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Risks - Real & Imagined Thumbnail

Risks - Real & Imagined

How many things that you feared would happen actually happened?  

The past 18 months have heightened the “fear quotient” in everyone. Most of us have feared things that thankfully haven't occurred. 

We start out life with only a couple of fears, (loud noises and falling), but over time learn other fears from our parents and others around us. Fear is an adaptive emotion that helps us recognize threats. Fear helps us survive. That’s good.

However, since most fears are learned from people around us, we can learn to fear almost anything. That’s not good.

Why Your Autobiography Matters 

A colleague recently exclaimed, “all strategy is autobiographical.” In terms of your perception of fear and risk, this is surely so.

Your memories, background, and personal experiences all combine to create a unique “risk soup.” Finance professor Elroy Dimson says, “risk means more things can happen than will happen.” 

The common problem all successful investors face is how to produce an increasing stream of income to offset living cost increases. You have to psychologically own this challenge in order to properly assess risk. 

Particularly in volatile markets, some clients think of risk as the daily change in their portfolio value. This is off base. While behavior influences outcomes, the short term is beyond your control.

It’s more productive to think of risk in terms of purchasing power. Within this context, it’s far less risky to be invested in stocks than assets with lower volatility. Actually, over any time frame longer than a few months, this isn’t debatable. It's a fact, proven by almost a century of detailed market history.

How To Behave In a Crazy World 

History aside, your particular “risk soup” may tug at your sleeve and nudge you to react in the face of fear. How you behave when the world is going crazy largely determines your financial future. 

You have 100% control over how much you save and how you behave. You have 0% control over the stock market, economy, or politics. As a friend likes to say, “Don’t get emotional, get focused.”  

The real irony is that the stock market, the place many investors fear, actually provides the safety investors crave.

Market prices change every single day--that’s not the issue. Your predictions about the future likely won’t take place. Stay firmly rooted in your ultimate reason for investing and avoid the emotional roller coaster. Finally, have faith and optimism in the future. Start there. Ready for a real conversation?

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