Holly's Blog: Risk - A four letter word
By Mike Narouei, Content Producer at Boring Money
12 April, 2019
Does ‘risk’ bring you out in hives? Or does it make you want to jump on a Yahama, rev the engine and shriek “Let me at ya, Bad Boy!!!”
I have probably talked to quite literally thousands of people by now about investments and risk. And it’s my view that this 4-letter word is stifling our ability to make decisions. It means that people who don’t see themselves as high rollers are picking the ‘middle risk’ portfolio regardless of their timeframes. It means millions of people in workplace pension schemes are arguably in the wrong options. And it means that over 70% of Junior ISAs are in cash. And no wonder – who in their right mind answers ‘yes’ when asked if they want to take a ‘risk’ with their money. Of course you flipping well don’t, unless you are oozing gold out of your earholes!
So to anyone who thinks that investing feels like gambling, who worries that they could “lose it all” and who wants nothing to do with risk – let me ask the question a different way.
What’s the risk of the world’s biggest companies all collectively going pop?
Think of Apple, Amazon, Barclays, Google, Heineken, HSBC, ITV and Samsung. All massive global firms, many of which will feature in a mixed bag of mainstream investments. What do you think the risk is that all of these firms will go bust over the next 5 years? Unless you’re stockpiling baked beans and fear the meltdown of capitalism as we know it, the chances are you think the possibility of this happening is so remote as to be negligible. If these sorts of companies all become worth £0 overnight it will be because Lex Luthor has taken over. And then we’ll have bigger things to worry about than our ISAs.
The point I make is that investing is simply Dragon’s Den on a larger scale. If we stick with mainstream providers, don’t get greedy by dabbling with crypto-currencies and other silly things we don’t understand, and invest in large companies which make decent products and services they can deliver at a profit – this is less risky than many of us fear.
It's not risk it’s uncertainty
Let’s consider risk from the eyes of a turkey. Lickle Ickle Baby Turkey is born on 15th September. Big Bad Farmer Barleymow walks in the next day and feeds him and turns a heat lamp on. The next day BBF Barleymow reappears and does the same. Gradually the turkey relaxes. As this routine continues day after day, the likelihood of the farmer harming the Baby Turkey falls. In the turkey's eyes by day 100 it is statistically impossible for the farmer to kill the turkey. Trouble is, that day is actually Christmas Eve. The turkey’s mistake was to confuse risk with uncertainty. Bye-bye Lickle Ickle Baby Turkey.
The same is true of investment markets. We think we’re talking about risk but in fact we’re just facing uncertainty. Which humans tend to hate. Many of us would rather the certainty of rubbish interest rates than the uncertainty of stock markets.
For anyone with timeframes of less than 5 years, this feels prudent. No-one wants to be a forced seller when things have a rocky year as they inevitably will. But possibly because the highly regulated industry shoves risk warnings down our throats, we shy away from what might be the better options. Imagine going onto the British Airways website and seeing endless warnings about death or hostage situations before booking a flight.
Uncertainty is indeed a characteristic of the stock market. But choosing to hitch our lot to the world’s largest brands which provide our cars, our energy, our food, healthcare, leisure, clothing and banking, is a sensible use of our money and bears little resemblance to the 50:50 of a roulette wheel. We need to have a more balanced conversation if we are to avoid a nation of people who sit in cash accounts paying historic all-time lows.
Phew. It’s a bit high up here on my soapbox! Time to step down!