Re: Answer to John Galt's Question - Why own Stock
Before I start, I'll say I challenge numbers and methods to understand them better, not to attack them or to necessarily invalidate them. Additionally, until a week or two ago I was over 95% in stock index funds for long term investing. Now I'm about 80/20 stock index funds & bond "total market index" and slowly considering whether I want to go to 70/30 or 60/40 in the near future even with 15-30 years until expected withdrawals begin and up to 30-45 years span of withdrawals.
First, I agree with salaryguru's objection about presenting standard deviation as risk. At first glance it seemed the only reasonable measure for risk, but if historically annualized stock returns dropped 22% one year then bounced up 22% the next, for example, that doesn't necessairly indicate more long-term risk if you're withdrawing a single-digit portion of your portfolio. I'm way too lazy today to look up historical statistics right now, but I seem to recall any dramatic one-year drop in stocks was generally quickly followed by a bounce in the other direction.
Second, I am a bit tickled about the 8% 100% stock returns given that I've read many times here that Bernstein expects closer to 3% returns over the next 30 years. I don't see how you can say that stock returns will be much less in the future while confidently applying historical deviation or "risk". Intuitively stocks will still be more volatile than bonds, but if one believes that stock returns will be much lower for a 30-year span then how would he also apply anything but a similarly-performing subset of historical statistics to that span? (Disclaimer: He isn't claiming both at the same time as far as I know, but both bits of information come from the same guy, and I find that curious.)
Third, it's been over 10 years since my statistics class, but I still have the textbook. I recall the standard deviation being somewhat of an average of deviations from the mean, and if that's the case then 20-22% sounds incredibly high for 100% stocks. (I am assuming by "stocks" he's using the total market index index.) I am opening my textbook to the definition of standard deviation, and there are too many greek letters for me to choose verifying my suspicion over getting myself a glass of wine, so my rusty half-informed speculation stands until someone more recently acquainted with statistics corrects or verifies my objection.
Oops, something just slipped loose in my brain, and I haven't started drinking wine yet. With the squares and square roots and a recollection of somewhat parabolic population bell curves, I recall the standard deviation helps shape the curve with respect to the mean; 20-22% still sounds high to me.