Staying safe costlier than living with risk.
Posted: July 21st, 2021, 2:45 pm
An interesting article in today's FT with the above headline.
A couple of snippets: a simple 60/40 stocks/bonds portfolio underperformed the S&P 500 alone by over 250% cumulatively over the past 25 years. The author claims the cure is worse than the disease often with hidden costs. Interventions against looming market crashes ultimately lead to lower compound returns than those crashes would have cost them. Markets have scared us far more than they have harmed us.
The author makes interesting observations but, to my mind, makes the usual omission of a key determinant in such articles. Our personalities and perception of risk encourage us to find comfort in certain strategies and not others. It is not solely logic. Emotion plays a major part. We are each of us placed somewhere on a continuum from one extreme of fear to the other. As a result we will see merit in different approaches. Is this confirmation bias?
I know these are complex matters and you can probably prove almost anything with selective timing and asset combinations. It seems there are very many possible permutations leading to understandable confusion. Occasionally on this forum we see strategies repeated in mind-boggling detail as though justifying a fact of life. There is no perfect solution though it is only human to want to find one. We only have frequently disconnected past events on which to base a strategy. We have no absolute facts about the future, only probabilities.
For example, I am personally towards one end of the spectrum compared to a friend who inherited a fortune but trawls supermarkets to save pennies and drives second-hand clapped-out bangers. Owning even one share would fill him with terror. Everyone else is somewhere between the extremes and will view and justify investment tactics accordingly.
What I would prefer to see is strategies that openly admit the precarious nature of assumptions about the future and offer a small range of solutions to cater for different personalities.
TP2
A couple of snippets: a simple 60/40 stocks/bonds portfolio underperformed the S&P 500 alone by over 250% cumulatively over the past 25 years. The author claims the cure is worse than the disease often with hidden costs. Interventions against looming market crashes ultimately lead to lower compound returns than those crashes would have cost them. Markets have scared us far more than they have harmed us.
The author makes interesting observations but, to my mind, makes the usual omission of a key determinant in such articles. Our personalities and perception of risk encourage us to find comfort in certain strategies and not others. It is not solely logic. Emotion plays a major part. We are each of us placed somewhere on a continuum from one extreme of fear to the other. As a result we will see merit in different approaches. Is this confirmation bias?
I know these are complex matters and you can probably prove almost anything with selective timing and asset combinations. It seems there are very many possible permutations leading to understandable confusion. Occasionally on this forum we see strategies repeated in mind-boggling detail as though justifying a fact of life. There is no perfect solution though it is only human to want to find one. We only have frequently disconnected past events on which to base a strategy. We have no absolute facts about the future, only probabilities.
For example, I am personally towards one end of the spectrum compared to a friend who inherited a fortune but trawls supermarkets to save pennies and drives second-hand clapped-out bangers. Owning even one share would fill him with terror. Everyone else is somewhere between the extremes and will view and justify investment tactics accordingly.
What I would prefer to see is strategies that openly admit the precarious nature of assumptions about the future and offer a small range of solutions to cater for different personalities.
TP2