I define risk is the fear of losing something we consider to be very valuable to us. The loss of it creates pain. Most people want to avoid such pain. If they determine a certain activity can possibly create pain, they label it as “risky” and stay away from it.
Life is risky
Everything we do has some degree of risk attached to it. Taking a shower is risky because we could slip, fall and break our hip. Playing in a playground is risky because a child could fall from a height and break his bones (my son almost did once). Crossing a road could get you hit by a car. You could even choke on the food you are eating and die. Yet, it’s funny how we don’t see these things as being “risky”. We have learned how to manage these risks. We chew our food so we don’t choke on it. We look on both sides of the road to make sure there is no approaching vehicle before we cross the road. We keep a eye on our kids at the park to make sure they are safe. And if we feel there is a danger, we ask them to be careful or lend them a hand until they are at a safe spot.
People fear the stock market. I did a decade ago. Maybe you do too. They stay away from it because they believe it to be very risky. Yet, there are millions who make money in the stock market. How can that happen? The answer is education. Warren Buffett said this a long time ago, “Risk comes from not knowing what you are doing.” The more you learn about a company and how it runs it business, your capability of making a quality decision improves. If you like what you find out about a company and its future prospects, invest in it. Or else, don’t.
Risks can be managed
Can I share a secret about risk with you? It can be managed.
Car accidents happen everyday. In some, people die. Yet, you and I get in our car every morning and drive. We can do this is because we have learned how to manage the risk. We have a “process” we never think about. We wear seat belts, we follow the driving rules. We do not speed. We do not change lanes without turning on the indicator first. We do not enter the wrong way. You get the point. Despite all that, can we get into an accident? Sure! Doing these things minimizes risk. It does not eliminate them. But, it minimizes the risk to a level where we become comfortable driving the car.
There are many frameworks out there that help you determine whether to take a certain risk of not. I want to share one of my favorites with you here. So, here’s how it works.
For this example, let’s say you are a family man with kids and have a cushy, comfortable job. You are considering whether to start a business of your own. You want to, but your wife sees it as very risky. In this case, here’s what you would do.
Take a pen and a piece of paper. Sit down with your wife at the dining table. Fold the paper in half and then fold it again so 4-columns are created on the paper. At the top of the first column, write “Worst Case Scenarios”.
Worst Case Scenarios
With your wife’s help, list every single worst case scenario that could happen by you starting a new business. Here are some examples to get you started.
- Your business could fail.
- You could die … not that businesses kill anybody but yours could. There’s always a first for something.
- You could get sued by an employee or a customer.
- Your employees could steal from you.
- You would be so busy building the business, you would have no time to spend with your family.
At the top of the next column, write down, “Recovery Time”. If an above listed scenario was to come true, how long do you believe it would take for you to re-create your life to the same point where you are today? Write down the recovery time next to each scenario you listed.
Best Case Scenarios
On the top of the third column, write “Best Case Scenarios”. If you were to start a business and it was to succeed, how could your life change for the better? What could you do that you cannot do now because of either time or money constraints? List down every single scenario possible.
- Could you take more vacations? at better destinations?
- Could you pay for your children’s college?
- Could you retire early and comfortably?
- Could you take care of your parents in their retirement?
- Could you donate to the charity of your choice?
- Would you travel the world the way you want?
Title the last column with “Mitigation Tactics”. What actions can you take to minimize each of the risks you listed in the “Worst-case scenarios” column? Can you start a low-cost business on a part-time basis and still continue working on your full-time job? Can you buy insurance to avoid losses from a lawsuit? Can you register it as a Limited Liability Company so your personal assets are protected? Can you put security procedures in place to avoid employees stealing from you? Can you hire some people so you the time it takes to build your business doesn’t affect your health or relationship with your family? Can you purchase substantial life insurance in an event you die prematurely?
Almost every risk you will ever encounter can be mitigated. The only questions are … what steps are you going to take to mitigate the risk? And how good is your mitigation plan? A better stronger plan offers you peace of mind and a sense of security for your family.
Now that you have listed the pros and cons, it’s decision time. Based on the sheet in front of you, can you make a quality decision? I’d say yes. This process has worked for me almost always time. If I cannot come up with good mitigation tactics, the decisions is a firm no. In most other cases, it’s a yes.
Last Question …
What does your decision process look like? Share it below.