How to Embrace more Risk in 2019
Don’t let your Fear of Risk Keep you on the Sidelines
The human brain hates to lose things. The technical term for it is “loss aversion. The only thing the brain hates more than losing is uncertainty. So, when presented with an uncertain outcome that has the possibility of losing something, the brain becomes stressed. Fear of taking risks is a natural and essential human trait.
If we did not have a healthy fear of risk, we would have never survived long enough to become the dominant species on the planet.
However, there is a difference between a healthy fear of risk that prevents us from acting recklessly and an unhealthy fear of risk that paralyzes us with indecision whenever we are presented with choices that involve risk.
Some people are always looking at the downside of everything. They are stuck in the “what if this happens?” mindset.
- If I invest my money, I could lose all my money
- If I go for that promotion, I probably won’t get it.
- If I do get that promotion, I could screw it up
- If I tell him/her I love them, I might be rejected
Always looking at the downside can lead to a “defeatist” attitude.
- I’ll never be able to get my finances together, I might as well not try.
- I’ll never be able to get in shape, why bother trying?
Not Trying is the Greatest Risk of All
If we give in to our fear of risk, we guarantee the same outcome, regardless of the situation, you won’t get the thing you want.
Put in simple terms, every time we are faced with a decision that involves risk there are two possible outcomes
- A positive outcome
2. And a negative outcome
Our brains trick us into thinking the negative outcome is more likely to happen than it is. We focus on the costs associated with a negative outcome when we make a risky decision.
What about the cost associated with foregoing the positive outcome by failing to make a risky decision? There is an opportunity cost for failing to take any risks.
“If you think investing is risky, wait until they hand you the bill for not investing”.
Investing your money involves risk. It is possible that you could invest your money right before the next financial crisis. However, a true financial meltdown is far rarer than our brains would have us believe. That’s not to say we should throw caution to the wind, but we shouldn’t blow these risks out of proportion.
The risk of investment loss should be weighed against the opportunity cost of not investing. Assets that involve a lot more risk (like stocks) return a higher return on investment over the long term then if you stick your money in a savings account, which involves no risk.
To illustrate the opportunity cost of avoiding investment risk your entire life, consider how much money you would have at 65 if you started saving and investing $400 per month starting at age 25 under two scenarios.
- Where you invest your money in a “safe” asset that returns 2% per year on average
- Where you invest your money in a “risky” asset that returns 7% per year on average.
Investing in the higher risk, higher reward investment you would have $1,025,326. Compared to only $295,728 investing in the “safe” asset. That’s a difference of over $700,000 which is more than most people ever have to live off in retirement.
When evaluating these type of investments over the long term there are two types of risk to balance. The short-term ups and downs of a “risky” (high variance) investment like stocks with the risk of locking in pitiful investment returns with “non-risky” assets.
For any Risky Decision, we Should weigh the risk of “Losing” with the risk of “Losing Out”.
- f you think telling someone you love them is a risk, consider the risk of them walking out the door.
- If you think going for that promotion is risky, consider what life would be like when the jerk in the cubicle next to you is your boss
- If you think taking control of your finances is risky, wait until the bank comes to foreclose on your house or the landlord comes to hand you the eviction notice
We cannot avoid risk. Even when we make the “safe decision” we expose ourselves to the risk of not getting a positive outcome. Risk is something that can be managed, it is not something that can be avoided.
Jim Rohn summarized how risky life is perfectly
“ I’ll tell you how risky life is, you’re not going to get out alive!”
What are some risky decisions you’ve been putting off? If the failure wasn’t an option, how different would your life be?
This article is for informational purposes only not all information will be accurate. This should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.