Oddly, risk moves to the forefront of investor consciousness only when things are already going badly. Losing money is perhaps the only thing that makes most investors worry about losing money. With so much pressure for competitive short-term performance, worrying about what can go wrong may seem like a luxury. Ironically, when almost no one is focused on the downside, even a minor increase in investor perception of risk can trigger dramatic market declines.
While we believe it is crucial to worry about what can go wrong, unproductive worrying will not and cannot make a difference. Worrying that your favorite team will lose is obviously unproductive. Worrying that you might have an ulcer could even prove counterproductive. Productive worrying, on the other hand, enables you to identify action that reduces or eliminates the source of concern, often at little or no cost. Concerned that it might rain? Pack a raincoat and umbrella. Worried you will be late? Leave earlier than originally planned.
Successful investing goes hand in hand with productive worrying. Worried that a stock you hold might fall sharply? Reduce your holdings or buy some puts. Concerned that interest rates may rise or the dollar fall? Establish an appropriate hedge. Worried that the stock you bought on a tip might be a bad idea? Sell it and move on. Worry enough during the day and you can, in fact, sleep justifiably well at night.
All of us are subject to biases that can impair our objectivity in investment decision-making. Striving to overcome these biases is crucial for long-term investment success. Have we been too optimistic in our assumptions? Have we blindly ignored new information because we are clinging too tightly to our original thesis? Have we held onto an investment because it keeps going up, irrationally ignoring that it has become overvalued? Without a healthy dose of reflective worry, we are unlikely even to identify our lapses in judgment, let alone correct them. In other words, only by actively, productively, relentlessly worrying about what can go wrong can we maximize the odds that things will go right, by doing everything within our control to perfect our decision-making. You rarely, if ever, make money from worrying; it does not typically enhance return. But by avoiding loss, you are able to hang on to what you have accumulated, which is a cornerstone of successful investing.