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...I don't buy bonds A lot of people would argue that even for a young person a portfolio with a small bond allocation is actually less risky with higher retur

by bradshaw1965 16y ago

...I don't buy bonds A lot of people would argue that even for a young person a portfolio with a small bond allocation is actually less risky with higher returns then a 100% allocation to stocks.

arthurdent 16y ago
1. a lot of people argue for things without backing it up. 2. it depends what you mean by "risk". arguments claiming bond allocation in your portfolio are less "risky" describe risk as "volatility of returns", which in finance are measured over shorter intervals than 40 years. patrick is specifically accepting short term volatility in return for the higher EV of returns. the marketplace prices debt instruments (especially US treasury issued) over the long term with cheaper expectations for returns specifically because it has lower variance of returns.
- bradshaw1965 16y ago
  So why not move even further up the risk chain to all Emerging Markets or invest at greater then 100% equity by using leverage? Fact is, adding a small amount of fixed income investments smooths investment returns and has very little effect on total return whether you accept standard deviation variance as a measure of "risk" or not.
seanos 16y ago
Actually, expected returns will be slightly lower but well worth it as the reduction in risk from the diversication away from 100% equities is huge. E.g. 20% in bonds will barely diminish expected returns whilst significantly reducing your overall risk.
- j0 16y ago
  Not always true, According to WSJ http://blogs.wsj.com/marketbeat/2011/02/07/depressing-chart-of-the-day-stocks-vs-treasurys/ http://blogs.wsj.com/marketbeat/2011/02/07/depressing-chart-... "Through the close of trading Monday, the investors in 7-10 year Treasurys would have seen a return of 76% percent over the last 10 years, versus a return of 17.4% for stocks. So you could have socked your money in supersafe U.S. Treasurys and reaped a risk-free 80% gain. "
Bootvis 16y ago
For young people financial theory advises against investing excess capital in bonds and for investing in stocks[1]. The idea is that in the long run stocks have a higher return then bonds and the volatility doesn't matter much (agian this applies only to excess capital). If your portfolio does go south, you've plenty of time to earn some extra income and if things go up you can hit a home run. In practice people tend to increase their relative holdings in stocks, this is highly risky since it's much harder to make up losses and the end of your working life. For me: Where I live a special accounts for retirment do not exist so I don't have an opinion on those. The excess cash I'm now started earn will be invested in simple ETF's. They provide good diversification for a small price. [1] So good for you!

...I don't buy bonds A lot of people would argue that even for a young person a portfolio with a small bond allocation is actually less risky with higher returns then a 100% allocation to stocks.

arthurdent 16y ago

1. a lot of people argue for things without backing it up. 2. it depends what you mean by "risk". arguments claiming bond allocation in your portfolio are less "risky" describe risk as "volatility of returns", which in finance are measured over shorter intervals than 40 years. patrick is specifically accepting short term volatility in return for the higher EV of returns. the marketplace prices debt instruments (especially US treasury issued) over the long term with cheaper expectations for returns specifically because it has lower variance of returns.

bradshaw1965 16y ago
So why not move even further up the risk chain to all Emerging Markets or invest at greater then 100% equity by using leverage? Fact is, adding a small amount of fixed income investments smooths investment returns and has very little effect on total return whether you accept standard deviation variance as a measure of "risk" or not.

seanos 16y ago

Actually, expected returns will be slightly lower but well worth it as the reduction in risk from the diversication away from 100% equities is huge. E.g. 20% in bonds will barely diminish expected returns whilst significantly reducing your overall risk.

j0 16y ago
Not always true, According to WSJ http://blogs.wsj.com/marketbeat/2011/02/07/depressing-chart-of-the-day-stocks-vs-treasurys/ http://blogs.wsj.com/marketbeat/2011/02/07/depressing-chart-... "Through the close of trading Monday, the investors in 7-10 year Treasurys would have seen a return of 76% percent over the last 10 years, versus a return of 17.4% for stocks. So you could have socked your money in supersafe U.S. Treasurys and reaped a risk-free 80% gain. "

Bootvis 16y ago

For young people financial theory advises against investing excess capital in bonds and for investing in stocks[1]. The idea is that in the long run stocks have a higher return then bonds and the volatility doesn't matter much (agian this applies only to excess capital). If your portfolio does go south, you've plenty of time to earn some extra income and if things go up you can hit a home run. In practice people tend to increase their relative holdings in stocks, this is highly risky since it's much harder to make up losses and the end of your working life. For me: Where I live a special accounts for retirment do not exist so I don't have an opinion on those. The excess cash I'm now started earn will be invested in simple ETF's. They provide good diversification for a small price. [1] So good for you!