Gene Fama on Risk, Rewards, and Reacting to Markets

- Most of us don't work our whole lives, we retire at some point. You know, before we retire, we send our kids to college or whatever, so we have a need to accumulate savings for both of those things, and other things. Maybe we have a bequest motive, we wanna save money for either our heirs or for our charities. So that's a reason to invest. That's the first step. The second step is, well, how risk tolerant are you when you invest? And that's a decision. It's a two-step decision. A, you save to invest to generate funds for the future, and B, you decide how much risk to take. And that's a matter of personal taste. Everybody's risk aversion is a little bit different. Some people are more risk averse, some people are less risk averse. But it's not a good or a bad thing, it's just life.

- If you have a long horizon over which you're gonna be invested, you basically don't wanna pay a lot of attention on the short term. If you have a bad period, and your risky part of your portfolio, you get out as a consequence. What that says is you never should have been there. If you don't like what happens over ten years, you shouldn't have been there to begin with. That's basically what it comes down to. 'Cause this was always a possibility. When I'm half joking, I say "Buy high, and never sell", is the rule of the investment rule you should follow. But the never sell part of it is the key thing. Basically, you'd be a lot better off if you just didn't look. Now, some people can't do that because they may be coming to the point where they're gonna need the money for their kids, go to college or whatever, or for their retirement, and those are things you have to plan for. So, there are exceptions, but basically you don't want to be paying a lot of attention to what's going on in markets.

- The upside is that it has a price and the price is a higher expected return not necessarily always delivered In fact a large fraction Of the time not delivered so that's the upside The downside is you can lose but that's the name of the game that's the way markets work. In a capitalist system somebody decides to bear the risk in over long periods of time they tend to get the reward but over short periods of time maybe not. And even over relatively long periods of time may be not. It's a product, it's a product that gets delivered that makes the economy work. I mean somebody has to be willing to bear the risk otherwise you won't have innovation or anything like that. Innovation is a very risky activity after all.