Out-Thinking Risk

A couple of weeks a go I did a blog article entitled Safe Isn’t.  It drew a comment from someone who had made the required leap of logic.

“What helped it click for us was a Vanguard article that said, basically: if you avoid investing money in variable funds for fear of losing value, you’re actually guaranteeing a loss of value, since savings accounts do not pay enough interest to keep pace with inflation. So, in truth, everything is a risk!  Might as well take the smarter risks.”

You could follow their blog here and see the advantages that they have gained for themselves.

The key is that losing value and losing money are not exactly the same thing. A savings account does not lose money but it does lose value.

Everything is a risk because everything we do involves the future and the future is unknowable with any precision.  Even vaguely knowable is not on that playlist.

Better informed people play the tendencies as evidenced in the past.  They know they are not guaranteed to happen but they are possible given similar circumstances.   The art is deciding if future circumstances will be materially different?

  1. Will people value flexibility and choices for their own lives?
  2. Will people want their children to be independent and successful?
  3. Will people value free time?
  4. Will governments be protective?
  5. Will governments be costlier or merely costly?
  6. Will investors expect to be paid for the use of their money?
  7. Will the social system permit their making something for the use of their money?
  8. Will investments be available?
  9. Will there be calamities that place a high premium on liquidity or on other hard assets?
  10. Will calamities last forever or just for a decade or less?

If the long future is not materially different then long investments would seem to be the proper course.  You cannot play the long run as a series of short runs and expect to succeed.  The short run is too variable to understand.

Years ago we had a house that had an unfortunate habit of flooding the basement about once a year.  Like 18 inches of water worth of flood with a high power sump pump running on a 2″ discharge line.  Its foundation sat in a rock bowl and when the water table rose, the bowl filled.  You pretty much had to pump the neighborhood dry.

A client made an interesting observation about the water.

“Water is persistent and patient.  You cannot defeat water, but you can out-think it.”

And so it is with risk.  It is always there and it is always changing its form.  You cannot defeat it, but you can out-think it.

Contact: don@moneyfyi.com  

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

 

 

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