“Most men either compromise or drop their greatest talents and start running after, what they perceive to be, a more reasonable success, and somewhere in between they end up with a discontented settlement. Safety is indeed stability, but it is not progression.”
― Criss Jami
Most of my clients think about risk in terms of how much they may lose in an investment. And indeed, I have a methodology that helps me discern how much “risk” a client can tolerate (spoiler alert: most are moderate risk takers).
Risk means different things to everybody; some people view risk as an uncertainty (which is the most accurate description of risk), many view risk as a potential loss, and very few view risk as an opportunity.
Fear is at the core of most people’s definition of risk; fear of loss, failure, or of making a mistake.
No one wants to be on the wrong side of a decision.
The point I strive to get across to people is that financial loss or failure does not make you a loser or a failure; the key is separating the outcome of an event from your identity and emotional well-being. Easier said than done (but I know a little about this personally, ask me about my adventures in buying rental property with a boyfriend).
I’m not advocating for overly risky and selfishly-motivated behaviors, far from it. I’m advocating for a broader, more accurate and workable definition of risk so that it’s not the demon you think it is.
I read a few articles in the Journal of Financial Planning about helping clients define and manage risk, one specifically by Michael T. Carpenter. According to Paul Slovic and Elke U. Weber’s 2002 paper “Perceptions of Risk Posed by Extreme Events,” we can view risk as:
- a hazard
- a probability
- a consequence
- potential adversity or threat
A broader list includes: Possibility of harm, market volatility, loss of capital (nothing positive yet), possibility of loss, a deviation from what’s expected, negative surprises. But Carpenter’s point in the article is that we’re often overly focused on the results of risk rather than defining and effectively managing risk (articulated as identifying one’s risk exposure, potential likelihood, impact, and possible strategies to reduce, transfer or share in the risk).
Apple’s Peter Oppenheimer says that risk is “the degree to which an outcome varies from expectations.” This is “an empowering definition because although we have little or no control over the future, we alone have total control over the full range of our expectations of potential outcomes ― both good and bad.” from Fixing the 5 Biggest Mistakes Planners Make Helping Clients Manage Risk in the Journal of Financial Planning by Michael T. Carpenter.
We have full control over our expectations.
Huh, how about that.
Now you may be thinking, “Great, now that’s one more thing I have to do!” but if you don’t think about and get clarity on your expectations, what exactly are you doing with your life? What are you doing to the lives of those you love?
Some years ago I read a wonderful book, The Glorious Pursuit by Gary L. Thomas (I actually read it twice, immediately after reading it the first time). In it he writes that humility is “the filter by which we become free from the tyranny of our grossly unrealistic expectations that the world should bend our way.” Indeed, we become angry and frustrated when things don’t go our way, but this is an immature response to life. Is it unrealistic or beneficial to assume that we can/ought/should control more things?
Curiously, apparently our body language affects our approach to risk. Check out Amy Cuddy’s amazing TED Talk about it (the discussion about risk is at about the 12 minute mark).
If you’d like to understand and challenge your thoughts about risk as well as your expectations, schedule a time to meet with me.
LIFE: Live Inspired, Financially Empowered 