Long-term strategy: “imperfect information changes everything”

In finance it is possible to imagine scenarios where virtually nothing is certain. In practice it is conventional to assume that governments of developed countries will honour their domestic currency obligations and to treat almost everything else as shrouded in some degree of doubt. But wealth planning and risk modelling exercises often proceed as if we can precisely quantify uncertainty. This is procedurally convenient; it is also misleading.

We know that we should expect a risk premium for investing in equities, but we do not know how much premium. We know that equities are risky, and more risky at some times than others, but we do not know precisely how to model how risky they will be. Chapter 3 discussed recent research which indicates that equities may be less risky over long periods than would be suggested by simple extrapolation of their short-term volatility. But we do not have a good feel for how big a reduction in volatility this will be, or even what the base level is from which the reduction should be measured. If this does not sound comforting to a cautious investor, it is not supposed to. This still leaves equities as risky assets for all investors, while governmen....