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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75777  
Subject: Rethinking Risk Date: 9/18/2013 6:54 PM
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I recently came across a couple of papers that discussed risk in the context of portfolios for the long-run. Which is pretty on-topic for this board when we're talking about investing FOR retirement rather than investing DURING retirement.

First: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2318961
Rethinking Risk
Summary of the Abstract:
"For long-term investors, short-term volatility is something they just have to live with and disregard as much as possible. Tail risks, however, are critical because, although rare by definition, they have a large impact on terminal wealth."

"stocks have both a higher upside potential and a more limited downside potential than bonds, even when tail risks strike. Hence, their higher volatility essentially is higher upside risk; that is, uncertainty about how much better, not how much worse, long-term investors are expected to fare with stocks rather than with bonds."

"even when tail risks do materialize, investors are more likely to have a higher terminal wealth by investing in stocks than by investing in bonds."

Also pertinent to recent discussion here: "Different investors assess risk in different ways. The return of a given asset over a given period is whatever the asset delivered; its risk instead is whatever investors perceive it to be."

Second: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2320828
Optimal Portfolios for the Long Run
David Blanchett, Michael S. Finke, Wade D. Pfau
Summary of the Abstract:
"strong historical evidence to support the notion that a higher allocation to equities is optimal for investors with longer time horizons"

"counterintuitive conclusion that risk-averse investors should demand stocks as a hedging strategy against a long-run drop in real consumption"

"[referenced study] finds that a 100% stock portfolio dominated other strategies for a retiree with a 40-year time horizon over historical rolling periods in the U.S."

"return predictability observed in U.S. data means that all but the most risk-averse investors would hold 100% equities for a 10-year or longer investment horizon"

"[There is] short-run volatility (regular swings in prices), but these prices even out over the long-run toward their long-run average."
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