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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75381  
Subject: Re: Hi gang... wow!!! Date: 9/19/2013 12:36 PM
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Hi AJ,

See, the thing is - it's Ray's spreadsheet, portraying his viewpoint.
Sorry, my bad apparently.... I thought we were objectively exploring the facts as mature unbiased adults with common interests.

By showing a 50/50 mix (a few different ways, in fact) he thinks, from his viewpoint, he's provided a way to mitigate the volatility risk that you have brought up.
I still haven't heard an answer of what 2 markets he is 'mixing' at a 50/50 ratio. He specifies the S&P, obviously... but it the other 50% cash? He previously said 60/40, going S&P & bonds (of an undetermined flavor,) but that last ambiguous 50/50 reference is the first I'd heard of it, and the numbers that followed it didn't reflect performance of a 50/50 starting blend.

He hasn't done it in the way that you want him to. But then, you haven't hired him, and he has no reason to follow your 'instructions' (which I still think are somewhat muddy*) if he thinks he's provided another way to mitigate the risk.
Ray's much more adult than you seem to give him credit for (at least in my opinion.)

I go back to - it's Ray's spreadsheet, portraying Ray's viewpoint. If you want to portray your viewpoint, you either need to hire Ray, so he has a reason to follow your specific instructions, or portray your viewpoint yourself.
This is TMF, where we voluntarily show up & contribute to each other without charge, remember?

* I'm still not clear on how one is supposed to coninually have a reserve equal to 50% of account value without investing the reserves, or selling assets from the account and moving them to reserves, since you have already stated that there isn't any more money to invest/reserve, and the reserves obviously don't grow at the same rate as the account. But, since I have already stated that I think this method of reserving is overkill, I'm not actually all that worried about this confusion.
As I explained to SykeSix, since we are not the Fed we can't simply manufacture currency out of thin air... if we have $1M total, we cannot simply conjure up an additional $500,000 to support the risks of $1M in the S&P500.

However, if we *DID*... then our total capital would be $1.5M, right?
Our $1M at risk would be 2/3 of our total capital. 1/3 covering the risk.
1/3 is 50% of 2/3... see?

THUS, if you only have $1M, you can put 2/3 of it at risk of a 50% drawdown (if the combined net rate of return is better than the alternatives,) and be safely assured of never having less than $1M.

The effect of having 2/3 of the capital compounding at whatever the CAGR of the market is, plus the 1/3 reserves earning whatever liquid reserves pays, results in a combined net return something around 2/3-ish the actual market.

Alternatively, in a vehicle with zero market downside, a full 100% of all initial capital can be put 'at risk' and compounding accrues on the full amount.

I'm also not clear on why you keep saying that it has to be a 50% reserve, when, by using a 50/50 mix, the max drawdown is less than 50%.
I never said a 50/50 market-to-reserves blend was necessary for the S&P. It has a typical historical drawdown expectation around 50%... thus, a risk-weighted allocation would be 66%/33% market-to-reserves, as I've explained.

Dave Donhoff
Leverage Planner
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