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odds of bear market highest since 2007_ (anyone buying this?)
Well, of course they are. And with each passing day the odds increment just a tiny bit more. The odds of my dying also increase with every passing day. Yes, I "buy it"... that's the way it is.
Does it really matter? I look at it this way: every year the odds are 50-50 the markets will go up and 50-50 they will go down. Some years they might go up a lot (smaller odds), and other years they might go down a lot (also smaller odds). That's why I have a long-term view of things and have an allocation that will allow me to sleep at night. If I based my investing decisions on what bad things might happen, I would never get out of cash. Am I going to go to cash just because I plan to retire this year? Of course not. I would want to be sure, though, that I have set aside 3-5 years of portfolio cash flow needs in cash, CDs or short-term bonds.
I completely agree with your retirement planning that includes not going to a fully cash portfolio and keeping a 3 to 5 year cash equivalent reserve.
However, without more definitive projections, I start each year assuming the odds of a positive/negative equity return is 70/30 and not 50/50. That assumption is simplistically based on the historical statistical data set. Simple is superior to complex in many, but not all, instances.
Please note the distinction between a probability and a statistical prediction. Both are attempts at estimating the likelihood of a future event, but the approaches differ. A probability projection is based on some mathematical model that is guided by weighting various input parameters. A statistical projection is based entirely on past performance records.
In the investment universe, models are in constant flux since the input parameters are uncertain and include both appropriate components and those that introduce errors. Therefore, I prefer the simple statistical approach.
Guys, the Societe Generale’s Bear market odds projection is only at the 25% level. That is far from a Bear market certainty.
First, it is premature to pronoun the prediction wrong. More test time is required. Second, even if it is proven that a Bear market is not happening, Societe Generale could reasonably claim a successful prediction since they are simultaneously forecasting a 75% likelihood that the Bull market will continue its run.
When making a prediction and incorporating specific odds percentages, forecasters are wisely protecting themselves. In a sense, it is a win-win situation for them.
When making any decision, especially an investment commitment, it is always a good policy to know the odds and the likely payoff boundaries. Statistics and models provide guidelines.
But Mark Twain gave us a cautionary warning: “Facts are stubborn, but statistics are more pliable.” Statistics indeed are pliable, but history demonstrates that market models are both pliable and unreliable.
Bear markets are as inevitable as the proverbial "death and taxes." What to do? Depends on age & circumstances. Youngsters can ride out several bears and still be fine - if history is a precedent.
But retirees are in a different boat and need to be very careful about the degree of risk they assume. This is always the case, whether you think a bear market is on the horizon or not. I take seriously the warnings (err ... rumblings) of David Snowball and Ed Studzinski and others in recent years. Of course, the problem with such warnings is they can be premature by years. That doesn't dismiss their validity.
I think what these persons are really concerned about is that many retirees who can't afford to lose much may be assuming too much risk. (And they're likely correct in their assessment.)
Oh - I took a 20% hit in 08 - but got it all back the following year. And, I'd weather another 20% hit just fine. But have grown more cautious with age and time - preferring to dwell mostly among conservative offerings like RPSIX, TRRIX, RPGAX and PRWCX. These will not prevent a loss - but they will help dampen the blow when the bear comes.
http://www.wsj.com/articles/imf-cuts-u-s-2015-economic-growth-forecast-to-2-5-1433424601 IMF Urges Fed to Wait on Interest Rates Until 2016 IMF cuts U.S. 2015 economic growth forecast to 2.5% ===== The economic recovery has been tepid. Maybe not a bear market but a trading range. We've been trained to expect a sharp decline. Maybe it will be a slow grind.
There is always a large terrorist attack - all bets off if that happens.
Your interpretation of BobC’s 50/50 market odds is very naïve. Formally, your reading might be called a Probit (PROBibility unIT) statistical measure. That form of measurement reduces the stats to an overly simplistic either/or positive/negative final judgment. Based on your post, you are satisfied with an equally weighted outcomes probability. The historical data does not support that weighting.
Either/or results need not be equally weighted. When a baseball hitter makes an official plate appearance, he can register either a hit or make an out. Extending your assessment, he has a 50/50 likelihood of either outcome, batting averages notwithstanding. You will surely go bankrupt if you accept the hit side of that wager.
Allow me to recite another extreme example of the problems assigning an equal probability to a bifurcation event for the mistaken reason that there are merely two possible happenings. Weather serves as a terrific illustration.
In my part of the Southern California landscape, any weather forecaster would lose his license to practice if he assigned a 50/50 odds for rain or clear on any given day. The proper odds likely hover at the 2/98 level against rain. Bifurcation does not typically translate into equally probable events.
From a Franklin Templeton market summary, over the past 88 years, the S&P 500 recorded 64 Up and 24 Down years. That is a 73% likelihood of a positive annual return. For the 64 positive return years, the annual average return was slightly North of 22%. For the 24 negative return years, the annual average loss was just South of -13% . So, not only do the odds favor a positive annual year, the returns for the positive years swamp the less likely negative years. That’s a double positive.
These favorable equity return stats are the basis for investing in stocks. The historical data shows that fixed income investments (like Bonds) have a higher likelihood of a positive annual return than stocks, but the payoffs are more muted. That’s why most portfolios that seek growth emphasize its stock components.
I’m sure you are familiar with these commonplace statistics. Given that familiarity, I’m puzzled by your submittal. You are just plain wrongheaded if you really believe that, without further mitigating circumstances, the odds are 50/50 that equities will deliver a positive or a negative reward/penalty in any given year.
Of course you’re free to assign whatever probabilities you like to the markets, but that’s being more than naïve; that’s completely ignoring the available database at your investment peril.
Good luck, and you will certainly need all of it if that’s your understanding and use of market statistics. I hope you were just joking or that I misread your post.
Dex said, "That is why I advise people to buy lottery tickets for their retirement - they have a 50/50 chance - either they win or they lose."
First, I'd never try to characterize anything Bob C says - because no one else can say it so well. But Dex, You can't be serious! 50/50 chance of winning the lottery?
Please take a timeout from your real investing work to participate in this two question series that was designed to test your probability and statistics instincts.
Assume you are gambling (speculative investing): In the first question you are tossing a fair two-sided coin, and in the second question you are rolling a single fair six-sided die. In each game you are investing one dollar per toss. Multiple tosses are encouraged.
In the fair coin toss game, a 50/50 outcome likelihood, select the payoff option you want: (a) Win 1 dollar if heads comes up. (b) Win 2 dollars if heads comes up. (c) Win 2 dollars if tails comes up. (d) Win 3 dollars if heads comes up.
In the single fair die toss game, not a 50/50 likelihood but a constant payoff, select your favored option: (a) Win 2 dollars if a 1 appears. (b) Win 2 dollars a 1 or 2 appears. (c) Win 2 dollars if a 1, 2,or 3 appears. (d) Win 2 dollars if a 1, 2, 3, or 4 appears.
The obvious answer to both these simple questions is the (d) option. That choice, regardless if it is made mathematically or instinctively, depends on a probability based Expected Returns rule. Individual Expected Return is the product of the probability of an event happening times its payoff, either positive or negative. Total Expected Return is the sum of all possible outcomes.
If you are sailing your portfolio ship through heavy seas, you had better have some probability understanding or probability instincts. Otherwise, you are piloting the Titanic into an iceberg field of danger. Disaster is a predictable ending. In that instance, it is a wise policy to hire a professional money manager to help pilot your portfolio ship into a safe port.
Sorry for the sea analogy, guys. Sorry for the probability lesson, but perhaps a few MFO members might benefit from it. Temptation overcame me which is an unacceptable behavior when managing a portfolio.
Dex said, "That is why I advise people to buy lottery tickets for their retirement - they have a 50/50 chance - either they win or they lose."
First, I'd never try to characterize anything Bob C says - because no one else can say it so well. But Dex, You can't be serious! 50/50 chance of winning the lottery?
I was taking the piss out of Bob C's comments.
But the younger the person, the less likely they will be able to afford to retire.
Comments
I completely agree with your retirement planning that includes not going to a fully cash portfolio and keeping a 3 to 5 year cash equivalent reserve.
However, without more definitive projections, I start each year assuming the odds of a positive/negative equity return is 70/30 and not 50/50. That assumption is simplistically based on the historical statistical data set. Simple is superior to complex in many, but not all, instances.
Please note the distinction between a probability and a statistical prediction. Both are attempts at estimating the likelihood of a future event, but the approaches differ. A probability projection is based on some mathematical model that is guided by weighting various input parameters. A statistical projection is based entirely on past performance records.
In the investment universe, models are in constant flux since the input parameters are uncertain and include both appropriate components and those that introduce errors. Therefore, I prefer the simple statistical approach.
Guys, the Societe Generale’s Bear market odds projection is only at the 25% level. That is far from a Bear market certainty.
First, it is premature to pronoun the prediction wrong. More test time is required. Second, even if it is proven that a Bear market is not happening, Societe Generale could reasonably claim a successful prediction since they are simultaneously forecasting a 75% likelihood that the Bull market will continue its run.
When making a prediction and incorporating specific odds percentages, forecasters are wisely protecting themselves. In a sense, it is a win-win situation for them.
When making any decision, especially an investment commitment, it is always a good policy to know the odds and the likely payoff boundaries. Statistics and models provide guidelines.
But Mark Twain gave us a cautionary warning: “Facts are stubborn, but statistics are more pliable.” Statistics indeed are pliable, but history demonstrates that market models are both pliable and unreliable.
Best Wishes.
Bear markets are as inevitable as the proverbial "death and taxes." What to do? Depends on age & circumstances. Youngsters can ride out several bears and still be fine - if history is a precedent.
But retirees are in a different boat and need to be very careful about the degree of risk they assume. This is always the case, whether you think a bear market is on the horizon or not. I take seriously the warnings (err ... rumblings) of David Snowball and Ed Studzinski and others in recent years. Of course, the problem with such warnings is they can be premature by years. That doesn't dismiss their validity.
I think what these persons are really concerned about is that many retirees who can't afford to lose much may be assuming too much risk. (And they're likely correct in their assessment.)
Oh - I took a 20% hit in 08 - but got it all back the following year. And, I'd weather another 20% hit just fine. But have grown more cautious with age and time - preferring to dwell mostly among conservative offerings like RPSIX, TRRIX, RPGAX and PRWCX. These will not prevent a loss - but they will help dampen the blow when the bear comes.
FWIW. - Thanks MJG
IMF Urges Fed to Wait on Interest Rates Until 2016
IMF cuts U.S. 2015 economic growth forecast to 2.5%
=====
The economic recovery has been tepid. Maybe not a bear market but a trading range. We've been trained to expect a sharp decline. Maybe it will be a slow grind.
There is always a large terrorist attack - all bets off if that happens.
Your interpretation of BobC’s 50/50 market odds is very naïve. Formally, your reading might be called a Probit (PROBibility unIT) statistical measure. That form of measurement reduces the stats to an overly simplistic either/or positive/negative final judgment. Based on your post, you are satisfied with an equally weighted outcomes probability. The historical data does not support that weighting.
Either/or results need not be equally weighted. When a baseball hitter makes an official plate appearance, he can register either a hit or make an out. Extending your assessment, he has a 50/50 likelihood of either outcome, batting averages notwithstanding. You will surely go bankrupt if you accept the hit side of that wager.
Allow me to recite another extreme example of the problems assigning an equal probability to a bifurcation event for the mistaken reason that there are merely two possible happenings. Weather serves as a terrific illustration.
In my part of the Southern California landscape, any weather forecaster would lose his license to practice if he assigned a 50/50 odds for rain or clear on any given day. The proper odds likely hover at the 2/98 level against rain. Bifurcation does not typically translate into equally probable events.
From a Franklin Templeton market summary, over the past 88 years, the S&P 500 recorded 64 Up and 24 Down years. That is a 73% likelihood of a positive annual return. For the 64 positive return years, the annual average return was slightly North of 22%. For the 24 negative return years, the annual average loss was just South of -13% . So, not only do the odds favor a positive annual year, the returns for the positive years swamp the less likely negative years. That’s a double positive.
These favorable equity return stats are the basis for investing in stocks. The historical data shows that fixed income investments (like Bonds) have a higher likelihood of a positive annual return than stocks, but the payoffs are more muted. That’s why most portfolios that seek growth emphasize its stock components.
I’m sure you are familiar with these commonplace statistics. Given that familiarity, I’m puzzled by your submittal. You are just plain wrongheaded if you really believe that, without further mitigating circumstances, the odds are 50/50 that equities will deliver a positive or a negative reward/penalty in any given year.
Of course you’re free to assign whatever probabilities you like to the markets, but that’s being more than naïve; that’s completely ignoring the available database at your investment peril.
Good luck, and you will certainly need all of it if that’s your understanding and use of market statistics. I hope you were just joking or that I misread your post.
Best Wishes.
First, I'd never try to characterize anything Bob C says - because no one else can say it so well.
But Dex, You can't be serious! 50/50 chance of winning the lottery?
http://www.nytimes.com/2013/08/10/your-money/win-a-lottery-jackpot-not-much-chance-of-that.html?_r=0
"The odds of winning (the lottery) remain infinitesimal: Powerball players, for instance, have a 1 in 175 million chance of winning. You have roughly the same chance of getting hit by lightning on your birthday."
Please take a timeout from your real investing work to participate in this two question series that was designed to test your probability and statistics instincts.
Assume you are gambling (speculative investing): In the first question you are tossing a fair two-sided coin, and in the second question you are rolling a single fair six-sided die. In each game you are investing one dollar per toss. Multiple tosses are encouraged.
In the fair coin toss game, a 50/50 outcome likelihood, select the payoff option you want:
(a) Win 1 dollar if heads comes up.
(b) Win 2 dollars if heads comes up.
(c) Win 2 dollars if tails comes up.
(d) Win 3 dollars if heads comes up.
In the single fair die toss game, not a 50/50 likelihood but a constant payoff, select your favored option:
(a) Win 2 dollars if a 1 appears.
(b) Win 2 dollars a 1 or 2 appears.
(c) Win 2 dollars if a 1, 2,or 3 appears.
(d) Win 2 dollars if a 1, 2, 3, or 4 appears.
The obvious answer to both these simple questions is the (d) option. That choice, regardless if it is made mathematically or instinctively, depends on a probability based Expected Returns rule. Individual Expected Return is the product of the probability of an event happening times its payoff, either positive or negative. Total Expected Return is the sum of all possible outcomes.
If you are sailing your portfolio ship through heavy seas, you had better have some probability understanding or probability instincts. Otherwise, you are piloting the Titanic into an iceberg field of danger. Disaster is a predictable ending. In that instance, it is a wise policy to hire a professional money manager to help pilot your portfolio ship into a safe port.
Sorry for the sea analogy, guys. Sorry for the probability lesson, but perhaps a few MFO members might benefit from it. Temptation overcame me which is an unacceptable behavior when managing a portfolio.
Best Wishes.
But the younger the person, the less likely they will be able to afford to retire.