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Probabilities & Absolutes…
Written by Steve | Published: |
Yesterday I listened to an interesting podcast (well at least I thought it was interesting). It was about sovereign debt, treasury yields and bond market reactions.
A real conversation starter for a party…right??? (ha ha)
Anyway, one of the things the host mentioned was that there are no absolutes in finance ONLY probabilities.
For example a 17% probability of winning a bet on a horse race is pretty good.
What is the probability of your doordash delivery getting there on time? Probably 50/50.
What about the odds that you are going to be hungry within the next 12 hours…probably closer to 97%.
Would you fly with a airline that says we get you to your destination without crashing 90% of the time?
The interesting thing about how this applies to investing is it depends on what you know.
If I am a real estate investor and know nothing about finance, property rights, construction/repair, tenant rights, etc. Then what do you think my probability is in successfully maintaining a successful real estate portfolio?
Conversely if I have a team of experts and/or have been working in real estate for the last 20+ years the odds of my success go up. Not to 100%, because not all of us have that surety but a higher chunk of the risk is mitigated.
The same thing applies to every individual stock/bond that you own.
Given that there are inherent risks and tradeoffs in every asset class. Every person has a different tolerance for risk.
But just because you are comfortable as a “risk taker” doesn’t mean you are going to have better results.
I regularly see conservative investors make millions of dollars more than those that loved “the ride” of the markets. Again not always, but there is something to be said about slow and steady.
Some advisors out there ask for your investor DNA and how much risk you are willing to take.
That is the WRONG question.
The real question is why are you saving and investing this money in the first place and how do we increase your probabilities of getting you there despite your appetite for risk.
If you get the itch to be a “risk taker” take a small amount of money and throw it on red or black and leave it there. If you win great, if you lose then you have a small calculated loss and got your thrill.
My main point with all of this is that those that have a scientifically planned strategy for cash flow in retirement are the individuals with the most satisfaction and peace of mind, and in this crazy world we live in there is a lot of value to that.
