Stocks and Hurricanes
As a saver, you have a cone of uncertainty, too
Two weeks ago, I recommended subscribers learn and have fun doing it by walking through FINRA’s risk and return “Learning to Invest” interactive game. I still do. The presentation contains an embedded fallacy, however, that is perpetuated throughout the investment community and instructive for sound financial decision-making. We discuss it in this week’s installment, which begins Chapter 6, “Investing in Stocks and Living Standard Risk.”
The fact that stock investments and portfolios of stock investments are riskier the longer the investment term doesn’t change the importance of stock investments in an economics-based financial plan. But, if you are building a plan and want to understand your living standard risk best, does it not make sense to be better informed about it? A likely benefit of an eyes-wide-open, “Oh, this is my risk,” clarity, when risk details are known, may bring palpable ease to a self-described risk-averse individual.
When investing for long periods, know the uncertainty about your ending investment account value increases, like the widening cone of uncertainty illustrated by NOAA for Hurricane Laura a few years ago.
Today: Forecasting the value of an investment. If you have a financial advisor, they likely use the simulation technique discussed this week, and this reading will put you in a better position to discuss planning. If you are down the path of real planning :), economics-based financial planning, the simulation technique is built into MaxiFi.
Excerpt:
