Understanding that we do not now the future is such a simple statement, but its 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 gains you might earn. The riskiest moment is when you’re right. That’s when you’re in most trouble, because you tend to overstay the good decisions. So, in many ways, its better not to be so right. That’s what diversificaiton is for.
Its 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.
By Peter Bernstein