Investment risk: what exactly is it?

 

🆓Nothing worthwhile is free. Nothing. And if it is, you should be worried as something is wrong.

💷 Everything has a price and sometimes you can’t quantify that in ££ and pp. Risk has a price. It’s a peculiar concept that means different things to different people, but can you quantify risk in ££ and pp?

I think the price of risk and investing is 📉fear, 📈greed, volatility, uncertainty, sleepless nights, frustration, regret, and missed opportunities.

You need to be aware that risk and investing have a price as otherwise, you’ll try to get something for nothing.

If you want to earn 10% a year for the next 30 years, is this reward free? Absolutely not. There is a price. And that price is risk.

In investing, the price you pay for the market giving you this return is that it can also take it away just as fast, if not faster. Markets tend to creep upwards slowly but fall very fast. You might not notice one but you sure as hell notice the other.

This can be unnerving; you didn’t really notice you were gradually getting wealthier year after year after year, now all of a sudden you can’t help knowing you’re not as wealthy as you were two months ago! This is the price of investment success. It hurts, doesn’t it?

Some people try to avoid paying this price and their minds play tricks on them to convince them this is okay. They try to time the markets, invest in funds that claim to do so, chase sectors and markets that the 🗞️ Sunday papers say will outperform… there is no evidence that any of this works.

😔 In short, they want the returns but don’t want to pay the price. Well sorry, you can’t have one without the other.

What are the solutions?

Mindset #1. Have the mindset of not looking at market volatility and risk as a punishment that should be avoided in the future. Instead, you should look at it as a cost for long-term investing success.

Mindset #2. Nobody likes paying fines, but it’s acceptable to pay costs for a longer-term benefit. Nobody likes paying a parking ticket or a speeding fine. But it’s okay to pay for a personal trainer to get in good physical shape. With investing, know that the price of accumulating wealth has to come with the risk of ups and downs. Don’t pretend this price is a myth and think other people have to pay it, but you don’t.

Mindset #3. Have a plan and stick to it, no matter what. Decide what level of risk you are comfortable with and stick with it regardless of what the markets do. This is hard, I struggle with this myself so I set good defaults that the funds I invest in do this for me. I’m therefore not tempted to get involved as the odds are doing something and getting it right are stacked against me!