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.
Support MFO
Donate through PayPal
Robo-Advisers Are Desperately Clinging to a Dangerous Dogma
It's been suggested that bets on spreads were created because some people had difficulty understanding odds. (Shows what has happened to the level of education when the average gambler can't handle the arithmetic at Santa Anita; but that's a whole 'nuther subject.)
Here, the author seems to have the same lack of appreciation of odds. The bet is on the favorite (assuming you believe bonds are favored), but no attention is paid attention to the odds (how much more one takes home when the underdog wins). AKA expectation value.
Let me offer you this bet: 99 times out of 100, you will lose a penny. One time in 100 you will make $10. I think most people here would take me up on that bet - not much downside risk, and though the odds are against winning, the expectation value is positive.
The author hasn't considered the distribution of returns over different rolling periods. (Only two periods are discussed - one being a subset of the other.) For the sake of argument, let's say that bonds do have a 60% chance of outperforming stocks, by about 1%. In the other 40% of the cases, stocks win by 4%. I'd place my money on stocks - good upside potential, won't fall that far behind even if there's a modest run of underperforming ("losing") years.
Since I've been discussing the reasoning, I haven't even gotten to the underlying assumptions of bonds vs. stocks, or the 35 year bull market in bonds. Or discussing robo-advisors in general. Both the robo aspect and the advisor aspect can affect the thinking in the column.
Disclaimer: anything I know about gambling I learned from Guys and Dolls
Comments
It's been suggested that bets on spreads were created because some people had difficulty understanding odds. (Shows what has happened to the level of education when the average gambler can't handle the arithmetic at Santa Anita; but that's a whole 'nuther subject.)
Here, the author seems to have the same lack of appreciation of odds. The bet is on the favorite (assuming you believe bonds are favored), but no attention is paid attention to the odds (how much more one takes home when the underdog wins). AKA expectation value.
Let me offer you this bet: 99 times out of 100, you will lose a penny. One time in 100 you will make $10. I think most people here would take me up on that bet - not much downside risk, and though the odds are against winning, the expectation value is positive.
The author hasn't considered the distribution of returns over different rolling periods. (Only two periods are discussed - one being a subset of the other.) For the sake of argument, let's say that bonds do have a 60% chance of outperforming stocks, by about 1%. In the other 40% of the cases, stocks win by 4%. I'd place my money on stocks - good upside potential, won't fall that far behind even if there's a modest run of underperforming ("losing") years.
Since I've been discussing the reasoning, I haven't even gotten to the underlying assumptions of bonds vs. stocks, or the 35 year bull market in bonds. Or discussing robo-advisors in general. Both the robo aspect and the advisor aspect can affect the thinking in the column.
Disclaimer: anything I know about gambling I learned from Guys and Dolls