Taking risk is an inevitable part of living a fulfilling and rewarding life. Learning how to assess and balance risk is integral to knowing when taking a risk will lead you toward your goals rather than to ruin.

Become a risk taker

Risk need not be an all or nothing proposition to lead you to success in your professional and personal life. In fact, the best way to use risk is in incremental steps, where you begin by risking only what you are willing to lose, understanding the downside of any risk, and diversifying your risk so that you always have a fallback plan. That way, if your plan fails, you still have options.  It only takes one good idea to pay off to make up for the ideas that fail.

You need to choose ideas with a good risk/return profile.  In other words, your risk needs to have a greater pay-off result than not risking at all. That is why, for example, investing in the stock market has a greater potential return than keeping your money in a savings account. There is greater risk in the stock market, but there is also a greater potential return on your investment. By our previous measure, however, you would want to put only the amount of money you were willing to lose into the stock market, while keeping some money in safer investments.

When considering potential investments, the old saying, ‘if it’s too good to be true, it probably is’ is sound advice. Likewise, if the deal is something you can’t understand, you shouldn’t participate. After all, how would you be able to assess the risk/reward relationship if you don’t understand the mechanics of what you’re getting into?

Any deal where you place money with someone who doesn’t have much business experience and no track record, or where the deal relies on some sort of “magic” that no one else understands is not one you should participate in.  Actually, one of the best ways is to invest in your own ideas, that way you can structure the deal to remain within your risk comfort zone.

Here’s an example of a deal that I went into that worked out.  I bought a new construction apartment in Dubai.  Dubai was booming (back then) so I went into the deal.  I made a few mistakes – one regarding the tax treatment.  In the end, I made enough that the taxation issue wasn’t a problem.  The other issue was that I overestimated the banking system in Dubai. The borrower lined up by the developer had a dispute and refused to process the loans.  In Australia, it would have happened like clockwork. The developer then insisted on payment despite the project running well behind schedule.  That complicated my cash flow projections on the deal.

In the end, I was able to finance the property myself and sell it at the top of the market.  I made a great profit.  The important factor was the risk/return ratio was in my favor.  It was cutting it a bit fine, and without reserves, the other problems would have made it a bad deal overall.  The factors that I didn’t anticipate were the ones that could have spoiled the deal, which is why it is essential to consider the downside potential and factor that into your risk/reward calculations.

While I’ve focused here on examples of investment risk-taking, risk extends to every area of our lives. From the relationships we choose to pursue, to our work, and even to our day-to-day behavior. Sitting at home won’t get you hurt, but it’s incredibly lonely.  By taking a measured risk, you will enrich your life.  You might get hurt from time to time, but you will build the reserves (emotional resilience and character) to learn from your mistakes and go forward a stronger person.

Tags: risk

This entry was posted on Tuesday, April 20th, 2010 at 8:13 pm and is filed under Personal growth. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.