I have been letting lots of people know about my article reporting on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia.
Yesterday’s blog entry reported on my correspondence with Economics Professor Valeriy Zakamulin. Set forth below is the text of the e-mail sent by Valeriy in response to the e-mail of mine detailed in the earlier blog entry:
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Rob:
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My comment on the following: I don’t agree that the thing that stock investors are being paid for is a willingness to take on risk. I believe that this idea became popular in the days before index funds. Then there really was risk — the investor was sharing in the fortunes or lack thereof of the company in which he bought shares of ownership. Indexing changes all that. When you buy an index fund, you are buying a share in the productivity of the U.S. economy. That economy has been sufficiently productive to produce an annual return of 6.5 percent real for 140 years now.
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What you basically say in this paragraph is that an index portfolio should eliminate all risk. This is somewhat related to the old Markowitz’ idea of diversification: when you put together lots of stocks, the risk decreases. If the stock returns were mainly independent of each others, in this case all risk could be eliminated and a large portfolio of stocks would be effectively riskless. However, this does not happen in reality. No matter how many stocks you put together, the risk decreases to some particular level only.
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Last but not least, what about bond investing? Often one advocates for a portfolio of 60% in stocks and 40% in bonds. Roughly 50-50. What are your thoughts on bond investing? Do you also have similar ideas on how to educate investors about the dangers of bond investing?
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Valeri
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I replied:
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Valeri:
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