Even
though a risk tolerance discussion usually belongs in the investment/retirement
portfolio realm, it can be just as applicable in thinking through major life
decisions. Some of the most important decisions we are going to make may require a risk assessment. Philosophically, will you lean towards risk aversion or a willingness to absorb risks? Some such decisions are: 1) what your priorities are, 2) which career path to follow,
3) whether to go to and which college to attend, 4) who to date and marry, 5)
who to make friends with, and 6) where to settle down.
Some of these major life decisions
are probably easier than others to decide based on what your parents taught you
growing up i.e. it may be ingrained into your value system. Other decisions will probably require doing a lot of homework on
your part and agonizing over what to do. Even with thorough due diligence, your decision could still lead to a bad
outcome. Similarly, you may end up making a decision haphazardly that somehow leads to a great outcome. The outcomes of taking risks are sometimes unpredictable no matter the amount of precautions you take.
Buying a foreclosed house 2 years ago as a single guy working in the bay area was somewhat of a risk on my part, as there were plenty of rental options available that made good economic sense. Nonetheless, after running a rent vs. buy analysis on excel I became comfortable with the economic risks. Economics weren't the only risk assessment. I had to consider the commuting time risk, the social life risks, and the overall priority shuffling. I also thought about the worst case scenario. In Donald Trump's biography
“The Art of the Deal” he stated the following:
“I always go into the deal anticipating the worst. If you plan for the worst – if you can live with the worst – then the good will always take care of itself… You don’t act on an impulse...unless you’ve considered the downside.”
While that quote is especially
applicable in real estate, it can also apply to how we make big decisions in
our lives. In thinking through the
consequences of the choices you are making for your career, social life,
romantic relationships or whatever else may be on your mind, it’s natural to
place emphasis on the likely outcome or the most
favorable outcome. Of course, in real life, the outcome of our choices
can fall anywhere on the spectrum of worst case scenario to best case scenario. Most outcomes probably fall in the middle ground. There are always things you can do to increase your odds of a more favorable outcome such as really doing your homework.
Even after doing your homework, it’s not always a no-brainer to
decide when to take risks and when to play it safe in making major life
decisions. However, it’s much easier to make those decisions when you have a
methodology to weigh the risks against the potential rewards. Alternatively,
you could take a trial and error approach to life just randomly taking risks
when you feel so inclined without weighing the risks thoroughly. Since we only
get one shot at life, it may behoove each of us to step away from spinning the
wheel on the Price is Right to determine the right path for us.
In weighing the risks of any decision, you'll need to do determine what your risk tolerance is. Are you willing to take risks akin to
gambling or are you a "play it safe" advocate towards major life
decisions? Here's an example of having a high
risk tolerance:
A friend of mine in his mid 30s I
met in Palo Alto several years ago was interested in finding a wife. He dated
frequently, but wasn't finding success in attracting the right fit in the bay area. Eventually,
he supplemented his dating efforts with online dating. Since Tim is a Mormon,
he tried an online dating site specifically for Mormons.
Simultaneous to Tim trying his hand
at online dating, there was a non-Mormon woman named Sarita working as a nanny
in Qatar. She was originally from Nepal, but had found a job with an American
Mormon family living in Qatar. The details aren't known to me why she signed up for
the same dating site as Tim. Since Tim had a high risk tolerance approach to dating, he was not
afraid to expand his search to overseas options even in countries he had never even
visited.
You can guess that Tim eventually
contacted Sarita. They began skyping nearly every day until the day that Tim
proposed on skype. They then were engaged to be married in Kathmandu in December 2010. Sarita was baptized a member of the Mormon church. Tim flew to Nepal
one day before the wedding and then followed through and got married the next day. Tim decided to
stay in Nepal while they worked through the visa issues. About 5 months after
they were married, I visited Tim and Sarita living in Kathmandu:
It has now been more than 2 years
since the time they were first married and are still going strong. Had you
given me the circumstances of their courtship without knowing Tim, I would have given it little
chance at success. The reason that it works for Tim is because he has the right mindset to make it work. He has believed for some time that "love is a choice." That's why he could get away with a much higher risk tolerance than most people. The decision worked for Tim and his life. The
story of their courtship was the basis of a documentary called "Love Hacking" directed by Stanford graduate Jenni Nelson.
There are plenty of us that won't go
to the same extremes as Tim in such an important life decision, but it doesn't make sense to be on the other side
of the spectrum either. I’ve met many people over the years who would rather
stay in their comfort zones than take any risks at all. They apply the "playing
it safe" philosophy to finances, pursuing their goals, dating and anything
else that gives us the opportunity to take risks all in the name of
predictability.
To find success in most realms, you have to put yourself out there and subject yourself to potential negative feedback, outright rejection, and failure. The people that persevere and continue trying despite the risks are the ones who end up the happiest and most successful. I'm glad that I was raised to be a 'tryer' even if the odds are stacked against me.
There is no better time than while you are
young to take risks. If you lose your life savings, you have the rest of your
life to recover. If you get rejected in dating, you can move on to a different
opportunity that's a better fit for you. If you get injured playing sports, you will recover physically. The mindset
we need to have summed up by this statement:
So fail. Be bad at things. Be embarrassed. Be afraid. Be vulnerable. Go out on a limb or two or twelve, and you will fall and it’ll hurt. But the harder you fall, the farther you will rise. The louder you fail, the clearer your future becomes. Failure is a gift, welcome it...
It doesn't make sense to "play it safe" in most instances. Take a few
calculated risks and you'll probably fail a lot of the time, but at least
you'll learn from your failures and move forward with more maturity, wisdom,
and experience. In some instances, you might actually find success that could
not have been achieved without the initial risk to have tried.
If
when you get old, you legitimately can say that you didn't have a viable chance to succeed at your goal then that's OK. However, if your entire life consisted
of "playing it safe" or making excuses to not try or giving merely a half-hearted effort, then you will probably have regrets about not attempting a fully invested try. The choice is yours and nobody else's how your life will evolve and which realms you choose to take risks in. Determining your risk tolerance now will make your major life decisions a lot easier to navigate.
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