Tuesday, September 24, 2013

How To Get Rich - Learn the Meaning of Risk

Have you ever been afraid of doing something because it is too risky ?

Do you think living with risk is too dangerous to your future ?

Truth is, risk is a vital part of getting ahead in life !

What Is Risk

Risk is defined as the potential negative impact of any decision you make. There is risk in everything you do or don't do. Life is all about risk.

If you decide to be safe and lay in bed all day because life is too risky, think again. You will be risking becoming lazy and obese and be more likely to attract health problems.

When investing, if you stick to safe low yielding investments, you will be risking that your money will be worth less in the future due to inflation and taxes.

Risk is everywhere and can never be avoided.

Managing Risk

Now that we understand everything has risk, how do we use risk to make the best future decisions ? Well, this is the tricky part and everyone will be different. Everyone has a different tolerance for risk.

Generally, one has to weigh the potential reward with the potential risk. Think of it as a scale. One side is reward and the other is risk. Determine the most probable outcome of your decision given historical statistics etc. Next determine the odds of that outcome not happening Place these on your scale and see which one is larger.

In many cases, the larger the potential reward, the larger the potential risk. In a lottery for instance, you risk a small amount of money for an even smaller chance of winning. The lure of a big windfall is what sells tickets. I would rather be the owner of the lottery corporation where the odds of winning every time are pre- determined. Lotteries make a lot of money.

If people were to use the above scale before buying a lottery ticket, they wouldn't buy one. The odds of winning are simply far too high. Instead, take the same money and save it for investing where the odds of making money are better.

Why Most Will Never be Wealthy 

I used the above lottery example to show why most people will never become wealthy. Simply, they do not understand how risk works. All they see is the potential reward and ignore the huge risk they are taking with their future wealth.

What To Do

Remember, everything has risk. You must learn to balance your potential reward with the potential risk you are taking. You should start making a conscious effort to use this balancing scale in everything you do. You may be amazed at how much easier your future decision making will become.

As always, I welcome your comments and suggestions for future topics.

1 comment:

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