We are faced with many choices each day. With those choices comes in a greater or lesser degree…Risk. It is our ever present partner and friend. We hear the dogmatic voices in the investing world claiming that the more risk that you are willing to take, the greater opportunity that you will have to receive rewards. Is that the case? Really? Let’s look at it a bit more. Answers.com states “Risk: The possibility of suffering harm or loss.” So according to that definition if we increase our possibility of Loosing, We also increase our possibility of Winning. That is like saying that if you enter yourself in a marathon, that the more time you spend eating Junk Food, watching Movies, and Playing Video Games the higher your chance will be to cross the finish line in first place. I don’t know about you but for me that just doesn’t make sense.
We as a nation have come to believe this concept and follow it in all of our investing lives. It is a lie that has been fed to the general populace. The next time you are talking with the manager of your 401k or Mutual Fund ask him how you can get higher returns. he will most likely direct you to the “High Risk” investment for the fund and happily take your money and put it there. Why, because more than likely your investment adviser makes his money every time you take a risk, not off of his own investing prowace, otherwise he would probably not be advising you. Warren Buffet, considered one of the greatest financial investors of our day stated, “Charlie and I detest taking even small risks unless we feel we are being adequately compensated for doing so. About as far as we will go down that path is to occasionally eat cottage cheese a day after the expiration date on the carton.” Would it seem then that our view on risk has been warped.
So you might be saying, is that answer for me to stop taking risks? No, absolutely not, that is a sure road to apathy. But definitely stop taking uninformed and uneducated risks. The more time and effort that you put into preparing for the Marathon (remember our example from the first paragraph) by eating healthy, practicing, setting goals, working with others whom have similar goals, studying your competition, etc… the more control you have over your ability to win the race and the greater control you have over regulating the amount of risk that you are actually exposing yourself to.
Risks are certainly those things that allow us the opportunity to grow and progress through life. But it is through the regulation of those risks that true happiness is found and that positive personal growth occurs (if we let it). So the answer is to take risks but only those that you can regulate and grow from. If you don’t know what your 401k is doing with your money regardless of how secure they say it is. You are taking a huge risk. Now I didn’t say take all of your money out of your 401k, I am merely pointing out that if you are currently involved in an investment or wanting to engage in an investment, go through a process to educate yourself. Learn how the return is created, Learn where value is being created with the investment. Become as involved as possible in the investment process and you will be minimizing your risk.
So go out and take some Risks, without the Risk!