A PERCEIVED RISK CAN BE JUST AS REAL

Last week I went with two of my brothers to Jackson Hole to do some whitewater rafting. The stretch of river we rode has several miles of class 2 and 3 rapids, which means it is enough to be exciting but not really dangerous if you follow the rules.
 
As we approached each rapid, the guide would direct the boat to create the maximum effect. We would yell and scream and when we hit the calm area that followed each rapid, we retold the tale as if we had just survived certain death. The reality is, we were never in any significant danger, but the experience created the impression that we were.
 
Humans enjoy scaring themselves, though I am not sure why, with each person’s comfort level being a bit different.  Some might enjoy relatively safe class 3 rapids while others crave the class 5 which are actually fairly dangerous. Still there are those whose only comfort level with whitewater rafting is to drive the car along the highway and pick up the group at the end. I would argue that the car ride may be more dangerous than the one in the raft, so risk can be a matter of perception, which is often incorrect.
 
I speak often about risk but I would like to address the perception of risk as being just as important as real risk itself, to an investor. It is a matter as worthy of consideration as any other factor in investing.
 
Most know that our family loves theme parks. I have always been right there with the kids to run to the fastest, highest and scariest ride in the park. I know the rides don’t have real risk, but the perceived risk can give such a thrill. One example is the Supreme Scream at Knotts. This ride takes you high into the air and then drops you suddenly. I have a fear of heights so the ride always frightened me, but for some crazy reason I enjoyed the thrill of that fright. However, I don’t get the same enjoyment out of it anymore. The ride has not changed, but I have changed and I no longer like being scared by it. I now prefer watching my kids scream on the ride while I eat my Dippin’ Dots on the bench below.
 
Financial advisors often encourage investors to take risks they are not comfortable with. The advisor may be comfortable with a high thrill level, so they push the investor to rely on the advisor’s comfort level. In this I believe the advisors err because an investor who is truly fearful, even if they maybe shouldn’t be, will not enjoy the experience. Life is meant to be enjoyed. Investing properly is designed to help make that possible. How can the investor enjoy life if they lose sleep or live in fear? Thus, even the perception of risk should be considered in any investing plan so that the investor, not just the advisor, might enjoy the experience.