Risk Tolerance and How It Leads You to Rewards

Most people are hesitant to take risks in their lives. It’s kind of human nature for people to fear risk. With the possible exception of Evel Knievel, Neil Armstrong, and a couple of others, it’s tough for us to step out onto that ledge and take a chance. You probably won’t be considering riding a motorcycle and jumping over a dozen cars or rocketing to the moon and back for fun or profit like Evel and Neil did back in the day, but what about other risky things that you deal with in your real life all the time? It all has to do with your risk tolerance.

It's important to know your risk tolerance, not only when you are investing, but in life as well. If we're afraid to take big risks, we may never know big rewards. Here's the smart way to deal with risk.

What Are Some Risks You May Have to Face?

There is a laundry list of things and events that we face regularly that may involve risk. That means everything from meeting your future in-laws for the first time to making financial investments for your future and retirement.

When it comes to money risks, I have had my share of both success as well as failure. You might remember my foolish investment in my former brother-in-law’s just-too-good-to-be-true stock investment that turned into a big loss. It turned out to be a complete scam from the word “go”.

Rewards and Risks Are Related

The reward for taking on risk is the potential for a great investment return. If you have a financial goal with a long time horizon, you may make more money by carefully investing in higher-risk assets, such as stocks or bonds, than if you limit yourself to less-risky assets. Over the long haul, market investments have always yielded higher returns than any short-term strategies.

On the other hand, lower-risk cash investments may be appropriate for your short-term financial goals. An aggressive investor, or one with a high risk tolerance, is willing to risk losing money to get potentially better results. A conservative investor, or one with a low risk tolerance, favors investments that maintain his or her original investment.

How Do You Know What Your Risk Tolerance Is?

The most common way to determine your risk tolerance is by talking with an expert who is bound by his profession to “qualify” your tolerance with a questionnaire and your answers to some basic questions. Being honest with yourself will reveal what you want and need and what you fear.

An easier way for some is to find one of the many investment websites that offer free online questionnaires to help you assess your risk tolerance. Some of the websites will even estimate asset allocations based on responses to the questionnaires.

While the suggested asset allocations may be a useful starting point, keep in mind that the results may be biased towards financial products or services sold by companies or individuals sponsoring the websites.

If and when you decide to invest, you must understand your risk tolerance level. Finding where your comfort levels are when you’re forking your money up to buy stocks, bonds, or funds will determine how much you can tolerate. Working with a banker or broker who helps you understand that can make investing a bit less intimidating.

What About Other Kinds of Risks?

For many people, starting a business, changing careers, or simply trying something new makes them think twice or even three or four times about it because the risk can sometimes seem too great. That’s unfortunate because safe can sometimes lead to sorry and if nothing else, that sorry is that you never gave yourself the opportunity to achieve something really big. Those are known as regrets and again, most of us have a few of those. Even the immortal Frank Sinatra sang about that when he did the classic tune “My Way”.

Turning risk into reward does not mean closing your eyes and taking a blind step. By taking the steps to heighten your sense of control, and reduce the “unknowns” that makes you afraid, risk begins to fade and eventually is no longer even a consideration. When you are in control and unafraid you don’t feel like you are taking risks. You get to make decisions instead.

Dealing with Risk

I know it’s an old cliché, but always start with, “What’s the worst thing that could happen?” Most of the time, our fears are groundless. Sure, you can get hurt trying that risky thing but, probably not. If you don’t try it, you never get the rewards. It was Wayne Gretzky, possibly the best NHL hockey player ever, who said, “You miss 100% of all the shots you never take!” Doesn’t that say it all?

Decide the most likely “worst” things that can happen and create a plan to deal with those outcomes before you start any new ventures. Then you can gain more control and face even fewer unknowns.

Try These Ideas

Start by taking the really small risks first! You don’t always need to go all in — in fact you shouldn’t. Taking a small plunge is not only safer in terms of any risk, but it helps you avoid becoming unable to think, walk, eat, or hold a conversation with anyone due to it making your brain melt! What’s the worst that can happen? The idea or action fails, but you’ll still learn something and what long-term harm was really done? Probably only a little, but it will give a chance to evaluate and learn a little bit of your real tolerance and its worth.

You can take another step to reduce any lingering fears: Get some backup and get a sounding board such as a good friend or trusted relative (but avoid your former brother-in-law at all costs!). Certainly your spouse should be involved so don’t ever leave them out of any risk transactions.

Even if a “worst” does pop up, there is some comfort knowing you didn’t go into it without some kind of input from a trusted friend or relative.

Final Thoughts

Your Evel Knievel moment arrives and you are ready to decide. Can you do it? Should you do it? Do you have the skills, willingness and motivation? You start your engine and drive ahead just like Evel did! If you want a great result you have to be willing to make an attempt and take these kinds of risks when you do!

Are you a risk taker? Do you think about making changes and taking chances in your life that might just lead to great success, but you hesitate because you are afraid? Do you fully understand your risk tolerance and are you willing to try to overcome your fears? What do you think Neil Armstrong thought of “risk/reward” in his life as he rocketed towards space?

Financially Savvy Saturdays

About Gary Weiner @ Super Saving Tips

Over the last 45 years I've worked in retail (department stores and supermarkets) and financial planning. In addition, I am a shopper, born and bred, who enjoys the challenges of finding the best items for the best prices. When I'm not busy saving money or writing here at Super Saving Tips, I enjoy baseball, music, and classic movies. I am retired and live in New Jersey with my wife.
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2 Comments

  1. Great topic that far too few people take the time to consider. Media talk is all about “beating the market” but many people should purposely NOT try to beat the market. Doing better than the market also tends to create huge drops in portfolios when the market goes down. Better to find a portfolio that balances your risk tolerance with your needs for a target return rate.

    Also, I wrote a similar post on this topic last year that your readers might enjoy: https://maximizeyourmoney.com/investing/understanding-risk-tolerance/

    • Thanks, Brad, for the thumbs up. I’m especially sensitive to risk more than ever because of the fact that I’m in retirement and my risk tolerance has dropped like a rock. But even young people who are in the market should understand what their risk tolerance is because if they don’t, they might make really poor decisions that can affect their futures. I’d encourage others to read your post as well.

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