Knowing your tolerance

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Risk is inherent in investment. It’s at its very core. Broadly speaking, this risk falls into four categories. They are market risk, default risk, inflation risk and mortality risk.

“Investing is taking risks where you think there’s going to be a pay-off,” says Greg B Davies. “If you want to get good investment returns you need to take risks. Period.”

For Chris Hunter, there’s calculated risk and uncalculated risk – the latter is gambling. In a military situation you should make an informed decision and, failing that, rely on intuition. “It’s your brain’s ability to compute before you even rationalise,” says the ex-bomb disposal expert.

The army trains for that kind of thinking, says Hunter. “The idea is that we can build up our muscle memory through repetition, knowledge and experience.” Therefore, when you’re under extreme stress and your decision-making is inhibited, intuition kicks in and guides you almost automatically through the situation.

Conversely, acting on instinct or intuition in investing can be costly, says Greg B Davies. The human brain, he explains, is incredibly good at recognising patterns – perhaps too good.

“The problem with financial markets is that they’re generally a lot more random than people think they are,” he says. “The human brain does perceive patterns very well. The negative side of this is that the human brain is very good at perceiving patterns where there are none. Investing is a place where intuition is actually, largely, phenomenally dangerous. Because our intuitions are very seldom accurate in investing.”

It’s important to appreciate though that, no matter what approach you take to investing, you can still lose as investments can fall in value.