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 thought aim was 10% volatility. So, I guess it's LV/MV. It's actually running a little under, perhaps 9%. In any case, much less than the new HV risk parity fund AQR has opened, which looks to be targeting 15%, nominally same as SP500.
Will be interesting to see if AQR provides comparable long-term return of SP500, but with better short-term management of risk. If they succeed, I suspect result could be profound.
As for the new AQR MV risk parity fund, I agree with you, I'm a little confused too...not exactly sure I understand difference, other than AQR I is closed to new investors.
FWIW, I've actually treated AQRIX as conservative allocation in my portfolio, so would probably make more sense for AQR to declare LV, MV, and HV variants versus the I & II discriminators they seem to have chosen.
I believe the new AQR Risk Parity funds are the same core strategy, but different. From the AQR website for Risk Parity I (The strategy will dynamically invest in over 60 markets based on the fund managers’ views while maintaining a diversified, risk-balanced portfolio) and if you look at Risk Parity II (The strategy will dynamically invest in over 50 markets based on the fund managers’ views while maintaining a diversified, risk-balanced portfolio.)
The differences from the prospectus:
Risk Parity I: "The Fund pursues its investment objective by allocating assets among major liquid asset classes (including global developed and emerging market equities, global nominal and inflation-linked government bonds, emerging market fixed income, sovereign debt, the credit spreads of mortgage-backed securities and corporate and sovereign debt, developed and emerging market currencies, and commodities)."
Risk Parity II: "The Fund pursues its investment objective by allocating assets among major liquid asset classes (including global developed and emerging market equities, global nominal and inflation-linked government bonds, developed and emerging market currencies, and commodities).
I'm guessing that HV II is looser with drawdown controls, among other differences. It will be interesting to see the first holdings report, as well as how I performs vs II.
Over the years I have said "build it and they will come". Fund companies know that suckers have been looking all their lives for that Utopia Fund. You know the all in one fund that always has a positive return, risk free, in any kind of market. Here are three examples:
I'm sitting in Barns&Noble with a hot chocolate reading Ted's opinion on risk parity funds. The biggest grin came to my face. All I could picture in my mind was those two old muppet guys sitting in their balconey seats giving sarcastic remarks. In my head I could hear those muppets saying you're dumb, you're a sucker- you are ignorant... oh- and have a Happy Thanksgiving.
The RP space is clearly not Utopia, but so far so good for the RP funds we own, AQRIX and ABRIX. Since inception, both have outperformed their bogey -- a 60/40 portfolio like VBINX -- with attractive downside participation relative to the bogey and poor correlations with most assets, thereby showing the value of RP funds as diversifiers in a portfolio. RP funds are not for everybody, but I know why I own them and they indeed provide value to my overall portfolio. If that makes me a sucker, then so be it.
Reply to @kevindow: In one article I read on risk parity funds, the author stated that Harry Brown's Permanent Portfolio concept, which was to bundle different asset classes together to combat cycling economic conditions and associated risks, was basically the first risk parity fund. So, I see these new funds as an extension of that permanent portfolio theory - reduce risk by investing in assets that perform differently in inflationary, deflationary and growth segments of the economic cycle.
At the start of this year, I had 15% of my portfolio in PRPFX because I believe in the overall concept of mixing assets. After reading different opinions on this fund, not the least being Mr. Snowball's view, it made sense to me that this fund would not do as well going forward with so much invested in treasuries and gold. I think it was you Kevin, that turned me on to PGDPX, another spread-the-risk dividend return allocation type fund. I took 5% from PRPFX and bought into PGDPX. After watching it's performance for a while, I reduced PRPFX further and kicked that percentage to 10%. Last week I sold my remaining PRPFX and will put it into ABRIX (AQRIX was my 1st choice but it isn't available through my TRP account) or one of the Pimco all asset funds, PASDX or PAUDX.
Anyway, I believe risk parity funds are a take off (hopefully an improvement) over some already established economic cycle, risk allocation funds that have proven themselves over a long time period - PRPFX a prime example.
PRPFX is a static portfolio mix and surely can have difficult times in various markets; versus the other funds you noted. I suspect an actively managed cluster of holdings related to holdings in a Permanent Portfolio style would work. But it would require work by an individual investor. My 2 cents worth. NOTE: we do not have a position in PRPFX. The below site has been in place for many years related to Harry Browne's Permanent Portfolio thoughts. Many have attempted to duplicate various aspects of what is now PRPFX, including a group at Bogleheads. There are various areas, including a forum if you choose to snoop around the site.
Risk parity is nothing but the pinnacle of all this silly, speculative, portfolio theory, total return, nonsense. Guess what folks, even if AQR can meet their goals by matching the return of the VBINX with less volatility you have still lost to the tune of ~1% per year because, listen carefully, it doesn't matter what the market value of your entire portfolio is this year if you're not going to spend it until next year! So a portfolio that halves in value when you don't need the money and quadruples in value when you do need the money is, despite its volatility, an undeniably less risky and superior portfolio and anyone that believes otherwise is a sucker.
And what's with all the fanfare about AQRIX beating its bogey anyway?...because the performance chart over at https://www.aqrfunds.com/OurFunds/GlobalAllocationFunds/RiskParityFund/Overview.aspx shows AQRIX mostly underperforming VBINX since inception before just barely catching up this year. So the fact is that AQRIX hasn't beaten its bogey...it lost.
Oh, and one last thing, if you're admiring this fund as an attractive diversifier to be used as an uncorrelated block within a larger portfolio you're missing the point because the idea of risk-parity is to optimize the management of all the correlations within a portfolio, not provide yet another "diversifier" for you to manage by some other means...that'd be like holding a hammer by its head in order to hammer nails with the handle: ridiculous, foolish, and ignorant.
This is exactly the sort of jive that that thief Larry Swedroe uses to scam the Bogleheads out of their hard earned dollars, but the simple truth is if you mind your cash flows then everything else will fall into place and anything else is speculation.
So- all we need to do now is design that incredible portfolio that "knows" which year we need the money and which year we don't. Shouldn't be that difficult...
I lifted a snippet from the recent interview with Dr. Eugene Fama where he is asked about risk-parity strategy. He remains unconvinced. Here is a portion of the interview:
Litterman: What do you think of the risk parity asset allocation strategy? A risk parity asset allocation strategy chooses weights in all asset classes in a portfolio so as to create the same level of volatility or risk in each. That portfolio can then be leveraged to equal the risk of, say, a 60/40 equity/bond allocation.
Fama: I don’t think much of that approach. You never start with a proposition like that—equalizing risk of assets in a portfolio—as the way to solve the portfolio problem. A mean–variance investor aims to form asset allocations that minimize the variance of the return of the entire portfolio given the level of expected return, which almost surely does not imply levering risk up to equate volatility across all the asset classes in the portfolio. A risk parity portfolio almost surely represents a suboptimal solution to the portfolio optimization problem.
I have been a shareholder of ABRIX for nearly a year, but I'm beginning to wonder if it's performance is an illusion - one based on luck rather than skill. I'm not sure anymore.
So a portfolio that halves in value when you don't need the money and quadruples in value when you do need the money is, despite its volatility, an undeniably less risky and superior portfolio and anyone that believes otherwise is a sucker.
I agree with you to a certain degree. You can actually get higher returns with a higher risk portfolio over a long term. The question is do you have the mental fortitude to stick with your investments when you experience that 50% downside. Many people cannot easily stomach that. In particular, in retirement such events can be disastrous as you still have to take out from your portfolio to live. Thus you give up a bit of the long term upside for more subdued and hopefully more even returns with less variance.
Reply to @mnzdedwards: I'm surprised by Eugene Fama's comment when he champions an essentially similar strategy with small and value "risk factors". In other words, since small and value stocks have historically been less volatile relative to their returns, Fama argues that one should overweight them to "diversify the risk factors". So the only difference between Fama's approach and "risk parity" is that I guess Fama intends for the overall leverage of the portfolio to remain fixed throughout time whereas in "risk-parity" the overall leverage is allowed to vary?
In any case I don't pay much attention to academic finance because academics, of all people, have the least incentive to get it right because the only thing they have to lose is a little prestige/reputation whereas actual market participants actively trading for profit are incentivized by their skin in the game.
Reply to @Investor: Investor, I'll give you an "amen". Long term is the key.
Volatility is NOT your friend when you are near or in retirement and you will be needing that money at some point. It's NOT your friend if you don't have a very high risk tolerance. That's exactly why advisors move to "reduce" risk. It is more likely you won't get higher over-all returns if you have to pull money out of the market during a volatile drop or prolonged bear market.
Sorry, but I think the "undeniable less risky and superior portfolio" comment above is circumstantial at best - only for a segment of investors (young with very high risk tolerance). And those trying to reduce risk are not suckers. I'd call them prudent.
If I go to the bank to cash a check today then I get 100% of its face value, but if I go to the bank tomorrow (Sunday) then I'd be lucky to get a dirty penny from the bum that sleeps in the alley. Plot that on a chart and you'd rightly conclude that cash is an enormously volatile asset whose market value drops 99.99% on a weekly basis, but does that mean I'm experiencing a 99.99% downside? No it does not; Volatility is not risk nor does bearing even the most enormous volatility require an iron stomach or a high risk tolerance for anyone that doesn't have need to liquidate his entire portfolio on a daily basis.
So it's not a question of mental fortitude, it's a question of mental aptitude and the ability to comprehend what is lost when a change in bid/ask prices occurs vs what isn't.
Reply to @BannedfromBogleheads: The volatility you refer is not of cash but the check for which you are seeking cash.
In fact, it is not even volatility. It is liquidity risk. Yet, we are not concerned that much as we can delay 1 day easility (not open ended - so it can be planned) and cash full value. On the other hand, with a volatile mutual fund there is no certainty regarding the when you can get the value you anticipate.
Most people do have some flexibility in payments when their income shows some variability. They can put off some spending later, etc. But, they can put off so much and if it turns out they cannot delay any more, the withdrawal from portfolio when it is down can have devastating effect because the amount you draw today will not get that huge bounce later. If you give up some upside for significant reduction of downside, you obtain more flexibility and you no longer depend on huge upside to present itself one day.
Now if you have a large enough portfolio that you can segregate some and guarantee your retirement needs, you may have the luxury to invest in such high volatility investments for the rest. Most of us are not that lucky. Similar situation exist young people with a stable work. They do not depend on the portfolio for sustaining their life yet. Everybody else should be more prudent. Even young people may have problem with large variability. Most people I have seen panic and sell at the worst possible time and never experience that huge upside. This is called "I can't stand it anymore" timing. So, it is easy to make claims and it is much harder to show mental fortitude even when you have theoretical capacity. In practice, most people is better served with an asset allocation, balanced type allocation from early investing through retirement. You don't have to follow a glide path and you would be OK.
I just don't have to hit home run or strikeouts. I think hitting singles, getting in the base is more or less consistent is enough or more productive. Did you read money all or watch the movie?
Most people here do understand this. You are welcome to disagree.
"Liquidity risk", "bankruptcy risk", etc, etc...Bottom line is I went to the check market last Sunday and the amount I received for my check was 1 dirty penny, just like when I went to the market in 2009 the amount I received for my stocks was 50% what it was the year before.
This is the definition of volatility...so the only question is whether you also perceive this 99.99% drawdown in market price to be an "unstomachable" test of "mental fortitude" and "risk tolerance" merely because it is, in fact, volatile or whether you perceive the risk contained in this situation to be independent of the volatility because you perceive volatility and risk to be different things.
Also, aside from day traders who liquidate their entire portfolio every day, there is no such thing as an investor who can't segregate at least part of their portfolio as not being needed immediately/today...so volatility as a risk measure is not only unsuitable for me, it's also unsuitable for almost all investors because portfolio volatility is, by definition, an aggregate measure that treats all drops in market value as equally bad regardless of whether you need to liquidate 0% or 100% of your portfolio during the market dips. Could volatility be a problem for some people behaviorally? Yes, but I'm not inclined to conflate their stupidity with the inherently unavoidable losses embodied by the concept of risk. I myself also have strategies I use to mitigate my own stupidity, but paying 1% per annum to reduce volatility under the mantra that "reducing volatility=reducing risk" is not one of them.
To state that aversion to volatility equates to stupidity is fatuous.
The dictionary defines "risk" as, among other things, "the possibility of financial loss". Simply because your personal definition of "risk" does not happen to agree with that of the dictionary does not confer upon you the right to determine the appropriateness or acceptability of another persons determination in this area.
I suggest that your supercilious commentary is out of place here at MFO- perhaps you should try for a return to the Bogleheads forum.
Reply to @BannedfromBogleheads: There is no point discussing with you. I've already addressed your arguments in previous posts. I suspect most people on this board will be agreeing with my line of thinking.
My definition is 100% in agreement with the dictionary. A drop in market value is not a "loss" which the dictionary defines as "detriment, disadvantage, or deprivation" because there is, in fact, no detriment, disadvantage, or deprivation to someone whose portfolio dropped in market value unless they liquidated it at the depressed bid prices just as I have not been deprived of the value of my megamillion dollar check if I don't sign it over for a dirty penny to a bum in the alley while the bank is closed. That is the point I believe you and others may be missing.
And on the basis of my best understanding of prudent investment strategy I have to admit that volatility aversion does certainly seem to be an indication of stupidity because all the investment theory I know says that volatility is rewarded...which is, unfortunately, commonly misinterpreted as the impossible contradiction that "risk is rewarded"; Risk is not rewarded (it can't be because, as you noted, risk is defined from loss which is the opposite of reward and, thus, it's logically impossible for an investment to simultaneously tend towards both risk and reward), volatility is rewarded and so the key to successful investing is to minimize risk while maximizing volatility.
I predict the market will go down at some point and I also predict it will go up at some point as well as predicting the securities that compose the market will, in aggregate, continue to pay some amount of dividends and I predict this will all be true whether it be the stock market, the bond market, the real estate market, the cash market, and the gold market except I do not predict any dividends for gold. Moreover, I predict that throughout all this there will be bubbles and bursts and fortunes made and fortunes lost.
So no I don't think the market is much more unpredictable than my local bank, but what baffles me is when reckless speculators began to fancy themselves "investors" because I don't think their grandfathers were ever so bold as to try to build the foundations of their livelihoods on the precarious notion that there will always be a greater fool to offload one's "investments" onto M-F 9:30AM-4PM.
Suppose "Mr Market" were to permanently shutter his doors this week, then what is the risk of your portfolio "Mr Speculator"? Or suppose you come across a fantastic market beating investment opportunity that you can't offload onto a greater fool because it can't be traded, then what is the risk?...don't you know because I sure do.
"And on the basis of my best understanding of prudent investment strategy I have to admit that volatility aversion does certainly seem to be an indication of stupidity because all the investment theory I know says that volatility is rewarded...which is, unfortunately, commonly misinterpreted as the impossible contradiction that "risk is rewarded"; Risk is not rewarded (it can't be because, as you noted, risk is defined from loss which is the opposite of reward and, thus, it's logically impossible for an investment to simultaneously tend towards both risk and reward), volatility is rewarded and so the key to successful investing is to minimize risk while maximizing volatility."
I am in a position of helping a friend with some retirement decisions; and attempting to define your above thoughts as they might apply to his monetary investments during his retirement.
He is being early retired due to the elimination of his current position; along with other co-workers. He just turned age 65, has no debt, owes a small house that suits his needs and has always been prudent with his spending. He is divorced and his former wife has signed off against his small pension, so that he will receive his full amount. He was not part of a union for his work; so he will need to pay for supplemental insurance plans to offset some fees within Medicare A and B, as well as provide his own prescription medication insurance, which will total about $260/month.
What he will have going forward: --- $1,000/month gross pension --- $1,800/month net Social Security (if he started today) --- About $200,000 total in IRA accounts (includes 401k rollover)
His monthly pension will be totally consumed, and more, from supplemental health insurance, house & auto insurance, utilities, food, auto gas, etc. He will also attempt to maintain an emergency cash acct. at his credit union. He, of course; prefers to not withdraw any monies from the IRA account until the required minimum distributions after age 70.5 years.
Based upon your statement above, what 4-6 mutual funds could he use to provide capital preservation and also have some captial appreciation of his IRA funds?
Reply to @BannedfromBogleheads: huh? Didn't understand a word of this last reply to Hank, but it doesn't matter.
Here's the thing. You keep repeating the same investment view on risk versus volatility and your perception of stupid investors compared to yourself, the smart investor (as if there were only one true investor style). You seem to get irritated if others don't agree with the point you are trying to make. These types of disagreements don't go anywhere. We should just agree to disagree. Not call another investor stupid because they don't agree with you.
Anyway, I tend to like controversial posters like yourself, so keep posting. But I don't think you can be one of those grumpy old Muppets in the balcony. I'm guessing you are to young.
And back to Risk Parity funds... this sucker is still contemplating between ABRIX and similar but different funds, PASDX and PAUDX.
Comments
Will be interesting to see if AQR provides comparable long-term return of SP500, but with better short-term management of risk. If they succeed, I suspect result could be profound.
As for the new AQR MV risk parity fund, I agree with you, I'm a little confused too...not exactly sure I understand difference, other than AQR I is closed to new investors.
FWIW, I've actually treated AQRIX as conservative allocation in my portfolio, so would probably make more sense for AQR to declare LV, MV, and HV variants versus the I & II discriminators they seem to have chosen.
I believe the new AQR Risk Parity funds are the same core strategy, but different. From the AQR website for Risk Parity I (The strategy will dynamically invest in over 60 markets based on the fund managers’ views while maintaining a diversified, risk-balanced portfolio) and if you look at Risk Parity II (The strategy will dynamically invest in over 50 markets based on the fund managers’ views while maintaining a diversified, risk-balanced portfolio.)
The differences from the prospectus:
Risk Parity I: "The Fund pursues its investment objective by allocating assets among major liquid asset classes (including global developed and
emerging market equities, global nominal and inflation-linked government bonds, emerging market fixed income, sovereign debt, the
credit spreads of mortgage-backed securities and corporate and sovereign debt, developed and emerging market currencies, and
commodities)."
Risk Parity II: "The Fund pursues its investment objective by allocating assets among major liquid asset classes (including global developed and
emerging market equities, global nominal and inflation-linked government bonds, developed and emerging market currencies, and
commodities).
I'm guessing that HV II is looser with drawdown controls, among other differences. It will be interesting to see the first holdings report, as well as how I performs vs II.
Turkey # 1- AQRIX
Turkey #2- QRMIX
Turkey #3- QRHIX
Happy Thanksgiving !
I loved those guys. Thanks for the funny memory.
Kevin
At the start of this year, I had 15% of my portfolio in PRPFX because I believe in the overall concept of mixing assets. After reading different opinions on this fund, not the least being Mr. Snowball's view, it made sense to me that this fund would not do as well going forward with so much invested in treasuries and gold. I think it was you Kevin, that turned me on to PGDPX, another spread-the-risk dividend return allocation type fund. I took 5% from PRPFX and bought into PGDPX. After watching it's performance for a while, I reduced PRPFX further and kicked that percentage to 10%. Last week I sold my remaining PRPFX and will put it into ABRIX (AQRIX was my 1st choice but it isn't available through my TRP account) or one of the Pimco all asset funds, PASDX or PAUDX.
Anyway, I believe risk parity funds are a take off (hopefully an improvement) over some already established economic cycle, risk allocation funds that have proven themselves over a long time period - PRPFX a prime example.
.
PRPFX is a static portfolio mix and surely can have difficult times in various markets; versus the other funds you noted. I suspect an actively managed cluster of holdings related to holdings in a Permanent Portfolio style would work. But it would require work by an individual investor. My 2 cents worth.
NOTE: we do not have a position in PRPFX.
The below site has been in place for many years related to Harry Browne's Permanent Portfolio thoughts. Many have attempted to duplicate various aspects of what is now PRPFX, including a group at Bogleheads. There are various areas, including a forum if you choose to snoop around the site.
Crawling Road
Regards,
Catch
Risk parity is nothing but the pinnacle of all this silly, speculative, portfolio theory, total return, nonsense. Guess what folks, even if AQR can meet their goals by matching the return of the VBINX with less volatility you have still lost to the tune of ~1% per year because, listen carefully, it doesn't matter what the market value of your entire portfolio is this year if you're not going to spend it until next year! So a portfolio that halves in value when you don't need the money and quadruples in value when you do need the money is, despite its volatility, an undeniably less risky and superior portfolio and anyone that believes otherwise is a sucker.
And what's with all the fanfare about AQRIX beating its bogey anyway?...because the performance chart over at https://www.aqrfunds.com/OurFunds/GlobalAllocationFunds/RiskParityFund/Overview.aspx shows AQRIX mostly underperforming VBINX since inception before just barely catching up this year. So the fact is that AQRIX hasn't beaten its bogey...it lost.
Oh, and one last thing, if you're admiring this fund as an attractive diversifier to be used as an uncorrelated block within a larger portfolio you're missing the point because the idea of risk-parity is to optimize the management of all the correlations within a portfolio, not provide yet another "diversifier" for you to manage by some other means...that'd be like holding a hammer by its head in order to hammer nails with the handle: ridiculous, foolish, and ignorant.
This is exactly the sort of jive that that thief Larry Swedroe uses to scam the Bogleheads out of their hard earned dollars, but the simple truth is if you mind your cash flows then everything else will fall into place and anything else is speculation.
Regards,
Ted
I lifted a snippet from the recent interview with Dr. Eugene Fama where he is asked about risk-parity strategy. He remains unconvinced. Here is a portion of the interview:
Litterman: What do you think of the risk parity asset allocation strategy? A risk parity asset allocation strategy chooses weights in all asset classes in a portfolio so as to create the same level of volatility or risk in each. That portfolio can then be leveraged to equal the risk of, say, a 60/40 equity/bond allocation.
Fama: I don’t think much of that approach. You never start with a proposition like that—equalizing risk of assets in a portfolio—as the way to solve the portfolio problem. A mean–variance investor aims to form asset allocations that minimize the variance of the return of the entire portfolio given the level of expected return, which almost surely does not imply levering risk up to equate volatility across all the asset classes in the portfolio. A risk parity portfolio almost surely represents a suboptimal solution to the portfolio optimization problem.
The complete interview can be read at:
http://www.cfapubs.org/doi/pdf/10.2469/faj.v68.n6.1
I have been a shareholder of ABRIX for nearly a year, but I'm beginning to wonder if it's performance is an illusion - one based on luck rather than skill. I'm not sure anymore.
Mike_E
In any case I don't pay much attention to academic finance because academics, of all people, have the least incentive to get it right because the only thing they have to lose is a little prestige/reputation whereas actual market participants actively trading for profit are incentivized by their skin in the game.
Volatility is NOT your friend when you are near or in retirement and you will be needing that money at some point. It's NOT your friend if you don't have a very high risk tolerance. That's exactly why advisors move to "reduce" risk. It is more likely you won't get higher over-all returns if you have to pull money out of the market during a volatile drop or prolonged bear market.
Sorry, but I think the "undeniable less risky and superior portfolio" comment above is circumstantial at best - only for a segment of investors (young with very high risk tolerance). And those trying to reduce risk are not suckers. I'd call them prudent.
Investor, your response was right on.
Reply to @MikeM:
If I go to the bank to cash a check today then I get 100% of its face value, but if I go to the bank tomorrow (Sunday) then I'd be lucky to get a dirty penny from the bum that sleeps in the alley. Plot that on a chart and you'd rightly conclude that cash is an enormously volatile asset whose market value drops 99.99% on a weekly basis, but does that mean I'm experiencing a 99.99% downside? No it does not; Volatility is not risk nor does bearing even the most enormous volatility require an iron stomach or a high risk tolerance for anyone that doesn't have need to liquidate his entire portfolio on a daily basis.
So it's not a question of mental fortitude, it's a question of mental aptitude and the ability to comprehend what is lost when a change in bid/ask prices occurs vs what isn't.
In fact, it is not even volatility. It is liquidity risk. Yet, we are not concerned that much as we can delay 1 day easility (not open ended - so it can be planned) and cash full value. On the other hand, with a volatile mutual fund there is no certainty regarding the when you can get the value you anticipate.
Most people do have some flexibility in payments when their income shows some variability. They can put off some spending later, etc. But, they can put off so much and if it turns out they cannot delay any more, the withdrawal from portfolio when it is down can have devastating effect because the amount you draw today will not get that huge bounce later. If you give up some upside for significant reduction of downside, you obtain more flexibility and you no longer depend on huge upside to present itself one day.
Now if you have a large enough portfolio that you can segregate some and guarantee your retirement needs, you may have the luxury to invest in such high volatility investments for the rest. Most of us are not that lucky. Similar situation exist young people with a stable work. They do not depend on the portfolio for sustaining their life yet. Everybody else should be more prudent. Even young people may have problem with large variability. Most people I have seen panic and sell at the worst possible time and never experience that huge upside. This is called "I can't stand it anymore" timing. So, it is easy to make claims and it is much harder to show mental fortitude even when you have theoretical capacity. In practice, most people is better served with an asset allocation, balanced type allocation from early investing through retirement. You don't have to follow a glide path and you would be OK.
I just don't have to hit home run or strikeouts. I think hitting singles, getting in the base is more or less consistent is enough or more productive. Did you read money all or watch the movie?
Most people here do understand this. You are welcome to disagree.
"Liquidity risk", "bankruptcy risk", etc, etc...Bottom line is I went to the check market last Sunday and the amount I received for my check was 1 dirty penny, just like when I went to the market in 2009 the amount I received for my stocks was 50% what it was the year before.
This is the definition of volatility...so the only question is whether you also perceive this 99.99% drawdown in market price to be an "unstomachable" test of "mental fortitude" and "risk tolerance" merely because it is, in fact, volatile or whether you perceive the risk contained in this situation to be independent of the volatility because you perceive volatility and risk to be different things.
Also, aside from day traders who liquidate their entire portfolio every day, there is no such thing as an investor who can't segregate at least part of their portfolio as not being needed immediately/today...so volatility as a risk measure is not only unsuitable for me, it's also unsuitable for almost all investors because portfolio volatility is, by definition, an aggregate measure that treats all drops in market value as equally bad regardless of whether you need to liquidate 0% or 100% of your portfolio during the market dips. Could volatility be a problem for some people behaviorally? Yes, but I'm not inclined to conflate their stupidity with the inherently unavoidable losses embodied by the concept of risk. I myself also have strategies I use to mitigate my own stupidity, but paying 1% per annum to reduce volatility under the mantra that "reducing volatility=reducing risk" is not one of them.
To state that aversion to volatility equates to stupidity is fatuous.
The dictionary defines "risk" as, among other things, "the possibility of financial loss". Simply because your personal definition of "risk" does not happen to agree with that of the dictionary does not confer upon you the right to determine the appropriateness or acceptability of another persons determination in this area.
I suggest that your supercilious commentary is out of place here at MFO- perhaps you should try for a return to the Bogleheads forum.
I wish you good luck with your own portfolio.
My definition is 100% in agreement with the dictionary. A drop in market value is not a "loss" which the dictionary defines as "detriment, disadvantage, or deprivation" because there is, in fact, no detriment, disadvantage, or deprivation to someone whose portfolio dropped in market value unless they liquidated it at the depressed bid prices just as I have not been deprived of the value of my megamillion dollar check if I don't sign it over for a dirty penny to a bum in the alley while the bank is closed. That is the point I believe you and others may be missing.
And on the basis of my best understanding of prudent investment strategy I have to admit that volatility aversion does certainly seem to be an indication of stupidity because all the investment theory I know says that volatility is rewarded...which is, unfortunately, commonly misinterpreted as the impossible contradiction that "risk is rewarded"; Risk is not rewarded (it can't be because, as you noted, risk is defined from loss which is the opposite of reward and, thus, it's logically impossible for an investment to simultaneously tend towards both risk and reward), volatility is rewarded and so the key to successful investing is to minimize risk while maximizing volatility.
I predict the market will go down at some point and I also predict it will go up at some point as well as predicting the securities that compose the market will, in aggregate, continue to pay some amount of dividends and I predict this will all be true whether it be the stock market, the bond market, the real estate market, the cash market, and the gold market except I do not predict any dividends for gold. Moreover, I predict that throughout all this there will be bubbles and bursts and fortunes made and fortunes lost.
So no I don't think the market is much more unpredictable than my local bank, but what baffles me is when reckless speculators began to fancy themselves "investors" because I don't think their grandfathers were ever so bold as to try to build the foundations of their livelihoods on the precarious notion that there will always be a greater fool to offload one's "investments" onto M-F 9:30AM-4PM.
Suppose "Mr Market" were to permanently shutter his doors this week, then what is the risk of your portfolio "Mr Speculator"? Or suppose you come across a fantastic market beating investment opportunity that you can't offload onto a greater fool because it can't be traded, then what is the risk?...don't you know because I sure do.
You wrote: I am in a position of helping a friend with some retirement decisions; and attempting to define your above thoughts as they might apply to his monetary investments during his retirement.
He is being early retired due to the elimination of his current position; along with other co-workers.
He just turned age 65, has no debt, owes a small house that suits his needs and has always been prudent with his spending. He is divorced and his former wife has signed off against his small pension, so that he will receive his full amount. He was not part of a union for his work; so he will need to pay for supplemental insurance plans to offset some fees within Medicare A and B, as well as provide his own prescription medication insurance, which will total about $260/month.
What he will have going forward:
--- $1,000/month gross pension
--- $1,800/month net Social Security (if he started today)
--- About $200,000 total in IRA accounts (includes 401k rollover)
His monthly pension will be totally consumed, and more, from supplemental health insurance, house & auto insurance, utilities, food, auto gas, etc. He will also attempt to maintain an emergency cash acct. at his credit union.
He, of course; prefers to not withdraw any monies from the IRA account until the required minimum distributions after age 70.5 years.
Based upon your statement above, what 4-6 mutual funds could he use to provide capital preservation and also have some captial appreciation of his IRA funds?
Regards,
Catch
Here's the thing. You keep repeating the same investment view on risk versus volatility and your perception of stupid investors compared to yourself, the smart investor (as if there were only one true investor style). You seem to get irritated if others don't agree with the point you are trying to make. These types of disagreements don't go anywhere. We should just agree to disagree. Not call another investor stupid because they don't agree with you.
Anyway, I tend to like controversial posters like yourself, so keep posting. But I don't think you can be one of those grumpy old Muppets in the balcony. I'm guessing you are to young.
And back to Risk Parity funds... this sucker is still contemplating between ABRIX and similar but different funds, PASDX and PAUDX.