Peter Bernstein: The Riskiest Moment In Investing Is When You’re Right!

Johnny HopkinsPeter BernsteinLeave a Comment

Here’s a great interview with Peter Bernstein, author of Against The Gods – The Remarkable Story Of Risk, speaking with Jason Zweig in which he discusses managing risk and surviving as an investor. Here’s an excerpt from the interview:

Understanding that we do not know the future is such a simple statement, but it’s so important. Investors do better where risk management is a conscious part of the process. Maximizing return is a strategy that makes sense only in very specific circumstances. In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.

The riskiest moment is when you’re right. That’s when you’re in the most trouble, because you tend to overstay the good decisions. So, in many ways, it’s better not to be so right. That’s what diversification is for. It’s an explicit recognition of ignorance. And I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I’m exposed to it. Somebody once said that if you’re comfortable with everything you own, you’re not diversified. I think you should have a small allocation to gold, to foreign currency, to TIPS [Treasury Inflation-Protected Securities].

Can you manage yourself in a bubble, and can you manage yourself on the other side? It’s very easy to say yes when you haven’t been there. But it’s very hot in that oven. And can you save your ego, as well as your wealth? I think I might have just said something important. Your wealth is like your children — the primary link between your present and the future. You should try to think about it in the same way. You want your children to have freedom but you also want them to be good people who can take care of themselves. You don’t want to blow it, because you don’t get a second chance. When you invest, it’s not your wealth today, but it’s your future that you’re really managing.

You can read the entire interview here:

Peter Bernstein Interview – Jason Zweig, Money Magazine.

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