Question

The conventional wisdom in the financial advisor community is that “over the long run, stocks outperforms bonds, small stocks outperform big stocks, and value stocks outperform growth stocks”. What should you do if you take them literally? Please explain what you need to pay attention to when applying these “rules”

Answer 1

If the conventional wisdom in the financial advisor community as mentioned in the question is to be taken literally, the biggest factor to pay attention to is the timeframe from the day an investment is made to the day the investment will be withdrawn. In other words, it's the time from now until the financial goals.

For example, if someone is planning to make funds available for retirement at the age of 60, then if the person is say just 25 years old, one may have higher exposure to stocks, preferably small stocks and value stocks as they give higher returns in the long run.

But, if someone is 58 years old and planning for retirement at 60, then the exposure may have to be different.

Also, what needs to be done when the conventional wisdom is taken literally by someone who is invested in small and value stocks is that they should exercise patience and avoid panic selling at times when the portfolio may not be doing well. The idea being eventually these stocks will return a handsome amount and hence buying more in dips may also be an idea.