Any portfolio committed 100% to two or more asset classes is by definition NOT an insurance policy against catastrophic failure since each investment carries all of the risks required by law in the investment statement. You should read your investment statements if you disagree with my response.My full quote was pretty clear.That's not true in general nor helpful to someone without more than enough assets to secure enough assets.A low catastrophic failure rate is not an insurance policy against catastrophic failure; an appropriately diversified portfolio is.
Diversified portfolios run the risk of failure. I can take my 50/20/20/10 US stock/ international stock/ fixed income / emerging market portfolio and find scenarios where 100% US stocks survives and my portfolio does not. I can find the longevity case or the more probable unexpected expenses case where 40x expenses in TIPS means running out of money.
We almost always trade expected returns for diversification and there is not a clear winner in advance. We can typically only secure some of the poor scenarios with diversification and in doing so we still add some new failure cases. Our goals should be first to secure enough resources and then to add diversification when and if we can afford to do so. We typically don't know which diversifiers will help the most and all we can do is make an educated guess on whether we need gold, commodities, REITS, bonds, factors, etc in our portfolio and to what extent to hold each of these. History tells us we are usually fighting the last battle and that even diversification may end up being be a zero sum game.
There are no guarantees.
Calculating FI on the basis of today's markets (which is what we are really talking about, after all) is a pretty risky assumption and start point. ie. Even the base premise here...that OP currently has more than enough assets (which could be true!)...is not certain if that conclusion is based on the total paper value dollar amount currently flashing in the window pane of one's brokerage account.
Compounding that risky assumption by, additionally, taking any current and future funds that OP currently feels are "more than enough" and placing those funds in "100% stocks" based on the thinking that equities over the long term horizon have had a low failure rate means doubling down on the first assumption. That double whammy puts a significant amount of future consumption at risk.
It's not unhelpful to point that out. Wouldn't a fiduciary be obligated to say pretty much the same thing, or at least call out the risks involved in going 100% equities?
While there are no guarantees, the claim that an appropriately diversified portfolio represents an insurance policy to help account for the spectrum of risks faced by a retirement saver planning lifetime consumption is not a controversial statement. It's one of the Five Things that Kenneth French listed in "Five Things that I Know about Investing."
Any portfolio committed 100% to one asset class is by definition NOT an insurance policy against catastrophic failure since it's pretty much inviting a fail state in that one asset class to topple one's whole retirement plan.
Appropriately diversified asset allocations, coupled with a strong savings rate and smart monthly budgeting may not result in a "winning" portfolio if the focus is on piling paper returns into virtual pyramids; but that basic and proven approach is the best one available to retail investors planning for their own individual long term horizons.
Statistics: Posted by abc132 — Mon Mar 25, 2024 11:19 am — Replies 78 — Views 8890