If I Only Knew Then...Submitted by Monument Group Wealth on July 14th, 2015
“Because I said so.” These were the watchwords when we were young. Then we grew up, and our days of blind obedience were replaced by the expression: “If I only knew then what I know now.”
For those of us who find ourselves saying the aforementioned expression, here’s a summer mind-bender for you. You are ahead of the game; at least in terms of your long-term investment strategy, you are ahead of the game. You do know now that which you will still want to know in the future.
For example, you already know that the heightened levels of uncertainty we are experiencing as a result of the unfolding Greek debt crisis and China-based concerns are the types of market risks we prepare for and plan around. It is market risk that drives future expected market returns. Market risk also explains why we maintain appropriately diversified portfolios (in order to prepare for investment environments when various market factors experience their inevitable turns at adversity).
A landmark 1958 paper, “Liquidity Preference as Behavior Towards Risk,” laid the groundwork for what became known as the Separation Theorem (one method of implementing this theory is, in summary, using short-term, high quality bonds in combination with riskier assets such as equities and thereby lowering the downside risk of the portfolio), which helped us understand that market risk is essential to investing. Without it, we could not expect to earn extra returns on riskier investments. When risk in the form of uncertainty does appear, those who do not know (or do not remember) this evidence are likely to panic and place ill-timed trades. Evidence-based fund managers can then be on the patient side of these panic sells, buying low when warranted and positioning funds to benefit in the future from any garage-sale prices to be had today. That is academic theory in applicable action, contributing to wealth-building goals.
So, let us celebrate what we already know about prudent investing. Let us also remember a lesson that Greek philosophers like Socrates taught us: the wisest individuals never stop learning. If you would like to better understand the historical context and economic implications of the Greek debt crisis, we recommend a primer published in late June by the University of Chicago’s Booth School of Business. If you would like a copy of the seven-page primer, please be in touch.
Until then, thank you for your trust and confidence.
Byron E. Woodman, Jr. Lee C. McGowan, CFP®
President Managing Director