diversification harm returns". To which I answered no. I then went on to explain the notions of compensated and uncompensated risk and stated that the latter can be gotten rid of with diversification.
Risko dismissed these as wrong in his characteristically vague and non-specific way. It appears he thinks diversification actually does harm returns. And that what non-systemic risk is compensated.
If so, he's attacking more than just a financial planner in a forum, he's claiming that the whole theoretical basis of most academic and professional work on risk is wrong.
Its an extraordinary claim. And you know what they say you need to provide when you make an extraordinary claim? Strong evidence! What evidence has Risko provided?
I agree with your points one and two completely. Your point two on chance of loss is one close to my heart and that of all super investors.
Norstad shows your point number one very nicely- risk blossoming with time,and his appendix puts definition on the proabability distribution of outcomes at the end of a holding period.
The first time I came across Norstad's paper was when I was trying to introduce this concept of risk relativity changing across time for assets such as equity and bonds. Someone knew all about it and claimed it was old hat ( Tonen, I think, he shows promise on his non- monosyllabic days), just 'time diversification" he said, go see Norstad. So I did, but didn't read past his discourse on time diversification. Later I discovered his excellent chart in the Appendix which shows well the point you make on uncertainty blossoming over time.
But, look closely, underneath his nice chart Norstad says:
"There's one problem with this chart. It involves a phenomenon called "reversion to mean." Some (but not all) academics and other experts believe that over long periods of time financial markets which have done better than usual in the past tend to do worse than usual in the future, and vice-versa. The effect of this phenomenon on the pure random walk model we've used to draw the chart is to decrease somewhat the standard deviations at longer time horizons. The net result is that the dramatic widening of the spread of possible outcomes shown in the chart is not as pronounced."
That's only the tip of the shortcomings iceberg on Norstad's chart- as our research and that of others is now showing. I hesitate to inflict a technical paper on you which is why I suggested starting with Siegel's book to see the empirics. The reference below was published roughly in parallel with Norstad's update ( 2005). It opens up the concepts behind these qualifying comments of Norstad for the US markets:
We've done the work on Australian and other markets. Don't you worry ( as Jo used to say) I'm not about to try impose mathematics that suggest the great uncertainty of long term investing can be dispensed with - but there are ways we can reasonably expect to reduce the downside while increasing the upside ( yes, not loose words).
Regards Risko
On Jan 5, 4:27 pm, "Jim Watts" <jimwa...@bigpond.net.au> wrote:
> Establishing clearly which part of the risk return spectrum they intend > to invest in is the critical step for investors. > It is also the area I find the least likely to be satisfactory in the long > term if it is based on an interview which begins "do you like losing money" > This is the point I was making in my previous advice to you, to find a > solution to that, rather than another algorithm of risk over time.
> Since you have raised risk over time again I will discuss it further.
> There are two conflicting issues being confused when time is being > considered.
> One ... is that the further out in time you go, the more uncertain things > must get. This is intuitively so and the John Norstead reference provides > plain mathematical evidence of its probable quantity.
> Two ... the further out in time you go the more certain it is that you wont > lose your money. This is almost intuitively so but not quite. It is > supported by data which shows that no previous period of around 15 yrs has > produced a result that loses money.
> The point of confusion is that one is dealing with the outer boundary of > returns eg how much return is possible. It is obviously extremely uncertain. > The other is dealing with an exact amount, which is the invested amount. > Putting any money into a system which does not take it to zero, (i.e. > diversified to remove uncompensated or business risk) and which is self > acting to produce a return & also a growth function ( i.e. distributes > dividends & retains some for growth) it is inevitable you will certainly > without fail get your money back sometime.
> I believe I already understand both of those, but the degree of uncertainty > is so vague it does no help me sleep as far as my super is concerned. > If you think you can produce another piece of maths to assure me, I can > assure you you ar wasting your time.
> > Hello Jim > > This thread is about as good an example as exists on ausinvest that > > there is no awareness in the industry of the importance of time when > > discussing/assessing risk. > > You wrote: > > "I would have thought pago or anyone should first establish clearly > > which > > part of the risk return spectrum they intend to invest in. "
> > The relationship between risk and return for assets such as shares and > > bonds varies depending on one's holding period. Short term risk ( which > > is what this thread is about if I read the sentiments right) has a very > > different relationship with return compared to, say, 10 year risk. > > So before 'establishing clearly which part of the risk spectrum ' they > > are interested in investors should establish their investment horizon. > > For many investors this is short term, but for most super investors it > > is long term.
> > "Having done this it makes sense to me to diversify as much as possible
> > within a constant bond equity ratio. The effect of this would be to > > hold > > risk at target but increasing diversity would maximise return at that > > risk. "
> > Believe ot or not, all our financial market history shows that as the > > investment horizon increases then the extent of the tradeoff between > > risk and return falls away. That is, as your horizon increases you dont > > get as much risk reduction from holding bonds in a bond equity > > portfolio. > > This is profound stuff for super investors. > > If you want to know more I suggest you read Jeremy Siegel's "Stocks for > > the Long Run" as a start. Everybody else says they have read it- there > > is a difference between reading it and comprehending what he is saying > > about long term risk of bonds and shares.What he is talking about in > > the US markets is observed in our own markets and most others- it is > > not simply 'time diversification' ( which has the relative riskiness of > > equity and bonds constant over time) but is an effect caused by the > > different underlying nature of the assets. This is not captured by the > > single period thinking that this debate so far is fashioned by. > > Regards > > Risko
> > On Jan 4, 10:23 pm, "Jim Watts" <jimwa...@bigpond.net.au> wrote: > >> Travis, > >> the one thing I miss in this thread , is any sign that you allow the > >> possibility that pago may have a higher risk profile and intend to accept > >> more risk for more potential return. > >> For example I would answer this question "are we overly diversified" by > >> saying we are overdiversified when the portfolio risk moves above or > >> below > >> the target risk. > >> Obviously this will only happen by moving widely among asset classes, or > >> more simply a large change in equity to bond ratio.
> >> I would have thought pago or anyone should first establish clearly which > >> part of the risk return spectrum they intend to invest in. > >> Having done this it makes sense to me to diversify as much as possible > >> within a constant bond equity ratio. The effect of this would be to hold > >> risk at target but increasing diversity would maximise return at that > >> risk.
> >> > On Jan 2, 10:39 am, pago_b...@yahoo.com.au wrote:
> >> >> I read a lot of Buffet stuff but I do not claim to know everything > >> >> there is to know about it. And having read a lot of his stuff, I > >> >> think > >> >> the secret of successful investing is that there is no secret and > >> >> anybody with a bit of common sense can do as well as the professional.
> >> > If by that you mean "by investing in a low cost index fund you'll do as > >> > well as a professional", I'd agree.
> >> > If you mean that only a bit of common sense is required to be a > >> > successful stock picker competing against professionals I'd say > >> > probably not.
> >> > According to a number of studies I've seen, professionals do tend on > >> > average to beat the market slightly before costs and professionals > >> > certainly are more skilled at technical things such as valuing > >> > companies.
> >> > They are disadvantaged by some factors such as the imperative to > >> > deliver market beating returns from one quarter to the next (limiting > >> > tracking error tolerance) and having to deal with much larger > >> > portfolios. Their portfolios are often subject to large inflows and > >> > outflows. And, they have the complexity of disclosure and regulatory > >> > requirements when they deal in large positions.
> >> > But I don't think only common sense is required to do well as an active > >> > investor. Stock markets are often counterintuitive to common sense > >> > because they represent the collective wisdom of a lot of individuals. > >> > The current thread "Risk vs Return...I find this illogical" shows how > >> > the application of common sense may lead to incorrect assumptions, > >> > where you treat the market as an unthinking inanimate machine as > >> > opposed to a rather brilliant if occasionally erratic group > >> > intelligence.
> >> >> I think this is what Buffet (and a lot of other people like him) is > >> >> trying very hard to point out to ordinary people like me.
> >> > In his comments recommending index funds to anyone who isn't a
On Jan 5, 8:00 pm, "risko" <drmgilli...@gmail.com> wrote:
> We've done the work on Australian and other markets. Don't you > worry ( as Jo used to say) I'm not about to try impose mathematics > that suggest the great uncertainty of long term investing can be > dispensed with - but there are ways we can reasonably expect to > reduce the downside while increasing the upside ( yes, not loose > words).
Are you bound by a confidentiality agreement or the terms of one of your patents from actually describing some of these ways?
You always withdraw at the crucial moment - just before revealing any useful information.
> On Jan 5, 8:00 pm, "risko" <drmgilli...@gmail.com> wrote:
>> We've done the work on Australian and other markets. Don't you >> worry ( as Jo used to say) I'm not about to try impose mathematics >> that suggest the great uncertainty of long term investing can be >> dispensed with - but there are ways we can reasonably expect to >> reduce the downside while increasing the upside ( yes, not loose >> words).
> Are you bound by a confidentiality agreement or the terms of one of > your patents from actually describing some of these ways?
> You always withdraw at the crucial moment - just before revealing any > useful information.
My first glance through this message found so many questions re Risko motives I thought you wanted a reply from him. He certainly did not start well with you and nothing has improved.
From my point of view , he is probably in this newsgroup to learn, and is not afraid to stick his neck out even when you flash a pretty sharp axe. Your own research indicates he appears qualified to contribute something if allowed.
The main interest he has displayed is the risk over time issue, with a leaning to say super investors have less risk because they are invested for a long time.
I was the one who provided the reference to Norstead and following that he appeared to do a 180 and left me wondering.
Subsequent messages indicate he is working on something supporting his original proposal but it appears to be the realm of 6th decimal place probability and unlikely change concepts outside academia.
However I am happy to listen to him as I never met anyone I could not learn something from.
I have not gathered he is anti diversification and would be astounded if he was.
regards
Jim Watts
"Travis Morien" <travismor...@yahoo.com> wrote in message
>> Since you have raised risk over time again I will discuss it further.
>> There are two conflicting issues being confused when time is being >> considered.
>> One ... is that the further out in time you go, the more uncertain >> things >> must get. This is intuitively so and the John Norstead reference provides >> plain mathematical evidence of its probable quantity.
> One important question which hasn't been addressed by Risko is this:
> Are portfolios which have been designed to reduce volatility via > combinations of asset classes using traditional (post Markowitz) > portfolio construction methods actually worse than portfolios > containing only domestic equities over the very long term from the > point of view of variability of compound returns, as per Norstead's > argument?
> Or are they better?
> I think that a multi asset class portfolio which gives more consistent > returns over short and medium terms will also give more consistent > returns over the very long term. The long term is after all just a > string of short and medium terms, and if those are less volatile then a > string of them also ought to be less volatile.
> If Risko has conducted some original research showing that in fact > diversified portfolios have greater variability in their long term > outcomes, I'd love to see it. Even better, if he's developed some > useful tools for measuring or estimating risk over these very long > terms that would be most welcome and no doubt go a long way toward > rectifying the credibility problems he's build up in aus.invest.
> If Risko hasn't conducted any such research, and is just assuming that > anything you do which improves short term volatility is > counterproductive in the long term, then he needs to carry it out. You > can't just go assuming these things, especially when they are > counterintuitive and counters conventional wisdom. To overturn > conventional wisdom requires empirical research and some kind of > theory, and Risko has given no hint at either here.
>> Two ... the further out in time you go the more certain it is that you >> wont >> lose your money. This is almost intuitively so but not quite. It is >> supported by data which shows that no previous period of around 15 yrs >> has >> produced a result that loses money.
> And portfolios which are more diversified than 100% S&P500 index don't > even have to go for that many years to avoid losing money.
>> The point of confusion is that one is dealing with the outer boundary of >> returns eg how much return is possible. It is obviously extremely >> uncertain. >> The other is dealing with an exact amount, which is the invested amount. >> Putting any money into a system which does not take it to zero, (i.e. >> diversified to remove uncompensated or business risk) and which is self >> acting to produce a return & also a growth function ( i.e. distributes >> dividends & retains some for growth) it is inevitable you will certainly >> without fail get your money back sometime.
> The question raised by this thread is "does diversification harm > returns". To which I answered no. I then went on to explain the > notions of compensated and uncompensated risk and stated that the > latter can be gotten rid of with diversification.
> Risko dismissed these as wrong in his characteristically vague and > non-specific way. It appears he thinks diversification actually does > harm returns. And that what non-systemic risk is compensated.
> If so, he's attacking more than just a financial planner in a forum, > he's claiming that the whole theoretical basis of most academic and > professional work on risk is wrong.
> Its an extraordinary claim. And you know what they say you need to > provide when you make an extraordinary claim? Strong evidence! What > evidence has Risko provided?
Jim Watts wrote: > I was the one who provided the reference to Norstead and following that he > appeared to do a 180 and left me wondering.
I thought it was me with the ref - maybe we both did :)
It's worth noting John Norstad is a hobbyist in these matters rather than a qualified academic. His area of expertise is in Mac computers in their early years of development.
I have personally communicated with John some time ago about mean reversion and a couple other matters. It's hard to know where risko is going with all this as he is giving mutually contradictory messages, but perhaps in light of comments to date, it's worth me posting a publically available comment by John Norstad (Vanguard Diehards # 45393)
"My opinion after reading lots of the books and papers and academic arguments on these topics is that RTM, if it exists at all, is a much weaker phenomenon than most people think, and for several reasons in addition to my suspicions about RTM, I do not agree with the popular opinion that stocks are somehow "safer" over longer time horizons. As for predictablity, I am once again suspicious, and even if there is some kind of weak predictability, it most likely reflects time-varying risk, which does not argue for any kind of market timing ("strategic," "tactical," or otherwise).
I have no trouble with technical papers, and understand the importance of probability where it can be applied. eg Life expectancy of men is vitally interesting to me, however while the decimal place is worth millions to the insurance industry, it is totally worthless to me as +/- 5 yrs still does not give a window wide enough to trust when I should book the hearse. Individual Risk profiles are about as black & white as life expectancy and risk return variance over time seems to me to be way into the decimal places. I read your reference paper on asset allocation over time and it certainly doesn't change any of my conceptual understanding and seems to contain enough contradictions to its own credibility from the academic point of view I'm not surprised it has not changed the world.
I am interested in anything that reduces the downside & increases the upside however, particularly if it is conceptually different from fundamentals like the "efficient frontier" and can be applied to super or more particularly the drawdown phase.
You now have this newsgroup on the edge of its seat for a glimpse of such a scheme sufficient to judge if it is new , rehashed existing, or bullshit.
> I agree with your points one and two completely. Your point two on > chance of loss is one close to my heart and that of all super > investors.
> Norstad shows your point number one very nicely- risk blossoming with > time,and his appendix puts definition on the proabability distribution > of outcomes at the end of a holding period.
> The first time I came across Norstad's paper was when I was trying to > introduce this concept of risk relativity changing across time for > assets such as equity and bonds. Someone knew all about it and claimed > it was old hat ( Tonen, I think, he shows promise on his non- > monosyllabic days), just 'time diversification" he said, go see > Norstad. So I did, but didn't read past his discourse on time > diversification. Later I discovered his excellent chart in the Appendix > which shows well the point you make on uncertainty blossoming over > time.
> But, look closely, underneath his nice chart Norstad says:
> "There's one problem with this chart. It involves a phenomenon called > "reversion to mean." Some (but not all) academics and other experts > believe that over long periods of time financial markets which have > done better than usual in the past tend to do worse than usual in the > future, and vice-versa. The effect of this phenomenon on the pure > random walk model we've used to draw the chart is to decrease somewhat > the standard deviations at longer time horizons. The net result is that > the dramatic widening of the spread of possible outcomes shown in the > chart is not as pronounced."
> That's only the tip of the shortcomings iceberg on Norstad's chart- > as our research and that of others is now showing. I hesitate to > inflict a technical paper on you which is why I suggested starting with > Siegel's book to see the empirics. The reference below was published > roughly in parallel with Norstad's update ( 2005). It opens up the > concepts behind these qualifying comments of Norstad for the US > markets:
> ( If you cant download the paper I can email it).
> We've done the work on Australian and other markets. Don't you > worry ( as Jo used to say) I'm not about to try impose mathematics > that suggest the great uncertainty of long term investing can be > dispensed with - but there are ways we can reasonably expect to > reduce the downside while increasing the upside ( yes, not loose > words).
> Regards > Risko
> On Jan 5, 4:27 pm, "Jim Watts" <jimwa...@bigpond.net.au> wrote: >> Hello Risko,
>> Establishing clearly which part of the risk return spectrum they >> intend >> to invest in is the critical step for investors. >> It is also the area I find the least likely to be satisfactory in the >> long >> term if it is based on an interview which begins "do you like losing >> money" >> This is the point I was making in my previous advice to you, to find a >> solution to that, rather than another algorithm of risk over time.
>> Since you have raised risk over time again I will discuss it further.
>> There are two conflicting issues being confused when time is being >> considered.
>> One ... is that the further out in time you go, the more uncertain >> things >> must get. This is intuitively so and the John Norstead reference provides >> plain mathematical evidence of its probable quantity.
>> Two ... the further out in time you go the more certain it is that you >> wont >> lose your money. This is almost intuitively so but not quite. It is >> supported by data which shows that no previous period of around 15 yrs >> has >> produced a result that loses money.
>> The point of confusion is that one is dealing with the outer boundary of >> returns eg how much return is possible. It is obviously extremely >> uncertain. >> The other is dealing with an exact amount, which is the invested amount. >> Putting any money into a system which does not take it to zero, (i.e. >> diversified to remove uncompensated or business risk) and which is self >> acting to produce a return & also a growth function ( i.e. distributes >> dividends & retains some for growth) it is inevitable you will certainly >> without fail get your money back sometime.
>> I believe I already understand both of those, but the degree of >> uncertainty >> is so vague it does no help me sleep as far as my super is concerned. >> If you think you can produce another piece of maths to assure me, I can >> assure you you ar wasting your time.
>> > Hello Jim >> > This thread is about as good an example as exists on ausinvest that >> > there is no awareness in the industry of the importance of time when >> > discussing/assessing risk. >> > You wrote: >> > "I would have thought pago or anyone should first establish clearly >> > which >> > part of the risk return spectrum they intend to invest in. "
>> > The relationship between risk and return for assets such as shares and >> > bonds varies depending on one's holding period. Short term risk ( which >> > is what this thread is about if I read the sentiments right) has a very >> > different relationship with return compared to, say, 10 year risk. >> > So before 'establishing clearly which part of the risk spectrum ' they >> > are interested in investors should establish their investment horizon. >> > For many investors this is short term, but for most super investors it >> > is long term.
>> > "Having done this it makes sense to me to diversify as much as possible
>> > within a constant bond equity ratio. The effect of this would be to >> > hold >> > risk at target but increasing diversity would maximise return at that >> > risk. "
>> > Believe ot or not, all our financial market history shows that as the >> > investment horizon increases then the extent of the tradeoff between >> > risk and return falls away. That is, as your horizon increases you dont >> > get as much risk reduction from holding bonds in a bond equity >> > portfolio. >> > This is profound stuff for super investors. >> > If you want to know more I suggest you read Jeremy Siegel's "Stocks for >> > the Long Run" as a start. Everybody else says they have read it- there >> > is a difference between reading it and comprehending what he is saying >> > about long term risk of bonds and shares.What he is talking about in >> > the US markets is observed in our own markets and most others- it is >> > not simply 'time diversification' ( which has the relative riskiness of >> > equity and bonds constant over time) but is an effect caused by the >> > different underlying nature of the assets. This is not captured by the >> > single period thinking that this debate so far is fashioned by. >> > Regards >> > Risko
>> > On Jan 4, 10:23 pm, "Jim Watts" <jimwa...@bigpond.net.au> wrote: >> >> Travis, >> >> the one thing I miss in this thread , is any sign that you allow the >> >> possibility that pago may have a higher risk profile and intend to >> >> accept >> >> more risk for more potential return. >> >> For example I would answer this question "are we overly diversified" >> >> by >> >> saying we are overdiversified when the portfolio risk moves above or >> >> below >> >> the target risk. >> >> Obviously this will only happen by moving widely among asset classes, >> >> or >> >> more simply a large change in equity to bond ratio.
>> >> I would have thought pago or anyone should first establish clearly >> >> which >> >> part of the risk return spectrum they intend to invest in. >> >> Having done this it makes sense to me to diversify as much as possible >> >> within a constant bond equity ratio. The effect of this would be to >> >> hold >> >> risk at target but increasing diversity would maximise return at that >> >> risk.
>> >> > On Jan 2, 10:39 am, pago_b...@yahoo.com.au wrote:
>> >> >> I read a lot of Buffet stuff but I do not claim to know everything >> >> >> there is to know about it. And having read a lot of his stuff, I >> >> >> think >> >> >> the secret of successful investing is that there is no secret and >> >> >> anybody with a bit of common sense can do as well as the >> >> >> professional.
