Why we believe that you need to be a medium-term market timer, to do well in all markets. A lesson from history http://puzzlefinancialadvice.com.au/2021/Core/Static_Asset_Allocation_long_term_buy_and_hold_strategies_often_fail_Why_is_that_210202.pdf
Puzzle Financial Advice
Australian Financial Service Licence 230050
Jeremy Grantham 27/2/2012 "Believe in history. History repeats. All bubbles break. Be patient and focus on the long-term. Wait for the good cards."
Risk Budget Concept
The concept of a risk budget is a useful one. It relates to how much capital, within "reasonable" probability, are you prepared to put at risk, while seeking to earn a higher return than cash.
Reminder of the logic of portfolio theory + risk budget
Investors can somethings hope to only ever invest in places where they will definitely get a reasonable return. However, in reality:
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every time we seek to invest (i.e. every time we risk our capital) we are hopefully putting our capital in a place that has a reasonable probability of getting a better return on cash over a certain time-frame.
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No one investment is an absolutely certainty over any time-frame. That is one of the very strong messages from investment history.
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And diversifying between a range of investments (each of which has a good probability of a better return than cash over a certain time-frame), is one technique that we use to try to reduce investment risk.
One of the other tools in our investment tool-kit is the risk budget concept.
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Risk tolerance = the preparedness to risk losing capital while pursuing a higher return than cash.
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Risk-averse investors (those with a low tolerance of a negative return) have only a small “risk budget” to “spend” when investing.
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Aggressive investors (those who have a high tolerance of a negative return) had a large “risk budget” to spend.
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We can choose to spend our risk budget on a larger number (amount) of investments with lower risk OR on a smaller number (amount) of investments with higher risk AND still have the same overall portfolio risk.
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If our portfolio is 100% cash, this means that either:
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we have no tolerance for risk OR
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we can currently find no investments with an acceptable level of risk OR
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we may be applying Jeremy Grantham’s (https://en.wikipedia.org/wiki/Jeremy_Grantham ) investment philosophy of, in periods of extremely high investment risk, “waiting for the good cards”.
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In this context, it is useful to also remind you of Marc Faber’s comment on 1/9/2020 that “Great Investors have Discipline and Patience”.
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