Risk is part of life, but how much is too much?

This week I met an Emirati man who explained to me how to avoid getting snapped by one of the ubiquitous traffic cameras located around Abu Dhabi. He sped all the time, he said, because he memorized where the cameras are. For a newcomer like me, he said, the best bet is to stay below certain speeds depending on the road. On the road between my villa and the office, for instance, he assured me that I could safely drive more than the posted limit of 60 kilometers per hour but I would almost certainly get flagged if I zoomed past a camera at more than 80 kilometers per hour.

The next morning on the drive to work, I dropped this knowledge on my wife. The trick, I told her, is to learn where the cameras are on our commute route so we can slow down just below 80 as we approach. That's nonsense, she said - why not just drive slower than 80 the whole way? To me, the prospect of shaving a few minutes off the drive was worth the chance I would get the occasional speeding ticket. For my wife, the benefits were not worth the gamble (it should be noted that I resisted the urge to bring up the report from the Ministry of the Interior earlier this year that "women driving too slowly" was the cause of many traffic accidents).

In other words, we have different attitudes toward risk. I thought of that conversation this week during our financial round table. One of the persistent themes that our panelists noted was how the financial crisis has forced local investors to re-examine their approach to risk. It's a healthy process. First off, there is no such thing as an investment that delivers high returns and no risk. And if a stockbroker or investment adviser offers you something that does, run the other way. It's most likely a scam.

So we all have a choice: how much risk are we willing to take on in pursuit of better returns? The experts on our panel observed that many of us perceive ourselves differently than we really are when it comes to money. Someone who considers himself a risk-taker because he is a weekend dune basher and X-Games addict may get nauseous at the prospect of losing 30 per cent of his nest egg. Someone else who collects the dirhams from the sofa cushions may be perfectly content to risk a loss if there is a chance that a more aggressive strategy could result in an early retirement, or that vacation home on the Amalfi Coast.

There is no "right" approach. The key is to be honest with yourself about your investment goals and what level of risk you are comfortable with. A good adviser will be able to tailor a portfolio to match. Regardless of the risk profile, virtually all investors need to own a diverse mix of assets - some combination of equities, fixed-income investments like bonds and perhaps a dose of currencies and commodities. It's also wise to be exposed to different regions around the world.

Some of the advisers on our panel who are relatively new to the area talked about how common it was until very recently to counsel clients who did not own any assets outside the Gulf region. By not keeping all of your eggs in one basket, you reduce the risk that they get scrambled in the event market realities clash with your expectations. It also pays to be aware of our tendencies. As a rule, men tend to be more comfortable with risk than women - something to do with all that testosterone rushing through our veins, no doubt. There are also evolutionary psychologists who speculate that prehistoric men who were not willing to be be aggressive found themselves sitting alone around the campfire at night.

We all know now that aggression can be taken too far - see Wall Street, circa 2003-04, as well as an ample body of research showing that men tend to be more active traders because they feel confident in their ability to read the markets. What's surprising is a recent study showing how that overconfidence can backfire. The US mutual fund giant Vanguard looked at the behavior of its 2.7 million customers during the financial crisis of 2008 and 2009 and found that men were much more likely to want to sell their shares at stock market lows. They were convinced the market would continue to plummet.

Women, who were not ashamed to admit that they did not know where the market was headed, were more inclined to stay the course - and subsequently enjoyed the market rally that began in the spring of 2009. One co-author of the study told the New York Times that "there's a lot of academic research suggesting that men think they know what they're doing, even when they don't know what they are doing."

On second thought, perhaps my wife has a point about that whole speeding thing. [e-mail]