Taking Calculated Risks
Posted by Todd Smith
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Today I want to help you make better risk decisions in your personal and professional life. I’ll share a framework for decision-making that can be used whenever you are faced with an opportunity or decision in which the true outcome, state, result, or value is unknown.
I’m referring to risks where there is a lack of complete certainty and where several possible outcomes could exist—at least one of which is undesirable. For example:
- Leaving a secure position with an established company to accept a more lucrative job with a new start-up. Possible outcome: What if the business fails?
- Entering into a partnership with a new business associate. Possible outcome: What if the person turns out to have different values than you that cannot be reconciled?
- Investing a large sum of money in a new investment opportunity. Possible outcome: What if it goes bad and you lose it all.
Understanding the Role of Risk in Life
Most of society is divided largely into three groups of people:
1. Those who are afraid to take risks, live a very conservative life, and retire not much better off than when they began.
2. Those who take bad risks and suffer the consequences.
Sadly, the evidence of bad risks and the decisions that follow are all too common. I have had friends who were millionaires, and lost it all as a result of taking unnecessary risks. I also had a friend lose his life in a deep-water scuba diving accident. In his quest for the thrill, he risked a great deal and left behind a widow and two teenage daughters.
3. Those who plan well, take calculated risks, and win.
If you desire to live a successful and fulfilling life and retire with enough money to enjoy your retirement years, you must take calculated risks. This includes risks in your relationships, risks in your career, and risks in your investments.
While taking smart calculated risks is vital to reaching your goals in life, remember that taking bad risks and losing can set you back, sometimes significantly. It may help, however, to remember that taking smart risks is as simple as making wise decisions.
A Framework for Good Decision-making
I’ve learned a lot in my life from observing others and through my personal experiences—both good and bad. Therefore, when I consider taking a risk in any area of my life, here are the questions I ask myself:
1. What are the risks? Be honest. Don’t let your emotions prevent you from carefully considering all possible risks. This is where the landmines exist.
2. What are the odds of one of the risks coming true? Be truthful. Use real data whenever you can by doing research and talking to others.
3. What are the rewards? Be realistic. Can you really quit your day job and devote ten hours a week to something and make $100,000 a year? (Probably not.)
4. What are the odds of those rewards? Be sensible. Find out how many others have done something similar and how they have fared.
5. What other options do I have? Be creative. Don’t limit yourself. Consider all possibilities.
6. Do I need to make this decision today? Probably not. Take the time you need to do your research and explore your options.
After you finish answering these six questions, remove the emotions from your decision and ask what your gut is telling you. Also, never forget about the wild card risk; you don’t know what you don’t know!
- Start small. You don’t need to hit a grand slam your first time at bat. Aim for singles and only advance to the next base when you feel like the odds are in your favor. You can live an amazing life, travel the world, and retire financially secure if you just keep hitting singles.
- Don’t get greedy. This is a potential major problem in any area, but especially in the financial realm. Some people never start building their net worth because all they ever engage in are risky ventures that don’t work. Others save money for years, get tired of working, roll the dice with their savings, and hope to strike it big, only to lose it all.
- Be careful with partnerships. One of the ways I reduce risks in my life is by not giving up control. I seldom see a partnership work unless it begins with a well-established and familiar relationship.
The next time you find yourself making a decision that involves risk, I urge you to review this lesson. Print it out or save the podcast where you’ll remember it.
If you take your time and make good decisions using the advice in this lesson combined with your own life experiences, your odds of making good decisions the next time you are faced with a risk will be dramatically improved.
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