“I’m scared to invest because I heard it’s risky.” Over the years I’ve often heard variations on this statement. By now, I’ve come to the conclusion that risk is one of the most poorly understood concepts in personal finance.
This failure to understand risk properly comes at a big cost because it leads to poor decisions and lost opportunities – avoiding or delaying investing, selecting inappropriate investing options assuming they’re “safer”, panic selling when the market drops and so on.So, today I want to unpack some of the common misconceptions around risk:Let’s start with this: there is no such thing as a safe investment.Think about what safe even means in this context.
This statement makes it sound as though the alternative options are not risky, when the truth is – everything has risks associated with it. The other variable that this statement ignores is the investor themself. It’s not just the activity of investing, or the investment product, that carries risk. The investor – their skills, decision-making abilities, emotional staying-power – also adds to the risk.
These are all risks that the investor has the direct ability to influence and manage. When investing, the amount of risk you are exposed to isn’t totally fixed – there are ways to manage and reduce your risk exposure, and that’s up to you as the investor.