INVESTING INVOLVES dealing with risks. Dealing with risks is like going to a dance. It just doesn’t make sense if you go to a dance to be a wallflower or, on the other hand, it would be exhausting to try to dance to every tempo with every possible partner.
In the first instance, you would be shooting yourself in the foot in terms of achieving the objective of going to the dance – assuming your goal is to enjoy the dance. Alternatively, the other extreme is self-destructive even if not in the short term; certainly it will wear you out in the long term.
Similarly, if your goal is to invest, you cannot avoid risks. In fact, trying to eliminate risks would not even make sense. The pursuit of high returns usually involves tolerating higher risks. We therefore should deal with risk, knowingly and deliberately.
So, at the dance, you may as well get on the dance floor and tolerate the risk most suited to your situation. If you are alone, it may make all the sense in the world to enter the dance and look for some likely good long-term partners and court them prudently.
Similarly, as you cast your eyes over the table of listed stock, in the first instance focus on, say, a couple of good long-term investment stocks. At the other extreme, to jump into the investment arena and grab all kind of risks is more likely to be self-defeating in the long-term.
Just like the dancer choosing a partner, in choosing the risks we will handle, we will all have different risk tolerance profiles and will therefore all choose different partners in size and personality or some other characteristic.
I believe, though, that the more dancing experience we have, the more likely we are to choose suitable partners and get the results that we crave. In fact, with more and more experience, choosing a partner is taken for granted as a relatively simple process as compared to our initial nervousness, self-consciousness and trepidation with our first dance.
And so it is with investing. You are safest not relying on anyone else to make such important decisions for you like choosing a dance partner or putting together a suitable portfolio of investments.
Personal choosing experience is indispensable. It helps you to understand the nuances of the investment market and of your own emotions and reactions, just like how we eventually learn to spot and engage a good dancing partner from across a crowded room. And you get better and better at handling risks – similar to how your expertise in choosing a dancing partner will improve with practice.
Nevertheless, the proof of the pudding is in the eating, so sometimes looks can be deceiving. There is no absolutely sure way of choosing the best dance partner or the best risk for you without some form of knowledge beforehand.
And just as an elderly dancer tends to avoid the new steps like dub and dancehall, preferring the more well-known and regal waltz, so too should the older investor avoid start-ups and such risky investments. It also makes sense to keep a number of good dance partners so that when one is sick or doing poorly, you have an alternative. A similar perspective is also germane to portfolio management.
I therefore invite all my readers to dance with risks and find their comfort zone. Encourage your children to experiment with risks. It is an important aspect of personal financial management, as is the social skill of dancing.
Those readers well suited to dancing with risks will find that they will reach a stage where they look forward to handling more and more complex risks.
Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.