I was listening to an interesting interview with Elon Musk a few days ago.
A known risks taker with a net worth of $30billion in 2020, he said that most people are too risk adverse even when they have nothing to lose in their 20s.
It reminded me of something I was reading online a few days after. Many older people were answering the simple question; what do you wish you would have known at 20? Many answered they wish they had taken more risks.
It got me thinking. Most of the people I know who are 25, 28 or 32 who are doing very well took risks.
A typical example is 2-3 recruiters I know. They got a job with a low basic salary at 21-22 after graduation. Then after 2-3 years of getting good at it, went to commission only or started their own company.
At 26-30, they were earning great money, with a better work-life balance than most people at the top consulting or law firms.
Most people would have been petrified to take such a risk, but what’s the worst that could have happened? My friend would have lost some money.
At 25-27, he could have applied for other jobs, and some interviewers would have been impressed, I am sure, about how proactive he was.
Let’s go further. Let’s say he would have lost $5,000 by failing as a commission only recruiter, as he lost his touch and still needed to pay his bills. He was only 23-25. He can make that money back; and besides most people waste much more than $5,000 on pointless consumption anyway.
Moreover, you can’t take away a client relationship vert easily. A salary can be taken away at any moment, especially in the private sector, but a client relationship built over time, can’t be taken away so easily.
The same thing in investing. Ironically, I have met many 25 year olds with only $5,000 to their name, who are more adverse to declines than 60 year olds.
This makes no sense. There is very little chance markets will be down over a 40-50 year period; and besides, a 10% decline on $5,000 is only $500. You probably spend that in daily life without even thinking.
The keys to having a more balance view on risk are often:
- To distinguish between volatility and stability – too many people think something that is volatile is more risky. The opposite is true. The person who is self-employed, and has 2-3 incomes, has a more volatile income. However, that person’s income is less likely to go to zero, compared to the person relying on 1 `non-volatile` income. Likewise, assets that are more volatile, like markets, have always outperform cash and bonds long-term. People make this mistake all the time. They speak about China having a `stable government` as opposed to a `low volatility government`, or `stock markets being unstable now`, when they really mean `highly volatile`.
- Remember also that taking no risks is impossible.
- There is no such thing as a free lunch. That job paying a non volatile income, especially if the income is high, will have 1000 candidates per 1 job. You will get told what to do all day, unless you are lucky. If you have a non volatile investment portfolio, you will end up poorer, you will just never see big declines.
- Doing nothing, taking no action, is usually more risky than doing something long-term.
- A decline and a loss isn’t the same. $10,000 invested in the S&P in 1941 would be worth $52 million today but there has been so many 50% declines along the way.
- Taking immediate action is one fo the best ways to overcome procrastination. Top performers get in the habit of taking immediate action.
- You will never get 100% information. As soon as you have 80%, you have actionable information. Take the decision. In investing all you need to know is; a). What is the long-term performance of the funds; b). What is the cost; c). What’s the process. Maybe 1-2 other things, but you get the point. Half the questions people ask, or are worried about, are irrelevant.
- If you are going to have loss aversion about anything, make it about time. Think about it. If you are paid $100 an hour, and you complain for 1 hour about some $5 fee your credit card company has levied, you are losing $95 even if you get it reimbursed. If you spend 5 hours a month, or 60 hours a year, checking your stock portfolio, you are losing time.