Risk must be Managed, not Feared

10/06/2019
Posted in Blog
10/06/2019 Mduduzi Luthuli

I wish I could tell you there will be a time in the future when it will be easier to make long-term investment decisions. Unfortunately, I’ve never experienced one of those periods at any point in my career. The future is always uncertain and that can be difficult to hear as investor.

Many investors have a very pessimistic view about the future. They could be right. There is certainly plenty to worry about on a global scale. But I think it’s a mistake to give in to that pessimism. If they are right and the world falls apart, they won’t be able to retire anyway. But what if they are wrong?

When faced with almost limitless financial options, how do you make the right investment decisions?

I Don’t Know

I don’t know if this is the best or worst time to invest in real estate, the stock market or anything else for that matter. I don’t think there is a “knowing” when it comes to investing. Investing is not dissimilar to walking intently in particular direction, without knowing your end destination. Your chosen strategy acts as a compass, a guide into an unknown and ever-changing terrain, that you must constantly assess and conquer.

You Don’t Know

There are many causes of human misjudgement, including over-confidence. These are the subtle ways that your mind might be leading you astray at a subconscious level. Your subconscious mind is larger than your conscious mind and yet we rarely pay attention to how we might be tricking ourselves.

One way to mislead yourself, for instance, is to make decisions based on a small sample size and extrapolate the results to a larger population. Another way we fool ourselves is to remain committed to something we’ve done in the past. We might rely on an authority figure (market commentators) or default to what everyone else is doing (herd mentality). You get the idea.

Usually, when we have extreme success or failure there are four or five factors working in the same direction. The same goes for psychology. The more human misjudgement factors there are working against us, the more likely we are to make an ill-informed decision.

Nobody Knows

Good investing does not require psychic powers, and it doesn’t involve reckless gambling either. The primary goal when investing is to preserve and grow the money that you have by taking reasonable risks that help you achieve your financial goals.

No matter what your investment strategy is, your best course of action is to get clear of your goals, use an investment method that fits your needs and comfort level and then execute without second guessing or being paralysed by fear of the future.

It is a good idea to save some money through a money market to have some ready cash available for immediate financial goals or in the case of an emergency. But there is no reason for all your money to be stored there. If you believe that the global economy will grow in the future, then your investments should pay off in a long-term market strategy.

The essence of effective investment is probability not guarantee. Find a means to select assets that will fare well when future states of the world become known. You are not Warren Buffett, and neither am I. We all need to understand as best we can what our limitations are in every situation.

But That Shouldn’t Stop You

There will be disasters in every market, learn to cope with them effectively. The reason risk management is essential – not optional – is because the amount you lose during the tough times determines how much you must make during the good times to meet your financial goals. You must preserve your capital during difficult periods so that your offensive investment strategy has a larger base of capital to grow from when profitable times return.

In life, almost every attempt at success involves a bit of risk and your investment strategy is no different. By devoting time to examining your goals, conducting some research, and working with a financial professional, you can learn how to manage risk in your portfolio.

Learn to manage risk, not fear it.

 

 

Subscribe NowA bi-weekly blog exploring our relationship with money

Any fool can know. The point is to understand - Albert Einstein