Investors consistently overestimate their risk tolerance on questionnaires because they know the "correct" answer. However, during an actual crisis, fear feels entirely rational and justified, leading them to panic and sell despite their stated intentions.
When an asset sees a massive price surge, it's effectively a "price compression" that pulls years of expected returns into a short period. This raises the probability of future volatility or stagnant performance, as the future gains have already been realized.
The best times to invest, like market bottoms during a crisis, often coincide with peak personal financial instability, such as job loss. This makes the common advice to "buy the dip" or "hold on" practically impossible for many, beyond just behavioral challenges.
Instead of using current market-cap weightings, a "forward cap" strategy allocates capital based on extrapolated macroeconomic trends. This means overweighting a sector like tech based on its projected future dominance, essentially "skating to where the puck is going."
Big Tech's sustained outperformance presents a portfolio anomaly. These companies are simultaneously the largest market components and among the fastest-growing, a rare combination that breaks historical patterns where size implies maturity and slower growth, forcing managers to adapt.
While lauded for its simplicity, the three-fund Boglehead portfolio reveals a key weakness in environments like 2022. Its lack of exposure to truly uncorrelated assets like cash means investors suffer when its core components fall in unison. A portfolio can be "too simple."
Your human capital—your future earning potential—should be treated as a fixed-income asset in your total portfolio. A stable, high-value income stream acts like a large bond holding, providing the behavioral and financial capacity to take significantly more risk with your investment assets.
A truly passive portfolio would own all global financial assets in proportion to their market value. However, this is impossible because many assets, like government-held bonds or restricted foreign stocks, are not available to public investors, making every real-world index fund an active bet.
The popular 60/40 stock-bond split traces its roots to the Wellington Fund during the 1929 crash. Its heavy bond allocation meant it was "crushed way less" than all-equity peers. Its fame grew not from high returns but from superior relative performance during a catastrophe.