People talk about risk without depth or nuamce. Nick Maggiulli has some thoughts on this in a recent article. Risking, Fast and Slow.
The point is we have different ways to address “fast” risk compared to “slow” risk.
Fast risk relates to events. Things we do mow and sometimes, but not always, get a prompt assessment of how dumb it was. He suggests these are examples.
The explanation of the cost for the choice is usually immediate or at least very soon.
People are good at assessing those risk and many of them are built in to our instincts. We recognize patterns easily, we hear faint sounds and notice motion easily. These are not much use in managing your portfolio, but kept our ancient ancestors alive. The response to the triggers is very strong.
While the end result is easily seen and the consequence not proportional to the advantage gained, we don’t deal with the risk very well. We do understand it though.
Slow risk is easy to ignore today because the payback for our mistake takes very long to show up. I doubt our ancient ancestors had any such issue.
Nick has an interesting graphic that shows how the incidence of smoking and long cancer played out. There are other slow risks that we know about but tend to be postponable.
The defence to these risks is primarily intellectual. Discipline the key. Most of us know discipline takes a lot of energy.
Risk is the idea of a probabilistic future outcome, where the outcome is negative. Risk also includes potentially positive outcomes. We saw a spectacular example of that recently. Digital World Acquisition Corp Acquired Donald Trump’s social media platform a week ago. The effect on the stock was “interesting.” October 21 it closed at 9.96. The price it had been since its inception in September. October 22, it closed at $45.79. On Friday, October 23, it opened at $131.90 and closed at $94. The weekend passed and no doubt people assessed the meaning, On Monday, it started around 94, peaked at $102 and closed at $82.45. Tuesday it opened up a little at $87 and traded up to 91 and closed at $59.
Each day had event like outcomes and quick risk on both sides. Risk of profit and risk of loss all in an hour. We have emotional attachment to that sort of situation.
Slow risk doesn’t work much like we think. In the long run, it has been hard to lose money in the stock market if you are patient. If you bought an S&P500 index fund in September 1988 and kept it until September 2021, the total return index went from 279 to 8,994 That 11.6% less some income taxes and some fees. By any standard a slow growth good outcome.
There were some blips if you look. From late 2007 to March 2009 it fell from 2300 to 1300. The risk is you. If you decided to not be patient, that’s a big drop. If you were aiming at 2021 instead of March 2009, bailing out would have left a lot of money on the table. For the 12.5 years you missed because of fear, the rate of return was 17.5%.
Avoid fast tisk. They’re easy to see and easy to avoid. In the stock market tips from cab drivers, bartenders, and most gurus on TV are risk.
Take slow risks. Understand their context. It is supremely boring to buy Index funds, but historically you have been adequately reimbursed for your boredom.
If you invest in long term investments like the business sector of the economy, the stock indexes, the only risk historically has been how you react to bad news. Panic is harmful.
Choose the kinds of risk you want to take and go from there.
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