The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Chapter 4

Risk

We helped Einstein invest his money.

What makes you think you should do it alone?

—Billboard advertising the services of TIAA-CREF

Once we possess capital of any size, our first duty as the steward of that capital is to preserve it against diminution through inattention, negligence, the ravages of inflation, incompetence or, God forbid, fraud. What we will actually do with our capital is a crucial question, of course, but if we don't husband our wealth carefully this issue will never arise—there won't be enough wealth to worry about.

In this chapter I discuss the very large and very important topic of risk. Following a general introduction to the topic, I focus on two aspects of risk that investors tend to overlook: first, the impact of variance drain on the growth of wealth, and second, the behavioral bias that all too often cause us to do exactly the wrong thing at the wrong time. I end the chapter with a description of a hypothetical investor named Edith and the many headwinds she faces as she tries to grow a nice inheritance into a large fortune.