Business Day - - THE BOTTOM LINE - Michel Pireu (pireum@street­

From Ben Carl­son at A Wealth of Com­mon Sense: The ob­vi­ous stuff is of­ten the first ca­su­alty of the fire­hose of in­for­ma­tion, noise, opin­ions, pre­dic­tions and anal­y­sis out there these days ... so I like to re­mind my­self reg­u­larly of the fol­low­ing in­vest­ment truths:

If you need to spend your money in a rel­a­tively short pe­riod of time, it doesn’t be­long in the stock mar­ket. If you want to earn higher re­turns, you’re go­ing to have to take more risk.

If you want more sta­bil­ity, you’re go­ing to have to ac­cept lower re­turns. Any in­vest­ment strat­egy with high ex­pected re­turns should come with the ex­pec­ta­tion of loss. The stock mar­ket goes up and down.

If you want to hedge against stock mar­ket risk, the eas­i­est thing to do is hold more cash. Risk can change shape or form but it never re­ally goes away. There’s no such thing as a per­fect port­fo­lio, as­set al­lo­ca­tion or in­vest­ment strat­egy.

No in­vest­ment strat­egy can out­per­form at all times. Size is the en­emy of out­per­for­mance. “I don’t know” is al­most al­ways the cor­rect an­swer when some­one asks you what’s go­ing to hap­pen in the mar­kets. If you in­vest in in­dex funds, you can­not out­per­form the mar­ket. If you in­vest in ac­tive funds, there’s a high prob­a­bil­ity you will un­der­per­form in­dex funds.

For buy and hold to truly work, you have to do both when mar­kets are fall­ing. Out­per­form­ing the mar­ket is hard (but not im­pos­si­ble). Most back tests work bet­ter on a spread­sheet than in the real world. Com­pound in­ter­est is amaz­ing but it takes a re­ally long time to work.

Pre­dict­ing the fu­ture is hard. The best in­vest­ment process is the one that fits your per­son­al­ity enough to al­low you to see it through any mar­ket en­vi­ron­ment. It’s al­most im­pos­si­ble to tell if you’re be­ing dis­ci­plined or ir­ra­tional by hold­ing on when your strat­egy is un­der­per­form­ing.

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