Krzysztof Piekarski is a Professor of Rhetoric at the University of Texas, with a strong behavioral economics and transformation of consciousness hobby. We are huge fans of his work on decision-making and occasionally invite him to write exclusive articles for 7investing (previously here and here, and a podcast interview with him here). You can also follow him on Twitter: @CxdDesign.

He appears as a guest writer for our site this week.

The hardest investing decisions are not necessarily about which stocks to buy, or how many shares, or at what price; but, rather, how to mange risk in a way that offers the investor the greatest rewards for the least amount of danger encountered.

If you can rescue 100 golden nuggets but need to defeat 50 mean-spirited hungry dragons to get your treasure, well, that’s nowhere as enticing as earning 90 copper pieces but having to conquer a humble field mouse. It’s the risk-reward-ratio that we need to consider.

Humans being what they are, however, want all the rewards but also somehow still want minimal risk.

But even if they are okay with saying, “Okay, fine, I’ll take fewer rewards, I just want to be conservative and safe”, they’re nonetheless susceptible to making a grave error of misunderstanding the underbelly of unexamined risk.

What are my options?

Imagine you’re a non-profit trying to do charitable things for the world and your organization has a nice chunk of cash to invest, as long as the investment is done safely and “conservatively” to appease the risk-averse donors. Where do you begin?

Perhaps you say: bonds!

To which anyone with a basic economic sense might reply: the current pittance passing for interest rates are not far from throwing your money in a campfire to make s’mores.

Perhaps you might say: let’s diversify!

To which an investing professional might say: diversifying into lots and lots of companies is statistically proven to underperform the market because, 1. most companies don’t beat the market and 2. it becomes harder and harder to gain– and keep up with–a deep understanding of all your holdings, forever dooming you to guess-work and diminishing returns. More for more’s sake tends to be less and less. Unless you have a hard-working team of multiple experts and analysts like 7investing to keep up-to-date on all the companies, you’ll be swallowed eventually by all the new unknowns you can’t keep up with.

So if you diversify, you better have people you trust helping you to do it. Outsourcing to “financial professionals” who know how to collect managerial fees but haven’t done original research in years is not as safe as it sounds for what would be fairly obvious reasons.

Then someone might say: let’s buy some big blue chips and check back in five years.

Yes, while long-term buy and hold is a reasonable strategy on paper, is buying and ignoring the fast pace of innovation really “less risky”? Is ignorance bliss? Usually not; usually it’s just ignorance which does not get rewarded. Patience must be an ally. But sitting on your hands and not paying attention does not patience make, Young Skywalker.

Okay, fine, let’s just buy an index!

At all-time highs? During an epic-bull run? And which index? And is buying a whole lot of mediocre companies– by definition– “less risky” than buying a carefully selected few that are already demonstrating excellence?

Gold!

Even though there’s a new proven cryptographically based technology that makes gold’s attributes seem like a dune-buggy in the age of a Tesla Model S plaid going 0-60 in 1.9s?

Just buy Google and Apple and Microsoft and Facebook then!

In a time when NFTs and Web 3.0 based innovations that are just beginning to allow everyone to own their own content and to be both the artist and the platform, that’s when you want to invest in middlemen? That’s less risky? Being on the wrong side of historical-paradigm-rattling innovation?

Stuff all the bills under the mattress, bolt the door, and load the rifles!

Did you forget that pesky 6% inflation rate and the $29 trillion debt clock that seems to be ticking upwards at an accelerating rate? Are your paper bills as valuable as you assume they are? Will they really hold their value, do you think, because you hope that they will?

The times they are a-changin’

These examples might appear overstated, ludicrous even. But fear makes people yearn for safety in disproportionate ways that deliberately block out slivers of contradictory reality for the sake of keeping things simple and ostensibly conservative.

Because to be a conservative investor, from this perspective, means to have a desire to conserve that which used to be true.

So even if you’ve read your Benjamin Graham and your Warren Buffet annual shareholder letters, and whatever other Bibles of Value Investing written in 1983, there’s something else that’s the riskiest thing of all you probably forgot to consider:

The world is always changing, and it is currently changing at a faster rate than ever before. Friends—quantum computing is now a thing! We’re living in a future more mind-altering than even Back to the Future dared to imagine.

Our national bard and Nobel laureate said it like this:

Come mothers and fathers

Throughout the land

And don’t criticize

What you can’t understand

Your sons and your daughters

Are beyond your command

Your old road is rapidly agin’

Please get out of the new one

If you can’t lend your hand

For the times they are a-changin’

So what’s the riskiest thing of all you can do as an investor?

The equivalent of tying a stone to your waist before going for a swim: to assume the world is the way you once experienced it and that former world is exactly the same world in which you now live, and that what was true in the previous decade is true in this one. Bonds, diversification, indexes, global international companies, dividend blue-chips, cash, etc. Are you sure they are safe?

Those who deliberately fail to examine their assumptions, and who forget that nothing is ever fixed and solid and true for all eternity will soon be drenched to the bone, as Dylan sang, because the times, they are, wildly and fiercely and unapologetically, a-changin.’

And the stock market is a future prediction machine with little regard for what happened yesterday. Adjust your risk goggles accordingly.

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