On Dec 11, 2:35 pm, BreadWithS...[at]fractious.net wrote:
- quote -

With the caveat that I do NOT recall of the previous thread -
I've heard these arguments too and I think they lie rooted in the
concept that you still own the asset. For example, if you owned 1,000
shares of Enron before the debacle and you own 1,000 shares of Enron
now - you still have 1,000 shares of Enron. So the possibility exists
(no matter how unrealistic) that should Enron recover you may be able
to sell your shares for more than you paid for them.

I am NOT negating anything you've said - losses in value represent
measurable losses that you MUST consider for a multitude of reasons.

However, I have heard other advisors use the "paper losses"
explanation to help calm (perhaps irrational and premature) fears that
would otherwise send an investor out of the market and into cash.

Just my 2 cents,
Gene E. Utterback, EA, RFC, ABA

jIM <noreplysoccer[at]hotmail.com> writes:

- quote -

This expression just makes me nuts. If the share price goes
down, whether or not you sell, you've lost money. Until you
sell, there are no *tax* consequences, but you have, overall,
less assets than before the stock tanked.

Pretending that paper losses are not *real* losses is a
dangerous way to look at a portfolio.

The question isn't "are they real lossses?" (they are) -
soem of the questions are:
"how does that affect my overall investment strategy?"
"Is this time to rebalance?"
"Is there something fundamentally wrong with my or
the market's perception of the stock in question?"
"if I realize this loss, how does it affect my tax situation?"

There are others, but make no mistake - whether you
sell or not, it's a loss (of assets/capital).



--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

"Elle" <honda.lioness[at]nospam.earthlink.net> wrote in message
news:13los2o9qdkci39[at]corp.supernews.com...
- quote -

Really? Webster defines "tolerance" as: 'the act or capacity of enduring;
endurance.' Risk tolerance is a personality trait not a stage in life. We
don't lose our tolerance for risk just because we've turn into some
gray-haired, slower-witted bit of flesh. However, our need to take on risk
does change with life changing events. I think you (and others) may be
confusing these two. In fact, the quiz under discussion here tries to assess
a person's risk tolerance at the same time it is trying to determine a
person's need to take on risk. That is it's primary flaw. Asset allocation
tries to find the point of intersection of our personal risk tolerance and
our need to take on risk.

Elizabeth Richardson

"Elizabeth Richardson" <erichktn[at]worldnet.att.net> wrote
- quote -

I think you are disagreeing with many, if not all, of the
free online asset allocation tools as well, then. No big
deal.

- quote -

For the record, to clarify I do not say this. It's what the
theory behind a 4% drawdown rate says, IIRC. I believe it
comes from the Trinity Study, and in fact the allocation
stays fixed over time.

Either way, it's only a crude guideline, as I think we all
have acknowledged at various times.

"Will Trice" <wtrice[at]notmonitored.com> wrote
- quote -

Come on, Will. Nor does it make it to the point of
ascertaining whether the person has an emergency fund.

I think we are splitting hairs and not adding anything new
to the discussion here, so out of respect for the mission of
the ng, I'll let it all stand.

On Dec 9, 10:29 am, "Elizabeth Richardson" <erich...[at]worldnet.att.netwrote:

- quote -

There are two major types of risk with the stock market. The first is
the stock market fluctuations as a whole, which can be alleviated by
having a certain amount in money markets. And, the second, is
individual stock risk which is covered by having a diversified
portfolio.

Elizabeth has the right idea in that when people have their house paid
for along with pension and SS income, their need for a lower risk
portfolio is reduced.

--
Ron

Elle wrote:
- quote -

Well, one has to equate risk and stock investing for the long-term to
have your statement contradict mine. As to the conventional wisdom,
look at the tact that Target Retirement funds take. These aside, even
Cheryl's quiz reduces risk tolerance for retirees in the marital question.

-Will

william dot trice at ngc dot com

Elle wrote:
- quote -

Typically, these quizzes are trying to eventually address the asset
allocation for one's retirement portfolio. An emergency fund is
typically considered separately, or as you stated in the thread
"Emergency Funds and Asset Allocation" in early October 2005,

'Either way, I would disreguard [sic] the "emergency fund" in my
portfolio allocation planning, because portfolio allocation tools are
designed around optimizing returns for a certain period of time. But
this emergency fund's lifetime is unknown.'

Now admittedly, this quiz doesn't actually make it to an asset
allocation, but Cheryl does assert that this quiz is to help in choosing
investments. Even you don't consider your emergency fund to be invested
per se (following quote from same thread):

"My point is that I don't expect any meaningful growth from the
emergency fund. Not compared to stocks, anyway. To invest for meaningful
growth means to take significant risks, which then defeats the purpose
of an emergency fund."

In the same thread, another poster commented, "If one were to vow not to
put money one *may* need within five years into equities, then nobody
but the very, very wealthy would ever invest in equities at all, since
there are many catastrophes imaginable which could wipe out your average
middle-class nest egg."

I happen to agree with the Elle of 2005 and the other poster and I would
posit that risk tolerance should not increase with retirement portfolio
size.

- quote -

Because of "risk"?

- quote -

I made no such assertion in this thread. But clearly the quiz is
intended to address risk in terms of short-term volatility. Or at least
that's how you've defended the quiz twice in your last post quoted
above. And in your other recent post you equate risk with percentage
stock allocation in retirement which implies a long term investment,
does it not? Or perhaps we need to discuss what "long-term" means?

- quote -

I agree, but some flaws are bigger or more numerous than others.

-Will

william dot trice at ngc dot com


======================================= MODERATOR'S COMMENT:
We're getting to the point (length of posts, discussing the same points, etc.) where future comments should be made via private email. Fresh comments on this thread would be welcome. Thank you.

"Elle" <honda.lioness[at]nospam.earthlink.net> wrote in message
news:13lmu3eau98fga1[at]corp.supernews.com...

- quote -

And this is one area where I would strongly disagree with Cheryl's quiz. A
person's risk tolerance doesn't necessarily lessen when s/he reaches
retirement. Yes, a portion of the investment mix should be in cash or cash
equivalents, but, as you say, a sizeable fraction should continue to be
invested in stocks or equity mutual funds, what are usually considered more
aggressive investments. If, in fact, there continues to be a sizeable
portion in equities, then that person still has a high tolerance for risk,
though the overall portfolio may be taking on somewhat of a lesser risk.

Elizabeth Richardson

"Will Trice" <wtrice[at]notmonitored.com> wrote
- quote -

Is this the conventional wisdom? I am pretty sure the 25x
income rule derives from the 4% drawdown guideline, which
assumes that (1) the investor/retiree stays in a sizable
fraction of stocks all one's life; and (2) stocks and bonds
return at historical rates.

"Will Trice" <wtrice[at]notmonitored.com> wrote
snip, hopefully without losing context. I try to follow the
guidelines.
- quote -

Because, say, if an emergency arises and the stock market
dove the day before, you are better able to address the
emergency financially. The person who saved less and who
takes on stock market risk, and then has an emergency, is
less able to address the emergency.

Consider what's behind the counsel to keep X dollars in a
money market fund to address emergencies. Why do we not tell
people to put the X dollars into stocks?

But the initial comment by you on this was, "For example, if
I have saved little and I'm not able to increase my savings,
I need to take on more risk, not less... " I raised my
eyebrows because I think this presumes that one has a long
timeframe where they will not have to touch the invested
money. Hence my comment about how much risk to take when one
has little savings also depends on age, for one.

Plus aren't you also labeling as "risky" a long term
investment in stocks, when in fact long-term, history
indicates they are not all that risky for the long term?

Regardless, I hesitate to agree that each question and its
respective points by themselves should be consistent with
"the general case." It's hard to say what the general case
should be.

- quote -

Are you assuming you are some young 20-something thing here?

Because indeed, the longer the timeframe, the more
aggressive one can be. (I won't call that "risky," because
historically, investing in stocks for long time periods has
not been all that risky.)

Anyway, the one question in C's quiz does not assume age.

- quote -

I really can't call this quiz flawed without calling all
discussions which try to ascertain risk flawed. I think
there is no perfect interview to ascertain risk tolerance,
particularly when working with someone new to investing, and
particularly since we're trying to quantify something that
resists precision for several reasons.

Happy to agree to disagree, anyway.

Elle wrote:
- quote -

Right, it does depend on exact circumstances, no doubt. These questions
are intended as a general guide. But as such, they should work in the
general case. While I agree that the investor's risk tolerance cannot
and should not be determined from a single answer, I would also suggest
that individual answers, at least when they are scored independently,
should work in the correct direction for the general case. For example,
as I have saved more money, why should that increase my risk tolerance
all else being equal? It would seem that in the general case my risk
tolerance would be highest when I am first starting to save and would be
lowest as I am approaching my savings goal.

-Will

william dot trice at ngc dot com

Cheryl wrote:
- quote -

Eh? I don't like the answer, it's true. But that's because the answer
is wrong.

- quote -

I might note that it was your posted quiz that equated investing and
gambling, not me.

- quote -

If I haven't been able to save, I literally have nothing to lose. I
presume this quiz is for the general case where I do have some money
that can be invested.

- quote -

This is neither unfair nor true. The rich tend to have moderate risk
portfolios because of their interest in maintaining their wealth. But
this doesn't mean that's what they *should* do. Nevertheless, I believe
your quiz is still broken on this point. For example, a rule of thumb
that is thrown around this newsgroup is that a person looking to retire
needs to save 25x their income. Once you reach that goal, conventional
wisdom is to ratchet down your risk and live the good life. Yet your
quiz puts a 30x saver in the highest risk category (all else being equal).

-Will

william dot trice at ngc dot com

joetaxpayer wrote:

- quote -

Good point. So, using Elle's frequently posted list of links, I turned
up this set of questions at Vanguard:
https://personal.vanguard.com/VGApp/...vQuestionnaire

While not perfect by any means, I think this quiz is substantially less
flawed than the one we saw posted here.

-Will

william dot trice at ngc dot com

On Dec 8, 4:42 am, Will Trice <wtr...[at]notmonitored.com> wrote:
- quote -

Will's statement "For example, if I have saved little and I'm not able
to increase my savings, I need to take on more risk, not less as the
quiz would indicate" is exactly why quizzes like this work. Just
because you don't like the answer, doesn't mean the quiz isn't
working. It is a common misconception that if you don't have
anything, you need to take on a more risk to get something. This is
how people get in trouble, and is what takes you from "investing" to
"gambling." If you haven't been able to save, what are you going to
do if you lose your hard-earned money (which gets more likely as you
take on more risk)? I know it isn't fair, and this is truly why the
"rich get richer" because they are the ones who can afford to take on
the most risk and not suffer so much from their losses, but even a
"middle class" wage earner should be able to grow their savings into a
nice retirement nest egg, if they are able to balance their calculated
investment risks.

"Will Trice" <wtrice[at]notmonitored.com> wrote
- quote -

It depends. Depending, some should take on more risk, and
others, less. This is why the response to any single
question by itself is not determinative of the category into
which one might consider him/herself. Adding the point
values of the responses to the first question (what is your
age? etc.) and the question to which you refer above
clarifies the point.

Either way, the poster of the quiz said it's only supposed
to /help/ one to determine their "risk tolerance." This is
acknowledgement that these quizzes are crude gages, nothing
more. The ones found online at the various free asset
allocation sites are no better, no worse. IMO, all tend to
promote further thought by the individual about investing,
with attention to different risk categories.

"Sgt.Sausage" <nobody[at]nowhere.com> wrote
- quote -

Value can and often does evaporate. The currency used to
purchase "a thing" does not. This also implies that "value"
is not zero-sum. As a result, through differing valuations,
wealth can be destroyed, and it can also be created.

Of course the "value" of currency can itself evaporate. But
those not trading in currency markets generally ignore
fluctuations. Currency acts as a "true" storage vehicle of
value for the "short term." "True" and "short term" being
subjective.

Will Trice wrote:

- quote -

It would be disingenuous of me to attack the vegas question, even though
the wording was poor. In an article I wrote on Risk, Reward, Coin
Flipping, http://www.joetaxpayer.com/flip.html I use coin flips to
illustration the formation of a bell curve and to show how a large
number of small wagers will reduce one's standard deviation, analogous
to diversifying among stocks.
There's a flaw in even using the bell curve to represent stock returns
as a normal distribution doesn't quite account for the 10 sigma type
events such as the crash of '87, or the tech bubble popping. (This
better exemplified in Taleb's book "The Black Swan")

I think, as a group, the discussion might have borne more fruit by
suggesting replacement questions, or how we assess others' risk
tolerance than the direction it all went. Then as you suggest, the
discussion could also include how we match up one's risk tolerance
(their own emotions) vs the presumed ideal (unemotional) portfolio.

When the client says get me the higher return (than CDs/Bonds) but I
want no risk, there's a gap there that needs bridging.

JOE

"Elle" <honda.lioness[at]nospam.earthlink.net> wrote in message
news:13livohbqheu8a9[at]corp.supernews.com...

- quote -

Does someone else have it? Or has it simply evaporated.
In most scenarios, it's evaporated. It ain't there and
*nobody's* got it.

joetaxpayer wrote:

- quote -

I agree that giving a new investor perspective via a mean/standard
deviation discussion will probably not achieve the goal of getting to
understand an investor's risk tolerance. But I think you were correct
in your first post that this quiz is close to useless. I've taken these
types of quizzes before, but never have they been as off the mark as
this one. (For the record I am also a 100% equity investor, well almost
- recently I put ~1% of my portfolio in a closed-end bond fund).

There are real flaws with these questions some of which have already
been mentioned (like the Vegas question). For example, if I have saved
little and I'm not able to increase my savings, I need to take on more
risk, not less as the quiz would indicate.


-Will

william dot trice at ngc dot com