The Risk of Perceived Safety

​Last week I discussed how some investors perceive more risk in the stock market than may actually exist. I compared them to a nervous passenger grabbing a parachute and jumping out of a sound airplane because they feared otherwise harmless turbulence. There is another side to the incorrect perception of risk and I can illustrate it with an aviation example. About 20 years ago, brothers Alan and Dale Klapmeier began producing the Cirrus line of small aircraft. These planes were groundbreaking because they contained a parachute that could float the entire plane and its passengers safely back to earth in an emergcncy.
The plane became a hot seller as it gave a great sense of peace to pilots and their passengers. The parachute changed the way people perceived the risk of flying in small planes. Surprisingly however, for the first several years the Cirrus’ fatal accident levels came in much higher than other non-parachute airplanes. It was determined that, among other things, having a full plane parachute to fall back on gave the pilot a greater perceived sense of safety. This resulted in some pilots taking more risks, mostly in poor weather conditions, than they would otherwise take. Thus, the perceived “safety” of the parachute had the potential to make the plane less safe. Cirrus eventually turned their safety record around through intensive pilot training.
Investors who perceive the stock market as having too much risk often move their assets into the bond markets. Others might just put their money in bank savings accounts and CD’s. They do this because they perceive these income products as having less, or even no risk at all. This is incorrect thinking since every possible place you could put your money has risk. To not recognize that is to become like one of those early Cirrus pilots who thought the airplane parachute could get them safely out of any bad situation.
We live in a time of very low interest rates, especially when it comes to government insured products such as CD’s, Treasuries and the like. Consider this. The largest debtor in the world is the U.S. government. If interest rates can be kept very low it will save the government billions of dollars. Since it is the savers who provide the money to fund that debt, it is those savers who are also helping to shoulder much of the cost of that debt. They do so by accepting interest payments that don’t even keep up with inflation. Thus, low interest rates actually become a stealth tax on savers and puts them at risk of not being able to fund their own retirement.
So beware of the perception of too much risk, but also be cautious of investments that you perceive to have little or no risk, because there may be more risk than you realize. It just comes in another form. Financial parachutes can be a great thing, but don’t let them lull you into thinking they will eliminate all risk.