What is the Risk of Avoiding Risk?

Investing is often a risky proposition. You send your money into the unknown future with the hope—not the guarantee—that you will earn a return sufficient to reward you adequately for the risk. You do not know whether there will be recessions, wars, international plagues, or other catastrophes. No matter how closely you examine an investment opportunity, you are always faced with the uncertainty of unknown events—who could have predicted the sharp drop in global stock markets following the terrorist attacks of 9/11?

Do you drive a car? If you answer ‘yes,’ consider the worst outcome. At any moment, an unknown and unpredictable set of events could result in serious injury or even death. You cannot predict the time, place, or nature of the event.

If you are risk averse—i.e., you don’t like risk—the ideal strategy is to minimize the probability of encountering events that can cause you maximum harm. In terms of driving a car, the only way to maximize safety is to avoid automobiles as either a driver or passenger. But this would leave you completely home-bound. It would ruin your ability to maintain your desired lifestyle. You make a decision—I will risk catastrophic harm to protect my standard of living. The risk of avoiding risk, in this case, is too high.

What about investing? Investing is about managing risk rather than about avoiding risk. You can take various precautions when driving—don’t speed, wear seat belts, etc. So also, you should take every step to manage risk when investing. There are various ways to do this that we will discuss in future posts. For now, we focus on the risk of trying to avoid investment risk. If a “safe” investment portfolio is unlikely to provide sustainable and sufficient future income, then you will become an “economic” shut-in just as the fearful driver becomes a home-bound shut-in.

Bottom Line: you don’t want a “safe” investment portfolio; you want a “suitable” portfolio. Think of the old tuna commercial on TV: “Sorry Charlie, we don’t want tuna with good taste; we want tuna that tastes good.”

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This blog is an adaptation of a similar post originally published on Mesothelioma Circle. Mesothelioma Circle is an organization focused on providing information and resources to victims of mesothelioma and their families. It is sponsored by Kazan McClain Satterley & Greenwood. Since 1974, Kazan Law firm has worked tirelessly to help the victims of asbestos exposure and mesothelioma.

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