STREET DOGS

Peter Bernstein in a conversation with Jason Zweig: Understanding that we do not know the future is such a simple statement, but it’s so important. Investors do better where risk management is a conscious part of the process.

Maximising return is a strategy that makes sense only in very specific circumstances. In general, survival is the only road to riches. Let me say that again: survival is the only road to riches.

You should try to maximise return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.

The riskiest moment is when you’re right. That’s when you’re in the most trouble, because you tend to overstay the good decisions. Once you’ve been right for long enough, you don’t even consider reducing your winning positions.

So, in many ways, it’s better not to be so right. That’s what diversification is for. It’s an explicit recognition of ignorance.

And I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I’m exposed to it.

Somebody once said that if you’re comfortable with everything you own, you’re not diversified.

I think you should have a small allocation to gold, to foreign currency, to Tips [treasury inflation-protected securities]. If you’re worried about the strength of the US dollar, then gold would be a good thing to own. It’s a very bad thing to own when things are good.

Can you manage yourself in a bubble and can you manage yourself on the other side? It’s very easy to say yes when you haven’t been there.

But it’s very hot in that oven. And can you save your ego, as well as your wealth?