You probably do not think consciously about risk most days, but you make risk-based decisions on a consistent, daily basis, as we all do. For example:
- When you drive, you decide when to pull out, how fast to go and when to change lanes.
- When you are doing a home project, you decide what tools you do and do not need, how closely you should follow the directions and how high you should climb on a ladder.
- When you have a difficult relational dynamic with someone, you decide what to say and what not to say, how to regulate your emotions and the nature by which you interact with that person.
How do you go about making these decisions day in and day out? We all do it differently, but one underlying principal comes to mind when considering these situations: do not take more risk than necessary when you are on track with your goals.
- If you are on time for your destination, do not speed excessively.
- If you can reach from where you are on the ladder, do not take the next step up.
- If your relational dynamic has improved with someone, do not say something, or take an action, that could set the relationship back.
When you are on track, you should minimize the risk of failure because you can afford to do so. This does not mean that you take no risk at all, it simply means that you right-size your risk tolerance for the specific goal you are trying to achieve.
Let’s turn this to a financial planning concept. You have been saving and investing for a shorter-term goal; let’s say for example, you are going to purchase a new property. You have been able to save more than originally anticipated and your investment has performed above expectations. You now have enough for your new property a year earlier than you anticipated; what do you do next?
In applying the above principal, you should likely put this money in something very safe, such as bonds or cash. You have achieved your goal, why keep risk on the table for more than you need, when you are also putting potential failure on the line?
Do not take more risk than necessary when your goals are on track. I think that principal checks out!
…..or does it? Stay tuned for part II next week!