I'm still buying it.
I'm still buying it.
Meaning what? It's part of your automatic allocation to your retirement accounts?
But if you are the active type and thing that EM could be a screaming buy if the Fed raises rates on thursday, then at least you are in good company!
http://finance.yahoo.com/news/allianzs-el-erian-bumpy-road-140511091.html
I would like to think that I'm prepared to handle the volatility but only time will tell.
But if you are the active type and thing that EM could be a screaming buy if the Fed raises rates on thursday, then at least you are in good company!
http://finance.yahoo.com/news/allianzs-el-erian-bumpy-road-140511091.html
What I got from that yahoo article is that there will be a buying opportunity after the fed rate hike. I guess I got in too early lol. But I do plan to keep this fund indefinitely. After a little while I will start a position in VTSAX and maybe a developed world market fund (if Vanguard has one, I did not yet check).
In the past, emerging markets has been riskier but also more rewarding. Will this be true going forward? Quite possibly. But would I put all of my taxable account in it? No.
I don't believe in tilting certain sectors/countries/however else you want to divide it of the global stock market. Maybe the tilt you choose will be a winner. Maybe it won't. I don't pretend to know. I'm pretty sure most others don't know either. I'd rather guarantee myself the average global stock market return (less Vanguard's minimal fees), for better or worse.
I also don't believe that truly assessing risk can be done with just one metric, no matter what the metric. The stock market is far more complicated than that.
In the past, emerging markets has been riskier but also more rewarding. Will this be true going forward? Quite possibly. But would I put all of my taxable account in it? No.
I don't believe in tilting certain sectors/countries/however else you want to divide it of the global stock market. Maybe the tilt you choose will be a winner. Maybe it won't. I don't pretend to know. I'm pretty sure most others don't know either. I'd rather guarantee myself the average global stock market return (less Vanguard's minimal fees), for better or worse.
I also don't believe that truly assessing risk can be done with just one metric, no matter what the metric. The stock market is far more complicated than that.
This describes my investment approach to a tee. I invest in emerging markets (and developed markets!) via Vanguard FTSE all-world UCITS ETF. Aside from the benefit of Keeping It Simple, it means I have no rebalancing to do within the equity portion of my portfolio. This is a big advantage because of my broker's somewhat high transaction fees.
I do, whatever percentage is in VTIAX. I believe it's 5-10% or so? My AA is 40% in foreign so no more than 4% in EE. I think a market weight allocation to EE is ok, I don't see a reason to do more. I note how "everyone" says emerging has more upside, so then isn't it priced in already..?
I do, whatever percentage is in VTIAX. I believe it's 5-10% or so? My AA is 40% in foreign so no more than 4% in EE. I think a market weight allocation to EE is ok, I don't see a reason to do more. I note how "everyone" says emerging has more upside, so then isn't it priced in already..?
I do, whatever percentage is in VTIAX. I believe it's 5-10% or so? My AA is 40% in foreign so no more than 4% in EE. I think a market weight allocation to EE is ok, I don't see a reason to do more. I note how "everyone" says emerging has more upside, so then isn't it priced in already..?
Most total international funds are around 18% emerging markets. In your case, VTIAX is 17.7%.
I've never gotten the comment of "isn't it priced in already?" If everything was priced in, there'd be no reason to buy stocks.
I'd hate to have been the idiot in 2002 that said "I don't want to invest in emerging markets, their upside is already priced in" and then have emerging markets shoot up 58% in 2003.
I guess you could say I usually believe the market knows something I don't, rather than thinking I know something the market doesn't.
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.
-High volatility and relatively low correlation lead to lots of buying chances when rebalancingAgain, you should be concerned about returns, not volatility. A high volatile asset with a long term return of zero means a lot of rebalancing opportunity sure but that doesn't help you one bit.
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.
No, volatility is never a desirable trait. High returns is. Of course, oftentimes high volatility accompanies high returns. But just because you have high volatility doesn't mean you'll have high returns.-High volatility and relatively low correlation lead to lots of buying chances when rebalancingAgain, you should be concerned about returns, not volatility. A high volatile asset with a long term return of zero means a lot of rebalancing opportunity sure but that doesn't help you one bit.
Makes sense.But the market doesn't necessarily have the same goals as you.I guess you could say I usually believe the market knows something I don't, rather than thinking I know something the market doesn't.
Great way to look at it. The market definitely knows more than I do!
Now this may sound simplistic, however I am currently looking at "The Four Pillars of Investing" by William Bernstein, page 283. An investment fluctuates between $5, $10, and $15 over the course of three months. An investor purchases $100 every month, thus buying 20, 10, and 6.67 shares at those prices, and ending with 36.67 shares at an average value of $10 each. However, they were purchased at an average price of $8.18. The investor ends with $366.67 at average prices, whereas the same amount invested into a perfectly non-volatile investment at the same average price comes out to only $300.High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.
No, volatility is never a desirable trait. High returns is. Of course, oftentimes high volatility accompanies high returns. But just because you have high volatility doesn't mean you'll have high returns.-High volatility and relatively low correlation lead to lots of buying chances when rebalancingAgain, you should be concerned about returns, not volatility. A high volatile asset with a long term return of zero means a lot of rebalancing opportunity sure but that doesn't help you one bit.
I would state it more strongly.
Volatility in and of itself is actually an undesirable quality, both because it eats away at CAGR (the only return that matters) and because low volatility equities are associated with higher than average returns (and vice versa).
Now this may sound simplistic, however I am currently looking at "The Four Pillars of Investing" by William Bernstein, page 283. An investment fluctuates between $5, $10, and $15 over the course of three months. An investor purchases $100 every month, thus buying 20, 10, and 6.67 shares at those prices, and ending with 36.67 shares at an average value of $10 each. However, they were purchased at an average price of $8.18. The investor ends with $366.67 at average prices, whereas the same amount invested into a perfectly non-volatile investment at the same average price comes out to only $300.High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.
No, volatility is never a desirable trait. High returns is. Of course, oftentimes high volatility accompanies high returns. But just because you have high volatility doesn't mean you'll have high returns.-High volatility and relatively low correlation lead to lots of buying chances when rebalancingAgain, you should be concerned about returns, not volatility. A high volatile asset with a long term return of zero means a lot of rebalancing opportunity sure but that doesn't help you one bit.
I would state it more strongly.
Volatility in and of itself is actually an undesirable quality, both because it eats away at CAGR (the only return that matters) and because low volatility equities are associated with higher than average returns (and vice versa).
Increasing the monthly fluctuation to $1, 10, and $19 results in the investor owning 115.26 shares, purchased at an average price of $2.60, and worth an average of $1,152.63. This is still with an average price of $10.
So... volatility looks beneficial to me in this situation. It seems like this method would even generate wealth with a highly volatile non-returning asset like gold. Of course the opposite would be true if you were selling, in which case volatility would be very bad.
A volatile investment doesn't mean it will have high returns.
A volatile investment doesn't mean it will have high returns.
Conceptually? No. Practically? It kind of does.
This is the premise of the efficient market hypothesis. Returns are inversely proportional to risk and liquidity. Ideally, an investment with higher volatility should offer higher returns to compensate for the risk. Otherwise why would anyone buy it?
A volatile investment doesn't mean it will have high returns.
Conceptually? No. Practically? It kind of does.
This is the premise of the efficient market hypothesis. Returns are inversely proportional to risk and liquidity. Ideally, an investment with higher volatility should offer higher returns to compensate for the risk. Otherwise why would anyone buy it?
Below is another simplistic demonstration. One investor places $100 per month in a volatile asset with 0 return that fluctuates between $7, $10, and $13. The other does the same in an investment that fluctuates between $9, $10, and $11 and additionally returns 1% compounded per month. The more volatile asset with 0 return still comes out fractionally ahead of the compounding asset! And that is with 0 returns. Now as Sol just said, volatility more generally tends to go together with higher returns. In conclusion, volatility is the friend of an investor who is dollar cost averaging from a starting point of 0. It is the enemy of a person selling a fixed dollar amount every month. That is (I assume) why the glide path concept exists, and also why I say emerging markets could be a good investment to start with (behavioral considerations aside).Now this may sound simplistic, however I am currently looking at "The Four Pillars of Investing" by William Bernstein, page 283. An investment fluctuates between $5, $10, and $15 over the course of three months. An investor purchases $100 every month, thus buying 20, 10, and 6.67 shares at those prices, and ending with 36.67 shares at an average value of $10 each. However, they were purchased at an average price of $8.18. The investor ends with $366.67 at average prices, whereas the same amount invested into a perfectly non-volatile investment at the same average price comes out to only $300.
Increasing the monthly fluctuation to $1, 10, and $19 results in the investor owning 115.26 shares, purchased at an average price of $2.60, and worth an average of $1,152.63. This is still with an average price of $10.
So... volatility looks beneficial to me in this situation. It seems like this method would even generate wealth with a highly volatile non-returning asset like gold. Of course the opposite would be true if you were selling, in which case volatility would be very bad.
Ok. Suppose this investment never appreciates. It constantly only ever fluctuates between $15 and $5, for a long term average return of 0%.
Meanwhile, Joe Shmo invests in VTSAX and gets the US market return. Something like 8-12% CAGR nominally depending on the time period you're looking at (I could be wrong with these numbers, but that's not the point here really).
Again, volatility isn't what you're after. High long term returns for an acceptable (whatever acceptable means to you) amount of risk is what you're after. A volatile investment doesn't mean it will have high returns.
| Volatile No Return Investment $/share # Purchased Accumlated $ $100.00 $7.00 14.29 $142.86 $100.00 $10.00 10.00 $242.86 $100.00 $13.00 7.69 $319.78 $100.00 $7.00 14.29 $462.64 $100.00 $10.00 10.00 $562.64 $100.00 $13.00 7.69 $639.56 $100.00 $7.00 14.29 $782.42 $100.00 $10.00 10.00 $882.42 $100.00 $13.00 7.69 $959.34 $100.00 $7.00 14.29 $1,102.20 $100.00 $10.00 10.00 $1,202.20 $100.00 $13.00 7.69 $1,279.12 Ending Shares 127.91 Ending Value $1,279.12 Less Volatile, but 1% Return Per Month Investment $/share # Purchased Accumlated $ $100.00 $9.00 11.11 $111.11 $100.00 $10.00 10.00 $212.22 $100.00 $11.00 9.09 $305.25 $100.00 $9.00 11.11 $419.42 $100.00 $10.00 10.00 $523.61 $100.00 $11.00 9.09 $619.76 $100.00 $9.00 11.11 $737.07 $100.00 $10.00 10.00 $844.44 $100.00 $11.00 9.09 $943.79 $100.00 $9.00 11.11 $1,064.34 $100.00 $10.00 10.00 $1,174.98 $100.00 $11.00 9.09 $1,277.64 Ending Shares 120.81 Ending Value $1,277.64 |
"Risk adjusted" as a prefix completely changes the meaning of "returns".The low volatility anomaly is pervasive and it demonstrates an inverse correlation of volatility with risk adjusted returns.A volatile investment doesn't mean it will have high returns.
Conceptually? No. Practically? It kind of does.
This is the premise of the efficient market hypothesis. Returns are inversely proportional to risk and liquidity. Ideally, an investment with higher volatility should offer higher returns to compensate for the risk. Otherwise why would anyone buy it?
Sure practically high volatility is correlated with high returns. But that's not thee point. Raven15 has demonstrated that he or she is misconstruing on a conceptual level how the implication works by bringing up a hypothetical example in an attempt to illustrate the concept.Not only is my concept sound, but it is actually a double whammy in favor of a more volatile asset if it also has the hoped-for higher returns (and you are starting at 0 and dollar cost averaging), per the above. However you will need to "glide" out of it over time, because volatility will gradually and unpredictably become the enemy.
Higher returns are great. Higher volatility is not.**Unless you are dollar cost averaging and your regular contributions are still large compared to the amount previously invested. And you have a glide path out. Specific circumstances may vary.
Higher returns are great. Higher volatility is not.**Unless you are dollar cost averaging and your regular contributions are still large compared to the amount previously invested. And you have a glide path out. Specific circumstances may vary.
(Let's see if I agree with me tomorrow.)
Below is another simplistic demonstration. One investor places $100 per month in a volatile asset with 0 return that fluctuates between $7, $10, and $13. The other does the same in an investment that fluctuates between $9, $10, and $11 and additionally returns 1% compounded per month. The more volatile asset with 0 return still comes out fractionally ahead of the compounding asset! And that is with 0 returns. Now as Sol just said, volatility more generally tends to go together with higher returns. In conclusion, volatility is the friend of an investor who is dollar cost averaging from a starting point of 0. It is the enemy of a person selling a fixed dollar amount every month. That is (I assume) why the glide path concept exists, and also why I say emerging markets could be a good investment to start with (behavioral considerations aside).Now this may sound simplistic, however I am currently looking at "The Four Pillars of Investing" by William Bernstein, page 283. An investment fluctuates between $5, $10, and $15 over the course of three months. An investor purchases $100 every month, thus buying 20, 10, and 6.67 shares at those prices, and ending with 36.67 shares at an average value of $10 each. However, they were purchased at an average price of $8.18. The investor ends with $366.67 at average prices, whereas the same amount invested into a perfectly non-volatile investment at the same average price comes out to only $300.
Increasing the monthly fluctuation to $1, 10, and $19 results in the investor owning 115.26 shares, purchased at an average price of $2.60, and worth an average of $1,152.63. This is still with an average price of $10.
So... volatility looks beneficial to me in this situation. It seems like this method would even generate wealth with a highly volatile non-returning asset like gold. Of course the opposite would be true if you were selling, in which case volatility would be very bad.
Ok. Suppose this investment never appreciates. It constantly only ever fluctuates between $15 and $5, for a long term average return of 0%.
Meanwhile, Joe Shmo invests in VTSAX and gets the US market return. Something like 8-12% CAGR nominally depending on the time period you're looking at (I could be wrong with these numbers, but that's not the point here really).
Again, volatility isn't what you're after. High long term returns for an acceptable (whatever acceptable means to you) amount of risk is what you're after. A volatile investment doesn't mean it will have high returns.
Now, don't make me show you how three volatile non-correlated assets with 0 return can generate a positive return through rebalancing (actually I am not inclined, so don't worry).
Volatile No Return
Investment $/share # Purchased Accumlated $
$100.00 $7.00 14.29 $142.86
$100.00 $10.00 10.00 $242.86
$100.00 $13.00 7.69 $319.78
$100.00 $7.00 14.29 $462.64
$100.00 $10.00 10.00 $562.64
$100.00 $13.00 7.69 $639.56
$100.00 $7.00 14.29 $782.42
$100.00 $10.00 10.00 $882.42
$100.00 $13.00 7.69 $959.34
$100.00 $7.00 14.29 $1,102.20
$100.00 $10.00 10.00 $1,202.20
$100.00 $13.00 7.69 $1,279.12
Ending Shares 127.91
Ending Value $1,279.12
Less Volatile, but 1% Return Per Month
Investment $/share # Purchased Accumlated $
$100.00 $9.00 11.11 $111.11
$100.00 $10.00 10.00 $212.22
$100.00 $11.00 9.09 $305.25
$100.00 $9.00 11.11 $419.42
$100.00 $10.00 10.00 $523.61
$100.00 $11.00 9.09 $619.76
$100.00 $9.00 11.11 $737.07
$100.00 $10.00 10.00 $844.44
$100.00 $11.00 9.09 $943.79
$100.00 $9.00 11.11 $1,064.34
$100.00 $10.00 10.00 $1,174.98
$100.00 $11.00 9.09 $1,277.64
Ending Shares 120.81
Ending Value $1,277.64
Does anyone really think that emerging markets will return 0% over the long term? I do not think emerging markets are risky because they are volatile, I think it is the other way around. Emerging markets are volatile because they are inherently risky due to their less stable political, social, and economical environments.
I definitely would not buy into emerging markets only to play with its volatility. I bought into it because I am positive that their economies will become more advanced in the coming decades.
Higher returns are great. Higher volatility is not.**Unless you are dollar cost averaging and your regular contributions are still large compared to the amount previously invested. And you have a glide path out. Specific circumstances may vary.
(Let's see if I agree with me tomorrow.)
DCM is a losing proposition more often then not. It's just a way to deal with the avoidance of the regret associated with being unlucky with your timing.
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.
volatility is never a desirable trait.
Higher returns are great. Higher volatility is not.**Unless you are dollar cost averaging and your regular contributions are still large compared to the amount previously invested. And you have a glide path out. Specific circumstances may vary.
(Let's see if I agree with me tomorrow.)
DCM is a losing proposition more often then not. It's just a way to deal with the avoidance of the regret associated with being unlucky with your timing.
Dollar cost averaging (as described by Raven) is how almost every accumulator must, by necessity, invest if they wish to avoid the pitfalls of dollar cost averaging (as you are using the term). That is, most accumulators earn money in small chunks over time (according to a regular payroll schedule, in the case of salaried employees), so if they throw their money into the market as soon as they get their hands on it, they're "dollar cost averaging" over time (and, as Raven said, they therefore often benefit from the market's volatility).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.
As does your absolute statement that:volatility is never a desirable trait.
which Raven has already disproved with his single counterexample.
The point that Raven actually made (that volatility can be a good thing for accumulators) is sound.
Does anyone really think that emerging markets will return 0% over the long term?
A volatile fund that returns 0% is worse than a nonvolatile asset with a positive return rate, and I don't think brooklynguy was trying to imply otherwise.
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.
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.
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.
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.
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.
I'm only concerned about getting (preferably high) positive rate of returns from investments (as in, assets that actually have some level of liquidity).
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) :-)
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) :-)
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.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.
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 (http://investor.gov/tools/calculators/compound-interest-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.
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.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.
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 (http://investor.gov/tools/calculators/compound-interest-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.
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
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.
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
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?
Brooklyn, your argument is all over the place here.
. . .
But volatility is in no way a desirable trait in and of itself.
Let's go back to your original statement. The one that I had a gripe with and started this entire discussion.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.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.
OK, I modified the statement above. Satisfied?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?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?
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 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?
Nope.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.
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 isAnd 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.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.
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).Year5% Ret.-5% Ret.I think we need to start showing our math here.
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 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.
Nope.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.
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?
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).Year5% Ret.-5% Ret.I think we need to start showing our math here.
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 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.
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.
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).Year5% Ret.-5% Ret.I think we need to start showing our math here.
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 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.
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??)
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.
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.Nope.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.
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?
I agree, these are extreme numbers. But yet you still stand by you assertion. Which genuinely surprises me.
Please show the math.
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).Year5% Ret.-5% Ret.I think we need to start showing our math here.
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 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.
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.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.
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.
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.
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.
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Also; wouldn't the same volatility punish you when you take it out? Remember that the value would jump around as much then too.