Full Circle’s Mutterings on Money
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31-01-2016, 02:34 PM
RE: Full Circle’s Mutterings on Money
(31-01-2016 09:16 AM)Dom Wrote:  You are 56. What are your personal plans for the future? It matters, it is important to know what one aspires to do and when.

Dom, that is a question that can only be answered by each individual and not what I intend to deal with in this thread. That is a question best answered in threads like “What would you do if you won the Lotto”.

This won’t be a philosophical exploration on what to do with whatever money you have, I will only be discussing how best to accumulate and put that money to work for you making more money in appreciation, dividends and interest. Thumbsup

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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31-01-2016, 03:44 PM (This post was last modified: 31-01-2016 04:32 PM by Full Circle.)
RE: Full Circle’s Mutterings on Money
NO PAIN, NO GAIN and CALCULATED EXPECTATIONS

I mentioned earlier Risk and Standard Deviations, I suspect many of you just plugged your ears and started going lalalalalalalalalalala and swore never to come back here. I don’t blame you, really.

It is incredibly important to evaluate risk in mathematical terms. Since most of us humans are so blind to normal distributions we need to come to terms with what this means when we talk about portfolio rewards and risk.

If you are still here I’ll try to make this painless but I suspect I will fail. At some point in your schooling some teacher somewhere probably said that today’s test was going to be graded on the Bell Curve. At that moment you knew you were screwed because Little Girly over there, the class genius, was going to skew the curve and make it harder for everyone to pass.

You’ve all seen one, it looks like this;

[Image: gauds.gif]

Why is this important FC? I thought we were going to talk about getting rich or something? Glad you asked.

When looking at the historical records of returns for any asset class, be it equities, bonds, treasuries, commodities or whatever you will be given the Mean or average (the mean is the average of the numbers: a calculated “central” value of a set of numbers.) In the Bell Curve (Gaussian Function) shown above the average is X, smack-dab in the middle. Duh.

To either side you will see a funky Greek letter that looks like a zero with a tail, that is the letter Sigma. To the right you have 1 Sigma, 2 Sigma and 3 Sigma. To the left you have -1 Sigma, -2 Sigma and -3 Sigma.

Sorry for the math lesson but this is important, so let me give you a real world example of how to use this information.
If I were to tell you that X Asset Class has over time made an average of 6% per year (annualized) and has a Standard Deviation of 7%, this 7% is equal to 1 Sigma. In other words it averages 6% give or take 7% most of the time.

You would then need to brace yourself for the following possibilities because remember that 6% is the average, there are years when it is more and years when it is less.

Returns for this Asset Class will fall between 1 Sigma of the average (6%), 68% of the time. Look at the numbers on either side of the X and you’ll see .3413, that is about 34% of the time on either side of the average, remember the average in this example is 6%.

Simplified what this says is in 68% of the years your returns for this Asset Class will fall between 6%+7% = 13% on the high side and 6%-7% = -1% on the low side.

This is why knowing what the Standard Deviation for any Asset Class is so important, it quantifies what your gains and losses can be.

At 2 Sigma or in 95% of the time 2x(0.3413+0.1359) the returns for this Asset Class will fall between 6%+(2x7%) = 20% on the high side and 6%-(2x7%) = -8% on the low side.

At 3 Sigma or 99% of the time 2x(0.3413+0.1359+0.0214) the returns for this Asset Class will fall between 6%+(3x7%) = 28% on the high side and 6%-(3x7%) = -15% on the low side.

So what in the hell does all this mean?

It means that you have to expect that your investment in this Asset Class will fall between
13% and -1% in 68% of the years.
20% and -8% in 95% of the years and
28% and -15% in 99% of the years.

or in dollar terms assuming you’ve invested the $1000 we talked about earlier, you can expect to make between
$130 and -$13 in 68% of the years
$200 and -$80 in 95% of the years and
$280 and -$150 in 99% of the years.

But on average this investment returns $60...or 6%.

Tip #3: Look for the highest Annualized Return with the Lowest Standard Deviation

The reasoning behind this explanation will become obvious when we start creating a Portfolio of Asset Classes.

I’m going to go get a drink now. Let me know if I can make any of this clearer, I’ve been told that I tend to assume too much and get into the minutia without explaining the bigger picture first. If this is the case my apologies.

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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31-01-2016, 04:08 PM
RE: Full Circle’s Mutterings on Money
(31-01-2016 02:34 PM)Full Circle Wrote:  
(31-01-2016 09:16 AM)Dom Wrote:  You are 56. What are your personal plans for the future? It matters, it is important to know what one aspires to do and when.

Dom, that is a question that can only be answered by each individual and not what I intend to deal with in this thread. That is a question best answered in threads like “What would you do if you won the Lotto”.

This won’t be a philosophical exploration on what to do with whatever money you have, I will only be discussing how best to accumulate and put that money to work for you making more money in appreciation, dividends and interest. Thumbsup

$4.86

What now?

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31-01-2016, 04:16 PM (This post was last modified: 31-01-2016 04:30 PM by Full Circle.)
RE: Full Circle’s Mutterings on Money
Rant #2.

I sometimes think that the talking heads who dispense with all sorts of “financial wisdom” are no better than thieves and criminals.

For example. How many times have you heard that when you are young you should be aggressive with your investments? After all, if you have $10,000 when you’re say 30 and lose it all you still have many years left to make it back up.

I think this is ass-backwards and I’ll tell you why in one word...Compounding.

At 5% growth that $10,000 invested when you are 30 years old will become $256,168 by the time you are 65! In other words you just kissed a quarter of a million dollars good-bye becuse the prevailing wisdom says you should be aggressive. Such bullshit.

If anything I think you should be less aggressive when you are young. Why aren’t people being told this?

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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31-01-2016, 04:29 PM (This post was last modified: 01-09-2017 09:26 PM by Full Circle.)
RE: Full Circle’s Mutterings on Money
(31-01-2016 04:08 PM)Heatheness Wrote:  
(31-01-2016 02:34 PM)Full Circle Wrote:  Dom, that is a question that can only be answered by each individual and not what I intend to deal with in this thread. That is a question best answered in threads like “What would you do if you won the Lotto”.

This won’t be a philosophical exploration on what to do with whatever money you have, I will only be discussing how best to accumulate and put that money to work for you making more money in appreciation, dividends and interest. Thumbsup

$4.86

What now?

Dodgy

Laugh out load

I figured someone would bring this up.

OK smarty-pants you asked for it. In my OP I said that LBYM was part of my philosophy. When my wife and I married we would invest $50 a month into a Mutual Fund. We always paid ourselves first meaning that the $50 was sacrosanct. I could do without a new pair of shoes, that money could not be touched.

As years passed that $50 became $100 and then $200 etc. If one of us got a raise half of it immediately would go into the kitty. It took us a long time to grow that $50/mo into something meaningful.

I take the view that each dollar I save is a worker in my financial army. I can put that $1 to work for me and it can make me 5 cents a year independent of what I bring home in the form of a paycheck. If I spend it I just downsized my little army of minions making me 5 cents a year on their own.

Like I said, I’m a visual kind of guy and this little picture of thousands of little $1 minions working for me makes me smile. Smile

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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31-01-2016, 04:39 PM
RE: Full Circle’s Mutterings on Money
DIVERSIFICATION

“Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.” So it is written in the Talmud.

[Image: hebrew_b.png]

More to come.

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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31-01-2016, 04:44 PM (This post was last modified: 31-01-2016 08:11 PM by Full Circle.)
RE: Full Circle’s Mutterings on Money
For some laughs and giggles before I continue with the heavy stuff.

Wall Street Journal investing columnist Jason Zweig’s new book, “The Devil’s Financial Dictionary” (PublicAffairs Books) is a satirical glossary of the lingo so often used to make investing more complex and confusing than it needs to be.

Here is a sampling of definitions from the book, including passages with imaginary characters, set off with $ and in italics.

BIG PRODUCER, n. A stockbroker or insurance agent who produces big commissions. The term is erroneous, however: The broker or agent doesn’t produce the commissions. It is his clients who produce them. He just collects them.

BULL MARKET, n. A period of rising prices that leads many investors to believe that their IQ has risen at least as much as the market value of their portfolios. After the inevitable fall in prices, they will learn that both increases were temporary.

CHURN, v. To trade a portfolio so rapidly that the only positive returns are earned by the brokerage firm that fills the orders. Formerly committed almost exclusively by stockbrokers, churning has become a common form of financial hara-kiri, in which speculators who mistakenly call themselves “investors” rapidly trade their portfolios over and over again. So long as any money remains in their accounts, they refer to what they are doing as “learning to trade.” When their balances hit zero, their education will be complete.

DATA, n. The raw material from which Wall Street fabricates distortions for marketing purposes.

DAY TRADER, n. See IDIOT.

DODD-FRANK ACT, n. A financial-regulation law, enacted in 2010, that sought to prevent financial institutions from becoming “too big to fail” but succeeded mainly at being too long to read, too complex to understand, and too convoluted to implement.

DOWNSIDE PROTECTION, n. A tactic put in place by a financial advisor to protect against whatever hurt the value of a portfolio last time. The portfolio will be hurt by something entirely different next time, however.

EFFICIENT MARKET HYPOTHESIS, n. A theory in financial economics believed only by financial economists. In theory, the market price is the best estimate at any time of what securities are worth; it immediately incorporates all the relevant information available, as rational investors dynamically update their expectations to adjust to the latest events. In practice, however, investors either ignore new information or wildly overreact to it, regardless of how relevant it is. Even so, that doesn’t make beating the market easy, because you must still outsmart tens of millions of other investors without incurring excess trading costs and taxes. As behavioral economist Meir Statman puts it, “The market may be crazy, but that doesn’t make you a psychiatrist.”

FINANCIAL ADVISOR, n. Often, someone who cares deeply about being prudent, diligent, competent, and honest, in which case his or her services will be priceless; sometimes, someone who cares only about being a BIG PRODUCER, in which case you are in for big trouble.

FORECASTING, n. The attempt to predict the unknowable by measuring the irrelevant; a task that, in one way or another, employs most people on Wall Street.

Because the human mind hates admitting the truth that the world is largely random and unpredictable, forecasters will always be in demand, regardless of their futility. Wall Street follows what marketing professor J. Scott Armstrong has called the seer-sucker theory: “For every seer there is a sucker.”

In the real world, as with weather forecasts or predictions about who will win a sporting event, those making the projections typically estimate the likelihood that they are correct. Wall Street forecasts, on the other hand, almost never have probabilities attached. As decision scientist Baruch Fischhoff wrote in 1994, “When both forecasters and client exaggerate the quality of forecasts, the client will often win the race to the poorhouse.”

IDIOT, n. See DAY TRADER.

IRRATIONAL, adj. A word you use to describe any investor other than yourself.

LOAD, n. In the real world, a heavy burden, often so weighty that only donkeys could carry it; on Wall Street, the sales commission on a MUTUAL FUND, ranging up to 5.75% of the amount invested. The two meanings are different, but only slightly.

MUTUAL FUND, n. A fund that is not mutual: its investors share all risks equally, whereas its managers share all fees exclusively.

OPTION, n. The right to buy or sell a financial asset at a fixed price on or before a specific time, from the Latin optio, “I choose”; a boon for stockbrokers whose clients don’t understand how options work and generate a fortune in commissions as they attempt to learn.

Explained Hugh Askin-Mee, a client of the brokerage firm Bourne, Rich Howe: “I put two children through Harvard by trading options. Unfortunately, they were my broker’s children.”

Perhaps the earliest recorded options trade, according to Aristotle, was made by Thales of Miletus (ca. 624-547 B.C.), one of the “Seven Sages of Greece,” who put down deposits on all nearby olive-oil presses one winter when his knowledge of astronomy purportedly told him that the next year would bring a good olive crop. Thales paid almost nothing and profited hugely when the abundant harvest created high demand for presses — thus making him one of the first individual investors to make more money trading options than his brokers did. He was also one of the last.

POTENTIAL CONFLICT OF INTEREST, n. An actual conflict of interest.

PRODUCT, n. A term added to the word investment, as in “We’ve just introduced this investment product,” to cloak complexity or to create the illusion of sophistication. Just as a “wine product” is wine adulterated with water, sugar, or fruit juice, and a “cheese product” contains such substances as calcium phosphate, sodium alginate, and apocarotenal, so an “investment product” often has risk additives or structural oddities, as well as high fees, that can surprise the unwary.

“This product is designed to provide downside protection while still giving you plenty of upside when the stock market does well,” said Wyatt Hertz, a financial advisor at the brokerage firm of Butcher, Cooke, Boyle, Frey Baker. “And, thanks to the innovative fee structure, my interests will be aligned with yours for years to come.”

SAFE, adj. A term used to promote any investment that is about to explode.

TAX SHELTER, n. A complicated investment that will possibly protect the investor’s income from high taxes but will certainly expose it to exorbitant commissions.

UNCONSTRAINED BOND FUND, n. A mutual fund, specializing in bonds, that places no limits on the number of ways in which it can provide disappointing results to its investors.

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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31-01-2016, 04:56 PM (This post was last modified: 31-01-2016 05:11 PM by Dom.)
RE: Full Circle’s Mutterings on Money
(31-01-2016 02:34 PM)Full Circle Wrote:  
(31-01-2016 09:16 AM)Dom Wrote:  You are 56. What are your personal plans for the future? It matters, it is important to know what one aspires to do and when.

Dom, that is a question that can only be answered by each individual and not what I intend to deal with in this thread. That is a question best answered in threads like “What would you do if you won the Lotto”.

This won’t be a philosophical exploration on what to do with whatever money you have, I will only be discussing how best to accumulate and put that money to work for you making more money in appreciation, dividends and interest. Thumbsup

It has nothing to do with winning the lotto.

Are you then making money just to make it and anticipate making it until you drop dead?

Or are you trying to retire at 60?

Or are you trying to buy/build a home to retire in and how many years will it take to get there?

If you are 40, you have 4 decades before you die (maybe).

If you are 60 you have only two.

Your age makes every difference if you are trying to reach goals.

For myself, the first step was to figure out how much time I had left to accomplish my goals and how much money I needed for it. And that had a HUGE influence on how I handled my investments.

[Image: dobie.png]Science is the process we've designed to be responsible for generating our best guess as to what the fuck is going on. Girly Man
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31-01-2016, 05:25 PM
RE: Full Circle’s Mutterings on Money
(31-01-2016 04:29 PM)Full Circle Wrote:  
(31-01-2016 04:08 PM)Heatheness Wrote:  $4.86

What now?

Dodgy

Laugh out load

I figured someone would bring this up.

OK smarty-pants you asked for it. In my OP I said that LBYM was part of my philosophy. When my wife and I married we would invest $50 a month into a Mutual Fund. We always paid ourselves first meaning that the $50 was sacrosanct. I could do without a new pair of shoes, that money could not be touched.

As years passed that $50 became $100 and then $200 etc. If one of us got a raise half of it immediately would go into the kitty. It took us a long time to grow that $50/mo into something meaningful.

I take the view that each dollar I save is a worker in my financial army. I can put that $1 to work for me and it can make me 5 cents a year independent of what I bring home in the form of a paycheck. If I spend it I just downsized my little army of minions making me 5 cents a year on their own.

Like I said, I’m a visual kind of guy and this little picture of thousands of little $1 minions working for me makes me smile. Smile

[Image: minions-1.jpg]

It was not a crack but I have no desire to spill my guts here. Your advice is fine, your assumption that everyone can have financial security if they just buckle down and LBYM is short-sighted, arrogant and presumptive.

Not being nasty just a realist. That's all.

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31-01-2016, 05:47 PM (This post was last modified: 31-01-2016 10:08 PM by Full Circle.)
RE: Full Circle’s Mutterings on Money
DIVERSIFICATION cont.

That bit in the Talmud might just be one of the most meaningful things ever written in any scripture right up there with Warren 3:16 “Don’t put all your eggs in one basket.”

Let me start off by saying that I don’t think having all your investments in the market makes you diversified no matter how they are allocated. If you want real diversification you need property (income producing preferably) and either a steady job or your own small business. In this way you have multiple sources of income.

If you are going to have income property a duplex is better than a single family residence, a quad is better than a duplex, a 10 unit apartment building is better than a quad and so on. Remember if your tenant leaves your single family residence you are now 100% vacant. Sadcryface2 That’s all I’ll say for now on that subject, I’m sure I’ll get back to it at some point.

Back to diversification in the Market.
I am a proponent of Index Funds and eschew owning single company stocks. Why you ask? Don’t you want to invest in the next Apple or Facebook or Under Armour?
Sure I do, but how can one tell? For every one of these there are a thousand that go nowhere or go belly up. And since I can’t tell which one will do what, and as I said earlier I hate losing money, I’ll just admit I’m not a brilliant stock picker and just buy a whole gob of them in an Index Fund, thank you very much.

Just like in my real estate example above, if I own one company and it goes kaput I just lost everything. Not for me and it shouldn’t be for you either, this isn’t a game and there are very real consequences when you roll the dice and plow all your money into only a few companies.

If you feel the need to gamble go buy a lotto ticket or take a few hundred to the Blackjack table, don’t do it with your life savings. To use a baseball analogy I’m good with hitting singles and doubles and leaving the home runs to others. The big home run hitters tend to strike out a lot and unlike baseball, you may not get another at bat if you strike out often enough or big enough (in Wall Street parlance it’s called Blowing Up your stake).

If you recall the Efficient Frontier example showing what expected returns and risk can be had with different percent allocations between stocks and bonds we can use that as a springboard.

The following information comes from The Vanguard Group. It shows you what different percentages in stocks and bonds have returned between 1926-2014, best year, worst year and years with losses.

The highest average annual return is an all-stock portfolio returning 10.2% but could you stomach a 43.1% loss in one year? Be honest, what is the worst year you could have and NOT pull out of the market? This is an important question as you will see when I show you a few eye-opening graphs of what happens if you miss out on the best 25 days in the market over the last 80 years.

Take your time, this is great info for determining your personal risk/reward metric.
Tip #4 At a 7% growth rate your money doubles every 10 years.
Tip #5 If your investment loses 20% of its value it has to grow by 25% to get back to even. If it loses 50% of its value it has to grow by 100% to get back to even. Gasp

Income
An income-oriented investor seeks current income with minimal risk to principal, is comfortable with only modest long-term growth of principal, and has a short- to mid-range investment time horizon.

100% bonds
Historical Risk/Return (1926–2014)
Average annual return 5.5%
Best year (1982) 32.6%
Worst year (1969) –8.1%
Years with a loss
14 of 89


20% stocks/ 80% bonds
Historical Risk/Return (1926–2014)
Average annual return 6.7%
Best year (1982) 29.8%
Worst year (1931) –10.1%
Years with a loss 12 of 89


*30% stocks/ 70% bonds
Historical Risk/Return (1926–2014)
Average annual return 7.3%
Best year (1982) 28.4%
Worst year (1931) –14.2%
Years with a loss 14 of 89


Balanced
A balanced-oriented investor seeks to reduce potential volatility by including income-generating investments in his or her portfolio and accepting moderate growth of principal, is willing to tolerate short-term price fluctuations, and has a mid- to long-range investment time horizon.

40% stocks / 60% bonds
Historical Risk/Return (1926–2014)
Average annual return 7.9%
Best year (1933) 27.9%
Worst year (1931) –18.4%
Years with a loss 16 of 89


50% stocks / 50% bonds
Historical Risk/Return (1926–2014)
Average annual return 8.4%
Best year (1933) 32.3%
Worst year (1931) –22.5%
Years with a loss 17 of 89


60% stocks / 40% bonds
Historical Risk/Return (1926–2014)
Average annual return 8.8%
Best year (1933) 36.7%
Worst year (1931) –26.6%
Years with a loss 21 of 89


Growth
A growth-oriented investor seeks to maximize the long-term potential for growth of principal, is willing to tolerate potentially large short-term price fluctuations, and has a long-term investment time horizon. Generating current income is not a primary goal.


70% stocks / 30% bonds
Historical Risk/Return (1926–2014)
Average annual return 9.2%
Best year (1933) 41.1%
Worst year (1931) –30.7%
Years with a loss 22 of 89


80% stocks / 20% bonds
Historical Risk/Return (1926–2014)
Average annual return 9.6%
Best year (1933) 45.4%
Worst year (1931) –34.9%
Years with a loss 23 of 89


100% stocks
Historical Risk/Return (1926–2014)
Average annual return 10.2%
Best year (1933) 54.2%
Worst year (1931) –43.1%
Years with a loss 25 of 89



Point to Ponder *A 30% stocks/ 70% bonds portfolio when compared to a 100% stock portfolio
returns 72% of the latter, has a max loss of only 28% of same and has 12% more winning years than losing years.

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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