A fabulously rich man was invited to visit a stock exchange one day, and the stock brokers were eager to meet him to pick his brain. What investments does a super rich person do? They were all curious, and someone asked the question. “Government bonds,” the man replied flatly. A little let down by the unexciting answer, one of the brokers remarked, “that’s not going to earn you a lot of money.”
Without missing a beat, the rich man responded dryly, “well, it does if you have many, many millions in them”.
I can’t quite recall where I heard this story from, but it has stuck with me. When you’re ahead, you hardly have to take any risk; you’re already winning! Conversely, if you’re behind and play it really safe, chances are you are probably not going to pull ahead, or even reach the finish line. As a relatively conservative person, this has made me sober up to the pitfalls of trying to avoid risk entirely. It helps shape my decisions in things like investment, obviously, and other matters in my life… with a rather welcomed side benefit of winning more often during board game nights with friends.
You’re not going to be young forever
This is a typical way financial salespeople like to sell their expensive products, I guess, but it still bears repeating because it’s quite true. The stuff they try to sell are dubious, but the magic of compounding is real.
Already have $100,000? Here’s how it’ll grow in 30 years:
|Returns per annum||Amount after 20 years|
You could also look at how long it takes to save $1 million if you saved $2,000 every month:
|Returns per annum||Number of years|
Someone’s investments could go terribly, terribly wrong and somehow completely wipe out 5 years of their savings, but if they learnt some lessons, got back into the game, and achieved a modest 5% p.a. return over the next two decades, they’d still reach a million dollars some 7 years sooner than someone who played it safe with bank deposits and Kong Guan biscuit tins.
It becomes more of an issue of time rather than just money. Do you want to have to keep working 30 to 40 years from now, or would you like to be able to stop perhaps a decade or two earlier? Risk averse people may be okay to earn less, but they risk forgoing a huge part of their lives if they are too risk conservative.
Life is a race, even if you don’t care for it
Even if you don’t care for the dream of retiring and enjoy life early, your financial productivity is perhaps one of the biggest risks you will face. Slow and steady may eventually win you the race… if you are medically fit enough to keep working until you reach your financial goals, that is. “This isn’t a race!” you might think, before you find yourself one day having to show a younger and cheaper you around the workplace.
Health and age issues are simply eventualities one would run into hopefully later rather than sooner, but they are eventual. Perhaps I’m being melodramatic here, but I already find myself more tired than before to work as hard, and already find all kinds of inexplicable aches and pains. Now imagine yourself in another decade or two. I don’t take investment risk only because retiring early sounds like a sexy concept; I do it because I am avoiding the larger risk of not being able to continue working in future.
These are hourglasses you can’t turn back around, and the sooner you realise this, the more you are able to put into perspective these risks you already face versus those of an investment portfolio. It is pretty easy managing the risk of an investment portfolio through diversification and time horizon. Compare that to trying to manage the risk of your future financial productivity.
There is a difference between being conservative and being paranoid
The risk averse people I know tend to make questionable choices outside of investing. They overbuy insurance, particularly whole life plans, as if that would somehow prevent them from ever falling sick. Forget about bungee jumping; I know a couple of friends who have – among other stranger behaviours – repeatedly taken STD tests despite not having had sex for a while. Someone else in my life refused to order food deliveries during the circuit breaker last year worried that the virus may spread to his household that way.
These may look like extreme examples, but it seems to me that many people’s risk aversion stems from paranoia rather than a justifiable reason to avoid risk. It is also unsurprising that these people stay out of investing. It does not matter if you tell them that volatility is hedged by a longer time horizon, or produce medical research showing how improbable it is for diseases and viruses to spread a certain way.
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On the other side of the coin: wild abandon
Of course, we all know of people with almost every single dollar invested in an alphabet soup of cryptocurrencies and meme stocks, and it goes without saying that the other extreme of being overly risk-seeking is far from the ideal… but that’s perhaps another post for another day.
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