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Chrysopylae

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Posts posted by Chrysopylae


  1. As a current educator, how confident are you that your pension will be there when it is time to retire?

     

    I wonder how many respondents have actually completed or read or even know the results of an actuarial analysis of Calstrs current and future income, investments, and liabilities.

     

     


  2. Since I decided to post these in the spur of the moment, I imagine that I might have missed something, but I think these steps might help people to make wiser investment decisions, including not being caught off guard by fluctuations of their portfolio and not re-setting their expectations to higher (and less probable) returns after periods of higher returns.

     

    Step One: List your investment goal(s) broadly and specifically.

     

    Step Two: List your investment time horizon(s).

     

    Step Three: Determine and list your asset allocation for each investment goal and time horizon, your expected returns (worst, best, average, median, etc.), and the range of fluctuations you expect in the ensuing time frame.

     

    Step Four: Determine how various possible returns will affect your final actions.

     

    Step Five: Implement your strategy for each goal and time horizon.

     

    Step Six: Before you monitor the progress of your strategies, always take out your list from Step 3. Monitor progress in light of Step 3.

     

    6a. If new data shows that your worst expected returns may be lower than your stated worst expected returns, then re-evaluate your plan.

     

    6b. If your fluctuations are in line with your expected fluctuations, maintain your expectations. Be careful not to revise your expectations upward due to higher than average returns or revise your expectations downward due to lower than average returns.


  3. If you own common stock, you have voting rights. If you own a sufficient amount of common stock, you can demand a proxy vote. Therefore, if you do not like how the management is managing the companies that you own through common stock, you can take direct action.

     

    If you invest in companies (including "Wall Street firms") though an open end fund, you can encourage the fund managers to vote and advance proxy statements in line with your goals.

     

    Of course, you can also wait for someone else to take action. If you are waiting for institutional investors (which include banks, insurance companies, retirement funds, pension funds, hedge funds, mutual funds, investment banks, unit trusts, and investment trusts), you might be waiting a while for their interests to align with your own.


  4. I am still not sure exactly what he did in his analysis (e.g. did he invest 5%/10%/20%? of his investment on a monthly/quarterly/yearly basis?). Did he just invest in stocks? If he invested in multiple asset classes, did he consider the effect of re-balancing versus no re-balancing?

     

    Before someone decides to DCA, they should carefully consider whether it will really provide the result they want.

     

    For example, suppose that starting in January Sam starts saving $1,000 each month toward retirement (and this is the maximum amount that he can reasonably save), and he decides to DCA $100 (of the $1,000 total) per month.

     

    In January, Sam saves $1,000 and invests $100. Sam has $900 in MM (or some short-term, liquid investment).

     

    In February, Sam saves $1,000 and invests $200 ($100 from his January savings and $100 from his February savings). Sam now has $1,700 in MM.

     

    In March, Sam saves $1,000 and invests $300 ($100 from his January savings, $100 from his February savings, and $100 from his March savings. Sam now has $2,400 in MM.

     

    In April, Sam saves $1,000 and invests $400. Sam now has $3,000 in MM.

     

    In May, Sam saves $1,000 and invests $500. Sam now has $3,500 in MM.

     

    In June, Sam saves $1,000 and invests $600. Sam now has $3,900 in MM.

     

    In July, Sam saves $1,000 and invests $700. Sam now has $4,200 in MM.

     

    In August, Sam saves $1,000 and invests $800. Sam now has $4,400 in MM.

     

    In September, Sam saves , $1,000 and invests $900. Sam now has $4,500 in MM.

     

    In October, Sam saves $1,000 and invests $1,000. Sam now has $4,500 in MM.

     

     

    Going forward, the future months would look like October with Sam saving $1,000 per month and investing $100 from that month and $100 from each of the previous 9 months.

     

    However, notice that in this scenario, Sam has $4,500 in some sort of short term investment on an on-going basis.

     

    There are several important points to notice about this scenario. I will highlight three:

     

    1. Sam has probably ended up with a different allocation than he initially intended (with a higher allocation in short term investments). Does this make sense?

     

    2. DCA only helped if returns from his overall portfolio allocation fell in the first 9 months and the degree that it helped declined as he moved from January to October.

     

    3. After October, DCAing is the equivalent of just maintaining an alternative asset allocation.

     

     

    The point of my example (and it is certainly not the definitive example) is that if a person who is making regular contributions (e.g. through a 403B) decides to DCA those contributions, that person should make a plan and be sure that he/she is comfortable with the results of that plan.

     

     

    If a person has a lump sum and does not feel that he/she could handle the total draw-down that we have seen in the past for his/her chosen asset allocation, then DCAing is totally beside the point. That person needs to create a more appropriate asset allocation.

     


  5. It's good to see that your retirement appears to be in excellent shape.

     

    " I would hope that we could live off the pension and use the TSA for.....health insurance/emergency/? Haven't thought about that - I guess we should."

     

    I agree. The first step should be to determine the purpose of the funds and the time frame or potential time frames for using them.

     

    In general [and I am obviously not saying anything new here], if you need your money sooner, you will want to put a greater percentage in fixed income, shorter duration, higher credit quality investments; and if you need you money later, you will want to put a greater percentage in longer duration, potentially lower credit quality fixed income and/or stock investments.

     

    When you determine the time frame for needing the funds (and don't be afraid to use a broad time frame like anywhere between the next 8 and 30 years if that is indeed the case), you should look at the sort of returns that various investments have made historically over these time frames to make an informed decision.

     


  6. You said you are looking to retire in 8 years and have a defined benefit plan.

     

    So are the above funds you are investing to be used over the course of your retirement or for a specific event in retirement?

     

    Also, will you be comfortable living just on your defined benefit plan? That is, would you be willing to forgo a distribution (re-investing any RMD's) if your portfolio lost a certain percentage of its value, or would you be able to live comfortably if you completely drew down your portfolio?


  7. I tend to recommend strategic allocations for the simple reason that I have yet to find a tactical allocation strategy that sufficiently satisfies me that it will hold up and provide better performance over the many different market conditions that we might find. Therefore, I would tend to recommend that you choose an allocation and stick with it.

     

    In a down market, this strategy can be psychologically difficult because your gut might tell you that you are losing all your hard earned money. In a rising market, the strategy can be psychologically difficult because your gut might tell you that you are missing out on higher returns. For this reason, I believe that you should carefully consider your investment objectives and write a plan before investing so that you can make a clear decision with a look to your over all returns and not be suckered into an emotionally driven short term decision.

     

    With that said, I don't know enough about your investment goals or time horizon to say whether your allocation is appropriate for you.

     

    Looking at your choices, your allocation suggests a bias towards certain market sectors (e.g. large-cap growth and natural resource and commodity stocks). Is this bias intentional?

     

     


  8. An exogenous change is a change that comes from outside the model and cannot be explained by the model. This model considers Government Spending (G) to be an exogenous variable.

    An endogenous change is a change that comes from inside the model and can be predicted by the model.

     

    GDP: Gross Domestic Product

    C: Personal Consumption Expenditures

    G: Government Expenditures

    I: Gross Private Domestic Investment

    N: Net Exports

     

    The model as I posted it earlier is:

     

    GDP = C + G + I + N

     

    We can rearrange the equation using the commutative and associative properties of addition:

     

    GDP = (C + I + N) + G

     

    Now, if the change in (C + I + N) is positive and the change in G is positive, then the change in GDP is positive.

    If the change in (C + I + N) is negative and the change in G is negative, then the change in GDP is negative.

    If there is no change in (C + I + N), then a positive change in G will result in a positive change for GDP and a negative change in G will result in a negative change in GDP.

    If (C + I + N) is positive and the change in G is negative or vice versa, then the change in GDP will depend on which change has the greater magnitude.

     

    I hope that clears up any misunderstandings. If it does not, I suggest consulting an introductory Economics textbook on the Simple Keynsian Model or Keynsian Cross.

     

    I provided data previously to help anyone interested get a feel for how the components have been changing recently.


  9. Vanguard Prime Cap or Vanguard Prime Cap core? The reason I ask is that I thought the former was closed to new investment.

     

    Also, why did you choose to include this fund in your portfolio?

     

    Also, is there any particular reason that you want a natural resources and commodities fund?

     

    And one more question, what type of product and what are the details for the fixed income account?


  10. Given this data, if we use the above model, then it becomes clear that the effect of the increase in Government spending (the exogenous component according to the model) has been to slow the decline in GDP. On the other hand, if government spending had remained the same or declined, then we would expect GDP to have fallen at the same or a greater rate.

     

    So those are the basics of how that particular model works.


  11.  

     

    Holding the other components constant, an increase in government spending (assuming that government spending is an exogenous variable) will result in an increase in GDP and a decrease in government spending will result in a decrease in GDP.

     

    I'm not at all sure that I buy this. The federal government has been spending like a drunken sailor for the past several months, and we have had a decline in GDP for at least the last two quarters. Now, when we do have recovery, will it be because of all this federal spending, or will it be because natural market forces have kicked in? I think that it is pretty difficult to discern cause and effect.

     

     

    The quote was a statement of fact about what the model tells us if we hold the other components constant to view the result of changing just one component (government spending).

     

     

    When we look at actual data, we of course see that all the components are changing.

     

    For example, here is the percentage change in nominal personal consumption expenditures year over year, starting at the beginning of last year. (http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s'>http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s'>http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s'>http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s'>http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s'>http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s'>http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s'>http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s'>http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s'>http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=PCE&s[1][transformation]=pc1)

     

     

    2008-01-01 &&&& 1.6673

    2008-02-01 &&&& 1.15965

    2008-03-01 &&&& 1.52541

    2008-04-01 &&&& 1.33375

    2008-05-01 &&&& 1.387

    2008-06-01 &&&& 1.06958

    2008-07-01 &&&& 0.21055

    2008-08-01 &&&& -0.21118

    2008-09-01 &&&& -0.64698

    2008-10-01 &&&& -1.30746

    2008-11-01 &&&& -1.44373

    2008-12-01 &&&& -1.88632

    2009-01-01 &&&& -1.63996

     

    Here is the same data adjusted for inflation. (http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=PCEC96&s[1][transformation]=pc1)

     

    2008-01-01 &&&& 5.33723

    2008-02-01 &&&& 4.69314

    2008-03-01 &&&& 5.01119

    2008-04-01 &&&& 4.77949

    2008-05-01 &&&& 4.95701

    2008-06-01 &&&& 5.19018

    2008-07-01 &&&& 4.68708

    2008-08-01 &&&& 4.14282

    2008-09-01 &&&& 3.395

    2008-10-01 &&&& 1.96799

    2008-11-01 &&&& 0.1119

    2008-12-01 &&&& -1.1256

    2009-01-01 &&&& -0.98852

     

     

    In both cases we see a declining growth rate that has changed to a negative growth rate in recent months.

     

    Here is the year over year percentage change in gross private domestic investment (quarterly data). (http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=GPDI&s[1][transformation]=pc1)

     

    2007-10-01 &&&& -3.11183

    2008-01-01 &&&& -2.9134

    2008-04-01 &&&& -6.81352

    2008-07-01 &&&& -7.07486

    2008-10-01 &&&& -8.46915

     

    Here is the data adjusted for inflation. (http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=GPDIC1&s[1][transformation]=pc1)

     

    2007-10-01 &&&& -3.27433

    2008-01-01 &&&& -2.29411

    2008-04-01 &&&& -6.63229

    2008-07-01 &&&& -7.34214

    2008-10-01 &&&& -9.76815

     

     

    Here is the Net Exports in Goods and Services. (http://research.stlouisfed.org/fred2/series/NETEXP?cid=108)

     

    2007-10-01 &&&& -696.7

    2008-01-01 &&&& -705.7

    2008-04-01 &&&& -718.2

    2008-07-01 &&&& -707.7

    2008-10-01 &&&& -551.5

     

    Here is the data adjusted for inflation. (http://research.stlouisfed.org/fred2/series/NETEXC?cid=108)

     

    2007-10-01 &&&& -484.5

    2008-01-01 &&&& -462.0

    2008-04-01 &&&& -381.3

    2008-07-01 &&&& -353.1

    2008-10-01 &&&& -372.9


  12. Some interesting links:

     

    1) Greg Mankiw's blog: http://gregmankiw.blogspot.com/

     

    From a recent post:

     

    "Econ prof Bill Seyfried of Rollins College emails me:

     

    Here's an interesting fact that you may not have seen yet. The M1 money multiplier just slipped below 1. So each $1 increase in reserves (monetary base) results in the money supply increasing by $0.95 (OK, so banks have substantially increased their holding of excess reserves while the M1 money supply hasn't changed by much)."

     

    2) http://curiouscapitalist.blogs.time.com/

     

    And here is an interesting recent blog: http://curiouscapitalist.blogs.time.com/20...ularity-or-not/

     

    3) Arnold Kling, Bryan Kaplan, and David Henderson share a blog at http://econlog.econlib.org/, though they certainly are open to disagreeing among themselves about the issues. See for instance: http://econlog.econlib.org/archives/2009/0...and_fiscal.html

     

    4) http://economistsview.typepad.com/economistsview/

     

    To continue the remarks on Fama's views, try this particular post: http://economistsview.typepad.com/economis...n-the-sand.html

     

    5) I should not forget Fama's and French's views: http://www.dimensional.com/famafrench/

     

    6) http://freakonomics.blogs.nytimes.com/


  13. No, I don't teach Economics. I yet hope to return to graduate school and finish my degree, though.

     

    I haven't read George Reisman's book, but I like reading libertarian view points. I will see if it is available in my local library after I finish my current book (The Math Instinct: Why Your a Math Genius (Along with Lobsters, Birds, Cats, and Dogs - how could I resist that title?). I often find libertarian views cogent and well considered, though I don't always agree with their assumptions or goals.

     

    It probably comes as no surprise that I tend to share your political views.

     

    As to the question about whether, and, if so, to what extent, and, if so, how a stimulus should be used, there are many competing views from well respected economists. It strikes me in reading many of these views, that the basic assumptions about the current state of the economy and assumptions for constructing models are not shared among all economists and, indeed, can vary significantly.

     

    By the way, have you read The Drunkard's Walk: How Randomness Rules Our Lives by Leonard Mlodinow or Predictably Irrational by Dan Ariely? They are absolutely fun books.

     

     

     


  14.  

     

    Steve is NOT clueless.

     

    I suspect that he is using different models and different assumptions than your own, and perhaps you would like to argue why your models and assumptions are better than the ones he chooses, but I see no reason to say that he is clueless.

     

     

    I don't want to get between Steve and Intruder - but will point out that Intruder is not "using a model", simply listing the only available options.

     

    When we run a deficit we must borrow, only three entities can buy that debt: Americans, Non-Americans or the Federal Reserve. I think it is doubtful the first two have the capacity or the desire to absorb the trillions in deficit spending that is coming (using the administration's numbers) and thus that leaves the lender of last resort - the Federal Reserve. They print money. Actually they don't, they create money out of thin air with a keystroke and that money is used to buy Treasury bills. This is usually (though not always) inflationary. The same as a company issuing more shares - they dilute the other owners.

     

    High deficit spending that is not financed by Americans or non-American must be monetized by the Federal Reserve - if you've got another way to do it I'm all ears.

     

    ScottyD

     

     

    Hi Scotty, AP and Chrysoplyae,

    I have Intruder on ignore. Dan can deal with Intruder if he wishes.

    I was only pointing out that some booms were caused by big government projects and some busts were usually caused when the projects ended. To say that government does not effect the overall economy because its only private sector that can, is IMO short sighted.

    Have a good day,

    Steve

     

     

    Steve,

     

    If we accept the expenditure method of quantifying GDP, then it follows that government spending affects economic growth.

     

    GDP = Consumption + Government Spending + Investments + Net Exports

     

    Holding the other components constant, an increase in government spending (assuming that government spending is an exogenous variable) will result in an increase in GDP and a decrease in government spending will result in a decrease in GDP.

     

    Since the observations you presented seem to fall in line with this model, I suspect that you are thinking along the lines of some variation of a Keynsian style model.

     

    For anyone interested, here is a link to data on the components of GDP.

     

    http://research.stlouisfed.org/fred2/categories/18

     

     

     

    Dan,

     

    Intruder is doing more than making the simple claim that only 3 entities are available to buy US government debt. He is making specific assertions about the results of current fiscal and monetary policies and proposed policies.

     

    I am not making a claim here about the merits of his assertions. I do wonder, though, if he is not using a model (e.g. a monetarist model), how he determined the results of these policies.

     

     

    You and Intruder have made claims about the intentions, rational, and ability of non-US entities to buy US debts. These assertions are separate from the assertion that only 3 entities are available to buy US government debt. Therefore, these assertions require a separate defense.


  15. Steve is NOT clueless.

     

    I suspect that he is using different models and different assumptions than your own, and perhaps you would like to argue why your models and assumptions are better than the ones he chooses, but I see no reason to say that he is clueless.


  16. Thank you, Steve.

     

    I, too, can't stand hearing the phrase "This time, it's different."

     

    Of course, this time won't be exactly the same (I haven't seen any people left holding the tulip), but broadly speaking, we have seen this type of market move before.

     

    Unfortunately, it seems to me that many people want to change their investment strategy without first considering the data to make an informed decision.


  17. How soon do you expect to need the funds? Will you need the funds to pay basic bills when you lose your job, or will you be able to call upon some other resource to stay afloat and leave your funds for future use?

     

    Generally, a 403b plan is meant for retirement. But if you starve today, what good is a non-existent retirement. Unfortunately, if you do have to pull the money out you should expect to have to pay taxes, a tax penalty, and possibly (if you are in an insurance product) a surrender charge.


  18. Facts! Facts! Facts!

     

    Faith has no place in making logical or rational investment decisions.

     

    So, do the facts support your previous opinion that the markets follow a "random walk"?

     

    Second, can you devise a strategy that will perform significantly better than a buy and hold strategy? If not, then continue with your buy and hold strategy.

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