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What's needed is a sound intellectual framework for decisions and the ability to keep emotions from corroding that framework. - Warren Buffett
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When too little risk is risky.
Wise investors understand that there are different kinds of risk when it comes to long term planning. The question is not about being in or out of the market. Rather, it is a tradeoff of one risk (the market) for another (purchasing power/inflation).
Whenever we meet new clients, we discuss their attitudes about investing and the investment capacity needed to accomplish their goals. Often, somewhat vague goals indicate a general inability (or unwillingness) to make choices and tradeoffs. This "gap" between risk attitudes and expressed goals is the crux of the problem.
As an investor, it is certainly possible to take too much risk...though it is more far more common for individuals to assume too little risk relative to their long term goals. Yet it is rare that retirement goals are accomplished without significant, continuous exposure in the equities markets.
As they assess the risk in these terms, most people decide that it is far more risky to be out of the market than to prudently invest in a well diversified, efficient portfolio.
- James E. Wilson, CFP® My Blog
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From The Wall Street Journal \ 10.8.2009
Assessing the risks, index funds outperform actively managed mutual funds.
Sam Mamudi served as editor of the London-based, Fund Action and Managing Intellectual Property, before joining the staff of MarketWatch in New York City.
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