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The Two Most Important Money Management Risks
By JLP | May 2, 2006
I have been both blogging and reading on the topic of asset allocation lately. I’m mostly doing because some other personal finance bloggers are asking questions about it (Claire at TiredButHappy and Jane Dough at Boston Gal’s Open Wallet). Anyway, this evening I was reading Roger Gibson’s excellent primer on asset allocation called Simple Asset Allocation Strategies
In the book, the author talks about the two most important money management risks:
1. Inflation – which really hurts interest-generating investments.
and
2. Volatility – most pronounced in equity (stocks) investments .
He then goes on to make an excellent point when he says:
Given the higher returns produced by equity investments, one could conclude that investors have greater fear of stock market volatility than they have of inflation.
He believes, and I agree, that most people are overly concerned with the volatility of common stocks and underconcerned with the damaging effects of inflation. Why is this? Well, for one, inflation takes its toll little by little over the years and most people do not look at the inflation-adjusted returns on their interest-generating investments. People still look back on the early 80′s as a great time period because they were earning 10 – 11 percent on Treasury bills. They forget the fact that inflation was running at 12 – 13 percent.
Anyway, I thought those observations were worth mentioning. When it comes to investing and asset allocation, it is important to understand just what your risks are. I’ll be writing more on this later.
Topics: Asset Allocation, Books | 1 Comment »
November 5th, 2006 at 5:17 pm
How would asset allocation change by age? I’d be interested in seeing model portfolios for someone who has retired and how the asset classes would differ from someone still working.