Probably the most malicious, the most damaging fallacy perpetuated by traditional investment thinking is absolutism. It spawns entire schools of thought that can send the faithful follower toward financial ruin. Should I take on risk? Is investing right for me? How much should I invest? These options do not exist. To even ponder them is to waste time and to impair clarity that is requisite to investment success.
To get to the core of this, we must again quote Albert Einsten. Maybe someday he will, posthumously, be ordained as the true father of investing. Einstein never said, “You know, some things appear to be relative to others” Einstein said, “Everything is relative”. This revelation should be the foundation for any sound perspective on investment. ‘Modern Portfolio Theory’, if viewed in the pure light of relativity has failed miserably. Historical patient data show that through flouride and regular dental hygiene, dentistry has served the patient well. Historical investment return data show that ‘traditionally accepted’ investment advice has not served the client well.
If you make a $ 1,000 investment, and five years later you still have $ 1,000, then you have no gain, but at least you haven’t lost any money. Right? Wrong. Absolutely wrong. Because our entire universe, every smidgeon of our life exists in and is defined by relativity, the success of the $ 1,000 investment, if you want the true answer, must be viewed relative to all the other investments that were available at the time. If, for example, other investments produced a gain of $ 1,000, then this one was in fact a big loser.
If a married couple decides to rent for several years to avoid investing in a precarious real estate market, are they successful? No. Wrong again. They will gain or lose from their action, based upon what home prices do. But, did they “avoid investing in a precarious real estate market”? No. That was not a choice. Since this was money they had allocated to home ownership, they are players, like it or not. Their only option was how to play the real estate market. They chose to bet that cash would outperform real estate.
Is there risk in cash, savings, CD’s? Yes. If you consider them properly (that means relatively), then they carry the same risk and volatility of the other investment options that are open to the particular investor. If the alternate choice was the stock market, then the cash is going up and down just as wildly, but in the opposite direction.
Every penny you have is invested. If it were not invested, it would not exist. Not a nice thought. Cash is a very real investment. Its wisdom must be viewed as Einstein would view it. Otherwise, in hopes of being able to sleep at night, the investor is choosing to ignore historical reality. That could be very expensive,. But, if he can sleep at night, it does prove another theory . . . that “ignorance is bliss”. If your goal is comfort, you might continue to soothe yourself with absolutism. If you are willing to sacrifice comfort in the quest of building wealth, the correct club for this shot is relativity.