I came across this quote and found it to be thought provoking. It comes with the preface that over an 80 year period that US large cap stocks have outperformed bonds by two times and that when inflation is stripped out, stocks are around three times more.
The more certainty you need, the more you’ll allocate your portfolio towards bonds, and the lower your lifetime total return will be. The more ambiguity you can tolerate, the more you’ll trust your fortune to equities-even, and especially, when you have no idea why they’re doing what they’re doing-and the higher your lifetime return will be.
~Nick Murray, Behavioral Investment Counselling
This raises the question about how to invest in equities and also about cash flow requirements and time horizon. The less a portfolio is dependent on cash flow and the longer the time horizon, typically, the greater the risk it can take on.
Much of the asset allocation process comes down to cash flow requirements, time horizon and the ability to accept ambiguity (aka volatility) in the portfolio. I like to call this a sleep factor. If a portfolio will keep you up at night then it is likely too risky.
To me, this is a good way to characterize risk and return.
This is food for thought and points to contemplate.