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Chuck Jaffe: Stock Are Far Less Risky Than You Think
Good article with a caveat and a bad title as always from Chuck. The caveat is that stocks have a higher return is not some natural law but an assumption based on historical empirical evidence. A long stretch of heads in a coin tossing experiment has not reduced the risk of betting on heads.
The probabilistic implication of that evidence suggests overweighting equities to exploit the current situation but it has not decreased the risk. In fact, the only rationale for higher returns from equities over the long term IS the risk premium, for assuming higher risk over other assets.
The new fad of not tapering beta exposure and worse increasing it with age can end very badly for many. In a market that works until it doesn't, my recommendation that I have expressed many times here is to have a glideslope from maximum beta exposure in the beginning with low cost indexed funds assuming the whole market risks (because one has the luxury of time) to proven active funds with downside or capital protection as one ages. That way you get the benefit of maintaining maximum beta exposure in rising markets while having some protection as the runway decreases trading off some performance for a safety net. I think this is a better glideslope than just reducing beta exposure with age which just looks silly in a roaring bull market.
A cited study reported on MFO discussions sometime this year, but more than ten pages back (I gave up at that point) modeled a portfolio that was low risk at retirement to avoid the impact of significant drawdowns, increasing risk as one aged. It made sense to me, so long as one could live on the returns from the low risk portfolio during the early years of retirement. (That particular issue was not addressed.) Cman's comment applies if one has not reduced risk at retirement. However, if one has a low risk initial portfolio (with some risk-on funds or stocks to enjoy a good market, if it exists - admittedly missing the big boosts from a great initial market), one can increase risk over time.
Comments
The probabilistic implication of that evidence suggests overweighting equities to exploit the current situation but it has not decreased the risk. In fact, the only rationale for higher returns from equities over the long term IS the risk premium, for assuming higher risk over other assets.
The new fad of not tapering beta exposure and worse increasing it with age can end very badly for many. In a market that works until it doesn't, my recommendation that I have expressed many times here is to have a glideslope from maximum beta exposure in the beginning with low cost indexed funds assuming the whole market risks (because one has the luxury of time) to proven active funds with downside or capital protection as one ages. That way you get the benefit of maintaining maximum beta exposure in rising markets while having some protection as the runway decreases trading off some performance for a safety net. I think this is a better glideslope than just reducing beta exposure with age which just looks silly in a roaring bull market.
Cman's comment applies if one has not reduced risk at retirement. However, if one has a low risk initial portfolio (with some risk-on funds or stocks to enjoy a good market, if it exists - admittedly missing the big boosts from a great initial market), one can increase risk over time.