Humans are generally very poor at quantifying risk. Making an effort to understand it is possibly one of the most important things you can do as an investor.
The Bitcoin mania of the past couple of years looks to me like an example of risk being thrown out of the window completely and the recent catastrophe at Quadriga highlights just how far from rationality investors can get.
Quadriga was one of Canadas biggest cryptocurrency exchanges and, in order to safeguard the 100m in cryptocurrency under its control, it stashed it in offline cold wallets so that online hackers couldnt get at it.
Like online hacking is the biggest risk with sticking your money in an unregulated investment, trusting it to a companys founders with no transparency or accountability, and who presumably are not sufficiently competent to implement a secure financial site? You know, the way banks and competent investment managers arent being hacked every day.
Nothing to it
And thats not even considering the risks of cryptocurrency itself, which has no underlying assets, no rational valuation, and nothing going for it other than the hope that some other sucker will come along later and buy it from you for more than you paid. Oh, and that get rich quick schemes have a habit of making people poor.
We now know that co-founder and sole manager Gerald Cotten went and died without telling anyone his passwords, and that spurred a good deal of speculation that maybe this was all just a scam and hed faked his death and made off with the cash.
Evidence has arisen that his reported death was real, with seemingly credible accounts coming from the hospital in India where he breathed his last, and security experts at Ernst & Young were able to crack his passwords and access hiscold wallets.
But they had been emptied months before Cottens apparent death. The money was gone. Still, at least there was no risk of online hackers getting the cash.
Risk aversion
At the other end of the risk scale, I encountered a mismatch of understanding when talking to a firm of financial advisors a few months ago as part of extracting cash from a protected-benefits pension scheme.
I described my investing approach as conservative and low-risk, focusing on shares in blue-chip FTSE 100 companies. But no, I was told that investing in shares, any shares, is high risk because they can go down!
In the financial advice world, low risk apparently means no risk and involves buying things like annuities (with their guaranteed but pitiful returns). In such a highly regulated environment in a country where our education system is sorely lacking when it comes to finance, I can see why such firms have to approach things that way.
The best risk
But it doesnt help to educate the British public in the genuine long-term risks versus rewards of buying stakes in the only things that actually generate new wealth and thats part ownership of companies.
For me, the FTSE 100 provides UK investors with that optimum balance, providing you take a long-term approach. And over the past century or so, buying shares in public companies has beaten all other forms of investment hands down.
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