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This is pretty sound advice. I'm 23, work in finance, and know a number of people who basically do this.


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Elaborate on "work in finance".


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aka, works for one of the top finance shops.

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The reason to speculate is very simple: you are compensated for higher risk with higher returns. This is why on average, US bonds return worse than US stocks, and Emerging Market stocks do better than US stocks. If you are 20 and not planning on retiring until your 60s, then you can afford to handle volatility in your retirement portfolio. Your goal should thus be to maximize your returns, not to worry about risk adjusted returns.

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What you miss is that active trading of volatile stocks is not equal to buying emerging market index funds.

Following the article's advice you have a bunch of financially challenged, inexperienced investors aggressively trying to beat the market. How does this end well for the majority of them?

J

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i didn't read the article, but i can see what rsliu is getting at.

his point is not to go willy nilly taking on non-diversifiable trading risk (for the sake of having a more risky portfolio). his poitn is that it may be the case that owning a diversified optimal portfolio is dominated by an absolute riskier risk premium collection strategy that concentrates on higher risk (and thus higher reward, but lower sharpe ratio) investments.

i.e. imagine 2 portfolios:

portfolio A) .6 sharpe ratio targeted at 10% risk annually...think aboutt he portfolio i'm always blabbering on about

portfolio B) .35 sharpe ratio targeted at 20% risk annually...think about a emerging market, small cap, growth dominated, leveraged portfolio

which portfolio will return more over rolling 5, 10, 20, 30, or 40 year periods?

i don't know, but it may be the case that the drawdown induced losses from the riskier strategy are offset by the compounded gains during good periods for the riskier, higher rewarding portfolio. EDITted to make the portfolio's returns not equal (expected return on portfolio A=6%/year B=7%/year)

rsliu makes a good point and one that warrants further investigating via simulation and backtesting.

Barron