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"- risks in owning bonds versus stocks." This article summarizes this point nicely, https://www.marketwatch.com/story/warren-buffett-says-famous-hedge-fund-bet

"- risks in owning bonds versus stocks." This article summarizes this point nicely, https://www.marketwatch.com/story/warren-buffett-says-famous-hedge-fund-bet-delivered-this-unexpected-lesson-2018-02-24 https://www.marketwatch.com/story/warren-buffett-says-famous...

ThrustVectoring 9y ago
People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. When people invest, they are worried about things like a market correction wiping out half their purchasing power should they decide to sell and spend it next year. These events are protected by owning bonds and cash. But the real insidious killer is the long-term risk of sitting in the sidelines as bull markets go by and wipe out your ability to purchase long-delayed spending on the cheap. Or in other words, the risk that today's price is the lowest you'll ever be able to find the S&P 500. I'm worried about that last scenario enough that I'm considering changing my investment strategy from 100% global stocks to include buying some long-dated S&P 500 call options. If the market goes down my future cash flows buy my retirement spending on the cheap, so losing a relatively small amount of money on call options that expire worthless is fine. If the market goes on a tear and stays up, though, I'm in a pretty rough spot.
- bradleyjg 9y ago
  > People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. This kind of pop evo psyche just so story is not any different than stories about how natural phenomena are the result of gods playing capricious games with humanity. It comes from the same place and has the same validity.
  - billforsternz 9y ago
    Your criticism seems irrational to me. Gods playing capricious games is not a plausible explanation for anything. Human behaviour reflecting ancestral selection pressures is at the very least plausible.
    - asimpletune 9y ago
      I think it's actually just as irrational to try and explain a series of complex behavior with one central premise. The truth is humans are complex. All that "pop evo psyche" stuff is just a story. It makes sense, it's vaguely plausible, but that doesn't actually make it true unless you only look for examples that confirm the story and ignore all the ones that don't.
      - billforsternz 9y ago
        You think it's just as irrational (as ascribing supernatural causes) to build a scientific theory? Who is denying humans are complex? Who is trying to explain everything with one central premise? The truth or otherwise of the "story" is a matter of debate. You seem to be wedded to the idea that the story is definitely untrue.
        bradleyjg 9y ago
        I don't see any scientific theory here. How exactly would we go about testing the relationship between risks in the ancestral environment and not being "wired properly [to] consider long-term risk"?
        billforsternz 9y ago
        I'm not sure, but presumably all branches of science that deal with conditions in pre-history have testability challenges. Doesn't mean you can't build theories, reason about them, devise ingenious and indirect ways to test and experiment. Humour me. I assume you don't dispute that modern civilization has been conincident with only a tiny fraction of human evolutionary history. Why isn't it reasonable to assume we are well adapted to pre-civilization environments and that sometimes this is not helpful in modern life?
- icebraining 9y ago
  I don't get it, if you're 100% on stocks, won't your portfolio rise with the market? Or are you worried specifically about your (lack of) exposure to the US market?
  - ThrustVectoring 9y ago
    My investment account balance is low compared to my lifetime future earnings - even at 100% stocks, I'm arguably under-exposed to equity bull markets.
    - icebraining 9y ago
      I don't follow the logic. What does your future lifetime earnings have to do with the returns of the market?
      - sjy 9y ago
        Sounds like the fascinating but terrifying 'mortgage your retirement' theory: https://www.bogleheads.org/forum/viewtopic.php?t=5934 https://www.bogleheads.org/forum/viewtopic.php?t=5934
        icebraining 9y ago
        Thanks for that! I have no idea what's the lesson to take away, but it sure was an interesting read.
      - ThrustVectoring 9y ago
        If a bundle of stocks worth $1MM at retirement is worth $100k today, then in order to save up $1MM at retirement I need to earn $100k more than I spend. If the stock market goes up 20%, then I now need to earn $120k more than I spend, putting retirement further away. Call options protect against this, giving relatively cheap insurance against huge market upswings.
mooreds 9y ago
I enjoyed that article, thanks. I want 1 year of expenses in cash, 2-4 years of expenses in bonds and the rest in stocks. Then I will have the courage to wait out (or buy into) the inevitable stock market crashes. This is my ideal retirement holding--while I have labor income is a different story. I don't buy bonds for the return, I buy them for safety of principal. So, the risk of lower return is absolutely acceptable to me. PS Please don't take investment advice from random people on the internet, definitely including me.
- AFNobody 9y ago
  I have similar plans oddly enough. 2 years in Series I bonds, 1 year in cash, the rest goes into a very aggressive investment portfolio of equities and real estate.
  - icebraining 9y ago
    It's not odd, from what I can tell that's the current standard investment advise: safety cushion in cash, then a mix of stocks and bonds, with the proportion of stocks being inversely proportional to one's age.
  - fspeech 9y ago
    You are only allowed to buy 10k in I-bonds per year and you will forfeit part of the interests if you hold them for less than 5 years.
    - AFNobody 9y ago
      I am aware. I have been buying them ever since I ran out of tax deferred retirement space. It's as much for expanding my effective tax deferred space as it is a secondary cash reserve. Secondary cash reserves all have similar problems.
- kgwgk 9y ago
  How are you going to buy stocks when the market crashes if you are already invested as much as you can? Edit: nevermind, I guess you mean with the incremental savings.
JohnJamesRambo 9y ago
This makes me invest in crypto even harder. It is the natural extension of this rule. Crypto is more risky than stocks but the greater yields vs. stocks more than make up for it. You can say "you could lose it all in crypto" but that's what the bond people say about stocks and the math is showing that to be completely backwards. Opportunity cost is the real killer.
- icebraining 9y ago
  greater yields Are they? What's the average yield across the whole cryptocurrency market vs the US stock market?
  - gfodor 9y ago
    It's very odd to hear the term "yield" be used to describe capital gains. Typically this term means return on investment from either interest or dividend income. Ie, the "safe" part of the return. For example it would be very strange to say an investment had negative yield (though it might have negative return), since yield is the money the investment "throws off" to the investor. If you are never planning to liquidate the investment, yield (and potential changes to it) is your primary concern. The only valid form of yield in crypto I think is earnings due to Proof of Stake deposits.
- icelancer 9y ago
  >> greater yields Past performance is no indicator of future returns. I am long cryptocurrency as well but the main attraction from an investment standpoint into cryptocurrency is twofold: 1) Volatility is incredibly high (useful for various reasons; does not come without a downside, also obviously) 2) Yield curves of US equities are trash A portfolio that is predominantly cryptocurrency is... pretty silly. It would be hard to reasonably argue against a majority share of equities and basic portfolio advice from someone like Buffett, with heavier weighting on higher variance items like cryptocurrency.
- tim333 9y ago
  I've been punting crypto a little, bearing in mind Buffett/Grahams Mr Market story where "... the more manic-depressive his behavior, the better for you." It's hard to find more nutty market behavior than with crypto. I daresay Buffett is bearish on crypto and has said he would buy 5 year puts on the whole lot if he could. (http://www.alphavest.com/an-essay-on-ben-grahams-mr-market-by-warren-buffett/ http://www.alphavest.com/an-essay-on-ben-grahams-mr-market-b...)
fspeech 9y ago
Quote: ... A poll of investment experts asked in late 2007 to forecast long-term common stock-market returns likely would have seen them guess, on average, close to the 8.5% actually delivered by the S&P 500,” he said I fear people may misinterpret what Buffett said esp. for those who don't have memory far back enough. In 2007 I recall one could buy long term CDs at 7%. These were basically relatively riskless guaranteed returns for small investors. Nowadays the comparable returns are a little above 3%. During the financial crisis many credits of financial companies were selling for a fraction of their face value. For example AIG bonds, or Bank of America subordinated debt. You could buy them for a whopping nominal interest rate north of 15%. Even as late as 2011, during the muni market scare, one could buy California state taxable bonds and and California school bonds (federal and state tax-exempt) at about 8% interest rate. If one were a little more adventurous (and read up on the laws a little) one could have bought California muni bonds backed by redevelopment tax increments at close to 10% (and insured as well). All these were safer than stocks at the time and delivered comparable returns. They were not meaningful if you have a portfolio the size of Buffett's, but they were good opportunities for small investors.
- kgwgk 9y ago
  Actually Buffett did a very profitable deal with Bank of America in 2011: https://www.bloomberg.com/news/articles/2017-06-30/buffett-to-swap-5-billion-bofa-shares-for-17-billion-of-stock https://www.bloomberg.com/news/articles/2017-06-30/buffett-t...
  - fspeech 9y ago
    Right. There are opportunities in equities not available to small investors and there are opportunities in bonds not available to whale-sized investors.
    - toomuchtodo 9y ago
      Where would you screen for the bonds you mentioned in this thread?

ThrustVectoring 9y ago

People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. When people invest, they are worried about things like a market correction wiping out half their purchasing power should they decide to sell and spend it next year. These events are protected by owning bonds and cash. But the real insidious killer is the long-term risk of sitting in the sidelines as bull markets go by and wipe out your ability to purchase long-delayed spending on the cheap. Or in other words, the risk that today's price is the lowest you'll ever be able to find the S&P 500. I'm worried about that last scenario enough that I'm considering changing my investment strategy from 100% global stocks to include buying some long-dated S&P 500 call options. If the market goes down my future cash flows buy my retirement spending on the cheap, so losing a relatively small amount of money on call options that expire worthless is fine. If the market goes on a tear and stays up, though, I'm in a pretty rough spot.

bradleyjg 9y ago
> People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. This kind of pop evo psyche just so story is not any different than stories about how natural phenomena are the result of gods playing capricious games with humanity. It comes from the same place and has the same validity.
- billforsternz 9y ago
  Your criticism seems irrational to me. Gods playing capricious games is not a plausible explanation for anything. Human behaviour reflecting ancestral selection pressures is at the very least plausible.
  - asimpletune 9y ago
    I think it's actually just as irrational to try and explain a series of complex behavior with one central premise. The truth is humans are complex. All that "pop evo psyche" stuff is just a story. It makes sense, it's vaguely plausible, but that doesn't actually make it true unless you only look for examples that confirm the story and ignore all the ones that don't.
    - billforsternz 9y ago
      You think it's just as irrational (as ascribing supernatural causes) to build a scientific theory? Who is denying humans are complex? Who is trying to explain everything with one central premise? The truth or otherwise of the "story" is a matter of debate. You seem to be wedded to the idea that the story is definitely untrue.
      - bradleyjg 9y ago
        I don't see any scientific theory here. How exactly would we go about testing the relationship between risks in the ancestral environment and not being "wired properly [to] consider long-term risk"?
        billforsternz 9y ago
        I'm not sure, but presumably all branches of science that deal with conditions in pre-history have testability challenges. Doesn't mean you can't build theories, reason about them, devise ingenious and indirect ways to test and experiment. Humour me. I assume you don't dispute that modern civilization has been conincident with only a tiny fraction of human evolutionary history. Why isn't it reasonable to assume we are well adapted to pre-civilization environments and that sometimes this is not helpful in modern life?
icebraining 9y ago
I don't get it, if you're 100% on stocks, won't your portfolio rise with the market? Or are you worried specifically about your (lack of) exposure to the US market?
- ThrustVectoring 9y ago
  My investment account balance is low compared to my lifetime future earnings - even at 100% stocks, I'm arguably under-exposed to equity bull markets.
  - icebraining 9y ago
    I don't follow the logic. What does your future lifetime earnings have to do with the returns of the market?
    - sjy 9y ago
      Sounds like the fascinating but terrifying 'mortgage your retirement' theory: https://www.bogleheads.org/forum/viewtopic.php?t=5934 https://www.bogleheads.org/forum/viewtopic.php?t=5934
      - icebraining 9y ago
        Thanks for that! I have no idea what's the lesson to take away, but it sure was an interesting read.
    - ThrustVectoring 9y ago
      If a bundle of stocks worth $1MM at retirement is worth $100k today, then in order to save up $1MM at retirement I need to earn $100k more than I spend. If the stock market goes up 20%, then I now need to earn $120k more than I spend, putting retirement further away. Call options protect against this, giving relatively cheap insurance against huge market upswings.

mooreds 9y ago

I enjoyed that article, thanks. I want 1 year of expenses in cash, 2-4 years of expenses in bonds and the rest in stocks. Then I will have the courage to wait out (or buy into) the inevitable stock market crashes. This is my ideal retirement holding--while I have labor income is a different story. I don't buy bonds for the return, I buy them for safety of principal. So, the risk of lower return is absolutely acceptable to me. PS Please don't take investment advice from random people on the internet, definitely including me.

AFNobody 9y ago
I have similar plans oddly enough. 2 years in Series I bonds, 1 year in cash, the rest goes into a very aggressive investment portfolio of equities and real estate.
- icebraining 9y ago
  It's not odd, from what I can tell that's the current standard investment advise: safety cushion in cash, then a mix of stocks and bonds, with the proportion of stocks being inversely proportional to one's age.
- fspeech 9y ago
  You are only allowed to buy 10k in I-bonds per year and you will forfeit part of the interests if you hold them for less than 5 years.
  - AFNobody 9y ago
    I am aware. I have been buying them ever since I ran out of tax deferred retirement space. It's as much for expanding my effective tax deferred space as it is a secondary cash reserve. Secondary cash reserves all have similar problems.
kgwgk 9y ago
How are you going to buy stocks when the market crashes if you are already invested as much as you can? Edit: nevermind, I guess you mean with the incremental savings.

JohnJamesRambo 9y ago

This makes me invest in crypto even harder. It is the natural extension of this rule. Crypto is more risky than stocks but the greater yields vs. stocks more than make up for it. You can say "you could lose it all in crypto" but that's what the bond people say about stocks and the math is showing that to be completely backwards. Opportunity cost is the real killer.

icebraining 9y ago
greater yields Are they? What's the average yield across the whole cryptocurrency market vs the US stock market?
- gfodor 9y ago
  It's very odd to hear the term "yield" be used to describe capital gains. Typically this term means return on investment from either interest or dividend income. Ie, the "safe" part of the return. For example it would be very strange to say an investment had negative yield (though it might have negative return), since yield is the money the investment "throws off" to the investor. If you are never planning to liquidate the investment, yield (and potential changes to it) is your primary concern. The only valid form of yield in crypto I think is earnings due to Proof of Stake deposits.
icelancer 9y ago
>> greater yields Past performance is no indicator of future returns. I am long cryptocurrency as well but the main attraction from an investment standpoint into cryptocurrency is twofold: 1) Volatility is incredibly high (useful for various reasons; does not come without a downside, also obviously) 2) Yield curves of US equities are trash A portfolio that is predominantly cryptocurrency is... pretty silly. It would be hard to reasonably argue against a majority share of equities and basic portfolio advice from someone like Buffett, with heavier weighting on higher variance items like cryptocurrency.
tim333 9y ago
I've been punting crypto a little, bearing in mind Buffett/Grahams Mr Market story where "... the more manic-depressive his behavior, the better for you." It's hard to find more nutty market behavior than with crypto. I daresay Buffett is bearish on crypto and has said he would buy 5 year puts on the whole lot if he could. (http://www.alphavest.com/an-essay-on-ben-grahams-mr-market-by-warren-buffett/ http://www.alphavest.com/an-essay-on-ben-grahams-mr-market-b...)

fspeech 9y ago

Quote: ... A poll of investment experts asked in late 2007 to forecast long-term common stock-market returns likely would have seen them guess, on average, close to the 8.5% actually delivered by the S&P 500,” he said I fear people may misinterpret what Buffett said esp. for those who don't have memory far back enough. In 2007 I recall one could buy long term CDs at 7%. These were basically relatively riskless guaranteed returns for small investors. Nowadays the comparable returns are a little above 3%. During the financial crisis many credits of financial companies were selling for a fraction of their face value. For example AIG bonds, or Bank of America subordinated debt. You could buy them for a whopping nominal interest rate north of 15%. Even as late as 2011, during the muni market scare, one could buy California state taxable bonds and and California school bonds (federal and state tax-exempt) at about 8% interest rate. If one were a little more adventurous (and read up on the laws a little) one could have bought California muni bonds backed by redevelopment tax increments at close to 10% (and insured as well). All these were safer than stocks at the time and delivered comparable returns. They were not meaningful if you have a portfolio the size of Buffett's, but they were good opportunities for small investors.

kgwgk 9y ago
Actually Buffett did a very profitable deal with Bank of America in 2011: https://www.bloomberg.com/news/articles/2017-06-30/buffett-to-swap-5-billion-bofa-shares-for-17-billion-of-stock https://www.bloomberg.com/news/articles/2017-06-30/buffett-t...
- fspeech 9y ago
  Right. There are opportunities in equities not available to small investors and there are opportunities in bonds not available to whale-sized investors.
  - toomuchtodo 9y ago
    Where would you screen for the bonds you mentioned in this thread?