We have written before about risk. See this, this, this, and this. Risk goes hand-in-hand with reward and the two will always be inextricably linked. A story I heard earlier this week sparked a few further ideas, specifically on how, paradoxically, safety can actually cause riskiness.
A former analyst of the auto insurance industry explained how when comparing some accident data on two types of vehicles, he noticed more accidents were occurring in the vehicle that had greater safety features. He knew that most accidents were caused by driver error, not an external condition. He realized that the drivers of the vehicle with more safety features felt safer, which caused them to drive less carefully, resulting in more mistakes and therefore more accidents. On the other hand, the drivers of the vehicle with fewer safety features didn’t feel as secure and therefore drove more carefully. His point was that the vehicle superior in safety features made the drivers feel safer, but this resulted in their complacency while driving, thereby causing more accidents.
An example best illustrates this idea:
There has been a terrible snow storm. The roads are icy and there is also a lot of snow. Person A drives a Hummer. Person B drivers a small car that is quite old. The Hummer is obviously safer. Yet the vehicles themselves rarely cause accidents; the drivers do. So while Person B gets to the destination, albeit puttering along at 15 mph because they feel unsafe, Person A winds up off the road in an accident because, despite the ice and snow, they were going the normal 60 mph, all because they felt safe. The analyst who told the story went on to say that if one wanted to drastically cut down on all accidents, a metal spike should be installed protruding from the steering wheel of every vehicle. Everyone would drive extremely carefully, with one or two unfortunate incidents.
With the story, the driver’s behavior matters more than the vehicle, but how does this translate to investing? Just like with driving, an investor’s behavior matters more than the investment vehicle. A safe investment vehicle becomes risky with risky behavior and riskiness is present where we feel safest because we become complacent. For young people, our greatest investing strength is time. That is, we have 50+ years to invest. However, this becomes a weakness because it creates complacency. It is easy to put off saving and contributing to retirement plans until next pay check when you have 50 years until you need to money. The conclusion is this: the greatest risk for millennials as it relates to investing is not the myriad of problems one might guess but simply getting started.