traditional diversification between stocks and bond.

We are so used to this way of thinking that even asset management experts like us tend to associate risk exclusively with the percentage of equities in a portfolio. This is a mistake. The zero or negative interest rate policy that central banks are pursuing has transformed the very concept of risk and what is risk free. Last year, Austria issued a 100-year bond at just over 2%. Say interest rates rise by only 1% - a pittance in any long-term chart - the loss on the investment would be nearly 50%! No one has 100-year bonds in their portfolio, but we all have long-term investments. It’s completely misleading to claim that a portfolio is low risk because it is only 20% or 30% invested in equities. Try to get a real understanding of your portfolio’s overall risk.

the risk/return trade-off.

While we can assume that everyone knows the risk/return trade-off - that to achieve higher returns, you have to be willing to accept higher risk - it is not as well known that our minds are naturally programmed for risk aversion, and often excessively so, as demonstrated by behavioral finance theories that have won two Nobel prizes in the past twenty years. This can be a formidable obstacle when building the right portfolio and penalize expected returns (or create unrealistic ones). Try keeping this in mind.

Diversify.

Of course, but how? One of the most frustrating things for an investor is seeing how the returns generated by different asset management companies are substantially the same. The reason for this is the way clients’ and managers’ interests are out of sync. Often, given their nature and size, managers tend to stick to benchmark returns to avoid assuming any real management risks. This way, without even realizing it, the client becomes her own manager if she decides, for example, to invest 70% in bonds and 30% in stocks. Managers will refer to the investment mandate as they seek to comply with it as much as possible, but this betrays the spirit of the client-manager relationship and defeats any attempt at diversification. If you choose to go with different managers, check that their approach is, in fact, truly different. And that they themselves invest in the instruments that they propose.

investment term.

Although many of you do not have cash requirements or you can plan for them, the preference for highly liquid investments runs high, especially in Italy. This creates two types of problems: forgoing higher returns, which, in the large majority of cases, investment vehicles with longer maturities can achieve, and the sale of many positions the instant the market takes its first serious dip, with the consolidation of an abrupt loss. Beware that, particularly in today’s world, in which over 50% of traded volumes are based on algorithms or indexed funds, there is no way - and I mean none at all - of anticipating or containing any market fluctuations which you’d be well advised to avoid.

currency diversification.

In my experience, while at times we focus on the risk level of stocks, corporate bonds, etc., other investors nonchalantly put 30% or more of their capital in, say, US dollars. Currencies are currently the least predictable investment on financial markets and one of the most volatile. Substantial forex positions can wipe out the work of a manager in one fell swoop (or magnify it) and are exactly what they appear to be: speculation. The decision to invest in currency is not one to be taken lightly, and only after carefully analyzing your assets, with forex investments segregated in various accounts, which will also help you gain an understanding of the manager’s ability.

cost control.

Talking about costs is more complex and delicate than it might appear. A focus on fees is sacrosanct given the financial industry’s opacity in this respect. But, like always, it depends on what the client is paying for. What is it fair to pay for the mere benchmark management described in rule 3? Nothing or almost nil. In today’s world, anyone can replicate the benchmark using passive management tools for just a few cents. If I have the chance to invest with Soros or Warren Buffett, I’m happy to pay as much as 5%. A good manager is always worth his fee. Look closely at your managers’ historic returns, net of their fees, and make sure you’re not cutting out returns when you cut costs.

keep a copy ofh the odyssey on your desk.

The part where Ulysses has his sailors tie him to the mast so he can hear the Sirens’ song without leading them to shipwreck is not only a marvelous tale, but the key to protecting and growing your capital over time, especially during market phases like the current one, in which the captivating songs come from two directions. First, there is the financial industry, whose creativity knows no bounds in the formulation of a wide array of products with all kinds of potential future returns. Second is our network of friends and acquaintances; who doesn’t know someone who struck it rich with bitcoin, bought oil at $40 and sold it all in September 2008? Without discipline, we cannot follow the first six rules and we cannot create value over time.