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 and it would be exhausting to try dancing 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. Alternately, the other extreme is self-destructive, even if not in the short term, but it will certainly 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. It is clear that risks pervade our lives. We therefore deal with risk, whether knowingly and deliberately or unknowingly.
So you may as well get on the dancefloor and tolerate the risk most suited to your situation. At the other extreme, jumping into the investment arena and grabbing all sorts of risks is more likely to be self-defeating in the long term.
It makes all the sense in the world to enter the dance and look for some likely good long term partners and court them prudently.
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 partners different maybe 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, or understand more about, the results that we crave. In fact, with more and more experience, choosing a partner is a relatively simple process compared to our nervousness, self-consciousness and trepidation with our first dance.
And so it is with investing. You are safest not to rely on anyone else to make such important decisions for you as 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 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 just like 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 dancing partner or the best risk for you without some form of knowledge beforehand.
And just as an elderly dancer tends to avoid new steps like dub and dancehall, preferring the better 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. It is also important to introduce your children to elements of dancing with risks. It is an important aspect of personal financial management as is the social skill of dancing.
For the ones well suited to dancing with risks, they will find that they will look forward to dancing all night.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.