Options for fixed payouts

I am proposing that it is using the SD computed as I describe above. This is not an SD derived from historical data.

snip stuff with which I do not necessarily agree.

You suggested some evidence exists for this to be the case for long bonds. Please try to be complete and fair. Also, do not assume this means I insist anything about shorter maturity bonds. Too often IMO you're trying to force me into defending a view that I never embraced fully. This is an exploration. Also, only in the last half-day or so have you offered to produce any citations of your own. To do a full analysis would ultimately, in my experience, test the moderators' patience, meaning there is no assurance that submissions will be posted. Though any resentment on their part in such instances is generally understandable. All things considered, I do not have incentive to continue.

Reply to
Elle
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So you object to the initial conditions under the "bond" setting? (Perhaps it is a bit of a coincidence that the standard deviation is

007%...) Set the standard deviation to whatever your heart desires. If it is less than the standard deviation for stocks, the result will be the same, the long term standard deviation for bonds will be less than that for stocks (though as they get real close, this will be hard to discern)

-Will

Reply to
Will Trice

Well it seems that all your cites and the sites that you cite and all the quotes you quote quote Siegel eventually. Yet Siegel contradicts himself in a debate with Shiller, "If stocks and bonds offered the same returns, investors would choose bonds, because they are safer." (at:

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However, from the many other articles available on the cite above, Siegel clearly claims that stocks are less risky than bonds. It seems that, for the quotes you've quoted, Siegel is not defining risk as volatility (unlike the debate I quoted above, where it seems he is referring to risk as volatility). Instead, he is defining risk as the probability that an investment will not beat inflation. This is an unusual, but not necessarily invalid, way of defining risk. In some sense, the definition is trivial, for if you look at the narrow standard deviations that any asset with near-Gaussian returns has over the long run, you can generally safely say that x asset is more likely to beat y constant percentage than z asset if the average return for x is higher than z. Admittedly, inflation is not constant, but the same idea holds.

So while this definition may be trivial in this sense, it may also be important from a planning sense. Yet, if it is important, then what does it mean for asset allocation for long term investors in the savings phase (i.e. those not drawing down their savings)? They should have all stocks! Yet this is not the prevailing wisdom of many on this newsgroup, nor the various asset allocation tools that are out there, mostly based on risk (with the volatility definition).

-Will

Reply to
Will Trice

This seems perfectly reasonable to me, as there is more than one kind of risk. If you only define risk as volatility and construct a portfolio which minimizes (or, horrors, avoids) volatility, you may place yourself square in the path of the risk of losing purchasing power. This is why asset allocation is so important. I realize Will and Elle, that you know this, but you seem to have been ignoring it in this discussion.

Elizabeth Richardson

Reply to
Elizabeth Richardson

"Will Trice" wrote

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do you know Siegel was speaking of the long term here? >From the context, I would think he's more than likely referring to the short term low volatility of bonds.

Why the exclamation point? Do you dismiss as rubbish the counsel to someone 25-years-old to hold no (investment grade, implied) bonds in his/her retirement portfolio? I do not. We also know that Siegel's findings are based on historical data, so the caveat, "Past performance is no guarantee of future returns," holds. This means a somewhat conservative investor might prefer holding, say, some bonds for the long term.

Reply to
Elle

Re the moneychimp.com "Risk and your Time Horizon" calculator

Whether I object to them or not depends on the level of analysis one is trying to do with this tool. This tool does not resolve whether investment grade bond volatility has in the past remained below stock volatility for the long term. The tool, from what I can tell, does give users insight on statistical probabilities, though, as they /might/ be applied to the stock market.

Again, please don't work from the premise that I think stock volatility (SD) falls below stock volatility for long term periods. I have found some claims that this is so, and nothing really explicitly asserting otherwise.

Reply to
Elle

Absolutely not. As I have pointed out here in the past, I invest 100% in stocks, to the point of not paying down my mortgage early. The exclamation point was more to my previous posts in this newsgroup about asset allocation...

But for a long term investor, how do you define "conservative?" Usually this is an investor who doesn't like short-term volatility (one definition of "risk"). But a long-term "conservative" investor should actually prefer an all-stock portfolio if you're using Siegel's definition of risk. Making those asset allocation calculators that you mention from time to time a bit misleading, eh?

-Will

Reply to
Will Trice

But typical asset allocation methodologies ignore Siegel's definition of risk, right?

-Will

Reply to
Will Trice

"Will Trice" wrote Elle wrote

You snipped the part where I explained this(!), namely, AFAIC it's perfectly plausible for a person to believe that the future will not repeat the past, as far as stock etc. returns are concerned. Shiller argues this, as I mentioned recently elsewhere and as you may have noticed.

I mention them all the time and feel no guilt. :-) You might notice that I try to also frequently mention that these calculators are based on past performances of various assets. Because I think people need to understand these numbers do not derive from thin air. The calculators do not predict the future but instead denote what many including myself call a best guess (albeit too often disguised as "precise").

Elizabeth--Agreed the thread is somewhat remiss in emphasizing how very important maintaining purchasing power and so hedging inflation via xyz assets is. Newbies take note.

Reply to
Elle

Well, admittedly, I've only been skimming this discussion. But didn't I read here that he has one definition in one place and another later on? I also admit I haven't made an in depth study of asset allocation methodologies. I thought you were supposed to get a mix that allows you to sleep at night, while still moving you toward your goal. If that's true, then ignoring one definition of risk or the other is probably a bad idea. You must try to strike a balance between the two. Because of the "sleep at night" admonition, this balance will likely be different from one individual to another.

Elizabeth Richardson

Reply to
Elizabeth Richardson

Yes, as I pointed out, with references, a while ago. I also pointed out a while ago - and even the moderator decided he'd had enough of me - that the reason for investing is to do better.

If the reason for investing were to be safe, all the companies in the SP500 would hold T-Bills and there would be no new products.

Reply to
dapperdobbs

Oops, you're right, I did miss this point in your previous post. Sorry about that.

I'm not asking for guilt, nor do I think that you believe they are magic

8-balls that can (successfully) predict the future. My point was that these types of calculators use a short-term volatility risk model, but you seem to be advocating a long-term Siegel risk model in this and an earlier thread. If one is a long-term investor, these two models should give dramatically different asset allocations.

-Will

Reply to
Will Trice

"Will Trice" wrote Re free online asset allocating tools:

I am not sure exactly what they use. The good ones cite most of their assumptions. Quite a bit of variation from one tool to the next does occur, IMO for various, plausible reasons. Either way, I take Siegel more as a guide and not a rigid rule. The longer one's timeframe, the more stocks one should have. For 30 years, all stocks would not bother me. Neither would 80/20 stocks/bonds, just as long as the investor was trying to be informed about his/her decisions.

Reply to
Elle

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