Know Risk, Know Return  

Q. How can an investor manage risks to the get the returns required for retirement?

A. By making the right investment decisions. 

The investment decisions that are important to your reaching critical mass in advance of your retirement are:

  • How to distribute your money among investment options?

  • Which investment options are right for you?

  • When should you add, reduce, or rebalance?

Decision making  

Most investment decisions are rooted in what is known, but it is the unknown that causes risk. 

  • Do you have all of the available information? 

  • Are you able to understand and process the information you have? 

  • Can you act without bias, emotion, and fear?

The following table is meant to be 'enlightening,' not comprehensive. 

  • the highlighted green items help you make the right decisions, 

  • the highlighted yellow items are used in decision making, but their value questionable,

  • the highlighted red items are typically not used and/or may be harmful to the decision making process

You only use 10% of your investing brain to make investment decisions.

Known to You Known to Others Unknown Unknowable

  • Current 'market' prices

  • Some personal needs

  • Past prices, earnings, financials

  • Personal behavior in reaction to external events

  • Public opinions and behaviors

    •

  1. Each individual has their own circle of competence that can be marginally increased with 'broker' or other paid opinions.

 

  • Real-time surveys and discussions with management 

  • Sophisticated analysis of all historical records

  • Industry expertise

    •

  1. In addition to what is known to you, the above are known to other 'professionals' or 'insiders' with a larger circle of competence.

  • Forecast of future market prices, earnings, growth

  • Unintended consequences

  • What's been 'discounted' (already built into pricing)

  • Capabilities, agendas, biases, and motivations of gurus, analysts, and advisors

  • Investor behavior

  • Technological breakthroughs

  • Short and long term results

    •

  1. Disclaimers about using history to predict future returns and forecasts are mandatory, but often dismissed.

  2. Only a Registered Investment Advisor has a fiduciary responsibility to their client.

  • Your tolerance under extreme pressures

  • Geo political events

  • Acts of nature

  • Times of exuberance, hysteria, catastrophe, and opportunity

  • Your health condition and life expectancy

  1. Depending on your level of spirituality, the future is unknowable.

 

If you've lost money in the stock or bond market, and have told yourself "you'll never invest again," think again — you've probably not invested at all, you've likely speculated on the price going up.

 

 

 

 

 

 

 
   
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