How do you become comfortable with risk?

BananaRepublic

Thrugelmir wrote: »

Diversify. The return may be lower but the odds of being wiped out totally diminish.

That is indeed the key, along with staying in for the duration.

If you look at a range of countries, stock markets and sectors over the past 100+ years, you will get a feel for what is going on. Once you understand risk, and volatility, you will feel comfortable with investing.

As long as you diversify your investments, you will not lose all of your money, except in the case of a global collapse of civilisation in which case money is not going to be of much use anyway. In fact the overwhelming likelihood is that in th elong term, you will make lots of money. I personally choose to avoid the more volatile and hence risky markets such as China, whilst others will say that China is a huge opportunity and should be part of a balanced portfolio. Each to their own, but you need to decide your own attitude to risk.

BLB53

Risk is blindly going along with investments without really knowing what you are getting in to because everybody else seems to be doing it.

Malthusian

Risk is part of life. If you are not exposed to investment risk then you are exposed to inflation risk. If you go outside you are exposed to the risk of being run over by a bus, if you decide not to ever go outside because you're scared of buses you are exposed to the risk of obesity and eventually mental breakdown.

Since there is no way to avoid risk the only rational option is to find the point at which you are comfortable with it - specifically with the balance of the various risks you are taking.

Pincher

BLB53 wrote: »

Risk is blindly going along with investments without really knowing what you are getting in to because everybody else seems to be doing it.

So only invest when you have insider information.

"You tell the man, Blue Horseshoe Loves Anacott Steel."

LHW99

Avoid "clever investments" that are unclear about what they are actually invested in (think endowment policies and the sub-prime mortgage issues).
Start small with regular monthly investments, so you see how many more units you can buy in a month when prices drop.
Learn as much as you can about the investments you are thinking of using - before you actually invest.
Keep an eye on charges, they shouldn't be the only thing to consider, but they're important.
Be patient, don't panic but keep an eye on what your investments are doing and how that compares to the wider market.

enthusiasticsaver

I am naturally a cautious person. I like to have the backup of knowing I have access to enough money to live (approaching retirement) off without having to liquidate assets. I started investing a few years ago and spent months reading up and following threads on here and reading blogs and articles on risk and how to minimise the risk of losing a percentage of your investment. So I would say knowledge of how investing and the market works helps with making you comfortable with taking a risk with your savings.

My multi asset portfolio is well diversified and I do not invest anything I am likely to need for the next 5 years. Keeping a large amount of cash in back up is therefore essential for me to feel comfortable in taking some risk.

As someone else said above familiarity is also helpful. I am in control of our investments rather than using an IFA and I can go on any time and see what they are worth and I know that there is market noise all the time and they go up sometimes and come down. So long as I do not need to access it, it does not matter. So having control and not panicking if your savings goes down is essential.

I also only do tried and tested funds. I am not interested in trying to make a fast buck. Slow and steady does it for me.

Mrs_Z

What a great question!
And it is indeed an interesting one…as for myself (and I’d describe myself as a naturally cautious one) the courage to take a risk came with a realisation that risk & opportunity usually go hand in hand. You have a risk on one hand and if you decide not to take it, you most probably would have a lost an opportunity too. Also, like already mentioned by other members, there is a risk in everything – doing or not doing – you could stay at home in fear of getting run over by bus, and you could end up being hit with a collapsed ceiling in your flat if your upstairs neighbour forgot to turn off the bath tap on that very day.

Personally, before taking a risk, I consider the worst case scenario and whether or not I’d be able to live with the outcome and secondly, what mitigation actions there are to avoid it. In reality, the outcome is likely to be somewhere between the best and the worst. I have also noticed that it is possible to get used to taking risks to some extent and become somewhat more comfortable with that fear. Quite often it does not have to be all or nothing; there are mitigation actions that you can take to avoid the worse case scenario – and if there aren’t any, then the risk is too great! For example; I remember being very scared of re-mortgaging our residential home to the tune of 3 x the original mortgage in order to buy a holiday home for cash. What if I lost my job and income? Well, the likelihood of both myself AND husband losing our jobs at the same time was small, neither of us had ever been out of a job for 3 months or more. As long as one of us had an income, we could manage. There was also the possibility of selling o renting out the holiday home (mitigation actions). Looking back, the worst case scenario did not happen, we didn’t lose our jobs, we didn’t need to sell or rent out the holiday home. On the other hand, the investment potential of that property never materialised either, due to recession in Europe but mainly totally different property market drivers compared to London/England which I failed to understand. So the outcome of that decision was indeed somewhere in between.
Then few years later it was time for us to move houses and yes, guess what – the new mortgage was 7 x the original loan sum. It was scary but I thought, you know what – we’ve been here. If it all goes t***s up, we’ll get in lodgers, I’ll get a second job, we downsize, rent it out, whatever.

At present, I’m aiming for early retirement and for that to happen, I need to finance a gap between going early and receiving my pension. I can only do that by saving and investing all of those savings. I have decided to take the plunge with stock & shares ISAs which may or may not go up in value. The worst case scenario? They value of them will be nowhere near what I need in which case I will need to continue working longer or until my pension. Mitigating actions? I’m not investing every last penny, and will have emergency funds separately. I have and am actively reading about investments and hopefully will make at least partly informed decisions. At least if I get it wrong, there is no-one else to blame. I would feel much worse giving the control for someone else and they getting it wrong! Once I have made the decision, then I tend not to worry about it as you can only base your decision on information that you know at the time, there is no point beating yourself up about something that you didn’t know at the time. At the end of the day, if it all goes wrong, oh well, at least your tried and have some tales to tell :rotfl:

Ray_Singh-Blue

Thinking about this again today & agree with what others have posted- that comfort can be increased by thinking about different pots of money, and assigning each appropriate risk levels.

Level 1: green. I sleep well knowing I have at least £20K instant access cash. So I always keep a savings balance above that, in a UK bank account at near zero risk.

Level 2: amber. I have ISAs which I might want to access in the next few years, but might not. I estimate I could live with up to a 40% drop in their value, worse case, but no more. So I divide these investments 60% equity / 40% fixed income. I estimate this could lose up to 40% of its value, but this would require a once-in-a-generation type crash.

Level 3: red. I have a SIPP which I cannot access for at least another 13 years, and because it is supplemental to an occupational pension I think I could even stomach losing the lot, worse case. So that pot is invested 100% in equities. But I'm not brave enough to leverage - I would not be happy to lose 150%.

Level 4: flashing red. Occasionally I buy a raffle ticket. I fully expect to lose 100%, but might win a giant teddy or something.

Level 5: code black. Once in a blue moon I send my teenage son to pick up some milk from Sainsburys with a crisp tenner & say "bring me the change". No way will I ever see that money again.

Mogley

Great thread. Being an engineer helps me quantify and manage risk. First you have an objective. Then you have options to meet the objective where each have a risk.

Risk = The event x The likelihood

Examples of events given in Bowlheads great post are: house burns down, currency collapse, inflation rate remains greater than savings rate etc.
Likelihood = how likely you think that event will occur (normally opinionated).
Doing a risk analysis means the worse the event and the greater the likelihood, the higher the risk. You may think to stop here. "I don't like High risk".
But... next you think of control measures to mitigate that risk as Mrs Z nicely points out. Do the risk analysis again and you should have a lower more acceptable risk. If not try a different option/scenario.

I'll use one of my objectives - "Savings of £x required for when my children turn 18 to do with what they want".
Options - Children's cash account, remain in CTF, Open JISA, Open S&S JISA, Open personal S&S ISA.
My best judgement is that this is for the long haul so I'll try "Open S&S JISA". Event = Loss of 50% of value when oldest turns 18. Likelihood = High. Risk =High. Control measure = Start children's cash account when age 15 to put in some hard cash. The likelihood of the event goes down to a risk level of a loss that I am comfortable with. At least they will have some money to spend at 18 on whatever they want.
Putting all your money into one stock because it performed well in the past (hypothetically) is extremely high risk unless..... "you only invest if you have insider information" (to coin Pincher's phrase). This changes the scenario to very high risk. I still would not be comfortable with this. Each to their own!!

Apply this methodology to any objective and scenario in whichever easy/complex way you want to help Manage Risk to a level you are comfortable with.