Qh6+!!

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  By Guest Blogger Doug Rowat

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Many would assume that chess is purely a game of skill, making risk-taking unnecessary. After all, if you’re the better and more knowledgeable player, why would you need to take chances?

However, risk-taking is a critical component of winning chess. Magnus Carlsen, who many view as the greatest chess player ever, has flatly stated that “the key to [chess] success is not being afraid to take risks.”

Nowhere was this better illustrated than at the 2016 world chess championship in New York City. Carlsen was locked in an epic battle with Russian grandmaster Sergey Karjakin with the deadlocked match requiring a playoff round to determine the winner. Playing white and needing only a draw in the deciding game, Magnus broke with customary tactics and played for the win.

He ultimately ended the match with an epic queen sacrifice (the chess notation of my title) that a commentator at Chess.com called “one of the most beautiful checkmates I’ve ever seen”. Google it. Even non-chess players will appreciate its elegance.

As with chess, taking investment risk is equally important to a portfolio’s success.

To be clear, ‘risk of ruin’ should always be considered, and no investor should ever adopt a level of risk that might ultimately result in crippled finances; however, learning to live with a measure of volatility will almost certainly result in better long-term returns. This isn’t a revelation, of course, as equities have almost always provided vastly superior long-term returns versus, say, cash or fixed income (more on this later).

However, even knowing this, investors have still opted more recently to hold unusually high levels of cash. In fact, cash levels have been much higher than normal since the pandemic:

Money market fund balances – cash levels have doubled since 2019

Source: Bloomberg, US Federal Reserve, UBS

There’s nothing wrong with occasionally reducing portfolio risk for tactical reasons, indeed we’ve recently raised some cash for our clients ahead of the US election; however, maintaining an excessively low-risk portfolio for years on end comes with an enormous cost. US Treasuries, for instance, which are arguably the world’s safest investment as they’re backed by the wealthiest and most powerful nation in the world, have delivered anemic returns over the past decade. The price paid for this safety is actually startling:

S&P 500 vs Treasury Bond Index – 10 years

Source: Standard & Poor’s. Total return for both indices.

However, the final argument for taking more risk comes from the world’s billionaires. Yes, in the eyes of many, billionaire behaviour isn’t ever worth emulating; however, there’s something valuable to be gleaned from how the vast majority of them earned their wealth. In 2014, Forbes began scoring billionaires based on whether they were self-made or whether they inherited their wealth. A 1-score indicating that they inherited every penny, a 10-score indicating that they, to paraphrase Drake, started from the bottom.

The results are revealing. In 2023, 70% of the world’s billionaires were self-made with 8s and 9s being, by far, the most frequent scores. In other words, the vast majority earned it. Becoming a self-made billionaire no doubt requires some luck; however, I’m quite certain that it also requires a willingness to accept more risk.

So, if you ever wonder why someone’s more successful than you, consider their risk tolerance.

Sergey Karjakin learned this the hard way with Magnus Carlsen.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.