re: Various Financial Questions

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Security A = Goes up 60% then down 40%
Security B = Goes up 6% then down 4%.

Security B is worth more than your initial investment while Security A is worth less. The key to growing capital over the long-term is to avoid large losses. The longer your time horizon, the higher chances the turtle will always beat the hare.

With that in mind we go to allocation drivers. Developed economies are looking at 0-2% real growth over the next 3-5 years while emerging nations are looking at 4-5% real growth. From a technical perspective, the realm of "safe" assets (treasuries, mortgages, agency debentures) is decreasing, pushing prices up and yields down. Investors are starved for yield which pushes them out the risk spectrum, in this case investment grade credit bonds would be the logical next step.

The equity market is highly volatile and if you believe that we'll only see 0-2% real growth than that is not good reason to own equities over the long term in large amounts. You should still have exposure, but "playing stocks" should be left to your personal brokerage account rather than retirement. With all this in mind this is roughly the personal allocation that I have and what I have allocated for friends and family.

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There are numerous papers by competent parties which have studied equity returns over long periods of time which point to slower growing economies exhibiting stronger equity returns than faster growing economies. What you have written regarding projected/estimated future real returns would seem to make rational sense, but often it has not.

The future is unknown. I am still a fan of the Ben Graham's 25/75 guideline, it might dampen gains in some years, but does provide a cushion in avoiding large losses when market valuations are high. During a period of above average market valuations one could also choose investments in funds or ETFs which have captured significant upside and experienced lower downside risk compared to investments in market cap indexes. Some people's personalities and skill set tilt them to trading, that's not my investing method. Personally, I would not buy domestic REITs at current yields (which include ROC in most distributions) and valuations. International, maybe.

I have 20% of my portfolio in TIPS, primarily in individual bonds that were bought when real yields were much higher. Today, I couldn't advocate buying short or other duration TIPS as one is either buying negative yielding securities or accepting the volatility of long bonds for very inconsequential real yield. I bonds are a maybe, at least one is guaranteed stability of principal and maintains the option to sell with a very minimal ding to accrued interest after Yr1, through Yr5, then no penalty.