Hi Dan.
I bought and read the AAII book Dan cites, and I have to say that I agree with more points than I disagree with, but I won’t fully adopt his strategy. Just as I do here, I try and identify strategies that will make me a better investor while simultaneously fitting well with my temperament.
I think a key point of the author’s – that Dan touched on – is that most financial professionals equate volatility and risk. To minimize volatility, they suggest that you diversify into asset classes that are poorly-correlated with domestic stocks, but offer diminished historical returns (I seem to recall that Saul endearingly calls the most representative of those asset classes “certificates of confiscation”). The AAII author claims that volatility is not the enemy – subpar returns over long time periods is. And that the real risk is failure to meet your financial goals because subpar returns hold you back.
I agree with this and would encourage board participants to contemplate it. That is why – outside of a relatively small cash position – I am 100% in equities (a mix of domestic and international). But it really requires a certain temperament to execute such a strategy. I’ll readily admit that I blew it during the brief crash of 1987. But I learned my lesson and did not panic during the tech/telecom crisis or the financial crisis. The last eight years have been pretty amazing, but I think I still recognize that I’ll have to suffer through a few more crises in my life (should I be lucky to live so long), and that panic was counter-productive while sticking with the plan was quite beneficial, once the short-term pain subsided. If you can develop the temperament to stick with a very large equity allocation, you’ll have some REALLY bad years. But you’ll also reach your financial goals sooner than you would have otherwise.
I think the AAII author is on the right track in identifying the true nature of risk in investing. I credit Dan for bringing it to our attention. And I urge board participants to contemplate risk and volatility, and come to their own conclusions about where they appropriately overlap and diverge.
Thanks and best wishes,
TMFDatabaseBob (long: I’m a lifetime AAII member, having purchased that right in the early '80s; these days, The Motley Fool influences my financial thinking more than AAII does, but I still have some respect for the AAII approach to things)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
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