Just outside our offices there is a traffic light controlled pedestrian crossing which I use every day.
Most days I will see someone cross the road when the lights are green for traffic. This usually involves walking between cars or waiting halfway across in the middle of the road. What strikes me each time is what can be so important that causes these people to risk injury or accident when it only takes one distracted driver to see the green light and not register the person standing in the road.
The ironic thing is that the person involved rarely seems to be in much of a rush. They are not running. The lights change every minute or so and, often, by the time they have navigated the traffic and reached the other side, the lights have turned red for traffic and the rest of us can cross safely. The total time saved can usually be measured in seconds.
I appreciate that saving seconds can mean the difference between life and death in certain situations, but that does not appear to be the case here.
If these individuals stopped and considered the true balance between risk and reward, would they still make the same decision? If saving a few seconds could potentially result in a broken leg or something much worse, I suspect most people would decide differently.
I often see similar behaviour when it comes to investing.
Many people take more investment risk than they need to, either because:
- They are not fully aware of the level of risk they are taking or the potential consequences.
- They do not know what level of risk they actually need to take to achieve their objectives, which is not necessarily the same as the level of risk they are prepared to take.
This links closely to another observation I frequently make when meeting new clients.
Financial planning can be a very emotive subject because, when done correctly, it gets to the heart of what somebody wants to achieve with their life, both now and in the future. The financial products we use are often simply tools to help facilitate those goals.
I use the word tool deliberately.
Many people view their investments with a degree of excitement, enjoying the thrill when values rise and feeling disappointed when markets fall. To put this into context, I often ask clients to rate how exciting their mortgage is on a scale of 1 to 10, where 1 is boring and 10 is exciting.
The overwhelming majority answer somewhere between 1 and 2.
This is entirely understandable. Most people view their mortgage as an unwanted necessity, a tool used to help them achieve home ownership. They do not follow it daily or derive excitement from it. It simply serves a purpose.
In many ways, investments and pensions should be viewed similarly.
When financial planning is carried out properly, investments become tools designed to help achieve specific lifetime goals. These goals may include retiring early, travelling more frequently, helping family members financially, purchasing a holiday home or simply achieving greater financial security.
Once those goals have been identified, the required return can be estimated. From there, the level of risk needed to pursue that return can be determined. In my view, risk and return are intrinsically linked, and the amount of risk taken should be driven by the objective rather than by the pursuit of excitement.
Of course, some people enjoy trying to beat the market. They may have a gambling instinct or simply enjoy the challenge. There is nothing necessarily wrong with this, provided it is approached sensibly. In these situations, I believe it can be prudent to set aside a separate sum of money specifically for that purpose, while leaving the majority of assets invested in a way that is designed to help achieve long-term objectives.
Ultimately, investments do not need to be exciting. In fact, the most successful financial plans are often the least exciting. If investments are structured appropriately from the outset, they can usually be monitored and reviewed periodically to ensure they remain aligned with changing circumstances and long-term goals.
By viewing investments as tools rather than sources of entertainment, and by carefully weighing the risks we take against the rewards we seek, we can focus our time and energy on the parts of life that should be genuinely exciting.
Warm regards,
Neil
Neil Rossiter APFS, Chartered MCSI, CFPCM
This article represents the opinion of W&T Ltd trading as Blackdown financial only and is intended as information only. The content of this article should not be construed as advice or recommendation.