The relationship between risk and wealth

 

A ship in a harbour is safe, but this is not what a ship is built for. –Grace Hopper

My dad was never a risk taker. He had me buy only GICs. Keep your money in the bank, he said, where it’s safe.

Dad didn’t realize that GICs (guaranteed investment certificates) also have risk, just different ones than what we normally associate with risk. They virtually guarantee a loss of purchasing power due to the twin evils of inflation and taxes, which is a very significant risk. Over time the risks of taxes and inflation eroding your purchasing power can be greater than the risk of short-term fluctuations taken by long-term stock market investors.

Generally, people become wealthy by taking risks. They see risk as an opportunity to make money. I’m not talking about stupid risks like putting it all on black at Vegas, but calculated risks where the odds are with you. This includes buying more of a good investment that’s down in value, not selling at a loss.

I once asked one of my clients if she would risk $1,000 on a 60-per-cent chance of doubling her money and a 40-per-cent chance of losing it. She would decline, she said. I asked why she would turn down a 60-40 chance of doubling her money. “Because I could lose it,” she said. For many people, the fear of loss is greater than the positive emotion of a gain of equal dollar value.

In his book The Millionaire Mind, Thomas Stanley explored the ideas, beliefs and behaviours that enabled millionaires to build and maintain their fortunes. He found that almost all self-made millionaires accumulated their wealth by taking risks that others refused to take. Those attitudes keep very cautious investors struggling with money problems throughout their lives.

Most of the wealthy have amassed their fortunes by owning and operating businesses. Many have also owned pieces of businesses other than their own – by buying individual stocks and stock mutual funds, for example.

Stanley says becoming wealthy is a mind game. To become a millionaire, you first have to think like one by letting courage conquer your fears.

Successful investors research their investments and, when they pull the trigger, they generally go all in. It takes courage and they lose on some, but they win more than they lose so the odds are with them.

Tax Trap“It takes courage to invest in the stock market,” Stanley writes. “The market guarantees nothing. It goes up and it goes down. Often, people get in the market late and get out early and they lose a lot of money.” When they jump in and out, it’s because of their fear of risk. Zigging when they should be zagging hammers investment returns, a mistake that business owners avoid better than most.

Stanley cited the example of Mr. Benjamin, who amassed a fortune of $3 million with equity investing. Benjamin rarely sold an investment within 10 years of purchase. Through good times and bad, he held on to his picks.

“He frequently had some fears and concerns, but dealing with fear in a positive manner is a foundation stone of becoming wealthy,” Stanley wrote. “It takes courage to invest in public corporations…but often it takes even more courage to hold onto one’s investments when the public mood is full of fear and panic.”

The ship mentioned at the top of this column is safe in its harbour, but a moored ship never reaches its destination. People who refuse to take risk never reach their destination either.

Written by Wayne Rothe

Wayne Rothe, Certified Financial Planner/Branch Manager, Wayne Rothe & Associates Wealth Management, Manulife Securities Investment Services Inc., wrothe@waynerothe.com, 780-962-1146, Spruce Grove, Alberta. These comments are the author’s and not necessarily those of Manulife Securities.

3 Responses to The relationship between risk and wealth

  1. I used to take big risks when it came to investing but when I lost my fortune when I was in my early twenties, I decided to take a more conservative approach when it comes to investing in stocks. When it comes to business, however, I’ve taken many risks and they’ve paid off. You just have to know what risks you are willing to take.

  2. There is one way to put your money in the bank and make as much as stocks… When I worked at the bank I would occasionally get called in to assist an elderly client removing and dusting off old stock certificates from their safety deposit box. These certificates would go all the way back to the 1950s.

    They bought them, held them, and collected their dividends. They never knew the full value of what they had. They didn’t care about stock market fluctuations. Dividend growth kept pace with inflation. Stock buy backs, splits, mergers, all building value over time.

    A great strategy in my opinion. If we can just get people to put their ETF statements in the vault, we’ll be set.

  3. Alex G says:

    There is a large gap in risk between a 60/40 chance of doubling your money and a GIC though. A 60/40 chance at doubling your money is still gambling in my opinion and I would not take that risk either. A 60/40 chance of multiplying your money by 10 and I may reconsider. A diversified portfolio of equities and bonds would be somewhere in between there at the upper end of safety and reward.

    Great quote though.

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