There are four personally relevant questions I recommend investors consider. These four questions are a result of decades of teaching and collaborating with my clients:
- Why are you investing?
- Where do returns come from?
- What is risk?
- How does one capture and manage risk?
These questions are examined in detail throughout 7 Steps to A Better Portfolio
Why Are You Investing?
Many answers may come to mind—investing is a personal decision—but at the most fundamental level, these reasons include:
- I want to.
- I need to.
- I was told to.
- It is the right thing to do.
- I want to get rich or richer.
The primary reason you are investing is to achieve a return.
Where Do Returns Come From?
There are many answers that come to mind:
- Buying and selling investments.
- Picking good investments.
- Investing in great companies.
- My advisor’s instincts.
The fundamental source of return is the compensation for accepting risk.
What is Risk?
Risk and return have a complicated relationship which can be the cause of many investment problems. Risk, the origin of return, will be discussed throughout the book.
“Risk means the chance of being wrong—not always in an adverse direction, but always in a direction different from what we expected.”
Risk, in the simplest form, is the possibility or probability the expected outcome does not occur. If you understand, consider the implications, and respect risk, you are better equipped to extract the return.
How Does One Capture and Manage Risk?
We seek return, relative to risk, in almost everything we do, from driving a car, to traveling to a foreign country, or attending a rock concert, and so on. We manage the risk by having a plan to manage the variables we control. Investing is no different. The returns we seek are the by-product of risk.
We need to focus on processes to manage this risk so we can capture or achieve the intended outcome. Investment return can be captured, and risk better managed, with a rules-based systematic process and structure focusing on the variables we can control to better manage the variables we cannot control.
“Sometimes in life, it’s not developing the best answers, but developing the right questions.”
Your answers to the questions require honesty. Why are you really investing? What is your investment time horizon? What are your current and future cash flow needs? Do you understand where returns come from and how they relate to risk? Do you understand investment risk? How have you reacted during past market declines? Do you have a willingness and ability to tolerate major down markets?
7 Steps to A Better Portfolio can teach you how to avoid the biggest mistakes in investing and achieve your financial goals.
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