I’ve posted Entry #165 for my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called How Much Do You Need to Retire? Perhaps Less Than You Think!
Juicy Excerpt: Risk reduces return. Buy-and-Holders don’t get this. Buy-and-Holders think of risk as a good thing. They believe that only risky asset classes can provide good returns. it follows that investors should seek out risk rather than avoid it.
I couldn’t possibly disagree more. I believe that investors should be perusing dual goals of always increasing return to the greatest extent possible while always also reducing risk to the greatest extent possible. Risk is bad. Where there is risk, there will eventually be losses. Losses are setbacks. You want to avoid setbacks. You want to avoid risk.
Now that we know how to reduce risk dramatically, we know how to increase returns dramatically. That follows.
So we can all use higher return assumptions on a going forward basis. If you are willing to take valuations into consideration when setting your stock allocation, you will avoid the losses that send others reeling backwards. Your higher portfolio amounts will compound more quickly. You will reach your retirement goals sooner.