Also at least in theory, once you have higher risk adjusted returns, if you want more risk the solution might not be go all in equity (you might leave the efficient frontier).
If you believe in the principles behind risk parity and have somewhat uncorrelated assets, you’d actually leverage the lower risk assets to achieve equal risk distribution on the asset classes.
Indeed, I wish there was a CHF hedged, Futures based x2 Bond Fund with monthly re-balancing. Such product was awesome.
I always claim that in such a scenario you need a bunker and ammunition. What must have happened that it came to this?
Stocks don’t go to zero for real, and it can be averted by solution diversification:
Stocks don’t go to zero for real, and it can potentially be solved by fleeing:
Stocks actually go to zero, but so does about every other asset, except for guns and barter you can carry:
Can someone come up with a scenario that has stocks at or near zero, but not other investment assets?
Right. On a risk-adjusted basis you have superior returns and you might then also have the possibility to leverage the portfolio to have higher returns at the same risk.
I might also try to make a similar argument to the 100% stock folk and say that everybody should go 100% in on bitcoin as if you look at the history it has much superior returns than stocks…
You don’t even need to consider the doomsday scenario of 100% share wipeout. A run of the mill crash of 40%-60% can already be devastating and there are plenty of historical examples which show that it can be many decades before stocks recover from such crashes.
“But stocks always go up in the long term!” Oh, really? Do they? Do we really have enough history to conclude that? What are the underlying fundamental factors that lead to this phenomenon? If the factors are increasing population and a multi-decade secular decline in interest rates, then maybe stocks don’t always go up in the long term and certainly not necessarily in the short timespan between accumulation and retirement…
But certainly not risk-adjusted.
(And volatility alone is not risk)
Being 100% exposed to Bitcoin is currently like playing at a casino. Until tokens and their use are regulated, I’m not sure 100% exposure is very smart (except for a teenager or young adult, but for a responsible person, not recommended).
Have 5-10% exposure, but no more.
And it’s hard to compare the historical value of an asset with so little hindsight… (IMO)
Which is precisely the point I am trying to make with that analogous example. Too many people look only at the raw return without considering any other relevant factors, such as risk.
I think there are a few such black swan events (and of course there are always the unknown unknowns, who has expected a global pandemic before COVID?):
Not all of them would wipe out stocks completely, but they could lead to huge drops and other assets (like gold or bonds) may not be affected.
Once you have certain savings, lets say more than what you forecast to be able to save in the next 10 years; you should ensure that you don’t keep all eggs in one basked. I consciously called them once every 200-300 year events because trully (and as 0xLambda stated), these are in reality unknown unknowns.
Just a selection of some known unknowns (sorted from what I consider unlikely to extremely unlikely):
No matter what, it is in my view always a good idea to have at least some assets that survive a meltdown of the stock markets and/or the banking system. Remember that 80% of the people have nothing; so as long as the government keeps these people in an ok situation, they will in case of any drastic change have less reservations to let the remaining ones that hold assets lose part or all of it.
That isn’t that unlikely: Lex in depth: how investors are underpricing climate risks
The big danger is of a “climate Minsky moment”, the term for a sudden correction in asset values as investors simultaneously realise those values are unsustainable.
(can probably find non-paywall through archive.is)
Anyone who invested in Russia has seen their stocks effectively go to zero.
Country risk: you’ve seen confiscation, bail-ins, financial repression in various countries.
Another one might be the increase of the currency and the stock prices fall to partly account for this, but holders of cash/bonds would benefit.
For most people who are invested in Russian stocks (i.e. Russians themselves), things aren’t looking so bad actually.
Well, in nominal terms maybe not. Although having your currency dropping in value and not being able to convert it to buy useful things (and being conscripted and sent to die) might be considered to be looking a little bit bad.
For ‘non-friendly’ investors, liquidity is gone and your assets are frozen now with a high chance of being expropriated.
I’ve always been almost exclusively investend in the stock market with ETF and some selected “fun” stocks.
However, recently some bonds (notably several EU ones) are selling at such a discout that I’ve looked closer and bought some of those.
We’re talking about government bonds with moderate to high level of security (well, it remains quite implausible that Italian or Spanish governments are going bankrupt in the next 5 years), selling at around 55- 65% of nominal value, with rates around 2% /yr.
I mean, it’s clear that holding them until around 2050 might be worse than buying shares, but my idea is to enjoy the interests (which are quite nice, especially since I’ve bought them at a discount), and then, once interests rates and inflation lower, bonds value will rise and I’ll resell them for the added value.
What do you think about that? Might be a clearly better alternative to cash.
Cheers
Are you considering currency risk there?
Those “2%” might mean 0 or negative if you spend in CHF.
I think he means coupon of 2%. With obligations valued at 60% of nominal, yield to maturity should be 8-10% (yeah, in Euro). And the principal will also lose in value.
Well, markets are efficient and there are no free lunches. But it could be that the market for these bonds is dominated by short-term traders who expect more trouble ahead. If you think these worries are exaggerated and is ready to keep them until maturity, why not.
What would be EURCHF by then is another question.
