Whether it’s pursuing an adventurous hobby, taking a financial decision, or making a big career move, the fundamental question is the same: Will this make my life better or worse? And just as importantly: If it goes wrong, how much worse off will I be?
This is how we unconsciously weigh risk in daily life and it is subjective. Driving a car carries risk, but most of us accept it because the potential downside (an accident) is statistically low compared to the benefits (convenience, necessity). But jumping off a building with a parachute? The consequences of failure are so extreme that most people wouldn’t take the risk unless they were highly trained and confident in the outcome. For BASE jumpers the adrenalin high is worth the high stakes.
Financial Decisions: The Hidden Risks
When it comes to money, these same calculations apply, but the risks are often harder to see.
- Investing in the stock market feels risky because we see prices go up and down. But avoiding this risk means lower financial security and independence later..
- Holding all your wealth in cash feels safe, but over decades, inflation could halve your real spending power.
- Avoiding annuities because they require giving up capital might seem sensible, but what if investment returns are poor and your pension fund runs out?
- Buying Bitcoin feels like an easy way to get rich, but the risk of loss is very high.
The Stability vs. Growth Dilemma
There’s also the status quo question: Is the potential reward worth disrupting what I already have?
- If you have little, risk-taking may feel necessary to improve your position. Or, you may feel you can’t risk losing what you have.
- But if you have a lot, do you protect what you have or try to get more?
This is where wealthy individuals often make mistakes. King Midas wanted more gold, but at what cost? Insider traders risk everything for financial gain when they already have plenty. Greed begets greed when we lose sight of how much is enough.
Managing Risk: The Key to Long-Term Security
To quote financial planner and author, Carl Richards’ “Risk is what is left over when you have thought of everything else.”
We can’t eliminate risk entirely, but we can manage it:
- The entrepreneur who takes financial risks but fails to secure life insurance leaves his family vulnerable.
- The retiree who doesn’t consider investment risk when rejecting an annuity could end up running out of money.
- The hard-working couple saving for their future, but without cover for short-term emergencies or lost income.
Risk is not inherently bad. It’s the failure to recognise and manage it that causes real harm. The key is understanding the trade-offs and making informed choices.
Would you rather face market risk, which can be scary in the short term but has historically led to growth, or inflation risk, which is less noticeable but guarantees the erosion of wealth in the long-term? The answer depends on your goals, time horizon, and ability to withstand uncertainty.
Ultimately, every financial decision should return to your original question: Will this make my life better or worse? Just as importantly, if it goes wrong, can I accept it and afford to live with the consequences?
