In our household, the political discussions are vigorous. Trump, Trudeau, deficits and pipelines are regularly in the mix. For me, however, one of the biggest issues facing society today is increasing complexity. How do we cope with the complexity that comes with rapid technological change and unconstrained information flow via social media? And more to the point, how do governments and regulators deal with it?
When it comes to investing, I’ve long felt that complexity should be added to the list of core risks. Traditionally, risk has been put into four buckets: interest rates; credit (or default); equity and liquidity. Each brings with it the possibility of increased volatility and capital loss, but also the potential to earn a return above the risk-free rate. There’s no way around it — you need some combination of the four to do better than the yield on a GIC or government T-bill.
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One of the problems with adding complexity to the list is that it’s not as productive as the others. Indeed, if we were charting it, the line would tend to go in the opposite direction — i.e. the more complex, the lower the long-term return.