Deep Risk: How History Informs Portfolio Design (Investing For Adults)

Deep risk: How History informs Portfolio Design is the third installment in the investing for adults series. this series is not for novices. This booklet takes portfolio design beyond the familiar €œblack box€ mean-variance framework. Most importantly, the short-term volatility of financial assets, commonly measured as standard deviation, is a highly imperfect measure of the actual long-horizon perils faced by real-world investors subject to the vagaries of financial and military history. These risks have names€"inflation, deflation, confiscation, and devastation€"and any useful discussion of portfolio design of necessity incorporates their probabilities, consequences, and costs of mitigation. You€re an investment adult, so you know that the future efficient frontier lies well beyond our ken; presumably you already know all about the mechanics, long-term benefits, as well as the uncertainties, of wide diversification and factor tilt using low-cost, efficient vehicles and the risk/reward spectrum between all-fixed- income and all-equity portfolios. This booklet contains no magic formula for the €œperfect portfolio,€ but rather, with luck, a framework within which to think more clearly about risk.