Tempted by this hot market? Don’t succumb to the sin of pride
“The devil appeared to a monk disguised as an angel of light, and said to him, ‘I am the angel Gabriel, and I have been sent to you.’ But the monk said, ‘Are you sure you weren’t sent to someone else? I am not worthy to have an angel sent to me.’ At that the devil vanished.” — Nun and theologian Benedicta Ward
When it comes to life, I truly believe the greatest evil among us is pride. It is the root of so much damage (as evident by what we’ve been witnessing in Ottawa and the resulting economic damage.)
Pride is also very destructive when it comes to investing, as it motivates us to take risks when we really shouldn’t, just because we’re not satisfied until we’re doing better than someone else.
Unfortunately, the investment industry knows the power of this motivation and harnesses it to secure your business. We are currently seeing an abundance of marketing by fund managers and advisors selling their performance over the past two years while downplaying what happened in 2022 as markets plummeted.
This is a shame, as the real value of an investment manager can be seen in years like that. This is because it takes real skill to manage risk alongside return, and touting performance numbers delivered during a bull market does little to demonstrate that.
Our friends over at Outcome Metric Asset Management LP recently provided an excellent overview of the importance of understanding the relationship between risk and return. They show two portfolios with dramatically different return profiles and yet the one with a significantly higher sum of returns over some very good years still generated a lower portfolio value. This is the effect volatility can have on a portfolio over time.
Downside protection is imperative because when
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