If I asked you to describe what risk feels like, what would you say? Recently, I participated in a Zoom call with Dave Goetsch, former Executive Producer of The Big Bang Theory. He said risk makes him feel like “lying on the floor and crawling into a ball.”
Some of you may recall the CNBC online article that Goetsch wrote last March, Op-Ed: ‘Big Bang Theory’ producer’s investment philosophy helps him through the crisis, where he described that David Booth at Dimensional had advised him “to have a philosophy with investing and life.”
As one might expect of a Hollywood writer and producer, Dave Goetsch is a very emotional person. In reality, we all are. The way risk makes you feel might actually be the most important aspect of your money life because of how much it impacts all your money choices.
Emotions Overwhelm Rationale
Feelings and emotions overwhelm facts and rationale…every time. You might think that investment decisions are made with your head, but inevitably these choices are made with your heart and justified in your head.
Everything you do involves some element of risk. How you feel about risk has a tremendous impact on how you behave, how you act, on a day-to-day basis.
With little question, the COVID-19 crisis has amplified how well, or how poorly, all of us process and deal with risk in our lives. The pandemic has also provided an opportunity for us to understand that every aspect of life can’t be fully controlled.
Risk vs. Luck
Risk is the other side of the luck coin. We like luck and therefore want more of it; we don’t like risk, so want less of it. Both risk and luck, however, are part of life.
I like to read about people from antiquity or from our own time that accomplished extraordinary things in their lives. In every instance, luck played a major role in how their lives unfolded.
We want each and every decision that we make to be right, but this fails to acknowledge the role of luck in the outcome. A better perspective is to focus on being “less wrong” with your choices. This is far more realistic.
Not All Risks Are Bad
Dave Goetsch makes the point that you often don’t know if a particular decision was good or bad for years. You don’t know, for instance, if something doesn’t work out as desired in the near term, what that might lead to in the future that’s better.
Everyone has a unique way of describing what risk feels like. The commonality among these various descriptions is that risk makes you feel bad. What you do about this bad feeling makes all the difference. In the end, financial decision-making is more about doing than it is about knowing.
Reacting to Risk
As an investor, you probably don’t have to look too far back in the rearview mirror to remember the bad feeling of risk. Just over a year ago in February/March 2020, the broad stock market took a quick 30%+ nosedive as the global COVID-19 pandemic began.
If you acted on the bad feeling and bailed out of the market, (as some investors did), you missed a 50%+ gain over the subsequent 12 months. That’s an expensive bad feeling!
Thus, the pivotal question is not how does risk makes you feel but rather how do you react to that feeling? The feelings are without context so you might be quick to react in an attempt to quell the pain.
The stock market is primarily a story of long-term cycles of growth juxtaposed against a backdrop of human behavior that overreacts wildly in both directions.
You might be stuck with the precise way that risk makes you feel. You aren’t, however, saddled with behaving in a way that works at cross purposes to your financial life. Start there. Ready for a real conversation?