We are relieved that the worst-case possibilities from the Fort McMurray wildfire have not played out after all, with containment efforts appearing to go well, most of the town left standing, and (miraculously) no human lives directly lost.
That said, especially if you or anyone you know were among the 80,000+ evacuees whose lives remain in turmoil, the event has been horrific enough. Reflecting on the event, we can at least use it to remember just how fragile – and risky – life can be. This is a message worth noting as we rebuild and rebound from the damage done.
It also applies to your finances. Many investors underestimate risk, believing that they can tolerate far more of it than they actually can. When risk is realized, if you panic and sell your holdings, it’s usually at a loss. If you manage to hold firm, you may be okay, but it might inflict far more stress than is necessary to achieve your goals.
Underestimating risk can also play a role in insurance planning. Financial author and neurologist William Bernstein, MD, PhD, refers to “deep risks” that are improbable but not impossible, and horrible if they do occur. It can be wise to insure for the most likely (if still remote) deep risks you face – such as stepped-up fire insurance if your house is in a forest, or flood insurance if you’re near a dam. We should be so lucky as to never need to file a claim!
Is investing riskier than usual these days? Probably not. If there is such a thing as “normal” in this world of ours, risk is certainly built into the definition. Still, let’s hope we won’t be seeing much more of it for a while. I think we’ve had enough for now.