The case for a stock-light portfolio
Mar 3, 2022 0:27:57 GMT
oldskeet, liftlock, and 1 more like this
Post by FD1000 on Mar 3, 2022 0:27:57 GMT
(www.mutualfundobserver.com/2022/03/the-case-for-a-stock-light-portfolio-version-4-0-2/)
Your financial adviser hates this article. They’ll explain that following a lower equity, lower volatility strategy will absolutely kill your long-term returns. Over 20 years, $1,000 earning 6% returns will grow to $3,200. Over the same time, $1,000 earning 12% will grow to $9,600. That’s vast. No argument.
Our argument is that if your investment horizon is not measured in decades, the risk-return calculus is vastly different. For a five-year horizon, for instance, the difference is a high certainty of $1300 (the equity-lite portfolio) and high uncertainty around a potential $1700 return (the equity-heavy portfolio).
......
Bottom line
Valuations in the US stock market, measured by the Shiller 10-year CAPE ratio, are at their second-highest level in over 150 years and climbing. As we note in this month’s Publisher’s Letter, more and more investors are taking more and more rash, perhaps irrational, and sometimes almost-laughable, actions. Many pundits and others paid to convince you to buy stocks see the coming Biden Bull, most especially in sectors that might benefit from reopening and government spending on green infrastructure.
You should hope they’re right, and plan your investments around the possibility that they’re wrong. In general, that might mean dialing down your exposure to equities (a portfolio with 30% equities has, historically, returned 7% annually), shortening by a bit your bond portfolio duration, adding some strategic cash to your holdings – just in case you encounter a sudden, dramatic sale – and looking beyond recent winners and stocks beloved by the day-trading crowd.
There are no guarantees but, on average and over time, slow and steady wins, risk-conscious wins, quality wins, dividends win. You should, too.
Your financial adviser hates this article. They’ll explain that following a lower equity, lower volatility strategy will absolutely kill your long-term returns. Over 20 years, $1,000 earning 6% returns will grow to $3,200. Over the same time, $1,000 earning 12% will grow to $9,600. That’s vast. No argument.
Our argument is that if your investment horizon is not measured in decades, the risk-return calculus is vastly different. For a five-year horizon, for instance, the difference is a high certainty of $1300 (the equity-lite portfolio) and high uncertainty around a potential $1700 return (the equity-heavy portfolio).
......
Bottom line
Valuations in the US stock market, measured by the Shiller 10-year CAPE ratio, are at their second-highest level in over 150 years and climbing. As we note in this month’s Publisher’s Letter, more and more investors are taking more and more rash, perhaps irrational, and sometimes almost-laughable, actions. Many pundits and others paid to convince you to buy stocks see the coming Biden Bull, most especially in sectors that might benefit from reopening and government spending on green infrastructure.
You should hope they’re right, and plan your investments around the possibility that they’re wrong. In general, that might mean dialing down your exposure to equities (a portfolio with 30% equities has, historically, returned 7% annually), shortening by a bit your bond portfolio duration, adding some strategic cash to your holdings – just in case you encounter a sudden, dramatic sale – and looking beyond recent winners and stocks beloved by the day-trading crowd.
There are no guarantees but, on average and over time, slow and steady wins, risk-conscious wins, quality wins, dividends win. You should, too.
