Classical Investing, Part 4: The Golden Mean

Aristotle’s Ethics has some pretty useful insights.

Raphael: School of Athens; Source: Wikipedia

Aristotle talked about the “golden mean.” He linked happiness and virtue to finding the balance between excess and deficiency in any particular trait. For example, the mean between cowardice and recklessness is courage. In politics, the mean between anarchy and tyranny is democracy. In the investment context, Aristotle’s “golden mean” would advocate finding a “golden balance” in your portfolio.

Some have argued for “Stocks For the Long Run,” that your best returns over time are achieved with a 100% equity portfolio. But investing that way entails significant downside risk—something we’ve seen before and will see again.

By contrast, a 50/50 portfolio that includes stocks and bonds that is rebalanced when either side gets out of whack—say, 10% away from the target—gives you most of the return with about half of the risk. Aristotle’s “golden mean” can lead to golden returns. The return from an actively managed balanced portfolio almost equals that of a 100% stock portfolio, with a lot less risk.

Those dead Greeks were pretty smart. Too bad more of us don’t apply what they had to say.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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