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* The future is unknowable * Compounding interest is how investing works
Early in your investing life there is no chance of much danger, as the balances are small and relatively benign in how much damage they can do to your life overall. So we might as well take all the risks we can.
As we approach retirement, especially that last decade or so is when all the real gains happen. with 6% growth your money will double in 13 years. So that last doubling will be HUGE for your retirement income as you go to retire. This leads to discussing volatility.
If we are invested 100% in equities, say a nice boring total stock market index(like VT), we will notice that history teaches us we can have a decade of terrible or no growth, but that is usually followed by tremendous growth of double digit % real growth.
So we need to keep our sustained growth rate nice and awesome forever. How do we do that?
Diversification across all asset classes.
So how about we just buy every asset class at "global market cap rate". i.e. we just buy a piece of everything, so that when X does well, we own some. when Y does well, we own some.
- Stocks (TSM fund, or go nuts with different sector break downs)
- Bonds (either TBM or just buy TIPS)
- Gold/precious metals (IAU or GLD, but IAU is cheaper) Also Miners see RING and SLVP
- Commodities (GSG/DBC) DBC seems to do better despite being slightly more expensive
- Art (not investable, since no ETF's exist and diversification really matters here)
- Real Estate (REIT's are part of a TSM fund, maybe not worth buying separately, unless you stop buying TSM)
- Cash (i.e. global currencies)
Global Market Cap In billions
Stocks: 89,475 Gold/Silver 10,935 Cash 6,662 Savings 95,698 Bonds 252,600 Real Estate 280,600 Commodities/Deriviatives 11,600
The professional "active investors" generally lose money after fees are taken into account:
"When performance is measured using before-fee model alphas and compared across the cross-sectional distribution, any active fund performance advantage is substantially less than one would conclude from benchmarking to average index fund performance. Moreover, any advantage of the top active managers over the top index funds is much less than the advantage of the worst index funds over the worst active funds. When performance accounts for residual risk, active funds no longer outperform index funds. " -https://www.cambridge.org/core/services/aop-cambridge-core/content/view/F025DBD6823F2948F6119050E95DA457/S0022109017000904a.pdf/passive_versus_active_fund_performance_do_index_funds_have_skill.pdf
JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS Vol. 53, No. 1, Feb. 2018, pp. 33–64 COPYRIGHT 2018, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195doi:10.1017/S0022109017000904 Passive versus Active Fund Performance: Do Index Funds Have Skill? Alan D.Crane and Kevin Crotty