This article originally published in The Northern Daily Leader on 7 June 2014.
Have you ever noticed how television and movie producers use music to set the mood or convey emotion? You can see this in action by watching a horror movie with the television on mute. Instead of scary, frightening, edge-of-your-seat viewing, it turns it in some very dull footage of people aimlessly walking around. You can try this next time you are home alone watching a scary movie and the music starts building up to a dramatic moment. Simply put the volume on mute and all the drama and tension is lost. It can be a bit boring watching an entire movie without any volume, but it probably beats being scared to death by some guy wearing an ice-hockey mask and wielding a chainsaw.
Unlike silent movies however, in the investment world, being boring should be welcomed. Many people may associate boring investments with low returns, but the reality is that the relationship between risk and return is not always a linear one. You may increase the possibility of a higher return by taking on more risk, but sometimes the level of risk increases far more quickly than the potential return. I was reminded of this during a recent discussion with a client. We were discussing risk and return and I retold an anecdote from my earlier days as an investment adviser. This was in the years preceding the global financial crisis, where annual stock market returns regularly exceeded 15%. Potential new clients had come in regarding the investment of the proceeds of the sale of a small business. After listening to an outline of our approach and investment philosophy, the potential clients left and were never heard from again. Sometime later we bumped into the potential clients at a social function. During a brief and friendly discussion, they apologised for not returning but said that our firm was simply “…too boring for us.” Instead they had invested their life savings with another firm called Storm Financial. Of course, you may recognise the name Storm Financial as being the Townsville-based business which was involved in the loss of billions of dollars of investor’s funds in the GFC. Storm Financial offered an apparently exciting approach to making money, founded on using debt to juice returns. The problem with debt however, is that it amplifies both gains and losses, as many investors with Storm sadly discovered during the GFC.
Given the choice between a slow and relatively uneventful accumulation of wealth, or a wild ride which may leave you either living like a king in the penthouse or struggling to get by in the doghouse, it’s not hard to see why boring can be an attractive option.