Which Risk do You Prefer?
Bad stuff happens in life, some of it predictable, much of it not. Trade-offs are inevitable (guns versus butter, you know). So is risk.

Lately I've been wondering if the most accurate way of describing the political divisions in the country is to ask some questions about risk.

Take retirement planning, for example. If you prepare by investing in a broad portfolio of bonds and stocks, you're going to have some investment risks. Interest rates will rise and fall, and the stock market will tank from time to time.

A lot of people think that's a good example of risk. They prefer that government take money from everyone, pass it to other people, and continue the process indefinitely.

I happen to think that THIS is risky behavior. It's trusting politicians, who inevitably have short-term horizons, to do the right thing. It also counts on one generation of politicians to keep the promises made by earlier generations. But that's not the wisest course. The retirement age has been raised and various taxes have been imposed over time. In other words, promises broken.

There are other examples that could be spun out, but that's a start. The point is the same: risk and uncertainty are inevitable, and in this life, "stuff happens." Is it better to diversify the risk and uncertainty through the voluntary actions of many (e.g., investing in a total market index fund) or through concentrating the risk in the hands of a relatively few number of politicians? (permalink)