Under-performing During Prosperity

[melveyr]

Hey PPers,

I have noticed that it can be very difficult for some posters to cope with the PP's performance when it is under performing the stock market. I can definitely sympathize because I understand the emotional aspect of this. After all, most of our peers have a much higher equity percentage. However, it is important to keep in mind that our goal is to meet our long-term savings objectives with minimal risk, not to outperform a given financial index. Generating real returns over 10yr time frames is what really matters.

Additionally I wrote the following piece titled Implicit Prosperity Tilt for my site:
http://www.stableinvesting.com/2012/03/ ... -tilt.html

Hopefully it can help out some of the newer PP investors.

"Some economic optimists can appreciate the careful balance of asset classes, but still desire to tinker with the PP by boosting the stock allocation in hopes of juicing up the long-run returns of the portfolio. This logic stems from the belief that in the long-run capitalism promotes economic growth and prosperity. Thus, given a long enough time frame, everything will work out swimmingly for stock investors.

However, I think it is vital to understand that those living in a capitalist society already have an implicit tilt towards prosperity. To view your investment portfolio in isolation is to ignore one of your most valuable assets, your human capital. For most people, human capital is the prime wealth generating asset they own. Most of us generate income from this asset by renting it out to corporations in the form of wage labor. We cannot see the value of our human capital fluctuate tick by tick like we can with the stock market, but both are strongly correlated with economic prosperity. We are likely to get paid more in boom times (especially with commission driven compensation), and we are subjected to the risk of unemployment in the subsequent crashes.

Because citizens operating in a capitalist society already have this implicit tilt towards prosperity, I think an economically agnostic investment portfolio operating in the background is extremely rational. Life as a wage laborer or entrepreneur is fraught with risks relating to economic prosperity and to have an economically agnostic portfolio gives greater flexibility when recession strikes. One hates to draw-down on their investment portfolio to pay for expenses, but at least with the PP the flexibility is there if you need it."

This doesn't even get into the possibility of increased crime-rate and financial hard-ship of loved ones who might need your support during recessions. We already have a lot riding on prosperity.

[moda0306]

I completely agree with what you're getting at, but other than having a PP as a great example of a working portfolio, would never know what degree to take it to.

If someone decided to abandon the stock portion of the PP because they wanted something that correlated less with their success in the job market, I'd hardly blame them.  I think that's definitely a logical way to look at things, though completely uncommon.

[atrchi]

If someone decided to abandon the stock portion of the PP because they wanted something that correlated less with their success in the job market, I'd hardly blame them.  I think that's definitely a logical way to look at things, though completely uncommon.

Perhaps more common than you think... check out the book "Are you a stock or a bond?"

[Greg]

We are likely to get paid more in boom times (especially with commission driven compensation), and we are subjected to the risk of unemployment in the subsequent crashes.

If we're betting on prosperity due to our jobs, what if you work for the federal government as a civilian though? You are trading a little bit of income for the safety of a job. Does that mean most people are like stocks, but I would be more like a hybrid of stocks/short-term bonds?

[murphy_p_t]

If we're betting on prosperity due to our jobs, what if you work for the federal government as a civilian though? You are trading a little bit of income for the safety of a job.

I thought our civil "servants" were higher paid than the host citizens...after all...gov't is about the only growth industry left in the US

[Greg]

If we're betting on prosperity due to our jobs, what if you work for the federal government as a civilian though? You are trading a little bit of income for the safety of a job.

I thought our civil "servants" were higher paid than the host citizens...after all...gov't is about the only growth industry left in the US

That's probably sadly true to some degree but from what I've seen for engineers working for the government, starting pay seems to be around 10k less than getting a job in the private sector. The benefits portion of the job however can outweigh the benefits provided by the private sector but it depends on what people want in a job. I got a scholarship to go to grad school and in exchange will work for a federal research lab for at least 2 years. Seemed to me to be a good deal to have a "guaranteed" job after I graduate and decide what I want to do after that.