Technology Makes Better Investment Decisions

I have many Minnesota clients who are doctors.  In my conversations with them over the years, I can recall many of their observations regarding new technology that provides patients with safer and more effective medical care.

The same advances in technology have taken place in the investment advice profession over the last few years. Individual investors don’t have to suffer through the old ways of managing stock market risk.

Doctors don’t practice medicine like they did even a few years ago.  Cars are much safe and more fuel efficient than a few years ago. Cell phones change like the speed of light.

I have never understood why investment management strategies have largely stayed the same over the years.

Longstanding and widely-held investment management theories have failed to protect stock market investors from periodic stock market declines. These investment management theories have been replaced by new investment management practices that reflect the complexity of today’s stock and bond markets.

The concept of asset allocation has been one of the most recent casualties. Common sense has taken over from the academic theories. Age and stock market risk tolerance are no longer the appropriate stock market risk benchmarks.  

What does a stock market investor’s age have to do with how much money they are willing to lose hanging on to losing investments in a bad stock market environment?

Part of the past asset allocation mantra of the current generation of investment professionals was based on the belief that younger stock market investors can afford to take more stock market risk than a near-retired or retired stock market investor. The concept was that younger stock market investors have the time to make up stock market losses later in their investment lives.

Does anyone actually believe that a 21-year-old investor is comfortable losing a large part of his or her company retirement plan account balance in a dramatic stock market decline? The same question can be asked about a 75-year-old retired investor.

Stock market risk tolerance is the same for every stock market investor regardless of their age. Potential loss of stock market principal has to be managed at all times and need to reflect what is going on in the current economic and stock market environments.

Stock market investors of any age group need to take advantage of today’s investment management technology in order to avoid significant principal losses that can take years to recover.

The bottom line is that relying solely on old rules of thumb like age and risk tolerance can cause individual investors to take more investment risk than is prudent. This is especially true now with the stock market levels at multi-year highs.

The current simplistic and narrow approach to stock market risk management is grounds for financial malpractice. Doctors don’t prescribe a treatment plan based solely on a patient's age and how much pain they can tolerate. Today doctors treat each patient with the best drugs, the best technology, and the best medical care available.

Managing your stock market risk should take full advantage of the same advances in technology as in other areas of our lives.

Ric Lager
Lager & Company, Inc.