How safe is the stock market?

[kimchi]

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anyone have any tips on accessing risk for a particular stock, sheerly based on it's numbers?

Like if i were to look at the financial + charts in the span of 1 minute on yahoo or google finance, what would be good indicators for a noob to look at?

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Average True Range (ATR) is a useful measure of current volatility of a market. Plotting this as a 10 or 20-day EMA can help greatly in deciding how much of your portfilio to invest/risk in a particular market at a particular time

[pig4bill]

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[ QUOTE ]
anyone have any tips on accessing risk for a particular stock, sheerly based on it's numbers?

Like if i were to look at the financial + charts in the span of 1 minute on yahoo or google finance, what would be good indicators for a noob to look at?

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What you want to know is the volatility of a stock.

Generally, stocks with lower float are more prone to big swings because it takes less money to move them.

However, to actually quantify that volality is IMO impossible because investor psychology plays such a big factor in price movement.

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FYP

[Courtesy Flush]

I'm thinking perhaps the best thing for me is just to use one of the ETF portfolio's suggested on that site kimchi linked to. How does this look to you guys?

10% S&P Depository Receipts (SPDR) S&P 500 (SPY) LCB
10% Vanguard Value VIPERs (VTV) LCV
10% I-Shares Russell Microcap Index (IWC) SCB
10% Vanguard Small Cap Value VIPERs (VBR) SCV
10% Vanguard REITs Index ETF (VNQ) REIT
10% I-Shares MCSI EAFE (EFA) Int'l LCB
10% I-Shares MSCI EAFE Value Index (EFV) Int'l LCV
20% WisdomTree Int'l Small Cap Div Fund (DLS) Int'l SCV
10% Vanguard Emerging Markets VIPERs (VWO) EM


Is there any overlap or do any of you feel there are unnecessary choices in there? Are any additions or adjustments I should make? It was last updated in Januray so I really want someone's approval before I dive in. I'm starting with 10k by the way, but might add more later.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
anyone have any tips on accessing risk for a particular stock, sheerly based on it's numbers?

Like if i were to look at the financial + charts in the span of 1 minute on yahoo or google finance, what would be good indicators for a noob to look at?

[/ QUOTE ]

What you want to know is the volatility of a stock.

Generally, stocks with lower market caps are more prone to big swings because it takes less money to move them.

However, to actually quantify that volality is IMO impossible because investor psychology plays such a big factor in price movement.

[/ QUOTE ]

price change models by mandelbrot have the closest link to reality.

that is because it makes more sense that volatility scales vs. being linked by a normal distribution (as st.dev assumes). the relative probability of a 10% move vs. the probability of a 5% move should be similar to the relative probability of a .1% move vs. the probability of a .05% move.

this has held true in the empirical tests of his theory. the normal distribution has been widely defunct. it predicts something like 30 moves of >3% in a day over a century where we've had thousands of such moves in less than a century.

the problem is finding the estimates of the exponent and time factor in the power law distribution mandelbrot asserts. small changes in these estimates lead to huge chnages in results.

it isn't impossible to assess risk just because you think it is impossible to assess volatility though. that is what ranges around your inputs and monte carlo simulations are for.

Barron

[spider]

Re: Allocating about 10% each to various funds. I think that looks fine as far as stock allocation, although I think you could simplify it to something like 60% VTI, 30% EFA, 10% EEM or VWO. That really gets very close to what you're doing while being much easier to keep track of, especially if you want to do periodic rebalancing.

Question for everyone: whatever happened to allocating a portion of assets to bonds? I was reading Intelligent Investor recently where it is suggested that you should never have less than a 25% allocation to either stocks or bonds. I am comfortable with having less than 25% in bonds myself, but I still like 10% to 15% as a lower bound on bond allocation. (I guess that this could be it's own thread but I find it interesting that it never seems to get suggested in these asset allocation discussions like this one.)

[pig4bill]

Maybe because bonds are near an all-time high? They dropped back a little after the Bernanke Bomb, but they are still very high on a historical basis.

[spider]

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Maybe because bonds are near an all-time high? They dropped back a little after the Bernanke Bomb, but they are still very high on a historical basis.

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True, although they're lower now than at many times in the last few years. But I don't really think that has much to do with it. I just see a fairly pervasive attitude among younger people in particular (but this includes a lot of 30-somethings) that stocks are likely enough to crush bonds in the long term, that they decide to just put it all in stocks and trust in the uber-long term.

I am just curious if there is any theoretical or academic support for going all-stock if you are young enough and not very risk-averse.

[mtgordon]

http://www.fundadvice.com/images/sto..._tuning_lg.jpg

According to this, over the last 35ish years having 25% in bonds would given about 12.75% annualized while 0% bonds would have yielded 14.4%. 1.65%/year is certainly nothing to sneeze at. While the past is certainly not proof for what is going to happen in the future, I think it at least shows a trend.

[spider]

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According to this, over the last 35ish years having 25% in bonds would given about 12.75% annualized while 0% bonds would have yielded 14.4%. 1.65%/year is certainly nothing to sneeze at.

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Right, but look at the worst 60 months for 70% equities vs 100% equities. It's basically +7% vs -7%. That is also nothing to sneeze at!

So I guess my question is why/when did a lot of people stop caring about diversification relative to absolute gains? I wonder if it's just a case of time horizon. For example, over 10 years maybe it's very important to be diversified but over 30 years it is sufficiently dominated by absolute returns that you can (reasonably?) ignore diversification.

[kimchi]

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[ QUOTE ]
According to this, over the last 35ish years having 25% in bonds would given about 12.75% annualized while 0% bonds would have yielded 14.4%. 1.65%/year is certainly nothing to sneeze at.

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Right, but look at the worst 60 months for 70% equities vs 100% equities. It's basically +7% vs -7%. That is also nothing to sneeze at!

So I guess my question is why/when did a lot of people stop caring about diversification relative to absolute gains? I wonder if it's just a case of time horizon. For example, over 10 years maybe it's very important to be diversified but over 30 years it is sufficiently dominated by absolute returns that you can (reasonably?) ignore diversification.

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Thing is, there's also the 'ulcer index'. I highly volatile portfolio is more likely to push the holder into buy/selling at exactly the worst time.

How many people (I'm guilty too) bought tech stocks in early 2000 and sold them in late 2002?

A well diversified, steady portfolio is more likely to help the average investor stick to his strategy - buy & hold