Thinking of yourself as a "saver" rather than an "investor" promotes a prudent and disciplined approach. It removes the get-rich-quick mentality often associated with investing, which leads to poor decisions and speculative behavior.
The goal of diversification is to hold assets that behave differently. By design, some part of your portfolio will likely be underperforming at all times. Accepting this discomfort is a key feature of a well-constructed portfolio, not a bug to be fixed.
This concept quantifies a reasonable time horizon for any asset, including stocks, by measuring its sequence of returns risk. It allows financial planners to build institutional-style, liability-driven portfolios for individuals by matching assets to specific future goals.
Rather than using today's market capitalization, this novel approach builds a portfolio weighted by the expected future market cap of sectors and economies. It's an attempt to "skate to where the puck is going" based on long-term macro trends.
The real benefit of diversification is matching assets with different time horizons (e.g., long-term stocks, short-term bills) to your future spending needs. All asset allocation is ultimately an exercise in managing financial goals across time.
Media headlines of 10% stock market returns are misleading. After accounting for inflation, fees, and taxes, the actual purchasing power an investor gains is far lower. Using real returns provides a sober and more accurate basis for financial planning.
Unlike a market-cap-weighted stock index driven by competition, an aggregate bond index is dominated by the largest issuer: the U.S. government. The index mechanically buys whatever debt the government issues, regardless of duration risk or investor interests.
The world's most common balanced portfolio doesn't have a rigorous academic origin. It evolved from the Wellington Fund, created by Walter Morgan in the late 1920s as a bond-heavy strategy to avoid the devastation of a major stock market crash.
The trillion-dollar asset allocation mutual fund industry has resisted disruption from low-cost ETFs. This will change when major life events or market downturns force investors to scrutinize the high fees previously masked by a strong bull market.