Risk is not Constant
It has been a year since my son Jayden won the “Dixie’s Got Talent” competition with his amazing dance moves. This year he has been asked to return as a guest performer. He has been working very hard putting together a new performance worthy of the event. At the same time he has expressed an interest in playing rugby. I don’t know much about rugby except that it seems to be played by very large individuals without helmets or pads. Jayden is a normal sized young man and so naturally his mother and I have had our concerns. Still, this is something that he really wants to do so we agreed to support him, encouraging him however to wait until after his dance performance before he gets too serious about mixing it up on the rugby field.
Yesterday our fears were realized but not in the way we had anticipated. After successfully practicing with the rugby team, he went down to our dance room to work on his performance. Anxious to prepare his best dance routine ever, he decided to add in a cool, but very challenging, horizontal spin. Well the spin did not end as planned and when he came down on his arm he gained a greater appreciation for the term “Break dancing.” As the doctor was putting the cast on his broken arm Jayden joked that we had been so worried about rugby ruining his dance performance and now dance had halted his rugby plans.
Investors looking to balance the risks in their portfolio tend to classify investment activities along established lines of risk. They seek balance between investments they view as more risky, such as individual growth stocks, and what they perceive as less risky investments like bonds and value stocks such as energy companies. In so doing they make somewhat arbitrary judgments on what is risky and what is not. Recent market movements driven by falling oil prices have demonstrated the danger of classifying investments based on assumed risk. Bonds and energy firms, generally viewed as less risky, have often been the hardest hit in this market. Like Rugby and Dance, investors are learning that risk is not constant, and needs to be continually evaluated based on current conditions.
Managing risk is an ongoing activity and we can never get too comfortable feeling we are protected from hazard. We also need to be ready to make changes quickly if risk profiles shift and things move against us. I learned a great lesson this week from Jayden. Even while the doctor was putting the cast on his right arm he was already re-choreographing his routine, planning how to put on a great performance with only one arm. His positive attitude in the face of opposition was inspiring.
If the markets have you down and you need a little encouragement, feel free to attend Dixie’s Got Talent on February 5th and watch a young man with a broken arm bust some amazing moves. (pun intended)