Given the volatility in equities and gold, what kind of asset
allocation strategy should one follow
First, as I write in the book, equities have always been volatile. Always! Nothing new about that. Gold too! Its just that in the longer term, equities have much better returns than gold. But theres nothing unique about volatility in the recent years well within normal historical ranges. In fact, volatility has steadily fallen since 2009s near-term peak.
But even that 2009 volatility high was perfectly normal. The farther you go back in history, on an average, the more volatility you see. Volatilitys all-time measurable peak was the 1930s. Before that, data wasnt good enough. But people always have thought recent times are more volatile than earlier. Its a basic human cognitive error. Theres no such thing as a silver-bullet, sure-fire correct asset allocation thats right for everyone.
Long-term strategic asset allocation should be driven by an individuals time horizon (i.e., how long they need the assets working for them), their long-term goals and objectives, their cash flow needs (if any), their current situation and a host of other factors, unique to them.
Since volatility is the biggest risk an investor faces, how should one minimise the risk
For some investors, it may be. For others, with a very long time horizon, opportunity cost is surely a bigger risk. Volatility is just one risk. Its one investors who tend to feel most keenly in the near term particularly myopic investors. But if you focus solely on volatility risk, you expose yourself to a whole host of other risks and may end up with much worse results.
In The Little Book of Market Myths, I discuss some of the other key risks investors often overlook. One is opportunity cost the risk of giving up superior long-term returns because youre too hyper-focused on the near term.
Opportunity cost is particularly tough because its effects may not be felt for a long time when it is, it may be too late to do anything about it. Also, all times are volatile, some more so than others. But volatility is a right and normal part of capital markets.
There are many ways to minimise risk in the near-time, but the bigger question is: Is it appropriate to minimise volatility By minimising volatility, are you decreasing the likelihood that you will achieve your long-term goals Investors tend to think of volatility as a downside. Its not! Volatility goes both ways you cant get upside volatility without downside. If you minimise all near-term volatility, you likely also minimise long-term returns, and most folks probably dont want that.
Is investing becoming more about probabilities and not about certainties
No. Investing has never been about certainties. Investing has always been about probabilities. There are not now, never have been and never will be any certainties in investing. Anyone telling you otherwise is probably trying to sell you something very bad for you.
While selecting stocks, what are the five important factors an investor should keep in mind
Ill give you three. Anytime you make any investing move, ask these three questions:
1.What do I believe thats actually wrong 2.What can I fathom that most people cant 3.What is my brain doing to mess me up Ask those three questions and answer them, truthfully. Do that, and overall and, on average, youll see the world more clearly. That alone should lower your error rate over time and improve your results.
Can you really have capital preservation and growth at the same time
Never. If someone sells it to you, take your money and run. To get growth, you must have some level of volatility. To do true capital preservation, you must avoid all volatility. The two goals are utterly at odds. Now, if you have long-term growth as a goal and have a well-diversified strategy and the discipline to stick with it, over time, your portfolio will grow.
Twenty years later, your portfolio may have doubled 2-3 times! That would be normal. And because your portfolio grew, you also preserved your capital.
But that capital preservation was the long-term result of following a long-term growth goal. But you simply cannot pursue growth and capital preservation as twin goals at the same time.
Since longevity is increasing, how can one ensure enough cash flow to fund retirement
For investors with long-time horizons and if longevity is
increasing, then by definition, time horizon is increasing too the best way to increase the odds of having sufficient cash flow is to have a portfolio that can grow long-term.
To do that, you need some amount of stocks.
How much will depend on those other factors I mentionedtime horizon, goals, current situation, other unique factors. But folks have a hard time with this. No similarly liquid asset class is likely to yield as good returns over time as stocks.
If you want a portfolio that can last, long term, and kick
off an appropriate level of cash flow, some amount of stocks must be part of the plan. Probably more than most think.