FYI: During three separate interviews this week I was asked if I was seeing any signs of complacency among investors, markets, or clients.
If anything, the people I talk to are more concerned with the high probability of lower market returns in the future but my view is surely clouded by the clientele and readers I deal with on a regular basis.
Whether my sample size is representative or not, measuring market sentiment is getting harder and harder these days. Everyone now has a megaphone to voice their opinions — social media, blogs, 24-hour financial television, podcasts, conferences, magazines, financial news websites, etc.
Regards,
Ted
http://awealthofcommonsense.com/2017/12/what-a-complacent-investor-looks-like/
Comments
Like it or not, volatility is a characteristic of markets. It does change, sometimes dramatically, over various periods, but the historical record tells the basic truth. In very gross terms, annual equity standard deviation is approximately double annual returns. That's not likely to change, so investors must accept that as the uncertainties of expected returns.
Variability always exists. The arithmetic average return will always be larger than the geometric return. That disparity grows as return standard deviation increases. The geometric average return Includes a correction for Standard Deviation. The geometric return is what determines your end wealth. The equation tells the story.
The approximate equation is: Expected Return equals Average Return minus 1/2 times the standard deviation squared.
Therefore, I take issue with Ben Carlson's closing statement. Portfolio volatility matters; it is your enemy. Portfolio Standard Deviation directly impacts long term returns in a negative way. That's why we work hard to select portfolio components that hopefully reduce our portfolio's volatility.
Carlson is a terrific financial writer. In this instance, he was not representing a viewpoint from an individual investor's portfolio perspective.
Best wishes on accomplishing that target goal.
Look at volatility as a source of opportunity, not something to be afraid of.
Also for visual reasons I linked this chart of historical yearly returns and Volatility of the S&P500. Volatility changes the spread or range of returns which is not always a negative enemy of your portfolio:
Thanks for reading my post and for the excellent, informative graph that you included in your reply.
I did read the article referenced, and I would say that the line you quoted is not unconditionally correct. It depends. It depends on the specific circumstances of the individual investor. If he is adding to his portfolio, market volatility is surely an "opportunity". But if the investor is in retirement and mostly using his portfolio as one source of income, volatility can be frightening.
The approximate equation that I quoted really does tell the story. Volatility does indeed operate to reduce net portfolio wealth over years below annual average return. The higher the volatility, the quicker and more forceful is that negative impact. And it's always negative.
Give it a test by running a few what-if possible cases. A couple of years of possible what-ifs will demonstrate the wisdom in that simple equation. Of course you will tire of this exercise after a few samples so the proof will be incomplete. However, I hope it will be sufficient to reinforce the validity of the questioned equation.
Thank you once again. Good luck good investing.
OJ
1. Satisfied with the current situation and unconcerned with changing it, often to the point of smugness
2. Eager to please
https://www.thefreedictionary.com/complacent
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