staythecourse wrote:surprised I am the first to ask what "risk aversion" means??
To me Risk Aversion refers to how your stomach feels when your portfolio drops significantly and how you are most likely to behave. If it frustrates you, you dwell on "I wish I 'rebalanced' sooner," you worry a lot about what's next, or you shift your AA away from the underperforming asset class in response, you're risk averse. If you take a robotic approach, "Honey, our net worth has dropped by 42% in the past 3 months but statistically speaking this is completely normal..." or you get a secret excitement by losing money because it's a buying/rebalancing opportunity, and you do rebalance or even shift your AA to overweight the underperforming asset class you're not risk averse.
This where I differ. I don't see short term volatility as risk. I see not having enough money when I need to draw off my investments to live off as risk. Roger Gibson in his excellent book "Asset Allocation" talks about in the end there are only 2 types of real risk. The short run (volatility) and long run (inflation risk). When you invest one is weighing one vs. the other. By increase certain assets (principle stable vs. volatile) they are decreasing one risk BUT AT THE SAME TIME increasing the other.
So back to my original point is what is RISK for the long term investor?? Having a pit in my stomach is not risk as I am concerned in the accumulation phase. Now if I was retired and reverse DCA or got canned and had to start early withdrawals that is a different story.
If one has a steady job (teacher, government worker, doctor, etc...), high EF, no need for liquidity, and a long time horizon what is real risk?? I don't think one year of dropping 50% is risk. I think not having enough money to retire is risk (this is not even talking about folks living longer and more active lifestyles then ever before requiring more money to live off).
Just some stuff to think about.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle