Risk: Your best friend and worst enemy

Taking risks can be scary, but it can also be lucrative. Learn about different ways to think about risk in your life.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

Risk fills in the gaps between your plans and the relentless power of chance, accident, luck, and misinformation. It sits over your shoulder while you're planning the future and whispers, "Hahaha, that's hilarious!"

Here are a few more things you should know about it.

People have an amazing ability to discount risks that threaten their livelihood. That's dangerous because people who should be the most experienced experts in a field may be the least able to objectively assess their industry.

Risk has a lot to do with culture. Europeans and Canadians are generally wary of the stock market. For Americans, it's a pastime. The French prefer raw milk. Americans are warned against it. Canadians are banned from it. Europeans are terrified of nuclear exposure. Americans couldn't care less. Walk through an international airport and you'll see one person wearing a face mask to prevent the spread of illness and another letting their kid crawl on the floor. Everyone wants to believe they're thinking objectively, but most of the time you're just reflecting the cultural norms of where you were born.

Success is an underrated risk. Jason Zweig once wrote: "Being right is the enemy of staying right -- partly because it makes you overconfident, even more importantly because it leads you to forget the way the world works."

Risk's greatest fuels are debt, overconfidence, impatience, a lack of options, and government subsidies.

Its greatest enemies are humility, room for error, and government subsidies.

Nothing in the world can give a damn less than risk. Risk doesn't care about your political views or your morals. It doesn't care what your view of the market is, or what you were taught in school. It's an indiscriminate assassin and a master at humbling ideologies.

Risk masquerades as your best friend. It tells you you're doing the right thing and making the right decisions before turning its back on you and making your life miserable.

You can create risk by trying too hard to eliminate it. Dutch psychologist Adriaan de Groot showed that amateur chess players drive themselves crazy trying to calculate the perfect move, while chess masters look for a pretty good move within a broader strategy. In a lot of fields, the smartest people don't have the most sophisticated models. They have the wisest rules of thumb.

Risk feeds off neglect and belittlement. The more you point and laugh at it, the stronger and more dangerous it becomes.

We're not very good at communicating risk. No one wants to hear that there's a 20% chance of a recession in the next year; they want a buy or sell recommendation. No one wants to hear about the prevalence of false positives; they want to know if they have cancer or not. Communicating in certainties for something that works in probabilities makes us dumber.

The more familiar we are with something, the less risky it feels. But the opposite is often true. Car accidents rarely make the news, but kill 32,000 Americans per year. Terrorism, fracking, shark attacks, and swine flu kill relatively few, but dominate headlines at the slightest event.

The more the media is talking about a risk, the smaller it probably is. If something's making headlines, people are already preparing for how to deal with it and anticipating its downsides, which goes a long way in making something less risky.

There are two parts of risk: How severe it is, and how long it lasts. In investing, there's too much emphasis on the former and not enough on the latter. A 30% crash that rebounds in a year or two probably isn't a big deal. But above-average fees left unchecked for decades can be devastating.

Learn how to manage risk, taking the right amount of it and handling it when it wants to fight you, and it can be your best friend. It is the seed of opportunity, and necessary to get ahead in almost every field.

Do yourself a favor and learn about risk vicariously through others. Other people have screwed everything up that there is to screw up. Learn from their mistakes rather than figuring it out the hard way.

Topics:
  • Investing Strategies
  • Market Volatility
  • Risk Management
  • Starting Out
  • Investing Strategies
  • Market Volatility
  • Risk Management
  • Starting Out
  • Investing Strategies
  • Market Volatility
  • Risk Management
  • Starting Out
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print
This article was written by Morgan Housel from The Motley Fool and was licensed as an article reprint. Article copyright 8/21/2015 by The Motley Fool.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
The third party provider of the reprint permission and Fidelity Investments are independent entities and not legally affiliated.
The images, graphs, tools, and videos are for illustrative purposes only.
Fidelity Brokerage Services Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
736183.1.0
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.

Here's what we suggest you explore next

Divorcing? How to split up retirement nest eggs

Divorce is not only emotionally stressful, it is also stressful financially. Read here for tips on how you can split your retirement savings during divorce.

Open an IRA and we'll match part of your contribution

Exceptional service. Range of investment choices. Access your account using any device.

You might also like

How to save money on food

You don't have to eat less to spend less on food. Tweaking your spending could help you save.

HerMoney with Jean Chatzky - Guest: Kathy Murphy

Investing isn't hard, but we know taking the first step can be.

Find a cost-effective car to save money

The ideal time to buy a used car is after depreciation hits and before maintenance costs increase.

Start budgeting: Meet Cinch

Introducing CinchSM from Fidelity, a simple way to track your saving and spending. Just answer a couple of questions to get started.