One of my favourite articles of the past year or so is Nick Maggiulli’s “Risking, fast and slow“.
It makes a general point that I find myself trying to communicate again and again, especially in the context of investing, but also in other contexts, such as health and relationships.
He makes this point by distinguishing between two types of risk – “fast risk” and “slow risk”.
He explains that “most of the time when people talk about risk, they are talking about fast risk”. It’s “the stuff that makes headlines”.
Slow risk, on the other hand, “doesn’t make headlines”.
Some examples are in order:
- When a hedge fund blows up, we hear about it. On the other hand, we don’t hear about people who sit in cash for decades because they’re too afraid to invest more aggressively.
- When people die from heroin, it usually happens fairly quickly. When people die from cigarettes, it’s usually after decades, and often indirectly.
With fast risks, the consequences are often “immediate and usually devastating”.
Slow risks relate to “the accumulation of bad decisions that eventually leads to an unwanted outcome. Often, there’s “no single event that you can point to and say, ‘Here’s where I went wrong'”.
Slow risks often relate to acts of omission, and we don’t see the error of our ways until we look back.
With investing, we often think that cash is “safe” because it has very little fast risk. The money’s likely to be where you left it, and you’ll have roughly the same tomorrow, next month, or next year, to what you have now.
Investing in shares exposes us to fast risk. Your share portfolio can drop by 30% in the course of weeks, and/or take years to return to previous market highs.
When it comes to slow risk, however, the balance shifts: “while cash is unlikely to be down more than 5% in the short run, over longer time periods it has trouble sustaining its purchasing power.
The opposite is true for the S&P 500 which often loses value in the short run, but usually doesn’t lose value over longer time periods”.
When making a decision or pursuing a course of action, there are often risks both ways. However, the risks can be very different.
As Maggiulli explains, “we evolved to avoid fast risk. We evolved to assume that the rustle in the grass behind us was a predator rather than nothing at all”.
There are times where the fast risks should be weighed more heavily. If you need money for a house deposit, then short-term volatility is important. However, the bias for most people is to weighing slow risk too much.
(It’s similar with social risks. It’s easy to focus on the fast risk of discomfort or embarrassment, which many people feel quite intensely. From an objective perspective, however, this ignores the slow and very real risk of isolation and loneliness.)