This article originally published in The Northern Daily Leader on 4 February 2012.
I’m never quite sure what I’m meant to do on Australia Day, besides throw some meat on the barbie (lamb of course) and have a few beers. On the most recent Australia Day however, even that ritual didn’t occur, as rainy and cloudy weather kept most of us in the Tamworth area indoors. Instead, I found myself at the video store, looking for a movie to watch while it rained outside.
Everybody knows that choosing a movie from the store can be a daunting experience, especially when you’re choosing a movie to watch with other people who aren’t there to offer their opinion. In this case my wife had stayed at home, while I was given the unenviable responsibility of choosing the movie. Eventually I narrowed the choice down to two: in one hand I held The Hangover Part II, and in the other was Sex in the City: The Movie. You can clearly see the dilemma which confronted me – a choice between a good bloke’s movie or a girly story about shopping and relationships.
It struck me then that choosing a movie was not unlike investing in the stock market – I had a choice between very different alternatives, just as you do when you select any investment. One of the choices, The Hangover, was clearly high-risk (my wife was not going to be happy when I showed her my selection) but also high-reward (I was going to be much happier watching it than the movie about shopping). Sex in the City however, was the complete opposite – low-risk (my wife was going to be thrilled with my choice) but also low-reward (I would have to try and keep awake for two hours watching Carrie and her friends go shopping and talk about their feelings).
Each time you invest money in the stock market, or indeed in any investment, even a bank account, you face a trade-off between high-risk, high-reward and low-risk, low-reward. Problems arise however when we fail to correctly identify and price the true risk of an investment, believing it to be low-risk when in fact it is the opposite. It’s a bit like not reading the back of the DVD box and accidentally taking home a low-budget erotic movie filmed in Eastern Europe – do not expect a favourable response from your wife. In the end, my survival (and investing) instincts came to the fore, and my wife was able to enjoy her movie about shopping while I went outside and dug some holes in the garden. When it’s an investment for life, sometimes you’ve just got to stay focused on the long-term.