Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I too believe that the referenced article undervalues the likelihood of a market meltdown. How quickly we forget 2008.
I particularly disliked the article’s assertion that Bear markets are “relatively rare” events; it is especially at odds with the historical data. The referenced work is utterly devoid of supportive statistics. It reflects a probability blindness. Where is their data to backstop this flamboyant claim?
We need probabilities. In golf, what is the likelihood of making a hole-in-one? What is the probability of marrying a millionaire? What are the odds that shape a market meltdown?
The answers to the first two questions can be found in Gregory Baer’s book “Life: The Odds”. It is an excellent fun and informative summertime read that often illustrates that we folks are terrible at guesstimating life’s odds. That’s especially so when estimating the odds and the payoffs of low probability events.
For a PGA professional, the hole-in-one odds are roughly 2,500 to 1. For those of us in the amateur ranks, the odds vary greatly from 10,000 to 1 to about 15,000 to 1, depending on hole distance. The professionals have improved their odds over time.
The marry a millionaire odds are approximately 215 to 1. Baer provides guidelines on how to improve those odds. With that tease as a motivating factor, you’ll have to read the book to get more information.
To rectify the market meltdown statistical deficiency, I defaulted to Sam Stovall’s recent Las Vegas MoneyShow presentation. In that presentation, he included relevant market overall crash stats.
Of special interest is the historical frequency at two levels of market disruptions: a 10% to 20% Correction and a Bear market loss greater than 20%. Stovall’s S&P 500 data from 1945 recorded 19 and 12 downturns for these categories, respectively. Since the data set incorporated 68 annual returns, the likelihood of a Correction is 28 %, and the probability of a Bear market is slightly over 17 %. This is not rocket science, but I don’t rate these probabilities in the “relatively rare” happenings group. These are scary numbers and demand attention.
The average negative downward thrust for the Correction and for the Bear markets were about -14% and -28%, also respectively. That’s not peanuts and must be worrisome for most investors.
For the Correction markets, the crash duration was 5 months followed by a 4 month recovery period. Overall, the complete cycle was 9 months. That’s bad enough, but likely manageable from an emotional perspective.
For the full Bear market category, the S&P 500 tailspin duration was 14 months with an elongated 25 month recovery phase. That’s a stomach churning and patience testing total of 39 months; wow, over three years of anxious agonizing. That’s a draining experience both from an emotional and from a portfolio wealth depleting perspective.
Indeed No! Bear markets are surely not “relatively rare” happenings. Defensive portfolio diversification, and some careful watching of those market and economic signals that potentially foretell a Bear market must be continually monitored. InvesTech’s Jim Stack and others do a good, but imperfect, job at providing candidate signals. Investing is never without risk.
The developing behavioral finance science has made measured progress at establishing and explaining our mental deficiencies in properly assessing stressful life and investing scenarios.
For example, the 911 disaster killed about 3,000 folks. Because of the manner in which the terrorism was executed, people abandoned air travel in favor of auto travel, even though air travel is statistically far safer than car trips. During the following one year when this fear persisted, it is estimated that the extra auto travel killed an additional 1,500 folks. We do not make rationale decisions for uncertain, low probability events. Typically, we overrate the frequency of occurrence and also the final impact of the event.
The referenced article summarized the development of what Daniel Kahneman called our fast-acting System 1 brain component (the Gut instinct), which was necessary for survival eons ago, but not so efficient for today’s market investment decision making. In contrast, the slow-acting reflective System 2 brain component (the Head instinct) should be more fully exploited in our decision making process. When investing in mutual funds, speed is not an essential element.
Jeez louise, it all, all depends on how you define relatively rare and rarity.
Go plot DODBX or CENSX or VWELX or even something mediocre like FFIDX over, say, my investing lifetime, from the mid-1960s.
Look at how long (short) the bear markets lasted, how long (short) till you were near whole, how you can hardly detect, say, 1987.
FFIDX troughs are unpleasant to look at in 2000s, yes, the others much less so.
If your stomach is going to quail and bail with downturns, no matter what your reason indicates, well, don't invest in equity funds. If you cannot manage your behavior even a little bit in the face of history and likelihoods therefrom, well, there is no helping that, really.
The chief way I have made the money that I have, newly retired, is from hanging in regardless. Nothing more, nothing less.
>>>>The chief way I have made the money that I have, newly retired, is from hanging in regardless. Nothing more, nothing less.<<<<
And for me the total and complete opposite. Never hold a losing position- aka discarding bad luck before it becomes worse luck. On winning positions always use a trailing stop from highs. I try to keep my drawdowns (of total equity) as low as possible in the 1% to 2% range. That's how I came to be a tight rising channel trader/investor and why I am so enamored with bond funds. All this just proves there are many ways to skin a cat or in this case to achieve our long term financial goals.
Edit: The 1% to 2% is drawdown of total equity when trading/investing in bond funds. When I traded mutual funds it was 3% to 4% drawdown of total equity.
I do struggle with setting right exit level: 3%? 6%? 9%? 6 mo MAXDD? On single equity holding. Depends on category volatility certainly, as Scott instructs. Where it is against 10-mo SMA. How much money it has made or lost me. Whether rationale for holding has changed.
It does seem that unless you have (or believe you have) a true edge, hard to justify hanging on watching a stock holding drop...regardless of investment horizon.
As for funds, however, I know you suggest the exit levels should be tighter. Here though I'm inclined to go with the PM. If I believe (ha!), I hang in regardless. If I don't, I exit. But I try to allocate such "buy and hold" plays accordingly in my portfolio.
Just me.
Hope all is well.
PS. Doing 4.5 mile hill run just about every other day. On "off" days, long walks in local canons and beaches.
Comments
I too believe that the referenced article undervalues the likelihood of a market meltdown. How quickly we forget 2008.
I particularly disliked the article’s assertion that Bear markets are “relatively rare” events; it is especially at odds with the historical data. The referenced work is utterly devoid of supportive statistics. It reflects a probability blindness. Where is their data to backstop this flamboyant claim?
We need probabilities. In golf, what is the likelihood of making a hole-in-one? What is the probability of marrying a millionaire? What are the odds that shape a market meltdown?
The answers to the first two questions can be found in Gregory Baer’s book “Life: The Odds”. It is an excellent fun and informative summertime read that often illustrates that we folks are terrible at guesstimating life’s odds. That’s especially so when estimating the odds and the payoffs of low probability events.
For a PGA professional, the hole-in-one odds are roughly 2,500 to 1. For those of us in the amateur ranks, the odds vary greatly from 10,000 to 1 to about 15,000 to 1, depending on hole distance. The professionals have improved their odds over time.
The marry a millionaire odds are approximately 215 to 1. Baer provides guidelines on how to improve those odds. With that tease as a motivating factor, you’ll have to read the book to get more information.
To rectify the market meltdown statistical deficiency, I defaulted to Sam Stovall’s recent Las Vegas MoneyShow presentation. In that presentation, he included relevant market overall crash stats.
Of special interest is the historical frequency at two levels of market disruptions: a 10% to 20% Correction and a Bear market loss greater than 20%. Stovall’s S&P 500 data from 1945 recorded 19 and 12 downturns for these categories, respectively. Since the data set incorporated 68 annual returns, the likelihood of a Correction is 28 %, and the probability of a Bear market is slightly over 17 %. This is not rocket science, but I don’t rate these probabilities in the “relatively rare” happenings group. These are scary numbers and demand attention.
The average negative downward thrust for the Correction and for the Bear markets were about -14% and -28%, also respectively. That’s not peanuts and must be worrisome for most investors.
For the Correction markets, the crash duration was 5 months followed by a 4 month recovery period. Overall, the complete cycle was 9 months. That’s bad enough, but likely manageable from an emotional perspective.
For the full Bear market category, the S&P 500 tailspin duration was 14 months with an elongated 25 month recovery phase. That’s a stomach churning and patience testing total of 39 months; wow, over three years of anxious agonizing. That’s a draining experience both from an emotional and from a portfolio wealth depleting perspective.
Indeed No! Bear markets are surely not “relatively rare” happenings. Defensive portfolio diversification, and some careful watching of those market and economic signals that potentially foretell a Bear market must be continually monitored. InvesTech’s Jim Stack and others do a good, but imperfect, job at providing candidate signals. Investing is never without risk.
The developing behavioral finance science has made measured progress at establishing and explaining our mental deficiencies in properly assessing stressful life and investing scenarios.
For example, the 911 disaster killed about 3,000 folks. Because of the manner in which the terrorism was executed, people abandoned air travel in favor of auto travel, even though air travel is statistically far safer than car trips. During the following one year when this fear persisted, it is estimated that the extra auto travel killed an additional 1,500 folks. We do not make rationale decisions for uncertain, low probability events. Typically, we overrate the frequency of occurrence and also the final impact of the event.
The referenced article summarized the development of what Daniel Kahneman called our fast-acting System 1 brain component (the Gut instinct), which was necessary for survival eons ago, but not so efficient for today’s market investment decision making. In contrast, the slow-acting reflective System 2 brain component (the Head instinct) should be more fully exploited in our decision making process. When investing in mutual funds, speed is not an essential element.
Best Regards.
Go plot DODBX or CENSX or VWELX or even something mediocre like FFIDX over, say, my investing lifetime, from the mid-1960s.
Look at how long (short) the bear markets lasted, how long (short) till you were near whole, how you can hardly detect, say, 1987.
FFIDX troughs are unpleasant to look at in 2000s, yes, the others much less so.
If your stomach is going to quail and bail with downturns, no matter what your reason indicates, well, don't invest in equity funds. If you cannot manage your behavior even a little bit in the face of history and likelihoods therefrom, well, there is no helping that, really.
The chief way I have made the money that I have, newly retired, is from hanging in regardless. Nothing more, nothing less.
And for me the total and complete opposite. Never hold a losing position- aka discarding bad luck before it becomes worse luck. On winning positions always use a trailing stop from highs. I try to keep my drawdowns (of total equity) as low as possible in the 1% to 2% range. That's how I came to be a tight rising channel trader/investor and why I am so enamored with bond funds. All this just proves there are many ways to skin a cat or in this case to achieve our long term financial goals.
Edit: The 1% to 2% is drawdown of total equity when trading/investing in bond funds. When I traded mutual funds it was 3% to 4% drawdown of total equity.
So you do this with mutual funds, which have min holding periods?
I do struggle with setting right exit level: 3%? 6%? 9%? 6 mo MAXDD? On single equity holding. Depends on category volatility certainly, as Scott instructs. Where it is against 10-mo SMA. How much money it has made or lost me. Whether rationale for holding has changed.
It does seem that unless you have (or believe you have) a true edge, hard to justify hanging on watching a stock holding drop...regardless of investment horizon.
As for funds, however, I know you suggest the exit levels should be tighter. Here though I'm inclined to go with the PM. If I believe (ha!), I hang in regardless. If I don't, I exit. But I try to allocate such "buy and hold" plays accordingly in my portfolio.
Just me.
Hope all is well.
PS. Doing 4.5 mile hill run just about every other day. On "off" days, long walks in local canons and beaches.
Most certainly (it's just a $17 charge to exit before the three months) but rarely/never with a fund that has short term redemption fees.
>>>> PS. Doing 4.5 mile hill run just about every other day. On "off" days, long walks in local canons and beaches.<<<<
That's great Charles! Lucky guy having access to the beaches. In my case I am running less but hiking more than ever and out there about every day.