Comments on: Volatility Tolerance and Market History

By: Brian

Brian — Wed, 23 Sep 2009 02:16:26 +0000

Good post Mike.

You have to be realistic in your long term expectations though. Over 30 year annualized real returns of US equities, the lowest since 1930 is about 1.5%, the highest is about 10.5%. Lets just hope that we don’t see another 1.5% annualized 30 year period when we retire! FYI that was in 1931 and 1932.

By: SEO David

SEO David — Wed, 23 Sep 2009 01:19:33 +0000

Yeah, timing has always been my challenge. If I don’t invest for the long run (buy, store in file cabinet and forget my investments for years), I will end up buying high and selling low.

By: Mom

Mom — Mon, 21 Sep 2009 23:28:07 +0000

So are you saying it’s easier to ignore the noise if you’re old?
Ahem!
The concept of fastening a seat belt and holding on works despite my youth! ( And clutching a pillow to my stomach helps a *whole* lot!)

By: Lee

Lee — Mon, 21 Sep 2009 21:56:41 +0000

Thanks for the tips, Mike! It does make a great deal of sense when you sit back dispassionately like I am now. In 5 years time when I’m staring down at a 35% loss, maybe not so.

I’m going to write on my ‘trading wall’ (my office wall…) in big bold letters: “DO NOTHING”.

Well, when I have an office and some shares I will. But one step at a time, right?

By: Monevator

Monevator — Mon, 21 Sep 2009 16:04:02 +0000

I’d just add that at the moment the problem is people don’t understand the good times could return someday.

Even investors who saw the Dow double every 3-5 years in the 80s and 90s seem to expect at best 5% returns ad infinitum from here.

On a long-term context, it’s important to understand how heady things can get (and roll with it) as it is to avoid being spooked out by the lows.

By: Rob Bennett

Rob Bennett — Mon, 21 Sep 2009 15:54:44 +0000

This is a fantastic suggestion, Mike. One of my big beefs with the conventional investing advice is that investors are often urged to invest for the long term (which is good advice) but not often given tools or strategies for doing so. It’s not obvious!

I suggest that people look at the actual year-by-year historical record (available at Robert Shiller’s site). You will find that market downturns that remain in length for any significant period of time always begin at times of insane overvaluation. So, if you want to be able to stick with your plan for the long term, consider going with a lower stock allocation at times of high valuations. There’s a calculator at my web site (The Investor’s Scenario Surfer) that lets you go through 30-year return sequences and to choose your return sequence each year. It’s not real life, but it permits you to see the long-term effects of changing your allocation or failing to do so.

The goal should be to change your allocation thoughtfully, not in response to panic over surprise price drops.

Rob