Real vs Perceived Risk

I visited a high-rise hotel with floor to ceiling windows. As I looked out the window, I was suddenly hit with my fear of heights that had me quickly stepping away. After a moment I slowly approached again, trying to overcome my fear so that I could see the beautiful view. The following day, I found myself at the same window enjoying the city below without any thought about the height.

A fear of heights can more accurately be referred to as a fear of falling.Once a person realizes there is no real chance of falling then the fear often goes away. As a pilot with acrophobia, I have many pilot friends with the same fear, but none of us sense that fear in an airplane. Something about the structure of the plane creates a sense that one cannot fall from it.

In the investing world we refer to “real” versus “perceived” fears. When negative world events happen investors initially feel a perceived fear. For example, when the Ukraine war began some initial fears were a possible nuclear action, a rapid spread to other parts of Europe, the entry of China into the fray or even the release of radiation from the Chernobyl nuclear plant. These and other perceived fears panicked investors and drove stocks down. As time went by, reality took the place of perception and the heightened perceived fears subsided.

This process repeats itself on Wall Street on almost a daily basis. Unpleasant events happen continually in our world and stocks respond to the initial perceived fears, then in time settle into a usually more moderate view of the real risks. One strategy of those who day trade stocks is to try and recognize these trends and trade against them. On the other side are regular investors who sometimes react hastily to the initial perceived threat to their portfolio rather than take the time to determine how “real” the risk really is.

So how do investors protect themselves from reacting improperly to the never-ending negative news cycle? To always turn a blind eye is not a good idea because some fears are real and should be addressed. Like looking out a high-rise window, or flying in an airplane, or standing on a crumbling edge of the Grand Canyon with no railing, a person needs to take a step back and think intelligently about how real the perceived risk is. As emotions settle down the mind has an opportunity to analyze a situation more clearly.

Fear is a natural instinct that can protect us from danger. It creates an immediate fight or flight reaction. When facing real dangers this instinct can save our lives. When facing only perceived risks in the investing world, this instinct can be detrimental to our retirement accounts. When you feel that “fear of heights” sensation as it relates to your investments, take a step back from the edge and evaluate whether what you are feeling is perceived risk that will pass, or a real risk that needs to be addressed.

Dan Wyson, CFP® is author of “The Gold Egg," and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 - 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor