For Long-Term Investors, the Focus Should Be on Risk
by Paula Hogan and Zvi Bodie
There is a common notion that stocks, at least if held for a long-time, usually outperform other assets, so that stocks should be the cornerstone of any long-term portfolio.
If, when this idea is presented, you protest: “Wait a minute. Stocks are also risky!" the reply is either, "Stocks have done well in the past and so they will probably also do well in the future," or "If you have a long time horizon, you'll do well in stocks."
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However, the thoughtful investor must also wonder: “But what if stocks don’t do well? What happens then to my retirement?”
And in this self query, the more appropriate approach becomes clear: It makes more sense to think first about what risk you are able and willing to bear, and then to think about what potential investment returns you might be able to capture.
So, let’s take a step back and before thinking about potential portfolio return, think through the factors that determine a person’s ability and willingness to take investment risk.
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Zvi Bodie , Ph.D., is a professor of finance and economics at Boston University School of Management. He maintains a website at www.zvibodie.com..