September 11, 2018
Father Knows Best (or Does He?)
As investors, we have to both look at the “long haul” and really understand risk. Owning individual stocks, for example, can be a dangerous game. This is why we advise clients to spread the risk among multiple asset classes and holdings.
At Benchmark Bank, we look for the efficient frontier— minimal risk with maximum return, in line with a client’s risk tolerance.
In last quarter’s newsletter, I told you about a contest I started to teach my kids about investments. The race is on and the kiddos are ahead…they’re whipping up on dear ole’ dad as investors! Over the last three months my kids have outperformed my pick by 5.43%, but that doesn’t tell the whole story; I’m teaching them about risk.
For example, while my kids’ investments outperformed mine over the last quarter, their risk is 25.2% higher. We got this measurement by taking the average annualized standard deviation of their stocks and subtracting the annualized standard deviation of my fund.
Now, I want you to look inside the numbers at what we call standard deviation or beta, over a 20 year period. These are measures of risk. In very simple terms, the lower the number, the less risk in the investment.
Remember, the key is minimizing risk while simultaneously maximizing returns. Owning stocks is difficult because often times “fools rush in”.
With that in mind, what you have to ask yourself when choosing an investment is, “can I sleep soundly at night taking on that kind of risk?”
When I tuck my kiddos in at night I need to know the money I worked to save for them is chugging along at its own pace, nice and slow like the trolley that went around Mr Roger’s Neighborhood. Sure, there are faster, sleeker trains out there, but they may just go off the rails.
Side note: Make sure and see the documentary, Won’t You Be My Neighbor. It’s a game changer and a good template for how to look at life.
Can we “ramp up” risk? Sure, we can and do for our clients when the time is right. But as this economic juggernaut continues along, we need to keep things in perspective; Before a market rolls over, there is generally a run and climb up the wall of worry. We may be in for another leg up, and it may be fast and look like a hockey stick. But—you know this by now—chasing returns is a loser’s game.
"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton
"Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night." - Seth Klarman
I want to sleep soundly at night and I know you do as well. I want your kids and grandkids to be able to laugh and smile and know that you have your family’s financial future protected. After all, Father Knows Best.
Farewell for now, fellow investors. Make sure and check out all the attached information for a succinct and detailed look at the current economy and market overview.
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