Monday, October 21, 2013

Retirement - Your Second First Job (5)


In recent posts, I have touched on risk tolerance.  Your risk tolerance, whether you have measured it or not, is the basis of your investing style.  Your personal risk tolerance level will define your ability to withstand the basic investing emotions: fear and greed.  These inner pressures affect most investors as their portfolios move up or down with the market.  Justin Mamis,  a famous technical investor and author, felt that your view of risk is formed, in part, in your childhood.  In his 1991 book The Nature of Risk, Stock Market Survival and the Meaning of Life, he discussed this phenomenon as follows: 

The first word parents want a baby to understand and respond to is not Mama or Daddy--it's No.  How is anyone going to learn to venture, to take a risk, when "No" resounds?  Parents and baby may exchange smiles, but as soon as the baby wants to take a risk--that is, do something venturesome--the infant hears: "Don't touch that," Watch out," "Be careful."  From infancy's earliest days, taking a risk becomes a negative concept.  "Don't" becomes a family motto. An infant knows no risk; all is ahead.  Parents know all is risk, and try to protect.  The child learns what the parents teach, and a world that starts out full of possibilities becomes full of limits and danger.

Americans are often described as basically optimistic, when in reality it is that they are perpetually hopeful.  The market seems to represent hope itself.  And yet, among professionals, even those who function on the stock exchange floor, a frequently heard stock market expression is, "No one ever said it was going to be easy."   It never can be easy because the rule of the market is that you have to act before you know enough.  Because it is a process there is no one moment or single point, at which one can make an obvious "sure" decision. 

Thus it is not just information that becomes the key to taking a market risk; it is also necessary to understand such information in terms of our relationship to that knowledge.  "What do we know?"   "How do we know it?" and "What is our reaction to that information?" - as well as "What do we need/wish/want to know?" - are all questions that affect the decisions we make every day.  When a decision is required, the way we take information in, and how we use it, affects that decision.  Our self's style goes back deep into childhood.  The manner in which we let information in, our ability to understand it, to deal with it, and perhaps even distort it, all start with who we are, as developed from the moment of beginning, on our hands and knees, to explore the world.

Thus the risk we are about to take via our next decision is not a simple choice of "do it or not" or "yes or no."  Before deciding, we need to know why what we know is never enough, a question that, in turn, leads to what kind of information do we believe or trust? and is it us or the market?  But we must remember that there are times when the market, or life itself, is incoherent, unclear, and/or conflicting: times when it isn't us, it's it.  The risk can never be cured by knowing enough.

But when information is insufficient we need the trust and belief in ourselves, and the inner acceptance that we'll be okay anyhow.  We need the discipline to accept whatever is available.  We need the experience to understand all the ifs, ands, and buts, and yet still confront the risk and make the decision.  Setting ourselves free from the quest for information, oddly enough, is what reduces risk even as it appears from the freedom itself that risk is being scarily increased. 

Keep all of this in mind as you approach your job of retirement investing.  Enjoy your retirement.  Now get to work!

Excerpts from The Nature of Risk, Stock Market Survival and the Meaning of Life by Justin Mamis, copyright 1991 are used by permission of Mr. Mamis and Fraser Publishing Company.

Comments are always welcome.  

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