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« The Insight Awards: Exposing Scams | Main | Weighing the Week Ahead: Less Risk, More Reward »

December 30, 2010

Comments

mike

Ah, the Investing Sirens...demands a firm hand on the wheel. Not just difficult for me, but VERY difficult.

Thanks for sharing your insights, Jeff. Happy New Year.

oldprof

Proteus -- That is exactly what I am suggesting, and how I advise people. If you have what you need, job one is protecting those assets.

You are right in observing that it is difficult to do. It is important to think about.

Jeff

oldprof

jb - For the simple rule of thumb here I am just using a normal distribution of returns. About 2/3 of the cases are +/- one SD, so 16.67% are more than 1 SD in each direction.

At some point I'll do a longer article on this piece alone. The distribution of stock returns is actually based on a lognormal curve, but it has "fat tails." Events generate an extreme result more often than we would expect.

Good question. For the planning purpose, I am trying to emphasize the sort of risk we are likely to see every year.

Jeff

Proteus

So simple, but hard to do.
Interesting thoughts about creating vs. needing to preserve wealth. Are you saying that if one has achieved a financial goal, one's asset allocation should significantly change to a more conservative strategy? (Maybe regardless of age, or risk tolerance.)

jb

"A volatility of 20 implies a 16% chance that the market will be 20% lower than the expected annual change."

How does one get to 16%? Thanks!

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