33% domestic stocks bias

Linton

itwasntme001 said:

Alexland said:

itwasntme001 said:

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

I don't know how people might misconstrue things but maintaining a diversified portfolio means you usually get more return for the amount of risk (the cost of investing) you take because of the alchemy of blending low corelation assets together. That's the point of all the academic work.

itwasntme001 said:

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Equities tend to be more volatile because their future outcomes are usually less certain than fixed income so are likely to move more wildly in price as the pendulum swings between unsustainable optimism and unjustified pessimism (according to Ben Graham) and that would be the same regardless of if those ideas had been developed or not. It's rebalancing that causes people to sell high and buy low arguably reducing market volatility.

Constructing a portfolio of uncorrelated assets and rebalancing a portfolio, can reduce portfolio risk but there is no guarantee that you get better return per unit of risk.  Some people do think there is a guarantee or a free lunch in diversification, which is obviously not true.  Some of your comments seems to suggest so but then other comments suggests not, so you might not know the difference.

What does a "better return per unit of risk" mean?  What is the arithmetic calculation?  What is a unit of risk? How are you defining risk?

For me the objective of investment is not to maximise return but rather to achieve the returns one needs to achieve a life objective.  Any pleasure of getting higher returns than that is greatly outweighed by the pain of failing to achieve it.  So increasing risk for higher returns does not make sense. In my view chasing maximum returns is a mere game, not serious investing.

In that light the purpose of diversification is not to increase returns but rather to reduce the risk of not achieving the returns required.  One gets maximum returns by predicting the winners years in advance.  However if the choice proves incorrect one can also makes the maximum loss. Therefore it makes sense to invest as widely as possible to ensure that returns are not seriously affected by economic problems that only affect a relatively small subset of all investment opportunities.

Given one has created a globally and sectorially well diversified portfolio invested in assets that are capable of giuving the desired return it is obviously sensible to rebalance it from time to time to ensure that it remains well diversified.  Rebalancing does have the side effect of selling high and buying low (the free lunch) but that is not the purpose of the exercise.

itwasntme001

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

I can't help but feel that this extreme definition of "free lunch" makes the term meaningless. Which is fine, because I didn't introduce it into the discussion and have no issue with dispensing with it, but I don't think anything in the real world has no cost at all under all scenarios. I suppose you could counter with, hence TANSTAAFL.

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Can I remind you that you introduced the term "free lunch" and started using it in a manner contrary to its standard meaning in finance, which has led to some confusion. There is always a risk that technical discussions might be misconstrued by those who don't fully comprehend the nuances, but I don't think anyone reading my posts in good faith could reasonably misunderstand my point. I used phrases like "can give one an edge" and noted that while diversification is also widely described as a free lunch, "it too doesn't always work".

You mentioned a "cost" to long-term patient investors, but you are conflating opportunity cost (the result of not picking the single winning asset in hindsight) with actual cost (an increase in risk or loss of capital). In reality, patient investing and rebalancing are complementary. Rebalancing is the tool that enables patience - it ensures a portfolio doesn't drift into a risk profile the investor never agreed to. The true "cost" of not rebalancing is the uncompensated risk of becoming overweight in a single asset class that is overdue for mean reversion.

Your suggestion that rebalancing strategies have "unravelled" in more recent years treats them like a market fad or a crowded trade. That isn't the case. They exploit a mathematical property of non-correlated assets. That hasn't unravelled, it has simply been overshadowed by a historic, 15-year momentum run in US tech. Using a period of extreme pricing to perfection to argue against rebalancing is a classic case of recency bias.

The most dangerous thing anyone could take away from this exchange is that the notion that the recent trend will continue.

You mention earlier that "when rebalancing happens, it is a free lunch".  You might not have introduced the term free lunch, but you are using it in a way that might be misleading to someone.

I’m genuinely disappointed to see you resort to misquoting me to sustain your argument. I thought you were better than that. You’ve deleted the word "bonus" from my sentence. That word is the entire lynchpin of the statement.

A "rebalancing bonus" is a specific mathematical outcome, whereas "rebalancing" is merely the process. I never claimed the action is a guaranteed lunch, I stated that the bonus, when captured, constitutes a free lunch by the standard definition. Distorting my words to make them easier to attack - and then claiming I am the one being misleading - is a low blow.

Meanwhile, you are insisting on a definition of 'free lunch' and 'exploit' that requires 100% certainty of outperformance - a standard that exists nowhere in science or economics.

Engaging in a further line of questioning when the foundational terminology is being misquoted and redefined is pointless. I think it’s best we leave the discussion here. I'm out.

I actually realised I misquoted you and corrected it, as you will see if you go back to my post.

But that is besides the point as my point still stands as far as I am concerned.

Free lunches do exist in finance in the form of arbitrage opporutnities.  But they are infrequent, especially now given more efficient markets supposively.  A rebalancing bonus is not an example of a free lunch though.

Ok, I see you were editing as I was composing my response. However, now that my quote has been corrected, it is clear that it is not misleading. The inclusion of the word "bonus" is critical. This is clearly not a blanket guarantee that the act of rebalancing will lead to any specific outcome. I stated that the bonus - the extra return harvested from volatility - is a free lunch when it happens.

You are now attempting to narrow the definition of a "free lunch" strictly to arbitrage. While arbitrage is a free lunch in theory, even that would fail your strict definition in practice. Real-world arbitrage is subject to execution, liquidity, and counterparty risks, meaning it is rarely guaranteed under all scenarios. When Markowitz called diversification "the only free lunch in finance", he wasn't talking about riskless arbitrage, he was talking about the structural improvement of risk-adjusted returns. A rebalancing bonus falls into that same category of structural efficiency.

Apologies for the error on my part and causing confusion.

I still do believe a rebalancing bonus should not be thought of as a free lunch.  You take an active investment decision in rebalancing your portfolio to hope for performing better over a defined period, in contrast to if you never took that active decision and instead let the portfolio drift.  We agree there was no certainty on this bonus.  A bonus (or out performance) might have resulted following the defined period, but that does not make it a free lunch.  By your reasoning, had you kept the portfolio to drift and it performed better than if you has rebalanced, wouldn;t you call this a free lunch also?

The fact that you decided to "sell high" and "buy low" from one uncorrelated asset to another and out-performed a drifting portfolio does not make it a free lunch anymore than if you had let the portfolio drift and out-performed a rebalanced portfolio.

Bonus and out-performance are the same thing.  Neither mean a free lunch.  A free lunch is defined.

I am not narrowing the definition of free lunch to mean arbitrage.  How did you deduce that?  I am simply saying an example of a free lunch in finance is arbitrage.  Another example is in sports betting, where you can arbitrage between betting shops due to the different bid/offers for the same bet.  Not as frequent anymore though.

I agree with you that TANSTAAFL given all the second order risks you mention for example.  But to be clear we are talking about first order risks in this context, e.g. portfolio return between rebalanced and drifting portfolios.

Markovitz may not have been talking about a riskless arbitrage but he was still using risk-return data based on history to theorise an efficient frontier from which an optimal portfolio should be constructed.  He might think this is a free lunch, by moving from a less optimal to a more optimal portfolio.  But the problem with this argument is that no matter how much effort that goes into these optimisations, you are still just using historical data and assuming correlations and volatilities to hold for your portfolio into the future.  Thats a very dangerous assumption and its this very same assumptions that break down this concept of it being a free lunch.

itwasntme001

Linton said:

itwasntme001 said:

Alexland said:

itwasntme001 said:

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

I don't know how people might misconstrue things but maintaining a diversified portfolio means you usually get more return for the amount of risk (the cost of investing) you take because of the alchemy of blending low corelation assets together. That's the point of all the academic work.

itwasntme001 said:

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Equities tend to be more volatile because their future outcomes are usually less certain than fixed income so are likely to move more wildly in price as the pendulum swings between unsustainable optimism and unjustified pessimism (according to Ben Graham) and that would be the same regardless of if those ideas had been developed or not. It's rebalancing that causes people to sell high and buy low arguably reducing market volatility.

Constructing a portfolio of uncorrelated assets and rebalancing a portfolio, can reduce portfolio risk but there is no guarantee that you get better return per unit of risk.  Some people do think there is a guarantee or a free lunch in diversification, which is obviously not true.  Some of your comments seems to suggest so but then other comments suggests not, so you might not know the difference.

What does a "better return per unit of risk" mean?  What is the arithmetic calculation?  What is a unit of risk? How are you defining risk?

For me the objective of investment is not to maximise return but rather to achieve the returns one needs to achieve a life objective.  Any pleasure of getting higher returns than that is greatly outweighed by the pain of failing to achieve it.  So increasing risk for higher returns does not make sense. In my view chasing maximum returns is a mere game, not serious investing.

In that light the purpose of diversification is not to increase returns but rather to reduce the risk of not achieving the returns required.  One gets maximum returns by predicting the winners years in advance.  However if the choice proves incorrect one can also makes the maximum loss. Therefore it makes sense to invest as widely as possible to ensure that returns are not seriously affected by economic problems that only affect a relatively small subset of all investment opportunities.

Given one has created a globally and sectorially well diversified portfolio invested in assets that are capable of giuving the desired return it is obviously sensible to rebalance it from time to time to ensure that it remains well diversified.  Rebalancing does have the side effect of selling high and buying low (the free lunch) but that is not the purpose of the exercise.

 I agree with this except for the free lunch part.

Your post describes why its so important to differentiate between academic theories and implementations to real life objectives for portfolio construction.

These recent posts discuss about free lunches and optimising risk-return.  But what most on here should really be doing is not working out correct portfolio weights to attempt to optimise risk-return metrics, but instead, as you suggest, to reduce risk based on need for spending your portfolio in the short and medium term.

These two are very different approaches.  Looking for free lunches and rebalancing bonuses is a distraction and perhaps even detrimental, to constructing portfolios based on needs and wants in life.

masonic

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

I can't help but feel that this extreme definition of "free lunch" makes the term meaningless. Which is fine, because I didn't introduce it into the discussion and have no issue with dispensing with it, but I don't think anything in the real world has no cost at all under all scenarios. I suppose you could counter with, hence TANSTAAFL.

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Can I remind you that you introduced the term "free lunch" and started using it in a manner contrary to its standard meaning in finance, which has led to some confusion. There is always a risk that technical discussions might be misconstrued by those who don't fully comprehend the nuances, but I don't think anyone reading my posts in good faith could reasonably misunderstand my point. I used phrases like "can give one an edge" and noted that while diversification is also widely described as a free lunch, "it too doesn't always work".

You mentioned a "cost" to long-term patient investors, but you are conflating opportunity cost (the result of not picking the single winning asset in hindsight) with actual cost (an increase in risk or loss of capital). In reality, patient investing and rebalancing are complementary. Rebalancing is the tool that enables patience - it ensures a portfolio doesn't drift into a risk profile the investor never agreed to. The true "cost" of not rebalancing is the uncompensated risk of becoming overweight in a single asset class that is overdue for mean reversion.

Your suggestion that rebalancing strategies have "unravelled" in more recent years treats them like a market fad or a crowded trade. That isn't the case. They exploit a mathematical property of non-correlated assets. That hasn't unravelled, it has simply been overshadowed by a historic, 15-year momentum run in US tech. Using a period of extreme pricing to perfection to argue against rebalancing is a classic case of recency bias.

The most dangerous thing anyone could take away from this exchange is that the notion that the recent trend will continue.

You mention earlier that "when rebalancing happens, it is a free lunch".  You might not have introduced the term free lunch, but you are using it in a way that might be misleading to someone.

I’m genuinely disappointed to see you resort to misquoting me to sustain your argument. I thought you were better than that. You’ve deleted the word "bonus" from my sentence. That word is the entire lynchpin of the statement.

A "rebalancing bonus" is a specific mathematical outcome, whereas "rebalancing" is merely the process. I never claimed the action is a guaranteed lunch, I stated that the bonus, when captured, constitutes a free lunch by the standard definition. Distorting my words to make them easier to attack - and then claiming I am the one being misleading - is a low blow.

Meanwhile, you are insisting on a definition of 'free lunch' and 'exploit' that requires 100% certainty of outperformance - a standard that exists nowhere in science or economics.

Engaging in a further line of questioning when the foundational terminology is being misquoted and redefined is pointless. I think it’s best we leave the discussion here. I'm out.

I actually realised I misquoted you and corrected it, as you will see if you go back to my post.

But that is besides the point as my point still stands as far as I am concerned.

Free lunches do exist in finance in the form of arbitrage opporutnities.  But they are infrequent, especially now given more efficient markets supposively.  A rebalancing bonus is not an example of a free lunch though.

Ok, I see you were editing as I was composing my response. However, now that my quote has been corrected, it is clear that it is not misleading. The inclusion of the word "bonus" is critical. This is clearly not a blanket guarantee that the act of rebalancing will lead to any specific outcome. I stated that the bonus - the extra return harvested from volatility - is a free lunch when it happens.

You are now attempting to narrow the definition of a "free lunch" strictly to arbitrage. While arbitrage is a free lunch in theory, even that would fail your strict definition in practice. Real-world arbitrage is subject to execution, liquidity, and counterparty risks, meaning it is rarely guaranteed under all scenarios. When Markowitz called diversification "the only free lunch in finance", he wasn't talking about riskless arbitrage, he was talking about the structural improvement of risk-adjusted returns. A rebalancing bonus falls into that same category of structural efficiency.

Apologies for the error on my part and causing confusion.

I still do believe a rebalancing bonus should not be thought of as a free lunch.  You take an active investment decision in rebalancing your portfolio to hope for performing better over a defined period, in contrast to if you never took that active decision and instead let the portfolio drift.  We agree there was no certainty on this bonus.  A bonus (or out performance) might have resulted following the defined period, but that does not make it a free lunch.  By your reasoning, had you kept the portfolio to drift and it performed better than if you has rebalanced, wouldn;t you call this a free lunch also?

The fact that you decided to "sell high" and "buy low" from one uncorrelated asset to another and out-performed a drifting portfolio does not make it a free lunch anymore than if you had let the portfolio drift and out-performed a rebalanced portfolio.

Bonus and out-performance are the same thing.  Neither mean a free lunch.  A free lunch is defined.

I am not narrowing the definition of free lunch to mean arbitrage.  How did you deduce that?  I am simply saying an example of a free lunch in finance is arbitrage.  Another example is in sports betting, where you can arbitrage between betting shops due to the different bid/offers for the same bet.  Not as frequent anymore though.

I agree with you that TANSTAAFL given all the second order risks you mention for example.  But to be clear we are talking about first order risks in this context, e.g. portfolio return between rebalanced and drifting portfolios.

Markovitz may not have been talking about a riskless arbitrage but he was still using risk-return data based on history to theorise an efficient frontier from which an optimal portfolio should be constructed.  He might think this is a free lunch, by moving from a less optimal to a more optimal portfolio.  But the problem with this argument is that no matter how much effort that goes into these optimisations, you are still just using historical data and assuming correlations and volatilities to hold for your portfolio into the future.  Thats a very dangerous assumption and its this very same assumptions that break down this concept of it being a free lunch.

I appreciate the apology. Looking back at how this started, I think our disconnect stems from a fundamental difference in perspective. You have spent this exchange arguing that rebalancing doesn't offer a guaranteed way to beat a 100% equity drifting portfolio. I don't disagree with that - if one asset class (like US tech) has a historic, multi-decade run, a drifting portfolio will obviously "outperform" a rebalanced one in hindsight.

However, my point from the beginning has been about portfolio management, not market timing. When volatility allows you to sell a high-performing asset to buy a depressed one, you often harvest a "bonus" that improves the risk-adjusted return. Letting a portfolio drift into a more concentrated allocation isn't outperformance, it is an unmanaged increase in risk. Rebalancing is the tool that ensures the investor remains in control of their exposure, rather than letting the market dictate it for them. And often this process leads to a better long term return than the sum of its parts in isolation. But it won't beat running a winner that happens to have a long run that extends beyond your investment horizon. Not that I'd ever advocate that as a strategy.

itwasntme001

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

I can't help but feel that this extreme definition of "free lunch" makes the term meaningless. Which is fine, because I didn't introduce it into the discussion and have no issue with dispensing with it, but I don't think anything in the real world has no cost at all under all scenarios. I suppose you could counter with, hence TANSTAAFL.

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Can I remind you that you introduced the term "free lunch" and started using it in a manner contrary to its standard meaning in finance, which has led to some confusion. There is always a risk that technical discussions might be misconstrued by those who don't fully comprehend the nuances, but I don't think anyone reading my posts in good faith could reasonably misunderstand my point. I used phrases like "can give one an edge" and noted that while diversification is also widely described as a free lunch, "it too doesn't always work".

You mentioned a "cost" to long-term patient investors, but you are conflating opportunity cost (the result of not picking the single winning asset in hindsight) with actual cost (an increase in risk or loss of capital). In reality, patient investing and rebalancing are complementary. Rebalancing is the tool that enables patience - it ensures a portfolio doesn't drift into a risk profile the investor never agreed to. The true "cost" of not rebalancing is the uncompensated risk of becoming overweight in a single asset class that is overdue for mean reversion.

Your suggestion that rebalancing strategies have "unravelled" in more recent years treats them like a market fad or a crowded trade. That isn't the case. They exploit a mathematical property of non-correlated assets. That hasn't unravelled, it has simply been overshadowed by a historic, 15-year momentum run in US tech. Using a period of extreme pricing to perfection to argue against rebalancing is a classic case of recency bias.

The most dangerous thing anyone could take away from this exchange is that the notion that the recent trend will continue.

You mention earlier that "when rebalancing happens, it is a free lunch".  You might not have introduced the term free lunch, but you are using it in a way that might be misleading to someone.

I’m genuinely disappointed to see you resort to misquoting me to sustain your argument. I thought you were better than that. You’ve deleted the word "bonus" from my sentence. That word is the entire lynchpin of the statement.

A "rebalancing bonus" is a specific mathematical outcome, whereas "rebalancing" is merely the process. I never claimed the action is a guaranteed lunch, I stated that the bonus, when captured, constitutes a free lunch by the standard definition. Distorting my words to make them easier to attack - and then claiming I am the one being misleading - is a low blow.

Meanwhile, you are insisting on a definition of 'free lunch' and 'exploit' that requires 100% certainty of outperformance - a standard that exists nowhere in science or economics.

Engaging in a further line of questioning when the foundational terminology is being misquoted and redefined is pointless. I think it’s best we leave the discussion here. I'm out.

I actually realised I misquoted you and corrected it, as you will see if you go back to my post.

But that is besides the point as my point still stands as far as I am concerned.

Free lunches do exist in finance in the form of arbitrage opporutnities.  But they are infrequent, especially now given more efficient markets supposively.  A rebalancing bonus is not an example of a free lunch though.

Ok, I see you were editing as I was composing my response. However, now that my quote has been corrected, it is clear that it is not misleading. The inclusion of the word "bonus" is critical. This is clearly not a blanket guarantee that the act of rebalancing will lead to any specific outcome. I stated that the bonus - the extra return harvested from volatility - is a free lunch when it happens.

You are now attempting to narrow the definition of a "free lunch" strictly to arbitrage. While arbitrage is a free lunch in theory, even that would fail your strict definition in practice. Real-world arbitrage is subject to execution, liquidity, and counterparty risks, meaning it is rarely guaranteed under all scenarios. When Markowitz called diversification "the only free lunch in finance", he wasn't talking about riskless arbitrage, he was talking about the structural improvement of risk-adjusted returns. A rebalancing bonus falls into that same category of structural efficiency.

Apologies for the error on my part and causing confusion.

I still do believe a rebalancing bonus should not be thought of as a free lunch.  You take an active investment decision in rebalancing your portfolio to hope for performing better over a defined period, in contrast to if you never took that active decision and instead let the portfolio drift.  We agree there was no certainty on this bonus.  A bonus (or out performance) might have resulted following the defined period, but that does not make it a free lunch.  By your reasoning, had you kept the portfolio to drift and it performed better than if you has rebalanced, wouldn;t you call this a free lunch also?

The fact that you decided to "sell high" and "buy low" from one uncorrelated asset to another and out-performed a drifting portfolio does not make it a free lunch anymore than if you had let the portfolio drift and out-performed a rebalanced portfolio.

Bonus and out-performance are the same thing.  Neither mean a free lunch.  A free lunch is defined.

I am not narrowing the definition of free lunch to mean arbitrage.  How did you deduce that?  I am simply saying an example of a free lunch in finance is arbitrage.  Another example is in sports betting, where you can arbitrage between betting shops due to the different bid/offers for the same bet.  Not as frequent anymore though.

I agree with you that TANSTAAFL given all the second order risks you mention for example.  But to be clear we are talking about first order risks in this context, e.g. portfolio return between rebalanced and drifting portfolios.

Markovitz may not have been talking about a riskless arbitrage but he was still using risk-return data based on history to theorise an efficient frontier from which an optimal portfolio should be constructed.  He might think this is a free lunch, by moving from a less optimal to a more optimal portfolio.  But the problem with this argument is that no matter how much effort that goes into these optimisations, you are still just using historical data and assuming correlations and volatilities to hold for your portfolio into the future.  Thats a very dangerous assumption and its this very same assumptions that break down this concept of it being a free lunch.

I appreciate the apology. Looking back at how this started, I think our disconnect stems from a fundamental difference in perspective. You have spent this exchange arguing that rebalancing doesn't offer a guaranteed way to beat a 100% equity drifting portfolio. I don't disagree with that - if one asset class (like US tech) has a historic, multi-decade run, a drifting portfolio will obviously "outperform" a rebalanced one in hindsight.

However, my point from the beginning has been about portfolio management, not market timing. When volatility allows you to sell a high-performing asset to buy a depressed one, you often harvest a "bonus" that improves the risk-adjusted return. Letting a portfolio drift into a more concentrated allocation isn't outperformance, it is an unmanaged increase in risk. Rebalancing is the tool that ensures the investor remains in control of their exposure, rather than letting the market dictate it for them. And often this process leads to a better long term return than the sum of its parts in isolation. But it won't beat running a winner that happens to have a long run that extends beyond your investment horizon. Not that I'd ever advocate that as a strategy.

Thanks and I agree with your premise around risk reduction and portfolio management.

Our disagreement stems from this act of rebalancing producing a better risk-adjusted return and the terminology to describe this as definitive or not.  We agree there are no guarantees.  Its just that I would not describe it as a free lunch if a bonus were to be produced.  This might be me being pedantic, for which I apoligise again.  But I hope you appreciate that terminology does matter as it can be misleading if used in the wrong context.

Alexland

itwasntme001 said:
Some people do think there is a guarantee or a free lunch in diversification, which is obviously not true.  Some of your comments seems to suggest so but then other comments suggests not, so you might not know the difference.

I have no idea what you think I have said that implies some kind of absolute guarantee in all scenarios. I usually include 'could', 'might', 'likely', etc to nod to the uncertainty ahead however if a diversified portfolio is likely to give the investor a better risk-adjusted return (which is what the research generally suggests) then I consider that a good thing even if you won't let me call it a free lunch (although I think it was you that first mentioned this phrase).

chiang_mai

I enjoyed following that exchange although I suspect many will have got bored and changed the channel. Readers with more endurance may have noticed a casual remark by Linton that is the investing equivelent of, why are we here and is worth high lighting:

"For me the objective of investment is not to maximise return but rather to achieve the returns one needs to achieve a life objective".  

If you don't have that objective clearly defined at the outset, you'll never know when you've been sucessful or not and whether your strategy is the right one. I think that trying to shoot the lights out and grab as much loot as you can, is something quite different and is more akin to gambling.

masonic

chiang_mai said:

I enjoyed following that exchange although I suspect many will have got bored and changed the channel. Readers with more endurance may have noticed a casual remark by Linton that is the investing equivelent of, why are we here and is worth high lighting:

"For me the objective of investment is not to maximise return but rather to achieve the returns one needs to achieve a life objective".  

If you don't have that objective clearly defined at the outset, you'll never know when you've been sucessful or not and whether your strategy is the right one. I think that trying to shoot the lights out and grab as much loot as you can, is something quite different and is more akin to gambling.

I think this is a valuable exercise to do, although the objective may need to start out being quite vague and woolly. Back when I began investing, my objective was to have something I could fall back on in the event of some unknown adverse event such as losing my job and unable to find other suitable work, or needing to go economically inactive in circumstances where I wouldn't have other support. My target was fairly modest: to beat inflation by at least 1% and had a fairly vanilla asset mix of mostly equities that I tried to keep 'balanced'. That had me focused on ISAs and only contributing a minimum employer match to a pension. I don't regret that, but over the years I've revisited the objective and it has matured, to the point I put much more emphasis on pension contributions and have specific investments and buckets earmarked for years of retirement.

I was treated to the global financial crisis a few years after starting, and that helped me learn about discomfort and discipline when I didn't have a huge amount at stake. I'm rather surprised not to have had to deal with anything quite like it since. The Covid crash and tariff crash were bumps in the road, but didn't really last long enough for hope to begin to dry up. I think it likely that this relatively calm period is the anomaly and not the new normal, so my portfolio is positioned much more defensively, given I don't need to shoot the lights out any more.

chiang_mai

I have ring fenced my investments which are totally separate and divorced from my retirement income and savings. If I lost it all, It wouldn't impact my retirement finances but I'd be seriously upset because the money is intended to be left as inheritance. Regardless of those things, I still treat the money at though my retirement does depend on it earning income and remaining intact. I set myself a target each year and when it's met, I may derisk my holdings and sit back and wait for the next financial year to come around, it's all very goal orientated. This year I wanted a 12% return on my money, which I achieved by late September, thereafter I reduced the high risk portion of my holdings. I have set a target of 12% for next year but at a much lower level of equities investment, which is still WIP but almost there.  

LHW99

Another aspect of the "clearly defined objective" is surely that it be flexible.

I began with the idea that I needed to make sure I always had enough reserves to cover whatever emergency happened - because growing up that wasn't always a given in the family. Later that changed to ensure there was enough to support my own family as they grew and needed (perhaps unplanned) expenditure. next stage was to ensure there was enough extra to provide sufficient income to be able to retire at a point in the future without worry. Finally to be able to give some help to grown up children and have something for care / inheritance.

So objectives yes (but to be honest rarely clearly defined!) provided they changed as life changed