Friday, February 15, 2013

Thoughts on Investing

How to Protect Yourself From Your Own Investing Ignorance

By CARL RICHARDS
 
Part of my goal in writing “The Behavior Gap” was to encourage people to do two things:

1) Have more meaningful conversations about money.

2) Get really clear about their relationship with money by using simple, hand-drawn sketches

Much to my surprise, both have happened.

During my recent exhibition at the Kimball Art Center, I asked people to draw financial concepts and display them on a wall we set aside for that purpose. When we started, I worried that we wouldn’t even fill up the wall. In the end, we had to take stuff down and rotate the art because we filled the wall multiple times.
There were so many great examples that I contacted a few of these artists to ask them to share their drawings with all of you and explain the thinking behind the sketch. Over the next few months, I plan to share some of the different submissions.

Today’s sketch comes from Ann Ford of Salt Lake City, which is posted here with her permission. Here’s how she described the feelings behind her sketch:

I’ll say it: I’m ignorant about financial matters. I’m talking really ignorant. I try to educate myself, and it’s like trying to teach French to a French poodle. I know I need to save and invest, but in what?
The answer is this: Invest in more than one thing. Diversify. By spreading funds across a variety of investments, no single ignorant decision I make can sink my savings. True, not everything I invest in will perform equally well, but I can sleep at night. Sleep is worth more to me than money any day.
Ignorance can also mean the things we can’t know, like the future or nuances about our investments that we miss, even if we’re well versed in investing. We can’t know everything; by diversifying, we don’t have to.
I love Ann’s sketch!

I love it because we often think of diversification as a technical term, something we just have to do. So we forget why we do it.

We diversify because we simply do not (and cannot) know everything. In other words, we’re ignorant about issues that might represent a huge risk to our financial futures.
Risk is what is left over after you think you’ve thought of everything. It is that “stuff” that is left over that we need to protect ourselves from. But because these risks, the real risks, are often surprises or things we didn’t think would happen, the only real way to protect ourselves is to avoid having all our eggs in one basket. So we diversify.

The smartest people I know are the the ones who understand that they don’t know everything and put policies in place to protect themselves from their own ignorance. And Ann’s sketch is a much better way to say all of that.

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