Here's a quote that Idea Farm attributed to Jeremy Grantham, “the only thing that really matters in asset allocation is sidestepping some of the pain when the rare, great bubbles break.” We've been saying essentially the same thing here since before the financial crisis, framing it as trying to avoid the full brunt of large declines.
A couple of quarters ago, I put the following chart into the update I sent out to clients.
The blue line is not a realistic outcome, it's cherry picked with no reasonable expectation that it would continue going forward but as an extreme example of the concept, it explains Grantham's (and mine) point.
Some of the declines for the red line have been brutal. The green boxes show periods where the blue line portfolio lagged by a mile and half. Sort of making numbers up, would you rather have a very smooth ride like the blue line to a compounded return of 7.5% or go on the red line rollercoaster to a compounded return of 8.5%? The difference between the two is risk adjusted return.
Short one tonight.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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