Thursday, July 2, 2015

"Rules of the Road" Revisited

High Five Interchange in Dallas, Texas

“Be patient, for the world is broad and wide.”
― William Shakespeare

The world is a complicated place. So complicated, it's worthwhile to review the so called "rules of the road." These are the investment rules of thumb that we hear about all the time. So are these useful principles or oversold bromides? In this four part series, I'll give you my take and a new perspective.

No rules are perfect...

By way of housekeeping, the stock market lacks definitive answers. The data available is infinite. We have financial statements the size of phone books. Pages upon pages of daily stock prices. Constant streams of news headlines. Decades of historical numbers.

But in the end, we don't know the future. And so we are left with conjecture. (If you want to see just how much conjecture, consider a stock market theory like the Fibonacci and the Golden Ratio...)
While it may seem surprising to start with this acknowledgement, a good first step is understanding what we don't know. This means there are no “experts,” at least not experts with the perfect solution. You can't go to a pundit, ask what to do, and get the answer with certitude. Just because someone is labeled an expert doesn't mean they’re always right. When it comes to the stock market, pundits may be useful, but they are also numerous and fallible.
So in plain English, we can be sure of  this - there is no crystal ball. At least not one that works.

Managing money seems like it should be easy - but it isn’t! 


Having money is difficult. This is counter-intuitive. We've been taught from the time we were children money makes life easier.
Money requires stewardship, and stewardship means important and difficult decisions. Who is the ultimate steward of your money? You are of course, and whether you wish to be or not. You'll likely want to be the best steward possible, especially in today's volatile world. While we may not have the ability to predict the future, there are some helpful guidelines.

A word of caution. These principles are not black or white and are often misinterpreted. Just as every coin has two sides, these principles have two aspects. I'll discuss the importance of understanding both.

The Four Principles 

  1. The Arithmetic of Loss
  2. Geometric Growth
  3. Unpredictability

Read Principle 1: Risk vs. Reward