How Does ‘Risk’ Affect You?

The Wall Street bullies are continuously promoting stock picking, market timing and trading. We have all seen the talking heads on the business channels, using the brokers’ tools, picking stocks and making great returns.

People like Jim Cramer want you to believe it is easy.

These commercials/shows make us believe that it is an easy task to predict market movement or pick the next ‘hot’ stock.

English: CNBC’s “Mad Money with Jim Cramer” ca...
English: CNBC’s “Mad Money with Jim Cramer” came to Tulane University’s Freeman School of Business Oct. 19, 2010 to broadcast in front of a live audience as part of the show’s “Back to School Tour.” (Photo credit: Wikipedia)

The bullies know we are looking for a get rich scheme to make our lives easy.

Hit it right, they contend, and you will be on easy street.

When you bet on a long shot in gambling or assume excessive risk by trying to pick the “big winner”, your brain releases Dopamine.

During the Packer-Lions game the Packers won on a last second ‘Hail Mary’ pass. High risk indeed. There was plenty of Packer fans releasing Dopamine.

The casinos in our area count on the excitement of winning a large sum of money with little risk. Just a small wager will result in huge returns. They count on the release of Dopamine.

This chemical produces a euphoric feeling and is closely related to the high that cocaine and morphine produce.

For stock pickers, even thinking about placing an order for a stock they hope will bring them huge returns can produce this chemical.

All the while stock pickers ignore the real risks and likely losses in the speculative venture.

Like the Packer win which was very unlikely and is not a recommended recipe for success on a consistent basis.

There will always be investors who get lucky and make unbelievable returns. We must realize that this is a matter of ‘luck’ and not ‘skill. These lucky investors will very seldom repeat in the future.

Successful investors have a long term plan when allocating their assets. They know there is an academic and scientific method available when building a prudent portfolio. Their strategy includes understanding the expected return and expected volatility of their portfolio.

Many investors believe that looking at past performance is a good indicator of future results.

This is exactly what the Wall Street bullies want you to believe.

As investors we must realize that if something happened in the past does not mean it will repeat in the future. Thousands of variables must be exactly the same for these situations to repeat.

During a meeting in Chicago I met with an active trader and his quote has stuck with me.

“Trading strategies work until they don’t.”

The problem for us investors we will never know when these strategies will stop working.

Develop a prudent strategy and remain disciplined. Find an investor coach/fiduciary adviser who shares your beliefs and go confidently into the future.

To succeed in reaching your long term goals you must own equities….globally diversify……rebalance.

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