HUMMONEY - THE RISK PARADOX (Perspective)

-        By Greg Lewin 

(Courtesy: RiskIntegrityManagement.com) There was a wonderful commencement speech given by Charles S. Sanford, Jr., the former Chairman and CEO at Bankers Trust, at the University of Georgia.  Using a 2500 year old thought by the Greek philosopher, Heraclitus, “Nothing endures but change,” he went on to challenge the students’ conventional notions of risk.  For me his illuminating message was captured in the following lines, “… in a world of constant change, risk is actually a form of safety, because it accepts that world for what it is. Conventional safety is where the danger lies, because it denies and resists that world.”

I want to say this one more time: risk is a form of safety. This idea is so unconventional and powerful that everyone should sit and think about it for a moment. Although this could potentially impact your life on so many levels, let’s distill the question for its investment relevance and examine how we could apply this wisdom.

On the most basic level it could possibly suggest that doing nothing could be incredibly risky. Let’s examine. If you decide to just leave your money in cash because you are afraid, you are relegating yourself to no growth and possible loss of principle when inflation is factored in. This may be acceptable to some but what if you actually need your savings to grow to meet your needs at retirement? Or perhaps changes in your health or employment circumstance could require larger capital reserves than you currently have. In this case the decision to not seek growth could prove costly. This is not an exercise to scare, rather an exercise to help you appreciate what risks you may actually be taking when you think you are taking no risk at all. To take another example, municipal bonds are generally considered safe, not just because they have the local authority to tax but because they come with the implicit protection of the federal government. Given the horrific financial circumstances of state and local governments and the federal government, are these assurances sufficient? Lastly, is the advice you’re getting adapting to the changing world sufficiently to manage risk?

This is just one example to a most complex problem of reexamining your fundamental views.  It is my intention to just challenge your thinking. For in these very difficult times change will be constant and if we fail to evolve our perceptions of risk, safety will be hard to come by. We will revisit this topic and revisit Mr. Sanford’s quote in the future but for now begin the process, think through your investment/financial positions and challenge your conventional perceptions of risk….  for your own safety.  

 ---The views expressed here are of the author, HUMMoney contributor Greg Lewin; currently a General Partner at TLF Capital, an investment management firm. During the past 26 years he has been a senior money manager or partner in Wall Street firms including Neuberger Berman, Charter Oak Partners and Sailfish Capital.