Nathan-

You are technically correct that lower correlations and volatility lead to higher compound returns, assuming the same expected return. But the problem is that the expected returns on other asset classes are so much lower than they are for stocks. So these differences swamp any advantage of low correlations and volatility.

For example, given the current low expected returns on bonds, it makes no sense to invest in bonds for building long horizon wealth, even with their lower correlations and volatility.

Correlation and volatility are a third order effect at best and should receive very little consideration in building growth portfolios.

Yes, myopic loss aversion is by far the most common cognitive error made by investors. And for those clients who do not respond to emotional coaching, the answer might be a trade off between short term emotional comfort and long horizon wealth.

But the cost of such trades off is huge and so as investment professionals we need to do everything we can to help our clients avoid such monumental mistakes.

In the case of the income portfolio, we can emphasize the growth in dividend income versus short-term draw downs. In the growth portfolio, we can emphasize the long investment horizons we all face, and thus the need for patience in tough market environments.

Not saying this will be easy, but the best advisors do everything they can to help clients build as much long horizon wealth as possible.

Remember, we are the adults in the relationship.