Financial literature from academics has been strongly influenced by the ground-breaking work of Harry Markowitz and William Sharpe, and the concept of risk & reward for a multi-asset portfolio. Although brilliantly innovative, this work is often misused, equating risk with (portfolio) volatility and reward with (portfolio) returns, and applying such principles without acknowledging the fundamental differences between investors and speculators, or accumulators and retirees.
This article will explore risk and reward from a perspective more suitable to retirement, and perform corresponding quantitative analysis of some simple portfolios.
This article provides updated Telltale charts, including 2017 returns. It focuses on the relative past performance of value and size factors compared to the total US market, as well as studying international and real estate funds.
Using Telltale charts can be very informative, truly ‘telling the tale’ of what happened over time to portfolio trajectories, illustrating return to the mean properties, or lack thereof.
Based on public data sources providing Japanese stock returns and bond interest rates, this article provides a quantitative analysis of the trajectory a Japanese passive investor could have experienced with his portfolio during the 1980-2016 time period. Japan suffered from what was probably the most severe stock crisis in modern history, starting by the end of 1989, taking nearly two decades to finally somewhat recover, and then being slammed again by the financial crisis of 2008. There is no equivalent in U.S. history of such long lasting crisis, and as such, it is a sobering example of what could happen.