Elon Musk and Investment Risk

I was listening to an interesting interview with Elon Musk a few days ago. He said that most people are too risk adverse even when they have nothing to lose in their 20s.

It reminded me of something I was reading online a few days after. Many older people were answering the simple question; what do you wish you would have known at 20? Many answered they wish they had taken more risks.

It got me thinking. Most of the people I know who are 25, 28 or 32 who are doing very well took risks.

A typical example is 2–3 recruiters I know. They got a job with a low basic salary at 21–22 after graduation. Then after 2–3 years of getting good at it, went to commission only or started their own company.

At 26–30, they were earning great money, with a better work-life balance than most people at the top consulting or law firms.

Most people would have been petrified to take such a risk, but what’s the worst that could have happened? My friend would have lost some money.

At 25–27, he could have applied for other jobs, and some interviewers would have been impressed, I am sure, about how proactive he was.

Let’s go further. Let’s say he would have lost $5,000 by failing as a commission only recruiter, as he lost his touch and still needed to pay his bills. He was only 23–25. He can make that money back; and besides most people waste much more than $5,000 on pointless consumption anyway.

Moreover, you can’t take away a client relationship vert easily. A salary can be taken away at any moment, especially in the private sector, but a client relationship built over time, can’t be taken away so easily.

The same thing in investing. Ironically, I have met many 25 year olds with only $5,000 to their name, who are more adverse to declines than 60 year olds.

This makes no sense. There is very little chance markets will be down over a 40–50 year period; and besides, a 10% decline on $5,000 is only $500. You probably spend that in daily life without even thinking.

The keys to having a more balance view on risk are often:

1. To distinguish between volatility and stability — too many people think something that is volatile is more risky. The opposite is true. The person who is self-employed, and has 2–3 incomes, has a more volatile income. However, that person’s income is less likely to go to zero, compared to the person relying on 1 `non-volatile` income. Likewise, assets that are more volatile, like markets, have always outperform cash and bonds long-term. People make this mistake all the time. They speak about China having a `stable government` as opposed to a `low volatility government`, or `stock markets being unstable now`, when they really mean `highly volatile`.
2. Remember also that taking no risks is impossible.
3. There is no such thing as a free lunch. That job paying a non volatile income, especially if the income is high, will have 1000 candidates per 1 job. You will get told what to do all day, unless you are lucky. If you have a non volatile investment portfolio, you will end up poorer, you will just never see big declines.
4. Doing nothing, taking no action, is usually more risky than doing something long-term.
5. A decline and a loss isn’t the same. $10,000 invested in the S&P in 1941 would be worth $52 million today but there has been so many 50% declines along the way.
6. Taking immediate action is one fo the best ways to overcome procrastination. Top performers get in the habit of taking immediate action.
7. You will never get 100% information. As soon as you have 80%, you have actionable information. Take the decision. In investing all you need to know is; a). What is the long-term performance of the funds; b). What is the cost; c). What’s the process. Maybe 1–2 other things, but you get the point. Half the questions people ask, or are worried about, are irrelevant.
8. If you are going to have loss aversion about anything, make it about time. Think about it. If you are paid $100 an hour, and you complain for 1 hour about some $5 fee your credit card company has levied, you are losing $95 even if you get it reimbursed. If you spend 5 hours a month, or 60 hours a year, checking your stock portfolio, you are losing time.

This story originally appeared on adamfayed.com. For questions about this story please contact me on adamfayed@hotmail.co.uk or adamfayed@iamgltd.com