by Linden Arden

Created on: July 14, 2007

The great military philosopher Sun Tzu advised generals to "Attack by Stratagem". He warned, "The general, unable to control his irritation, will launch his men to the assault like swarming ants, with the result that one-third of his men are slain, while the town still remains untaken". He goes on to identify five essentials for victory, the first and foremost, "He will win who knows when to fight and when not to fight."

Novice investors would do well to head the warnings of Sun Tzu. For investors new to the market it is not an easy task to watch the market march to seemingly new heights on a daily basis, without feeling the urge to attack, or buy. For new investors patience is typically gained in the unpleasant lessons learned of investment losses. For some these losses are valuable insight to our own short comings as novice investors, and often as people. For others these losses may be so terrible as to drive them from the market for good.

Quite often neophyte investors rush into the market without a strategy, just as Sun Tzu warned against. They buy the book dejour on investing, devour the book,and certify themselves as ready to invest. Rubbing their palms in anticipation of riches, they jump headfirst into the market and purchase stocks, mutual funds, or exchange traded funds. I know I am probably exaggerating just a wee bit. However that strategy or lack there of is tantamount to handing money out on the street corner.

The most basic strategy that I believe all investors must understand is that of minimizing risk. A good starting point is understanding how to minimize risk among asset classes. This is where the risk pyramid is most helpful. It's similar to the pyramid of life taught in most Psych 101 courses. Imagine a pyramid, the bottom one-third of the pyramid is where the bulk of what ever activity that is going on is shown, in the example of life it would be: from birth to say age 35, here we spend most of our time just having fun (well that's the way it's supposed to be); the middle one-third would be from 35-55, here arrive at that interesting stage known as mid-life and have the pleasure of facing some type of crisis; the top one-third, 55 - really old, this is where we get really, really old (thats the cynic in me, no this is where we hopefully have saved enough through investing to travel, enjoy grandchildren (read spoil), participate in hobbies or things we take pleasure in, this is where we enjoy the fruits of our labor.

I digress, the risk pyramid

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