Posted on August 30, 2012 | AAII Journal
The German statesman Konrad Adenauer was quoted as saying “We all live under the same sky, but we don’t all have the same horizon.”
That’s certainly true of investors: We all live among the same set of assets, but how we combine them into an investment portfolio depends on our own circumstances—including our investment horizons.
To simplify, we might say there are two types of investors. The first type—call them tactical—pays attention to short-term fluctuations, hoping to identify opportunities to buy undervalued assets or to sell overvalued ones. Tactical investors play an active role in identifying mispricings and trading in a way that tends to eliminate them. For tactical investors, correlations among asset classes are less important than current valuations—and volatility may actually be good, because it creates trading opportunities.