Lots of little wins can equal a big loss

Written by Gary Silverman, CFP®

At a recent investment management conference I attended, one of the speakers said something to the effect of, “Not allowing people to fail creates an environment where they will have many small successes and only a few small failures, which will kill your business.”

That night one mutual fund representative and I were discussing the day and he wondered what point she was trying to make—why would limiting failure be bad for business? Since the speaker wasn’t there with us, I attempted to explore her premise with something both of us were familiar with: Driving a car.

Few things in life can be more terrifying than learning how to drive a car other than having to teach someone to do so. Being careful, many parents will take their kids to an empty parking lot to start the lessons. Even then, the maximum speed is well below 20 mph. Nothing to run into; no danger of flipping over; no possibility of failure—except maybe for that lightpost.Nothing wrong with that training.

Well, nothing wrong with that, unless 2 years later they’re still circling that empty parking lot. Staying in a situation where you only have small successes and only a few (if any) small failures keep you from growing. We all know that we eventually have to change that environment. Increasing the successes you can enjoy increases the potential failure you might experience. But to get anywhere in life, you must eventually leave the parking lot and head out on the highway.

Still you can take more risk than is needed to accomplish your task. If you live in upstate New York, you need to get out into that parking lot again to learn how to drive after it snows. Still again when there is ice on the road. Here in North Texas, you can just stay home for a day or two. Matching the risk you need to expose yourself to with your needs is a good and normal thing.

Likewise in investing (you knew I was going to get to investing eventually), you’ll want to match what you do in terms of risk with the goal you have set for yourself. Usually this means you’ll need to expose your portfolio to bigger chances of failure (like a bear market or even a crash) if you also want/need bigger successes.

And likewise in investing there is no need to take more risk than you need in order to accomplish your goal. Putting most of your retirement investment portfolio in a CD earning half a percent is being too careful, while putting  all of your Christmas gift spending money in the stock market it is being too risky.

The phenomenon of high risk equaling potential high rewards is not only true in investing. It happens in many areas of your business and your life. Give yourself a chance to fail. Like your car experience, you might collect a few dings along the way, but it still beats walking everywhere.

This article was published in the "Your Money" column of the Times Record News on August 2, 2015.