Remember that you are investing in COMPANIES, not markets. If the company is sound, and you don’t need the money soon, you can afford to ride out the bumps. Better yet, treat a 50% plunge with the same excitement you would a store-wide discount day at Macy’s.

If you insist that people selling you quality companies at bargain prices is a BAD thing, then you probably ought not invest in stocks. Or bonds. Or real estate. Why fear volatility when you have a 20-year time frame?

The Samuelson share also assumes that the rest of your portfolio is in cash. If you’re mixing in long-duration bonds, so long as the correlation between stock and bonds (over the relevant term) is less than 1, you’re generally going to benefit from an increased proportion of stocks so long as they have an expected return higher than bonds.

If you’re an efficient markets guy, you’ll say the market is more volatile and risky so I should reduce my positions (as if someone fat-fingering an order is a fine example of the market reflecting all available information).

If you’re Buffett, you’ll say, there are a bunch of donkeys with fat fingers out there that I can take advantage of, so I can increase my position size.

Using volatility as a way to decide whether stocks are a good buy is the living embodiment of all that is laughable about Efficient Market Theory.

Needless to say, your timing has been impeccable.

Secondly, the stability of bond returns is in part illusory because of the long downside tail risk that does not appear in daily or monthly bond returns even on an mtm basis. Many retail investors view their bond portfolios in accrual terms which further exaggerates this illusion. Even worse, their accounting is done in nominal terms when what they really care about is real dollars.

Finally, your last paragraph is completely nutty – any lottery winner could say the same. It just detracts from your argument, so why did you include it?

1) Risk is not volatility.

2) Even if vol were risk you mismatched the term structure of volatility to the term of the equity returns. The vix measures 30 day vol not 40 year vol.

http://mbablogreader.blogspot.com/2010/0 5/5092010-on-peculiar-advice-of-mr-salmo n.html

Regards.

p.s. nice link to your blog in this weekends NYTimes magazine….

Technically, he is even more exposed to economic (if not market) volatility. His net worth as well as his income are tied up in one illiquid equity investment in his own business. A positive outcome ten years on does not invalidate the point that an nondiversified investment in one illiquid equity is likely more, not less, risky than investing in a diversified, liquid portfolio of stocks (and bonds).