I wouldn't dream of investing in equities over a period of just 4 years

Duke of Marmalade said:
Well the point I am making is that risk has its price and that price is purely personal.
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Most older people will not invest in equities, although it's the correct thing to do. Advisers should advise them of the right thing to do, even if the client decides against it.

I would be happy to take on any bet with a positive expectation which risks less than say 1% of my wealth.

My granny might not be prepared to do that, but she should do so.

Brendan
 
I agree with everything Brendan has said , consistently taking bets of positive expectation over your lifetime will result in you more than likely been up over that time. You just need good bankroll management , I've had mid 4 figures on the lotto before when it had a positive expectation (this is very rare I can remember doing it twice) in my mind I felt like I was flushing money down the toilet but , if its a +EV bet I'll take it.
If the stock market paid out a set rate every year it would be a much lower rate than we will see averaged over a lifetime of investing , risk and return go hand in hand you can't have a return without risk.

And btw Brendan if you really feel like you say you should become a professional gambler , every weekend of premier league there is hundreds of thousands available on value bets you don't need to know anything about sport just be good at maths.
Just last weekend of matches there was over 1 million matched on accumulators that offered combined odds of 7/4 when real odds (based on 100% book value ) where 6/5 and 11/8 on real odds of 1/1 .
There is as much as you want to take , this is a real positive expectation bet without gambling available to all , when all you need is a calculator and no sports knowledge, some people I know that do this are ex stock traders who noticed bigger margins in sports . Think about it before dismissing it .
 
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Fella said:
I agree with everything Brendan has said , consistently taking bets of positive expectation over your lifetime will result in you more than likely been up over that time.
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Over a lifetime (or any extended time period/repeated bet) - sure, we're all agreed on that point. But I don't think that's the point that Brendan is making.
 
Hi Sarenco

I find it very difficult to explain to you why it's illogical for a very loss tolerant investor such as yourself to be prepared to invest in the stock market over the long term but to avoid it over 4 years.

I think it's a result of loss aversion, which is just not justified.

Fella is making a different point, but it's based on the same principle.

If I am offered a one off coin toss tomorrow which offers me 6/5 on €1,000, I will take it. I have a 50% of chance of losing €1,000 but I have a 50% chance of winning €1,200. I am not loss averse. Losing €1,000 won't change my life.

Likewise I avoid comprehensive car insurance (my car is worth only about €5,000) and go for the maximum excesses on other insurance. I will lose out from time to time, but I should be a big winner overall.

Brendan
 
Fella said:
...risk and return go hand in hand you can't have a return without risk...
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Yes, but not as a moral imperative. There is no line in the Bible which says "Blessed are the risk takers for they shall be rewarded". The reason risk is rewarded (on balance) in the stockmarket is because of the pricing mechanism. The majority of market participants prefer certainty to uncertainty (unlike gamblers) and therefore price in a reward for the risks they are taking. Risk has a price. But that price is different for different situations and different individuals. The stockmarket is dominated by pension funds who have long term horizons and highly diversified portfolios. The risk therefore gets priced down to what could be argued is quite low - 3% equity risk premium is oft touted.

If an individual has a time horizon much less than the average market participant or is not diversified then it could be argued that they are not getting fair compensation for the risk.

BTW I am not convinced that there are arbitrage opportunities in football betting. Maybe what you are observing is as follows. Let's say a team is 2/1 on to win. The bookie will mark that up as, say, 9/4 on i.e. a mark-up of 3.8%. Now if we do a Treble of such events we will get accumulated odds of 2/1 against. But this represents an accumulation of 3 mark-ups of 3.8%. If the bookie was happy to get only 3.8% on the Treble she would lay it at 9/4 against.

Boss, absolutely with you on avoiding comp insurance of low valued cars and maxing on excesses. BTW I noticed from your earlier link that back then you were considering spending €100K on a new car. If it's only worth €5K now, you have not been treating the poor creature kindly;)
 
Brendan Burgess said:
If I am offered a one off coin toss tomorrow which offers me 6/5 on €1,000, I will take it. I have a 50% of chance of losing €1,000 but I have a 50% chance of winning €1,200. I am not loss averse. Losing €1,000 won't change my life.
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To get all techie for awhile - a guy goes into a meat shop, sees a side of meat hanging from the ceiling, assesses the height of the butcher and says "I bet you €100 that you can't reach that meat up there." The butcher considers the proposition and in the end goes "ah no, the steaks are too high!" [SORRY - blame the meds!]

Interesting debate - kudos to contributors. Funnily enuff, I shot the breeze on more or less this question a few months back but got minimal traction.

I'm interested in seeing how far (i.e. for how much) folk would be prepared to take the above bet and why - particularly the why! My belief being that there comes a point when even mad-dog McManus (term of affection) would arrive at the same decision as our butcher pal!!
 
Hi Brendan

I'm certainly risk adverse in the sense that I have a general preference for certainty over uncertainty.

So, I would prefer to get a risk-free return of €5 on my €100, rather than take a 50% chance that my €100 will be worth €120, with a 50% chance that it will be worth €90. When faced with two investments with the same expected return, a logical investor will always chose the investment with the lower risk. Hopefully we can agree on that as a starting point.

Now, let's move up the risk curve. Same risk-free return of 5% but this time there is a 60% chance that your €100 will be worth €130 at the end of the bet, with a 40% chance that it will be worth €80. Your view, I think, is that a logical investor should always take that bet if they have the ability to absorb the potential €20 loss. Right?

I take a different view. My objective in investing is not to maximise my gains – my objective is to achieve my financial goals while taking the minimum amount of risk possible.

A 60% chance of achieving a "good result" is not sufficient for my purposes if it means there is a 40% chance that I won't meet my financial goals. I won't take that risk if I don't need to.
 
Hi Sarenco

1) Agreed that there is no point in taking a risk for the sake of it. I would not toss a coin for €100 on an even money bet.

2) You are right in that maintaining your wealth is more important than maximising it.

3) There is no material risk in tossing a coin for €100 if you have a reasonable level of wealth and income. Losing €90 is not a material risk.

4) So should someone with €600k invest in the stock market at all?
It would follow on from your argument, that he should never invest in the stock market. Not for 4 years and not for 20 years.

5) I would argue that if it makes sense to invest for 20 years, it makes sense to invest for 4 years, as he can handle the loss.

6) I also think that people are treating State Savings Certs as risk-free. I think that they are low-risk, but they are not zero-risk. And if the government goes bust, then the investor could lose everything. If I have a portfolio of shares, they might fall 80%,but they are unlikely to go to zero.
 
Brendan Burgess said:
Hi Sarenco

6) I also think that people are treating State Savings Certs as risk-free. I think that they are low-risk, but they are not zero-risk. And if the government goes bust, then the investor could lose everything. If I have a portfolio of shares, they might fall 80%,but they are unlikely to go to zero.
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Ahh! Boss, can't let you away with that. So you envisage a scenario where widows' and orphans' State Savings would be 100% welched on by the Government and fat cats would be allowed retain their shares. I think State confiscation of "excess" assets would happen way, way before there would be complete default on State Savings.

But this is such an unreal line of argument. Of course nothing is risk free, heck what is anything worth if we are all nuked. But State Savings are IMHO as safe as safe can be, far safer than US Treasury Bills or indeed Irish Sovereign Bonds. They will be the last to be welched on.

On the more substantive point, I am not following your argument that the case for 4 year investment in the stockmarket stands or falls with the case for 20 year investment. This is certainly not mainstream thinking and all the financial models would point to the longer term horizon having far better risk/reward metrics than short term horizons.
 
Brendan Burgess said:
Losing €90 is not a material risk
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But equally it's not a material gain!
Brendan Burgess said:
It would follow on from your argument, that he should never invest in the stock market. Not for 4 years and not for 20 years.
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This is really the crux of the debate.

Based on historical data, the probability of US stocks (as a proxy for stocks generally) beating intermediate term US government bonds (as a proxy for bonds generally) over a 20-year holding period is close to 100%. It's certainly not guaranteed but the chances of such bonds beating stocks over that holding period is minimal.

However, the probability of US stocks beating intermediate term US government bonds over a 5-year holding period is in the order of 70%. Or to put it another way, there is roughly a 30% chance of such bonds beating stocks. The risk of holding stocks over a shorter time period is quantitatively higher.

5-Year State Savings Certs have cost and tax advantages over stocks (and government bonds for that matter) for Irish resident investors. I would guestimate that the probability of (global) stocks beating savings certs over a 5-year holding period is less than 50% once you take account of the cost and tax advantages of savings certs.

You are, of course, right that there is no such thing as a "zero risk" investment. However, the probability of the Irish government defaulting on savings certs is so low that it borders on theoretical.
 
Duke of Marmalade said:
On the more substantive point, I am not following your argument that the case for 4 year investment in the stockmarket stands or falls with the case for 20 year investment. This is certainly not mainstream thinking and all the financial models would point to the longer term horizon having far better risk/reward metrics than short term horizons.
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OK, I will try to explain it.

I have €250k to buy a house in 4 years. If it falls in value, I won't be able to buy the house. Therefore, it would be completely inappropriate to invest that in the stock market.

I have €250k to invest indefinitely. I might need it in two years. I might need it in 4 years. I might not need it at all in that I might leave it behind me after I die. The best place for that is the stock market.

I have €600k to invest, but will need €250k to buy a house in 4 years. The best place to invest that is the stock market.
 
Brendan Burgess said:
If it can be handled, then the rewards justify taking the risk.
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Not to me.

Again, my objective is to achieve my financial goals while taking the minimum risk possible. My objective is not to maximise my potential wealth. I won't take a risk if I don't need to in order to achieve my objective.
 
Brendan Burgess said:
OK, I will try to explain it.

I have €250k to buy a house in 4 years. If it falls in value, I won't be able to buy the house. Therefore, it would be completely inappropriate to invest that in the stock market.

I have €250k to invest indefinitely. I might need it in two years. I might need it in 4 years. I might not need it at all in that I might leave it behind me after I die. The best place for that is the stock market.

I have €600k to invest, but will need €250k to buy a house in 4 years. The best place to invest that is the stock market.
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Sorry Boss I got side tracked into a fascinating discussion with Fella on +EV betting, to use his term.

Basically I think you are saying that since the stock market is a +EV bet you should place everything you can afford to lose in the stock market. This assumes that every € won is equivalent in utility to a € lost. Maybe indeed that's what you mean by afford to lose. However, in reality that is unrealistic. Most people ascribe more pain to 10k lost than pleasure to 10k won. Fella uses a version of the Kelly criterion to decide how much he should put on a +EV bet. The Kelly criterion would suggest that you should invest about 75% of your capital in the stock market.

But the Kelly criterion is based on a utility function. There is no case at all that this is universal. Every individual has his/her own utility function. Put quite simply people know themselves what their attitude to risk is. It is for financial advisors to spell out the risks in simple terms and let the punter decide. It is misleading to suggest there are any absolute principles like - investing in the stock market always makes sense or on a 4 year or whatever view it makes sense.
 
Duke of Marmalade said:
Put quite simply people know themselves what their attitude to risk is.
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I do appreciate that. But most people's attitudes to risk are poorly informed and I think that they should be better informed.

Most people think that deposit accounts are risk-free. They have no appreciation that inflation is a real risk to them. They have even less appreciation that their money might disappear altogether.

It's not enough to ask them "What is your attitude to risk?". They should be told what risk means and what risks they are exposing themselves to.

Brendan
 
Just to clarify my situation was €400k in cash with €250k needed for build in 4 years. As the balance (€150k) is surplus and available to clear a tracker mortgage the issue was whether to invest this in the stock market over a longer term (20yrs) or clear tracker (<1% interest). From all the posts it is clear that I should get a much better return investing this in a variety of shares over the longer term rather than clearing mortgage. (The €250k would remain on deposit for 4 years).
 
Hi Lobster

To be fair, I think Brendan deliberately split out this thread from your own to discuss the wisdom (or otherwise) of investing in equities for a period as short as 4 years (in response to one of my comments) rather than advising on your specific individual circumstances.

I think your plan looks perfectly reasonable.

However, I take some issue with your use of the word "should" in the context of your proposed equity investments. I'm conscious that this sounds very pedantic but I think it's important to try to get the language right.

Risk and expected returns are inextricably linked but the stock market has absolutely no obligation to meet your expectations. Based on stock market history over the last ~100 years, you can certainly form a reasonable expectation that equities are very likely to beat (essentially) risk-free assets, after all expenses and taxes, over a 20-year holding period. But there are no guarantees here - there's no "should".

I think I've already expressed a view as to what I would do in your shoes. But ultimately only you can decide on your own ability, need and willingness to trade investment risk for expected (but not guaranteed) rewards.

Please don't interpret this as advice not to invest some (or even all) of your "surplus" assets in equities. I'm simply trying to give you a framework for making your decision.

Hope that helps.
 
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Brendan Burgess said:
Hi Sarenco

1) Agreed that there is no point in taking a risk for the sake of it. I would not toss a coin for €100 on an even money bet.

2) You are right in that maintaining your wealth is more important than maximising it.

3) There is no material risk in tossing a coin for €100 if you have a reasonable level of wealth and income. Losing €90 is not a material risk.

4) So should someone with €600k invest in the stock market at all?
It would follow on from your argument, that he should never invest in the stock market. Not for 4 years and not for 20 years.

5) I would argue that if it makes sense to invest for 20 years, it makes sense to invest for 4 years, as he can handle the loss.

6) I also think that people are treating State Savings Certs as risk-free. I think that they are low-risk, but they are not zero-risk. And if the government goes bust, then the investor could lose everything. If I have a portfolio of shares, they might fall 80%,but they are unlikely to go to zero.
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To quote Ian Cowie from The Times, and I know he is referring to UK Inflation & Brexit:

"the long intervening period of falling interest rates, rising bond yields and – most recently – financial repression, is coming to an end.

"A new generation of bondholders and bank depositors is about to discover the meaning of ‘reckless prudence’, which was a commonplace phrase when I began work in the City more than 30 years ago.

‘Equity income is somewhat protected from inflation and represents a genuine growth opportunity as business revenue and earnings should increase around the same pace as inflation, which means the prices of shares should rise along with general prices of consumer and producer goods.’
More positively, investment trust shareholders and others exposed to equities will benefit from rising inflation and interest rates. Brexit means winners and losers but, most of all, it is bad news for bonds.

The phrase "reckless prudence" resonates quite a bit.
 
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