One study of 20,000 people found that there was a ‘strong positive association between life satisfaction and willingness to take risks in general’. Think about some of the best experiences and parts of your life to date, and then consider their origin stories.
Did you apply for a job that you weren’t sure you were qualified for?
Did you ask someone on a date without knowing if they’d say ‘yes’?
Did you speak up on an issue that affected you or someone else?
Did you try an activity that you felt a little apprehensive about?
Some of the happiest moments of our lives grow from moments of fear, doubt or worry
Your investing journey involves taking risks, making mistakes and getting back up again, and growth – in your confidence as an investor and hopefully also in your investments. You can use this knowledge to inform your decisions as an investor, as the better you understand the role risk plays in investing – and what that means to you – the better you’ll be able to make long-term investment decisions.
What does risk mean to you?
Think about what actions feel risky to you: for example, skydiving, speaking in public, going on a date or travelling solo. These actions might feel very risky to some people, while to others they might be a piece of cake. This point is really important to reflect on; the same action can bring up a diverse range of viewpoints depending on who you speak to, their personal experiences and their knowledge of the topic.
It’s no different to investing.
Many of our views are informed by the media, a family member’s experience or misinformation from online forums. Have you historically considered investing to be a risky activity? Think about what you’re basing these views on: your family history, past experiences, job and so on.
The deeper you think about this, the better you’ll understand your own risk profile and how that impacts the way you invest. Let’s work through some strategies for managing your risks as an investor and making life a little easier for yourself.
Don't invest money you need in the short term
It’s very important that you don’t invest your emergency fund or any money you’re putting away for short-term goals. The reason for this is that on any given day, month or year, your investment could fall in value for reasons outside of your control (such as a global pandemic). Shares and ETFs are investments we typically make with a long-term view of 5–10 years at minimum. These investments need a long-term approach so they have time to grow.
One of the reasons investors lose money is that when their investment falls in value, they get scared and sell. However, if you go into investing with the understanding that there will be good years and bad years, you’ll be more comfortable staying invested when you see your portfolio fall in value because you’ll know it’s all part of the journey.
Diversification is key
‘Diversification’ is a word that I think about a lot in all areas of my life. I try to diversify my income streams, friendships, information sources, books, indoor plants and hobbies. It leads to a much richer (and happier) life in many cases, and it means if one thing falls through, I’ve still got a lot of options.
It’s also a way that you can reduce the level of risk you take as an investor. You could use ETFs, shares, cash and bonds as the building blocks of your investment portfolio, for example. There’s a lot of data and research on building the ideal portfolio for your risk profile, age group and so on, but at the end of the day you need to build your portfolio around the life you want to live, accounting for all the things that make you unique.
Remember, what your friend or Professor Google says to do won’t necessarily be right for you and your individual circumstances. This is one of the reasons many people seek out personalised financial advice.
Do your own research
As an investor, it’s important to have a good understanding of what you’re buying. This gives you the confidence to make investment decisions and stick to your plan, even when you see headlines that say the market is falling. Please don’t invest in something you see advertised online if you can’t explain to a friend what it does at minimum.
There’s a general rule of thumb that taking on more risk over a long period of time will lead to higher returns. However, if you invest in something without doing your homework and it turns out to be a poor investment, no amount of risk-taking can help you.
Control what you can – and know what you can’t
In Risk: A User’s Guide, General Stanley McChrystal writes that ‘dealing with risk is the active practice of controlling every single factor within your reach’. You will never be able to control everything as an investor, so focus on managing the risks within your control.
So, how does all this tie into buying happiness? The more you understand the risks within your control and how to manage them, the less stressed you’ll feel about investing. A lower-risk investment option may give you more peace of mind, for example. You need to invest in a way that lets you sleep at night.
Perhaps building a portfolio of shares you have to actively manage won’t make you happy because the requisite research takes up too much of your time and the volatility of the market makes you nervous. You might instead decide that a hands-off approach to building your portfolio is better suited to your personality, and means you’ll sleep a lot better at night.
The biggest risk of all: Not doing anything
Sometimes what we need to overcome our fears around investing is the reminder that not getting started might be the biggest risk of all. Sure, if you don’t invest, you might never directly experience the risk of loss and making a mistake, but you also might look back and wish you’d prioritised your financial future.
The more time you give your investments to grow, the more you’ll benefit from compound interest. Just think about how many more options you’ll have in decades to come if you’ve built up a comfortable nest egg!