Death by Cigarettes

Death by Cigarettes


Nick Maggiulli writes on his blog that there are two kinds of risks in investing and in life—fast risk and slow risk. Fast risk is the stuff that makes headlines. It’s the things that we are warned about every day. The reason for this is simple—the consequences of fast risk are immediate and usually devastating. But then there’s slow risk. Slow risk is the accumulation of bad decisions that eventually leads to an unwanted outcome.

Slow risk doesn’t make headlines. Every time a hedge fund blows up you will probably hear about it. But you never hear about the person who sat in cash for 20 years because they were too afraid to get invested. Both are equally devastating, but one seems less spectacular than the other.

The simplest analogy to differentiate between fast risk and slow risk is heroin vs. cigarettes. Heroin is fast risk. Cigarettes are slow risk. Heroin tends to kill people quickly (especially in the event of an overdose), while cigarettes tend to kill people slowly.

Unfortunately, most of the time when people talk about risk, they are talking about fast risk. For example, stocks have lots of fast risk, but little slow risk. The S&P 500 could drop 20% tomorrow, but 30 years from now it’s likely to be much higher than it is today. On the other hand, cash has lots of slow risk, but little fast risk. Next year your dollar should be worth about the same as it is worth today. But 30 years from now? Not so much.

As your time horizon increases the risk of losing money in stocks decreases and the risk of losing money in cash increases. As Peter L. Bernstein noted in Against the Gods: Risk and time are opposite sides of the same coin, for if there were no tomorrow there would be no risk. This is why cash isn’t really a risk-free asset but more of a fast risk-free asset. Cash still has plenty of risk, but it is of the slow variety.

Source: dollarsanddata

Asset Multiplier Comments:

  • Even little amounts, if correctly invested, may build up to a lot of money over a young investor’s time horizon. In financial markets, consistency is essential, and never underestimate the power of compounding.
  • Every asset, whether debt, equities, hard cash, or art, carries a different degree of risk, but then so are the returns! Diversifying your portfolio will give you the required edge over the broader market while reducing the total risk of your portfolio.
  • The risk in a portfolio of diverse individual stocks and assets will be less than the risk in holding any one of the individual stock or an asset, given that the risks of the various assets are not directly related. A portfolio that contains both assets will pay off most of the times, regardless of market conditions. Adding one risky asset to another can reduce the overall risk of an all-weather portfolio. It’s all about choosing the right combination of stocks among which to distribute one’s nest egg.
  • Calculated investments, even in risky assets, may be better than haphazardly investing in debt funds.


Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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