The Investment Scientist

Posts Tagged ‘invisible risk premium

Look forward when investing.

It is well established that investors’ sense of risk reward is shaped by immediate past experience.

However, investing based on immediate past experience is like driving while only looking through your rear view mirror. It’s a disaster waiting to happen.

The proper way to think about risk reward is to see investing as a risk taking occupation. When there are more job openings than job seekers, wages will rise. When there are many job seekers chasing too few openings, wages will be lower. It’s just simple economics.

In academic circles, this wage of taking risk is called risk premium.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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