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Investing Pleasantly and With The Least Necessary Risk

There's no point worrying about your investments (just steals energy, etc.). It makes you a worse investor if you worry about them. Investing should be pleasant CONTINUALLY. What the stock market does on any given day, or over any given period should NEVER have any negative affect on you.

Feeling or thinking negatively or excessively euphoric about your investments is just asking for trouble. The media, Wall Street, etc. has a vested interest in getting readers emotional and dependent on the fix that a roller coaster ride provides. Just like many like soap operas, read tabloids... many people invest looking for the same rush.

Most people don't have enough money to justify taking high risk and being forced to wait decades for a potential decent reward. It takes money to make money. Even these compounding examples you're fed remember, those interim amounts are YOUR capital at risk. Gains are as much your capital as contributions. It's not a gift, you earned it with time, effort, and risk. So don't just look at the intial value or contributions.

Time is money. You're better off taking the least necessary risk to do "well enough" and enjoying the ride. The irony is you'll probably make more money, anyway. Sound ludicrous? Well, stay with us and we'll tell you why this is so.

Investing with the least necessary risk OVERALL is more enjoyable. It does not mean you can't have some speculative positions.

Net return fixation. Why take risk commensurate with the gross return? You may be willing to take high risk for 11%, but focus on the net return of, say, 5%.  Are you willing to stake your future on that? Using the rule of 72, 5% takes about 14 years to double ( 72/5 ). The older I get the LESS willing I am to wait 14 years to double my money and the less I need to double my money. The older I get the less I want to wait 14 years+ for the outcome of a coin toss.

Beware of long term periods that owe their good returns to recent excess. In 1999, we were told that the "market", "buy/holders" "stocks" "high risk" did 11.3% or so a year. In fact, only a tiny sliver did that. At that time they used the S&P 500 to represent that. But, it beat about 85%. So, it was not enough to merely buy/hold, take high risk, buy stocks, etc. Your crystal ball had to figure out IN ADVANCE which of the 1,000s of choices to buy, when to lump sum in, when to sell, etc. They fixated mostly on 1983+ as if the stock market begun then and it was not possible to have bought/held PRIOR to that date.

The 11.3% was due to EXCESSIVE move of 1983-1987 and 1995-1999. Hardly representative periods. Having 2 massive bull markets so close together without a major bear in between is a FLUKE!

The Dow Jones did under 2% a year in capital gains 1929-1980. Tack on the REAL TIME dividend now of about 1.8% and you can see that the long term isn't necessarily going to be the "average" of 11%! Yes, be sure to use the REAL TIME dividend yield not historic average. Capital gain varies and is hard to predict but dividend yields are known. Adjust your estimate when the yield changes, but at the moment put down 1.8%.

The total average return 1929-1980 was about 8%, a far cry from 11%+. I have a problem with the notion of a "long term return" when teh BULK OF THE PERIOD the return was materially less!

Or, look at 1926-1980 for those who decry that 1929 was a major top. They show 1926-1999 and say 11% is the long term. But, 80% of the period, the return was about 8%.

Long term return 11%? But, if you're going to say LONG TERM, then even longer term is better. The very long term return is on order of 8.5% (1800+). If we use 1900+, it's 9.7%.

The lower the return of high risk, the greater odds you can take half the risk and beat it.

Then factor in costs, taxes, and inflation. Sure, that applies to lower risk, BUT you have far more control over costs and taxes and you can fixate more on that and be more efficient. Fixating on costs and taxes in higher risk can really backfire. But, it's very hard to go wrong in lower risk. And, the premium shrinks on a net return level.

Besides, the key question is: What is the net return? If it's not high enough, I don't care if it MIGHT beat lower risk, it's NOT WORTH TAKING THE HIGH NETWORTH PERCENT RISK, anyway! So, no dice. Oh, sure, for a SMALL portion of my assets.

This idea that whatever the market delivers is a commensurate and fair return? I don't buy that bs. Risk/reward varies. Sometimes it's commensurate and worth the risk, most often it isn't. It depends on how much money you have and how much time you're willing to wish away.

I might take high risk for 12% (gross) but definitely wouldn't take the same risk for 6%. Especially since the margin vs. lower risk is even more narrow. At 12%, really the biggest margin is probably 9%, but at 6% only 3%. And, that's a probable BEST CASE potential, NOT an average scenario. 12% is by no means a given, it's a near best case.

Look at capital gain returns. IF you buy the day of a MAJOR long term bottom, over 10 years, 10% is probable best case. Sometimes more, but ONLY FOR SO LONG before the bear comes and brings it back in line. Tack on today's 1.8% or so dividend yield and you have a probable best case of 11.8% while most are thinking that's a min or average scenario. AND, that's from the day of the bottom, we aren't at such a point!

And, that's IF you pick the right portfolio, lump sum in, avoid selling at wrong points, and either sell the top of a bull ccle or are fine with losing significatnly more money than ever before, etc.

The lower the return, the more time it will take. Big difference if I'm taking high risk vs. low risk. If high risk takes too long, it becomes irrelevent if it MIGHT take less time than lower risk. Game over. Why bother?

But, there's an age you hit where you are significantly less willing to postpone rewards. Long before you die, the quality of life and the need for excess will diminish. There's a point where all you fixate on is MERE SURVIVAL. Most cases a low risk approach will take care of that as it doesn't cost much for that.

Many will poo-poo the "trivial" difference of 1.3% or so but that's HUGE if you are taking high risk. And, these same people put down those who show half risk doing 1.3% less! They THEN claim 1.3% is a huge difference. It's peanuts IF I took half the risk. This is especiall true becasue taxes, costs, and inflation reduce it further. And, 1.3% premium takes decades to potentially become significant.

Life is too short to wish your time away. Don't wait decades for a reward (a reward that is a big MAYBE). If the reward takes decades, if the justification for taking the risk is decades away, I don't receive any compensation in the interim and live no better than those taking half the risk. But, isn't the point to ENJOY THE RIDE AS MUCH TODAY AS LATER? Values matter today, perhaps more than tomorrow when you may not be coherent or be at an age where you will be indifferent between studio apartment living vs. mansion living.

The myth is that only those who were "so unlucky to have bought the 1929 top" were hurt by it. What a crock. Evne if you bought in 1900, so long as you were in 1929 and stayed in you got creamed. This idea that losing profits is not a problem. That's nuts. Who in the 1929 crash was consoled by that? Profits are every bit as valuable and yours (your capital) as contributions.

In fact, those in the longest got creamed the most. They may have had the most in. Those who just got in weren't programmed to just buy/hold, they probably jumped out fast.

The idea that we look at real time balance as the same as the initial or intial + contributions and separate gains? Hogwash! If you began with 10,000 20 years ago and you had 100,000 at the top, you won't be blaise about losing 50% fixatinng only on the 5 fold gain!

There's no evidence that capital gain steps up to make up for lower dividend. Look at history. High dividend yields only help. The idea that they're reinvesting the money rather than doling it out? So what, the dividend yield is still what it is. There's no evidence that reinvesting makes up the difference.

Capital gain returns stay in the same range. A lower dividend does NOT lead to higher captial gains.

See, even if you did well even after the 2000 bear, lsoing 50% after years in the market is actually WORSE than losing 50% when you have less money in and are older yet the are all blaise about the impact on long term buy/holders! And, as if you were happy to be up 9% a year long term after being up 17% a year long term in 1999!

The more money in, even if the same % of net worth as before, the greater the impact of a 10% drop. Could that money have gotten to GOOD ENOUGH in reasonable time if you had taken half the risk?

Notice how they later abandoned using the S&P 500 as the representative (simply because it fell - as if that wasn't inevitiable!). Rest assured, the current representative(s) will be dumped after it INEVITABLY lags (and they will act all surprised that a, gulp, bear market came - maybe they should study history: There were about 25 bear markets in the 1900s).

We provide the OTHER SIDE of the story that you don't hear on Wall Street. We aren't out to change minds, just provide alternative information, the other side of the coin.

Get The Straight Scoop - No Bias.

We do not sell anything and will give it to you straight. We are very open minded and are very happy to change our view if it will help cut our costs, make more money and invest better. We are very flexible, unlike most who are devoted to one style or another and become defensive.

Our objective is NOT to stay with a view but to continually challenge it in hopes we find a better approach.

Open minded is willingness to change. That does not mean you necessarily change a view, just that you are equally happy to change as stay.