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MichaelDickens comments on Selecting investments based on covariance with the value of charities - Effective Altruism Forum

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Comment author: MichaelDickens  (EA Profile) 04 February 2017 06:09:32PM 6 points [-]

I'm glad you're thinking about this. Investing is an important issue and I believe there's room for more discussion of the topic.

[I]t is commonly accepted by now that altruists should generally be less financially risk averse than other people. This implies that we shouldn't worry too much about diversification, but only about expected value.

False. By diversifying, you can increase your risk at any given level of return, which also means you can increase your return at any given level of risk. (These are dual optimization problems).) You should also be concerned about correlation with other altruistic investors, and most investors put way too much money in their home country (so mostly the US and UK).

I don't know that you are claiming this, but you sort of imply it, so to be clear: you should not believe that US stocks have higher expected returns than any other country. If anything, you should believe that the US market will perform worse than most other countries because it's substantially more expensive. Right now the US has a CAPE ratio of 26, versus 21 for non-US developed markets and 14 for emerging markets. CAPE ratio strongly predicts 10-year future market returns.

On the covariance-with-charities issue: I'm doubtful that this consideration matters enough to substantially change how you should invest. If your investments can perform 2 percentage points better by investing in emerging markets rather than developed markets (which they probably can), I would expect this to outweigh any benefits from increased covariance. I would need to see some sort of quantitative analysis to be convinced otherwise.

I'm also not convinced that we should actually want to increase covariance rather than decreasing it. By increasing covariance you increase expected value by expanding the tails, but I don't believe we should be risk-neutral at a global scale because marginal money put into helping the world has diminishing utility.

Similar concerns apply to investing in companies that are correlated with AI development. AI companies tend to be growth stocks, which underperform the market in the long run compared to value stocks.

Comment author: kbog  (EA Profile) 04 February 2017 07:16:11PM 1 point [-]

False. By diversifying, you can increase your risk at any given level of return, which also means you can increase your return at any given level of risk.

No because the risk/return frontier is bounded. You can't arbitrarily get more expected returns for taking on more risk, except possibly with complicated financial instruments and trading. For most people the best you can reasonably do is pick an aggressive index, and getting further returns is beyond reach. But if you're investing for the purpose of donating then an aggressive stock index is generally well below your risk threshold.

On the covariance-with-charities issue: I'm doubtful that this consideration matters enough to substantially change how you should invest. If your investments can perform 2 percentage points better by investing in emerging markets rather than developed markets (which they probably can), I would expect this to outweigh any benefits from increased covariance.

You are neglecting more aggressive markets within the US, where there are more options than the emerging markets offer. Small caps probably beat the US as a whole as well, as they, like emerging markets, are more risky. 2% better annual returns for the same level of risk is ridiculously optimistic.

I'm also not convinced that we should actually want to increase covariance rather than decreasing it. By increasing covariance you increase expected value by expanding the tails, but I don't believe we should be risk-neutral at a global scale because marginal money put into helping the world has diminishing utility.

This is described above where it is relevant to the cause area. However at the global level, EA money is a drop in the pond.

Similar concerns apply to investing in companies that are correlated with AI development. AI companies tend to be growth stocks, which underperform the market in the long run compared to value stocks.

That is not a settled debate.

Comment author: BenHoffman 11 February 2017 03:14:29AM 0 points [-]

You can't arbitrarily get more expected returns for taking on more risk, except possibly with complicated financial instruments and trading.

Paul Christiano suggests leveraged ETFs. There's also buying stocks on margin, which is not terribly hard to set up.