Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Save like a pessimist, invest like an optimist

collaborativefund.com

Post reply on HN
Print view View original

21–30 of 214 posts

Re: Save like a pessimist, invest like an optimist

#21

Post by Moodles »

fairity wrote: post #19
Moodles wrote: post #14

Earlier quoted context omitted.

Yeah, it’s essentially just estimating the probability of you getting an emergency which coincides with a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency. I’m at a point where I’m ok with that risk. At some point you would be too: 85%? 90%? 99%? Clearly we agree Jeff Bezos doesn’t need 6 months cash on hand at all times. So the limit is somewhere. I think a total ma…

Makes sense. 99% sounds about right for myself. But, how do I estimate the degree of downswing that I'm 99% confident will never happen in my lifetime? Or, is there a way to buy options to protect against this outcome that would economically make sense? Thanks!

Yeah it’s hard. There is about 200 years of stock market data so I would look at the biggest crashes to get a sense of what the biggest of them all could be. I guess that’s the German tank problem. It seems very unlikely we’ll get a crash relatively twice as bad as the Great Depression though

Re: Save like a pessimist, invest like an optimist

#24

Post by nprz »

lixtra wrote: post #11

> You could tell three things about Bill Gates pretty quickly. He was really smart. He was really competitive; he wanted to show you how smart he was. And he was really, really persistent. Of course he was also a lier (vapor ware). And a cut throat business man. You might like nowadays Bill Gates philanthropist, but there is a reason people hated him for decades. I don’t understand why retrospectives on him ignore th…

Public relations.

Re: Save like a pessimist, invest like an optimist

#25

Post by Moodles »

pedrosorio wrote: post #20
Moodles wrote: post #14

Earlier quoted context omitted.

Yeah, it’s essentially just estimating the probability of you getting an emergency which coincides with a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency. I’m at a point where I’m ok with that risk. At some point you would be too: 85%? 90%? 99%? Clearly we agree Jeff Bezos doesn’t need 6 months cash on hand at all times. So the limit is somewhere. I think a total ma…

> a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency I don’t follow the logic here. It doesn’t need to reduce your funds anywhere near the emergency amount. If it reduces your investments to 3x your emergency you were just forced to sell 1/3 of your portfolio at what is potentially the lowest point.

Because there are actually two goals, not one:

1. To have enough money to survive an emergency no matter what.

2. To maximize long-term net worth on average.

I was only talking about 1. You are talking about 2. But, to address your point: yes, stocks can indeed go down, but on average they go up. Sometimes your emergency will coincide with a good stock market. You're literally choosing the worst possible situation and then saying "see, this strategy doesn't work!". But I'm actually being very careful with my words here. I am saying: mathematically, backtesting with real data and with monte carlo simulations, you will maximize your long-term net worth on average if you forgo the EF after a certain net worth level.

Consider also the original comment I replied to talked about investing on margin while simultaneously having an EF. Which, if you're against me forgoing an EF, you must really be against investing on margin while having an EF: That's kind of the same to what I'm currently doing, only paying interest for it!

Re: Save like a pessimist, invest like an optimist

#27

Post by cortesoft »

Moodles wrote: post #6
kd5bjo wrote: post #3

Earlier quoted context omitted.

I personally don’t invest on margin. It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead. In short, there’s no set of circumstances where my decision tree comes down on the side of taking the loan.

I actually have a somewhat controversial opinion (that shouldn’t be controversial because it’s all math, but it still is regardless) that, after you save 5-6x your emergency fund, you don’t need an emergency fund at all and you’re better off investing it all in a total market index fund. The reason being that even if there is a market crash, you’ll still be able to afford the emergency since you’ve saved multiples of…

The bad part is that you are going to have to pull money out of the market at the worst time, when prices are way down.

Re: Save like a pessimist, invest like an optimist

#28

Post by Moodles »

cortesoft wrote: post #27
Moodles wrote: post #6

Earlier quoted context omitted.

I actually have a somewhat controversial opinion (that shouldn’t be controversial because it’s all math, but it still is regardless) that, after you save 5-6x your emergency fund, you don’t need an emergency fund at all and you’re better off investing it all in a total market index fund. The reason being that even if there is a market crash, you’ll still be able to afford the emergency since you’ve saved multiples of…

The bad part is that you are going to have to pull money out of the market at the worst time, when prices are way down.

You won't necessarily have to, but yes, no risk no reward. Doing this is what people who have retired have to do whenever there is a market crash.

Really this shouldn't be that controversial. It's super simple: Which does better long-term? Stocks or cash? That's pretty much all I'm saying. There's a ton of data to back up what I'm saying.

https://earlyretirementnow.com/2016/05/05/emergency-fund/

Re: Save like a pessimist, invest like an optimist

#29

Post by pedrosorio »

Moodles wrote: post #25
pedrosorio wrote: post #20

Earlier quoted context omitted.

> a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency I don’t follow the logic here. It doesn’t need to reduce your funds anywhere near the emergency amount. If it reduces your investments to 3x your emergency you were just forced to sell 1/3 of your portfolio at what is potentially the lowest point.

Because there are actually two goals, not one: 1. To have enough money to survive an emergency no matter what. 2. To maximize long-term net worth on average. I was only talking about 1. You are talking about 2. But, to address your point: yes, stocks can indeed go down, but on average they go up. Sometimes your emergency will coincide with a good stock market. You're literally choosing the worst possible situation an…

People don’t keep EFs to maximize their expected net worth. They do it to keep worst case scenarios within reasonable bounds.

You argue keeping stocks is ideal for 2 (sure) and it doesn’t hurt 1 (assuming your net worth is significantly higher than what you’d keep as EF). Agreed.

An EF is for 3. Maximize long-term net worth in x th percentile of outcomes (where x EDIT: “ you must really be against investing on margin while having an EF”. Yep.

Re: Save like a pessimist, invest like an optimist

#30

Post by marioletto »

fairity wrote: post #2

One question that's been top of mind lately for me is how optimistic you should be in your investing strategy. IBK currently allows retail investors to trade on margin with an annual interest rate of only 1% (yes, really). You can borrow up to 2x your principle at this rate. If you were extremely optimistic, you would borrow 2x your principal and expect to 3x your annual return. If you were optimistic but wanted to a…

I think the answer is more philosophical than a formula that applies to everyone: in that sense i would say: save like your pessimist self would save and invest like your optimistic self would do. Like a grandpa would say, "To Each Their Own" My optimistic self will probably always invest way more conservatively than someone investing on margin...
Post reply on HN