Risk Taking for Regular People
Published March 2nd, 2008
This is one of those posts I have spent countless hours on and re-written 3 times. Why? It’s a difficult subject to write about; not because it scares me, but because it scares everyone else–and it shouldn’t. I think for many people the word “risk” has many negative connotations. One automatically thinks that taking a risk can be reckless, cause physical or emotional harm, or even financial loss. Ofcourse these things are all possible, but can also happen when we don’t take chances! This article will focus on risk being a matter of perspective, and applying this to your personal finances. In reality, this concept can add value to many areas of your life, including your career and relationships.
Perspective
We’ve all heard the saying “knowledge is power.” I apologize for not knowing who coined that phrase. I think what causes people to not take risks, is closely tied in to their overwhelming fear and lack of knowledge about a particular subject. I believe that on this journey we all have many opportunities to do great things. The biggest risk of all, is being too scared to leave our current comfort zone and see what the world has to offer.
First of all, we need the right attitude. We need to be open to at least learning about something we consider risky. You have absolutely nothing to lose by doing a web search on the subject. For example, starting a retirement plan: Say you do a search and even spend one hour a day for a week reading web articles and finding other resources on this subject (like your local library, friends, or relatives). By the end of the week, you’ll feel more confident in taking the next step. By the end of a month, you’ll have a working knowledge of some of the key words, types of investments, and ways to go forward. You can start the plan yourself, or at least be armed with the knowledge necessary to talk to your personal banker about getting started. The more knowledge and types of information you have on a subject, the less risky the decision will be.
The key here is that you don’t just blindly do what other people tell you. With your knowledge, you only do what’s comfortable for you. People often lament about the losses they’ve sustained with investments that were promised to make them a lot of money, and were shocked when the money disappeared. The mistake here, is letting someone else tell you what will work in your situation. If you’d made the decision yourself based on your own research, one of two things would have happened: 1) You’d realize that you have made a sound investment and you just need to hang in there as the market corrects, or 2) Review your criteria and realize that it’s time to learn from your mistake and move on. Either way, because of your knowledge, you have won, and the risk is minimized. You are always going to be the biggest expert on your own life.
In my article, Overcoming Fear, I spend a lot of time talking about the steps you can take to deal with the things that scare you, and the huge benefits to doing this. I’m no expert, but I have overcome some major fear-based obstacles in my life over the last 6 months, and took the time to document in detail ways that it can work for you. Once you’ve overcome a fear, it really opens up the possibility to doing so much more than you ever imagined.
Risks and Personal Finance
As I mentioned in the example above, armed with the correct information, you will always be the biggest expert on your own finances. I’m not saying we don’t need help sometimes, or that we shouldn’t use financial professionals. What I am saying is that you need to know exactly what is going on, the ins and outs, so you can make an informed decision. The key words here are informed decision. There are no guarantees in life, but when you make a decision, the risk can be greatly minimized by going through a process of learning and deciding, based on that information. Just knowing exactly what you are paying for on your credit card statement, or where the money is coming from and going to when you look at your bank statement online puts a lot of the power back in your hands. Mistakes are made, and with knowledge you will be able to recognize them and take corrective action.
When it comes to investing, start simple. Think about what your goals are for the next few months, year, 5 years, and 10 years. Put it in writing, and work from there. I love Moneysense Magazine. It’s a magazine for everyday Canadians. Many articles are about regular people like me that have done some great things, or even made mistakes but learned from them and succeeded. The reading is easy, and the authors are not pretentious. This is not a magazine that aims to go over your head. At their website, you can’t read all of the articles online, but there is a wealth of information on everything from getting the best insurance rate to the easy “Couch Potato Portfolio.”
As far as investments proper, I never make any kind of a purchase without reading the data at www.morningstar.ca or www.morningstar.com for my U.S. friends. They not only rate a mutual fund for tax efficiency, but give you useful information, like how a fund performs compared to others in its category. There are many different models to choosing a stock or mutual fund, but pick 3 or 4 criteria that are most important to you, learn about them, and be consistent.
If you like reading books, Suze Orman, David Chilton, and David Bach are very successful in giving you the knowledge to take control of your own financial destiny. Suze Orman recently published a great book specifically for women called “Women and Money”, with a great 5 month plan for saving yourself by learning about the ins and outs of every aspect of your finances from types of bank accounts, to insurance products, to saving for retirement. I like David Chilton (author of the famous book “The Wealthy Barber”) for his Canadian perspective and down to earth approach. I’ve enjoyed reading David Bach’s work because he has a real “can do” attitude, and is all about automating your saving and working smarter, not harder.
The rest of your life
I really do believe that everything happens for a reason. Often, it’s only when we look in hindsight that we see things clearly. Life is a continuous circle, we will often find ourselves at a similar crossroads in the future. If we’ve learned from our previous experiences, we’ve greatly reduced the risk for next time around.
I also think that good things come to those who are open to them. We greatly underestimate the power of having a positive attitude. Many years ago, by being open to risking rejection, I’d made up my mind to ask my now husband out on our first date. What happened next was crazy: I had worked up the nerve, opened my mouth to say it, and he me beat me to it by a split second! Yes, true story.
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