When investors want to make money regardless of the type/process of investment, it can lead them to myopically focus on promises of profit, rather the size and type of risk they are taking with an investment. In my short lifetime, I have seen very smart friends, taking risks that they don’t understand.
Eventually, they end up suffering the consequences.
That’s why in my humble opinion, we should always prepare before making an investment. It’s important to have a strategy for the foreseeable outcomes.
Personally, I like to sum up like this: risk is the probability of losing money permanently. Volatility is the variance between returns of an asset or security.
Ideally, I try to invest in something with little risk associated, even if the volatility is high. Risk should be minimized, volatility embraced.
First, it’s still impossible to forecast stock returns over the short run. Second, costs matter and higher costs are predictive of lower returns. Third, taxes are costs, and focusing on tax efficiency is critical. Finally, it’s more important to concentrate on risk management than on returns, which means one should keep a relatively constant exposure to high-risk stocks and low-risk bonds.
If you agree/disagree, or wish to add something to this thoughts, please feel free to comment.
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