Harry Markowitz won the Nobel Prize in 1990 for his work on the efficient market theory that basically shows risk and return are interrelated. Two sides of the same coin as it were. Investment professionals have known this for a long time and instead of a mathematical formula, use these three simple words: risk generates return.
I was struck by this fact when I read a recent survey report that shows individual U.S. investors hold 48 percent of investible assets in cash, 18 percent in stocks and 7 percent in bonds. Since the risk of cash is close to zero, the return is also close to zero.
Think about that the next time you are nervous about your investing approach and considering moving to cash or sitting on cash and remember the old investment saying: risk generates return. Without risk there is no return. Can you reach your investment and life goals with zero return potential?
That was one line in a sales letter I recently received that promoted a stock trading education course. The rest of this sales letter offered similar tasty come-one like:
“We will pull back the curtain to show you the truth about the daily transfer of wealth…”
“We can teach you to time the market, which is simply a matter of learning to read a picture of price movement over time…”
“Wall Street has convinced most people that ‘timing the market’ is too risky…”
And my favorite:
“We have been taught that an 8%—12% return is great. Wall Street would never be happy with that and neither should you. Raise your expectations!”
And so on. The bottom line offer in the sales letter is that I can attend this free workshop and “Start learning how to change my life.” How wonderful. Where do I sign up?
Obviously, this is all a bunch of hooey meant to get me to a workshop where the company will try to sell me into one of their costly programs that is long on implied success and short on results. The company marketing this workshop is playing on my emotions, specifically:
- I am greedy and am willing to reach for an investment return that is un-realistic and thereby get rich quick. Greed is the second oldest emotion in the history of mankind.
- I feel left out and that the “smart money” is making money while I am not. No one wants to feel stupid or less than and this letter preys on my fears of being left behind.
- I am competitive and see investing as a game that I can win. My colleague Frank Armstrong III calls this the belief in the performance fairy.
Investing success is boring. It comes from choosing the investment approach that is right for you, sticking with it and rebalancing regularly. This philosophy makes for boring sales letter copy and long-term investment success. Ignore the hype, be aware of your emotions and stick with what has worked over time. I can’t promise 8%-12% returns, but I can promise market returns, whatever that may be.