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Frequent Contributor

Re: ideas for downside protection

Is it just me or does anybody else see the irony in a retiree who promotes a 90/10 allocation giving advice in this thread about how to increase “downside protection?”

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Participant ○○○

Re: ideas for downside protection

If we were willing or able to live on an AWR < 2% we would hold an 80/20 retirement port.

I'd call that superb downside protection.

"Is it just me or does anybody else see the irony in a retiree who promotes a 90/10 allocation giving advice in this thread about how to increase “downside protection?”

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Explorer ○○○

Re: ideas for downside protection

To Galeno:

Your: "Is it just me or does anybody else see the irony in a retiree who promotes a 90/10 allocation giving advice in this thread about how to increase “downside protection?”

 Be careful when you talk "allocations" as the market does not follow allocations and could be very well outside the current thinking on allocation evaluations. I always follow the market [what is in favor and what is not] and invest [and sell] accordingly. Sometimes my current allocations is outside current thinking....

 Downside protection [IMHO] is the control of our numb3r of #shares currently owned tied to our current risk allocation numb3rs. In up markets we could take on some additional risk [say 2%-4% more in shares] and in down markets we can reduce the risk [say 4%-8% less in shares while eliminating our non-performers]....

 One single opinion of the many I am sure....

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Re: ideas for downside protection


@xray wrote:

To Galeno:

Your: "Is it just me or does anybody else see the irony in a retiree who promotes a 90/10 allocation giving advice in this thread about how to increase “downside protection?”

 Be careful when you talk "allocations" as the market does not follow allocations and could be very well outside the current thinking on allocation evaluations. I always follow the market [what is in favor and what is not] and invest [and sell] accordingly. Sometimes my current allocations is outside current thinking....


 

To Galeno? The quote you provided was Bentley's. Nobody implied that the market follows allocations. The investor has allocations and IMO, 90% equity for a retiree is inappropriate. I just find it humorous that a retiree, who promotes a 90% equity allocation because bond returns may be dampened for a while, is giving advice on how to limited downside protection when the most effective way is to decrease a portfolio's equity allocation.

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Re: ideas for downside protection


@Bentley wrote:

Is it just me or does anybody else see the irony in a retiree who promotes a 90/10 allocation giving advice in this thread about how to increase “downside protection?”


Where did I promote 90/10? I said it was my AA but other investors Can pick whatever AA theory are comfortable with. My focus on this thread is that investors can substitute dividend stocks for bonds In whole or in part in their AA because of the low yields of fixed income securities due to Feds 0 interest policy. An investor who is satisfied with the return/security of their fixed income can remain with the bond allocation they have chosen. 

Federal reserve is signaling that 0 rate will extend to end of 2023 which means yields on safe treasury securities will be at or below the rate of inflation.

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Re: ideas for downside protection


@Intruder wrote:

@Bentley wrote:

Is it just me or does anybody else see the irony in a retiree who promotes a 90/10 allocation giving advice in this thread about how to increase “downside protection?”


Where did I promote 90/10? On a M* forum. In fact after I commented how inappropriate it was for a retiree another member posted a article from some guy teaching at a foreighn school endorse a 90/10 portfolio. I said it was my AA but other investors Can pick whatever AA theory are comfortable with. Of course anyone is free to choose their own allocation just as it is OK for members to comment on how inappropriate a 90/10 allocation is for a retiree. My focus on this thread is that investors can substitute dividend stocks for bonds In whole or in part in their AA because of the low yields of fixed income securities due to Feds 0 interest policy. An investor who is satisfied with the return/security of their fixed income can remain with the bond allocation they have chosen. That has never been in dispute.

Federal reserve is signaling that 0 rate will extend to end of 2023 which means yields on safe treasury securities will be at or below the rate of inflation. So a retiree should go 90/10 based on treasury yields? OMG.


 

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Participant ○○

Re: ideas for downside protection

There is no downside protection outside of risk and reward. Unless you believe the Fed is infallible. Risk is loss and is built into your required rate of return. Portfolio theory reduces specific risk using negative correlations. Modern Portfolio Theory reduces systematic risk using the market and risk free rate. Derivatives are complex, expensive, and often ineffective. If they worked we'd all be using them and the market would be a fundamentally different place. The market thrives on zero-sum. Models for risk using standard deviation don't adequately take into account high sigma events. Energetic open market operations with its concomittant misallocation of capital and compressed discount rate is the downside risk protection. It absorbs the heightened volatility it has a hand in creating. The question is: Will the Frankenstein monster turn on its creator?

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Participant ○○○

Re: ideas for downside protection

If I were a RICH lifelong bachelor living on a 2% AWR my port would be 90% VT + 10% CASH.

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Frequent Contributor

Re: ideas for downside protection


@Mortmain wrote:

There is no downside protection outside of risk and reward. Unless you believe the Fed is infallible. Risk is loss and is built into your required rate of return. Portfolio theory reduces specific risk using negative correlations. Modern Portfolio Theory reduces systematic risk using the market and risk free rate. Derivatives are complex, expensive, and often ineffective. If they worked we'd all be using them and the market would be a fundamentally different place. The market thrives on zero-sum. Models for risk using standard deviation don't adequately take into account high sigma events. Energetic open market operations with its concomittant misallocation of capital and compressed discount rate is the downside risk protection. It absorbs the heightened volatility it has a hand in creating. The question is: Will the Frankenstein monster turn on its creator?


Nothing wrong with risk which creates downturns in stocks which gives intelligent investors the opportunity to buy highly valued stocks at a discount after the stocks were bid up. Buying at a 10-20%+ discount allows more shares of outstanding stocks to be purchased than when the stock was at a  higher price.

All of your pondering over financial theories for rationalizing the yin and yang of the stock markets ignores the only infallible rule of investing: buy low, sell high which is never wrong. I found the rule valuable in selecting beat down stocks to purchase in 2009 after the fed cut interest rates to 0 and poured $3T into the economy to revive it. I did it again beginning in late March when Congress passed legislation to inject nearly $3T into the economy and the fed dropped the interest rate to 0 and put $3T into circulation to provide liquidity. The stock markets responded with a dramatic upturn which created another new high in August. The recent spate of overbuying started by Soft bank which caused a 10% selloff in the tech sector created another opportunity to buy outperforming stocks at a discount.

I don’t think risk is bad because It creates lower prices when investors who overpaId for equities sell out which allows intelligent investors to buy at a cheaper price. These investors are rewarded when stocks go up with the next surge in the economy.

Unlike you I don’t have a required rate of return because I don’t believe in total return. I take what the markets give me which is usually more than I expected. I sleep fine knowing I don’t have to worry about meeting some imaginary rate of return set at the beginning of a year and questioning My judgment of why it wasn’t  met at the end of the year.

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Explorer ○

Re: ideas for downside protection

In case anyone is interested in the paper by “some guy teaching at a foreign school”, here is the link along with this “guy”’s CV.  As far as “endorsing” a 90-10 portfolio?  For the right investor with the right amount of assets and risk tolerance to let him/her sleep at night?  Why not?   If that’s an endorsement - then okay.  If someone sleeps better with a 10-90, good with that too. 

https://blog.iese.edu/jestrada/files/2017/01/Buffett-AA-Global.pdf

https://www.iese.edu/faculty-research/faculty/javier-estrada/

By the way - Christine Benz’ bucket approach is mentioned in the paper. 

 

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Re: ideas for downside protection


@Intruder wrote:


Nothing wrong with risk which creates downturns in stocks which gives intelligent investors the opportunity to buy highly valued stocks at a discount after the stocks were bid up. Buying at a 10-20%+ discount allows more shares of outstanding stocks to be purchased than when the stock was at a  higher price.

 

 Sounds easy. Ever wonder why Ichan and Buffett have not been able to outperform VTI over the past decade++? If men with the resources to afford the best of the best managers, inside information, low cost of capital, and possess years of experience and tremendous discipline can't outperform a simple index, maybe, just maybe the markets are too efficient for you to execute your ever-changing strategies. Send Carl and Warren some of your ideas...............:)

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Explorer ○

Re: ideas for downside protection

That is an interesting thought - why doesn’t Warren Buffett just throw in the towel and become an index investor based on 10 years of outperformance by a market index?  Well, he has been outperformed by indexes for long periods before, so maybe he trusts his long term plan.  And there have been long periods where the market index have underperformed treasuries, so maybe long term the market will earn it’s average return.  So, still why doesn’t he throw in the towel?  Maybe he hopes to regain the immediate press glory of putting another notch in SMASHING the indexes over his career, because he needs that short-term gratification?  Maybe he is insecure and the ego needs a feed.  Then again, maybe he doesn’t have “ever-changing” strategies, but keeps with his program. Why in the world doesn’t he switch to index investing?  What is the risk/reward comparison of Berkshire to a market index?  I wonder if Warren has looked at these things?????  

Seriously - whatever the strategy - be diversified, pick a risk tolerance, and stay the course.  

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Re: ideas for downside protection


@Slooow wrote:

That is an interesting thought - why doesn’t Warren Buffett just throw in the towel and become an index investor based on 10 years of outperformance by a market index?  Well, he has been outperformed by indexes for long periods before, so maybe he trusts his long term plan.  And there have been long periods where the market index have underperformed treasuries, so maybe long term the market will earn it’s average return.  So, still why doesn’t he throw in the towel?  Maybe he hopes to regain the immediate press glory of putting another notch in SMASHING the indexes over his career, because he needs that short-term gratification?  Maybe he is insecure and the ego needs a feed.  Then again, maybe he doesn’t have “ever-changing” strategies, but keeps with his program. Why in the world doesn’t he switch to index investing?  What is the risk/reward comparison of Berkshire to a market index?  I wonder if Warren has looked at these things?????  

Seriously - whatever the strategy - be diversified, pick a risk tolerance, and stay the course.  



@Slooow wrote:

That is an interesting thought - why doesn’t Warren Buffett just throw in the towel and become an index investor based on 10 years of outperformance by a market index?  Try 13 years plus not just ten and he has said he cannot outperform the market. Well, he has been outperformed by indexes for long periods before, so maybe he trusts his long term plan. So, still why doesn’t he throw in the towel?  Maybe he hopes to regain the immediate press glory of putting another notch in SMASHING the indexes over his career, because he needs that short-term gratification?  Maybe he is insecure and the ego needs a feed.  Then again, maybe he doesn’t have “ever-changing” strategies, but keeps with his program. Why in the world doesn’t he switch to index investing?  That is where he is putting his money after he dies, 90% S&P/10% bonds. What is the risk/reward comparison of Berkshire to a market index?  I wonder if Warren has looked at these things?????  He has and he has talked about it. He well understands the markets have become too efficient to outperform.


Warren Buffett says he can't beat the S&P 500

By Paul R. La Monica, CNN Business

Updated 2:07 PM ET, Mon February 25, 2019

https://www.cnn.com/2019/02/25/investing/warren-buffett-sp-500-stocks/index.html


Stock markets are getting efficient


 "US stock markets are more efficient. Technology adoption helped improve the information flow. In an efficient market, it becomes tougher to outperform the markets. Also, some of Warren Buffett’s recent investment decisions haven’t fared the way he would have envisioned. Last year, Buffett invested $10 billion in Occidental Petroleum to finance the acquisition of Anadarko Petroleum. Energy prices have crashed this year. In 2015, Buffett acquired Precision Castparts, which supplies to aircraft manufacturers. However, the aviation sector has been in doldrums since 2017."

 

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Explorer ○

Re: ideas for downside protection

That article says he’s having a tough time beating it, not that he can’t. In other articles he explains why he likes 90-10 - he thinks stocks are a better bet than bonds  for the next 10 years - just like many here think. And he thinks an index is best for most investors because most investors don’t have the tools, skills or time to pick individual companies. Unlike Buffet, Intruder has gone to town on technology and I would assume is doing very well.  What he has done is not average.  I couldn’t agree more that the goal is to buy low and sell high. He seems to be coasting along well with that. As far as choosing stocks over bonds right now in this environment,  I’m in - planning a higher allocation towards long term dividend stocks in lieu of a higher bond allocation.  

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Re: ideas for downside protection


@Intruder wrote:

@Bentley wrote:

Is it just me or does anybody else see the irony in a retiree who promotes a 90/10 allocation giving advice in this thread about how to increase “downside protection?”


Where did I promote 90/10? I said it was my AA but other investors Can pick whatever AA theory are comfortable with. My focus on this thread is that investors can substitute dividend stocks for bonds In whole or in part in their AA because of the low yields of fixed income securities due to Feds 0 interest policy. An investor who is satisfied with the return/security of their fixed income can remain with the bond allocation they have chosen. 

Federal reserve is signaling that 0 rate will extend to end of 2023 which means yields on safe treasury securities will be at or below the rate of inflation.


Can't do both. I can't pick 60/40% stocks/bonds and then substitute dividend stocks for bonds. That will just push my stocks up > 60%. Dividend paying stocks are stocks.

I'm not focused on income. First, I don't need it. Second, I don't believe in it, as I have explained twice already below. My bonds are for ballast. Dividend paying stocks may provide better income, better value, and even better long-term risk adjusted return than bonds, but they do not provide good ballast when stocks go down. It boils down to that.

Having said that, we aren't 180° apart. I've been buying every dip since 2016, and I own divvy payers inside SCHD and Global Wellington (VGWAX) and Wellesley (VWIAX). I probably should have added to SCHD in March ... my bad. I might add to SCHD if I land a job I've applied for and start earning a paycheck again.

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Explorer ○○○

Re: ideas for downside protection

As a Relative novice, I ask this Q from a lay person's position:

Are two different Questions being confused here with two different approaches and answers??

Reducing Bond Exposure by Adding Dividend Equities[ ETF's or MF's ] for purposes of Income generation  And Reducing Bond Exposure by Adding Dividend Equities, and addressing its impact on Ballast Protections?

 

Signed, 

NoFriends1 from Smokey Sienna Rust Sunset Seattle, and for once the smoke is NOT eminating from my bedroom!

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Frequent Contributor

Re: ideas for downside protection


@Bentley wrote:

@Intruder wrote:


Nothing wrong with risk which creates downturns in stocks which gives intelligent investors the opportunity to buy highly valued stocks at a discount after the stocks were bid up. Buying at a 10-20%+ discount allows more shares of outstanding stocks to be purchased than when the stock was at a  higher price.

 

 Sounds easy. Ever wonder why Ichan and Buffett have not been able to outperform VTI over the past decade++? If men with the resources to afford the best of the best managers, inside information, low cost of capital, and possess years of experience and tremendous discipline can't outperform a simple index, maybe, just maybe the markets are too efficient for you to execute your ever-changing strategies. Send Carl and Warren some of your ideas...............:)


Ichan has underperformed because he is 57% invested in industrial companies and 17% invested in energy. Only 11.5% invested in technology. Buffett has underperformed because he has invested in wide moat value companies that have underperformed in industrial companies, financial services and insurance which is 31% of BRK market cap. 26% of BRK is cash. Only outstanding investment is AAPL 43% of market cap.

QQQ 10 year return of 20.3% is almost 50% better than 13.77% 10 year TR of VTI.

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Re: ideas for downside protection


@Bentley wrote:

@Intruder wrote:


Nothing wrong with risk which creates downturns in stocks which gives intelligent investors the opportunity to buy highly valued stocks at a discount after the stocks were bid up. Buying at a 10-20%+ discount allows more shares of outstanding stocks to be purchased than when the stock was at a  higher price.

 

 Sounds easy. Ever wonder why Ichan and Buffett have not been able to outperform VTI over the past decade++? If men with the resources to afford the best of the best managers, inside information, low cost of capital, and possess years of experience and tremendous discipline can't outperform a simple index, maybe, just maybe the markets are too efficient for you to execute your ever-changing strategies. Send Carl and Warren some of your ideas...............:)


Ichan has underperformed because he is 57% invested in industrial companies and 17% invested in energy. Only 11.5% invested in technology. Buffett has underperformed because he has invested in wide moat value companies that have underperformed in industrial, financial services and insurance sectors which is 31% of BRK market cap. 26% of BRK is cash. Only outstanding investment is AAPL 43% of market cap.

QQQ 10 year return of 20.3% is almost 50% better than 13.77% 10 year TR of VTI.

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Re: ideas for downside protection


@NoFriends1 wrote:

. . . . and for once the smoke is NOT emanating from my bedroom!


Well, you have a pretty high opinion of yourself.

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Re: ideas for downside protection


@NoFriends1 wrote:

As a Relative novice, I ask this Q from a lay person's position:

Are two different Questions being confused here with two different approaches and answers??

Reducing Bond Exposure by Adding Dividend Equities[ ETF's or MF's ] for purposes of Income generation  And Reducing Bond Exposure by Adding Dividend Equities, and addressing its impact on Ballast Protections?

 

Signed, 

NoFriends1 from Smokey Sienna Rust Sunset Seattle, and for once the smoke is NOT eminating from my bedroom!


If an investor receives more than enough income from all sources including dividend stocks to cover all expenses and taxes why is it necessary to invest in low yielding bonds with returns of 2-3% as ballast protection which will not be needed? Instead of holding bonds invest in dividend stocks with higher yields and cap gains tax rate. If needed Retirees can obtain liquidity from a line of credit, a Heloc or a tax free distribution from a Roth IRA .

 

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