The vast majority of what you read and hear about investing focuses on returns. As in, what mutual fund, or stock, or asset class investors ought to buy now to garner the best return for some indeterminate period. Or which stock or mutual fund had the best or worst returns for a given quarter or year or decade.
Risk—the flip side of reward—tends to get much less attention, except in the wake of severe market slides such as we’ve seen recently. And that’s not sensible, because risks are always present in investing (well, in life, too, of course), even if those risks are not apparent.
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Apparently the Rothschilds, the great banking family, had a saying about when to commit capital: “Buy at the sound of cannon; sell at the sound of violins.”
Although they probably were thinking about political instability, the saying has a contemporary lesson for investors. It’s a reminder that long-term cycles, from peak to trough, are embedded in the capital markets.
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I’ll admit it’s a stretch for investors to find something positive from the past 18 months or so. But perhaps one plus is that a number of investing beliefs are under examination, and that many of us are reconsidering our beliefs about the risks that are always present in investing. (Of course, there also are risks involved in NOT investing, but that’s a topic for another day.)
Young journalists are advised: “If your mother says she loves you, check it out.” A bit of investigation and a dash of skepticism are in order for investors too, whether applied to long-held tenets of investing or when seeking to debunk conventional wisdom. The important thing is to put some thought into your investment approach.
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Here’s a table that codifies the pain of investing over the past decade. It compares the results of investing in several asset classes under two scenarios: A $10,000 lump-sum investment at the beginning of the decade, and a regular $1,000-a-year investment over ten years (in a 401(k) plan, for example).
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