At some point during every client conversation, the word "risk" has come up.
Maybe I've said it. Maybe you've said it.
We talk about it because no matter how we invest, we're accepting some level of risk. In simple terms, we understand that equities are usually riskier than bonds, and bonds are usually riskier than cash.
We deliberately take the time to discuss risk with you as we want to help you make an educated decision in weighing up your options.
But there's a catch.
During these conversations, I've noticed that we, as humans, often confuse risk with uncertainty. We often say, "It's too risky." But my experience tells me that when I ask enough questions and discover that clients really mean, "I can't predict what will happen." This confusion can make investing and behaving at the same time a challenge.
When uncertainty is greater than the real risk, we may end up making costly mistakes based solely on our fear of the unknown. "I can't predict what will happen" becomes the green light for making short-sighted decisions. Instead of working towards your future goals, you may find yourself focussing on trying to control what's clearly outside your control.
By way of example, even though equities tend to be riskier than bonds or cash, I also have reason to believe clients will be rewarded for that extra risk based on the long term historical evidence. But I can't say with certainty what the reward will be. One percent? Twenty percent? I don't know.
Because I can't offer a guaranteed number, uncertainty passing itself off as risk cancels out the reward of owning equities. Instead of being an acceptable risk when compared to the reward, equities fall in the category of too risky. This uncertainty explains, at least in part, why some people run to cash or secure funds in times of volatility.
I also understand why people like cash. We can see it and touch it. Even if we check it twenty times a day, the cash will still be where we left it. However, the certainty of cash under the mattress trades one risk for another risk (e.g., inflation).
We work with you to ensure the line between risk and uncertainty isn't blurred and any decision you make is with your long term financial plan in mind.