I read something in the New York Times recently which included this sketch by Carl Richards, a financial planner in Park City Utah who also works as The Sketch Guy in the Your Money section of the paper. I have taken the main message from the article to apply to the UK rather than the US.
I had a conversation with some clients last week who love to travel. When I asked them where they were planning to travel this year, they surprised me by saying they didn’t know. When I asked why, they replied ‘it seems to be a little bit scary to travel based on everything that is going on in the world’.
In my opinion, this perfectly demonstrates how newspaper headlines tempt us in to thinking the world is falling apart.
We begin to think that because there were a few planes that crashed last year, air travel is suddenly riskier. However, whilst the media depicted the most dangerous ever year for flyers, according to Flightglobal’s Annual Review, 2014 was the safest year for air travel yet.
In comparison, even though the risk of dying in a traffic accident is many, many times more likely than a plane crash, people don’t think twice about getting into cars. The headlines confuse issues such as these so much, so that it effects the decisions we make.
This year, we’ve already lost track this year of the number of people asking whether the events in Russia and the Ukraine, the rest of Europe, or China should have an impact on their investment strategy.
Let us be clear – investing is not a risk free proposition. Risk is something that we have little control over; making it something that is rarely worth our time and attention.
Exposure is easier to define and we can rest assured knowing that if an event was to happen, we have a reasonable idea as to what impact it would have upon our financial affairs.
So, while risk poses the question, ‘what could happen?’, exposure asks, ‘what impact will it have on me?’ We can’t always answer the first question, but we can have a good idea of how to answer the second.
This is why we talk about asset allocation in clients’ portfolios, as opposed to whether Russia will invade a neighbouring country!
It means that we set up life assurance cover – instead of worrying about catching Ebola – and it also means that we wear our seatbelts, even on a short drive to the shops.
Risk will always grab the headlines, but by understanding and evaluating our exposure, we can gain valuable control over our lives.
“Image credited to Carl Richards at Behavior Gap”