Looking as we leap – risks and our goals

I let my kid front-flip off the roof yesterday. It was a calculated risk. (I’m hoping his mother doesn’t read this.)

A few things you should know before you turn me over to the parenting police: there was a sturdy ladder for the way up and a 12-foot trampoline below. And my nine year old and I looked at the risks for a good long while before going for it.

There was a big white X in the middle of the tramp for us to shoot for. What were the chances of missing it? This is essentially what risk – particularly investment risk – is all about: whether or not we will reach our goal. Since this is a perfect time to be setting goals for the year ahead, it’s good to consider the risks we’re running and make sure nothing can derail us from achieving what we’re aiming to accomplish.

How much risk are we running?

I had been mowing and had moved the tramp from its usual position and nearer to the house, which of course led to the inevitable question, “Dad, can I jump off the roof?” And my default was to immediately say no. (“No way!”) But then I looked at it a bit more closely.

The chance of a safe jump was actually quite good. Consider the following:

• We knew about ladders, roofs and tramps. Although we had never combined all three, we had recently been working on ladder safety and taking in the view from the roof.
• He knew about front-flipping. It’s a regular phenomenon.
• He had made higher jumps than this. Our tramp usually sits below a high tree, where kids regularly dangle and let themselves fall and bounce.
• We had seen how most tramp accidents (via YouTube of course) involve jumps that bounce you off the centre on a diagonal (and this roof jump was pretty straight vertically).

So what made the risks worth running was a combination of personal experience and learning from the experiences of others. The risks for a safe jump were acceptable.

My hope is that likewise in the investment space we can learn from our own personal experiences in KiwiSaver, for instance, as well as from the experiences of other investors before us.

Linking risks with goals is important. Whenever we set a goal, there is always the risk that we might not reach it for some reason or another – the trick is to do what we can to limit risks as much as possible (which is also where the value of insurance comes in to offload that risk).

Aren’t risk and volatility the same thing?

Perhaps this is also a good time to point out that volatility – the ups and downs in value that an investment can have – is often confused with risk. When people say that shares are risky, they may just be saying that they move up and down like a roller-coaster. But this may not get in the way of our reaching our goals. For example, if our goal requires a modest 3% return and our shares bounce between 15% and 4% for years, the risk that we won’t achieve what we’re aiming for is actually very low – despite the volatility.

Volatility risk is real, but it is only one kind of risk. In fact, when you read a disclosure statement about an investment, there is typically an entire list of risks to be aware of before you put your money in.

The Financial Markets Authority, which is tasked with helping investors stay safe in the waters, has a helpful discussion of investment risks. These include those brought on by inflation (our results need to outpace this), the particular industry (which may be going through rough times), the global economy (which has its good and bad seasons), currency (the ups and downs of the dollar here and abroad), rising interest rates, or even the company going under. There’s also the risk of not being able to get our money back (liquidity), due to it being locked up or there not being anyone who wants to buy our investment when we’re ready to sell.

As they say, “risk isn’t bad” in itself – it’s why we’re getting paid a return after all. It’s all about whether we’ll reach our goal, whether we’ll land on the white X we’re aiming for.

Happy to report that a handful of jumps were made safely from the roof – so fun! By the end my son and I were marvelling at how Hollywood stunt actors do this all the time.