Author Topic: Emerging Markets  (Read 18858 times)

brooklynguy

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Re: Emerging Markets
« Reply #50 on: September 16, 2015, 09:46:35 AM »
Yes, of course. Volatility is not desirable in and of itself. It's more of a tiebreaker between two funds that you expect to perform equally well over the long run.

Yep.  I read into Raven's original statement the words "all else being equal," which, in context, seemed to be the point he/she was actually making.

If we're going to split philosophical hairs with our gripes, then we might as well recognize that nothing in investing, including returns, is desirable "in and of itself."  Most people, for example, would prefer a lower-return investment with some liquidity over a higher-return investment with zero liquidity (imagine some hypothetical investment in which you could deposit money but never withdraw it, which illustrates that even high returns are not desirable in and of themselves).

johnny847

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Re: Emerging Markets
« Reply #51 on: September 16, 2015, 10:16:35 AM »
Yes, of course. Volatility is not desirable in and of itself. It's more of a tiebreaker between two funds that you expect to perform equally well over the long run.

Yep.  I read into Raven's original statement the words "all else being equal," which, in context, seemed to be the point he/she was actually making.

If we're going to split philosophical hairs with our gripes, then we might as well recognize that nothing in investing, including returns, is desirable "in and of itself."  Most people, for example, would prefer a lower-return investment with some liquidity over a higher-return investment with zero liquidity (imagine some hypothetical investment in which you could deposit money but never withdraw it, which illustrates that even high returns are not desirable in and of themselves).

I don't know about you but my definition of investment doesn't include hypothetical assets where I could never ever obtain the value from it. That's completely useless.

brooklynguy

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Re: Emerging Markets
« Reply #52 on: September 16, 2015, 10:29:22 AM »
I don't know about you but my definition of investment doesn't include hypothetical assets where I could never ever obtain the value from it. That's completely useless.

I was making a conceptual point in the abstract to illustrate a point, same as you.  In any event, it's not as if the hypothetical example is inconceivable in the real world.  Different investment vehicles have different positive and negative attributes, so choosing among them necessarily involves making trade-offs.  Some investments are more illiquid than others, making it more difficult to extract their value.  If you put your money into an investment product in the Republic of Wadiya and government-imposed sanctions subsequently render it impossible to liquidate that investment, no rate of returns is going to be desirable to you in and of itself.

johnny847

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Re: Emerging Markets
« Reply #53 on: September 16, 2015, 10:39:35 AM »
I don't know about you but my definition of investment doesn't include hypothetical assets where I could never ever obtain the value from it. That's completely useless.

I was making a conceptual point in the abstract to illustrate a point, same as you.  In any event, it's not as if the hypothetical example is inconceivable in the real world.  Different investment vehicles have different positive and negative attributes, so choosing among them necessarily involves making trade-offs.  Some investments are more illiquid than others, making it more difficult to extract their value.  If you put your money into an investment product in the Republic of Wadiya and government-imposed sanctions subsequently render it impossible to liquidate that investment, no rate of returns is going to be desirable to you in and of itself.

Okay, and in the abstract, I would not call that an investment. I'm not sure what I'd call it. But that's not an investment in my book.

In your Republic of Wadiya example (yay for the Dictator reference) if that investment product is now 100% illiquid, to me that's no longer an investment. I can't count it as part of my investment portfolio. My investment portfolio is something I want to cash out during retirement. I have no idea if I am ever going to get even a penny of that money back, even if it has a nominal value. If I can't cash it out during retirement, then it has no value to me.

I'm only concerned about getting (preferably high) positive rate of returns from investments (as in, assets that actually have some level of liquidity).


If your definition of investment still includes that illiquid product you bought from the Republic of Wadiya, then I guess we have nothing else to talk about.

brooklynguy

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Re: Emerging Markets
« Reply #54 on: September 16, 2015, 10:57:58 AM »
I'm only concerned about getting (preferably high) positive rate of returns from investments (as in, assets that actually have some level of liquidity).

Well, that was kind of my point -- positive rates of return are only desirable if you can access them.  But I was only making that point in service of my larger point that seizing on the wording of Raven's post to argue the obvious point that volatility is not desirable in and of itself was splitting hairs too finely (and in making that point I guess I managed to turn this thread into an even bigger off-topic hair-splitting contest) :-)

johnny847

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Re: Emerging Markets
« Reply #55 on: September 16, 2015, 11:05:09 AM »
I'm only concerned about getting (preferably high) positive rate of returns from investments (as in, assets that actually have some level of liquidity).

Well, that was kind of my point -- positive rates of return are only desirable if you can access them.  But I was only making that point in service of my larger point that seizing on the wording of Raven's post to argue the obvious point that volatility is not desirable in and of itself was splitting hairs too finely (and in making that point I guess I managed to turn this thread into an even bigger off-topic hair-splitting contest) :-)

It certainly seemed like I was splitting hairs too finely when I made my first remark that volatility in of itself was not desirable. But I fully expected raven15 to respond something along the lines of oh well I meant volatility typically accompanies high levels of positive returns. it's generally difficult to get high returns without some level of volatility.

But that's not how raven15 responded. Which prompted me to write all the stuff above.
« Last Edit: September 16, 2015, 11:10:12 AM by johnny847 »

milesdividendmd

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Re: Emerging Markets
« Reply #56 on: September 16, 2015, 11:44:40 AM »

I'm only concerned about getting (preferably high) positive rate of returns from investments (as in, assets that actually have some level of liquidity).

Well, that was kind of my point -- positive rates of return are only desirable if you can access them.  But I was only making that point in service of my larger point that seizing on the wording of Raven's post to argue the obvious point that volatility is not desirable in and of itself was splitting hairs too finely (and in making that point I guess I managed to turn this thread into an even bigger off-topic hair-splitting contest) :-)

Brooklyn, your argument is all over the place here. Liquidity is utterly irrelevant to this discussion.

It is not far out to say that when considering portfolios over all that these are all desirable qualities:

1.  High returns
2.  Low risk of permanent loss
3.  Liquidity
4.  Low volatility

Since there is no asset or portfolio that offers each of these in one package so we must always trade one good quality for the other.

But volatility is in no way a desirable trait in and of itself. It tends to lower compounding returns all else being equal. it's something you accept in order to take on higher rewards or more liquidity, or in order to cancel out another non correlated assets volatility.

Radagast

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Re: Emerging Markets
« Reply #57 on: September 16, 2015, 11:49:18 AM »
And I can construct the example below where volatility is shown not to be a desirable characteristic. You can construct as many examples as you want raven15, but your absolutely statement that "High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame." only needs one counterexample to be proven false.


Mutual fund A returns 5% a year.

Mutual fund B fluctuates between $5, $10, and $15 a share. In always spends 4 months of the year in each of the 3 prices, but it's random so you don't know which months will have which prices.

Both are currently priced at $10/share.

What do you have after 30 years if you invest $10/month?

Mutual fund A, with the help of an investment calculator $7976.98.

Mutual fund B:
Four months of the year you buy 2 shares at $5/share.
Four months of the year you buy 1 share at $10/share.
Four months of the year you buy 0.667 shares at $15/share.

So each year you buy 14.667 shares. In 30 years, you have 440 shares.
Even if you sold all of them at $15/share you only have $6600 which is less than what mutual fund A is worth.
Sorry Johnny847, your example proves my point. The asset with 5% returns is clearly better than the asset with 0 returns after 30 years, which should not surprise anyone. However using your numbers the asset with 0 returns and high volatility is the best investment for the first nine years. See your scenario played out below.
Year   5% Ret.   0% Ret.
1    $121.05     $146.67
2    $247.10     $293.33
3    $379.46     $440.00
4    $518.43     $586.67
5    $664.35     $733.33
6    $817.57     $880.00
7    $978.45     $1,026.67
8    $1,147.37     $1,173.33
9    $1,324.74     $1,320.00 <-- break even point
10    $1,510.98     $1,466.67
11    $1,706.52     $1,613.33
12    $1,911.85     $1,760.00
13    $2,127.44     $1,906.67
14    $2,353.82     $2,053.33
15    $2,591.51     $2,200.00
16    $2,841.08     $2,346.67
17    $3,103.14     $2,493.33
18    $3,378.29     $2,640.00
19    $3,667.21     $2,786.67
20    $3,970.57     $2,933.33
21    $4,289.10     $3,080.00
22    $4,623.55     $3,226.67
23    $4,974.73     $3,373.33
24    $5,343.46     $3,520.00
25    $5,730.64     $3,666.67
26    $6,137.17     $3,813.33
27    $6,564.03     $3,960.00
28    $7,012.23     $4,106.67
29    $7,482.84     $4,253.33
30    $7,976.98     $4,400.00


johnny847

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Re: Emerging Markets
« Reply #58 on: September 16, 2015, 12:05:34 PM »
And I can construct the example below where volatility is shown not to be a desirable characteristic. You can construct as many examples as you want raven15, but your absolutely statement that "High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame." only needs one counterexample to be proven false.


Mutual fund A returns 5% a year.

Mutual fund B fluctuates between $5, $10, and $15 a share. In always spends 4 months of the year in each of the 3 prices, but it's random so you don't know which months will have which prices.

Both are currently priced at $10/share.

What do you have after 30 years if you invest $10/month?

Mutual fund A, with the help of an investment calculator $7976.98.

Mutual fund B:
Four months of the year you buy 2 shares at $5/share.
Four months of the year you buy 1 share at $10/share.
Four months of the year you buy 0.667 shares at $15/share.

So each year you buy 14.667 shares. In 30 years, you have 440 shares.
Even if you sold all of them at $15/share you only have $6600 which is less than what mutual fund A is worth.
Sorry Johnny847, your example proves my point. The asset with 5% returns is clearly better than the asset with 0 returns after 30 years, which should not surprise anyone. However using your numbers the asset with 0 returns and high volatility is the best investment for the first nine years. See your scenario played out below.
Year   5% Ret.   0% Ret.
1    $121.05     $146.67
2    $247.10     $293.33
3    $379.46     $440.00
4    $518.43     $586.67
5    $664.35     $733.33
6    $817.57     $880.00
7    $978.45     $1,026.67
8    $1,147.37     $1,173.33
9    $1,324.74     $1,320.00 <-- break even point
10    $1,510.98     $1,466.67
11    $1,706.52     $1,613.33
12    $1,911.85     $1,760.00
13    $2,127.44     $1,906.67
14    $2,353.82     $2,053.33
15    $2,591.51     $2,200.00
16    $2,841.08     $2,346.67
17    $3,103.14     $2,493.33
18    $3,378.29     $2,640.00
19    $3,667.21     $2,786.67
20    $3,970.57     $2,933.33
21    $4,289.10     $3,080.00
22    $4,623.55     $3,226.67
23    $4,974.73     $3,373.33
24    $5,343.46     $3,520.00
25    $5,730.64     $3,666.67
26    $6,137.17     $3,813.33
27    $6,564.03     $3,960.00
28    $7,012.23     $4,106.67
29    $7,482.84     $4,253.33
30    $7,976.98     $4,400.00

Let's go back to your original statement. The one that I had a gripe with and started this entire discussion.
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.

Notice how you said long time frame. If you think nine years is a long time frame, then sure, your statement still holds.

However, I'm pretty sure most people would agree that in investing contexts, nine years is not a long time frame.


I can take this even further. Your original statement, as written says volatility is good. With zero mention of returns.

So by that logic, an investment (Fund A) with a long term negative real return but high volatility is good because it has high volatility. And by your logic, it is better than an investment (Fund B) that has low volatility, but actually happens to have a positive real return.

I think anybody including yourself can see that fund B is clearly better than fund A.

Radagast

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Re: Emerging Markets
« Reply #59 on: September 16, 2015, 12:10:55 PM »
And here is the volatile asset from your example with except with the addition of -5% compounding returns still outperforming the asset with +5% returns for the first 5 years.

Year   5% Ret.   -5% Ret.
1    $121.05     $146.67
2    $247.10     $286.00
3    $379.46     $418.37
4    $518.43     $544.12
5    $664.35     $663.58 <--break even
6    $817.57     $777.06
7    $978.45     $884.88
8    $1,147.37     $987.30
9    $1,324.74     $1,084.60
10    $1,510.98     $1,177.04

johnny847

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Re: Emerging Markets
« Reply #60 on: September 16, 2015, 12:14:39 PM »
And here is the volatile asset from your example with except with the addition of -5% compounding returns still outperforming the asset with +5% returns for the first 5 years.

Year   5% Ret.   -5% Ret.
1    $121.05     $146.67
2    $247.10     $286.00
3    $379.46     $418.37
4    $518.43     $544.12
5    $664.35     $663.58 <--break even
6    $817.57     $777.06
7    $978.45     $884.88
8    $1,147.37     $987.30
9    $1,324.74     $1,084.60
10    $1,510.98     $1,177.04


I didn't check the math on that but it doesn't matter, I'll just assume you're right.

You're still not true to your original statement.
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.
So you're saying 5 years is a long time frame? Or that someone who will be buying regularly is better off with this negative real return asset? Which is it?

brooklynguy

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Re: Emerging Markets
« Reply #61 on: September 16, 2015, 12:20:56 PM »
Brooklyn, your argument is all over the place here.

. . .

But volatility is in no way a desirable trait in and of itself.

I'm not sure what argument you think I'm making, but as seattlecyclone succinctly summed up, an investment with higher volatility can be better for the accumulator who slowly invests over time than an investment with lower volatility and the same total return.  That's just a fact of math about which everyone here presumably agrees, and all the nominal disagreement on this topic is just people talking past each other.

Radagast

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Re: Emerging Markets
« Reply #62 on: September 16, 2015, 12:27:35 PM »
Let's go back to your original statement. The one that I had a gripe with and started this entire discussion.
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.
Notice how you said long time frame. If you think nine years is a long time frame, then sure, your statement still holds.

However, I'm pretty sure most people would agree that in investing contexts, nine years is not a long time frame.

I can take this even further. Your original statement, as written says volatility is good. With zero mention of returns.

So by that logic, an investment (Fund A) with a long term negative real return but high volatility is good because it has high volatility. And by your logic, it is better than an investment (Fund B) that has low volatility, but actually happens to have a positive real return.

I think anybody including yourself can see that fund B is clearly better than fund A.
It looks to me like volatility is beneficial all by itself to someone who recently started dollar cost averaging. However, it will become increasingly detrimental as time goes by and the total amount invested becomes large relative to ongoing contributions, thus there is a need to gradually diversify into other things. Nine years is short for an entire investing career, but it allows a nice smooth glide path into something less risky if the nine years are the first stage of a long term plan. See target date retirement funds, your age in bonds, etc. Buying a into volatile asset and holding it and only it forever would not be a good choice.

Of course higher expected returns are always preferable.

Radagast

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Re: Emerging Markets
« Reply #63 on: September 16, 2015, 12:31:37 PM »
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame in which to diversify into lower volatility and/or non-correlated assets.
So you're saying 5 years is a long time frame? Or that someone who will be buying regularly is better off with this negative real return asset? Which is it?
OK, I modified the statement above. Satisfied?

johnny847

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Re: Emerging Markets
« Reply #64 on: September 16, 2015, 12:43:23 PM »
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame in which to diversify into lower volatility and/or non-correlated assets.
So you're saying 5 years is a long time frame? Or that someone who will be buying regularly is better off with this negative real return asset? Which is it?
OK, I modified the statement above. Satisfied?

Nope.

Let's try framing this another way.

Joe Shmo comes to you for investing advice. He has zero assets currently and plans on investing for 30+ years.

His wife will go beserk unless they invest in one of two funds from XYZ mutual fund company. These are only two options to choose from:

Fund A: Very volatile. It swings +/-40% in value every year with a long term real return of -50% return.
Fund B: Not volatile. It increases very steadily at 2% after inflation. It's not correlated with fund A.

What do you recommend Joe invests in?


What is an accurate statement is
If you have two funds that both return 5% over the long run, the more volatile one can be better for those of us who invest a little bit of new money every month, precisely because of the effect that raven15 mentioned earlier: you buy a lot of shares in the down months. This is irrelevant if the total return is lower, but for two funds that go to the same destination the winding path can be better than the straight one.
The bolded part is the important part that I've been trying to convey to you.

milesdividendmd

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Re: Emerging Markets
« Reply #65 on: September 16, 2015, 12:53:00 PM »

And here is the volatile asset from your example with except with the addition of -5% compounding returns still outperforming the asset with +5% returns for the first 5 years.

Year5% Ret.-5% Ret.
1 $121.05  $146.67
2 $247.10  $286.00
3 $379.46  $418.37
4 $518.43  $544.12
5 $664.35  $663.58 <--break even
6 $817.57  $777.06
7 $978.45  $884.88
8 $1,147.37  $987.30
9 $1,324.74  $1,084.60
10 $1,510.98  $1,177.04


I didn't check the math on that but it doesn't matter, I'll just assume you're right.

You're still not true to your original statement.
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.
So you're saying 5 years is a long time frame? Or that someone who will be buying regularly is better off with this negative real return asset? Which is it?

I think we need to start showing our math here.

I honestly have no idea what any of these sequences of values is intended to show, but the conversation would be advanced if the calculations were spelled out.

Radagast

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Re: Emerging Markets
« Reply #66 on: September 16, 2015, 01:46:14 PM »
Nope.

Let's try framing this another way.

Joe Shmo comes to you for investing advice. He has zero assets currently and plans on investing for 30+ years.

His wife will go beserk unless they invest in one of two funds from XYZ mutual fund company. These are only two options to choose from:

Fund A: Very volatile. It swings +/-40% in value every year with a long term real return of -50% return.
Fund B: Not volatile. It increases very steadily at 2% after inflation. It's not correlated with fund A.

What do you recommend Joe invests in?
This is getting to an extreme that is beyond "investments" I have considered. However, without doing math or knowing the nature of the fluctuations, the best idea (on average, the downside is more than most would tolerate) is probably to start 100% in A, and gradually transition to 100% B in increments of say 4% per month.

What is an accurate statement is
If you have two funds that both return 5% over the long run, the more volatile one can be better for those of us who invest a little bit of new money every month, precisely because of the effect that raven15 mentioned earlier: you buy a lot of shares in the down months. This is irrelevant if the total return is lower, but for two funds that go to the same destination the winding path can be better than the straight one.
The bolded part is the important part that I've been trying to convey to you.
And that is the part I am disagreeing with. Over the short term, for someone who recently started making regular contributions, volatility can be beneficial all by itself, regardless of the long term expected return. Now this is assuming long term expected return is within the range of things people typically invest in. If you start saying -50% or -90% expected long term return that is just crazy and beyond the scope of the argument, which is actually over whether it is a good idea to begin investing by buying an emerging markets fund.

Another point, things with short term risks are better for long term investors, while things with long term risks are better for short term investors. The big risk with emerging markets is that they may drop 80% in the next year, which makes them ideal for people who will not need the money for a long time. The risk for US treasuries is that at some point in the next 1,000 years the US will probably stop repaying its debt, which makes them ideal for people who need the money within the next 5 years. I wanted to clarify the long term / short term thing a little.

Radagast

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Re: Emerging Markets
« Reply #67 on: September 16, 2015, 01:56:36 PM »
Year5% Ret.-5% Ret.
1 $121.05  $146.67
2 $247.10  $286.00
3 $379.46  $418.37
4 $518.43  $544.12
5 $664.35  $663.58 <--break even
6 $817.57  $777.06
7 $978.45  $884.88
8 $1,147.37  $987.30
9 $1,324.74  $1,084.60
10 $1,510.98  $1,177.04
I think we need to start showing our math here.

I honestly have no idea what any of these sequences of values is intended to show, but the conversation would be advanced if the calculations were spelled out.
The first column is a simple 5% compound interest formula, starting at $1 (restriction from government compound interest calculator) and adding $120 per year compounded annually. In Excel it multiplies the previous value by 1.05 and then adds $120 (5% compound interest).

In excel, the second column starts at 0, then it multiplies the previous value by 0.95 and then adds $146.67 (-5% compound interest).

Nothing too fancy. Not a model of real world conditions.

johnny847

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Re: Emerging Markets
« Reply #68 on: September 16, 2015, 02:02:12 PM »
Nope.

Let's try framing this another way.

Joe Shmo comes to you for investing advice. He has zero assets currently and plans on investing for 30+ years.

His wife will go beserk unless they invest in one of two funds from XYZ mutual fund company. These are only two options to choose from:

Fund A: Very volatile. It swings +/-40% in value every year with a long term real return of -50% return.
Fund B: Not volatile. It increases very steadily at 2% after inflation. It's not correlated with fund A.

What do you recommend Joe invests in?
This is getting to an extreme that is beyond "investments" I have considered. However, without doing math or knowing the nature of the fluctuations, the best idea (on average, the downside is more than most would tolerate) is probably to start 100% in A, and gradually transition to 100% B in increments of say 4% per month.


I agree, these are extreme numbers. But yet you still stand by you assertion. Which genuinely surprises me.

Please show the math.



milesdividendmd

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Re: Emerging Markets
« Reply #69 on: September 16, 2015, 03:16:12 PM »

Year5% Ret.-5% Ret.
1 $121.05  $146.67
2 $247.10  $286.00
3 $379.46  $418.37
4 $518.43  $544.12
5 $664.35  $663.58 <--break even
6 $817.57  $777.06
7 $978.45  $884.88
8 $1,147.37  $987.30
9 $1,324.74  $1,084.60
10 $1,510.98  $1,177.04
I think we need to start showing our math here.

I honestly have no idea what any of these sequences of values is intended to show, but the conversation would be advanced if the calculations were spelled out.
The first column is a simple 5% compound interest formula, starting at $1 (restriction from government compound interest calculator) and adding $120 per year compounded annually. In Excel it multiplies the previous value by 1.05 and then adds $120 (5% compound interest).

In excel, the second column starts at 0, then it multiplies the previous value by 0.95 and then adds $146.67 (-5% compound interest).

Nothing too fancy. Not a model of real world conditions.

Why are you contributing different amounts to the 2 funds?  (120 and 146.67??)

Radagast

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Re: Emerging Markets
« Reply #70 on: September 16, 2015, 07:31:16 PM »

Year5% Ret.-5% Ret.
1 $121.05  $146.67
2 $247.10  $286.00
3 $379.46  $418.37
4 $518.43  $544.12
5 $664.35  $663.58 <--break even
6 $817.57  $777.06
7 $978.45  $884.88
8 $1,147.37  $987.30
9 $1,324.74  $1,084.60
10 $1,510.98  $1,177.04
I think we need to start showing our math here.

I honestly have no idea what any of these sequences of values is intended to show, but the conversation would be advanced if the calculations were spelled out.
The first column is a simple 5% compound interest formula, starting at $1 (restriction from government compound interest calculator) and adding $120 per year compounded annually. In Excel it multiplies the previous value by 1.05 and then adds $120 (5% compound interest).

In excel, the second column starts at 0, then it multiplies the previous value by 0.95 and then adds $146.67 (-5% compound interest).

Nothing too fancy. Not a model of real world conditions.

Why are you contributing different amounts to the 2 funds?  (120 and 146.67??)

It comes from this parameter. $120 per year is being invested in each, but because of the fluctuation in price, it equates to more shares of the more volatile option being purchased. At the average price that means a higher value is purchased each year.
Four months of the year you buy 2 shares at $5/share.
Four months of the year you buy 1 share at $10/share.
Four months of the year you buy 0.667 shares at $15/share.

Radagast

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Re: Emerging Markets
« Reply #71 on: September 16, 2015, 07:36:24 PM »
Nope.

Let's try framing this another way.

Joe Shmo comes to you for investing advice. He has zero assets currently and plans on investing for 30+ years.

His wife will go beserk unless they invest in one of two funds from XYZ mutual fund company. These are only two options to choose from:

Fund A: Very volatile. It swings +/-40% in value every year with a long term real return of -50% return.
Fund B: Not volatile. It increases very steadily at 2% after inflation. It's not correlated with fund A.

What do you recommend Joe invests in?
This is getting to an extreme that is beyond "investments" I have considered. However, without doing math or knowing the nature of the fluctuations, the best idea (on average, the downside is more than most would tolerate) is probably to start 100% in A, and gradually transition to 100% B in increments of say 4% per month.


I agree, these are extreme numbers. But yet you still stand by you assertion. Which genuinely surprises me.

Please show the math.
I did the math, and using the previous simple method, values alternating $6, $14, $6, $14 (rather comically) converged to alternating between $323.81 and $247.62. Conceptually the volatile option would still be best at the beginning, but the break even point would be very fast, within a few months. At this point I realized your parameter "+/-40% in value every year" was too course to produce meaningful results over this period.

Radagast

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Re: Emerging Markets
« Reply #72 on: September 16, 2015, 08:03:51 PM »
My perspective is that annually withdrawing 5% from an investment with a long term expected return of 10% has the possibility of early failure due to volatility despite the high long term rate of return. The investor has to sell a disproportionately large number of shares at lower than average prices to maintain income during down periods. For a regular seller, higher volatility is more likely lead to a bad outcome the closer the investment gets to zero.

I am simply saying that the opposite is also true: regularly investing into a volatile asset will buy a disproportionately large number of shares at below average prices, which leads to the possibility of early success even in the face of a relatively low expected rate of long term return. For a regular buyer, higher volatility is more likely lead to a good outcome the less money has so far been invested .

milesdividendmd

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Re: Emerging Markets
« Reply #73 on: September 16, 2015, 09:11:25 PM »


Year5% Ret.-5% Ret.
1 $121.05  $146.67
2 $247.10  $286.00
3 $379.46  $418.37
4 $518.43  $544.12
5 $664.35  $663.58 <--break even
6 $817.57  $777.06
7 $978.45  $884.88
8 $1,147.37  $987.30
9 $1,324.74  $1,084.60
10 $1,510.98  $1,177.04
I think we need to start showing our math here.

I honestly have no idea what any of these sequences of values is intended to show, but the conversation would be advanced if the calculations were spelled out.
The first column is a simple 5% compound interest formula, starting at $1 (restriction from government compound interest calculator) and adding $120 per year compounded annually. In Excel it multiplies the previous value by 1.05 and then adds $120 (5% compound interest).

In excel, the second column starts at 0, then it multiplies the previous value by 0.95 and then adds $146.67 (-5% compound interest).

Nothing too fancy. Not a model of real world conditions.

Why are you contributing different amounts to the 2 funds?  (120 and 146.67??)

It comes from this parameter. $120 per year is being invested in each, but because of the fluctuation in price, it equates to more shares of the more volatile option being purchased. At the average price that means a higher value is purchased each year.
Four months of the year you buy 2 shares at $5/share.
Four months of the year you buy 1 share at $10/share.
Four months of the year you buy 0.667 shares at $15/share.

This is crazy.  If you buy $120 worth of stock a month, you buy $120 worth of stock. While you might be buying more shares as the stock prices go  down the shares are worth less.

All your example shows is that if you select a terrible investment you can keep up with a superior investment for a short while if you simply invest more.

Radagast

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Re: Emerging Markets
« Reply #74 on: September 16, 2015, 10:57:34 PM »
This is crazy.  If you buy $120 worth of stock a month, you buy $120 worth of stock. While you might be buying more shares as the stock prices go  down the shares are worth less.

All your example shows is that if you select a terrible investment you can keep up with a superior investment for a short while if you simply invest more.
It assumes that over your investing time frame the investment's per share value will go both up and down. If it just goes down the point is moot. Of course in real life at the time of each purchase it would be worth what it is worth, with little reasonable way to expect otherwise. That being said, even in real life I would expect any stock fund I bought to have both higher and lower values in the future than what I first bought it at, even if I couldn't forecast them.

I would have said the amount invested into each was an equal $10 per month.
« Last Edit: September 16, 2015, 11:01:12 PM by raven15 »

milesdividendmd

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Re: Emerging Markets
« Reply #75 on: September 16, 2015, 11:27:45 PM »
Your example says absolutely nothing about volatility. That's the key point here.

It's a terrible model for the argument you are making.

Scandium

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Re: Emerging Markets
« Reply #76 on: September 17, 2015, 08:47:52 PM »
I'm confused what the debate is here. Returns being equal volatility is bad. I thought this was investing 101..? I remember Ferri's asset allocation book had some simple examples.

Also; wouldn't the same volatility punish you when you take it out? Remember that the value would jump around as much then too.

milesdividendmd

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Re: Emerging Markets
« Reply #77 on: September 17, 2015, 08:56:09 PM »

I'm confused what the debate is here. Returns being equal volatility is bad. I thought this was investing 101..? I remember Ferri's asset allocation book had some simple examples.

Also; wouldn't the same volatility punish you when you take it out? Remember that the value would jump around as much then too.

Totally agree. This is a through the looking glass debate, replete with bizarre examples and arguments.

Radagast

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Re: Emerging Markets
« Reply #78 on: September 17, 2015, 11:13:16 PM »
I'm confused what the debate is here. Returns being equal volatility is bad. I thought this was investing 101..? I remember Ferri's asset allocation book had some simple examples.
I will be reading that book shortly (next week or so). Until then anyone is free to post a counter example.

Also; wouldn't the same volatility punish you when you take it out? Remember that the value would jump around as much then too.
Absolutely. I believe I said that several times.

Heckler

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Re: Emerging Markets
« Reply #79 on: September 18, 2015, 12:17:10 AM »
.

Also; wouldn't the same volatility punish you when you take it out? Remember that the value would jump around as much then too.

Unless you sold it all at a high point and moved your allocation to bonds since you're now taking money out...

Radagast

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Real life example
« Reply #80 on: September 18, 2015, 01:54:16 PM »
Here is a real life example of what I have been saying. Between 1997 and 2003 intermediate term treasuries returned 7.57% and had a standard deviation of 6.4%, the definition of a good investment. Over the same period emerging markets returned 1.76% and had a standard deviation of 37.06% (the definition of a bad investment), as seen at Portfolio Visualizer.
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&annualOperation=0&initialAmount=1000&EmergingMarket1=100&FiveYearTBills2=100&endYear=2003&mode=2&inflationAdjusted=true&annualAdjustment=1000&startYear=1997&rebalanceType=1&annualPercentage=0.0.
Someone who began with $1,000 in intermediate term treasuries ended this period with $1,666, while someone who began with $1,000 in EM ended with $1,130. This is a resounding example of volatility and emerging markets being bad investments, right?

Wrong.

If the same two people began with $1,000 and then invested an additional $1,000 per year, the person investing in intermediate term treasuries ended with $11,181, while the person investing in emerging markets ended the same period with $11,456. Furthermore the EM investor accumulated so many shares during this period that their investment subsequently soared.
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&annualOperation=1&initialAmount=1000&EmergingMarket1=100&FiveYearTBills2=100&endYear=2003&mode=2&inflationAdjusted=true&annualAdjustment=1000&startYear=1997&rebalanceType=1&annualPercentage=0.0

That is right. The person buying into an asset with a return of 1.76% and a standard deviation of 37.06% actually ended with more money than the person investing in an asset with a 7.57% return and a standard deviation of 6.4%. The primary factor behind this outperformance was dollar cost averaging into a highly volatile period. Mathematically, volatility will benefit a dollar cost averager, and more volatility will be of more benefit. However there will be many other things at play and volatility may or may not be the dominant factor over any given time frame.

Now for some cautions, exceptions, etc. First, it is implicit that volatility would be correspondingly bad for a person regularly selling a fixed dollar amount. Second, at some point the impact of volatility on accumulated wealth will become greater than its benefit to new contributions, and it is possible it will result in a loss that is not recoverable over a reasonable time frame. For these two reasons it would be very important to begin a glide path into less risky assets almost immediately (for example by increasing target bond allocation by 2% or 3% annually until the final desired portfolio is reached). Third, over the long term compound returns will always come to dominate. Fourth, there are many potential pitfalls with buying highly volatile assets, for example the investor might panic and sell low, or might lose employment and be forced to make highly detrimental withdrawals. For these reasons I am not advising to go all-in with this, I am just pointing out that it may be possible for some people to use this mechanism to their advantage.