Well, It Depends

Someone asked me yesterday if they could take 1 million dollars and turn it into 3 million over the course of 5 years if they invested it wisely. I immediately thought of a backcountry ski guide I hired when first learning the ropes of mountaineering. No matter what questio
I asked him about skiing, keeping myself safe, or handling an avalanche he came back with the same answer,
“Well, it depends.”
I think he wanted to make sure I thought things out and realized that no two situations are ever the same. You must think about both the good and bad consequences of your decisions and realize that every situation is unique. He taught me toTHINK things through, to do your homework, and to research so you have the knowledge base to make informed decisions.

So when asked this investment question, I followed my guide’s example and told her, “Well, it depends.” I also told her this question made me think of Warren Buffet and his #1 rule: protect your principal. The first thing you must ask yourself is, “Are you willing to risk your original 1 million to gain the extra 2 million over the next 5 years?”

Every person has their own “investment risk tolerance profile.” You need to weigh your desired return against how well you want to sleep at night. Do you catch my drift? Typically the higher the return on investment you seek, the more risk, and consequently the less you sleep you’ll get.

We went over her situation and estimated what kind of an annual return she would need to get as well as the options I thought she had for attaining this return. When we finished the exercise we came to the conclusion that it would be more realistic for her to expect doubling her money (or more) within the 5 year time frame while protecting her (precious) principal. It was a conclusion that could help her both grow in the direction of her financial goals, while avoiding the risk of sliding backwards in the progress of her pursuits.

So the moral of the story is:

1. Learn to THINK about all of the pros and cons of your decisions.

2. Learn your own risk tolerance level for investing.

3. Remember rule #1 in investing “protect your principal.”

4. Train yourself to think “Well, it depends...” when making choices about life, backcountry skiing and especially investing.

5. Learn all you can about investing wisely and what OPTIONS are available to you.

6. Hire Peter Leh as your guide when learning the backcountry!

~ Tim Rhode