{"id":7487,"date":"2021-04-21T12:40:13","date_gmt":"2021-04-21T11:40:13","guid":{"rendered":"https:\/\/www.boosst.financial\/insights\/?p=7487"},"modified":"2021-04-29T18:40:19","modified_gmt":"2021-04-29T17:40:19","slug":"lets-talk-about-risk-coconuts-v-sharks","status":"publish","type":"post","link":"https:\/\/www.boosst.financial\/insights\/lets-talk-about-risk-coconuts-v-sharks\/","title":{"rendered":"Let’s talk about risk: Coconuts v Sharks"},"content":{"rendered":"

If you have ever been fortunate enough to swim in the azure tropical waters of the Caribbean, or on Bondi Beach amongst the surfers, or in the chilly waters of Cape May (where the film \u2018Jaws\u2019 that scared the 1970s generation out of the water was filmed) in the back of your mind may have lurked the thought that a large shark might just be out there looking for lunch. What was that shadow?<\/em><\/span> Yet most of us don\u2019t think twice about the risks of sitting under a coconut tree, which urban myth suggests is far more likely to kill you from a falling coconut than a shark attack, as is the malaria-carrying mosquito that lands on bare flesh as the sun sets in paradise.\u00a0 Nor did we consider the risk of a deep vein thrombosis from the long-haul flight to get there.\u00a0 We fixate on the shark.<\/p>\n

Humans are irrational and we find it hard to place risks in perspective, in part because they involve numbers (which many people hate), are influenced by fear or recent news and often depend on the way in which they are framed, to name just a few of the challenges.\u00a0 We have a very clear recent example of our confusion with the extremely rare possible side effects of some of the Covid-19 vaccinations.\u00a0 Latest estimates, suggest that the risk of dying from the vaccine due to blood clots is 1 in 1 million, which is similar to the chance of being murdered next month (nasty) or dying in a road accident on a 250-mile road trip(1)<\/strong><\/span>. And that, is the point. Life is full of risks and those that we deem to be everyday consequences of modern life, we take, usually without batting an eyelid, such as: driving, using ladders, drinking alcohol, climbing mountains, and walking through fields of cows (nearly 100 people were killed by cows between 2000 to 2020 (2)<\/strong><\/span>). \u00a0Yet other exceptionally low risks we deem \u2018too big\u2019 to take.<\/p>\n

It is similar with investing.\u00a0 Investors tend to worry about equity market crashes, perhaps not surprisingly, as equity markets can and have fallen by more than 50% in the past. Yet owners of equities should not be looking to sell them in the next few years but relying on fixed income assets to meet liquidity needs.\u00a0 In most cases, markets recover relatively quickly over say 3-5 years, sometimes more slowly.\u00a0 With horizons well beyond these falls and recoveries, investors who stay the course should be rewarded – as they have been in the past \u2013 with strong returns above inflation.<\/p>\n

Inflation remains the real risk to long-term investors.\u00a0<\/strong> Avoiding equity market risk and putting money on deposit is actually the risky strategy.\u00a0 Over the past 10-years, those holding cash have lost around 1\/5, or 20%, or \u00a320 in every \u00a3100 of purchasing power\u00a0(3)<\/strong><\/span>, however you want to describe it.\u00a0 That is risky.\u00a0 <\/span><\/p>\n

 <\/p>\n

Managing risk in our lives is summed up well by Professor Dame Glynis Breakwell who wrote a book titled The Psychology of Risk (4):<\/strong><\/span><\/span><\/em><\/p>\n

\u2018Risk surrounds and envelops us.\u00a0 Without understanding it, we risk everything and without capitalising on it, we gain nothing.\u2019<\/span><\/em><\/p>\n

 <\/p>\n

Go on, get the vaccine, take that long haul flight (once you can) back to the azure waters, brave the sharks and stick with your equities.\u00a0 The risks will be worth it.<\/strong><\/span><\/h5>\n

 <\/p>\n

 <\/p>\n

 <\/p>\n

References<\/strong><\/span><\/p>\n

(1)<\/strong><\/span> https:\/\/www.bbc.co.uk\/news\/explainers-56665396<\/a><\/p>\n

(2)\u00a0<\/strong><\/span>UK Health and Safety Executive (HSE) https:\/\/www.hse.gov.uk\/<\/a><\/p>\n

(3)\u00a0<\/strong><\/span>Bank of England \u2013 1 month Treasury bills<\/p>\n

(4)\u00a0<\/strong><\/span>This book is not for the faint-hearted! \u00a0If you are interested in how to use and understand statistics in a numbers-driven world, an enjoyable and more accessible read is Tim Harford\u2019s book \u2018How To Make The World Add Up\u2019<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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