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How Much Should We Depend On The Stock Market?

Simple analyses, which look to historical returns as estimates for what retirees should expect in the future, tend to provide an incomplete picture that may overstate the potential for stocks relative to other strategies. We will investigate some of the adjustments that should be made to historical returns to obtain a better idea about the…

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The Coronavirus and Your Investments

The Coronavirus is scary. When it’s possible to make reasonable comparisons with the Spanish Flu, that should make you sit up and take notice. Aside from the reasonable precautions that you should be taking, what should you be doing to protect your investments from the disruptions that the Coronavirus may cause? We’ve already seen significant…

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The Case for Stocks

The case for using an aggressive investment portfolio with a high stock allocation to fund retirement expenses rests on the idea that it will probably work. Stocks are expected to outperform bonds, and if and when that happens, a retiree will be able to spend more from their asset base in retirement. For example, in…

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Modern Portfolio Theory – Part Two

This article is part of a series; click here to read Part One. Efficient frontier diagrams do not actually show the asset allocations of portfolios on the efficient frontier, but this information is also available. Exhibit 1.3 provides an example of ten portfolios on the efficient frontier shown in Exhibit 1.2. These range from the…

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Modern Portfolio Theory

Before shifting into further discussion about whether these historical numbers provide the most appropriate assumptions for future market performance, it is worth understanding how to choose an asset allocation and put together an investment portfolio while assuming that these historical numbers are the right ones to use. The more basic point is that any assumptions…

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Historical Market Returns – Part Two

This article is part of a series; click here to read Part One. Moving to bonds, Morningstar data shows that since 1926, the average return from intermediate-term government bonds was 5.2 percent with a standard deviation of 5.6 percent. With the lower volatility, the compounded return is only slightly less at 5.1 percent. For long-term…

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Historical Market Returns – Part One

The primary subject of my book is comparing the risk premium with risk pooling as a source of funding for retirement goals. An important step is to first make clear what the risk premium is and how it relates to an investment portfolio. Fundamentally, investors prefer certainty to uncertainty. A bond provides a known yield…

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Overview of Stocks and the Stock Market

Stocks provide an ownership stake in a company. They provide access to company earnings based on its future performance. Companies can pay dividends to their stockholders to return profits to the owners, or they could reinvest profits into the firm to lay the foundation for better performance and even larger dividends to owners in the…

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