jvini wrote: ↑Thu May 28, 2020 3:53 pm
Thank you all. I suppose they took the average rise and fall over a certain period to get that number. I really don't know. I'm happy sticking with my 60/40 ratio and rebalancing but was curious how that correlation was arrived at.
here's something else to think about mathwise. People think they'll lose less money as they take a more conservative approach with age. This may be true in percentage terms, but is not likely in dollar amounts. I.E. the reality is, as one's portfolio grows over time, the dollars lost will increase even though the percentage losses (amount of risk) would decrease if you choose less risk over time.
Failing to understand that, will result in panicking each and every time declines come. Because the dollar losses will be larger as the portfolio grows (even if you take less risk).
And I think people panic more because they say "I lost X dollars!!", not "I lost 20%!"
So, understanding that you're risking losing more dollars later on, even though the percentage will be less (if you take less risk) is crucial to be a good investor.
For those who don't understand this, here's the scenario:
You're in your 20s, contributing to 401k, getting employer match, reinvesting dividends, getting growth on investment.
You're 100% in stock because you have the need, ability and willingness to take risk.
You're portfolio has grown to $50,000.
The stock market falls 30%
What's the dollar loss? $15,000.
(.30 X $50,000 = $15,000)
You stay the course and keep investing over the next few decades.
You're in retirement now.
Your portfolio has grown over the decades to $500,000 (10X the size it was in your 20s. Yes, you hopefully would have a million or more, but just go with me)
But since you're in retirement you can't take the risk you did in your 20s. So now you have 30% of your money in stock. The rest in fixed income.
The stock market now falls 30% (just like it did in your 20s).
What is your percentage loss now? (it's not 30%, you'd have to have 100% invested like in your 20s to lose 30%. But since you only have 30% in stocks, if the 30% in stocks loses 30%...)
You'd have a 9% loss (.30 X .30 = .09 or 9%)
But what's the dollar loss?
$45,000 (.09 X $500,000 = $45,000).
You now lost 3 times the amount (of dollars) you did as when you were in your 20s.
But you only took a third of the risk as you did in your 20s. (30% stock is a third roughly of 100% stock)
See how you will have to get used to larger and larger dollar losses...even if your portfolio gets less and less risky as time goes on?
Of course, you'd rather have 91% of your portfolio remaining (in the example above) than 70% (in the example in your 20s). But do people really say, "Whew. I've got 91% of my portfolio left!" No, they say, "I lost $45,000!!"
Do you think the average investor is really, truly aware of this? I don't.