Risk vs Reward

[Spaf]

Risk vs Reward​

There were some heated discussions recently about the pros and cons of market timing. Most of the talk was about profits, gains, and generally rewards. IMHO that ony represents half the picture.

There was nothing said about risks. Having had mutual funds for years, there is a lot of guidance about portfolio construction and how it should be restructured as one gets near retirement. How to reduce risk. The Life Cycle funds of TSP specifically address this issue.

I may have gone over to swing trading, and lately switched to position trading. However, the mutual fund numbers associated with buy-and-hold still have the ring of being conservative near and in retirement. I consider this to be a valid consideration with the TSP-funds. and maybe not so important with my internet broker funds.

Trading has one big advantage with TSP and TSPTalk. That is the ability to gauge the market, listen to other members, and be able to transfer funds to prevent a large loss i.e., the down slide of 2000-2003 (see chart below). Hopefully a bubble burst won't happen again. But, one never can tell! It's taken almost 6 years to recover the bubble burst! Maximizing gains needs to be done on a risk reward basis. Remember, when considering losses, 5% of a goose egg is different than 5% of a guinea egg.

Anyway, here is some shared information on risk vs reward:

Portfolio Construction:.....Bonds%........Stock%........(Stocks Intnl)
..........Safe...................Age.............100 - age.....20%
..........Avg....................Age - 10......110 - age......33%
..........Aggressive...........Age - 20......120 - age......40-50%

Also see tsptalk TSP suggested allocations: http://www.tsptalk.com/allocation.html

Retirement: For retirement you need 70% - 80% of your present income.

.....A withdrawl rate much above 4% generally is too high.

.....A balanced portfolio 50% stock/40% bond/10% short-term: 60% chance of exceeding 25 years.
.....A conservative........20%.........50%.........30%................20%
.....A short-term...........0.............0.............100%...............0%

Time to retirement
..........Time Horizon Stocks Bonds Cash
..........<5 yrs.........30......30.....40
..........5-15 yrs......50......25.....25
..........15+............70......20.....10

TSP
Life Cycle Funds.....2040.....2030.....2020.....2010.....L-Income
Years to retire.......30-40....20-30....10-20....02-10....< 2
Percentage G-fund..5%.......16%......27%......43%......74%

Losses
Max loss to a portfolio: 2%. Any one fund: 5%.

Percentage Gain Required to Recover Loss
Loss of.....5.0%.....10.0%.....25.0%.....50.0%.....75.0% will need a
Gain of.....5.2%.....11.1%.....33.3%....100.0%....300.0%

Le Chart
[TSP started 1987]​

Chart courtesy of: http://bigcharts.marketwatch.com​

 

[Birchtree]

And frankly any buy and holder of the long term persusaion who had the guts and good common sense to dollar cost average that drop all the way down buying cheaper and more share accumulation (and it takes mucho courage) and continues to buy via DCA all the way back up is now sitting i n the sweet spot. If you needed that money at the July 2002 bottom you were in desparate shape - but if you didn't it didn't matter if the balance was halved - you can't spend the money anyway - just close your eyes and hold your nose and throw and throw more dollars down the never ending rabbit hole and at some point you will hit water. Then you count your blessings becasue every two weeks more life raft money is headed your way. Sounds like fun right? These people here have such a phobia of a little pain - if it doesn't rain accasionaly you forget how important a little sunshine can be. Friday was a good day to reinvest some dividends. I'm hoping this type of intraday volatility continues with 120 to 150 point swings - that's where the action lies. You think the housing market was on a roll, wait and see what is headed this way - your head wii spin. I'm slowly starting to DCA my tugboat on the way up to lighten up and I think Tom should at least DCA slowly on the upside to get in or he is going to miss the greatest darn market bull in years. Just MHO. Snort.

 

[GGal]

Birch, on the drop (when was it, 2000, 2001) did you move everything to G to protect it, continue to buy C with your contributions, then move the principal back to C when it started back up?

Just Wondering.

Thanks
GA

 

[Birchtree]

Peaches,

I was a rider on the storm. Made an IFT in Jan'01 from the C fund to the S fund and rode the cycle the entire way until Jan'04. Made an IFT back to the C fund and have stayed with it since then. I always DCA at 100% into my allocation so that I can accumulate as many shares as possible. I am now in the very slow process of peeling off the C fund at 2% increments to build an insurance policy but I'm still doing DCA at 100% and will all the way to the top, where ever that happens to terminate. That cyclical bear market wasn't really that bad, especially if one didn't need the money and could handle the sacrifice of a smaller balance for awhile. We are now in a secular mega bull trend and I only want to leave marginal crumbs on the table - so my current sacrifice is to take some off the table. I'm in up to my eyeballs.

 

[Birchtree]

I did have the good fortune to put my wife into her small cap fund (OTCFX) in Jan'99 when no one in their right mind wanted small caps. It was a good decision and I've been peeling off gains the last two years going into her international fund (AEPGX) and will continue to peel off gains from both of those funds going forward and start to build a poistion in her large cap selection which is the (PYODX). These transitions require time and discipline - so now that the world is focused on international I'm slowly pulling out.

 

[Birchtree]

I don't think you felt any pain at all on a permanent basis - there are many here that would like your balance. Look back and trace the price of the C fund all the way down and then back up - admire those golden prices, you'll never see them again. I've always said the DCA is a great redeemer of past mistakes - all one needs to do is throw money down the black hole. And frankly that takes courage and confidence - and look at you now, hardened and ready to battle the bearish forces and make some serious green. What bothers me is that it would be a real shame to lose out on this "once in a lifetime " opportunity to fully exploit it, but I think many individuals are going to miss this run. Well I bet no one cared about you in July'02 or Oct'02 or even Mar'03 but you were accumulating more shares than most cluckers - so welcome into the sunshine.

 

[Birchtree]

The key is dollar cost averaging - if you are going to hold the line and make that sacrifice then you must acquire shares at lower prices which means you accumulate more shares quicker. You paid the price of looking at a temporary reduction in the value of your account month after month, but you also were smart enough to add insult to injury by accumulating more shares at lower prices. It's like saying hurt me it feels so good. The value changes but the number of shares continues to grow and when the price rebounds you are that much further ahead. I'm starting to shift some change into the G fund and folks think I'm being defensive when I'm actually be offensive. I'm willing to sacrifice some profit on the way up to build cash so when the blind side comes I can bleed and still have cash to add to my own insult to pain during the correction - I want more shares. That's the goal - because without shares you don't have increased value. And using a fixed contribution buys less shares the higher prices go - so when you max contributions you are at your limit - you are allowed to do only so much. This is where trading becomes beneficial - but you really need multi-thousands of shares to make the effort worthwhile - and I'll be doing the Palladin shoot out soon enough. Ain't this exciting and dangerous at the same time? Knowledge is the equalizer.