ARE YOU WILLING TO TAKE A RISK??

What is your Risk tolerance? Are you Risk averse or wired to take on Risk?

Will you take on more Risk if the potential Reward is great enough?

These are the types of questions every investor has been asked and asks themselves…and the answers determine your investment choices.

I have spoken before about the, IMO, broken Risk/Reward model used by banks, advisors & investment co’s so I won’t go into detail about it here…I will quickly summarize it like this:

• Typically, the question used by ‘investment specialists’ in order to determine what investments to put you into is your Risk tolerance — high, medium or low
• Your answer will determine the ratio of supposedly higher Risk investment options to lower Risk ones (usually some kind of blend)
• This is based on the belief/understanding that the higher Risk investment options usually generate higher returns and the lower ones — lower returns…but they are ‘safer’ and less Risky supposedly

The majority of the population still invest through advisors with their bank or investment co. and this is the model they use (it could be a more detailed conversation and, sadly, it could be ‘3 simple questions you answer on our website’…and that’s it).

The problem I have with this model is the assumption that investments that produce higher returns are naturally higher Risk…so you should only participate in them if you are ‘willing to lose it all’ and have a high-Risk tolerance.

Nonsense!

What about the concept, which all the banks and investment co’s use, of mitigating for Risk? How does that affect this model if you can LOWER the potential Risk for investments that have potentially higher returns?!?

Because you can, successful investors do, and it completely changes the game of investing…and that’s how I, my colleagues and clients have been able to enjoy double digit returns for many years (in a row) while actually having LESS RISK than most of you settling for 2–8% in mutual funds, GIC’s and ETF’s.

And why I run courses, programs and coaching about this very subject and show people what I do to mitigate Risk.

But today…I actually want to make a left turn and talk about Risk in a different way…and start with a question:

How does avoidance of Risk affect you?

I remember a statement about Risk that said ‘all animals naturally try and reduce Risk’…and I thought it was a useless statement (it was in a course I used to teach that covered Risk in Project Management).

Well D’uh — of course all animals try and reduce Risk…is that supposed to be insightful?! And who cares if ‘all animals’ do it…we’re talking about PEOPLE in this course so why bother to say all animals?!

But you know what…that statement is actually a lot more insightful than I initially thought (maybe I’m more insightful and deep now that I’m a bit older and (hopefully) wiser).

The fact that ‘all animals’ do it means it is wired into our DNA and has been in us for millions of years…not just something we learn from our parents or society.

What I’m realizing about that now is that we will do just about anything to avoid Risk…and this is why SO many people never get started in investing or if they do, they make mistakes, suffer from paralysis and don’t pull the trigger (even after doing tons of due diligence).

And I believe it’s why most of the population still just hand their hard-earned $ over to someone else to invest for them…even if they aren’t really happy with how that is going or get lousy service or know they should try something different.

At least they don’t have to face up to Risk directly. Someone else does it for them.

Even if one part of our brain is telling us ‘do it — take action — it’s the only way to reach your goals’…several other parts of our brain are saying ‘Oh no you don’t!!’

And knowing this as an investor is VERY helpful…because you may not find it easy to overcome.

Here’s a personal example of how this affects me:

Last week I shared I have been investing in Crypto the last few months and it’s been going VERY well so far…but one of the challenges I’ve had, several times, is not being able to pull the trigger and Buy the Dips like I know I want to and believe in doing!

So last week was an example…there was a dip, and I bought (I was in a hurry and didn’t have much time to think about it honestly), and then prices went down further…and I did nothing. I was frozen.

My brain was screaming at me ‘THIS IS THE FURTHER DIP YOU WERE WAITING FOR — BUY BUY BUY!!’

But several other parts of my brain (in shifts for maximum exposure) were creating all kind of narratives of why I shouldn’t…and it was all about the Risk (What if it goes down further? What if it stays here and never goes back up? Maybe you’ve done too much already and should hold back?)

It was chaotic times in my head to say the least. And as I said I didn’t Buy more during this further dip so clearly we know which voices were winning.

Now I’m not here to debate the Crypto markets and what they will/won’t do or investing strategies…I just want to point out that even for an experienced investor like me who is Educated and Empowered around investing…who has a Plan and who follows the trends…the fear of Risk was overpowering for a time.

I don’t believe that this is the end of the Crypto Bull run yet. I didn’t believe that prices would plummet…and even if they did I believed they would come back (and I wasn’t needing to Sell so I could just wait it out)…yet here I was frozen with fear of Risk.

And if you know anything about Crypto, you know it’s VERY volatile with severe price swings regularly. Bitcoin lost like a third of it’s value last week (from a high around $65k all the way down to close to $47k). These periods will push your fear of Risk buttons over and over again.

If that happened in the Stock market they’d be singing songs about The Great Crash around the fire for decades…but in Crypto it’s just a ‘down week’ that happens every now and then. No Big Deal.

So the takeaway for today is that as an Investor (or if you wish to become one), you WILL have to come to terms with Risk and how you react to it.

For the record I still think it’s worth asking those original questions about your Risk tolerance and what kind of investing you want to do…it’s just the follow-up conversations that I believe need to change about now how to mitigate for Risk (rather than just accepting it or avoiding higher Returns to try and avoid it).

Risk is part of investing. We can mitigate for Risk and we can’t get it to zero.

There is also the Risk of not taking any Risk (which actually is a bit more of a guarantee…if you never take any Risks you will not see any Rewards).

I am not one to look for or take on Risk and EVEN when the Reward is potentially high (as it is with Crypto) I STILL believe in mitigating for that Risk as much as possible!

Lower the Risk. Maximize the Reward.

That’s my investing Mantra and yet I still sometimes wind up allowing my fear of Risk to get the better of me (for awhile).

Do you know how your fear of Risk shows up for you?