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ls7550

04/25/15 10:50 AM

#39440 RE: ls7550 #39439

In a world of zero inflation, anything that provides even a marginal positive reward will attract investors. Slow growth/declining earnings combined with even relatively small changes in yield will induce above average volatility.

AIM captures potential benefits from each of price appreciation, dividends/interest and volatility. Of those three my guess is that volatility could provide the biggest degree of rewards under such circumstances.

Diversifying appropriately across a range of volatile assets having low/no correlations and periodically rebalancing will help capture (lock in) such benefits. If you don't trade and just buy and hold (looking for price appreciation and dividends income alone) then you'll miss out on such volatility capture benefits. Combining low and high beta assets (such as cash and stocks) and periodically rebalancing can also capture volatility trading benefits. Having an advisor that tells you when its appropriate to implement such rebalance trades (AIM) is comforting/helpful. Keeps you on the straight and narrow rather than becoming fearful or greedy and making poorer decisions.

Japan post 1990 has seen near zero average inflation whilst a diversified rebalanced 50/50 stock/bond blend yielded 4% real (after inflation). i.e. some domestic stock, some foreign stock, some mid duration bonds, some short duration bonds/bills. If we emulate those prolonged zero inflation conditions whilst achieving similar real gains, then that's little different to the real gains that were achieved across periods of higher inflation/interest rates.