"Will Trice" <wwtrice[at]paragondynamics.com> wrote
Re free online asset allocating tools:
- quote -

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.

Elle wrote:
- quote -

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

- quote -

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

Elizabeth Richardson wrote:
- quote -

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.

"Will Trice" <wwtrice[at]paragondynamics.com> wrote in message
news:451A112F.1050704[at]paragondynamics.com...
- quote -

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

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
Elle wrote
- quote -

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.

- quote -

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.

Elizabeth Richardson wrote:

- quote -

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

-Will

Elle wrote:

- quote -

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...

<snip> This means a somewhat
- quote -

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

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
- quote -

calculator
- quote -

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.

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
- quote -


- quote -

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.

"Will Trice" <wwtrice[at]paragondynamics.com> wrote in message
news:4518D495.4020009[at]paragondynamics.com...

- quote -

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

Elle wrote:
- quote -

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:
http://www.jeremysiegel.com/index.cf...rceID/6223.cfm)


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

Elle wrote:

- quote -

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

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
- quote -

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.
- quote -

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.

Because of quotations like the following, the truth about
the relationship between stock and bond long term
volatilities remains to me an exploration.

"Research shows clearly that over periods of 20 years or
more, stocks are no more risky -- in fact, less risky --
than bonds or Treasury bills." -- Congressional Testimony,
James K. Glassman, 1998
http://www.aei.org/publications/pubI...pub_detail.asp

"It is widely known that stock returns, on average, exceed
bonds in the long run. But it is little known that in the
long run, the risks in stocks are less than those found in
bonds or even bills." -- Siegel, as quoted by Glassman
above.

"Siegel notes that the risk inherent in stocks never
disappears no matter how long you are invested. What does
diminish over time is the risk of holding stocks versus that
of bonds. The relative risk of stocks is below that of
bonds. Over long periods of time, stocks were more stable
than would have been expected from their year-to-year
volatility. However, that was not true for bonds. Stocks,
being claims on real assets, respond much better to
inflation risk."
http://www.antandsons.com/traderscor...forthelongrun/

Elle wrote:

- quote -

If this were true then it would not be a Monte Carlo simulator.
Instead, each pass will take n random draws against a Gaussian
distribution for the n year simulation, each draw using the input
average and standard deviation (i.e. the single year arithmetic average
and the standard deviation of that average). It will then calculate the
total return using all the draws and dump the result in one of the
histogram bins on the chart. Rinse, repeat. After many passes like
this the histogram chart will fill out (that's why you see it grow). No
need to divide by the square-root of anything, although doing this would
avoid having to use the Monte Carlo simulator.

- quote -

Well, they do. It just may not be Gaussian, or known, or stable. If
you recall from a thread a while back, I'm a big proponent of not using
Gaussian distributions when modelling short-term returns. But even the
biggest fat-tail distribution guru admits that, long-term, the
distributions of asset returns gets to be pretty darn Gaussian. And
even short-term, Gaussian distributions are useful for gross modelling.

- quote -

In an earlier post I showed results from actual data that this is indeed
the case.

- quote -

Sorry, I don't know which post you're referring to, but why don't you
believe the published data that you cited? Namely, the Campbell paper,
"Strategic Asset Allocation". He talks about actual data in the
second-to-last paragraph on page 6.

-Will

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
Re the site
http://www.moneychimp.com/articles/risk/longterm.htm and
long term volatilities of stocks and bonds
- quote -

Right, not exactly the same, because the Monte Carlo trials
vary somewhat on each run. All the software is doing, I bet,
is dividing the SD for the short periods by sqrt(long
period/short period) and generating the random distribution
of the same using MC trials. The software assumes, somewhat
misleadingly, that stock and bond returns comport to a
random distribution. The result is that the site above is
contrived and says nothing about whether the actual long
term volatility of bonds is below that of stocks.

Regardless, my "tunnel vision" post of a day or so ago
offers an explanation of why the relation between stock and
bonds' long term volatilities is probably moot and so one
cannot easily find anything credible and truly dispositive
on either your claim or my claim.

Elle wrote:

- quote -

I thought the inflation thing might be worth investigating so I've been
playing around with Shiller's data at:
http://www.irrationalexuberance.com/...ds/ie_data.xls

Using the long bond data in his spreadsheet, I constructed an index (I'm
unable to locate any freely available bond index data that contains more
than 10 years worth of values) and computed 30 year annualized returns
and volatilities, with and without adjusting for inflation, for both
long bonds and the S&P.

Here's what I turned up:

S&P (dividend adjusted)
Nominal 30 year average annualized return: 9.2%
Standard deviation: 2.23%
Real 30 year average annualized return: 6.47%
Standard deviation: 1.72%

Long Bonds
Nominal 30 year average annualized return: 4.6%
Standard Deviation: 1.9%
Real 30 year average annualized return: 2%
Standard deviation: 1.3%

Keep in mind that using a bond index approach like this artificially
increases volatility because it does not allow for holding bonds until
maturity.

I did the same for home returns using Shiller's data at:
http://www.irrationalexuberance.com/Fig2.1Shiller.xls

With this we have:

Home prices
Nominal 30 year average annualized return: 3.4%
Standard deviation: 1.7%
Real 30 year average annualized return: 0.27%
Standard deviation: 1%

Thus showing that stock risk > long bond risk > home risk, defining risk
as the standard deviation on 30 year annualized returns.

As always, check my math...
-Will

Elle wrote:

- quote -

Not sure I follow you here. I used the custom setting as you suggest
above, and not surprisingly, it gives more-or-less the same answer.

As to reversion to the mean, this is what you would expect over the long
term. Why do you think SDs get narrower over long time periods?

-Will

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
- quote -

Go to the custom setting. Manually put in the fixed bond's
settings of 6% return and 7% standard deviation. Compare in
a second window to the bond setting, using 5 years and 20
years. This software is extrapolating somehow from the
short-term volatilities and not indicating long term SDs
derived from historical data. All it is demonstrating is a
reversion to the mean with enough 'rolls of the dice' ( =
years of stock or bond returns), which is what one would
expect from a Monte Carlo simulation. As usual I did not
cite this link in support of the point you imply.

Elle wrote:

- quote -

Well, the sources I'll cite are not necessarily fresh. First, there is
my previous quote about *actual market data* from
http://kuznets.fas.harvard.edu/~camp...tlantatalk.pdf

Then I'll direct you to the Monte Carlo simulation on the site you
cited: http://www.moneychimp.com/articles/risk/longterm.htm

Run it for stocks over 20 years, and then for bonds over 20 years.
Compare the widths of the bell curves (which is described by the
standard deviation). You'll find the bond curve to be considerably
narrower.

-Will