Redrawing the Old Map of Risk and Return
Why the portfolio navigation tools from the 1950s need an update
First, a little personal news
A few weeks ago I passed the Series 65 licensing exam. The Series 65, or more formally the Uniform Investment Adviser Law Examination, is for investment adviser representatives. It is not a financial planning certification. It has nothing to do with tax planning.
The Series 65 qualifies me to provide investment advice professionally. Here’s what struck me when I was studying for the exam: we're still teaching the same old stories about risk and return I learned in grad school 25 years ago—stories that were written decades before that.
(If you want to know more about what is tested on the Series 65, here is a link to the topics covered on the exam.)
What will I do with the certification? I’m still thinking about that.
I would love to hear your thoughts, suggestions, or questions. Leave a note in the comments or send me an email.
Let’s Go Explore!
Photo by Spencer DeMera on Unsplash
I want to take some time over the coming weeks to explore two big questions that may change how you think about investing. These questions were planted when I was studying for the Series 65, and they have been growing in my thoughts since.
First: How do we understand risk differently now than we did in the 1950s? We have decades more data, vastly better computing power, and new behavioral insights about how markets actually behave.
Second: What if the relationship between risk and return isn't as straightforward as we've been taught? What if there are better ways to build wealth for longer retirements?
Because risk and return are inseparable, these aren’t separate questions. They form a single puzzle. Solving this puzzle will let us tackle important issues for your retirement portfolio:
What if diversification as currently practiced does not reduce the risk of running out of money in retirement? What if how we practice diversification today leads us to save a lot more of our wages during our career than we really have to?
Are the spending assumptions we use in those retirement calculators and simulators right? Are they even close? Are the “percent success” numbers from those simulators too high?
Let’s go find the answers to these questions - it will be a fun journey.
What to Expect
This little quest is going to take a while. I hope you will come along. I want to show you not just the map, but also what the actual terrain feels like under your feet.
Navigating requires tools and gear, practical equipment that helps reach real destinations. We will find or develop tools along the way, practical tools you can use immediately: evaluate your portfolio in new ways focused on long-term success, understand what risk tolerance is, and form questions that will surprise your financial advisor. By the end of this series, you will know more about what retirement planning really requires. My hope is you will feel more confident that your plan is working for you now and will provide for you in the future.
What’s fascinating is we have so much more data and incredibly more powerful software and statistical methods than when portfolio theory was initially developed in the 1950s. Can you imagine what we will find when we explore what researchers and experts have accomplished since then?
This exploration should uncover many new questions. These will be questions to ask yourself and to ask your advisor. If you'll come along with me on this series I think you will find both deeper understanding and clearer direction for your own investing journey.
The disclaimer matters now more than ever before. :-)
I am not a registered investment advisor nor an investment advisor representative. All I did was pass the test.
Nothing here at The Rickhouse is financial advice. Any mentions of specific securities are not recommendations. They can’t be since I know nothing about your financial plans, risk capacity, risk tolerance, or your current financial situation.
The Rickhouse has content to help you see what risks may be in your portfolio. Knowing those risks does not directly translate to making changes in your investments. In fact, more knowledge should help you become more confident in your investment decisions and ask better questions of your financial advisor.