In the last two weeks Global and Indian stock markets have been worrying about risks of North Korea’s threat of using nuclear missiles, India and China’s military standoff, impact of GST implementation on corporate profits and many other things. Newspapers are filled with stories warning us that world will likely face political, economic and social risks. This diverts investors’ mind from its focus on investment activity. Anthony Isola has written an article warning investors that worrying about risk can be very risky.
Isola warns us that there is a huge bubble in unnecessary worry. Our greatest risk is choosing the wrong thing to worry about. Probability blindness is our enemy. For example, we vastly overstate the potential for cataclysmic markets events. “We pay close attention to some risks while ignoring others, which very often causes the dilemma of choosing between risks to vanish,” according to Dan Gardner. We tend to ignore the risks of familiar things. Instead, we focus on risks that are novel and never before seen.
Isola reminds us to think of how people react to terrorism. Between 1968 and 2007, international acts of terrorism killed 3,765 people. In India 146,000 people died in road accident in 2015. Still, the average person believes their loved ones have a pretty good chance of being killed by ISIS in 2017.
Over the years, sincere (but misguided) worried about events that investors were certain could blow their portfolios back to the Stone Age. These were: A new unstoppable disease, Economic Calamity, World War III, Nuclear Armageddon, Unstoppable terrorism, Environmental disaster, technology gone wild. While there is a chance of one of these events happening, creating an investment strategy based on the high probability of these events occurring is a guaranteed money loser. Why? If you bet on the end of the world and you “win”, who in God’s name are you going to collect from?
What can investors do about this? Focus on the familiar risks that you tend to ignore while anxiously waiting for the events that will end civilization. “Nice” financial salespeople are a greater enemy to investors’ portfolio than any of the above events. Managing risk can be very complicated. The key to success is focusing on the risks that have the highest probability of occurring. According to Bruce Ames, “There are really important things to worry about and it gets lost in the noise of this constant scare about unimportant things.”
The best advice Isola can give is- Choose your own risks. Don’t let others determine what you should be worrying about.
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