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an answer to the question of avoiding the big six

The last section, on risk, is fascinating to contemplate; want to see braham and msf weigh in --- is the arg really in favor of equal weighting, or just stick with the winner-bias approach?


  • msf
    edited October 2020
    It's the usual academic argument. One considers volatility not really because it is "risk" but because with leveraging (or deleveraging, i.e. underweighting) one can achieve virtually identical results using any investment having a given "risk adjusted" rate of return.

    I've previously quoted John Rekenthaler on this subject:
    [A]lthough academic theory states that performance should be risk-adjusted, investors tend to pay greater attention to unadjusted returns--not without reason. Academic theory assumes the use of leverage, but few mutual fund owners will ever borrow to purchase more shares. They therefore may be pardoned for favoring the bottom line...

    My question for investors remains: if you're not thinking about leveraging, why do you care about the volatility of an investment you won't touch for a decade or more? Why does it matter to you the path it follows to the same end result?

    Jeff Ptak's take: "The saying is true: You really can't eat risk-adjusted returns. But it appears that higher risk-adjusted performers are easier for investors to use."

    Buffett's take: "Charlie and I would much rather earn a lumpy 15% over time than a smooth 12%. (After all, our earnings swing wildly on a daily and weekly basis - why should we demand that smoothness accompany each orbit that the earth makes of the sun?)".
  • Don't want to get off on a tangent, but a quick side opinion....if a professional ChFA with 30 years of experience managing millions with a large staff of assistants and networks of peers with unlimited resources cannot beat the SP500 over long periods of time, why do individuals with limited resources believe they can? The greatest advantage an investor has is to have a budget to asset ratio that allows him to not be forced to compete against the SPY benchmark. Survival is the top priority IMHO. Some of these professional PM's are even benchmarked by sector.
  • Volatility has been a big part of my style since 2000. Since retirement in 2018 it's a huge part of style.
    Volatility/Risk isn't that important for young accumulators but retirees who have enough money to sustain their lifestyle to death have the ability to select lower volatility portfolio to suite their sleep well at night goal.

    I can't find a combo of funds that meet my goals of making 6+% average annually, SD < 3, be positive every year, never lose 3% from any last top and why I will continue to use my style.
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