Lessons from the Past

"Absent the ability to forecast changes in economic activity & policy more accurately than the forecasts that are already built into asset prices,investors should maintain an allocation to risky assets that is consistent with their risk preferences & long term goals." What we can learn from Past Financial Turmoil-Dimensional Fund Advisors- Dr. Inmoo Lee and Garrett Quigley

I had a chance to hear Dr. Lee present findings from his research paper recently and think they are on point. The only clarification or quibble I would have with the quote above is the word "preferences". Many investors might "prefer" little or no risk but they "need" higher risk levels to fund long term financial goals.

The paper explains how attempts to time allocation decisions among differing stages of the business cycle often prove futile. Markets are forward looking -anticipating changes before they actually occur. Prices have tended to recover quickly in previous bear markets and investors who maintained risky asset allocations (stocks) were generally rewarded for the risk.