Comments on: Deciding the Trade-Off Between Volatility and Return http://allfinancialmatters.com/2007/04/12/deciding-the-trade-off-between-volatility-and-return/ A personal finance blog dedicated to discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance. Fri, 20 Nov 2009 19:56:44 -0800 http://wordpress.org/?v=abc hourly 1 By: AllFinancialMatters » Blog Archive » 100% Stocks vs. 90/10 Portfolio http://allfinancialmatters.com/2007/04/12/deciding-the-trade-off-between-volatility-and-return/comment-page-1/#comment-99790 AllFinancialMatters » Blog Archive » 100% Stocks vs. 90/10 Portfolio Wed, 25 Apr 2007 17:59:50 +0000 http://allfinancialmatters.com/?p=1709#comment-99790 [...] I have always been in agreement with myself that 100% stocks is the way to go when investing for the long haul, I mean afterall, over the long run stocks perform the best. Historically that’s true and in my mind the case was closed. That was until yesterday when I put together Deciding the Trade-Off Between Volatility and Return… [...] [...] I have always been in agreement with myself that 100% stocks is the way to go when investing for the long haul, I mean afterall, over the long run stocks perform the best. Historically that’s true and in my mind the case was closed. That was until yesterday when I put together Deciding the Trade-Off Between Volatility and Return… [...]

]]> By: Duane http://allfinancialmatters.com/2007/04/12/deciding-the-trade-off-between-volatility-and-return/comment-page-1/#comment-98159 Duane Tue, 17 Apr 2007 18:18:08 +0000 http://allfinancialmatters.com/?p=1709#comment-98159 As the person who instigated the discussion, thank you to everyone (and JLP in particular) for such a thorough investigation of my off-hand remark. As the person who instigated the discussion, thank you to everyone (and JLP in particular) for such a thorough investigation of my off-hand remark.

]]> By: Jeremy http://allfinancialmatters.com/2007/04/12/deciding-the-trade-off-between-volatility-and-return/comment-page-1/#comment-97055 Jeremy Fri, 13 Apr 2007 18:09:30 +0000 http://allfinancialmatters.com/?p=1709#comment-97055 Ahh, no problem, JLP. I didn't even think about the fact the data was from a paid resource. Thanks for the post though, I have always wondered what some hard data would prove in regards to this topic. Ahh, no problem, JLP. I didn’t even think about the fact the data was from a paid resource. Thanks for the post though, I have always wondered what some hard data would prove in regards to this topic.

]]> By: Rob http://allfinancialmatters.com/2007/04/12/deciding-the-trade-off-between-volatility-and-return/comment-page-1/#comment-97054 Rob Fri, 13 Apr 2007 17:53:45 +0000 http://allfinancialmatters.com/?p=1709#comment-97054 Don - looking only at the current decade skews the results because of the bubble that formed at the end of the last decade and burst at the beginning of this one. When the market is down then the more bonds you have will almost always be better. 100% bonds would have done better in the current decade than 90/10. Does this mean 100% bonds always has a better return for lower risk? No. There is no particular reason to look at the 6 year results that happen to make up the "current decade" as opposed to any other 6 year period. Those time periods are too short. The important part of the graph is the black part in the middle that shows the cumulative results over a really extended period. Don – looking only at the current decade skews the results because of the bubble that formed at the end of the last decade and burst at the beginning of this one. When the market is down then the more bonds you have will almost always be better. 100% bonds would have done better in the current decade than 90/10. Does this mean 100% bonds always has a better return for lower risk? No. There is no particular reason to look at the 6 year results that happen to make up the “current decade” as opposed to any other 6 year period. Those time periods are too short. The important part of the graph is the black part in the middle that shows the cumulative results over a really extended period.

]]> By: Savvy Steward http://allfinancialmatters.com/2007/04/12/deciding-the-trade-off-between-volatility-and-return/comment-page-1/#comment-97036 Savvy Steward Fri, 13 Apr 2007 15:53:47 +0000 http://allfinancialmatters.com/?p=1709#comment-97036 Here's a article over at Fund Advice that shows a table comparing returns/deviation based on what mix of stocks and bonds: http://www.fundadvice.com/fehtml/bhstrategies/9702/9702.html You can see the trade-off between volatility and performance. Here’s a article over at Fund Advice that shows a table comparing returns/deviation based on what mix of stocks and bonds:
http://www.fundadvice.com/fehtml/bhstrategies/9702/9702.html

You can see the trade-off between volatility and performance.

]]> By: No Credit Needed » Blog Archive » My Current Investments http://allfinancialmatters.com/2007/04/12/deciding-the-trade-off-between-volatility-and-return/comment-page-1/#comment-96950 No Credit Needed » Blog Archive » My Current Investments Fri, 13 Apr 2007 03:22:21 +0000 http://allfinancialmatters.com/?p=1709#comment-96950 [...] –My 403b funds are aggressively invested. I know this, I acknowledge this, and I am FINE with this. Why? My wife’s job provides her with a pension fund and will be our “safety” net. I have decided to be aggressive with my 403b in an effort to maximize my returns. (NCN “personal prediction sure to be wrong”: I think that the areas for growth in the next 5 years will be in international stocks and small cap stocks. I’m probably wrong, but this is what I “think”. Please note, I would NEVER, EVER suggest that ANYONE mistake my prediction for advice. The FASTEST way for you to go broke is to listen to what I have to say about investing! If you are looking for blogs by people who KNOW what they are talking about when they talk about investing, check out some of my personal finance blogging pals: Five Cent Nickel, My Money Blog, All Financial Matters, and Free Money Finance. Getting out of debt or trying to save for emergencies? I’m your man. Learning how to invest? Me, too!) [...] [...] –My 403b funds are aggressively invested. I know this, I acknowledge this, and I am FINE with this. Why? My wife’s job provides her with a pension fund and will be our “safety” net. I have decided to be aggressive with my 403b in an effort to maximize my returns. (NCN “personal prediction sure to be wrong”: I think that the areas for growth in the next 5 years will be in international stocks and small cap stocks. I’m probably wrong, but this is what I “think”. Please note, I would NEVER, EVER suggest that ANYONE mistake my prediction for advice. The FASTEST way for you to go broke is to listen to what I have to say about investing! If you are looking for blogs by people who KNOW what they are talking about when they talk about investing, check out some of my personal finance blogging pals: Five Cent Nickel, My Money Blog, All Financial Matters, and Free Money Finance. Getting out of debt or trying to save for emergencies? I’m your man. Learning how to invest? Me, too!) [...]

]]> By: Don http://allfinancialmatters.com/2007/04/12/deciding-the-trade-off-between-volatility-and-return/comment-page-1/#comment-96948 Don Fri, 13 Apr 2007 02:38:48 +0000 http://allfinancialmatters.com/?p=1709#comment-96948 Actually, according to your graph, the current decade so far is inverse to all of the others. In fact, adding some bonds to a stock portfolio both increases return and lowers risk. Actually, according to your graph, the current decade so far is inverse to all of the others. In fact, adding some bonds to a stock portfolio both increases return and lowers risk.

]]> By: Customers Revenge http://allfinancialmatters.com/2007/04/12/deciding-the-trade-off-between-volatility-and-return/comment-page-1/#comment-96936 Customers Revenge Fri, 13 Apr 2007 02:17:30 +0000 http://allfinancialmatters.com/?p=1709#comment-96936 Return is return, and risk is risk -> they are NOT related except that one would prefer to get paid more by taking more risk. The free market brings about a consistent "price" for risk. You can find a portfolio that contains the least amount or risk possible for any given return. If you choose to collect that same return but take on more risk than the minimum, by not diversifying for example, then you are dumb :) As probably everyone here knows there are different grades of bond risk too. Taking a risky bond would likely yield a higher return. Then there are essentially the risk free bonds of the government that are dirt low returns. Who knows what kinds of bonds make up the 90/10? Who knows what type of stocks either . . . Return is return, and risk is risk -> they are NOT related except that one would prefer to get paid more by taking more risk. The free market brings about a consistent “price” for risk. You can find a portfolio that contains the least amount or risk possible for any given return. If you choose to collect that same return but take on more risk than the minimum, by not diversifying for example, then you are dumb :)

As probably everyone here knows there are different grades of bond risk too. Taking a risky bond would likely yield a higher return. Then there are essentially the risk free bonds of the government that are dirt low returns. Who knows what kinds of bonds make up the 90/10? Who knows what type of stocks either . . .

]]> By: Jake http://allfinancialmatters.com/2007/04/12/deciding-the-trade-off-between-volatility-and-return/comment-page-1/#comment-96934 Jake Fri, 13 Apr 2007 02:13:18 +0000 http://allfinancialmatters.com/?p=1709#comment-96934 I don't know what I'm talking about but I have had a negative opinion of the lifecycle funds because I'd prefer to control the timing that I move from fund to fund. I have worried that these would end up timing the moves during a down cycle etc. Maybe they move a tiny bit at a time? so timing isn't as much of an issue? I don’t know what I’m talking about but I have had a negative opinion of the lifecycle funds because I’d prefer to control the timing that I move from fund to fund. I have worried that these would end up timing the moves during a down cycle etc.

Maybe they move a tiny bit at a time? so timing isn’t as much of an issue?

]]> By: Rob http://allfinancialmatters.com/2007/04/12/deciding-the-trade-off-between-volatility-and-return/comment-page-1/#comment-96913 Rob Fri, 13 Apr 2007 00:14:02 +0000 http://allfinancialmatters.com/?p=1709#comment-96913 Actually after I made the above post I had a nagging feeling that I had also read somewhere that you can actually increase your return for the same risk by diversifying. So I did a little internet searching and found what I was thinking about. There is a "90/10 rule" that lets you increase your return for the same or even LESS risk, but it is at the other end of the spectrum. You can actually add stocks to an all-bond portfolio and get this effect (i.e. a portfolio with 10% stocks can actually have a higher return with less risk than an all-bond portfolio). It is not true at the other end though. You can't reduce your risk without lowering your return by adding bonds to a stock portfolio (though you can make the portfolio more "efficient"). Here is a good explanation that shows graphs of the concept: http://www.bestmindsinc.com/documents/InefficientFrontier-0615-Final.pdf Actually after I made the above post I had a nagging feeling that I had also read somewhere that you can actually increase your return for the same risk by diversifying. So I did a little internet searching and found what I was thinking about. There is a “90/10 rule” that lets you increase your return for the same or even LESS risk, but it is at the other end of the spectrum. You can actually add stocks to an all-bond portfolio and get this effect (i.e. a portfolio with 10% stocks can actually have a higher return with less risk than an all-bond portfolio). It is not true at the other end though. You can’t reduce your risk without lowering your return by adding bonds to a stock portfolio (though you can make the portfolio more “efficient”). Here is a good explanation that shows graphs of the concept:

http://www.bestmindsinc.com/documents/InefficientFrontier-0615-Final.pdf

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