Most people do not realise that their perception of risk changes according to a whole raft of factors. If asked independently of ‘anything’ most would imagine that their propensity to take risks is the same throughout their lives and for all situations but clearly that is not the case and we can take more risks according to the more we know and understand. Before you say you don’t take risks, if you boil the kettle, cross the road, jump in a car or an airplane… or even get out of bed in the morning you are taking risks!
Past patterning affects our decisions too. If you were gambling and had a purely random but big winning streak, it often increases confidence to gamble more and bigger but it is not usually based on anything but sheer chance and not special skill or anything. In converse, if you have suffered a bad experience and lost something or money, that may encourage you to be risk averse, whereas really that result is not a reflection of what the future may bring to you from the same decision. In fact, if an asset has halved from an over-valued position, arguably it is far lower risk now than it was when you were happy to hold it before! Of course, we need to realise that if we have suffered some trauma, great stress or anxiety (which can be linked to a financial loss or some other life loss), then that can imprint itself upon how we see things going forwards, even if that is totally irrational when considering a particular financial decision – but it is understandable.
We have to all try to help manage these things in our decisions – in life as with our money. One way of helping is actually to recognise these factors in the first place and that realisation alone can release us to make better decisions and to help rationalise our judgements. Remember too, especially with money, that it is not quite the same as crossing the road. We can take different views with different parts of the whole of our finances and indeed, the more we spread our money around and in different baskets, the lower we make the overall risks which could impact us.
This is where a good financial adviser can help and if you can build a trusting relationship with one as they can help to balance your biases and guide you into the type of strategy that is best suited to your needs and future requirements. They cannot avoid risk as you can’t either even if you do ‘nothing’ but they can help you recognise the types of risks which exist and also how to help manage those risks and to avoid them having a catastrophic impact on you should the unexpected occur.