How do annual risks translate into long-term risks?
"The short answer is the annualised volatility over twenty years should be pretty much the same as the annualised volatility over five years. For independent, identically distributed returns the volatility scales proportionally. So for any number of monthly returns T, setting the annualization factor m = 12 annualises the volatility.  It should be the same for all time scales.  However, note the discussion here: https://quant.stackexchange.com/a/7496/7178 Scaling volatility [like this] only is mathematically correct when the   underlying price model is driven by Geometric Brownian motion which   implies that prices are log normally distributed and returns are   normally distributed. Particularly the comment: ""its a well known fact that volatility is overestimated when scaled over long periods of time without a change of model to estimate such ""long-term"" volatility."" Now, a demonstration.  I have modelled 12,000 monthly returns with mean = 3% and standard deviation = 2, so the annualised volatility should be Sqrt(12) * 2 = 6.9282.   Calculating annualised volatility for return sequences of various lengths (3, 6, 12, 60 months etc.) reveals an inaccuracy for shorter sequences.  The five-year sequence average got closest to the theoretically expected figure (6.9282), and, as the commenter noted ""volatility is [slightly] overestimated when scaled over long periods of time"". Annualised volatility for varying return sequence lengths  Edit re. comment Reinvesting returns does not affect the volatility much.  For instance, comparing some data I have handy, the Dow Jones Industrial Average Capital Returns (CR) versus Net Returns (NR).  The return differences are somewhat smoothed, 0.1% each month, 0.25% every third month.  More erratic dividend reinvestment would increase the volatility."
If your primary goal is no / minimized fees, there are 3 general options, as I see it:  Based on the fact that you want some risk, interest-only investments would not be great. Consider - 2% interest equals only $1,500 annually, and since the trust can only distribute income, that may be limited. Based on the fact that you seem to have some hesitation on risk, and also limited personal time able to govern the trust (which is understandable), I would say keep your investment mix simple. By this I mean, creating a specific portfolio may seem desirable, but could also become a headache and, in my opinion, not desirable for a trust executor.  You didn't get into the personal situation, but I assume you have a family / close connection to a young person, and are executor of a trust set up on someone's death. That not be the case for you, but given that you are asking for advice rather than speaking with those involved, I assume it is similar enough for this to be applicable: you don't want to set yourself up to feel emotionally responsible for taking on too much risk, impacting the trustee(s)'s life negatively. Therefore, investing in a few limited index funds seems to match what you're looking for in terms of risk, reward, and time required. One final consideration - if you want to maximize annual distributions to the trustee(s)'s, consider that you may be best served by seeking high-dividend paying stock (although again, probably don't do this on a stock-by-stock basis unless you can commit the time to fully manage it). Returns in the form of stock increases are good, but they will not immediately provide income that the trust can distribute. If you also wish to grow the corpus of the trust, then stock growth is okay, but if you want to maximize immediate distributions, you need to focus on returns through income (dividends & interest), rather than returns through value increase. "The question that I walk away with is ""What is the cost of the downside protection?"" Disclaimer - I don't sell anything. I am not a fan of insurance as an investment, with rare exceptions. (I'll stop there, all else is a tangent) There's an appeal to looking at the distribution of stock returns. It looks a bit like a bell curve, with a median at 10% or so, and a standard deviation of 15 or so. This implies that there are some number of years on average that the market will be down, and others, about 2/3, up. Now, you wish to purchase a way of avoiding that negative return, and need to ask yourself what it's worth to do so.  The insurance company tells you (a) 2% off the top, i.e. no dividends and (b) we will clip the high end, over 9.5%.  I then am compelled to look at the numbers. Knowing that your product can't be bought and sold every year, it's appropriate to look at 10-yr rolling returns. The annual returns I see, and the return you'd have in any period. I start with 1900-2012. I see an average 9.8% with STD of 5.3%. Remember, the 10 year rolling will do a good job pushing the STD down. The return the Insurance would give you is an average 5.4%, with STD of .01. You've bought your way out of all risk, but at what cost?  From 1900-2012, my dollar grows to $30080, yours, to $406. For much of the time, treasuries were higher than your return. Much higher.  It's interesting to see how often the market is over 10% for the year, clip too many of those and you really lose out.  From 1900-2012, I count 31 negative years (ouch) but 64 years over 9.5%. The 31 averaged -13.5%, the 64, 25.3%.  The illusion of ""market gains"" is how this product is sold. Long term, they lag safe treasuries." Long-term bonds -- any bonds, really -- can be risky for two main reasons:  return on principal, or return of principal.  The former is a problem if interest rates are low (which they are now in the US) because existing bonds will fall in price if interest rates rise.  The second is a problem if the lender defaults: IOU nothing. No investment is riskless.  Short-term bonds command a lower interest rate than long-term bonds (usually) because of their quicker maturity, but short-term bonds carry risk just like long-term bonds (though the interest rate risk is lower, sometimes quite a bit lower, than for long-term bonds). "1. Interest rates What you should know is that the longer the ""term"" of a bond fund, the more it will be affected by interest rates. So a short-term bond fund will not be subject to large gains or losses due to rate changes, an intermediate-term bond fund will be subject to moderate gains or losses, and a long-term bond fund will be subject to the largest gains or losses. When a book or financial planner says to buy ""bonds"" with no other qualification, they almost always mean investment-grade intermediate-term bond funds (or for individual bonds, the equivalent would be a bond ladder averaging an intermediate term). If you want technical details, look at the ""average duration"" or ""average maturity"" of the bond fund; as a rough guide, if the duration is 10, then a 1% change in interest rates would be a 10% gain or loss on the fund. Another thing you can do is look at long-term (10 years or ideally longer) performance history on some short, intermediate, and long term bond index funds, and you can see how the long term funds bounced around more. Non-investment-grade bonds (aka junk bonds or high yield bonds) are more affected by factors other than interest rates, including some of the same factors (economic booms or recessions) that affect stocks. As a result, they aren't as good for diversifying a portfolio that otherwise consists of stocks. (Having stocks, investment grade bonds, and also a little bit in high-yield bonds can add diversification, though. Just don't replace your bond allocation with high-yield bonds.) A variety of ""complicated"" bonds exist (convertible bonds are an example) and these are tough to analyze. There are also ""floating rate"" bonds (bank loan funds), these have minimal interest rate sensitivity because the rate goes up to offset rate rises. These funds still have credit risks, in the credit crisis some of them lost a lot of money. 2. Diversification The purpose of diversification is risk control. Your non-bond funds will outperform in many years, but in other years (say the -37% S&P 500 drop in 2008) they may not. You will not know in advance which year you'll get. You get risk control in at least a few ways. There's also an academic Modern Portfolio Theory explanation for why you should diversify among risky assets (aka stocks), something like: for a given desired risk/return ratio, it's better to leverage up a diverse portfolio than to use a non-diverse portfolio, because risk that can be eliminated through diversification is not compensated by increased returns. The theory also goes that you should choose your diversification between risk assets and the risk-free asset according to your risk tolerance (i.e. select the highest return with tolerable risk). See http://en.wikipedia.org/wiki/Modern_portfolio_theory for excruciating detail. The translation of the MPT stuff to practical steps is typically, put as much in stock index funds as you can tolerate over your time horizon, and put the rest in (intermediate-term investment-grade) bond index funds. That's probably what your planner is asking you to do. My personal view, which is not the standard view, is that you should take as much risk as you need to take, not as much as you think you can tolerate: http://blog.ometer.com/2010/11/10/take-risks-in-life-for-savings-choose-a-balanced-fund/ But almost everyone else will say to do the 80/20 if you have decades to retirement and feel you can tolerate the risk, so my view that 60/40 is the max desirable allocation to stocks is not mainstream. Your planner's 80/20 advice is the standard advice. Before doing 100% stocks I'd give you at least a couple cautions: See also:" There are several aspects to this but at a high level it boils down to A lot goes in to insurance rating and risk projecting.  You can't adjust a single variable and expect a proportional change in your premium, 7,000 miles per year just won't be 70% of the cost of 10,000 miles per year, because there are a lot of other things in play as well.  To further address premium adjustments.  Consider this: Even if your liability coverage did scale with perfect correlation to your mileage (using the same 70% from above, 7,000 miles per year versus 10,000 miles per year) then your premium composition is: $200 to $170 is 15%.  No change will have a direct linear correlation to your total premium because there are different component pieces of the total premium.  Fixed costs may be built in to the amounts for other component pieces of the premium, for example maybe no line of coverage ever has a cost below $X. Obviously these numbers are all made up Additionally, and also less considered is the fact that your liability also scales because of a lot of factors that have nothing to do with you.  It might be the other cars that are on the road, it might be that more densely populated areas have more fender benders.  For example if you live in Beverly Hills you have a much higher likelihood of accidentally bumping a $70-$80-$90-$100k+ car than you do in say, rural Wisconsin.  If your zip code is gentrifying and everyone starts buying Mercedes, your liability coverage increases.   You can not adjust one single variable and decide that you are lower risk than all insurers think you are.  If you shop this coverage and all insurers are within a nominal margin of pricing for the same coverage levels, there isn't much to argue with; you are simply riskier than you think you are and the variable you are focused on is not as meaningful as you think it is. "An answer from a psychological viewpoint: money does not have a linear value to people. If you have $10.000, losing one dollar doesn't really matter. Losing all $10.000 is more than 10.000 times as bad. As a simple example of a non-linear function, let's use the ""square root"" function. Let's say that having $100 is ten times as good as having $1, and having $10000 is ten times as good as having $100.  Now, this means that an insurance may have a negative expectation when expressed in dollars (since the insurance company is making a profit), but the expected value still can be positive. Let's assume the premium is $150 and there's a 1% chance it will pay $10.000. Clearly in dollars the expected loss is $50. But in the value to you (using that same square root function), the premium is just -0.75 (sqrt(9850)-sqrt(10000) and the expected payout is 1 (sqrt(10000)*1%).  Intuitive: you won't notice the premium, if you're rich enough that you don't need the insurance. But once you do need the insurance, you could now be so poor that you appreciate the payout. As a side effect - this also shows that you want an insurance with a fairly high deductible. If a $10.000 loss is a risk you can bear, then you don't need insurance for losses in the order of $100. And that's even ignoring the fact that such small payouts have relatively high administrative costs for insurance companies, which is why the premium discount for high deductibles can be disproportionally high." If you look at history, it shows that the more people predict corrections the less was the chance they came. That doesn't prove it stays so, though. 2017 is not any different than other years in the future: Independent of this, with less than ten years remaining until you need to draw from your money, it is a good idea to move away from high risk (and high gain); you will not have enough time to recover if it goes awry. There are different approaches, but you should slowly and continuously migrate your capital to less risky investments. Pick some good days and move 10% or 20% each time to low-risk, so that towards the end of the remaining time 90 or 100% are low or zero risk investments. Many investment banks and retirement funds offer dedicated funds for that, they are called 'Retirement 2020' or 'Retirement 2030'; they do exactly this 'slow and continuous moving over' for you; just pick the right one. I don't trust his analysis.  Further, any composite measure that includes a Black Swan year is *at least potentially* misleading. 2009 was a once in multigenerations event unlikely to be repeated anytime soon.  Since Shiller uses a 10 year historical running average it includes 2009 and is therefore, IMO, unreliable. Making 2009 look even more like an aberration is that the hole had been filled and then some in under 4 years.