We like to think, even assume that we are reasonable. When it comes to investing, this “reason” is often called rational and when it comes to retirement, the rational is often the replacement for risk. Three Rs: reason, rationality, and risk and each one plays a role in our success and almost just as often, our success at investing, both in the present tense and in our future plans. Which makes the argument that safety somehow plays a role in not only how far we go but how long our money is likely to last.
Our reasonableness is worn as a badge of experience. We think therefore we are apt to make reasonable, well-thought out decisions that have both the benefit of our experience and the foresight that experience has brought us. Except that we were as the saying goes, “so much younger then, we’re older than that now”. And that youthfulness we once wore in such cavalier fashion has given way to our ability to take a lofty position when it comes to our retirement.
That’s right, lofty. It is something Peter Singer, professor of bioethics at Princeton and author of “The Expanding Circle” termed as an “escalator of reason” lifting us to a vantage point where we finally see that our interest are intertwined with the interest of others and because of that, do not matter more. As we plan for the future, we tend to make the mistake that is often considered a “good move”, we play it safe.
Safe means never getting on that escalator, never looking for a vantage point and never believing that we are all somehow tied to the same raft – or balloon. Our feeling that we are in this alone, the world of investing is the enemy and we are either smarter than the rest or, on the flip side, not as dumb, has propelled us into dangerous territory.
Reason has led us to believe we are smart and smart is good. Right? Yet, where has it gotten you? Smart now is not as smart as it was in the past. The Flynn Effect, named for the philosopher who suggested that since I.Q. test were first administered, we have been getting smarter. Keep in mind that these tests, even as standardized as they are, become more challenging in each successive year, test your abstract reasoning. Not math, not language, not the tools we use to portray how smart we are, but the way we use them.
To be reasonable is no easy feat. It should lead to rational behavior. It should make us more cognizant of the potential of each decision and allow us to understand exactly what risk is and what role it plays. So we are smart enough – at least the rising I.Q. scores point towards that and in the last decade or so, the increased number of women into the investment community to assume that this should have made everything more stable. At least a reasonable thinker might assume that: we are smart and women are more pragmatic and that said, volatility should more or less level out, even to the point where it is only discussed in passing.
If Steven Pinker’s recent book about the decline of violence “Better Angels of Our Nature” is evidence, and he suggests in what one reviewer called a “masterly achievement” that violence has declined because of, but only in part because there are so many more of us than when the world was younger, do numbers make the market? With more market participants, shouldn’t this also be the case? Shouldn’t safety in numbers level the playing field for all of us?
So where is this volatility coming from in the markets we participate in even as there are more of us involved? Is it the few dictating for the rest of us or is it some lack of reasonable and rational insight that makes us seek a risk-free, dark corner instead of the opposite? When it comes to investing, risk is needed. Any assessment of your own “tolerance” – a word that suggest we have used reason and rational thinking to determine how much risk we can stomach – should lead us to a diversified approach to this process.
Yet this assessment has instead suggested that we find the safest place for our investments. And in doing so, we agree that we have more time to plan and grow our money than previous generations. Truth is, time is on our side if we assume more risk than we have been. We rationalize: we will have to work longer, why is it that we do not use that premise to make slightly more risky choices and when we do, stick with them?
I am not suggesting that you “go all in” with your investments. But a retreat to no risk offers us no opportunity to get close to what we see as a reasonable retirement goal. Roger Wohlner writes: “As I generally say to anyone saving for retirement, your biggest risk is the loss of future purchasing power, as opposed to a loss of principal due to a decline in your investments. Said another way, the biggest risk in retirement is outliving your assets.” This is risk we base on fear and if as Seneca wrote in Epistles “if we let things terrify us, life will not be worth living” we are missing the reasonable and rational motivations of investing.
We will live longer modern medicine and actuaries suggest. And when we hear this, we make what appears to be the next logical leap in the process: we will work longer which will allow us to save/invest more which means – based on that reasoning, so be more conservative. We tell our youth to take a risk when it comes to investing because they will have time to recover from any market swings. So why do we avoid the same advice when we add so many more years to the equation of our own working lives?
Our portfolio construction should be diversified and that means some risk is needed, even necessary. If there are more investors investing and the numbers seem to be growing with revisions to 401(k) plans (through auto-enrollment and auto-escalation to name a few), then taking some risk is both rational and reasonable. The more us that assume some risk, then lower the overall volatility And it might give you the opportunity to retire sooner rather than later.
Related posts:
- I Resolve: Six Resolutions for Retirement Planning in the New Year
- Retirement Planning: Not Your Mother’s Retirement Plan
- Your 401(k): When Your Plan Becomes Transparent
- One is a Lonely Number: A Retirement Plan
- Live Longer, Worry More: How to Plan for Retirement in the Face of Gloom
Your Retirement Plan: Safety Isn’t the Issue
We like to think, even assume that we are reasonable. When it comes to investing, this “reason” is often called rational and when it comes to retirement, the rational is often the replacement for risk. Three Rs: reason, rationality, and risk and each one plays a role in our success and almost just as often, our success at investing, both in the present tense and in our future plans. Which makes the argument that safety somehow plays a role in not only how far we go but how long our money is likely to last.
Our reasonableness is worn as a badge of experience. We think therefore we are apt to make reasonable, well-thought out decisions that have both the benefit of our experience and the foresight that experience has brought us. Except that we were as the saying goes, “so much younger then, we’re older than that now”. And that youthfulness we once wore in such cavalier fashion has given way to our ability to take a lofty position when it comes to our retirement.
That’s right, lofty. It is something Peter Singer, professor of bioethics at Princeton and author of “The Expanding Circle” termed as an “escalator of reason” lifting us to a vantage point where we finally see that our interest are intertwined with the interest of others and because of that, do not matter more. As we plan for the future, we tend to make the mistake that is often considered a “good move”, we play it safe.
Safe means never getting on that escalator, never looking for a vantage point and never believing that we are all somehow tied to the same raft – or balloon. Our feeling that we are in this alone, the world of investing is the enemy and we are either smarter than the rest or, on the flip side, not as dumb, has propelled us into dangerous territory.
Reason has led us to believe we are smart and smart is good. Right? Yet, where has it gotten you? Smart now is not as smart as it was in the past. The Flynn Effect, named for the philosopher who suggested that since I.Q. test were first administered, we have been getting smarter. Keep in mind that these tests, even as standardized as they are, become more challenging in each successive year, test your abstract reasoning. Not math, not language, not the tools we use to portray how smart we are, but the way we use them.
To be reasonable is no easy feat. It should lead to rational behavior. It should make us more cognizant of the potential of each decision and allow us to understand exactly what risk is and what role it plays. So we are smart enough – at least the rising I.Q. scores point towards that and in the last decade or so, the increased number of women into the investment community to assume that this should have made everything more stable. At least a reasonable thinker might assume that: we are smart and women are more pragmatic and that said, volatility should more or less level out, even to the point where it is only discussed in passing.
If Steven Pinker’s recent book about the decline of violence “Better Angels of Our Nature” is evidence, and he suggests in what one reviewer called a “masterly achievement” that violence has declined because of, but only in part because there are so many more of us than when the world was younger, do numbers make the market? With more market participants, shouldn’t this also be the case? Shouldn’t safety in numbers level the playing field for all of us?
So where is this volatility coming from in the markets we participate in even as there are more of us involved? Is it the few dictating for the rest of us or is it some lack of reasonable and rational insight that makes us seek a risk-free, dark corner instead of the opposite? When it comes to investing, risk is needed. Any assessment of your own “tolerance” – a word that suggest we have used reason and rational thinking to determine how much risk we can stomach – should lead us to a diversified approach to this process.
Yet this assessment has instead suggested that we find the safest place for our investments. And in doing so, we agree that we have more time to plan and grow our money than previous generations. Truth is, time is on our side if we assume more risk than we have been. We rationalize: we will have to work longer, why is it that we do not use that premise to make slightly more risky choices and when we do, stick with them?
I am not suggesting that you “go all in” with your investments. But a retreat to no risk offers us no opportunity to get close to what we see as a reasonable retirement goal. Roger Wohlner writes: “As I generally say to anyone saving for retirement, your biggest risk is the loss of future purchasing power, as opposed to a loss of principal due to a decline in your investments. Said another way, the biggest risk in retirement is outliving your assets.” This is risk we base on fear and if as Seneca wrote in Epistles “if we let things terrify us, life will not be worth living” we are missing the reasonable and rational motivations of investing.
We will live longer modern medicine and actuaries suggest. And when we hear this, we make what appears to be the next logical leap in the process: we will work longer which will allow us to save/invest more which means – based on that reasoning, so be more conservative. We tell our youth to take a risk when it comes to investing because they will have time to recover from any market swings. So why do we avoid the same advice when we add so many more years to the equation of our own working lives?
Our portfolio construction should be diversified and that means some risk is needed, even necessary. If there are more investors investing and the numbers seem to be growing with revisions to 401(k) plans (through auto-enrollment and auto-escalation to name a few), then taking some risk is both rational and reasonable. The more us that assume some risk, then lower the overall volatility And it might give you the opportunity to retire sooner rather than later.
Related posts: