Rigged System: Fake Risk, Fake Return
With seemingly everyone chiming in on fake news, have investors considered their risk/return profile may also be fake? When it comes to investing, who or what can we trust; is the market rigged; and why does it matter?
For eight years now, an investment in the S&P 500 has yielded positive returns [2015 assumes dividends reinvested]. In recent years, expressions like “investors buy the dips” and “low volatility” have become associated with this rally.
Before, investors used to construct portfolios that provided a risk/return profile they were comfortable with, but the ‘old days’ are over. To be prepared for what’s ahead, Merk debunks some myths and discusses the rigged system; hidden risks; why risk is masked; investors desperate for insurance; is selling volatility a risky proposition; are we facing a market melt-up; is the Fed being fooled; a possible market crash; underperforming in bull markets; beating the average is impossible; and buying the dips can be irresponsible.
Many investors go along for the ride during the good times and are over-exposed to risk assets. They chase returns because they don’t have enough money to retire. When the market plunges, they lose much of their net worth. The appropriate way to react in that situation is not to double down and put a disproportionally larger portion of net worth at risk. If you cannot stomach the risk of an investment, stay away from it. When you lose money, you can afford to take less risk, not more risk. Any pundit suggesting otherwise is irresponsible.