I listened today to a video talking about market vol. The range of the VIX for the year is 11 to 36 and today it’s 13. In the video he spoke about AI’s effects. AI is a Bayesian like engine that reprices risk according to constant real time data streams and then trades on the picture the data paints based on likelihood. What does that statement mean?
Imagine you’re on a boat several miles off shore from your little island. You go out fishing every day to catch your family some supper and to have some fish to trade for other goods say maybe a bottle of white. You bases your life on the day in day out probabilities that today will be not unlike yesterday. Today however there was an under sea earthquake 2000 miles away which generated a tsunami headed to your island. While you’re out fishing the wave passes under you. Monstrous energy passes you but only a couple feet of vertical translation is all that you perceive. You just keep fishing since today is just like yesterday, maybe stay out an extra hour to get a few more fish to sell so the kids can have Christmas. Soon enough the wave hits the bottle neck and the energy dispersed across a huge area is all concentrated on your islands shore line and your island is destroyed. Your day was just like yesterday. Your boat is still intact, you have a load of fish, but you no longer have a home or a family, you just don’t know it yet.
This is how AI works. It creates a most likely picture and trades into that picture without the ability to understand reality. It relies on the presumption that the picture it creates is an accurate representation of reality, and the more days that picture goes unchallenged the more the AI scales it’s investment into the picture being actual reality. Since it has a huge presence in the market it’s picture of reality carries a lot of weight, in the pricing of risk based on it’s rules. The AI doesn’t care, it doesn’t understand beauty, it doesn’t understand families or islands or tsunami’s. It has some know ledge of tsunami’s but has no sensitivity to that risk to the picture given the preponderance of days and days of the same ol’ same ol’.
The data it is fed suffers under the same delusion as the passive investor. The passive investor doesn’t have an understanding nor a sensitivity for tsunami’s either. The crash hits and he’s plowing yet more money into a train wreck based on the picture a blog narrative painted for him. Why the future is like the past! But wait, no island exists.
In 1989 on Christmas Eve at 3:39 in the morning my house burned down. My picture I used to judge my normalcy burned up. It gives you great pause when in 5 minutes you go from having a complete life to having no toothbrush or underwear or shoes and it 25 degrees outside. But you are grateful you didn’t get burned up and your wife didn’t get burned up. You attend midnight Mass wearing smokey stuff you manage to find in a box under some rubble. YEP 4 x 25… I heard it in a love song.. heard it in a love song… can’t be wrong
4 Replies to “This Is What Your Up Against”
Thank goodness you got out okay in 1989! That’s how I look at life. There some things to worry about and then there are some things to REALLY WORRY about.
Life and death stuff which many of us docs have dealt with does help one look at the bigger picture.
In Canada, there is no where to hide. The government/ regulators are coming after much of what one has built up. I am glad I see this happening now versus working another decade or two before I see it.
If I could do it easily my first plan was cashflow positive RE. But since I am unable to do that efficiently than it will be passive train for me.
The difference is that I have ZERO confidence that this is the best way. I just know for me it is the better way. Insight can be brutal at times.
We were extremely lucky in 89. Our bedroom was at the other end of the house which gave us an extra 2 min to get out. I we would have had a kid that kid would be dead. I worked a burn ICU so I was so thankful!
We’re all bozo’s on the bus MB I watched a vid regarding Canadian real estate and it’s totally nuts. I watched a vid on how inflation is being hidden by changing how CPI is calculated. There is no truly smart move some are just slightly more likely to pay off. The real key is a big wad of dough and a small amount of risk maybe twice what it takes to cover inflation, and a tax optimization plan. You got that covered so you’re done! Good to hear from you
Hi Dr. Gasem,
I just posted this as a comment to Big ERN’s site and you may want to f/u with a comment on his site, or contact him to see if you two can collaborate again on a post:
Hi Karsten, I really liked this 3-part series. First because I learned a lot, e.g. how SS pension benefits are taxed (Part 2) , how to use the ERN Google Sheet in this specific case (always helps to supplement the good generic explanations with a widely applicable example like this with lots of nuances that we can all use) (Part 1), the interaction between the 3 factors of SS Benefits, Other Income, and Other income mix btw Ordinary income and “Cap Gains” (Part 3) (Nice examples of how to deal with 3 variables (factors) in 2 dimensions ?) . I also liked the way you plan out the withdrawal sequence for them so that it is tax efficient, and diagram out what a Glide path could do for them. And the final Schematic path of Portfolio value (Chart) in Part 1. When a person sees this schematic, then they can avoid bailing out at the low points or going crazy spending at the high points.
And the practical results for Becky and Stephen case are quite remarkable in their optimization results achieving (based on $1.35 M) : almost 7% withdrawal rate (meeting their spending goals before SS benefits start and then continuing to meet goals and even LTC goals), only 4% tax on the partial Roth Conversions (<$20K on $490K T.IRA amount) (that makes taking their 401 Ks and T. IRA during their working years very worthwhile since the reduction in taxes must have been at a rate of at least 10 to 15%. And finally, a good likelihood of leaving a legacy to family or charity when they pass.
Very complete series that should give a good model so that interested persons can make a plan (Spreadsheet model) now for accrual, cash flow, SWR, and the taxes for the rest of their Accumulation phase, their Roth Conversion phase, and their after SS Benefits start phase optimizing it. And adapt the plan as their circumstance change, and the tax laws change. That is the most that we can do, but is quite a lot in comparison with what most people have (even if they have a good financial advisor.)
1. Can you share the spreadsheet(s) that produced the Figures 4 and 5 and 6 in this Part 3 post of the series? These will be useful for those of us who want to adapt the results to our specific situation.
2. This example covers well a “normal FIRE” situation with about $500 K in IRA. But what about a case like Dr. Gasem (at MD on FI/RE) where he as $1.5 M to convert (a FAT FIRE situation) leaving 500 K in the T. IRA at age 70 when SS Benefits start. The good Doctor as written extensively about his conversion plans (e.g. http://mdonfire.com/page/6/) and plans to spend $338 K in the partial Roth Conversions. This is certainly a case where optimizing will be important. So, could you take this kind of a case (either Dr. Gasem’s or other) and use your tools again to see how to optimize?
This will give readers a full spectrum of examples to work with and so we will be able to plan our own situation and thus be able to assure that the SWR calculation that you have studied so extensively takes into account an optimized tax plan also.
I didn’t read ERN’s latest yet, been busy with other things. This retirement crap will wear you out! I’ll look it over and see what I can add if anything as ERN is a pretty thorough and very credible dude.