This article originally published in The Northern Daily Leader on 18 May 2013.
Last week we went on our first family holiday, spending a week at the coast. Some relaxing time at the beach seemed just the tonic after a busy summer. To our surprise, holidays have changed somewhat since the advent of children. Only distant memories remain of lazy days at the beach. Now a half-hour visit to the beach (the maximum amount of time the 6 month-old will tolerate) requires the logistical coordination skills of a German Field Marshal. And the load-bearing and bag-managing abilities of a small army of pack donkeys. Nappies, food, clothes, sleeping bags, tents, beds….all apparently required items for a quick trip to the beach. And then even the best-laid plans can still be cast awry by an unexpected baby/toddler bowel movement. It’s no surprise that a dirty nappy at the beach has few friends.
The highlight of the trip however, was the time spent with Jack in the sea. No deeper than knee-height of course, but introducing him to the thrill of the ocean was memorable. The beach we frequented however, was not particularly child-friendly, with a steep drop-off and strong cross-currents. Jack, of course, was blissfully unaware of the treacherous nature of the surf, eagerly awaiting the next dumper to crash on the shore. Completely fearless (or clueless), it was only my vice-like grip on his wrists which prevented him from being swept out to sea and an extended stay in Davy Jones’ Locker.
Jack’s attitude to the sea reminded me of the approach some investors adopt to their investments. It’s easy to make decisions which don’t fully consider the risks, or the potential outcomes. It’s easy to jump on the bandwagon, when it seems that you may be missing out on the latest fad or short-lived mania (gold, tulips, Poseidon Nickel anyone?). As with Jack’s attitude to swimming (or sinking), none of these haphazard approaches to investing promise any long-term success. Any investment decision must be balanced on the basis of risk and return. Jack’s desire to jump into the sea, without any regard for the ferocity of the surf, was the same as an investor’s decision to invest without due regard to the risks. And these risks are many, from the risk of outright loss, to illiquidity risk, duration risk, credit risk, interest rate risk, currency risk, reinvestment risk and even political and regulatory risks. Why is that we employ pest inspectors, building inspectors and pay for land title searches when considering buying a house, yet select our superannuation investment option (often worth as much as we pay for a house) almost randomly? And that’s if we can be bothered to make a selection at all. Just as Jack mistakenly thinks the bigger the wave, the greater the fun, don’t get carried away by returns without due regard for the risks.