Small risks are more significant when it comes to investing
July 17, 2014
Today we are going to take a journey through the human mind to offer an excellent perspective on how we can become better investors.
A significant part of investing is managing risk. While the theory on how this is done is simple, putting this into action is much more difficult.
The biggest fear about investing is losing all or most of your money. No one wants to be whipped out financially the way so many were as a result of the stock market crash that triggered the Great Depression in 1929.
Humans fear the worst. We think big when it comes to risk. If you have the opportunity to travel south in the winter and enjoy time at a beach resort, a risk you will most likely consider is being attacked by a shark.
You could never be more vulnerable than swimming in the ocean if there was a shark in the water. Remember the fear that gripped the beach community in the 1975 movie Jaws because of one killer shark.
Sharks do kill humans so the risk is real. However, there are seven billion people on the planet and sharks kill about 10 of us every year.
Our modern day fear is the possibility of being killed by terrorists. The tragic September 11th terrorist attack has shaped our fear of terrorism so much that we accept security delays at airports to ensure protection.
The U.S. State Department reported that only 17 U.S. citizens were killed as a result of terrorism in the year 2011. The risk of death as a result of terrorism is low but it is a high focus of our attention.
Some people think there is a significant risk in flying. Most of us understand it to be more risky travelling to the airport than the flight itself.
When it comes to risk we humans do think big. While we worry about the large and dramatic risks it is the little things like driving to the airport that causes us more harm.
Twenty-five thousand people are killed by dogs every year. Mostly because dogs carry rabies. Mosquitoes kill almost three-quarters of a million people annually because they carry deadly diseases.
When it comes to investing, it is the little things that can be far riskier than the fear of a major financial melt-down. Yes, major events like the 1929 stock market crash can and do happen.
It is the small risks of investing that are likely to be your mosquito. Small everyday risks affect all of us. Are you paying too much in commissions? Are you buying and selling too much which magnifies the risk of high commissions.
Are your investments organized to be tax-effective? Not likely. I would hazard to guess that most people are exposed to extra income tax liability because their investments are not structured correctly.
These types of risks are not are sensational enough to get your full attention but they will be a thousand times more significant than the risk of another world stock market crash.
It is the small risks that are the silent killer of investment returns. They occur every day, should be managed and can be managed. They are within your control. You can greatly reduce risk by focusing on them to prevent them from adding to your investment costs.
See these costs act as sandpaper slowly eroding away at the size of your investment portfolio. Gradually, over time your portfolio shrinks because of simple and small mistakes.
We recommend you instill the discipline of tracking your investments carefully. Yes, you can worry about the sensational risks like a stock market crash but it is those small hidden risks that you need to follow and manage.
Successful investing requires you to identify and stop the small risks from accumulating over time and ultimately contributing towards poor investment results.
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