“Planning is bringing the future into the present so that you can do something about it now.” – Alan Lakein
While we have always lived in uncertain times (is there any other kind?), none of us actually welcome uncertainty, especially in our personal lives. As human beings, we avoid uncertainty – just evidence the popularity of daily horoscopes or the rush for numerologists and astrologers.
While we are fearful of uncertainty, we are generally good at managing it. One of the ways one can manage uncertainty is by preparing for it. One way to prepare well for uncertainty is to plan for the probable outcomes.
In many facets of our life, we manage uncertainty very well. A person catching a regular train to work keeps a buffer of a couple of minutes to reach the station to account for a sudden traffic jam. He will also have an alternate plan to reach work in time, just in case the train is missed (eg. take a cab). While this may seem a very basic example, this principle is employed everywhere by us.
Also, when we plan for uncertainty, we plan suitably keeping in mind the “risk”. We make sure that we don’t take more than an acceptable amount of risk for a given event, depending on the severity of the uncertainty and the opportunity cost of failure. We use a “margin of safety” to manage uncertainty and the higher the uncertainty or the higher the stakes (probable losses), higher is the margin of safety. The whole objective is to try and make sure that the plan doesn’t fail, except in extremely unforeseen circumstances.
Eg. in the above case, in order to catch a local train, one would be comfortable reaching the station about a few minutes before the departure time. But in case of an airplane journey, one generally reaches the airport nearly 1.5-2 hours before the journey. This is despite knowing that the check-in counter closes only 45 minutes prior to departure. In this case, we keep a higher buffer because the “cost” of a missed flight here is much higher than the cost of the missed local train.
So how is this relevant to Investing? When we invest our hard-earned money, we wish to reduce uncertainty. Hence, we seek surety in returns. We also fear the risk of capital loss, even if it temporary. So, how does one handle these fears? Let us attempt to answer this in light of what we learnt from the above quoted examples.
One lesson is to choose the appropriate asset class depending on the time-horizon of the investment. When you do that well, time is the “buffer” that ensures that “risk” (eg. market volatility) gets evened out and generates the necessary return over the long term. Going back to our example – when we have enough time on our hand to reach the airport in time, does an unforeseen traffic jam (or a punctured tire) worry us? The answer is no, because we know that this is temporary, and we have enough time to reach our destination comfortably.
Another lesson is to have a “margin of safety”. As a retail investor, not following the herd to jump in when markets are booming would ensure that “margin of safety” is not compromised. Making sure that your asset selection is in the right products and in the hands of accomplished managers also helps manage this risk fairly successfully. After all, trying to catch a flight with 30 minutes left (before counter closes) versus 5 minutes, would make your journey so much more worry-free in terms of experience, even with the unplanned traffic jams and punctured tires, wouldn’t it?
Having fears while investing your money is natural. They cannot be wished away. But they can be managed and overcome by implementing these lessons. Having a plan for your financial goals, which identifies the right asset classes and investments to meet them, can make your investing journey a far more peaceful one, despite volatilities that will be faced along the way. And having a good financial planner to hold your hand through the planning journey, while keeping in mind your needs and risk appetites, will make sure that you will enjoy your present, secure in the knowledge that your future is also in safe hands.
Finwise is a personal finance solutions firm that helps individuals and families plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at firstname.lastname@example.org or +91 9870702277/9820818007.
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