Don't take all the pain for none of the pleasure.
Two articles grabbed my attention here on The Fool recently: Harvey Jones' article Risk Is A Four Letter Word, and Alan Oscroft's article Why Do We Listen To Experts? In this article I'd like to pick up the baton by following up with the question "Whose Risk Is It Anyway?".
Attitude to risk
Whenever you sit down with a financial advisor, the first thing they do is to carry out a "risk assessment" to find out what your risk tolerance is. Rightly or wrongly, the sceptic in me reads between the lines to reach the following conclusions:
- If your 'investment' generates pitiful returns, the advisor will tell you that it is your own fault for choosing the "low risk" option.
- If the value of your investment falls substantially, then, well, you did say you had a high risk tolerance didn't you?
Heads -- they win! Tails -- you lose!
Whenever I sit down with a financial advisor -- which I never do, because I won't let them near me -- my stock answer to the "attitude to risk" question is: "It depends who is taking the risk".
I have quite a high risk tolerance when I am taking the risk myself; witness my spread betting, although it need not be as risky as it is often portrayed to be. However, I have an ultra-low risk tolerance when someone else is taking the risk on my behalf.
Despite the numerous qualifications that our advisers boast, I have one qualification that they don't have. I care about my own money! So even when 'risking' it, I like to be in control of my risk.
The illusion of control
When driving my own car, I may be prone to pushing the boundaries a little. Nothing illegal, you understand. And I'm comfortable doing so because I know what a great driver I am.
When I jump aboard one of those National Express coaches, I don't care how good the driver thinks he is. I just want him to drive safely.
Some financial authors describe this as "the illusion of control" and point out that none of us is as good a driver as we think we are, so we might as well leave it up to the professionals.
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The blame game
Many investors do leave it up to the professionals, and here's why:
- If their investments perform well, they can congratulate themselves on a good choice of advisor.
- If their investments perform badly, they can console themselves with the thought that it wasn't really their fault -- because they were given "bad advice".
Most people would rather blame someone else than themselves, and relying on someone else's advice is a handy way of doing this. Wake up, folks! When risking you own money, then -- unless there is some fraud involved -- you only have yourselves to blame for the end result. If you want to pat yourselves on the back when it all goes well, you also need to take the blame (and pain) when it all goes wrong.
All the pain, and none of the pleasure
When you drive fast, do a bungee jump, or whatever, you are willing to take the pain (if things go wrong) in exchange for the pleasure you get from taking the risk.
This gives us a problem if we are to take the pain for our investment decisions, because we may not actually be getting the pleasure from the "high risk" assets we're invested in.
Entrusting your investment money to a third party manager is like giving him a bag load of money to take to Las Vegas, paying for his hotel and other 'expenses', and asking him to report back to you on how he did. He gets all the pleasure from rolling those dice, and (whether you like it or not) you take all the pain for opting for his 'high risk' strategy.
You know what? I can lose my own money just as effectively as the professionals can; so I might as well have the fun in the casino myself -- and enjoy the complementary sandwiches. Or forget about fast cars and bungees jumps altogether, and just play it safe with the National Savings.
Do It Yourself
It's your money that you're risking.
If you want to risk it, go have some fun and don't pay someone else to have the fun for you. If you want to play safe, do you really need to pay for expert advice on where to secure your consequent low return?
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