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. He mentioned some 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?
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.
When 9/11 was still fresh in people’s memories, more Americans avoided planes and preferred driving. Though, the latter is much more dangerous. The memory of the recent catastrophe made the fear of flying weigh more heavily than it rationally should have done. According to 2020 statistics presented by the National Safety Council in the U.S., these were some of the odds of death: heart disease (1 in 6), cancer (1 in 7), motor vehicle crash (1 in 101). As for passenger on an airplane, there were “too few deaths in 2020 to calculate odds”.
Now apply it to finance.
We dread a big market crash. We fret about one quarterly earnings of a company. Something is always going on when it comes to geo-politics. Yet, we habitually ignore the slow-burning risks.
We hold no sway over the direction of the economy or the markets; they're going to do what they're going to do. But we do exert influence over our own situations: how much we save versus spend, how we have allocated your portfolio, whether we've built an adequate cash cushion, and so on.
When it comes to risk, look at what is within your power. Focus on the things you can control.
- Have you consistently increased 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. Every single year, increase your savings, however small the amount.
Read: 3 questions to answer to kickstart your savings
- Look at costs and fees. Rs 1 lakh invested, earning 6% p.a. for the next 25 years, would amount to Rs 4.30 lakh. A 2% annual fee would lower it down to 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. When jumping in and out of stocks or funds, take into account short-term capital gain tax, brokerage fees, exit loads, and any other transaction cost.
- Invest regularly without fail. 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. Start early. Be consistent. Your patience will reward you.
Read: 3 ways to put the odds in your favour when it comes to risk
- Sometimes, you could be a victim of the low probability and high impact event. The pandemic was one such event. Be prepared. Get adequately insured. Put an Emergency Fund in place.
Read: 4 things an Emergency Fund is not
- The real risk is your behaviour. Do you panic and exit in a downturn? Do you go all into equity in a bull run? Getting swayed by your emotions will play havoc on your portfolio. In times of volatility, it would make sense to take your eyes off your portfolio and watch your behaviour. It is interesting how people view the "market" as risky. But are completely blind as to the risk of their own behaviour - their emotional, irrational and impulsive decisions have a huge cost.
Read: The gap between investor return and investment return
Additional Reading
Back To Basics
Articles by Investment Specialist Larissa Fernand
