10 investment quotes to live by
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Investment QuotesTRANSCRIPT
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Lance Roberts Wednesday 18 March 2015
10 Investment Quotes To Live By
As markets hover near allshytime highs investors have become quite complacent that the current bullmarket trend will continue indefinitely But why shouldnt they After all the Central Banks of the worldhave made it a primary mission to ensure that asset prices dont fall in order to keep extremely weakeconomies limping along Interest rates hover near historic lows and inflationary pressures are nonshyexistent Of course these arguments are used to justify the second highest levels of valuation in historyand a market that has set records for the longest stretch without a 10 correction This time is trulydifferentright
Of course a quick look at history tells us that this time is not different In March of 2008 I was giving aseminar discussing why we had already likely entered into a recession and that a market swoon of massproportions was approaching While that advice fell on deaf ears as we were in a Goldilocks economyand subprime was contained the bubble ended just a few short months later Why Because thatbubble was no different than any other time in history The slide below was from the presentation
Share
(imagesstories1dailyxchange001shythistimeisdifferentPNG)
Of course the next time I make this presentation I will have to add Central Bank Interventions to the list
The reality is that markets cycle from peaks to troughs as excesses built up during the previous bullmarket cycle are liquidated The chart below shows the secular cycles of the market going back to 1871adjusted for inflation What is important is that historically bull markets are launched from ver lowvaluations (buy low) and have historically ended with valuations around 23x earnings (sell high)
(images1dailyxchange2015SP500shyPEshyRecessionsshy031815PNG)
This time is not different The excesses being built up in the markets today will eventually revert just asthey have been at every other peak in market history The only question of which no one has the answerto is exactly when this occurs
With this in mind there are 10shybasic investment rules that have historically kept investors out of troubleover the long term These are not unique by any means but rather a list of investment rules that in someshape or form has been uttered by every great investor in history
(images1dailyxchangemiscSavingjpg)1) You are a saver shy not aninvestor
Unlike Warren Buffet who takes control of a company and can affect its financialdirection shy you are speculating that a purchase of a share of stock today can besold at a higher price in the future Furthermore you are doing this with your hard
earned savings If you ask most people if they would bet their retirement savings on a hand of poker inVegas they would tell you no When asked why they will say they dont have the skill to be successful atwinning at poker However on a daily basis these same individuals will buy shares of a company in whichthey have no knowledge of operations revenue profitability or future viability simply because someoneon television told them to do so
Keeping the right frame of mind about the risk that is undertaken in a portfolio can help stem the tide ofloss when things inevitably go wrong Like any professional gambler shy the secret to long term success wasbest sung by Kenny Rogers You gotta know when to holdemknow when to foldem
(images1dailyxchangemiscInvestmentpng)2) Dont forget the income
As stated by the Investment Brothers an investment is an asset or item that willgenerate appreciation OR income in the future In todays highly correlated worldthere is little diversification left between equity classes Markets rise and fall inunison as highshyfrequency trading and monetary flows push related asset classesin a singular direction This is why including other asset classes like fixed income
which provides a return of capital function with an income stream can reduce portfolio volatility Lowervolatility portfolios will consistently outperform over the long term by reducing the emotional mistakescaused by large portfolio swings
(images1dailyxchangemiscBuyshyLowshySellshyHighshyRogersjpg)3) You cantbuy low if you dont sell high
Most investors do fairly well at buying but stink at selling The reason is purelyemotional driven primarily by greed and fear Like pruning and weeding agarden a solid discipline of regularly taking profits selling laggards and
rebalancing the allocation leads to a healthier portfolio over time
Most importantly while you may beat the market with paper profits in the short term it is only therealization of those gains that generate spendable wealth
(images1dailyxchangemiscPatienceshyandshyDiciplinejpg)
4) Patience And Discipline Are What Wins
Most individuals will tell you that they are longshyterm investors However asDalbar studies have repeatedly shown (indexphpcomponentflexicontent2shytheshydailyshyxshychange2438shywhyshydoshyinvestorsshyreallyshyunderperformshyovershytimehtmlItemid=164) investors are driven more by emotionsthan not The problem is that while individuals have the best of intentions of investing longshyterm theyultimately allow greed to force them to chasing last years hot performers However this has generallyresulted in severe underperformance in the subsequent year as individuals sell at a loss and then repeatthe process
This is why the truly great investors stick to their discipline in good times and bad Over the long term shysticking to what you know and understand will perform better than continually jumping from the fryingpan into the fire
(images1dailyxchangemisc2shyrulesshyWarrenshyBuffettjpg)5) Dont Forget RuleNo 1
As any good poker player knows shy once you run out of chips you are out of thegame This is why knowing both when and how much to bet is critical towinning the game The problem for most investors is that they are consistentlybetting all in all of the time
The fear of missing out in a rising market leads to excessive risk buildup in portfolios over time It alsoleads to a violation of the simple rule of sell high
As discussed recently (indexphpbloghtmlid=2646) the reality is that opportunities to invest in themarket come along as often as taxi cabs in New York City However trying to make up lost capital by notpaying attention to the risk is a much more difficult thing to do
(images1dailyxchangemiscTimeshyvsshyMoneyjpg)6) Your most valuableand irreplaceable commodity is time
Since the turn of the century investors have recovered theoretically from twomassive bear market corrections After 15 years investors are now back to wherethey were in 2000 after adjusting for inflation The problem is that there has beenan irreplaceable loss the time that was available to save for retirement is
gone forever
For investors getting back to even is not an investment strategy We are all savers that have a limitedamount of time within which to save money for our retirement If we were 15 years from retirement in2000 shy we are now staring it in the face with no more to show for it than what we had over a decade agoDo not discount the value of time in your investment strategy
(images1dailyxchangemiscTheshytrendshyisshyyourshyfriendgif)7) Dont mistake acyclical trend as an infinite direction
There is an old Wall Street axiom that says the trend is your friend Unfortunately investors repeatedly extrapolate the current trend into infinity In 2007 the markets wereexpected to continue to grow as investors piled into the market top In late 2008 individuals wereconvinced that the market was going to zero Extremes are never the case
It is important to remember that the trend is your friend That is as long as you are paying attention to itand respecting its direction Get on the wrong side of the trend and it can become your worst enemy
(images1dailyxchangemiscOverconfidencePNG)8) Success breeds overshyconfidence
Individuals go to college to become doctors lawyers and even circus clowns Yet every day individuals pile into one of the most complicated games on theplanet with their hard earned savings with little or no education at all
For most individuals when the markets are rising their success breedsconfidence The longer the market rises the more individuals attribute their success to their own skill Thereality is that a rising market covers up the multitude of investment mistakes that individuals make bytaking on excessive risk poor asset selection or weak management skills These errors are revealed bythe forthcoming correction
(images1dailyxchangemiscBuyshyFearshySellshyGreedpng)9) Being acontrarian is tough lonely and generally right
Howard Marks once wrote that
Resisting ndash and thereby achieving success as a contrarian ndash isnt easy Things combine to make it difficultincluding natural herd tendencies and the pain imposed by being out of step since momentum invariably makesproshycyclical actions look correct for a while (Thats why its essential to remember that being too far ahead ofyour time is indistinguishable from being wrong)
Given the uncertain nature of the future and thus the difficulty of being confident your position is the right one ndashespecially as price moves against you ndash its challenging to be a lonely contrarian
The best investments are generally made when going against the herd Selling to the greedy and buyingfrom the fearful are extremely difficult things to do without a very strong investment disciplinemanagement protocol and intestinal fortitude For most investors the reality is that they are inundatedby media chatter which keeps them from making logical and intelligent investment decisions regardingtheir money which unfortunately leads to bad outcomes
(images1dailyxchangemiscpaintshydrypng)10) Comparison is your worstinvestment enemy
The best thing you can do for your portfolio is to quit benchmarking against arandom market index that has absolutely nothing to do with your goals risktolerance or time horizon
Comparison in the financial arena is the main reason clients have trouble patiently sitting on their handsletting whatever process they are comfortable with work for them They get waylaid by some comparisonalong the way and lose their focus If you tell a client that they made 12 on their account they are verypleased If you subsequently inform them that everyone else made 14 you have made them upsetThe whole financial services industry as it is constructed now is predicated on making people upset sothey will move their money around in a frenzy Money in motion creates fees and commissions Thecreation of more and more benchmarks and style boxes is nothing more than the creation of more thingsto COMPARE to allowing clients to stay in a perpetual state of outrage
The only benchmark that matters to you is the annual return that is specifically required to obtain yourretirement goal in the future If that rate is 4 then trying to obtain 6 more than doubles the risk youhave to take to achieve that return The end result of taking on more risk than necessary will be thedeviation away from your goals when something inevitably goes wrong
Its all in the risk
Robert Rubin former Secretary of the Treasury changed the way I thought about risk when he wrote
As I think back over the years I have been guided by four principles for decision making First the onlycertainty is that there is no certainty Second every decision as a consequence is a matter of weighingprobabilities Third despite uncertainty we must decide and we must act And lastly we need to judge decisionsnot only on the results but on how they were made
Most people are in denial about uncertainty They assume theyre lucky and that the unpredictable can bereliably forecast This keeps business brisk for palm readers psychics and stockbrokers but its a terrible way todeal with uncertainty If there are no absolutes then all decisions become matters of judging the probability ofdifferent outcomes and the costs and benefits of each Then on that basis you can make a good decision
It should be obvious that an honest assessment of uncertainty leads to better decisions but the benefitsof Rubins approach goes beyond that For starters although it may seem contradictory embracinguncertainty reduces risk while denial increases it Another benefit of acknowledged uncertainty is itkeeps you honest A healthy respect for uncertainty and a focus on probability drives you never to besatisfied with your conclusions It keeps you moving forward to seek out more information to questionconventional thinking and to continually refine your judgments and understanding that difference betweencertainty and likelihood can make all the difference
The reality is that we cant control outcomes the most we can do is influence the probability of certainoutcomes which is why the day to day management of risks and investing based on probabilities ratherthan possibilities is important not only to capital preservation but to investment success over time
Lance Roberts
Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management He is also thehost of Street Talk with Lance Roberts Chief Editor of The XshyFactor Investment Newsletter and theStreettalklive daily blog (httpstreettalklivecomindexphpbloghtml) Follow Lance on Facebook(httpswwwfacebookcomSTAWealth) Twitter (httpstwittercomLanceRoberts) and LinkedshyIn(httpswwwlinkedincomprofileviewid=125338026amplocale=en_USamptrk=tyahamptrkInfo=tarId3A13978354077432Ctas3Alance2Cidx3A1shy1shy1)
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(imagesstories1dailyxchange001shythistimeisdifferentPNG)
Of course the next time I make this presentation I will have to add Central Bank Interventions to the list
The reality is that markets cycle from peaks to troughs as excesses built up during the previous bullmarket cycle are liquidated The chart below shows the secular cycles of the market going back to 1871adjusted for inflation What is important is that historically bull markets are launched from ver lowvaluations (buy low) and have historically ended with valuations around 23x earnings (sell high)
(images1dailyxchange2015SP500shyPEshyRecessionsshy031815PNG)
This time is not different The excesses being built up in the markets today will eventually revert just asthey have been at every other peak in market history The only question of which no one has the answerto is exactly when this occurs
With this in mind there are 10shybasic investment rules that have historically kept investors out of troubleover the long term These are not unique by any means but rather a list of investment rules that in someshape or form has been uttered by every great investor in history
(images1dailyxchangemiscSavingjpg)1) You are a saver shy not aninvestor
Unlike Warren Buffet who takes control of a company and can affect its financialdirection shy you are speculating that a purchase of a share of stock today can besold at a higher price in the future Furthermore you are doing this with your hard
earned savings If you ask most people if they would bet their retirement savings on a hand of poker inVegas they would tell you no When asked why they will say they dont have the skill to be successful atwinning at poker However on a daily basis these same individuals will buy shares of a company in whichthey have no knowledge of operations revenue profitability or future viability simply because someoneon television told them to do so
Keeping the right frame of mind about the risk that is undertaken in a portfolio can help stem the tide ofloss when things inevitably go wrong Like any professional gambler shy the secret to long term success wasbest sung by Kenny Rogers You gotta know when to holdemknow when to foldem
(images1dailyxchangemiscInvestmentpng)2) Dont forget the income
As stated by the Investment Brothers an investment is an asset or item that willgenerate appreciation OR income in the future In todays highly correlated worldthere is little diversification left between equity classes Markets rise and fall inunison as highshyfrequency trading and monetary flows push related asset classesin a singular direction This is why including other asset classes like fixed income
which provides a return of capital function with an income stream can reduce portfolio volatility Lowervolatility portfolios will consistently outperform over the long term by reducing the emotional mistakescaused by large portfolio swings
(images1dailyxchangemiscBuyshyLowshySellshyHighshyRogersjpg)3) You cantbuy low if you dont sell high
Most investors do fairly well at buying but stink at selling The reason is purelyemotional driven primarily by greed and fear Like pruning and weeding agarden a solid discipline of regularly taking profits selling laggards and
rebalancing the allocation leads to a healthier portfolio over time
Most importantly while you may beat the market with paper profits in the short term it is only therealization of those gains that generate spendable wealth
(images1dailyxchangemiscPatienceshyandshyDiciplinejpg)
4) Patience And Discipline Are What Wins
Most individuals will tell you that they are longshyterm investors However asDalbar studies have repeatedly shown (indexphpcomponentflexicontent2shytheshydailyshyxshychange2438shywhyshydoshyinvestorsshyreallyshyunderperformshyovershytimehtmlItemid=164) investors are driven more by emotionsthan not The problem is that while individuals have the best of intentions of investing longshyterm theyultimately allow greed to force them to chasing last years hot performers However this has generallyresulted in severe underperformance in the subsequent year as individuals sell at a loss and then repeatthe process
This is why the truly great investors stick to their discipline in good times and bad Over the long term shysticking to what you know and understand will perform better than continually jumping from the fryingpan into the fire
(images1dailyxchangemisc2shyrulesshyWarrenshyBuffettjpg)5) Dont Forget RuleNo 1
As any good poker player knows shy once you run out of chips you are out of thegame This is why knowing both when and how much to bet is critical towinning the game The problem for most investors is that they are consistentlybetting all in all of the time
The fear of missing out in a rising market leads to excessive risk buildup in portfolios over time It alsoleads to a violation of the simple rule of sell high
As discussed recently (indexphpbloghtmlid=2646) the reality is that opportunities to invest in themarket come along as often as taxi cabs in New York City However trying to make up lost capital by notpaying attention to the risk is a much more difficult thing to do
(images1dailyxchangemiscTimeshyvsshyMoneyjpg)6) Your most valuableand irreplaceable commodity is time
Since the turn of the century investors have recovered theoretically from twomassive bear market corrections After 15 years investors are now back to wherethey were in 2000 after adjusting for inflation The problem is that there has beenan irreplaceable loss the time that was available to save for retirement is
gone forever
For investors getting back to even is not an investment strategy We are all savers that have a limitedamount of time within which to save money for our retirement If we were 15 years from retirement in2000 shy we are now staring it in the face with no more to show for it than what we had over a decade agoDo not discount the value of time in your investment strategy
(images1dailyxchangemiscTheshytrendshyisshyyourshyfriendgif)7) Dont mistake acyclical trend as an infinite direction
There is an old Wall Street axiom that says the trend is your friend Unfortunately investors repeatedly extrapolate the current trend into infinity In 2007 the markets wereexpected to continue to grow as investors piled into the market top In late 2008 individuals wereconvinced that the market was going to zero Extremes are never the case
It is important to remember that the trend is your friend That is as long as you are paying attention to itand respecting its direction Get on the wrong side of the trend and it can become your worst enemy
(images1dailyxchangemiscOverconfidencePNG)8) Success breeds overshyconfidence
Individuals go to college to become doctors lawyers and even circus clowns Yet every day individuals pile into one of the most complicated games on theplanet with their hard earned savings with little or no education at all
For most individuals when the markets are rising their success breedsconfidence The longer the market rises the more individuals attribute their success to their own skill Thereality is that a rising market covers up the multitude of investment mistakes that individuals make bytaking on excessive risk poor asset selection or weak management skills These errors are revealed bythe forthcoming correction
(images1dailyxchangemiscBuyshyFearshySellshyGreedpng)9) Being acontrarian is tough lonely and generally right
Howard Marks once wrote that
Resisting ndash and thereby achieving success as a contrarian ndash isnt easy Things combine to make it difficultincluding natural herd tendencies and the pain imposed by being out of step since momentum invariably makesproshycyclical actions look correct for a while (Thats why its essential to remember that being too far ahead ofyour time is indistinguishable from being wrong)
Given the uncertain nature of the future and thus the difficulty of being confident your position is the right one ndashespecially as price moves against you ndash its challenging to be a lonely contrarian
The best investments are generally made when going against the herd Selling to the greedy and buyingfrom the fearful are extremely difficult things to do without a very strong investment disciplinemanagement protocol and intestinal fortitude For most investors the reality is that they are inundatedby media chatter which keeps them from making logical and intelligent investment decisions regardingtheir money which unfortunately leads to bad outcomes
(images1dailyxchangemiscpaintshydrypng)10) Comparison is your worstinvestment enemy
The best thing you can do for your portfolio is to quit benchmarking against arandom market index that has absolutely nothing to do with your goals risktolerance or time horizon
Comparison in the financial arena is the main reason clients have trouble patiently sitting on their handsletting whatever process they are comfortable with work for them They get waylaid by some comparisonalong the way and lose their focus If you tell a client that they made 12 on their account they are verypleased If you subsequently inform them that everyone else made 14 you have made them upsetThe whole financial services industry as it is constructed now is predicated on making people upset sothey will move their money around in a frenzy Money in motion creates fees and commissions Thecreation of more and more benchmarks and style boxes is nothing more than the creation of more thingsto COMPARE to allowing clients to stay in a perpetual state of outrage
The only benchmark that matters to you is the annual return that is specifically required to obtain yourretirement goal in the future If that rate is 4 then trying to obtain 6 more than doubles the risk youhave to take to achieve that return The end result of taking on more risk than necessary will be thedeviation away from your goals when something inevitably goes wrong
Its all in the risk
Robert Rubin former Secretary of the Treasury changed the way I thought about risk when he wrote
As I think back over the years I have been guided by four principles for decision making First the onlycertainty is that there is no certainty Second every decision as a consequence is a matter of weighingprobabilities Third despite uncertainty we must decide and we must act And lastly we need to judge decisionsnot only on the results but on how they were made
Most people are in denial about uncertainty They assume theyre lucky and that the unpredictable can bereliably forecast This keeps business brisk for palm readers psychics and stockbrokers but its a terrible way todeal with uncertainty If there are no absolutes then all decisions become matters of judging the probability ofdifferent outcomes and the costs and benefits of each Then on that basis you can make a good decision
It should be obvious that an honest assessment of uncertainty leads to better decisions but the benefitsof Rubins approach goes beyond that For starters although it may seem contradictory embracinguncertainty reduces risk while denial increases it Another benefit of acknowledged uncertainty is itkeeps you honest A healthy respect for uncertainty and a focus on probability drives you never to besatisfied with your conclusions It keeps you moving forward to seek out more information to questionconventional thinking and to continually refine your judgments and understanding that difference betweencertainty and likelihood can make all the difference
The reality is that we cant control outcomes the most we can do is influence the probability of certainoutcomes which is why the day to day management of risks and investing based on probabilities ratherthan possibilities is important not only to capital preservation but to investment success over time
Lance Roberts
Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management He is also thehost of Street Talk with Lance Roberts Chief Editor of The XshyFactor Investment Newsletter and theStreettalklive daily blog (httpstreettalklivecomindexphpbloghtml) Follow Lance on Facebook(httpswwwfacebookcomSTAWealth) Twitter (httpstwittercomLanceRoberts) and LinkedshyIn(httpswwwlinkedincomprofileviewid=125338026amplocale=en_USamptrk=tyahamptrkInfo=tarId3A13978354077432Ctas3Alance2Cidx3A1shy1shy1)
XshyFactor Report
Xshyfactor NewsletterJoin Over 35000 Readers
Streettalk Radio Show
About The Show (theshycasthtml)Listen Now (httpv5playerabacastcomv51playerindexphpuid=6089)iTunes (httpitunesapplecomuspodcaststreettalkshyliveid461109169)Archive Vault (radiohtml)Listener Feedback (listenershyfeedbackhtml)
Sector Analysis401shyk Plan ManagerNewsletter ArchivesFinancial Tools and More
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The Many Errors Of The Active vs Passive Debate(indexphptheshymanyshyerrorsshyofshytheshyactiveshyvsshypassiveshydebate2html)Why Market Bulls Should Hope Rates Dont Rise(indexphpwhyshymarketshybullsshyshouldshyhopeshyratesshydonshytshyrisehtml)Its Only Like This Until Its Like That(indexphpitshysshyonlyshylikeshythisshyuntilshyitshysshylikeshythathtml)The Problem With Forward PEs(indexphptheshyproblemshywithshyforwardshypshyeshyshtml)10 Legendary Investment Rules From Legendary Investors(indexphp10shylegendaryshyinvestmentshyrulesshyfromshylegendaryshyinvestorshtml)The Math Of Loss(indexphptheshymathshyofshylosshtml)10 Investment Rules To Live By(indexphp10shyinvestmentshyrulesshytoshyliveshybyhtml)Economists Stunned By Housing Fade Told You So(indexphpeconomistsshystunnedshybyshyhousingshyfadehtml)What Is A Liquidity Trap And Why Is Bernanke Caught In It(indexphpwhatshyisshyashyliquidityshytrapshyandshywhyshyisshybernankeshycaughtshyinshyithtml)The 7 Deadly Sins Of Investing(indexphptheshy7shydeadlyshysinsshyofshyinvestinghtml)Reiterating Bond Buy shy 35 Years Of History Confirms(indexphpreiteratingshybondshybuyshy35shyyearsshyofshyhistoryshyconfirmshtml)4 Tools Of Corporate Profitability amp The Economic Consequences(indexphp4shytoolsshyofshycorporateshyprofitabilityshytheshyeconomicshyconsequenceshtml)Interest Rate Predictions Meet Bob Farrells Rule 9(indexphpinterestshyratesshymeetshybobshyfarrellshyrule9html)How Long Is Long Term(indexphphowshylongshyisshylongshytermhtml)Expect Low Returns Over The Next 10shyYears(indexphpexpectshylowshyreturnsshyovershytheshynextshy10yearshtml)
Featured Blogs
The Fallacy Of The Fed Model(indexphptheshyfallacyshyofshytheshyfedshymodelhtml)Market And Investing Wisdoms(indexphpmarketshyandshyinvestingshywisdomshtml)Visualizing Bob Farrells 10 Investing Rules(indexphpvisualizingshybobshyfarrellshysshy10shyinvestingshyruleshtml)10 Immutable Laws Of Money(indexphp10shyimmutableshylawsshyofshymoneyhtml)The Next Secular Bull Market Is Still A Few Years Away(indexphptheshynextshysecularshybullshymarketshyisshystillshyashyfewshyyearsshyawayhtml)
Advertise with Streettalk(indexphpadvertiseshystreettalkhtml)
Disclosure amp Privacy Policy(indexphpdisclosureshyprivacyshypolicyhtml)
Newsletter Disclaimer(indexphpnewslettershydisclaimerhtml)
Theriot Creative(httptheriotcreativecom)
(images1dailyxchange2015SP500shyPEshyRecessionsshy031815PNG)
This time is not different The excesses being built up in the markets today will eventually revert just asthey have been at every other peak in market history The only question of which no one has the answerto is exactly when this occurs
With this in mind there are 10shybasic investment rules that have historically kept investors out of troubleover the long term These are not unique by any means but rather a list of investment rules that in someshape or form has been uttered by every great investor in history
(images1dailyxchangemiscSavingjpg)1) You are a saver shy not aninvestor
Unlike Warren Buffet who takes control of a company and can affect its financialdirection shy you are speculating that a purchase of a share of stock today can besold at a higher price in the future Furthermore you are doing this with your hard
earned savings If you ask most people if they would bet their retirement savings on a hand of poker inVegas they would tell you no When asked why they will say they dont have the skill to be successful atwinning at poker However on a daily basis these same individuals will buy shares of a company in whichthey have no knowledge of operations revenue profitability or future viability simply because someoneon television told them to do so
Keeping the right frame of mind about the risk that is undertaken in a portfolio can help stem the tide ofloss when things inevitably go wrong Like any professional gambler shy the secret to long term success wasbest sung by Kenny Rogers You gotta know when to holdemknow when to foldem
(images1dailyxchangemiscInvestmentpng)2) Dont forget the income
As stated by the Investment Brothers an investment is an asset or item that willgenerate appreciation OR income in the future In todays highly correlated worldthere is little diversification left between equity classes Markets rise and fall inunison as highshyfrequency trading and monetary flows push related asset classesin a singular direction This is why including other asset classes like fixed income
which provides a return of capital function with an income stream can reduce portfolio volatility Lowervolatility portfolios will consistently outperform over the long term by reducing the emotional mistakescaused by large portfolio swings
(images1dailyxchangemiscBuyshyLowshySellshyHighshyRogersjpg)3) You cantbuy low if you dont sell high
Most investors do fairly well at buying but stink at selling The reason is purelyemotional driven primarily by greed and fear Like pruning and weeding agarden a solid discipline of regularly taking profits selling laggards and
rebalancing the allocation leads to a healthier portfolio over time
Most importantly while you may beat the market with paper profits in the short term it is only therealization of those gains that generate spendable wealth
(images1dailyxchangemiscPatienceshyandshyDiciplinejpg)
4) Patience And Discipline Are What Wins
Most individuals will tell you that they are longshyterm investors However asDalbar studies have repeatedly shown (indexphpcomponentflexicontent2shytheshydailyshyxshychange2438shywhyshydoshyinvestorsshyreallyshyunderperformshyovershytimehtmlItemid=164) investors are driven more by emotionsthan not The problem is that while individuals have the best of intentions of investing longshyterm theyultimately allow greed to force them to chasing last years hot performers However this has generallyresulted in severe underperformance in the subsequent year as individuals sell at a loss and then repeatthe process
This is why the truly great investors stick to their discipline in good times and bad Over the long term shysticking to what you know and understand will perform better than continually jumping from the fryingpan into the fire
(images1dailyxchangemisc2shyrulesshyWarrenshyBuffettjpg)5) Dont Forget RuleNo 1
As any good poker player knows shy once you run out of chips you are out of thegame This is why knowing both when and how much to bet is critical towinning the game The problem for most investors is that they are consistentlybetting all in all of the time
The fear of missing out in a rising market leads to excessive risk buildup in portfolios over time It alsoleads to a violation of the simple rule of sell high
As discussed recently (indexphpbloghtmlid=2646) the reality is that opportunities to invest in themarket come along as often as taxi cabs in New York City However trying to make up lost capital by notpaying attention to the risk is a much more difficult thing to do
(images1dailyxchangemiscTimeshyvsshyMoneyjpg)6) Your most valuableand irreplaceable commodity is time
Since the turn of the century investors have recovered theoretically from twomassive bear market corrections After 15 years investors are now back to wherethey were in 2000 after adjusting for inflation The problem is that there has beenan irreplaceable loss the time that was available to save for retirement is
gone forever
For investors getting back to even is not an investment strategy We are all savers that have a limitedamount of time within which to save money for our retirement If we were 15 years from retirement in2000 shy we are now staring it in the face with no more to show for it than what we had over a decade agoDo not discount the value of time in your investment strategy
(images1dailyxchangemiscTheshytrendshyisshyyourshyfriendgif)7) Dont mistake acyclical trend as an infinite direction
There is an old Wall Street axiom that says the trend is your friend Unfortunately investors repeatedly extrapolate the current trend into infinity In 2007 the markets wereexpected to continue to grow as investors piled into the market top In late 2008 individuals wereconvinced that the market was going to zero Extremes are never the case
It is important to remember that the trend is your friend That is as long as you are paying attention to itand respecting its direction Get on the wrong side of the trend and it can become your worst enemy
(images1dailyxchangemiscOverconfidencePNG)8) Success breeds overshyconfidence
Individuals go to college to become doctors lawyers and even circus clowns Yet every day individuals pile into one of the most complicated games on theplanet with their hard earned savings with little or no education at all
For most individuals when the markets are rising their success breedsconfidence The longer the market rises the more individuals attribute their success to their own skill Thereality is that a rising market covers up the multitude of investment mistakes that individuals make bytaking on excessive risk poor asset selection or weak management skills These errors are revealed bythe forthcoming correction
(images1dailyxchangemiscBuyshyFearshySellshyGreedpng)9) Being acontrarian is tough lonely and generally right
Howard Marks once wrote that
Resisting ndash and thereby achieving success as a contrarian ndash isnt easy Things combine to make it difficultincluding natural herd tendencies and the pain imposed by being out of step since momentum invariably makesproshycyclical actions look correct for a while (Thats why its essential to remember that being too far ahead ofyour time is indistinguishable from being wrong)
Given the uncertain nature of the future and thus the difficulty of being confident your position is the right one ndashespecially as price moves against you ndash its challenging to be a lonely contrarian
The best investments are generally made when going against the herd Selling to the greedy and buyingfrom the fearful are extremely difficult things to do without a very strong investment disciplinemanagement protocol and intestinal fortitude For most investors the reality is that they are inundatedby media chatter which keeps them from making logical and intelligent investment decisions regardingtheir money which unfortunately leads to bad outcomes
(images1dailyxchangemiscpaintshydrypng)10) Comparison is your worstinvestment enemy
The best thing you can do for your portfolio is to quit benchmarking against arandom market index that has absolutely nothing to do with your goals risktolerance or time horizon
Comparison in the financial arena is the main reason clients have trouble patiently sitting on their handsletting whatever process they are comfortable with work for them They get waylaid by some comparisonalong the way and lose their focus If you tell a client that they made 12 on their account they are verypleased If you subsequently inform them that everyone else made 14 you have made them upsetThe whole financial services industry as it is constructed now is predicated on making people upset sothey will move their money around in a frenzy Money in motion creates fees and commissions Thecreation of more and more benchmarks and style boxes is nothing more than the creation of more thingsto COMPARE to allowing clients to stay in a perpetual state of outrage
The only benchmark that matters to you is the annual return that is specifically required to obtain yourretirement goal in the future If that rate is 4 then trying to obtain 6 more than doubles the risk youhave to take to achieve that return The end result of taking on more risk than necessary will be thedeviation away from your goals when something inevitably goes wrong
Its all in the risk
Robert Rubin former Secretary of the Treasury changed the way I thought about risk when he wrote
As I think back over the years I have been guided by four principles for decision making First the onlycertainty is that there is no certainty Second every decision as a consequence is a matter of weighingprobabilities Third despite uncertainty we must decide and we must act And lastly we need to judge decisionsnot only on the results but on how they were made
Most people are in denial about uncertainty They assume theyre lucky and that the unpredictable can bereliably forecast This keeps business brisk for palm readers psychics and stockbrokers but its a terrible way todeal with uncertainty If there are no absolutes then all decisions become matters of judging the probability ofdifferent outcomes and the costs and benefits of each Then on that basis you can make a good decision
It should be obvious that an honest assessment of uncertainty leads to better decisions but the benefitsof Rubins approach goes beyond that For starters although it may seem contradictory embracinguncertainty reduces risk while denial increases it Another benefit of acknowledged uncertainty is itkeeps you honest A healthy respect for uncertainty and a focus on probability drives you never to besatisfied with your conclusions It keeps you moving forward to seek out more information to questionconventional thinking and to continually refine your judgments and understanding that difference betweencertainty and likelihood can make all the difference
The reality is that we cant control outcomes the most we can do is influence the probability of certainoutcomes which is why the day to day management of risks and investing based on probabilities ratherthan possibilities is important not only to capital preservation but to investment success over time
Lance Roberts
Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management He is also thehost of Street Talk with Lance Roberts Chief Editor of The XshyFactor Investment Newsletter and theStreettalklive daily blog (httpstreettalklivecomindexphpbloghtml) Follow Lance on Facebook(httpswwwfacebookcomSTAWealth) Twitter (httpstwittercomLanceRoberts) and LinkedshyIn(httpswwwlinkedincomprofileviewid=125338026amplocale=en_USamptrk=tyahamptrkInfo=tarId3A13978354077432Ctas3Alance2Cidx3A1shy1shy1)
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The Many Errors Of The Active vs Passive Debate(indexphptheshymanyshyerrorsshyofshytheshyactiveshyvsshypassiveshydebate2html)Why Market Bulls Should Hope Rates Dont Rise(indexphpwhyshymarketshybullsshyshouldshyhopeshyratesshydonshytshyrisehtml)Its Only Like This Until Its Like That(indexphpitshysshyonlyshylikeshythisshyuntilshyitshysshylikeshythathtml)The Problem With Forward PEs(indexphptheshyproblemshywithshyforwardshypshyeshyshtml)10 Legendary Investment Rules From Legendary Investors(indexphp10shylegendaryshyinvestmentshyrulesshyfromshylegendaryshyinvestorshtml)The Math Of Loss(indexphptheshymathshyofshylosshtml)10 Investment Rules To Live By(indexphp10shyinvestmentshyrulesshytoshyliveshybyhtml)Economists Stunned By Housing Fade Told You So(indexphpeconomistsshystunnedshybyshyhousingshyfadehtml)What Is A Liquidity Trap And Why Is Bernanke Caught In It(indexphpwhatshyisshyashyliquidityshytrapshyandshywhyshyisshybernankeshycaughtshyinshyithtml)The 7 Deadly Sins Of Investing(indexphptheshy7shydeadlyshysinsshyofshyinvestinghtml)Reiterating Bond Buy shy 35 Years Of History Confirms(indexphpreiteratingshybondshybuyshy35shyyearsshyofshyhistoryshyconfirmshtml)4 Tools Of Corporate Profitability amp The Economic Consequences(indexphp4shytoolsshyofshycorporateshyprofitabilityshytheshyeconomicshyconsequenceshtml)Interest Rate Predictions Meet Bob Farrells Rule 9(indexphpinterestshyratesshymeetshybobshyfarrellshyrule9html)How Long Is Long Term(indexphphowshylongshyisshylongshytermhtml)Expect Low Returns Over The Next 10shyYears(indexphpexpectshylowshyreturnsshyovershytheshynextshy10yearshtml)
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The Fallacy Of The Fed Model(indexphptheshyfallacyshyofshytheshyfedshymodelhtml)Market And Investing Wisdoms(indexphpmarketshyandshyinvestingshywisdomshtml)Visualizing Bob Farrells 10 Investing Rules(indexphpvisualizingshybobshyfarrellshysshy10shyinvestingshyruleshtml)10 Immutable Laws Of Money(indexphp10shyimmutableshylawsshyofshymoneyhtml)The Next Secular Bull Market Is Still A Few Years Away(indexphptheshynextshysecularshybullshymarketshyisshystillshyashyfewshyyearsshyawayhtml)
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which provides a return of capital function with an income stream can reduce portfolio volatility Lowervolatility portfolios will consistently outperform over the long term by reducing the emotional mistakescaused by large portfolio swings
(images1dailyxchangemiscBuyshyLowshySellshyHighshyRogersjpg)3) You cantbuy low if you dont sell high
Most investors do fairly well at buying but stink at selling The reason is purelyemotional driven primarily by greed and fear Like pruning and weeding agarden a solid discipline of regularly taking profits selling laggards and
rebalancing the allocation leads to a healthier portfolio over time
Most importantly while you may beat the market with paper profits in the short term it is only therealization of those gains that generate spendable wealth
(images1dailyxchangemiscPatienceshyandshyDiciplinejpg)
4) Patience And Discipline Are What Wins
Most individuals will tell you that they are longshyterm investors However asDalbar studies have repeatedly shown (indexphpcomponentflexicontent2shytheshydailyshyxshychange2438shywhyshydoshyinvestorsshyreallyshyunderperformshyovershytimehtmlItemid=164) investors are driven more by emotionsthan not The problem is that while individuals have the best of intentions of investing longshyterm theyultimately allow greed to force them to chasing last years hot performers However this has generallyresulted in severe underperformance in the subsequent year as individuals sell at a loss and then repeatthe process
This is why the truly great investors stick to their discipline in good times and bad Over the long term shysticking to what you know and understand will perform better than continually jumping from the fryingpan into the fire
(images1dailyxchangemisc2shyrulesshyWarrenshyBuffettjpg)5) Dont Forget RuleNo 1
As any good poker player knows shy once you run out of chips you are out of thegame This is why knowing both when and how much to bet is critical towinning the game The problem for most investors is that they are consistentlybetting all in all of the time
The fear of missing out in a rising market leads to excessive risk buildup in portfolios over time It alsoleads to a violation of the simple rule of sell high
As discussed recently (indexphpbloghtmlid=2646) the reality is that opportunities to invest in themarket come along as often as taxi cabs in New York City However trying to make up lost capital by notpaying attention to the risk is a much more difficult thing to do
(images1dailyxchangemiscTimeshyvsshyMoneyjpg)6) Your most valuableand irreplaceable commodity is time
Since the turn of the century investors have recovered theoretically from twomassive bear market corrections After 15 years investors are now back to wherethey were in 2000 after adjusting for inflation The problem is that there has beenan irreplaceable loss the time that was available to save for retirement is
gone forever
For investors getting back to even is not an investment strategy We are all savers that have a limitedamount of time within which to save money for our retirement If we were 15 years from retirement in2000 shy we are now staring it in the face with no more to show for it than what we had over a decade agoDo not discount the value of time in your investment strategy
(images1dailyxchangemiscTheshytrendshyisshyyourshyfriendgif)7) Dont mistake acyclical trend as an infinite direction
There is an old Wall Street axiom that says the trend is your friend Unfortunately investors repeatedly extrapolate the current trend into infinity In 2007 the markets wereexpected to continue to grow as investors piled into the market top In late 2008 individuals wereconvinced that the market was going to zero Extremes are never the case
It is important to remember that the trend is your friend That is as long as you are paying attention to itand respecting its direction Get on the wrong side of the trend and it can become your worst enemy
(images1dailyxchangemiscOverconfidencePNG)8) Success breeds overshyconfidence
Individuals go to college to become doctors lawyers and even circus clowns Yet every day individuals pile into one of the most complicated games on theplanet with their hard earned savings with little or no education at all
For most individuals when the markets are rising their success breedsconfidence The longer the market rises the more individuals attribute their success to their own skill Thereality is that a rising market covers up the multitude of investment mistakes that individuals make bytaking on excessive risk poor asset selection or weak management skills These errors are revealed bythe forthcoming correction
(images1dailyxchangemiscBuyshyFearshySellshyGreedpng)9) Being acontrarian is tough lonely and generally right
Howard Marks once wrote that
Resisting ndash and thereby achieving success as a contrarian ndash isnt easy Things combine to make it difficultincluding natural herd tendencies and the pain imposed by being out of step since momentum invariably makesproshycyclical actions look correct for a while (Thats why its essential to remember that being too far ahead ofyour time is indistinguishable from being wrong)
Given the uncertain nature of the future and thus the difficulty of being confident your position is the right one ndashespecially as price moves against you ndash its challenging to be a lonely contrarian
The best investments are generally made when going against the herd Selling to the greedy and buyingfrom the fearful are extremely difficult things to do without a very strong investment disciplinemanagement protocol and intestinal fortitude For most investors the reality is that they are inundatedby media chatter which keeps them from making logical and intelligent investment decisions regardingtheir money which unfortunately leads to bad outcomes
(images1dailyxchangemiscpaintshydrypng)10) Comparison is your worstinvestment enemy
The best thing you can do for your portfolio is to quit benchmarking against arandom market index that has absolutely nothing to do with your goals risktolerance or time horizon
Comparison in the financial arena is the main reason clients have trouble patiently sitting on their handsletting whatever process they are comfortable with work for them They get waylaid by some comparisonalong the way and lose their focus If you tell a client that they made 12 on their account they are verypleased If you subsequently inform them that everyone else made 14 you have made them upsetThe whole financial services industry as it is constructed now is predicated on making people upset sothey will move their money around in a frenzy Money in motion creates fees and commissions Thecreation of more and more benchmarks and style boxes is nothing more than the creation of more thingsto COMPARE to allowing clients to stay in a perpetual state of outrage
The only benchmark that matters to you is the annual return that is specifically required to obtain yourretirement goal in the future If that rate is 4 then trying to obtain 6 more than doubles the risk youhave to take to achieve that return The end result of taking on more risk than necessary will be thedeviation away from your goals when something inevitably goes wrong
Its all in the risk
Robert Rubin former Secretary of the Treasury changed the way I thought about risk when he wrote
As I think back over the years I have been guided by four principles for decision making First the onlycertainty is that there is no certainty Second every decision as a consequence is a matter of weighingprobabilities Third despite uncertainty we must decide and we must act And lastly we need to judge decisionsnot only on the results but on how they were made
Most people are in denial about uncertainty They assume theyre lucky and that the unpredictable can bereliably forecast This keeps business brisk for palm readers psychics and stockbrokers but its a terrible way todeal with uncertainty If there are no absolutes then all decisions become matters of judging the probability ofdifferent outcomes and the costs and benefits of each Then on that basis you can make a good decision
It should be obvious that an honest assessment of uncertainty leads to better decisions but the benefitsof Rubins approach goes beyond that For starters although it may seem contradictory embracinguncertainty reduces risk while denial increases it Another benefit of acknowledged uncertainty is itkeeps you honest A healthy respect for uncertainty and a focus on probability drives you never to besatisfied with your conclusions It keeps you moving forward to seek out more information to questionconventional thinking and to continually refine your judgments and understanding that difference betweencertainty and likelihood can make all the difference
The reality is that we cant control outcomes the most we can do is influence the probability of certainoutcomes which is why the day to day management of risks and investing based on probabilities ratherthan possibilities is important not only to capital preservation but to investment success over time
Lance Roberts
Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management He is also thehost of Street Talk with Lance Roberts Chief Editor of The XshyFactor Investment Newsletter and theStreettalklive daily blog (httpstreettalklivecomindexphpbloghtml) Follow Lance on Facebook(httpswwwfacebookcomSTAWealth) Twitter (httpstwittercomLanceRoberts) and LinkedshyIn(httpswwwlinkedincomprofileviewid=125338026amplocale=en_USamptrk=tyahamptrkInfo=tarId3A13978354077432Ctas3Alance2Cidx3A1shy1shy1)
XshyFactor Report
Xshyfactor NewsletterJoin Over 35000 Readers
Streettalk Radio Show
About The Show (theshycasthtml)Listen Now (httpv5playerabacastcomv51playerindexphpuid=6089)iTunes (httpitunesapplecomuspodcaststreettalkshyliveid461109169)Archive Vault (radiohtml)Listener Feedback (listenershyfeedbackhtml)
Sector Analysis401shyk Plan ManagerNewsletter ArchivesFinancial Tools and More
Subscribe gtgt
By subscribing to the newsletteryou agree to the terms andconditions of the privacy policydisclosure and newsletterdisclaimer
The Many Errors Of The Active vs Passive Debate(indexphptheshymanyshyerrorsshyofshytheshyactiveshyvsshypassiveshydebate2html)Why Market Bulls Should Hope Rates Dont Rise(indexphpwhyshymarketshybullsshyshouldshyhopeshyratesshydonshytshyrisehtml)Its Only Like This Until Its Like That(indexphpitshysshyonlyshylikeshythisshyuntilshyitshysshylikeshythathtml)The Problem With Forward PEs(indexphptheshyproblemshywithshyforwardshypshyeshyshtml)10 Legendary Investment Rules From Legendary Investors(indexphp10shylegendaryshyinvestmentshyrulesshyfromshylegendaryshyinvestorshtml)The Math Of Loss(indexphptheshymathshyofshylosshtml)10 Investment Rules To Live By(indexphp10shyinvestmentshyrulesshytoshyliveshybyhtml)Economists Stunned By Housing Fade Told You So(indexphpeconomistsshystunnedshybyshyhousingshyfadehtml)What Is A Liquidity Trap And Why Is Bernanke Caught In It(indexphpwhatshyisshyashyliquidityshytrapshyandshywhyshyisshybernankeshycaughtshyinshyithtml)The 7 Deadly Sins Of Investing(indexphptheshy7shydeadlyshysinsshyofshyinvestinghtml)Reiterating Bond Buy shy 35 Years Of History Confirms(indexphpreiteratingshybondshybuyshy35shyyearsshyofshyhistoryshyconfirmshtml)4 Tools Of Corporate Profitability amp The Economic Consequences(indexphp4shytoolsshyofshycorporateshyprofitabilityshytheshyeconomicshyconsequenceshtml)Interest Rate Predictions Meet Bob Farrells Rule 9(indexphpinterestshyratesshymeetshybobshyfarrellshyrule9html)How Long Is Long Term(indexphphowshylongshyisshylongshytermhtml)Expect Low Returns Over The Next 10shyYears(indexphpexpectshylowshyreturnsshyovershytheshynextshy10yearshtml)
Featured Blogs
The Fallacy Of The Fed Model(indexphptheshyfallacyshyofshytheshyfedshymodelhtml)Market And Investing Wisdoms(indexphpmarketshyandshyinvestingshywisdomshtml)Visualizing Bob Farrells 10 Investing Rules(indexphpvisualizingshybobshyfarrellshysshy10shyinvestingshyruleshtml)10 Immutable Laws Of Money(indexphp10shyimmutableshylawsshyofshymoneyhtml)The Next Secular Bull Market Is Still A Few Years Away(indexphptheshynextshysecularshybullshymarketshyisshystillshyashyfewshyyearsshyawayhtml)
Advertise with Streettalk(indexphpadvertiseshystreettalkhtml)
Disclosure amp Privacy Policy(indexphpdisclosureshyprivacyshypolicyhtml)
Newsletter Disclaimer(indexphpnewslettershydisclaimerhtml)
Theriot Creative(httptheriotcreativecom)
(images1dailyxchangemiscTheshytrendshyisshyyourshyfriendgif)7) Dont mistake acyclical trend as an infinite direction
There is an old Wall Street axiom that says the trend is your friend Unfortunately investors repeatedly extrapolate the current trend into infinity In 2007 the markets wereexpected to continue to grow as investors piled into the market top In late 2008 individuals wereconvinced that the market was going to zero Extremes are never the case
It is important to remember that the trend is your friend That is as long as you are paying attention to itand respecting its direction Get on the wrong side of the trend and it can become your worst enemy
(images1dailyxchangemiscOverconfidencePNG)8) Success breeds overshyconfidence
Individuals go to college to become doctors lawyers and even circus clowns Yet every day individuals pile into one of the most complicated games on theplanet with their hard earned savings with little or no education at all
For most individuals when the markets are rising their success breedsconfidence The longer the market rises the more individuals attribute their success to their own skill Thereality is that a rising market covers up the multitude of investment mistakes that individuals make bytaking on excessive risk poor asset selection or weak management skills These errors are revealed bythe forthcoming correction
(images1dailyxchangemiscBuyshyFearshySellshyGreedpng)9) Being acontrarian is tough lonely and generally right
Howard Marks once wrote that
Resisting ndash and thereby achieving success as a contrarian ndash isnt easy Things combine to make it difficultincluding natural herd tendencies and the pain imposed by being out of step since momentum invariably makesproshycyclical actions look correct for a while (Thats why its essential to remember that being too far ahead ofyour time is indistinguishable from being wrong)
Given the uncertain nature of the future and thus the difficulty of being confident your position is the right one ndashespecially as price moves against you ndash its challenging to be a lonely contrarian
The best investments are generally made when going against the herd Selling to the greedy and buyingfrom the fearful are extremely difficult things to do without a very strong investment disciplinemanagement protocol and intestinal fortitude For most investors the reality is that they are inundatedby media chatter which keeps them from making logical and intelligent investment decisions regardingtheir money which unfortunately leads to bad outcomes
(images1dailyxchangemiscpaintshydrypng)10) Comparison is your worstinvestment enemy
The best thing you can do for your portfolio is to quit benchmarking against arandom market index that has absolutely nothing to do with your goals risktolerance or time horizon
Comparison in the financial arena is the main reason clients have trouble patiently sitting on their handsletting whatever process they are comfortable with work for them They get waylaid by some comparisonalong the way and lose their focus If you tell a client that they made 12 on their account they are verypleased If you subsequently inform them that everyone else made 14 you have made them upsetThe whole financial services industry as it is constructed now is predicated on making people upset sothey will move their money around in a frenzy Money in motion creates fees and commissions Thecreation of more and more benchmarks and style boxes is nothing more than the creation of more thingsto COMPARE to allowing clients to stay in a perpetual state of outrage
The only benchmark that matters to you is the annual return that is specifically required to obtain yourretirement goal in the future If that rate is 4 then trying to obtain 6 more than doubles the risk youhave to take to achieve that return The end result of taking on more risk than necessary will be thedeviation away from your goals when something inevitably goes wrong
Its all in the risk
Robert Rubin former Secretary of the Treasury changed the way I thought about risk when he wrote
As I think back over the years I have been guided by four principles for decision making First the onlycertainty is that there is no certainty Second every decision as a consequence is a matter of weighingprobabilities Third despite uncertainty we must decide and we must act And lastly we need to judge decisionsnot only on the results but on how they were made
Most people are in denial about uncertainty They assume theyre lucky and that the unpredictable can bereliably forecast This keeps business brisk for palm readers psychics and stockbrokers but its a terrible way todeal with uncertainty If there are no absolutes then all decisions become matters of judging the probability ofdifferent outcomes and the costs and benefits of each Then on that basis you can make a good decision
It should be obvious that an honest assessment of uncertainty leads to better decisions but the benefitsof Rubins approach goes beyond that For starters although it may seem contradictory embracinguncertainty reduces risk while denial increases it Another benefit of acknowledged uncertainty is itkeeps you honest A healthy respect for uncertainty and a focus on probability drives you never to besatisfied with your conclusions It keeps you moving forward to seek out more information to questionconventional thinking and to continually refine your judgments and understanding that difference betweencertainty and likelihood can make all the difference
The reality is that we cant control outcomes the most we can do is influence the probability of certainoutcomes which is why the day to day management of risks and investing based on probabilities ratherthan possibilities is important not only to capital preservation but to investment success over time
Lance Roberts
Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management He is also thehost of Street Talk with Lance Roberts Chief Editor of The XshyFactor Investment Newsletter and theStreettalklive daily blog (httpstreettalklivecomindexphpbloghtml) Follow Lance on Facebook(httpswwwfacebookcomSTAWealth) Twitter (httpstwittercomLanceRoberts) and LinkedshyIn(httpswwwlinkedincomprofileviewid=125338026amplocale=en_USamptrk=tyahamptrkInfo=tarId3A13978354077432Ctas3Alance2Cidx3A1shy1shy1)
XshyFactor Report
Xshyfactor NewsletterJoin Over 35000 Readers
Streettalk Radio Show
About The Show (theshycasthtml)Listen Now (httpv5playerabacastcomv51playerindexphpuid=6089)iTunes (httpitunesapplecomuspodcaststreettalkshyliveid461109169)Archive Vault (radiohtml)Listener Feedback (listenershyfeedbackhtml)
Sector Analysis401shyk Plan ManagerNewsletter ArchivesFinancial Tools and More
Subscribe gtgt
By subscribing to the newsletteryou agree to the terms andconditions of the privacy policydisclosure and newsletterdisclaimer
The Many Errors Of The Active vs Passive Debate(indexphptheshymanyshyerrorsshyofshytheshyactiveshyvsshypassiveshydebate2html)Why Market Bulls Should Hope Rates Dont Rise(indexphpwhyshymarketshybullsshyshouldshyhopeshyratesshydonshytshyrisehtml)Its Only Like This Until Its Like That(indexphpitshysshyonlyshylikeshythisshyuntilshyitshysshylikeshythathtml)The Problem With Forward PEs(indexphptheshyproblemshywithshyforwardshypshyeshyshtml)10 Legendary Investment Rules From Legendary Investors(indexphp10shylegendaryshyinvestmentshyrulesshyfromshylegendaryshyinvestorshtml)The Math Of Loss(indexphptheshymathshyofshylosshtml)10 Investment Rules To Live By(indexphp10shyinvestmentshyrulesshytoshyliveshybyhtml)Economists Stunned By Housing Fade Told You So(indexphpeconomistsshystunnedshybyshyhousingshyfadehtml)What Is A Liquidity Trap And Why Is Bernanke Caught In It(indexphpwhatshyisshyashyliquidityshytrapshyandshywhyshyisshybernankeshycaughtshyinshyithtml)The 7 Deadly Sins Of Investing(indexphptheshy7shydeadlyshysinsshyofshyinvestinghtml)Reiterating Bond Buy shy 35 Years Of History Confirms(indexphpreiteratingshybondshybuyshy35shyyearsshyofshyhistoryshyconfirmshtml)4 Tools Of Corporate Profitability amp The Economic Consequences(indexphp4shytoolsshyofshycorporateshyprofitabilityshytheshyeconomicshyconsequenceshtml)Interest Rate Predictions Meet Bob Farrells Rule 9(indexphpinterestshyratesshymeetshybobshyfarrellshyrule9html)How Long Is Long Term(indexphphowshylongshyisshylongshytermhtml)Expect Low Returns Over The Next 10shyYears(indexphpexpectshylowshyreturnsshyovershytheshynextshy10yearshtml)
Featured Blogs
The Fallacy Of The Fed Model(indexphptheshyfallacyshyofshytheshyfedshymodelhtml)Market And Investing Wisdoms(indexphpmarketshyandshyinvestingshywisdomshtml)Visualizing Bob Farrells 10 Investing Rules(indexphpvisualizingshybobshyfarrellshysshy10shyinvestingshyruleshtml)10 Immutable Laws Of Money(indexphp10shyimmutableshylawsshyofshymoneyhtml)The Next Secular Bull Market Is Still A Few Years Away(indexphptheshynextshysecularshybullshymarketshyisshystillshyashyfewshyyearsshyawayhtml)
Advertise with Streettalk(indexphpadvertiseshystreettalkhtml)
Disclosure amp Privacy Policy(indexphpdisclosureshyprivacyshypolicyhtml)
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Theriot Creative(httptheriotcreativecom)
The only benchmark that matters to you is the annual return that is specifically required to obtain yourretirement goal in the future If that rate is 4 then trying to obtain 6 more than doubles the risk youhave to take to achieve that return The end result of taking on more risk than necessary will be thedeviation away from your goals when something inevitably goes wrong
Its all in the risk
Robert Rubin former Secretary of the Treasury changed the way I thought about risk when he wrote
As I think back over the years I have been guided by four principles for decision making First the onlycertainty is that there is no certainty Second every decision as a consequence is a matter of weighingprobabilities Third despite uncertainty we must decide and we must act And lastly we need to judge decisionsnot only on the results but on how they were made
Most people are in denial about uncertainty They assume theyre lucky and that the unpredictable can bereliably forecast This keeps business brisk for palm readers psychics and stockbrokers but its a terrible way todeal with uncertainty If there are no absolutes then all decisions become matters of judging the probability ofdifferent outcomes and the costs and benefits of each Then on that basis you can make a good decision
It should be obvious that an honest assessment of uncertainty leads to better decisions but the benefitsof Rubins approach goes beyond that For starters although it may seem contradictory embracinguncertainty reduces risk while denial increases it Another benefit of acknowledged uncertainty is itkeeps you honest A healthy respect for uncertainty and a focus on probability drives you never to besatisfied with your conclusions It keeps you moving forward to seek out more information to questionconventional thinking and to continually refine your judgments and understanding that difference betweencertainty and likelihood can make all the difference
The reality is that we cant control outcomes the most we can do is influence the probability of certainoutcomes which is why the day to day management of risks and investing based on probabilities ratherthan possibilities is important not only to capital preservation but to investment success over time
Lance Roberts
Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management He is also thehost of Street Talk with Lance Roberts Chief Editor of The XshyFactor Investment Newsletter and theStreettalklive daily blog (httpstreettalklivecomindexphpbloghtml) Follow Lance on Facebook(httpswwwfacebookcomSTAWealth) Twitter (httpstwittercomLanceRoberts) and LinkedshyIn(httpswwwlinkedincomprofileviewid=125338026amplocale=en_USamptrk=tyahamptrkInfo=tarId3A13978354077432Ctas3Alance2Cidx3A1shy1shy1)
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