You continue to miss the point. Investing the asset any which way has no risk based on the risk measure of impact to the ability to meet one's needs. There then may be other risk measures the investor cares about that do distinguish investment choices for the asset. They have no impact on the investor's ability to meet his or her needs. But they may drive the investment choice for an aspiration.It has little risk by your own words.Not in this case. You can only decide that the asset is not needed by evaluating the remaining assets as an independent portfolio. Once that is established, then the unneeded asset can be invested in any manner without taking risk of failure to meet needs. It can be donated. It can be flushed down the toilet. It has no bearing on the overall portfolio's ability to meet one's needs. So that risk measure sheds no light on the relative risk of different investments for it-- they all have the same risk in that measure.It is the portfolio that matters, not the individual asset. This is the classic case of visualizing risk incorrectly.When assessing the risk of investment choices for some asset A, if our maximum possible spending needs are covered by other assets, then the impact on our ability to meet our spending needs ceases to be a relevant risk measure for investment choices for asset A. At that point, it is valid to discuss other risk measures for investment choices for asset A. In that scenario, stocks are a riskier choice than some other investment choices due to the possibility of losing money on the investment.
Calling stocks risky with a full TIPS ladder is nonsensical. That's my specific example from this thread.
"It can be flushed down the toilet"
"It has no bearing on the overall portfolio's ability to meet one's needs."
What you have is loss aversion instead of evaluating the consequences of the loss along with the likelihood of the loss relative to the gain. The low level of consequence along with the low expected probability of loss over many decades make it low risk. Compare this to someone that needs the money in 6 months for a life-saving medical procedure. The consequences matter in our risk assessment. This is also why having bonds makes stocks less risky in a portfolio - the consequences are less because of the other asset. This is why we shouldn't evaluate them individually.
It is the portfolio that matters because that determines the consequences.
Statistics: Posted by Northern Flicker — Sat Jun 01, 2024 1:38 am — Replies 138 — Views 15902