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Misperceptions of Risk

Below is the outline of a recent talk given by Nick Murray. For those unfamiliar with his message, it is one of extreme optimism. He is renowned within the industry for his ability to look past all the noise and point out the truths of why now is the best time to invest… in a rather direct and blunt approach.

Investing is easy. there are only two outcomes:

1) You will outlive your money.

2) Your money will outlive you.

It’s that simple.

Investors have two misperceptions of risk:

1) Investors are concerned about loss of principal.

why is this a misperception?

The real concern is loss of purchasing power NOT principal.

Purchasing power is inflation.

3% inflation rate over 30 years of retirement means that you will need $125,000 in 30 years to buy $50,000 worth of goods in today’s dollars.

The problem is erosion of purchasing power.

Every year, everything you need to buy will cost more.

Investors can not invest in a retirement they can’t imagine.

To solve this problem, investors need rising income to account for inflation.

Fixed income is like a rattle snake, it warns you before it bites. It’s fixed like the name implies.

Solution: invest in the great companies both domestic and foreign and own for the rest of your life. The dividends produced rise over time and may help reduce inflation risk.

2) Investors can’t distinguish between volatility and loss

All too often, investors mistake temporary declines for permanent loss and sell out before it returns.

Why is this a misperception?

Stock market is not the source of all ruin

Most parents of baby boomers were born during the depression and the baby boomer’s thoughts on the stock market are based on their parents perceptions of the market.

News does not equal truth

News does not think in 30 year clips

Solution: turn off the TV and stop listening to the noise.