Advice for pension funds with looming stock market crash

grumiofoundation

zagfles said:

grumiofoundation said:

Deleted_User said:

There may or may not be “reversion to the mean”.  Its a made-up rule.  People like patterns and make them up when there aren’t any.  The probability of getting “heads” is 50% even if you threw 3 in a row. 

Even highly educated, mathematically competent people struggle with this concept (Assuming a fair coin of course!)

Gambler's Fallacy.

Except with a coin there's physics which determines the probability, history plays no part. Who says history plays no part in stockmarket movements? Do you think people who make the buying/selling decisions which move the market price aren't influenced by history? Does anyone seriously believe that the 3% or so rise in most markets today was in no part a reaction to or a "bounce" from the 3% or so drop yesterday?

Oh I was just commenting on the coin aspect, obviously can't apply same rules to a non-purely mathematical system such as stock market. 

Prism said:

zagfles said:

grumiofoundation said:

Deleted_User said:

There may or may not be “reversion to the mean”.  Its a made-up rule.  People like patterns and make them up when there aren’t any.  The probability of getting “heads” is 50% even if you threw 3 in a row. 

Even highly educated, mathematically competent people struggle with this concept (Assuming a fair coin of course!)

Gambler's Fallacy.

Except with a coin there's physics which determines the probability, history plays no part. Who says history plays no part in stockmarket movements? Do you think people who make the buying/selling decisions which move the market price aren't influenced by history? Does anyone seriously believe that the 3% or so rise in most markets today was in no part a reaction to or a "bounce" from the 3% or so drop yesterday?

Yes, the probability in the stock market is more like Monty Hall - when the situation changes, the probability changes. And it seems many mathematically competent people don't get that puzzle either.

Imagine if you can't explain the coin trying to then explain that!

https://www.statisticshowto.com/probability-and-statistics/monty-hall-problem/

Thrugelmir

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Workerdrone said:

Not been a brilliant few years for new retirees SORR. I'd imagine most retirement portfolios stay clear of the tech stocks which saw a nice COVID bounce. First COVID, then inflationary pressures, now war in Ukraine. Glad I am still in the accumulation phase but watching with interest to learn how best to handle such things.

What makes you say that? A typical 60/40 portfolio is up over 20% over the last 3 years, and inflation has been relatively benign until recently. 

Have a look at the 1970s to understand what genuine SORR is.

Once the 2-3 year performance drops out of the figures. That 20% is going to look a lot more muted. Reversion to the mean. 

Not really sure how your comment relates to SORR? Are you thinking of what might happen going forward?

If so, outside of the developed large cap growth space (in equities), are other areas really that overvalued?

That very much depends on how high bond yields rise in the months and years ahead. 

I was referring more to equities - small-cap value and EM.

Debt markets are 8 times larger than equity markets. As interest rates rise then the risk premium demanded to hold equities will correspondingly change. This is the start of a reset. Forty plus years of a bond bull market going into reverse. Markets will find their own equilibrium as time passes. 

[Deleted User]

zagfles said:

grumiofoundation said:

Deleted_User said:

There may or may not be “reversion to the mean”.  Its a made-up rule.  People like patterns and make them up when there aren’t any.  The probability of getting “heads” is 50% even if you threw 3 in a row. 

Even highly educated, mathematically competent people struggle with this concept (Assuming a fair coin of course!)

Gambler's Fallacy.

Except with a coin there's physics which determines the probability, history plays no part. Who says history plays no part in stockmarket movements? Do you think people who make the buying/selling decisions which move the market price aren't influenced by history? Does anyone seriously believe that the 3% or so rise in most markets today was in no part a reaction to or a "bounce" from the 3% or so drop yesterday?

1. I am physicist. The coin flipping example related to statistics rather than physics.  

2. The market did not drop yesterday, let alone 3%. Dropped in the morning. By close in NA markets were up. Went up again today.  Not that one-day performance and patterns are meaningful in the context of a pension forum. 

BritishInvestor

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Workerdrone said:

Not been a brilliant few years for new retirees SORR. I'd imagine most retirement portfolios stay clear of the tech stocks which saw a nice COVID bounce. First COVID, then inflationary pressures, now war in Ukraine. Glad I am still in the accumulation phase but watching with interest to learn how best to handle such things.

What makes you say that? A typical 60/40 portfolio is up over 20% over the last 3 years, and inflation has been relatively benign until recently. 

Have a look at the 1970s to understand what genuine SORR is.

Once the 2-3 year performance drops out of the figures. That 20% is going to look a lot more muted. Reversion to the mean. 

Not really sure how your comment relates to SORR? Are you thinking of what might happen going forward?

If so, outside of the developed large cap growth space (in equities), are other areas really that overvalued?

That very much depends on how high bond yields rise in the months and years ahead. 

I was referring more to equities - small-cap value and EM.

Debt markets are 8 times larger than equity markets. As interest rates rise then the risk premium demanded to hold equities will correspondingly change. This is the start of a reset. Forty plus years of a bond bull market going into reverse. Markets will find their own equilibrium as time passes. 

Right, but my point is the market has differing levels of valuation:

EM  P/E ~10
DM small-cap value: PE~10

This is a world of difference from the sectors that had recently been "outperforming" (until the start of the year) - even after falls, I'm still seeing multiples of >30.

On multiples of ~10, how much of a reset are you expecting? 

And even those that had piled into those top-performing sectors might well be fine with SORR risk as they will hopefully have built a large margin of safety into their plan based on how valuations have historically affected sustainability (and inflation)

https://www.morningstar.com/articles/1072524/how-inflation-and-valuation-affect-safe-withdrawal-rates

(also see small cap value's impact on improving SWR, and therefore how large-cap growth is likely to be a drag).

So for example, Mr Broad Market investor might be happy starting with a 3% withdrawal rate, whereas Mr Top Performing sectors might have naturally built a big buffer into their plan as their portfolio had gone up so much in recent years, so may well have a much lower withdrawal rate (hopefully)

This covers pre-retirement sequence of returns.

https://www.youtube.com/watch?v=B__RAq949DU

zagfles

Deleted_User said:

zagfles said:

grumiofoundation said:

Deleted_User said:

There may or may not be “reversion to the mean”.  Its a made-up rule.  People like patterns and make them up when there aren’t any.  The probability of getting “heads” is 50% even if you threw 3 in a row. 

Even highly educated, mathematically competent people struggle with this concept (Assuming a fair coin of course!)

Gambler's Fallacy.

Except with a coin there's physics which determines the probability, history plays no part. Who says history plays no part in stockmarket movements? Do you think people who make the buying/selling decisions which move the market price aren't influenced by history? Does anyone seriously believe that the 3% or so rise in most markets today was in no part a reaction to or a "bounce" from the 3% or so drop yesterday?

1. I am physicist. The coin flipping example related to statistics rather than physics.  

2. The market did not drop yesterday, let alone 3%. Dropped in the morning. By close in NA markets were up. Went up again today.  Not that one-day performance and patterns are meaningful in the context of a pension forum. 

1. The obvious point was that the statistics are determined by physics. If the the coin was biased ie the physics was different then the statistics would be different. Stockmarkets movements are not determined by physics, but by people who make buying/selling decisions, and those decisions will be affected by history. Unlike a coin which has no memory.

2. The FTSE 100 dropped 3.88% on Thu and rose 3.92% on Fri. The FTSE all share dropped 3.69% on Thu and rose 3.77% on Fri. The Euro Stoxx 50 dropped 3.63% on Thu and rose 3.69% on Fri. The DAX dropped 3.96% on Thu and rose 3.67% on Fri. The Nikkei 225 dropped 1.81% on Thu and rose 1.95% on Fri.

The point was the rises are almost certainly related to the drops, ie they were affected by history. Not that I'm saying they were predictable, just that they were affected by history. So they can't be compared to a coin toss, which isn't affected by history.