From Risk Aversion to Risk Management

How to start investing in a never-ending crisis cycle

Published in

Small Steps

4 min readMar 1, 2024

In 2020, to get life insurance, I had to answer a few questions to establish my risk profile regarding investment. The result came as a cold shower knowing my financial background: risk aversion!

To illustrate my thinking process, when a friend talks to me about buying a house and the benefits, I hear a little voice in my head, saying:

U.S. home values dropped by 26% from their peak in June 2006 to November 2010.

And I somehow become deaf to every argument about future value growth.

Unpaid rent in France increased from less than 1% of leases in 2020 to more than 3% in 2023.

And suddenly having tenants doesn’t seem to be a good idea.

This examples above are unfortunately a true representation of my risk management. I seem to be so impacted by financial crises that most of the time, it prevents me from investing. I realized that it all comes down to two reasons:

fear of getting out of my comfort zone, and of potential financial losses
laziness.

To achieve financial freedom, I have to go from risk aversion to risk management. And I will share my plan below.

Big picture

According to Wikipedia, confirmation bias is:

the tendency to search for, interpret, favor, and recall information in a way that confirms or supports one’s prior beliefs or values.

This is basically how our brain works, and it affects the information we search for and how we interpret or recall it. In the case of investing, risk aversion will reinforce itself very easily if you understand that the video with the following buzzwords will perform: crises, crash …

To neutralize this is very easily, I just have to take a step back and look at historical data. If we continue with the real investment illustration, how have house values evolved in the last 50 years? Were there trends?

When data are on the table, there is a clear shift from emotional reaction (in my case, fear) to rational thinking.

Crises, crises

Lately, economic uncertainty is rising so fast that it is hard not to be scared. The point here is again to take a step back and try to assess the real risk. What are the worst-case scenarios I can identify?

If I am thinking about buying a house to invest in, there would be multiple worst-case scenarios:

a house value crash
a tenant not paying their rent and the time needed to get rid of them (I’m not talking about murder here, just to be clear!)
incapacity to pay the debt on the loan.

In each scenario, the key here is to assess its impact on my financial situation, in other words, to put a number on those fears.

The next step is pretty intuitive.

Risk management

The point now is to search for ways to mitigate the risks for each scenario.

a house value crash: Is there a way to anticipate the value change? Will you have the financial stability to keep the house until the crash is over? How long would it take on average based on historical data?
a tenant not paying rent: Is there insurance to cover this risk? What are the costs involved?

Compare different scenarios

To make the final decision on whether to invest or not, don’t forget to compare the different investing scenarios to not investing at all. This is a tricky one, as you should not forget that with inflation, not investing is just a guaranteed way of losing money.

Failure is part of the process

Investing requires a complex combination of skills. So you will fail inevitably and the key here is to keep going, trying to understand what went wrong and how to improve.

The strategy here implies anticipating failure and not investing money you can’t lose.

My plan

In France, there are multiple websites like lita.co where you have access to financial instruments: investments with an interest rate around 10%, unlisted shares ... Of course, it is kind of risky as you won’t be lending your money to a bank, and this is less liquid than stocks of course.

I plan to do the following:

finish a first read of my 800-page accounting book before March 18th
assess the risk of the different financial instruments based on the annual accounts/investment documents
carefully select one instrument and invest
continue to educate myself.

At this point, I am open to opportunities and might change a part of the plan except this one part: taking action.

This investment plan is of course very personal and linked to my background. If you have gone from risk aversion to risk management, feel free to share advice in the comments.