In another thread, we have been discussing why the recommended stock/bond splits for average investors have been much more aggressive these days, as opposed to 30 years ago. Vanguard’s Target Date Funds now hold 90% stocks for many years until into older age. Authors like Burton Malkiel continue to increase the stock allocation in their recommended portfolios with each edition. For a 30’s/40’s age investor, 65% stocks was recommended in 1990 by him. That advice has now risen to almost fully in stocks I believe.
Many answers came in across the board from Bogleheads. Recency bias, longer life spans, short memories, bond risks not previously understood, a long period of low interest rates, etc.
But one answer (from Founding Father) really made me stop in my tracks. I had not heard anyone say this before. He said that it’s possible that stocks are less risky now than they used to be.
He attributed this to the amazing advancement of index funds. The fact that we can diversify globally across thousands and thousands of stocks means that the worry of a portfolio collapse is reduced.
Is there any data or evidence to support this idea? Is an indexer who is fully diversified still facing the same downside risks as many years ago when you held mutual funds with many less securities perhaps?
EDIT: A smart comment below; someone asked for “risk” to be defined. I think perhaps a better word for this conversation might be “volatile” and really looking at investors’ risk tolerance for drawdowns and bear markets…and determining if that has changed over the years, or is it true that stocks and the method of investing in stocks have changed the volatility expectations.
Thank you Founding Father for bringing this point up for debate. I am truly excited to see what the forum will say.
Many answers came in across the board from Bogleheads. Recency bias, longer life spans, short memories, bond risks not previously understood, a long period of low interest rates, etc.
But one answer (from Founding Father) really made me stop in my tracks. I had not heard anyone say this before. He said that it’s possible that stocks are less risky now than they used to be.
He attributed this to the amazing advancement of index funds. The fact that we can diversify globally across thousands and thousands of stocks means that the worry of a portfolio collapse is reduced.
Is there any data or evidence to support this idea? Is an indexer who is fully diversified still facing the same downside risks as many years ago when you held mutual funds with many less securities perhaps?
EDIT: A smart comment below; someone asked for “risk” to be defined. I think perhaps a better word for this conversation might be “volatile” and really looking at investors’ risk tolerance for drawdowns and bear markets…and determining if that has changed over the years, or is it true that stocks and the method of investing in stocks have changed the volatility expectations.
Thank you Founding Father for bringing this point up for debate. I am truly excited to see what the forum will say.
Statistics: Posted by TrustTheMarket — Thu Jan 23, 2025 2:24 pm — Replies 17 — Views 950