Recently retired, I re-read this series and felt insights I had the first time I read these. What are the many kinds of investment risks? Most people think of the risk of losing their money. William Bernstein dissects this simple view into many different shades of risk and astutely discusses that not all risks are of equal possibility. So while some may worry about a certain risk, they should also consider how possible that event to create the risk may be. Yes, markets go up and down all the time. But, that is not risk! The risk comes from how you react to markets.
The first booklet, “ The Ages of the Investor,” looks at the sequence of market returns. – There are two different kinds of risk:
1) Savings Sequence Risk – The sequence of returns does matter when investing periodically and does NOT matter with lump sums when invested. “That is, with a lump sum, a particularly good or bad sequence of returns will not affect your final result one bit.” – Younger savers want volatility to get more exposure to buy low opportunities.
– Second kind of savings risk: 2) Very Low Equity Returns – Mitigated by periodic investing -Thus … challenge is to recognize (prediction isn’t possible) when situation changes from the first (normal) to the second kind (bad state of the world) – Fear of the second kind of risk tends to make annuities popular for retirees. However, these come with “four large disadvantages:1) Do not allow for emergency withdrawals, 2) have to give up ownership, 3) profit needs reduces payouts; profit needs help avoid, don't prevent 4) insurance companies may not survive the very same systemic crisis that leads to annuity popularity (and state guarantee funds may be inadequate in the same situation as well due to low returns).
The author has a written a lot of books over the years that have inspired and changed my perceptions of investing and economic history that have been helpful over the past 30+ years preparing for retirement.
"The Ages of the Investor: A Critical Look at Life-cycle Investing" is intended to be the first installment in the "Investing for Adults" series. Just as grown-ups do not believe in the Tooth Fairy, the Easter Bunny, or Santa Claus, “Investing adults” know that there is no such creature as the Stock-picking Fairy or the Market-timing Fairy. Further, there is no Risk Fairy who will write you cheap options that will protect your stock holdings against loss. Investing adults are familiar with Gene Fama, Zvi Bodie, Jack Bogle, and Burton Malkiel, and understand that a mean variance optimizer does not…
William J Bernstein's second booklet in this series, “Skating Where the Puck Was,” looks at correlations. – In a perfect world, investment options would be totally uncorrelated to each other. At one time in history, this was truer than it is today. With communications shrinking the world, events on one side of the globe quickly reverberate through the markets to the other side. The effect is to increase correlation. – The effect is that strategies that used to work tend not to anymore due to correlations. And new strategies quickly fall on their faces when events turn their ugly head and bite. – Bernstein ticks off many strategies falling on their faces due to the effect of strategies becoming more widely used. – My main beef with the tone of this booklet is the focus on beating markets (which may be more to say what the strategies are about, then what his other written works describe – indexing).
The goal should be first about how to reach YOUR goal … and then design the portfolio (everything combined so they work together to smooth the road more) and your other financial resources (i.e., Social Security, pension if you have one) according to that plan. Otherwise, the risk is investing without a plan, which more often than not leads to chasing markets and emotions. Chasing puts you in the wrong place at the wrong time. Diversify so some investments do well while others don't and when markets change, what does well or not switches without you having to do anything at all.
Skating Where the Puck Was: The Correlation Game in a Flat World is the second installment in the Investing for Adults series. This series is not for novices. This booklet explores the notion that, as a general rule, no magic policy rich in high-return/low-correlation alternative asset classes exists that will simultaneously preserve upside reward and protect against downside losses. And as long as I'm lowering your expectations, this booklet is most certainly not a blueprint for the “perfect portfolio.” You're an adult, after all, so you know that the future efficient frontier lies well beyond our ken; presumably you already…
William J Bernstein's third booklet, “Deep Risk ,” circles back to Pfau’s video and blog about this booklet. – Risk = [size of the loss] X [duration of the loss] – Shallow Risk = loss of real capital that recovers relatively quickly – Deep Risk = permanent loss of real capital – A person may experience shallow risk, but put themselves into deep risk by buying high and selling low … thus, permanently losing the capital value they would have had if they had stuck it out (goes to the two kinds of risk in the first booklet). – You can NOT avoid deep risk no matter how disciplined or prudent you are (think 2001 or 2008 as more recent examples). – Gold is NOT an inflation hedge … he explains it works during Deflation (falling general price levels). [ Two other gold risks he discusses are confiscation and devastation]. – Not all 4 of these risks are equally possible … he discusses probability and how this may impact allocation to address those that concern you.
Deep risk: How History informs Portfolio Design is the third installment in the investing for adults series. this series is not for novices. This booklet takes portfolio design beyond the familiar “black box” mean-variance framework. Most importantly, the short-term volatility of financial assets, commonly measured as standard deviation, is a highly imperfect measure of the actual long-horizon perils faced by real-world investors subject to the vagaries of financial and military history. These risks have names—inflation, deflation, confiscation, and devastation—and any useful discussion of portfolio design of necessity incorporates their probabilities, consequences, and costs of mitigation. You're an investment adult, so…
Wealth Odyssey: The Essential Road Map for Your Financial Journey Where Is It You Are Really Trying to Go with Money?
By
Larry R. Frank Sr.,
Maxwell Limanowski (editor),
Peter Sander (editor)
What is my book about?
In Wealth Odyssey, author Larry R. Frank Sr., MBA, CFP® (Retired), uses his extensive financial background to provide a universal road map that will help you determine the wealth you need to support your chosen lifestyle. He discusses such topics as:
The Wealth Rule The Earning-Spending-Saving Formula Using debt wisely Risk management
Wealth Odyssey is written to be timeless; it does not matter what the market has done, or will do.
Wealth Odyssey is a practical, no-nonsense guide that will help you develop a personal definition of wealth and create an effective strategy for long-term financial success based on you and your life's realities.
