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OPINION

Look before you leap

Look before you leap
September 19, 2014
Look before you leap

There has been much doom-mongering over the prospects for an independent Scotland. There will certainly be many challenges to be overcome both north and south of the border should Scotland decide that, come 2016, it will wend its own way in the world. Even a close 'no' vote threatens to disrupt the fabric of the UK for some years to come. But there is also a high likelihood that some of the scare stories will turn out to be no more than just that.

Anyone who has voted yes in a rational manner will have done so paying attention to the pros and cons of independence, in as far as they can be ascertained (although that isn’t very far at all at the moment). And they will have decided that, taking the possible dangers into account, the prospects for a free nation were that much brighter. In other words, the rewards outweigh the potential risks, as much as either can be measured in a world of unknowns – of both the known and unknown variety.

This decision making process should be a familiar one to all investors – whenever you invest you should be asking the question of whether the expected returns from an asset make up for the risks it carries. I am quite certain, however, that many do not pay as much heed to this process as they should, especially when it comes to managing their exposures to more volatile small cap shares. I am equally certain that there are many would-be investors who, in the blanket belief that investing is risky, do nothing at all.

Both standpoints are equally dangerous, yet also understandable given the complexity of the world we invest in – there are so many flavours of risk and so many potential outcomes that the prospect of trying to steer a course that avoids and predicts them all is an exercise in futility. Even simple events, where the outcome seems predictable – like a yes/no referendum or a football match – have hidden complexities; it’s why bookmakers employ the best and brightest mathematicians to manage their books these days (and if Betfair’s risk gurus are right the no vote will triumph – it has already paid out on this eventuality).

Risk shouldn’t be ignored though, and nor should we be afraid of it- another way of looking at risk is as opportunity, and it's what underpins not just all investment but many things that we do in life. And it’s how you manage it that matters - if you follow the practical advice in this week’s cover feature that needn’t be as complicated as you think.