different perceptions of risk

[clarkfan1979]

https://affordanything.com/329-challenging-your-confirmation-bias-with-economist-larry-kotlikoff/


This is a good example demonstrating that different people and different fields of study have different perceptions of "risk". Paula interviews an Economics Professor from Boston University. His first point regarding inflation is pretty good. However, after that, the interview takes a very weird turn. I am going to try to digest it and give myself a few days.

Spoiler Alert: In the middle of the interview he says that investing in the stock market is the same thing as gambling at a casino. You shouldn't invest in the stock market, until all debts are paid off, including a primary house with 2.5% interest rate.

[maizefolk]

Could you summarize some of the weirder points?

I skipped around and the first 15 minutes or so seem to be about inflation.

I found a bit about "pay off your grandkid's college tuition today" which it wasn't clear how one would go about doing that (unless they are going to a public school in a state that allows prepayment) and a strong endorsement for I-bonds and active investing in "value" stocks.

Skipped forward some more and laughed when he get tripped up by asking the host "but would you borrow $200k on your house and invest it in the stock market?" and she says "yes" but over all it didn't hold my interest well enough to listen to the whole thing and I couldn't find a transcript.

Edit: Listened to a little more: "If they [stocks] were really such a safe deal, no one would be buying 30 year treasuries." I think Kotlikoff is the kind of economist that primes people to laugh at jokes like:

Two economists are walking down the street when one points to the ground and says, “Look, a ten dollar bill!”

The second economist replies, “That’s crazy. If that was a ten dollar bill someone would have picked it up already.”

[TomTX]

Risk? You can do an excellent investment/FIRE risk analysis right here - all based on public, verified data:

https://engaging-data.com/will-money-last-retire-early/

Pay special attention to the grey section.

[American GenX]

Spoiler Alert: In the middle of the interview he says that investing in the stock market is the same thing as gambling at a casino. You shouldn't invest in the stock market, until all debts are paid off, including a primary house with 2.5% interest rate.

Thanks.  I can tell it's not worth taking the time to listen to it.

[kite]

I get it.  But I didn't need this particular economist to convince me.  I work on that really big casino. He's not wrong.

[nessness]

On average, people gain money by investing it in the stock market, especially over the long-term. On average, people lose money by gambling in a casino. So no, these things are not the same.

[TheAnonOne]

On average, people gain money by investing it in the stock market, especially over the long-term. On average, people lose money by gambling in a casino. So no, these things are not the same.

Depends, people who slam cash into index funds win, but on the whole, traders lose.

[maizefolk]

On average, people gain money by investing it in the stock market, especially over the long-term. On average, people lose money by gambling in a casino. So no, these things are not the same.

Depends, people who slam cash into index funds win, but on the whole, traders lose.

Active traders lose out relative to the indices. But I'd be shocked if they end up net negative relative to cash under a mattress.

That said, please to feel free to shock me if you have numbers on this.

[Metalcat]

https://affordanything.com/329-challenging-your-confirmation-bias-with-economist-larry-kotlikoff/


This is a good example demonstrating that different people and different fields of study have different perceptions of "risk". Paula interviews an Economics Professor from Boston University. His first point regarding inflation is pretty good. However, after that, the interview takes a very weird turn. I am going to try to digest it and give myself a few days.

Spoiler Alert: In the middle of the interview he says that investing in the stock market is the same thing as gambling at a casino. You shouldn't invest in the stock market, until all debts are paid off, including a primary house with 2.5% interest rate.

Any one-size-fits-all prescription for handling *personal* finance is utter nonsense in discussions of risk.

Personal finance is, in fact, personal. The challenge is for individuals to really assess their personal real life risk factors, and not just volatility of the markets, which can play a shockingly tiny role in terms of personal risk.

It's not that there are many perceptions of risk, it's that there are many forms of risk, and different professionals market different risks, depending on their expertise and what they are trying to sell. Someone selling an investment product will emphasize whatever risks that product mitigates, and someone selling their own wisdom as a product is likely to emphasize the risk that those other professionals aren't focusing on.

On the personal front though, all risks interact and carry different weights in terms of real life impacts.

[vand]

On average, people gain money by investing it in the stock market, especially over the long-term. On average, people lose money by gambling in a casino. So no, these things are not the same.

Depends, people who slam cash into index funds win, but on the whole, traders lose.

Active traders lose out relative to the indices. But I'd be shocked if they end up net negative relative to cash under a mattress.

That said, please to feel free to shock me if you have numbers on this.

Nope, benchmarked against $0 nominal return, most traders still lose money.

[markbike528CBX]

On average, people gain money by investing it in the stock market, especially over the long-term. On average, people lose money by gambling in a casino. So no, these things are not the same.

Depends, people who slam cash into index funds win, but on the whole, traders lose.

Active traders lose out relative to the indices. But I'd be shocked if they end up net negative relative to cash under a mattress.

That said, please to feel free to shock me if you have numbers on this.

Nope, benchmarked against $0 nominal return, most traders still lose money.

Depending in the definition of "trader".  Please provide data, links, etc.

[yachi]

So 15 years of investing instead of paying off loans, and we're just... lucky?  We've made less than $1.2 million in income during that time, and have over $1.6 million in investments.  I guarantee we wouldn't be in the same situation if we had prioritized mortgage and student loan debt instead.  Before 2009, we focused a lot on reducing our student loan levels, but then changed it up to maximize 401(k) contributions.  We bought our house in 2010 with an extra $5k homebuyer incentive, but it was way more worth it to invest our money than pay off that mortgage.

During that time I've also bought lottery tickets when the prize gets high - that's been a losing proposition.

[GodlessCommie]

Nope, benchmarked against $0 nominal return, most traders still lose money.

Are we talking about traders including individual investors, or traders as in "people trading securities professionally"?

[slappy]

This was such a funny episode. It's pretty much the opposite of everything Paula has ever said, and it was so obvious that she disagreed with almost everything he says. I mean, I get the idea of challenging your firmly held beliefs, but I wonder why she even had this guy on. He sounded like the economist version of Dave Ramsey.

[clarkfan1979]

It would be awesome if someone could get some data on amateur day traders for 2020. Even though there was a huge recovery, I'm guessing many amateurs lost money in the stock market in 2020.

My 401a was up 33.48% for 2020. I think the S & P 500 was 16.5% (not including dividends). I am normally 70% large cap, 10% small cap, 10% international and 10% bonds. After the crash (June?), I deleted the bonds and replaced it with more international/small-cap. I might have gotten a little lucky on the day I switched in June. I think the stock market was a little down on that day.

Now for 2021, I went back to 10% bonds. As a result, I am about 4% lower than the S & P 500. I'm around 15% and the S & P 500 is around 19%. My employer plan buys stock once a month. It's never the same day but happens sometime around the 10th to 15th. When looking at the days stock was purchased, I've gotten really unlucky so far. My buys days have been when the stock market was really high. It should average out over the long run. 

Edit: My dad and step-mom are really bad with money. They have an Edward Jones account. I did their taxes for 2020. They included their 2019 taxes for me to use as a guide. They lost money in the stock market in 2019 and 2020 from selling products that they bought 3-4 years in the past. I don't think this even includes the Edward Jones fee.

I think this is why many Americans don't invest in the stock market. They don't understand it and don't have the skill set to make a profit. The idea that someone buys an investment product in 2016 and sells it for a loss in 2019 or 2020 is nuts. 

Edit Edit: For context, they bought 16,900 worth of investment products in 2016 and sold for $16000 in 2020. So a 5% loss over 4 years. For 2019, the took around a $500 loss on selling around $30,000 worth of investment products that were also purchased around 2016. They still have a mortgage on their primary home. I think it's 3.625%. They refinanced around Jan/Feb 2020.

If my parents represent the "typical investor", the economist is correct. For the average person, it's better to pay off the mortgage and not gamble in the stock market.

I'm guessing less than 1% of the people on this forum has lost money in the stock market since 2016. Maybe the MMM forum doesn't represent the typical investor?   

[Metalcat]

This was such a funny episode. It's pretty much the opposite of everything Paula has ever said, and it was so obvious that she disagreed with almost everything he says. I mean, I get the idea of challenging your firmly held beliefs, but I wonder why she even had this guy on. He sounded like the economist version of Dave Ramsey.

It's hard to generate content, but content that produces conversation is actually better than boring but valid content.

[maizefolk]

On average, people gain money by investing it in the stock market, especially over the long-term. On average, people lose money by gambling in a casino. So no, these things are not the same.

Depends, people who slam cash into index funds win, but on the whole, traders lose.

Active traders lose out relative to the indices. But I'd be shocked if they end up net negative relative to cash under a mattress.

That said, please to feel free to shock me if you have numbers on this.

Nope, benchmarked against $0 nominal return, most traders still lose money.

Numbers on this? The only dataset I've ever run across that looked at this was a dataset from 1991 to 1996 which found highly active individual investors earned an annual return of about 11.4%/year at a time when the market indices were turning out 17.9%/year. [1]

If that 6.5% differential is constant that'd suggest over the super long term when the stock market is returning more like 9.3%, highly active individual traders might average 2.8%/year which isn't good by any means, but still beats cash stuffed under the mattress.

Is that perfect data? No. Could I be wrong? Absolutely. But where are you seeing these benchmarks you assert?

[1] Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. The journal of Finance, 55(2), 773-806.

[vand]

On average, people gain money by investing it in the stock market, especially over the long-term. On average, people lose money by gambling in a casino. So no, these things are not the same.

Depends, people who slam cash into index funds win, but on the whole, traders lose.

Active traders lose out relative to the indices. But I'd be shocked if they end up net negative relative to cash under a mattress.

That said, please to feel free to shock me if you have numbers on this.

Nope, benchmarked against $0 nominal return, most traders still lose money.

Numbers on this? The only dataset I've ever run across that looked at this was a dataset from 1991 to 1996 which found highly active individual investors earned an annual return of about 11.4%/year at a time when the market indices were turning out 17.9%/year. [1]

If that 6.5% differential is constant that'd suggest over the super long term when the stock market is returning more like 9.3%, highly active individual traders might average 2.8%/year which isn't good by any means, but still beats cash stuffed under the mattress.

Is that perfect data? No. Could I be wrong? Absolutely. But where are you seeing these benchmarks you assert?

[1] Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. The journal of Finance, 55(2), 773-806.

My source is literally any sensible reading and researching on the topic.. it's VERY commonly accepted knowledge and an open secret that most people who try to make money through trading (ie, buying on margin to boost returns) lose money. Period.

Actual percentages of winners/losers is difficult to pin down because hey, everyone who loses their shirt is so keen to fill in questionnaires about how they lost their shirt.. right?

But accepted wisdom is that most fewer maybe around 10% are long term profitable.  That is what statistics from most trading platforms seem to corroborate.
https://www.babypips.com/news/almost-80-percent-of-retail-traders-are-unprofitable

[maizefolk]

But accepted wisdom is that most fewer maybe around 10% are long term profitable.  That is what statistics from most trading platforms seem to corroborate.
https://www.babypips.com/news/almost-80-percent-of-retail-traders-are-unprofitable

To clarify for those who don't click through to the link, vand posted a story about the majority of people trading foreign currencies losing money, not people trading stocks.

[wageslave23]

Actively trading vs index investing is one thing, actively trading vs. $0 returns?  The average trader definitely comes out ahead.  By mathematical law they have to, because index finds mirror the market.  And both are positive, so the rest of traders outside of index funds will equal the index and market returns too. The studies show after fees that the actively managed accounts perform slightly worse than index funds.

[ericrugiero]

Actively trading vs index investing is one thing, actively trading vs. $0 returns?  The average trader definitely comes out ahead.  By mathematical law they have to, because index finds mirror the market.  And both are positive, so the rest of traders outside of index funds will equal the index and market returns too. The studies show after fees that the actively managed accounts perform slightly worse than index funds.

True.  There are plenty who lose money but overall most will gain on average.  I'm not sure if this applies to some of the more "sophisticated" ways to invest such as options, calls, puts, etc. 

[nereo]

https://affordanything.com/329-challenging-your-confirmation-bias-with-economist-larry-

Spoiler Alert: In the middle of the interview he says that investing in the stock market is the same thing as gambling at a casino. You shouldn't invest in the stock market, until all debts are paid off, including a primary house with 2.5% interest rate.

Well you just saved me from having to listen to it through.

[markbike528CBX]

https://affordanything.com/329-challenging-your-confirmation-bias-with-economist-larry-

Spoiler Alert: In the middle of the interview he says that investing in the stock market is the same thing as gambling at a casino. You shouldn't invest in the stock market, until all debts are paid off, including a primary house with 2.5% interest rate.

Well you just saved me from having to listen to it through.

And threreby not challenging your confirmation bias?  :-)

[vand]

But accepted wisdom is that most fewer maybe around 10% are long term profitable.  That is what statistics from most trading platforms seem to corroborate.
https://www.babypips.com/news/almost-80-percent-of-retail-traders-are-unprofitable

To clarify for those who don't click through to the link, vand posted a story about the majority of people trading foreign currencies losing money, not people trading stocks.

No, it's not just FX. CFDs are derivatives that cover a multitude of markets.

if you think that most people make money trading you are hopelessly, and I do mean hopelessly, misguided.  If most people made money, why would they ever stop? But the statistics show that most people who trade wash out after 1-2 years.

[nereo]

https://affordanything.com/329-challenging-your-confirmation-bias-with-economist-larry-

Spoiler Alert: In the middle of the interview he says that investing in the stock market is the same thing as gambling at a casino. You shouldn't invest in the stock market, until all debts are paid off, including a primary house with 2.5% interest rate.

Well you just saved me from having to listen to it through.

And threreby not challenging your confirmation bias?  :-)

Your smiley denotes this was said in jest, but you do bring up a good point about confirmation bias. One should systematically question what they believe and why, but that doesn't mean giving equal footing to every contrarian opinion out there. I've read countless articles and taken a deep dive into equities to know that it isn't the same as gambling at a casino.

It's not unlike climate change - which i've spent the last decade closely studying in my professional life.  It's great to consider where our current understanding is lacking, but at this point you can also safely disregard anyone who claims that there's "just no evidence that climate change is happening".

[markbike528CBX]

https://affordanything.com/329-challenging-your-confirmation-bias-with-economist-larry-

Spoiler Alert: In the middle of the interview he says that investing in the stock market is the same thing as gambling at a casino. You shouldn't invest in the stock market, until all debts are paid off, including a primary house with 2.5% interest rate.

Well you just saved me from having to listen to it through.

And threreby not challenging your confirmation bias?  :-)

Your smiley denotes this was said in jest, but you do bring up a good point about confirmation bias. One should systematically question what they believe and why, but that doesn't mean giving equal footing to every contrarian opinion out there. I've read countless articles and taken a deep dive into equities to know that it isn't the same as gambling at a casino.

It's not unlike climate change - which i've spent the last decade closely studying in my professional life.  It's great to consider where our current understanding is lacking, but at this point you can also safely disregard anyone who claims that there's "just no evidence that climate change is happening".

I also was "saved" from having to click and read.  Yes, I jested, but you got the point I was making.
Those of us who have been on this forum or bogleheads forum have seen the data that destroys the active management/ trading benefits claims many times.
New people may not have see the data, and might get locked into a confirmation bias box and not know it.
I notice none of the above posts stated or linked to data, just referring to "statistics say".
I'd like a list of this studies, like the one RWD has for "reasons not to invest now".  Maybe a sticky.

If you are locked into a confirmation bias box, this is the best one to be in.

[slappy]

https://affordanything.com/329-challenging-your-confirmation-bias-with-economist-larry-

Spoiler Alert: In the middle of the interview he says that investing in the stock market is the same thing as gambling at a casino. You shouldn't invest in the stock market, until all debts are paid off, including a primary house with 2.5% interest rate.

Well you just saved me from having to listen to it through.

And threreby not challenging your confirmation bias?  :-)

Your smiley denotes this was said in jest, but you do bring up a good point about confirmation bias. One should systematically question what they believe and why, but that doesn't mean giving equal footing to every contrarian opinion out there. I've read countless articles and taken a deep dive into equities to know that it isn't the same as gambling at a casino.

It's not unlike climate change - which i've spent the last decade closely studying in my professional life.  It's great to consider where our current understanding is lacking, but at this point you can also safely disregard anyone who claims that there's "just no evidence that climate change is happening".

I also was "saved" from having to click and read.  Yes, I jested, but you got the point I was making.
Those of us who have been on this forum or bogleheads forum have seen the data that destroys the active management/ trading benefits claims many times.
New people may not have see the data, and might get locked into a confirmation bias box and not know it.
I notice none of the above posts stated or linked to data, just referring to "statistics say".
I'd like a list of this studies, like the one RWD has for "reasons not to invest now".  Maybe a sticky.

If you are locked into a confirmation bias box, this is the best one to be in.

I actually listened to the whole thing, in the spirit of challenging my confirmation bias, and there was nothing that even remotely challenged. I mean, I get what he is saying. As someone else mentioned, there are actually a lot of people who would better off paying off their mortgage and everything first. Particularly people who tend to sell at the bottom and then wait for it to come way back up before getting back in. There is some chart out there showing that the market averages x% but the average investor (not trader) gets y%. I don't remember the exact numbers, but y% was somewhere like 3-5%, and it's because of investor behavior. So if someone is likely to panic sell at the bottom, or even invest too conservatively in general, then maybe they should focus on the debt first. I've also seen a chart that discusses paying off your mortgage and it shows the allocation and at what rate your mortgage would be so that it would make sense paying it off vs investing. So if you are invested conservatively, you should pay off the mortgage if it is x%. If you are invested more aggressively, it makes sense to pay off debt if it is a higher rate. These are all things are common knowledge to most who post here, but not necessarily to the the average person.

All that to say, there was nothing in there that actually compelled me to challenge my confirmation bias, which is another reason I'm surprised she had him on the show. She could just have had Ramsey on instead.

[maizefolk]

if you think that most people make money trading you are hopelessly, and I do mean hopelessly, misguided.  If most people made money, why would they ever stop? But the statistics show that most people who trade wash out after 1-2 years.

You're certainly welcome to insult me all you like, but if all the statistics show this (for stocks mind you, not expected zero return trades like currency) then why not just point me to them? I've linked to the one study I could find that looks at regular consumers trading stocks and explained why, in the absence of any data, it'd lead me to conclude the average person who trades stocks is better off than putting money under the bed but far less well off than someone who just indexes. One aging study from the '90s isn't the be all and end all though. I'd be shocked if there isn't better data out there.

But there is a world of difference between showing with statistics and just claiming "the statistics show" without actually showing any stats.

[clarkfan1979]

https://affordanything.com/329-challenging-your-confirmation-bias-with-economist-larry-

Spoiler Alert: In the middle of the interview he says that investing in the stock market is the same thing as gambling at a casino. You shouldn't invest in the stock market, until all debts are paid off, including a primary house with 2.5% interest rate.

Well you just saved me from having to listen to it through.

And threreby not challenging your confirmation bias?  :-)

Your smiley denotes this was said in jest, but you do bring up a good point about confirmation bias. One should systematically question what they believe and why, but that doesn't mean giving equal footing to every contrarian opinion out there. I've read countless articles and taken a deep dive into equities to know that it isn't the same as gambling at a casino.

It's not unlike climate change - which i've spent the last decade closely studying in my professional life.  It's great to consider where our current understanding is lacking, but at this point you can also safely disregard anyone who claims that there's "just no evidence that climate change is happening".

I also was "saved" from having to click and read.  Yes, I jested, but you got the point I was making.
Those of us who have been on this forum or bogleheads forum have seen the data that destroys the active management/ trading benefits claims many times.
New people may not have see the data, and might get locked into a confirmation bias box and not know it.
I notice none of the above posts stated or linked to data, just referring to "statistics say".
I'd like a list of this studies, like the one RWD has for "reasons not to invest now".  Maybe a sticky.

If you are locked into a confirmation bias box, this is the best one to be in.

I actually listened to the whole thing, in the spirit of challenging my confirmation bias, and there was nothing that even remotely challenged. I mean, I get what he is saying. As someone else mentioned, there are actually a lot of people who would better off paying off their mortgage and everything first. Particularly people who tend to sell at the bottom and then wait for it to come way back up before getting back in. There is some chart out there showing that the market averages x% but the average investor (not trader) gets y%. I don't remember the exact numbers, but y% was somewhere like 3-5%, and it's because of investor behavior. So if someone is likely to panic sell at the bottom, or even invest too conservatively in general, then maybe they should focus on the debt first. I've also seen a chart that discusses paying off your mortgage and it shows the allocation and at what rate your mortgage would be so that it would make sense paying it off vs investing. So if you are invested conservatively, you should pay off the mortgage if it is x%. If you are invested more aggressively, it makes sense to pay off debt if it is a higher rate. These are all things are common knowledge to most who post here, but not necessarily to the the average person.

All that to say, there was nothing in there that actually compelled me to challenge my confirmation bias, which is another reason I'm surprised she had him on the show. She could just have had Ramsey on instead.

My step-mom freaked out and sold at the bottom in March 2020. I think there is a really good chance that her returns are less than 3% over the last 10 years. If she represents the "typical investor", the economist might be correct. It's actually fairly reasonable to advise these people to pay off their student loans and mortgage first.

If you can match the stock market around 9% it doesn't make sense to pay off your students loans and/or mortgage. I think the MMM community is capable of matching the market, but not necessarily beating the the market.

I left grad school in August 2011 with 57K of student loan debt with an interest rate around 5.25%. I signed up for the lowest payment possible which was a 25-year graduate extended plan, with a payment of $333/month. Instead of paying off the debt, I focused on investing in real estate and the stock market, in that order.

Ten years later, I still have $24,000 in student loans and my payment is $160/month. However, with the recent bull market in real estate and the stock market over the past 12 months, we now have a net worth over 1 million. 

If I was a "typical investor" and at the age of 42 still had $24,000 of student loans that would probably be considered a bad thing. However, based on the strategy to focus on net worth, the $24,000 in student loans is not a big deal.

Dave Ramsey does an excellent job of getting the average person out of debt. However, how does he get the average person to get 12% in the stock market?

[nereo]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

[slappy]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

It's easy to "know thyself" in good times. As the saying goes, everyone has a plan til they get punched in the mouth. In Jan of last year, I'm sure lots of people "knew" that they were "buy and hold", "not the type to panic", etc. Until March of last year punched them in the face. I can't believe how many smart people told me "this time is different". I have a friend that has millions of dollars and has always been in the market, but went to cash last year because "this time feels different".

[clarkfan1979]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

It's easy to "know thyself" in good times. As the saying goes, everyone has a plan til they get punched in the mouth. In Jan of last year, I'm sure lots of people "knew" that they were "buy and hold", "not the type to panic", etc. Until March of last year punched them in the face. I can't believe how many smart people told me "this time is different". I have a friend that has millions of dollars and has always been in the market, but went to cash last year because "this time feels different".

Once the government stepped in and flooded the economy with stimulus money, I really couldn't understand people moving to a cash position. At the very least, the stock market is going to experience small gains due to inflation. Before the stimulus money, times were very uncertain. Anything could have happened and it did (33% drop). 

[frugalnacho]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

It's easy to "know thyself" in good times. As the saying goes, everyone has a plan til they get punched in the mouth. In Jan of last year, I'm sure lots of people "knew" that they were "buy and hold", "not the type to panic", etc. Until March of last year punched them in the face. I can't believe how many smart people told me "this time is different". I have a friend that has millions of dollars and has always been in the market, but went to cash last year because "this time feels different".

I put my entire emergency fund into the market at the bottom last march.  I'm sticking to the plan and it's working swell. 

[nereo]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

It's easy to "know thyself" in good times. As the saying goes, everyone has a plan til they get punched in the mouth. In Jan of last year, I'm sure lots of people "knew" that they were "buy and hold", "not the type to panic", etc. Until March of last year punched them in the face. I can't believe how many smart people told me "this time is different". I have a friend that has millions of dollars and has always been in the market, but went to cash last year because "this time feels different".

Which is why reviewing how you have reacted in past situations can be so informative.
FWIW, Vanguard released a white paper following the 'great recession' and detailed how something like 80% of their private investors made no substantial change to their contributions or withdrawals during the market downturn.  Just an interesting thing to think about.

[maizefolk]

FWIW, Vanguard released a white paper following the 'great recession' and detailed how something like 80% of their private investors made no substantial change to their contributions or withdrawals during the market downturn.  Just an interesting thing to think about.

Interesting. I need to track this down. From 2014-2019 I was frustrated with the subset of folks who would constantly predict with great certainty that everyone too young to be invested in the stock market in 2007 was doing to panic sell the minute a new recession came along, no matter what we said at the time. Now we've had a new test and have the data to see how common/uncommon panic selling actually was.

[Cool Friend]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

It's easy to "know thyself" in good times. As the saying goes, everyone has a plan til they get punched in the mouth. In Jan of last year, I'm sure lots of people "knew" that they were "buy and hold", "not the type to panic", etc. Until March of last year punched them in the face. I can't believe how many smart people told me "this time is different". I have a friend that has millions of dollars and has always been in the market, but went to cash last year because "this time feels different".

I put my entire emergency fund into the market at the bottom last march.  I'm sticking to the plan and it's working swell.

Wish I had done this but I didn’t have the stomach for it—had no idea if I’d lose my job or get sick or what. I was gonna drop $3,000 to open up my first Vanguard account around the end of March 2020, but I was extra nervous and had only just hit my emergency fund target. Oh well!

[wageslave23]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

It's easy to "know thyself" in good times. As the saying goes, everyone has a plan til they get punched in the mouth. In Jan of last year, I'm sure lots of people "knew" that they were "buy and hold", "not the type to panic", etc. Until March of last year punched them in the face. I can't believe how many smart people told me "this time is different". I have a friend that has millions of dollars and has always been in the market, but went to cash last year because "this time feels different".

I put my entire emergency fund into the market at the bottom last march.  I'm sticking to the plan and it's working swell.

Wish I had done this but I didn’t have the stomach for it—had no idea if I’d lose my job or get sick or what. I was gonna drop $3,000 to open up my first Vanguard account around the end of March 2020, but I was extra nervous and had only just hit my emergency fund target. Oh well!

Thats alright.  From a risk reward standpoint, that's a dumb move.  It might have worked this time and you doubled your emergency fund money - whoopdy do!  If that's a substantial amount of money in the grand scheme of things, then you are calculating your emergency fund wrong.  Your emergency fund should only be money that you would HAVE to have in case of emergency, anything more than that and you just have extra cash laying around that should be invested anyway.  Don't invest actual emergency fund money just to make a few thousand dollars.

[talltexan]

Proposed way to measure your tolerance for risk:

put $10,000 into crypto-currency. check back in a week. How do you feel about the 30% you've either gained or lost?

[matchewed]

That's only a way to test volatility risk. There are many more risks out there in the financial world.

[frugalnacho]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

It's easy to "know thyself" in good times. As the saying goes, everyone has a plan til they get punched in the mouth. In Jan of last year, I'm sure lots of people "knew" that they were "buy and hold", "not the type to panic", etc. Until March of last year punched them in the face. I can't believe how many smart people told me "this time is different". I have a friend that has millions of dollars and has always been in the market, but went to cash last year because "this time feels different".

I put my entire emergency fund into the market at the bottom last march.  I'm sticking to the plan and it's working swell.

Wish I had done this but I didn’t have the stomach for it—had no idea if I’d lose my job or get sick or what. I was gonna drop $3,000 to open up my first Vanguard account around the end of March 2020, but I was extra nervous and had only just hit my emergency fund target. Oh well!

Thats alright.  From a risk reward standpoint, that's a dumb move.  It might have worked this time and you doubled your emergency fund money - whoopdy do!  If that's a substantial amount of money in the grand scheme of things, then you are calculating your emergency fund wrong.  Your emergency fund should only be money that you would HAVE to have in case of emergency, anything more than that and you just have extra cash laying around that should be invested anyway.  Don't invest actual emergency fund money just to make a few thousand dollars.

We still had lines of credit and over 2 years worth of expenses invested in a brokerage account, even at the bottom last March.  I don't disagree with you, but I don't think I was putting myself at as much risk as it initially appears.  I'd do it again given the opportunity. 

[Cool Friend]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

It's easy to "know thyself" in good times. As the saying goes, everyone has a plan til they get punched in the mouth. In Jan of last year, I'm sure lots of people "knew" that they were "buy and hold", "not the type to panic", etc. Until March of last year punched them in the face. I can't believe how many smart people told me "this time is different". I have a friend that has millions of dollars and has always been in the market, but went to cash last year because "this time feels different".

I put my entire emergency fund into the market at the bottom last march.  I'm sticking to the plan and it's working swell.

Wish I had done this but I didn’t have the stomach for it—had no idea if I’d lose my job or get sick or what. I was gonna drop $3,000 to open up my first Vanguard account around the end of March 2020, but I was extra nervous and had only just hit my emergency fund target. Oh well!

Thats alright.  From a risk reward standpoint, that's a dumb move.  It might have worked this time and you doubled your emergency fund money - whoopdy do!  If that's a substantial amount of money in the grand scheme of things, then you are calculating your emergency fund wrong.  Your emergency fund should only be money that you would HAVE to have in case of emergency, anything more than that and you just have extra cash laying around that should be invested anyway.  Don't invest actual emergency fund money just to make a few thousand dollars.

Yeah, I just ran the numbers and I would have made $14k if I had parked it in the S&P500. A substantial amount to me, but not would not actually have changed anything. The peace of mind of knowing that I had a fund if shit really had hit the fan was worth it, I think.

I did bulk up my emergency fund to cover a full year's expenses over 2020 though, which is maybe excessively risk-averse to some. But then again, I only achieved financial stability in the past couple years of my life, so I was pretty motivated to defend it.

@frugalnacho sounds like your ass was well-covered though! Good on you. :)

[Loren Ver]

Actively trading vs index investing is one thing, actively trading vs. $0 returns?  The average trader definitely comes out ahead.  By mathematical law they have to, because index finds mirror the market.  And both are positive, so the rest of traders outside of index funds will equal the index and market returns too. The studies show after fees that the actively managed accounts perform slightly worse than index funds.

This is something I really struggled with when I found MMM and people were all about low cost index funds.  I had most of my investments (non 401ks) in higher cost mutual funds.  The thing is, they are doing REALLY well (even after costs).  And continue to do really well, even compared to their standard or the S&P.  I've been in them for over 20 years.   So we have let that money ride there and then diversified into some low cost index funds over the years as well (since those funds aren't highly diversified).  The thing is, our more expensive, actively managed funds are really out pacing the low cost ones.  Not worth selling to rebalance, since paying taxes or paying back ACA subsidies isn't worth the costs.  We are just using those higher cost funds to pay our early retirement. 

Of course given the types of funds they are, the risks are higher, and if the market goes down, they can go WAY down.  Being through a few market crashes with them, I know how we react, but I don't recommend the average investor put money in them. 

LV

[bacchi]

From decade long study of day traders in Taiwan, very few day traders were profitable, and even the profitable traders didn't necessarily beat the market.

https://faculty.haas.berkeley.edu/odean/papers/Day%20Traders/Day%20Trading%20and%20Learning%20110217.pdf

Inconsistent with  models  of  rational  speculation  and  learning,  we  document  that  the  aggregate performance of day traders is negative, that the vast majority of day traders are unprofitable, and many persist despite an extensive experience of losses

Of course, everyone thinks they're the ~5% who are profitable.

https://xkcd.com/1570/ comes to mind.

-----
Here's an analysis of one broker's data: https://www.curiousgnu.com/day-trading

The following histogram shows the average gains of each trader over the past twelve months. In the end, 79.5% of them lost real money. The median 12-month returns were -36.3%.

That was in 2015/2016, when the market was fairly flat.

-----
The Berkeley study above has a lot of references. This is one:

Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually.

= Lower return than the market and way more taxes.

[meandmyfamily]

Clarkfan-We have some very similar relatives and for them it is like going to the casino.

[wageslave23]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

It's easy to "know thyself" in good times. As the saying goes, everyone has a plan til they get punched in the mouth. In Jan of last year, I'm sure lots of people "knew" that they were "buy and hold", "not the type to panic", etc. Until March of last year punched them in the face. I can't believe how many smart people told me "this time is different". I have a friend that has millions of dollars and has always been in the market, but went to cash last year because "this time feels different".

I put my entire emergency fund into the market at the bottom last march.  I'm sticking to the plan and it's working swell.

Wish I had done this but I didn’t have the stomach for it—had no idea if I’d lose my job or get sick or what. I was gonna drop $3,000 to open up my first Vanguard account around the end of March 2020, but I was extra nervous and had only just hit my emergency fund target. Oh well!

Thats alright.  From a risk reward standpoint, that's a dumb move.  It might have worked this time and you doubled your emergency fund money - whoopdy do!  If that's a substantial amount of money in the grand scheme of things, then you are calculating your emergency fund wrong.  Your emergency fund should only be money that you would HAVE to have in case of emergency, anything more than that and you just have extra cash laying around that should be invested anyway.  Don't invest actual emergency fund money just to make a few thousand dollars.

We still had lines of credit and over 2 years worth of expenses invested in a brokerage account, even at the bottom last March.  I don't disagree with you, but I don't think I was putting myself at as much risk as it initially appears.  I'd do it again given the opportunity.

Yeah it sounds like you have an EMERGENCY fund (the lines of credit and brokerage account) and some extra money that you hadn't gotten around to investing.  I have the same thing.  Mostly because my wife is risk averse and also wants to buy a house.  She has a big chunk of money in a savings account that I don't bother her about right now since the market is sky high.  But if it drops again, I'll be pushing her to invest it. 

[wageslave23]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

It's easy to "know thyself" in good times. As the saying goes, everyone has a plan til they get punched in the mouth. In Jan of last year, I'm sure lots of people "knew" that they were "buy and hold", "not the type to panic", etc. Until March of last year punched them in the face. I can't believe how many smart people told me "this time is different". I have a friend that has millions of dollars and has always been in the market, but went to cash last year because "this time feels different".

I put my entire emergency fund into the market at the bottom last march.  I'm sticking to the plan and it's working swell.

Wish I had done this but I didn’t have the stomach for it—had no idea if I’d lose my job or get sick or what. I was gonna drop $3,000 to open up my first Vanguard account around the end of March 2020, but I was extra nervous and had only just hit my emergency fund target. Oh well!

Thats alright.  From a risk reward standpoint, that's a dumb move.  It might have worked this time and you doubled your emergency fund money - whoopdy do!  If that's a substantial amount of money in the grand scheme of things, then you are calculating your emergency fund wrong.  Your emergency fund should only be money that you would HAVE to have in case of emergency, anything more than that and you just have extra cash laying around that should be invested anyway.  Don't invest actual emergency fund money just to make a few thousand dollars.

Yeah, I just ran the numbers and I would have made $14k if I had parked it in the S&P500. A substantial amount to me, but not would not actually have changed anything. The peace of mind of knowing that I had a fund if shit really had hit the fan was worth it, I think.

I did bulk up my emergency fund to cover a full year's expenses over 2020 though, which is maybe excessively risk-averse to some. But then again, I only achieved financial stability in the past couple years of my life, so I was pretty motivated to defend it.

@frugalnacho sounds like your ass was well-covered though! Good on you. :)

Hindsight is 20/20.  Like you said $14k is a lot to you right now, in 10yrs from now probably not so much.  Come up with your investment strategy and stick to it whether the market is up or down.  All the people on here with $1M+ nest eggs will attest to this strategy.

[frugalnacho]

Or: know thyself

I know I won’t go on a spending bender just because my credit limit is increased, nor do I buy/sell based on what the markets had been doing. Others might not say the same.

It's easy to "know thyself" in good times. As the saying goes, everyone has a plan til they get punched in the mouth. In Jan of last year, I'm sure lots of people "knew" that they were "buy and hold", "not the type to panic", etc. Until March of last year punched them in the face. I can't believe how many smart people told me "this time is different". I have a friend that has millions of dollars and has always been in the market, but went to cash last year because "this time feels different".

I put my entire emergency fund into the market at the bottom last march.  I'm sticking to the plan and it's working swell.

Wish I had done this but I didn’t have the stomach for it—had no idea if I’d lose my job or get sick or what. I was gonna drop $3,000 to open up my first Vanguard account around the end of March 2020, but I was extra nervous and had only just hit my emergency fund target. Oh well!

Thats alright.  From a risk reward standpoint, that's a dumb move.  It might have worked this time and you doubled your emergency fund money - whoopdy do!  If that's a substantial amount of money in the grand scheme of things, then you are calculating your emergency fund wrong.  Your emergency fund should only be money that you would HAVE to have in case of emergency, anything more than that and you just have extra cash laying around that should be invested anyway.  Don't invest actual emergency fund money just to make a few thousand dollars.

We still had lines of credit and over 2 years worth of expenses invested in a brokerage account, even at the bottom last March.  I don't disagree with you, but I don't think I was putting myself at as much risk as it initially appears.  I'd do it again given the opportunity.

Yeah it sounds like you have an EMERGENCY fund (the lines of credit and brokerage account) and some extra money that you hadn't gotten around to investing.  I have the same thing.  Mostly because my wife is risk averse and also wants to buy a house.  She has a big chunk of money in a savings account that I don't bother her about right now since the market is sky high.  But if it drops again, I'll be pushing her to invest it.

We normally keep $10k in savings for emergencies so we won't have to dip into our taxable brokerage account too hard, unless shit is crazy and we burn through $10k first.   Mostly for something like if my car (with liability insurance only) gets totalled, I have enough to buy a replacement with cash immediately without having to sell. When it dipped hard, the entire situation was kind of scary, but we figured the market was on sale.  It's also not like the $10k just vanished, even without the lines of credit and fat brokerage account, we could easily have sold it if needed and recouped most of that $10k.  Seemed like a gamble worth taking.  If the market drops 20%+ again I will likely invest my $10k "emergency" fund as long as I still have a job, credit, etc.