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



## Sarenco (27 May 2017)

Copied and moved from another thread - Brendan 



I wouldn't dream of investing in shares over an investment horizon as short as 4 years as suggested.[by Brendan]


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## Brendan Burgess (28 May 2017)

Sarenco said:


> I wouldn't dream of investing in shares over an investment horizon as short as 4 years as suggested.





Lobster said:


> Intend to move in 4-5 years also so not willing to lock savings away for long term



In the old days when investment managers took a huge lump out of the initial investment and probably charged an exit fee as well, one had to invest for around 10 years to recover the charges.  Even if you bought shares directly, you were paying 1.5% commission on buying and selling and 1% stamp duty, so you needed time to recover the 4% transaction charges.

There is also the idea that the longer you invest, the more likely you are to get a positive return, so you need to invest for a long time.

These days the costs are much lower so this is no longer a reason why you should not invest for 4 years.

So what about the argument that you might lose money over 4 years?  Over 4 years, there are a few possible outcomes ranging from a serious fall in the value of your investments to a serious rise in the value of your investments.  However, the chances of a rise are higher than the chances of a fall. The net result is that the return from investing in the stock market should, on average, be higher than putting your money on deposit.





Brendan


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## Sarenco (28 May 2017)

Brendan Burgess said:


> The net result is that the return from investing in the stock market should, on average, be higher than putting your money on deposit.



Looking at historic US data, there is a roughly 70% probability that US stocks (total market) will outperform 5-year US Treasuries over any given 5-year holding period.  However, that ignores investment expenses and, critically, taxes.

There are no investment costs involved with buying 5-year State Savings Certs and the returns are tax free.  In contrast, there are costs (commissions, stamp, etc) involved with purchasing equities directly, dividends are taxed at an investor's marginal rate and any gains are subject to CGT.

When you take account of investment expenses and taxes, I would suggest that the risk/reward analysis changes dramatically and the probability of a diversified portfolio of stocks outperforming 5-year Savings Certs falls dramatically.

I would "guesstimate" that the probability of the net, after-tax return on a diversified equity portfolio outperforming the net, after-tax return on State Savings Certs over a 5-year period is materially less than 50%.

In other words, it's a bad bet.


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## Brendan Burgess (29 May 2017)

Sarenco said:


> Looking at historic US data, there is a roughly 70% probability that US stocks (total market) will outperform 5-year US Treasuries over any given 5-year holding period.  However, that ignores investment expenses and, critically, taxes.
> 
> There are no investment costs involved with buying 5-year State Savings Certs and the returns are tax free.  In contrast, there are costs (commissions, stamp, etc) involved with purchasing equities directly, dividends are taxed at an investor's marginal rate and any gains are subject to CGT.
> 
> ...



Hi Sarenco

I am confused.  You often recommend that people invest in the stock market.  

If it's a "bad bet" over 5 years, then why is it not a bad bet over 10 years or over 30 years? 

Brendan


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## Sarenco (29 May 2017)

Brendan Burgess said:


> If it's a "bad bet" over 5 years, then why is it not a bad bet over 10 years or over 30 years?



Hi Brendan

Essentially it's because the probability of stocks beating bonds increases over longer holding periods.

Again looking at historical US data, the probability of stocks (total US market) beating bonds (5-year treasuries) increases to roughly 80% over 10-year holding periods, 90% over 15-year holding periods and (essentially) 100% over holdings periods of 20 years and longer.

It's also relevant that the probability of suffering a loss on equities diminishes over longer holding periods.  Remember Mr Buffett's golden rule of investing – never lose money!

The following are the worst real annual returns of the S&P500 over different holding periods from 1871 to 2016 (with dividends reinvested).

3 years -35.2%
5 years -13.2%
10 years -5.9%
20 years -0.2%
30 years   1.9%
40 years   3.2%

I also try to emphasize that investment costs and taxes can skew the risk/reward analysis quite dramatically so that paying down debt (essentially the same thing as buying a tax-free, cost-free bond) is often the best use of after-tax savings on a risk-adjusted basis.

Hope that makes sense.


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## Brendan Burgess (29 May 2017)

Let's take a one year period for simplicity.

Let's say I can put €100 on deposit at 2%.

The alternative is to put it in an investment with the following outcomes

50% chance that it will be worth €120and 50% chance that it will be worth €90.

The expected value of my investment is €105 (€120 x .5 + €90 x.5)

So I should invest the €100 rather than put it on deposit. 

If I repeat that every year, I will lose half the time, but my gains will exceed my losses.

That will work out something like being ahead 80% of 10 year periods, and 100% over 20 year periods.

If there is a positive expected value, then it should not matter what the holding period is, if I can handle the potential losses. ( Excluding transaction costs.)

Johnny has an income of €100k, owns his home mortgage free and has €100k cash. He should invest in the stock market, because he can handle the losses and expected returns are higher.

Mary has an income of €50k and is planning to buy a house next year. She has €60k saved.  She can't take the risk of investing in the stock market as a 50% fall would mean she can't buy her house. She must put it on deposit. 

In the original question, from which I extracted this thread, Lobster had €600k in cash and needed to spend €250k in 4 years.

He should invest the lot in the stock market. After 4 years, the most likely outcome is that the €600k will have increased in value by more than any alternative.  But it's possible that the €600k will have fallen by 50% over 4 years. So what? He will still have €250k to spend in 4 years. 

If he had only €250k to invest, I would recommend a deposit account. 

Brendan


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## Duke of Marmalade (29 May 2017)

Ahhh!  A recurring theme on AAM.  _Boss _just to be a bit more posh on the numbers.  A typical model would posit that shares can expect to deliver a "risk premium" of, say, 3%.  But with a risk (technically volatility) of 20%.  The math gives the following results for the probability that shares will outperform deposits.
Over 1 year 56%
Over 4 years 62%
Over 10 years 70%
So yes the law of large numbers operates as you describe but not quite as dramatically as you surmised.

Now why should this be so?  Not because shares are real assets with real entrepreneurs blah blah blah  As Rory Gillen has pointed out, Coca Cola has been a very well managed company by any of the accounting metrics.  It has however been a poor investment.  Why?  Because its prospects were overpriced by the market.

This is all about the psychology and dynamic of the stockmarket as a second hand market.

Over the last century or so the stockmarkets (Japan a notable exception) have fairly consistently over compensated for the fear of short term volatility.  Let us say that this is still the case.  Then whether the stockmarket is a good investment for a particular individual depends on how her risk/ reward calculus stacks up against the market norm.  Two examples have been cited, one where the individual would be less risk averse than the norm and one where the opposite is the case - thus pointing to two different but equally rational investment decisions.

But are current stockmarket prices still compensating for fear of short term volatility?  Maybe with interest rates so low, the search for some sort of return is dominating the fear of short term volatility.  If interest rates return to anything like normal levels of say 3% to 4% in 4 years' time it would seem to me that stock prices will suffer a major correction.  Who knows?


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## Brendan Burgess (29 May 2017)

Duke of Marmalade said:


> The math gives the following results for the probability that shares will outperform deposits.
> Over 1 year 56%
> Over 4 years 62%
> Over 10 years 70%



Duke - that is very helpful thanks. 

So someone who invests over 4 years will win 62% of the time and lose 38% of the time. 

At first sight, those are great odds which I, for one, would be very happy to take. 

But that is only part of the answer. If he wins small but loses big, then it could be a bad bet. 

Have you any way of guesstimating the potential losses over 4 years? 

Brendan


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## Sarenco (29 May 2017)

Brendan Burgess said:


> Have you any way of guesstimating the potential losses over 4 years?


I'm not sure if this answers your question but the total return of the S&P500 for the four years ended 31 December 1933 was -70.5%.

To be honest, I think we may be talking at cross-purposes.  I wouldn't invest in any asset unless the odds of that asset producing an acceptable return over my investment horizon were overwhelming (albeit there are never any guarantees in that regard). 

To me, anything else is gambling, which doesn't really appeal to me.


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## Duke of Marmalade (29 May 2017)

Brendan Burgess said:


> Have you any way of guesstimating the potential losses over 4 years?
> 
> Brendan


From the model, which for the nerds is called the lognormal model and is used by practitioners for pricing options.

In 4 years:

There is a 10% chance of underperforming deposits by more than 32%  (i.e. losing more than 32% versus a deposit)
20% chance down 19%
30% chance down 9%
60% chance up 2% or better
50% chance up 13%
40% chance up 25%
30% chance up 39%
20% chance up 58%
10% chance up 88%

The model tilts the numbers towards equities both in probability terms and also in distribution of monetary outcomes.

_Sarenco's _observation that anything which involves an unacceptable chance of loss is "gambling" is worth comment.
I personally define gambling when someone accepts that on balance the expected outcome of a punt is negative, but still undertakes it in the hope of a positive outcome.
This does not apply in the model I have described for the stockmarket which, whilst allowing for negative outcomes, on balance expects a positive outcome. 

However, _Sarenco's _is an equally valid definition.  But whilst my definition is absolute _Sarenco's _is relative to the punter.


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## Sarenco (29 May 2017)

Duke of Marmalade said:


> I personally define gambling when someone accepts that on balance the expected outcome of a punt is negative, but still undertakes it in the hope of a positive outcome.


Interesting observation Duke – I never thought of it in those terms.

Maybe the better distinction is between investing (where there is always a reasonable expectation of a gain) and speculating (where a significant risk of loss is more than offset by the possibility of a significant gain).

As a matter of curiosity, does your model take account of investment expenses or taxes?


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## Duke of Marmalade (29 May 2017)

Sarenco said:


> Interesting observation Duke – I never thought of it in those terms.
> 
> Maybe the better distinction is between investing (where there is always a reasonable expectation of a gain) and speculating (where a significant risk of loss is more than offset by the possibility of a significant gain).
> 
> As a matter of curiosity, does your model take account of investment expenses or taxes?


Nope, no expenses or taxes.

Yes, "speculation" fills a gap.

So we go from "gambling" where we know the odds are tipped against us through "speculating" where we take significant risks but with the odds in our favour through to "investing" where whilst some risk is present on balance the expectation is overwhelmingly favourable.

So I would suggest that day trading is gambling (because of the costs), short term stock market positions, say indeed up to 4 years, are a tad speculative but long term equity positions are investments.


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## Brendan Burgess (29 May 2017)

Sarenco said:


> Interesting observation Duke – I never thought of it in those terms.



The Duke learned it from me. 

https://www.askaboutmoney.com/threa...ting-gambling-or-investing.70918/#post-549319

It is a key point though. If something has a positive expected value, then it's worth the investment, if you can handle the risk. 


Brendan


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## Sarenco (29 May 2017)

Brendan Burgess said:


> If something has a positive expected value, then it's worth the investment, if you can handle the risk.


I wouldn't arrive at that conclusion Brendan.

Stocks always have a positive expected return but then so do 5-Year State Savings Certificates.  I would estimate that the odds of stocks beating 5-Year State Savings Certificates over a 5-year holding period are actually negative once you take investment expenses and, critically, taxes into account. So, from my perspective, purchasing stocks for such a short period isn't investing at all.  It's not even speculating.  It's gambling!

I'm not interested in gambling – or speculating – to fund my future financial requirements.

Your _ability_ to take a risk is certainly important.  But your _need_ and _willingness _to do so are also important considerations.


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## Brendan Burgess (29 May 2017)

Hi Sarenco

If you have worked out that it's right to do it over 20 years, then it's arithmetically right to do it over 5 years.

Unless there is some peculiarity in a particularly high return on State Savings Certs over 5 years.

The key point that there is a positive expected value in each year. We just don't know in advance which the good  years will be. 

Brendan


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## Duke of Marmalade (29 May 2017)

_Boss _a riddle for you.  Jane has worked hard all her life and is celebrating her retirement.  Why not?  She has a €1M nest egg accumulated all those years.  In comes Donald Trump and offers her 10/1 on the toss of a coin provided she bets the full €1M.  Should she accept the bet?


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## Brendan Burgess (29 May 2017)

Absolutely not.  

But if an honourable man like yourself offered her 6/5 odds on a €10,000 toss, she should take it. 

Or better still a series of tosses at 6/5 for €1,000.

Brendan


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## noproblem (29 May 2017)

What's Trump putting up as his stake?


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## Sarenco (29 May 2017)

Brendan Burgess said:


> But if an honourable man like yourself offered her 6/5 odds on a €10,000 toss, she should take it.



Why?  She's already met her financial goals - she has no _need_ to take that risk.

Would you take the same view if the odds were 2/1?

Or what if a condition of the bet was that the coin toss had to be an annual event?


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## Duke of Marmalade (29 May 2017)

Well the point I am making is that risk has its price and that price is purely personal.  JP McManus would bite Donald's hand off for that bet but Jane, we all agree, must reject it. Expectation is not everything.

PS you have no grounds whatsoever for castigating me as an honourable man


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## Brendan Burgess (29 May 2017)

Duke of Marmalade said:


> Well the point I am making is that risk has its price and that price is purely personal.



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


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## Fella (29 May 2017)

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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## Sarenco (29 May 2017)

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.


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.


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## Brendan Burgess (30 May 2017)

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


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## Duke of Marmalade (30 May 2017)

Fella said:


> ...risk and return go hand in hand you can't have a return without risk...


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


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## Dan Murray (30 May 2017)

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.



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!!


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## Sarenco (30 May 2017)

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.


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## Brendan Burgess (30 May 2017)

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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## Duke of Marmalade (30 May 2017)

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.


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.


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## Sarenco (30 May 2017)

Brendan Burgess said:


> Losing €90 is not a material risk


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.


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.


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## Brendan Burgess (30 May 2017)

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.



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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## Brendan Burgess (30 May 2017)

Sarenco said:


> The risk of holding stocks over a shorter time period is quantitatively higher.



Yes, but what is the impact of that risk?   If it can be handled, then the rewards justify taking the risk. 

Brendan


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## Sarenco (30 May 2017)

Brendan Burgess said:


> I have €250k to invest indefinitely. I might need it in two years



Well, if you might need it in two years your investment horizon is not infinite.


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## PGF2016 (30 May 2017)

Brendan Burgess said:


> 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.



250k should be put on deposit for 4 years. The remainder that is not needed could be invested in the market.


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## Sarenco (30 May 2017)

Brendan Burgess said:


> If it can be handled, then the rewards justify taking the risk.


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.


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## Duke of Marmalade (31 May 2017)

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.
> 
> ...


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.


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## Brendan Burgess (31 May 2017)

Duke of Marmalade said:


> Put quite simply people know themselves what their attitude to risk is.



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


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## Lobster (14 Jun 2017)

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).


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## Sarenco (14 Jun 2017)

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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## monagt (15 Jun 2017)

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.
> 
> ...



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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## galway_blow_in (19 Jun 2017)

Sarenco said:


> Hi Brendan
> 
> Essentially it's because the probability of stocks beating bonds increases over longer holding periods.
> 
> ...




im pretty sure thirty year u.s treasuries have beaten the s + p since the year 2000 , not quite twenty years but close enough

bonds are very expensive today , especially in europe , european equities are no higher than ten years ago, they seem incredibly cheap compared to bunds for example


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## Sarenco (19 Jun 2017)

galway_blow_in said:


> im pretty sure thirty year u.s treasuries have beaten the s + p since the year 2000 , not quite twenty years but close enough


That is correct and we have recently seen a thirty-year period where 20-year US treasuries beat the S&P500.  However, I specifically referred to five-year US treasuries.

The pricing of any liquid, publicly traded security already reflects the market consensus view.


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## galway_blow_in (19 Jun 2017)

Sarenco said:


> That is correct and we have recently seen a thirty-year period where 20-year US treasuries beat the S&P500.  However, I specifically referred to five-year US treasuries.
> 
> The pricing of any liquid, publicly traded security already reflects the market consensus view.



my mistake , i overlooked where you specifically referred to five year treasuries


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## Sarenco (19 Jun 2017)

No problem GBI.

I actually think you highlighted an excellent point that we all understand intellectually but behaviourly we always forget or ignore - that past performance is no guarantee of future returns.

Prior to September 2011, it was accurate to say that US stocks had beaten long-term US treasuries over every single 30-year holding period since the US civil war.  Can't say that anymore.

In fact, there isn't a single major developed market that I know of where domestic stocks have beaten domestic long-term government bonds over every single 30-year holding period.

I'm not suggesting that I have a clue how things are going to pan out over the next 30 years - I don't.  I can make guesses.  I can formulate probabilities based on historic data and current valuations.  But at the end of the day, I really don't have a clue what's going to happen.

We all want to extrapolate the future from what happened in the past.  Unfortunately, markets don't work like that.


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## galway_blow_in (9 Jul 2017)

Sarenco said:


> No problem GBI.
> 
> I actually think you highlighted an excellent point that we all understand intellectually but behaviourly we always forget or ignore - that past performance is no guarantee of future returns.
> 
> ...



while i realise there are many variables , might it be likely that the huge involvement of central banks this past twenty years has been the biggest thing to determine which way bonds went in comparison to stocks 

i think this is especially the case in the eurozone , i was checking out how the spanish , italian and french stock market performance since the mid nineties on a site yesterday , in the case of france , the market high was way back in 2000 , in the case of spain and italy , its even further back  , spains market is still more than 40% below its 2007 high and the ibex 35 is no higher today than in 1998 , so in the case of three pretty major european economies , bonds have absolutely hammered stocks for twenty years  , now i dont know if this is down to the creation of a single currency union and a european central bank which many believe especially hurt the economy of italy and favoured others , germanys market has never been higher and bar the 2009 and 2012 heart attacks , has almost done as well as the u.s market since 2000 

the ECB is a relatively new player in the markets so perhaps history doesnt teach as much with draghi and co in such an influential position nowadays ?


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## Noahikman (4 Aug 2017)

In everything you must have to take a risk. Just like the popular saying that goes: it is even risky not to take a risk. Business is one of the area you should always be ready to figure out new ways of doing things.


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