Carole has a 1980s’ classic on the brain and recognises that, with the children back at school, there are lessons to be learnt about accepting risk in our lives – whether that comes from the playground or the stock markets
On the day my teenagers went back to school I found myself inexplicably humming that Soul II Soul classic up there in the heading. Clearly something in my subconscious recognised just how apt those lyrics were for the day: “La la la…la la di da da da…back to here and now-ow-ow…” – you get the idea. Pictures of gin-soaked parents crying out in jubilation that here was a day that resembled ‘a normal we once knew’ were doing the rounds on social and there was a collective, middle-aged sense of “Yass! Finally!”
Three and a half school days later and Daughter number 1 is sent home to self isolate for a fortnight as someone in her form has tested positive for Covid-19. Personally, I don’t mind (don’t tell her, but I quite like having her around), but for her – I’m gutted. This is the year she and all her friends turn 18. In the coming weeks and months there should have been gatherings, parties, moderate drunkenness, snogging (ahem, every cloud…) and whatever rites of passage would have floated their respective boats.
Life isn’t fair
Instead there is frustration and disappointment. This is little more than a gentle reminder for us, the grown-ups, that we live with uncertainty. But for 17-year olds who have had things relatively easy thus far, it feels like a brutal smack around the face. They didn’t sign up for this – which is why they’re not aware of the small print telling them in no uncertain terms that life isn’t fair and that living comes with risk.
The risk of death and disruption
In its most general sense, risk is uncertainty – which in itself isn’t necessarily bad. But, colloquially, we do tend to layer it with negative connotations. When we decline the offer of a free bungee jump off the Grand Canyon because it is ‘too risky’, we mean we think we might maim ourselves or die doing it. We are weighing up the possibility of experiencing the ‘thrill of a lifetime’ against the uncertainty that we will live to tell the tale. By sending the children back to school, we – as a society – are aiming for a generation of children who have been educated to an acceptable standard. The associated risk is that a medically unchallenged virus will spread further into our communities causing death and disruption.
Why not just play it safe?
In an investing sense, risk is the uncertainty of whether you will get your money back. By taking on risk you are laying yourself open to the possibility that you could lose out. So, why would we do that? Why wouldn’t we just play it safe by staying on the ledge with our feet planted firmly where we can see them? Well, there are a few reasons, but one of them is that, along with the certainty that you won’t lose out comes the certainty that you won’t gain anything either.
Test the rope and take the leap
When we view risk as the trade-off for the possibility of something good, we can be more accepting of it. There are common-sense limits to this, of course. No ‘possibility-of-something-good’ is ever great enough to overcome the ‘possibility-of-something-disastrous’: if a bad outcome will lead to ruin (or anything close) then the risk is undoubtedly too high to contemplate. But if the ground we’re standing on doesn’t feel solid enough to support us going forward, sometimes the best thing we can do is test the rope and take the leap.
Certainty that the money will be there
Regular readers will know I often speak of the reasons why women shy away from investment risk. One of these is directly linked to our ‘lesser’ wealth – when you don’t have much spare at the end of the month you focus on budgeting for the here and now (back to Soul II Soul, again!) – or, at the most, for emergencies in the near future. Savings that might be called upon at any given moment because the boiler has broken, or there is an unexpected school trip that everyone else is going on, must be kept in the safest of places – which usually means a deposit account in a reputable bank or building society that is protected by the Financial Services Compensation Scheme. This gives you certainty that the money will be there when you need it.
Safety has its downsides
If you are saving for something more long term, however – even if it is for nothing more specific than a bit of extra spending for when you are retired – you have to factor in the risks of not taking any risk. Leaving your money in a ‘safe’ place for ten years or more exposes you to two main downsides:
- The risk that inflation will be greater than the interest you are earning. This means your money in 10 years’ time will not buy you as much as it can now
- Your money will not ‘grow’
With the prospect of growth comes the risk of loss. You have to weigh this up against the certainty that your money will not be worth any more than it is today if you play it safe.
We balance risk every day in our lives. Sending the children back to school is a risky thing to do – even if the risks to the younger generation are not so stark, we have others in our communities that will feel the impact of these mass playground gatherings. But we square that off by doing everything we can to minimise the risks. Social distancing, hand washing, meeting grandparents outside and not hugging them. All of these things are diluting the risks while allowing us to move forward with our lives – albeit with some faltering steps and setbacks along the way.
There are no guarantees but there is possibility
This is exactly how it is with investing. The stock markets don’t always move in the direction we want them to, but by spreading our money over a number of different types of investment we are diluting the risk of a major catastrophe. (I say “we” but, in reality, most of us leave this risk management and ‘spreading out’ to professional investment managers who pool our money in funds – it’s a full-time job!) The idea is that, over time, the companies and institutions that we invest in will grow and will share their profits with us. We don’t have any guarantees about that growth, but we do have the possibility of growth – and that is something that we definitely don’t have when we leave our ‘spare’ cash in a bank account for any length of time.
Back to reality
If we keep the children at home until there is a vaccine against the Coronavirus we risk raising a generation that fails to learn. By sending them back, we are accepting that their education comes with the risk of higher rates of infection – and the risk that these children could be back in the house fighting for the laptop at any given moment. This is just how it has to be. Back to life. Back to reality.
10 September 2020 firstname.lastname@example.org
All opinions are those of Carole Haswell and do not constitute financial advice
Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Beaufort Financial Planning Limited, Kingsgate, 62 High Street, Redhill, Surrey, RH1 1SH, which is authorised and regulated by the Financial Conduct Authority, FCA Registration No. 583233