Are you focusing on the wrong risk?

By Larissa Fernand |  02-08-21 | 

On March 8, 2014, Malaysia Airlines Flight 370, carrying 227 passengers and 12 crew members, loses contact with air traffic control less than an hour after taking off from Kuala Lumpur then veers off course and disappears.

A plane crash is sensational. But the macabre nature of this incident lay in the fact that it did not crash, but vanished into the night.

Think about it. With emails, smart phones, WhatsApp, social media and zoom calls, we can contact anyone, anywhere, anytime. In fact, to be disconnected, even for a short while, requires a conscious decision and a fair bit of planning. So an aircraft going "off the radar" is extremely bizarre. The entire world was gripped with this story.

Six days later, Morgan Housel, now a partner at Collaborative Fund, pens down an article on his thoughts of risk based on that event. I remember reading it with immense fascination because few have the knack of dabbling in non-linear, multi-dimensional thinking as he does.

On March 14, 2014, Morgan Housel looked at annual averages…

  • 10,500 people have likely died from malaria since then (March 8)
  • 4,000 have died from traumatic injuries
  • 16,500 from tuberculosis
  • In the U.S., 9,900 people have died of heart disease, just under 600 in car accidents, 250 were likely murdered.

Did they make the news? No! Did they garner as much attention as Flight 370? No! If American news focused on the biggest threats Americans face, it would write about heart diseases and strokes, and cancer and car accidents. (source)

So what gives?

Morgan Housel made some fascinating observations when he pointed to flaws when reacting to risk.

Threats like plane crashes, which are statistically insignificant and not frequent, grab our attention and scare us more than those that are deadly serious but common, like heart attacks and car accidents. And yet, we can minimize the effect of the common threats if we pay attention to what we eat, how often we exercise, never drink and drive, observe traffic signals, put on our seat belts, and wear a helmet when we take out the bike. There is a huge gap between the things we worry could happen and what's actually happening around us.

Now apply it to finance. We dread a big market crash and pay significant attention to the quarterly earnings of a company. But habitually ignore the slow-burning risks.

Here’s how to get sorted.

  • Pay more attention to your savings rate. Most people spend too much time trying to become a better investor and not enough time trying to save more money. Savings are the raw material to get started. If you have not saved, you cannot invest. Read Why does saving suck? to help you get started.
  • Costs/fees matter. Imagine you have Rs 1 lakh invested, earning 6% per annum for the next 25 years. You would end up with about Rs 4.30 lakh. If you added 2% a year in fees (costs), you would have only about Rs 2.60 lakh. As this note in Vanguard points out, the 2% you paid every year would wipe out almost 40% of your final account value.
  • Don’t jump in and out of stocks or funds. Take into account short-term capital gain tax, brokerage fees, exit loads, and any other transaction cost. Also, you need to give your investments time.
  • Investing a set amount of money each month consistently over a long period of time will get you the desired results. Let’s say you are 25 years old and starting out with Rs 500 to be invested every month. With a 10% return, you should get around Rs 28 lakh by the time you are 65. Delay that by 10 years and start investing when you are 35; the amount drops to around Rs 10 lakh. So the trick lies in starting early (however small), and being consistent and patient.
  • Sometimes, you could be a victim of the low probability and high impact event. A pandemic could hit and you could lose your job, or a loved on. You need to be prepared. Get adequately insured. Get an Emergency Fund in place. Read 4 things an Emergency Fund is not.

When it comes to risk, look at what is within your power. Your focus must be on the things you can control.

Larissa Fernand is Senior Editor at Morningstar India. You can follow her on Twitter.

Add a Comment
Please login or register to post a comment.
<>
Top
Mutual Fund Tools
Ask Morningstar
Feedback