The Real Risks In Investing

One of our core beliefs is that risk and return are related.   Asset categories that contain more risk, over long term time periods produce higher returns than lower risk assets. Okay, but that is looking at risk along a single dimension without consideration of your particular circumstances.  The real risks in investing rest in thinking that you can achieve your long term financial goals (which usually are life goals with financial implications), with only temporary or minimal exposure to volatile/risky assets. This is the pablum fed to investors each day by the myth makers (media), brokers and transaction based "advisors". It represents the financial equivalent of saying you can lose weight without exercise or watching your diet.

Creating and building wealth is one thing but preserving the long term purchasing power of these assets for 30, 40 years or more is an even more difficult task. The most prevalent risk (and where the most mistakes are made) is believing that you can achieve the premium returns associated with stocks without actually being in the markets for the long term. This may be possible in theory but it is highly improbable and certainly doesn't represent a plausible strategy.

People invest for a specific purpose, something in the future that they want, a life they want to live. If the goal is permanent, then exposure to the equities market should be also. Trying to time the market so that you are in for the up cycle and out for the down is incredibly risky and won't work except by chance. The reason investors (and the traditional financial services system) attempt this is because it appeals to the emotional aspects of investing that often dominate logic. Emotions are real but they can be terrible for the investing process.  Successful investing requires what we call "dispassionate discipline" to avoid the risk of bailing out just at the wrong time or investing only in the hot investments in the boom times. The attached piece by Weston Wellington of Dimensional, The Best Of Times, The Worst Of Times is a recent example of how our emotional view of the economy, markets, etc may not be the right view.

There are no shortage of people who claim to manage wealth. The problem is most don't put your best interests first. We do and because of that we are vastly different than other advisors. Don't keep us a secret.

  - James E. Wilson, CFP®