The above legal analogy was designed to make some important points about making decisions in times of uncertainty. Just as the legal system never requires a jury to be 100% certain of guilt, investors never have certainty that they will make money. If the outcome is guaranteed, you are not making money. You may not realize it because of a want of knowledge, but the loss is there nonetheless. A major reason that I decided to write this book is my thesis that most investors (which includes the vast majority of today’s working public) make unreasonable decisions based on the best reason of all: Prudence.
If you do not understand how markets work and someone in the personnel office asks you what your investment strategy is, you will certainly not have an answer to put on your 401(k) forms. For want of knowledge, we make the most reasonable decision that the uninitiated person can make; we choose an extremely “conservative” investment strategy that in the end will cause us to lose money. The galling irony of this is that we made the decision based on a desire to not lose money. In other words, with the most conservative strategies, our money is not conserved.
In a way, our employers are often guilty of false advertisement, especially when they limit our investments to a few canned strategies. If you have three options such as conservative, moderately aggressive, and aggressive, you are in trouble. The problem with these canned strategies (or those of lifecycle funds) is that there is no objective standard for what is conservative and what is aggressive. When we go with menu investments, we are at the mercy of whoever designed the menu. If I work for a financial company that sponsors retirement programs and my company makes the most money selling stocks as opposed to bonds, you can bet that we’re going to load all of our baskets with a healthy dose of equities. If you just check a box and forget about it, you will only know that you are in trouble when your quarterly statement comes in and you pass out upon reading it.
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Last Updated: 6/25/2018