Taking risks, fearing the wrong thing
By Joel Dresang
Shouting boys rushed by me on the path. I followed their cries to the river where I saw Billy, crouching on the seat of a half-sunk boat bobbing in the current.
Moving only to stay balanced, Billy kept his eyes down. He ignored the pleas and jeers of our fellow Boy Scouts. He was heading for rapids, they yelled. He needed to get out. None of us knew who left that old boat near our campsite. He was going to wreck it.
But Billy just stayed put.
I was annoyed. Why didn’t Billy respond? Why didn’t the other boys do something besides holler?
I ran downstream a bit and waded into the river, fought the current and the slippery rocks and grabbed the boat’s rope just as it trailed by. I took hold and tugged the boat toward shore.
The other guys cheered.
Billy stayed squatting, eyes down.
“Why didn’t you get out?” I asked, even more annoyed, as I towed him.
“My shoes,” he said. They were new sneakers. He said he was afraid of getting them wet. He was afraid of ruining them. He was afraid of getting in big trouble when he got home.
It’s easy to be afraid of the wrong things. Life is full of risks, and as we try to assess how to handle them, it’s common to misjudge which risks to fear the most.
As bond yields rose in the early months of 2021, some investors worried about the sinking value of their bond holdings. Some sought out other investments they thought would hold up better for the fixed-income portion of their portfolios.
“We’re at a point,” Kyle Tetting said in a recent Money Talk Podcast, “where investors are starting to do some things in the bond market that if we see another bout of volatility, they might really regret: Pouring money into things like lower-quality floating-rate bonds, pouring money into inflation-protected type investments that maybe they don’t fully understand. I think clearly there’s some risk there that we probably need to explore.”
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Paul Slovic, a psychologist at the University of Oregon, studies human judgment, decision making and risk analysis. In a recent interview, he explained that early in evolution our brains learned to evaluate risks based on personal experiences. Even now, feelings and intuitions influence how we determine probability. Often, we use memories or our imagination as shortcuts for determining the chances of something happening.
For instance, Billy apparently pictured his parents’ fuss over his ruined shoes more clearly than he could foresee himself and the boat crashing through the rapids.
“We originally thought that people were analyzing risk, doing some form of calculating in their minds about what the probability of something bad happening would be and how serious that would be and perhaps even multiplying the severity of the outcome by the probability to get some sort of expectation of harm,” Slovic said. “And as we started to study this, we found out that basically we can do those calculations, but it’s certainly easier to rely on our feelings.”
Dave Sandstrom said in the podcast that investors whose feelings were pushing them into bond alternatives needed to reflect on whether potential payouts from those new investments would be worth the additional risks they’d be taking.
“Going into some of these areas of the bond market, where those risks are largely elevated, could end very poorly,” Dave said. “You’ve got to stay disciplined during times like this.”
Paige Radke advised putting recent yield movements in context of the longer term. Especially in diversified bond mutual funds, she said, investors can benefit as fund managers take advantage of falling prices to replace bonds that are maturing out of the fund.
“You have to remember that higher yields mean higher income payments over the long term,” Paige explained in the podcast. “Looking at this two-month, two-and-a-half month time span, you might get a little bit worried about your bond portfolio, but you really have to remember that the long-term implication won’t actually be as bad as when you’re looking at that short-term time frame.”
Dave said investors also should review why they have bonds in their portfolio: For relatively secure money to cover near-term needs.
“Those are not funds that you want to be placing in harm’s way,” Dave said.
Weighing risks has been especially important during a global pandemic. Intuitions and memories and imaginations have played into how individuals have decided whether to wear a mask, whether to gather with others, whether to accept the vaccine.
I haven’t done hard calculations on my chances of contracting COVID-19, but for the past year I’ve figured I could put off going out to get my hair cut or my teeth cleaned or my eyes examined. Then I saw a news report in which doctors cautioned against using the pandemic as an excuse for skipping critical health checkups and cancer screenings.
By mid-2020, screenings for breast cancer were down 85%, according to one study. Screenings for colon cancer dropped 75%, for prostate cancer — 74%, for lung cancer — 56%.
I remembered that a dermatologist had encouraged me, based on my age and complexion, to see her periodically to check for skin cancer. Again, I didn’t do the math. But I thought of the advice from Dave and Paige: Consider the bigger picture, look at the longer run and weigh the various risks. I made an appointment.
Joel Dresang is vice president-communications at Landaas & Company.
Allocation to optimize reward vs. risk, a Money Talk Video with Dave Sandstrom
Investor trade-off: Risk vs. return, a Money Talk Video with Paige Radke
Risk: How much can you stand? How much do you need? a Money Talk Video with Isabelle Wiemero
The Importance of Balance for Investors, a Money Talk Video
(initially posted March 25, 2021)
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