It would be nice if the path were always clear or the choice always obvious. But a life aimed at the long haul is a little more complicated. No guarantees, but at least there’s plenty of good company here in the messy real world.
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Our energy is a finite resource. Sure, we consume food and we sleep to replenish our bodies, but they too don’t last forever. The basic formula for kinetic energy requires velocity—movement. But we don’t always direct our movement in the most skillful ways.
For instance, we humans are great at focusing on low-probability events. After all, these are the events that catch headlines: “if it bleeds, it leads” the saying goes. (I mean, how do you think the world ended up with Shark Week?)
We wrote recently about bear attacks, among all things, and now we’re thinking more deeply about these ideas. What if instead of placing so much energy into unlikely (albeit scary) events, we limit our focus a little: what if we focused more instead on what’s probable?
In the markets, we hope to see at least the typical patterns of probability. Some ups and downs every year, a general trajectory of more up than down across almost any stretch of five or more years. No guarantees. But these are the general probabilities of the long-term proposition.
We don’t lock into losses by treating drops like the end of the world. Of course fatal shark attacks do happen, they are real, but we don’t stay out of the pool because one time somebody got eaten out in the open sea. That just wouldn’t make a ton of sense, huh?
The possibilities are endless, and they could consume us until our last breath. Let’s direct more energy toward what’s probable.
Clients, want to discuss what’s probable and suitable for your situation? Reach out anytime.
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One recent morning, I was lucky enough to be hiking on a mountain trail with my sister. The air was crisp and clear, the smell of the pines was thick—a beautiful day.
We came across animal tracks, then more animal tracks, on the muddy parts of the trail.
We knew before we started that there were bears in the neighborhood. (In fact, one might say we were in the bears’ neighborhood!) The tracks seemed to have the shape of claws, with a size and depth that impressed me with a desire to avoid a meeting.
It seemed as good a time as any to turn around, so we did. My senses were on high alert as we began to descend. We reached the trailhead without incident.
Later, I looked up the facts about bear attacks. Only one out of 175 million people worldwide is the victim of a fatal bear attack each year, fewer than two in the whole United States.
The danger I perceived was far larger than the actual risk involved.
This reminds me of where we are in the investment markets. It seems to be the economic equivalent of a beautiful day: the market has had a sharp rebound from the pandemic lows of 2020. Yet some are concerned about the bear (a bear market meaning, of course, a big decline).
Just as there are plenty of bears in the wooded mountains, there are regular declines in the stock market. Some estimate that 10 to 15% declines are routine each year. But fear of the bear often seems to be greater than the actual damage a bear market might do to long-term investors.
Learning to live with the ups and downs, one may benefit from long-term growth in value. But fear of a decline that proves to be temporary—and rarely truly catastrophic—may lead one to sell out long before money is actually needed, with future gains foregone.
Clients, thank you for inviting us to hike the trails of your life with you. If you would like to talk bears or mountains or markets, please email us or call.
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The advancement of technology has helped humans perform more tasks more safely.
Backup cameras and drift warning systems help curb preventable accidents in our vehicles. Even in our pastimes, technology can monitor more risks and dangers than ever. Big-wave surfers take on, well, bigger waves, prepared with more data about the conditions than ever before… not to mention a jet-ski nearby, ready to help anyone who crashes.
Such monitoring technology may allow us to take on more risk, but this doesn’t mean we ought to. Specifically, this tech becomes dangerous when we let it take over and do our thinking for us too.
Some providers offer tech tools to help “measure” risk tolerance. The tools are, in theory, designed to increase transparency. If we know more about the dangers present, shouldn’t we be able to make better decisions?
For some investors and clients, it’s perfectly comfortable to use such scores to determine the “appropriate” investments. The trouble is that then the tech tool is doing the interpreting, moving from observation to decision.
That middle part—the thinking, the choosing, the deliberation—that’s where we like to focus our energy in this shop.
Many tools may seem like safety nets, keeping us from ever falling too hard, but they should not replace the process.
You may remember The Flying Wallendas, a family that for generations has performed high-wire stunts (one of them crossed the Grand Canyon on live television a few years ago). The family avoids nets when they can.
Why?
The net may make you feel better about the risks involved, but it’s counterproductive—and dangerous—if it leads you to behave with less awareness, intention, and energy.
You must behave as if the risks are always present… And carry on, making the best decisions possible.
Clients, wondering about nets, risk, and more? Let’s chat: call or write anytime.
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In psychology, “black-and-white thinking” is a defense mechanism that helps the brain cope by pushing things to their extremes. If there is a crisp division between “right” and “wrong,” things are easier, yeah? It’s not so overwhelming to decide how to behave if we can boil a situation down to two basic options.
Like a lot of fairytales, it sure does sound nice on the surface.
But so few things in life are truly black-and-white, all-or-nothing, either/or. The problem with “black-and-white thinking” is that it’s almost always a logical fallacy.
And a logical fallacy is just that: it is false, illogical. You can‘t reason with a fallacy. You reject it and find a frame that suits the situation better.
So why do people avoid hanging out in all that gray between black and white? Because gray is blurry. There are way more decisions to make when we navigate the gray.
I’m sorry to say it, but life is already mostly in the gray in-between. And it is no time for us to splinter into camps when we all could stay on the same team. Nebraskans are suffering tremendously as COVID-19 continues to move through our communities and swamp our hospitals and care systems.
What if we didn’t splinter in the face of such challenges? It is easier to hang out in the gray when we accept that we are here together. The extremes get lonely: we’d rather face reality and work through it with each other.
Across the coming years, we will learn more about the science of this pandemic and the damage it will continue to inflict even on those who survive. In the meantime, we don’t need things to be totally “black-and-white” to move in the right direction.
Stay safe enough.
Avoid unnecessary risks.
Use our resources as wisely as we can.
What do we stand to gain when we hang out in this blurry space? We get share each other’s strength in this tough time. We get to hold out some hope for the road ahead, the other side.
Clients, we’re grateful to get to work with you, even in this tough time. Have questions about your own options? Let’s talk.
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In what seems like the good old days, we thought about many kinds of risk. Now, to many, risk only means one thing. All the other kinds of risk seem to have disappeared. Here are some of the classic risks as we learned them long ago, and still understand today:
Market Risk. Changes in equity prices or interest rates or currency exchange rates that hurt the investment value.
Liquidity Risk. Being unable to sell an investment without a discount for lack of buyers.
Concentration Risk. Having all your eggs in one basket, when the basket gets upset.
Credit Risk. A bond issuer might not be able to pay you back because of adverse conditions.
Inflation Risk. A loss of purchasing power over time because investments fail to keep up with a rising cost of living.
This old-fashioned approach to risk focused on possibilities for what might happen in the future. This makes sense to us, since the future is where we will get all of our coming investment results, good and bad. The past is past.
But perhaps the most popular approach to risk today is based totally on the past, not the future. Past volatility is supposedly the measure of risk in any investment and every portfolio. Modern Portfolio Theory (MPT) implicitly assumes that past volatility is the sole measure of risk. Yet volatility is inherent in any form of long-term investing, and has little to do with many of the classic forms of risk.
Investment firms and advisors promoting ‘risk analytics’ and many measures of ‘risk tolerance’ are using this backward-looking theory of risk. It has nothing to do with the classic definitions of risk, outlined above. In our opinion, some of the latest and greatest risk management technology is not focused on actual risk at all, and could discourage people from enduring the volatility required to achieve long term results.
Meanwhile, the classic understanding of risk has us thinking about its many dimensions as we choose securities and build portfolios. One drawback of our approach? It takes more work to do things the old-fashioned way. But we think it is the right way to go. No guarantees, of course.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
If you believe that living with ups and downs is an integral feature of long term investing, some aspects of customary investment practices seem rather curious.
The idea that volatility is risk is the root of the trouble, in our view. We believe volatility is simply the normal ups and downs, not a good measure of risk. A widely followed concept, Modern Portfolio Theory or MPT, adopts the approach that volatility is literally, mathematically, risk.
This approach attempts to work out “risk tolerance,” by which they mean willingness to endure volatility. If one is averse to volatility, then portfolios are designed with volatility reduction in mind.
Unfortunately, volatility reduction may result in performance reduction. But investments which do not fluctuate are not truly investments. Your bank account does not fluctuate, but it is not an investment.
We think beginning the conversation with an attempt to tease out willingness to endure volatility is a lot like a doctor working with a child to determine tolerance for icky-tasting medicine before making a prescription.
Our strategy is to impart what we believe about investing. We work with people to understand what part of their wealth might be invested for the long term, and whether they are comfortable with ups and downs on that fraction of it.
This necessarily involves learning about near and intermediate cash needs and income requirements, as well as talking about what it takes to live with the ups and downs. We invest a lot of time and energy into providing context and perspective so people might be better able to invest effectively. This process begins at the very beginning of our discussions with potential clients.
Clients, if you would like to talk about this or anything else, please email us or call.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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