When Risk No Longer Feels Risky

“The investor’s chief problem, and even his worst enemy, is likely to be himself.” (Benjamin Graham)

A different conversation

One of the privileges of working with clients over many years is noticing how their questions evolve. A decade ago, most conversations about investing centred on protecting wealth from the next financial crisis. Today, we find ourselves hearing something rather different. Increasingly, clients are asking whether they’re being too cautious.

It’s a change, for sure. Investors have already been through the Global Financial Crisis, Brexit, a pandemic, soaring inflation, sharply higher interest rates, wars, trade disputes and, most recently, uncertainty about artificial intelligence. Every crisis seemed to arrive with the same message: this time would be different. But businesses adapted, economies adjusted, and markets recovered through periods of severe volatility. Those investors who remained disciplined were generally rewarded for their patience.

That is exactly what long-term investing is supposed to achieve. It’s also prompted us to wonder whether repeated recoveries have quietly changed something else: not the markets themselves, but the way many of us think about risk.

The danger of familiarity

Increasingly, clients have been asking whether they are being too conservative. Their reasoning is difficult to fault. Every major setback has eventually become another reminder that markets recover. If markets are able to absorb almost everything eventually, do we still need quite so much in bonds and cash?

Psychologists have studied this behaviour for decades. They call it recency bias: our tendency to believe that recent experience is the best guide to the future. Closely related is normalisation bias, where repeated exposure to the same event gradually makes it feel ordinary rather than exceptional.

It’s not that investors suddenly get aggressive. Usually, the change is much more subtle. Diversification starts to seem like overkill. Holding cash doesn’t seem efficient. Defensive assets seem to detract from returns rather than shield wealth. Unconsciously, we start to read the uncertainty of the future through the prism of recent success.

The markets haven’t become less risky, we’ve become more familiar with risk. Those are two very different things.

History has a longer memory

History offers reasons for both confidence and humility. Diversified markets have repeatedly demonstrated remarkable resilience over long periods, rewarding investors who remained committed to their plans. At the same time, no two crises unfold in quite the same way. The banking crisis of 2008 was very different from the pandemic, which was very different from the inflation shock that followed. Today’s uncertainties, ranging from geopolitical fragmentation to artificial intelligence, will present challenges of their own.

Every crisis introduces itself as something the world has never seen before. History usually takes a more balanced view. It reminds us that recoveries are rarely predictable, comfortable or identical to those that came before. Respecting that uncertainty is very different from fearing it.

The behaviour gap

One of the more sobering findings in investment research is that markets don’t always disappoint investors; investors often disappoint themselves. For decades, independent research house DALBAR has tracked the returns earned by investment funds against the returns actually achieved by the people invested in those funds. The gap is surprisingly persistent, and the explanation has very little to do with poor investment selection. Instead, it reflects a very human tendency to allow emotions to influence decisions. Investors often become most optimistic after markets have already risen and most cautious after they have already fallen, buying when confidence is high and selling when fear takes hold.

The lesson is a simple and very uncomfortable one. Behaving well is as important as picking the right portfolio when it comes to long-term investment success. Markets have proven time and time again that they can bounce back from periods of uncertainty. But investors don’t always stay invested long enough to see those recoveries play out.

Perspective is the real value

That’s where good financial advice comes in. We can’t predict the next crisis or say when markets will come back. But we can provide perspective when recent experience is distorting judgement.

Financial planning has never been about predicting tomorrow’s headlines. It’s always been about ensuring tomorrow’s headlines don’t derail today’s well-considered plan. The world will continue to surprise us, but successful investing has never depended on eliminating uncertainty. It’s always been about building portfolios – and the discipline – to withstand it.

If you’d like to discuss anything in this article, please do give us a ring.

Jason Yutar: +27 83 415 9603 or
Zaheera Mohammed: +27 82 775 1898

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.

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