Risk is relative
Risk - and trade-offs - are all around us
Don’t forget to register for the February 19th webinar I mentioned last week:
It’s called Opening Doors: Conversations with Aging Parents About Care.
Be sure to sign up here.
Feel welcome to share this webinar with anyone else that might be interested…
We're surrounded by risk.
It permeates every facet of our lives.
Yet, even self-described "risk-averse" people are able to function and go about their daily lives.
Consider this…
You prepare a meal at home.
There is a risk that the food could be contaminated from a not-yet-announced food recall.
You walk out the front door of your home to get the mail.
A tree could fall on you or a passing car could veer into you from the road.
You get in your car to drive to work (or anywhere).
While traveling down a two-lane highway, someone crosses the center line and hits you head-on.
Or you go to apply the brakes and they don't work.
You're playing tennis and your doubles partner accidentally knocks you down and you break your arm.
In this context, I'm sure you can think of other “risks” we knowingly expose ourselves to every day.
And while these may be unlikely events, they could still happen to any of us at any moment.
Thankfully, we're not all living in fear of eating, driving, playing, etc.
And that's because we understand and accept the trade-offs for the risks we're taking.
If we don't eat, we starve.
If we don't drive to work, we lose our job and our income.
If we don't play, we don't exercise and this can lead to a host of other problems.
So why is it that when it comes to our money, savings, and investments, some people are "afraid to leave the house?"
You've probably heard of these people.
You may even know them.
They feel "brave" investing in CDs while the rest of their money is buried in the backyard inside a coffee can.
Or stuffed in hidey-holes around their home.
Don't get me wrong, I'm not saying you or anyone necessarily needs to embrace risk or be risk-seeking.
Quite the contrary.
I want to minimize uncertainty and risk in my clients’ finances.
However, for me to personally achieve the goals that are important to me and my family, I have to take some financial risks.
You probably do too.
Here's the problem . . . while most of us grasp the risks we take in our daily lives, very few have explored the trade-offs associated with financial decision making and its associated risks.
Sure, many investors and professionals give lip service to the concept of "risk vs return."
But what about risk vs your retirement?
Or risk vs sending your kids to college?
Or risk vs your dream home?
Or risk vs the European vacation you've always dreamed of?
Or risk vs caring for your family?
You need to frame risk in the proper context.
Consider the pros & cons.
The risk versus the potential reward.
As Thomas Sowell said,
“There are no solutions. There are only trade-offs.”
And this is exactly what I work on with my clients.
We establish a decision framework for exploring the trade-offs between their perception of risk and how it impacts everything - and everyone - that is important to them.
Ultimately, if someone still wants to avoid as much risk as possible, that's fine, but they should only make that decision in the context of how it impacts their ability to do what they want, when they want.
It's all about perspective, isn't it?
Let me know what you think.
Links & things
Please see this great post from Linkedin about how dividends really work.
For more on the relativity of risk, read:
Why Stocks Are Safer Than Bonds
When I wrote the above article in 2008, a 1st class stamp cost 42 cents.
Today, a stamp costs 73 cents, a 74% price increase over 17 years.
Thanks for reading.
Until next Wednesday,
Russ
Terrific post. Psych was my minor, specifically cognitive psychology. Too many people do not understand or practice "second level" thinking in risk management.