Are we taking the right risks?

Are we taking the right risks?

Image by PIRO4D from Pixabay 

If you’ve ever been fortunate enough to swim in the azure tropical waters of the Caribbean, or on Bondi Beach amongst the surfers, or even 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 might have lurked the thought that a large shark might just be out there looking for lunch …  what was that shadow?  Yet most of us wouldn’t think twice about the risks of sitting under a coconut tree, which urban myth suggests is far more likely to kill you (from a falling coconut) than a shark attack.  Equally, a malaria-carrying mosquito that lands on bare flesh as the sun sets in paradise is also more likely to kill you and we don’t even consider the risk of a deep vein thrombosis from the long-haul flight to get there, we fixate on the shark!

Humans are irrational.  We find it hard to place risks in perspective, in part because they involve numbers (which many people hate), they’re influenced by fear or recent news and often depend on how they’re framed, to name just a few of the challenges.  We have a very clear recent example of our confusion with the extremely rare possible side effects of some of the Covid-19 vaccinations.  Estimates in April suggest that the risk of dying from the vaccine due to blood clots is 1 in 1 million, similar to the chance of being murdered next month (nasty) or dying in a road accident on a 250-mile road trip[1].  And that’s the point.  Life is full of risks and those that we deem to be everyday consequences of modern life, we take, usually without batting an eyelid, such as driving, using ladders, drinking alcohol, climbing mountains, and walking through fields of cows (cows killed nearly 100 people between 2000 to 2020)[2].  Yet other exceptionally low risks we deem ‘too big’ to take.

It’s a similar picture when it comes to investing.  We tend to worry about equity market crashes, perhaps not surprisingly, as equity markets can and have fallen by more than 50% in the past, but as owners of equities should we really be looking to sell them in the next few years to avoid a possible market crash?  Instead shouldn’t we be using cash and fixed income assets to meet our expenditure and liquidity needs over the next five years. 

In most cases, markets recover relatively quickly over three to five years, sometimes more slowly but generally speaking they do recover.  Most investors have time horizons well beyond these falls and recoveries.  Those of us who stay the course should be rewarded – as we have been in the past – with strong returns above inflation.  As I’ve said before, inflation is a real risk to long-term investors.  Avoiding equity market risk and putting money on deposit is actually the risky strategy.  Over the past 10-years, those holding cash have lost around 1/5, or 20%, or £20 in every £100 of purchasing power[3] .  However you want to describe it, that’s risky. 

The reality is that most of us will get the vaccine, take long haul flights (once we can), swim in the sea  (and therefore braving the sharks) and we should also stick with our equities investments.  The risks of doing all these things should be worth it.

Cheers

Charles

This blog is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.  Your capital is at risk when investing.  Past performance is not a reliable indicator of future results.

[1] https://www.bbc.co.uk/news/explainers-56665396

[2] UK Health and Safety Executive (HSE) https://www.hse.gov.uk/

[3] Bank of England – 1 month Treasury bills