It doesn't matter whether you're young or old, have $100,000 or $10 million, or use a different asset allocation. In the end, the discussion always comes back to performance and, for many investors, risk-adjusted returns.
Using your example, suppose your portfolio grows to $5 million and you retire. At that point, you may decide to reduce risk. The moment you start thinking about balancing return and risk, you're discussing risk-adjusted returns.
That's why talking only about dollars earned or portfolio income never tells the whole story. Performance and risk-adjusted performance provide a common framework that allows investors to compare strategies, learn from one another, and have meaningful discussions about investing.
Likewise, asset allocation (AA) is not the entire story. AA is most useful when discussing long-term buy-and-hold indexing strategies. Once you begin making tactical changes, using actively managed funds, or investing in alternative strategies, asset allocation alone becomes much less informative.
Why are risk-adjusted returns so important?
Because they help investors understand how efficiently returns are being generated. If you can achieve the same return with lower volatility, you've improved your portfolio. Better yet, if you can achieve higher returns while reducing volatility, you've improved both performance and risk management.
That's the ultimate goal: make more while taking less risk. The better you become at doing that, the better your investment results can be.
See SPY vs QLENX,QNZNX in the last 3 years (link). See SD, and Sharpe, but also watch Sortino=down SD.
