Risk Leads to Bankruptcy

We have been so inundated by salesmen that we no longer respond to real dangers.

It is common to read that accepting risk leads to higher rewards. Nothing is farther from the truth. Most often, accepting risk is foolhardy. If greater risk leads to a greater reward, then investors should put everything into the lottery.

Even the Efficient Market salesmen have it wrong. They equate risk with volatility. Increasing volatility reduces annualized returns, an important mathematical relationship.

The accurate statement is that you should never accept a risk unless you receive adequate compensation.

The best strategies for today pay attention to dividends and valuations. Total return (liquidation) strategies, which involve stock sales, are incredibly dangerous in today’s market. They may work. It is a matter of probabilities. But selling shares during a market downturn leads to bankruptcy. Stick with dividend and valuation based strategies. They increase income. They avoid unnecessary risk. Most likely, they will enhance returns.

Have fun.

John Walter Russell
September 9, 2007