Risk is defined as: a source of danger; a possibility of incurring loss or misfortune. We are faced with risk in our everyday lives. Driving runs the risk of a car accident, walking can run the risk of being mugged. Showing up late runs the risk of getting fired and saving for retirement can run the risk of losing your money in the stock market. Risk is part of everyday life, there is nothing that we can take for granted or say with certainty. In your own life, do you find yourself being someone that avoids risk (risk averse), or welcomes it by constantly tempting fate? I believe there comes a point in a person’s life by which they avoid risk too much, and are missing out on opportunities. As the old saying goes, “no risk, no reward”.

Accepting risk

Specifically for this article, I’d like to talk about taking financial risks, and not just necessarily by putting money in a ‘risky’ stock or mutual fund. I think that a lot of us are still a little scared from 2008. A lot of us were in middle or high school; old enough to sort of know what was going on. We saw our older friends struggle to get jobs, saw our parents worry about saving money, and saw our grandparent’s retirement funds get cut by a third. Seeing the negative outcome of the risk equation has left a bad taste in our mouths. We don’t like the unknown and we don’t like to lose. Unfortunately, it’s just not possible to live your life in this manner. We face risk every single day of our lives, and no decision we make will be without risk. You can’t live under a rock for the rest of your life to avoid risk and to be successful; you will have to face risk. Let’s repeat this to ourselves; successful people take risks.

The risk calculation

Think back to when you were a high school senior and you were considering your college options. If you went to college, it was certainly a risky proposition. Take on tens of thousands (if not more) of dollars in student debt, not hold much more than a part time job (although some of you might have held full time ones), and devote the next 4 years of your life to studying. The risk? 4 years of your live and tens of thousands of dollars in debt. The reward? A degree that will open up many doors down the road and hopefully better life. How did you weigh the pros and cons and ultimately arrive at your decision? You likely decided to go to college, by deciding the reward was worth the risk.

When (and you will) you are faced with a tough decision in life, you should always come back to that same decision making process. Weigh the risks, and weigh the rewards. It’s certainly not an easy process, sometimes the risk and rewards are unknown or are hard to quantify.

Mitigate risk, don’t avoid it

Let’s pretend for a second that you were deathly afraid of getting in a car accident. The thought of even a minor fender bender puts you into a panic. To avoid this risk, you don’t drive. You’d rely off of Amazon Prime, likely work from home and take public transport everywhere (but even that might be a stretch). This isn’t a realistic scenario, because the reward of being able to lead a normal life greatly outweighs the risk of a car accident. Instead of avoiding the risk and never leaving your house; mitigate your risk by: getting auto insurance, practicing safe driving and purchasing a safe vehicle.

This same principle applies towards your finances. So many of us avoid the investing our hard earned money in the stock market, instead putting our money in a savings account that pays essentially pennies. We choose to avoid the risk of losing our money, and place a greater value of preserving our wealth, rather than growing it. This just isn’t a prudent way to live your life. The potential return of the stock market (5-15% annually) should greatly outweigh the risk of you losing your money.

Choose your risk wisely

Now, it certainly wouldn’t be smart to put all your money into the stock market, as there is always a risk of losing money. However, it also wouldn’t be smart to put none of your money and take some chances with it. You’ll always face risks in life, and avoiding them completely isn’t the answer. Take steps to mitigate your risks: diversify your assets, keep some money in the bank, and purchase home/life/auto insurance to protect you in the event of a loss. Don’t live your life under a rock; learn to wisely take on risk!

Thanks for reading! Hey, it’s getting to be Tax Time, be sure to check out Amazon and get a 10% bonus on your federal return!