Wednesday, May 20, 2015

Volatility Does Not Equal Risk!

Why Volatility does not Equal Risk - Warren Buffett

Volatility does not measure risk. Past volatility is not a measure of risk. It's nice math, but it's wrong.

May 20, 2015
Are Long Maturity Bonds Worth the Risk?

So the losses in the BC Aggregate were roughly 70% lower, on average, with around half the volatility. But the returns were nearly 90% of the long-term treasury performance numbers. So to earn slightly better performance numbers, an investor would have had to deal with much higher volatility and much larger losses in long bonds.

As a holder of long-term inflation protected treasuries with intent to hold to maturity, I could give a rat's @$$ about volatility. I care only about risk. I have no desire to own the BC Aggregate filled with an assortment of low yielding medium-term treasury and corporate bonds. Need I point out that interest rate risk is not the only risk here?

1. There are no guarantees that corporate bonds will return the principal to you. Corporations cannot print money. They own no monetary printing presses.

2. Investing in an assortment of medium term bonds does not guarantee that one's nest egg can keep up with inflation over the long-term, especially with the yield curve so steep.

3. What if long-term interest rates don't rise from here and, as long-term savers, we are permanently stuck at the short end of the curve? You know, like the last half decade. Then what? Better have an eatin' cat food over the long-term backup plan. Sigh.

I am a retiree. I cannot afford to take many risks. I have no job to fall back on if I lose money in this economy's casino. Volatility does not keep me up at night. Risk does. They are not the same thing.

I don't lock in these low rates over the long-term out of greed. I lock them in because I know there is the potential for them to get worse. As they say, a bird in the hand is worth two in the bush. They also say not to count one's chickens before they hatch. Sitting in shorter-term investments to meet longer-term needs is chicken s%^t. That's right. I'm suggesting that the plan is filled with manure. Of course, manure can make things grow. It's just not something I am willing to count on.

This is not investment advice.


I see that the BC Aggregate Index does not hold municipal bonds. I guess it is not as aggregate as the name implies. It does, however, hold mortgage-backed bonds. This should come in handy for those eager to embrace housing bust risks again, in the name of safety. And as an added bonus, the index used to be called the Lehman Aggregate Bond Index, for those still sentimental over the pillar of risk free strength that fine institution once was, lol. Sigh.


fudge_hend said...

"Corporations cannot print money. They own no monetary printing presses."

Don't a lot of countries outsource the printing of their money to people like Del La Rue. So it seems they do own the printing presses, we just trust them not to use them. They also print passports. It's like a bond movie waiting to happen, we just need a super villain. Thankfully they aren't attracted to such mundane industries such as finance.

I'm sure it's just a coincidence that they also get credited for originated the modern deck of cards used for gambling.

Stagflationary Mark said...


It's like a bond movie waiting to happen, we just need a super villain.

Where [Monsanto] could [Monsanto] we [Monsanto] possibly [Monsanto] find [Monsanto] a [Monsanto] suitable [Monsanto] corporate [Monsanto] super [Monsanto] villain?