Burton Malkiel, author of A Random Walk Down Wall Street
, describes himself as "one who has been smitten with the gambling urge since birth." I do not know whether Professor Siegel has ever commented on his own risk tolerance, but I think it is reasonable to surmise that people are attracted to the investment world because
they a personal taste for risk. Thus, they are apt to be at the aggressive end of the risk tolerance spectrum, and to have "decreasing relative risk aversion." That is, they react to increased wealth by saying "Great! Now I can afford
to gamble a bit," as opposed to people who say "Great! Now that I've won the game, I'll stop playing."
Knowing Siegel's constant cheerleading for stocks and, for at least the last three years, repeatedly crying "wolf!" about bonds, I assume that his personal investment allocation is 100% stocks.
I do not think there can be any serious question that his 1/3, 1/3, 1/3 allocation involves distinctly more risk than a 100% U. S. stock allocation. The additional risks of international investing in general and emerging markets in particular are acknowledged in every prospectus, and Vanguard puts their international funds in risk potential category 5, whereas Total [U.S.] Stock Market Index is in category 4.
Certainly, a sane person could judge that it is a calculated risk and that they are willing to take it in order to increase their chances of reward. As for diversification, it might make the total risk of the portfolio less risky than the sum of the risk of its parts
, but it is not credible that the diversification effect would make such a portfolio safer
; I am sure Professor Siegel did not claim that. Even the most casual glance at the behavior of Vanguard Total Stock
, Total World
, [International] Developed Markets
, and Emerging Markets
during 2008-2009 makes this clear. The global diversification of the Total World fund did not reduce the size of the drop, and overweighting Emerging Markets would only have made things worse.
It's not a huge amount
of extra risk, but it's more risk, not less. It may well have a better reward-for-risk relationship, but, again, it is more risk, not less.
In short, Professor Siegel's portfolio sounds quite suitable for someone with a secure tenured academic job, probably a decent chunk of wealth from royalties and his consulting at WisdomTree, and decreasing relative risk aversion."
DId he say that it was a suitable model for everyone?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.