Phipps Lane

The equity markets historically have been the best way for investors to achieve their long-term financial goals. According to the book, “Triumph of the Optimists”, this has been true for at least 230 years, and in all 16 of the countries that have had equity markets for that duration. Through — and despite — all the wars, natural disasters, revolutions, and financial calamities and depressions.

But what is your long-term, and real, time horizon? How much yield do you need to sacrifice for a decrease in risk? How do you know?

Because, there are numerous and tremendously treacherous traps set by the misguided and innocent, but with the unintended consequence that shares the same results (or the miscreants who apparently actually may have designs) — to separate you from your wealth: the IRS, trial attorneys, government policy, unscrupulous bankers, unwitting advisors, feckless associates — waiting to lose or to take (which is worse?) what is yours.

Beware of these traps. There are risks we know, risks we know we don’t know, and risks we don’t know we don’t know.

As Mark Twain said, “it ain’t what he don’t know,
it’s what he knows that just ain’t so…”

Among so many others, here is just a smattering of risks:

–There is business risk for each individual stock or bond you may purchase.

–There is sector or industry risk (think buggy whip, or type writer industry), especially if you invest in funds.

–There is geographic risk (think Detroit versus the South for automobiles, or Western developed countries with rule of law and property rights versus countries designated as not-free, with weak rule of law and property rights).

–There is the “black swan” risk, where extraordinary and unexpected things take place that theoretically never should have.

–There is behavior risk. Your own behavior, as well that of others. Your emotions may get in the way of good decisions. Your advisors may not be immune to these same emotions, either. Investors –large and small, sophisticated and novice — are subject to their own misbehaviors (and this is compounded by the “advice” of investment advisors, financial planners, industry shills, and financial media to continue doing the exact wrong things). The misbehaviors contribute to the Financial Cancer™ and to the Financial Malpractice™ . One such misbehavior is Alpha seeking: sounds mysterious or sophisticated, but just means that you are trying to beat the markets. Sure, some can and do beat the markets. In some cases it appears they beat the markets consistently. But how can you identify these market beaters in advance? You can’t. And when you chase them, the results are usually very disappointing or worse. Misbehaviors include buying high and selling low, track record chasing, market-timing, and speculating and gambling. These misbehaviors are not investing at all.

–There are fees and expenses, which put your returns at risk. These are often gigantic. All funds have their “net expense ratio” which is their cost to do business on your behalf. In addition, there are the hidden fees, such as the cost of the “bid-ask spreads” on the underlying securities, and the transaction costs due to turnover. This is true with mutual funds, and even separately managed accounts, but especially so with hedge funds, and private equity funds.

–There is liquidity risk. How can liquidity be risky? It is either subject to very low interest rates of return because it is tied to debt instruments (CD’s, Money Market Mutual Funds, Bonds, etc.) and thus erosion of principal return, or to equity markets’ fluctuations (something we endured in 2001-2 and again in 2007-8).

–Taxation is a risk we all know. Taxation is probably the biggest risk we face. If you do not believe me, or need proof or corroboration, or just are unsure how big the problem is, contact me to share with you a spreadsheet that shows just how your largest creditors (the taxing authorities) place your investments at risk. Insidiously, or overtly. But continuously and inevitably.

However as counter-intuitive it may be, and however contrary to what some financial media “pundits” have espoused, the biggest risks are taxation, and inflation (another government “policy”, though sometimes not intentional).