Humans are irrational.
A pretty bold statement. But we so often find it hard to put risk into perspective.
If you’ve ever been fortunate enough to swim in the azure tropical waters of the Caribbean, on Bondi Beach amongst the surfers, or in the chilly waters of Cape May (where the film ‘Jaws’ that scared the 1970s generation out of the water was filmed) in the back of your mind may have lurked the thought that a large shark might just be out there looking for lunch. What was that shadow?
It’s pretty irrational when you compare it to the risk of sitting under a coconut tree. Urban myth suggests you’re far more likely to be killed by a falling coconut than a shark attack.
On a more day to day basis we struggle with risk because it often involves numbers – something many of us hate, or maybe because we’re influenced by scaremongering news headlines.
Take the Covid vaccine. Estimates suggested the risk of dying from the vaccine due to blood clots was 1 in 1 million. Yet it was hard to ignore the headlines.
The truth is that life is full of risks
Most we deem to be everyday consequences of modern life – driving, using ladders, drinking alcohol, climbing mountains, and walking through fields of cows (nearly 100 people were killed by cows between 2000 to 2020).
Yet other exceptionally low risks we deem ‘too big’ to take.
It’s similar story with investing
Investors tend to worry about equity market crashes, which do happen, but owners of equities shouldn’t be looking to sell them in the next few years to avoid this potential risk.
In most cases, markets recover relatively quickly over say 3-5 years.
When you’re investing for the long-term, those who stay the course should be rewarded – as they have been in the past – with strong returns above inflation.
In fact, the opposite is the real risk
Over the past 10-years, those holding cash have lost around 1/5th or 20% or £20 in every £100 of purchasing power, however you want to describe it. That’s a risk we wouldn’t advise taking.
Managing risk in our lives is summed up well by Professor Dame Glynis Breakwell who wrote a book titled The Psychology of Risk…
‘Risk surrounds and envelops us. Without understanding it, we risk everything and without capitalising on it, we gain nothing.’
So go on, swim in the ocean, sit under that coconut tree and stick with your equities. The risks will be worth it.
If you’re struggling to understand which risks are worth taking, get in touch and we can help you decipher the amount of risk you need to take to achieve your goals.
Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.
