How risky is the stock market for investors who are focused on the long-term real spending their wealth can support, rather than the present value of their wealth?
It’s easy to overlook the fact that, in thinking about investment risk, we are implicitly making a choice about the benchmark against which risk is measured.
If you put $100,000 of your savings into Bitcoin at the end of 2020 and are still holding those coins today, you’d be down 20% on your investment. But, if you'd used that $100,000 to short Bitcoin, you’d have suffered a loss too. How is this possible?
Yale Professor Robert Shiller’s Cyclically Adjusted Price-to-Earnings ratio (CAPE) is a respectable predictor of the future real return of the stock market, but it underwhelms when used on its own to set stock exposure. We examine a better way of using CAPE, with much better results.
In general, the more optimistic we are on the prospects of an investment, the more of it we’ll want to own. However, at extreme levels of bullishness, the normal relationship can be turned on its head and it can make sense to own less of an asset the more we like it.
We provide a practical definition of the ideal personalized risk-free asset, and then we’ll discuss how to construct an efficient portfolio when that ideal asset doesn’t exist in investable form.
The top ten stocks in the S&P500 add up to 27% of the index. Is that a problem?