Section 5.2

Asset Class Risk

Much of the academic work on risk uses a definition that focuses on money and the market value of goods.  We want to use an expanded definition that includes such things as health, joy, pain, duration of life, how well you sleep, and the so forth.

Note that different types of stocks are classified in different risk categories.  Not all stocks behave the same in your portfolio.  Of course, we can make some important generalizations.  As an asset class, stocks are riskier than bonds, and investors require a better rate of return to take on that risk.  If stocks did not make your money than bonds, you wouldn’t take on the extra risk.  You’d just buy bonds.  Given the length of the present bull market, it is not likely that the returns on stocks will be nearly as profitable as they have in the past.

It is important to note that paying someone to pick stocks (and other assets) for you is an expensive prospect, and all of the academic research agrees that once fees and expenses are taken into account, you are much better off using an index investing strategy.  Index funds should have very low fees and expenses, and those savings enjoy the magic of compounding over the years.  Investment firms are keen to attract customers and their assets, and they go to great lengths to offer whatever product you want to buy (almost).  If you can find an index to track, you can likely find a mutual fund to track it.  We will spend a lot of time on picking assets and how to allocate them in your portfolio in later sections (I will also provide some examples of high-quality funds that meet my low-cost requirements).


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Last Updated: 6/25/2018