Bad road conditions often produce wrecks; but not always. With the exception of chronic worriers, most of us don’t ponder on the bad things that could have happened yet didn’t. But that kind of thinking is precisely what risk management is all about. It’s not exciting but it is critical.
Tuesday morning in Indiana began with rain turning to ice. I have personal commitments to students at Purdue University as well as my team and clients in the Lafayette area. For 20 years, I have journeyed across Indiana every Tuesday and Thursday. This week would have been no different except for the ice! For just the second time in seven years I missed teaching a Purdue class due to weather.
No news story would have been printed about how I made it safely to campus risking life and limb to teach. Nor will there be a news story about my untimely death or disability resulting from a wreck en route to campus. Good risk management often leads to no news and thus no news story. You will never wake up to read an article in this or any other paper proclaiming, “You lived!” This is a critical point in managing risk – whether in life or investment portfolios.
When you opt not to take a specific action rarely do you know how the action would have turned out. That is one reason why risk management is often forgotten. It gets no credit! Your spouse may be proud you stayed home, but others are frustrated when schools are delayed and cancelled. After all, there were no wrecks! Risk management is critical and its role in saving lives and nest eggs is often overlooked.
There are four – and only four – things you can do with risk. I could have avoided the risk all together and simply stayed home on Tuesday. You could choose not to make an investment or not to jump out of a perfectly good airplane! You don’t know with certainty what would have happened in either scenario.
The trip to Lafayette is only 90 minutes and I could have accepted the risk and headed out the door, trusting my driving skills and good luck to get me there. You could leave all of your money in a stock that is fundamentally broken but still going up in price. Until the stock crumbles or the car wrecks who cares?
There are other routes I could have taken Tuesday. I could’ve driven slower to reduce the risk but would not have eliminated it. Diversification in a portfolio is a good example of this mindset. As long as everything works, going slower or diversifying seems silly!
Last but not least I could transfer the risk if someone were crazy enough to guarantee the trip’s safety. Transferring risk means passing the risk to another – usually an insurance company. Regardless of your choice or risk management style, if nothing bad happens there are no stories, no excitement and no credit to good common sense.
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Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.
