The Truth About Taking Risks
My grandfather used to say, “If you’re not making mistakes, you’re not doing anything.” Sage words from a great man. In 2012, America and the world live in a world of Risk Aversion.
Now I’ve gone and done it. What is Risk Aversion? It is simply living life in a way to avoid taking risks. Here are a couple of examples of what Risk Aversion looks like…
- Don’t ask the girl to dance, she might say No
- Don’t ask the girl on a date, she might say No
- Don’t apply for the job, they might say No
- Don’t ask for a raise, they might say No
- Don’t make that investment, it might lose money
- I’m too old to pursue my dreams. What if I fail?
Should I go on? No I didn’t think so. That list is short, but could be much longer. Here is the reality. When you choose to avoid Risk, you actually put yourself at 100% Risk. By choosing not to act, you are 100% guaranteed NOT to reach your goal. By choosing to act, you reduce risk by at least 50%! Yes, you may not get what you want, but you also may just get what you want.
This is worth repeating. By choosing to avoid Risk, you actually put yourself at 100% Risk! No action = No Reward. That is a 100% guarantee. You decide.
Let’s go to the Bible for a word of encouragement on this topic.
Cast your bread upon the waters, for after many days you will find it again. Give portions to seven, yes to eight, for you do not know what disaster may come upon the land. If cloudss are full of water, they pour rain upon the earth. Whether a tree falls to the south or to the north, in the place where it falls, there will it lie. Whoever watches the wind will not plant; whoever looks at the clouds will not reap. AS you do not know the path of the wind, or how the body is formed in a mother’s womb, so you cannot understand the work of God, the Maker of all things. Sow your seed in the morning, and at evening let not your hands be idle, for you do not know which will succeed, whether this or that, or whether both will do equally well.
Ecclesiastes 11:1-6 (NIV)
I’ve heard many Christian investment advisors use this scripture to encourage diversification of asset allocation among stocks and bonds. Diversifying a portfolio is incredibly important in risk management. It’s the old saying, “Don’t put all of your eggs in one basket.” Why don’t we consider this with our income streams?
For some reason, we get up every day to go to a job that 87% of Americans hate. Then, rather than working to break free from that job, we complain about it. Rather than looking for ways to increase income in multiple fashions, we complain that our boss won’t give us a raise. What does this look like?
You are around people who get this concept every day. How many people do you know who own rental real estate? How many people ask you every week to join their multi-level marketing or direct sales business? How many business owners do you know who own more than one business?
Those are small scale operations. The ultra wealthy have actually mastered the art of this concept. Millionaires in America have in excess of 5 sources of income. The average middle class family has 1 or 2 sources of income. That’s called a clue. Diversify your income and your asset portfolio and you’ll do well to reduce risk in your life.
Why? When we only have a single source of income that our family depends on to pay the bills, any disruption to that income is devastating. Job loss, disability, illness, downsizing, etc. are all common ways employees lose their income streams. In addition, any time you’re employed by another person, your income is directly affected by that other persons choices and decisions about their business. The only control you have is showing up every day.
Another form of Risk associated with employment to a single source is the tax burden. W-2 wage earners pay more taxes by percentage of their income than business owners and investors. Why? Because most W-2 wage earners don’t have any tax deductions. They receive their income after taxes have been paid. Business owners pay taxes on their after expense income. Investors pay capital gains tax which is currently only 15%.
The greatest risk Americans take with their income comes in the form of Lack of Knowledge. It is the fastest way to remain broke and living paycheck to paycheck.
2. You do not know which will succeed, whether this or that, or whether both will do equally well.
Risk is a funny thing. It is a variable of unknown certainty. FEAR sets in and paralyzes most to a position of inaction. Not knowing the outcome can be frightening.
I had a mentor years ago who used to say, “Make your mistakes on paper.” What he was trying to tell me was to reduce my risks in ventures by practicing on paper first. Try to eliminate as many of the costly mistakes before you make them.
I like to buy houses, fix them up, and sell them for a profit. I have friends who think I’m crazy for doing this in the current real estate market. I spend a lot of time reviewing each deal on paper before making any offers to buy. The trick to making money in real estate is buying right. It’s been said that a person makes his money when he buys.
For example. If I purchase a home for full retail value yet, that home needs $10,000 in repairs, and I have $10,000 in selling costs, I don’t have any room for a profit. In fact, I will lose money. When we buy homes, I am overly selective about the homes we buy. I want to buy homes at 50% or less of the actual market value. Then if I have to put in several thousand to fix it and pay for sales costs, I can still make a profit on the deal.
Additionally, I study the market to understand the real price I can sell the property for. My goal is to sell the properties quickly. Yes, even in today’s real estate market. The key is Buy low and Sell low. That simply means that I have to price my houses below what my competition is selling for. By doing so, I can sell much more quickly than people trying to squeeze every last drop of blood from a turnip.
Ok, additionally, I have a mortgage company in which we write mortgage loans. We also have our curriculum company which we sell books, dvd’s, and coaching to help other people get unstuck and free from the rat race in life. Our next endeavor is to buy real estate we can rent long term.
The point? We don’t know which endeavor will do well and which will not do well. It is a lot of work to manage them all, however, our goal is for all of them to do well. When one doesn’t do so well, the others usually pick up the slack. It is a way to reduce risk and increase opportunity for wealth.
Remember this. Risk is a four letter word that when misunderstood spells catastrophe!
God Bless You!
- The Truth About Real Estate (daveramsey.com)
- Where Does Real Estate Investing Fit In The Baby Steps? (daveramsey.com)
- The Risks of Risk Aversion (scholarlykitchen.sspnet.org)
- May 2012 Wealth Reports (zeropassiveincome.com)