Apparently, winter has arrived in Montana. As I look out my window, it looks like the middle of January, not a typical early November day. I’m finally getting caught up today after last week’s travels and being delayed on my return trip due to the winter weather. During my delay, I spent a lot of time thinking about uncertain outcomes like not arriving home when planned and the resultant consequences.

Uncertainty, a synonym for risk, is part of all of our lives. Whether we care to characterize the uncertainty in our lives as risk doesn’t really matter. It’s still there and will always be there.  As a result, we’re all engaged in some form of risk management whether through an insurance policy (probably most common) or some other action we use to hedge against uncertain outcomes.

Some of the macro risks we face today include war, terrorism, economic depression, expropriation of assets, etc… We have no control over these risks and probably shouldn’t worry too much about them in our day-to-day lives. According to Business Insider, Americans are more likely to be killed by a sharp object, an animal, a heatwave, an airplane incident, an accidental gunshot, bicycling or choking on food, among others, than they are to be killed by a foreign-born terrorist. Not to minimize or disrespect those that have lost their lives as a result of a terrorist attack, but the point is being negatively impacted by a macro risk event is highly improbable for most of us.

Some of the personal risks we face include losing our job, getting into a serious accident, becoming terminally ill, etc… These are legitimate concerns for all of us, but most people don’t like to dwell on them for obvious reasons. There are, however, some of us who constantly climb the proverbial wall of worry as a result of our inherent anxious natures or because we allow others such as the media to create a sense of paranoia within us. In reality, there’s only so much we can do to minimize and/or prevent the personal risks we face in our lives. After that, it comes down to fate or chance, whichever you prefer.

Investing is a microcosm of our lives. There is plenty of uncertainty. There is only so much we can do to mitigate that uncertainty without resorting to hiding our money under our mattresses. There are plenty of people that would have us worry about outcomes we have no control over.

Money and investing is an emotionally charged part of our lives. None of us likes to lose money and most of us would like to have more of it. However, we tend to prefer not losing money to making more of it. As a result, we tend to focus more on the risks associated with an investment opportunity than on the potential gains. In behavioral finance this is referred to as loss aversion.

Loss Aversion

Loss aversion is front and center in the media and markets today. Nearly everyone appears to be more focused on the risks going forward versus the potential gains. A piece in the Sunday NY Times touched on this very phenomenon.

A couple of quotes extracted from the article drive home my point:

“Investors have never felt less secure, even though we are eight years into a bull market.”

“…the vast majority of questions are about what will ultimately bring the market crashing down.”

“No one ever asks when the S&P is going to blow past 3,000”

While bubbles and market crashes so often feel like the topic du jour any more, there appears to be just enough hesitation and restraint on the part of the investment community to keep things from getting out of hand in the near term. That’s not to say we aren’t headed in the direction of excess and a market correction or bear market. However for now, it doesn’t feel like it’s imminent. So, make sure you have a sound investment plan in place and that you follow it. Beyond that, there’s not much you can do.

“You cannot invest successfully when you are crouched under your desk in a fetal position.”  – Richard Bernstein via NY Times