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Save like a pessimist, invest like an optimist

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Re: Save like a pessimist, invest like an optimist

#91

Post by Moodles »

icedchai wrote: post #64
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…

I keep roughly 10% of my net worth in cash... That equates to several years of expenses. It may be excessively high but it lets me sleep at night. You joke, but the past year shows something like a zombie apocalypse is a possibility.

Yeah as I say, it's fine to do whatever you want with your money to provide emotional comfort. I'm merely saying it's a psychological bias you may want to be aware of.

I mean, you chose a 10% figure. Why 10%? Why not 20% or 5%? I think it's helpful to really think through the math sometimes.

Re: Save like a pessimist, invest like an optimist

#92

Post by paulpauper »

Moodles wrote: post #82
imtringued wrote: post #35

Earlier quoted context omitted.

You have $100k. Put 80% of it in the stock market. The stock market drops by 40%, your investment is worth $48k and you withdraw nothing but spend your entire emergency fund. The market recovers and now your portfolio is worth $80k. You have $100k. Put all of it in the stock market. The stock market drops by 40%, your investment is worth $60k and you withdraw $20k. The market goes back to 100% and now you have $67k i…

You've just given a cherry picked example to show that yes, withdrawing during market downturns is bad. I don't disagree with this? I'm merely saying that, on average, over the long-term, it makes more mathematical sense to ditch the EF if you're a high net worth individual. For example, you have literally just picked the worst case scenario and used that to justify why the strategy is bad. What about all the times y…

in theory, all your money should be in the market if the market is efficient and has a positive drift

Re: Save like a pessimist, invest like an optimist

#93

Post by Moodles »

sokoloff wrote: post #37
imtringued wrote: post #35

Earlier quoted context omitted.

You have $100k. Put 80% of it in the stock market. The stock market drops by 40%, your investment is worth $48k and you withdraw nothing but spend your entire emergency fund. The market recovers and now your portfolio is worth $80k. You have $100k. Put all of it in the stock market. The stock market drops by 40%, your investment is worth $60k and you withdraw $20k. The market goes back to 100% and now you have $67k i…

That’s another use of margin. Invest 100% (but not more). Emergency hits and you can withdraw cash without selling stocks (up to a point).

I mean honestly, using a credit card for a month before interest hits is usually fine too? My credit limit is like 50k or something ridiculous across all my cards. Not to mention when all in on stocks you can sell for better long-term capital gains tax treatment or even tax loss harvest losses too, which you can't do with a savings account. And ETFs are actually pretty liquid: I can sell and withdraw in a few days if I wanted to anyway.

Re: Save like a pessimist, invest like an optimist

#94

Post by paulpauper »

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…

Absolutely not because of risk of ruin owing to path dependency. I would recommend 2-3x ETFs instead because there is no risk of ruin but there are still possible path dependency issues.

Re: Save like a pessimist, invest like an optimist

#95

Post by Moodles »

paulpauper wrote: post #92
Moodles wrote: post #82

Earlier quoted context omitted.

You've just given a cherry picked example to show that yes, withdrawing during market downturns is bad. I don't disagree with this? I'm merely saying that, on average, over the long-term, it makes more mathematical sense to ditch the EF if you're a high net worth individual. For example, you have literally just picked the worst case scenario and used that to justify why the strategy is bad. What about all the times y…

in theory, all your money should be in the market if the market is efficient and has a positive drift

Yeah, I mean there's also some practicalities involved like having cash to withdraw from an ATM or paying rent, but yeah pretty much I'm fully invested.

Re: Save like a pessimist, invest like an optimist

#96

Post by lotsofpulp »

marvin wrote: post #78
lotsofpulp wrote: post #69

Earlier quoted context omitted.

In the very worst scenario, you’re going to need guns, source of food, land, and most importantly a network of people who you can call to help defend you (or go on offense with you to acquire necessary resources). The dollar is only useful as long as the US government continues to perform as an organization. However, as the US approaches dissolution, I would expect the value of USD to approach zero as the government…

>or go on offense with you to acquire necessary resources Are you seriously suggesting, on a hacker forum, to be prepared to use the proceeds of your emergency fund to violently steal life-critical resources from other people in a crisis? I really hope I've misunderstood, and you're using the phrase "go on offense" as a euphemism for deer hunting.

No, I am suggesting that in a worst case scenario, an emergency fund full of cash is useless (on a multiple year timescale, of course how many years is subjective).

It’s conceivable to imagine a scenario where resources are so limited that acquiring them becomes a do or die situation, which is what I imagine the previous poster meant by “zombie apocalypse” scenario (or more realistically, war). Or I erroneously assumed “zombie apocalypse” to mean worst case scenario.

I also forgot to include a less drastic measures of also owning assets in a different country and the rights to live there in case you need to immigrate.

Re: Save like a pessimist, invest like an optimist

#97

Post by shoo »

yojo wrote: post #39

I’m skeptical of the closing claim that exponential growth keeps happening forever. Yes, you can grow GDP 2% for 200 years, that results in an economy 50x the start size. Expand it to 1000 years and you’re talking about an economy 400 million times as large. After 2100 years you’re up to an economy a QUINTILLION times as large. At some point the exponential curve has to go S-shaped. Maybe we’re still in the happy exp…

> I claim that economic growth cannot continue indefinitely. [...] the Earth has only one mechanism for releasing heat to space, and that’s via (infrared) radiation. We understand the phenomenon perfectly well, and can predict the surface temperature of the planet as a function of how much energy the human race produces. The upshot is that at a 2.3% growth rate (conveniently chosen to represent a 10× increase every century), we would reach boiling temperature in about 400 years. [Pained expression from economist.] And this statement is independent of technology. Even if we don’t have a name for the energy source yet, as long as it obeys thermodynamics, we cook ourselves with perpetual energy increase.

https://dothemath.ucsd.edu/2012/04/economist-meets-physicist...

Re: Save like a pessimist, invest like an optimist

#98

Post by xenihn »

paulpauper wrote: post #86
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…

The vast majority of famous people also have a lot of haters

You can't climb to the top without crushing a few throats.

Re: Save like a pessimist, invest like an optimist

#99

Post by Moodles »

sanderjd wrote: post #66
Moodles wrote: post #21

Earlier quoted context omitted.

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

Why does that seem very unlikely? It seems to me that the right way to think about that is that the likelihood is simply unknowable either way.

It seems very unlikely since there's 200 years of data to show that was the biggest crash ever. So a crash twice that size is very unlikely. You could do the math to calculate the exact probability given the sample size of stock market years.

Re: Save like a pessimist, invest like an optimist

#100

Post by fennecfoxen »

yojo wrote: post #39

I’m skeptical of the closing claim that exponential growth keeps happening forever. Yes, you can grow GDP 2% for 200 years, that results in an economy 50x the start size. Expand it to 1000 years and you’re talking about an economy 400 million times as large. After 2100 years you’re up to an economy a QUINTILLION times as large. At some point the exponential curve has to go S-shaped. Maybe we’re still in the happy exp…

> At some point the exponential curve has to go S-shaped.

In principle yes, of course.

In practice, you are imagining a world in which we never expand our civilization into space and across the galaxy, because otherwise you would be looking at the S curve and thinking "wow, this thing has only just gotten started" and marveling at what lies ahead.

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