The word “risk” is so frequently used you might start feeling numb to its meaning. It seems the word “risk” shows up everywhere: with the HR rep when you set up your 401(k), when you purchase stocks, when you purchase a home…the list goes on and on.
But what is it, and how should you view risk with relation to your financial decisions?
Let’s answer that question with another question. What do you mean by risk?
For example, the same “risk” could be different — riskier — between two people. Why? It’s all based on circumstance and context. Your young cousin could bet money at the track. His failure would hurt, but, that same behavior by your fixed-income grandmother would obviously be riskier. (Bettng at the track, I’ll add, isn’t a sound financial plan!)
Here are seven ways to define “risk”. Which apply to you?
1 – Risk is not investing at all because inflation will erode true savings.
2 – Risk is investing aggressively when you’re just a few years away from retirement.
3 – Risk means you can lose it all.
4 – Risk is being a day trader — buying and holding stock isn’t as risky.
5 – Risk is basing investment decisions on emotional things, or, things that don’t really matter to the intrinsic value of the investment.
6 – Risk is letting someone else make your financial decisions for you.
7 – Risk is opportunity. Greater risk yields greater returns.
So how do you broadly define risk in your own life? I personally like #7. If you view risk as an opportunity — and play wisely according to your own sense of boundaries — the payoff can be great. Do I always treat risk as opportunity? No, and I don’t think anyone else does, either.
Bottom line: risk fluctuates. No matter how you define it, be willing to redefine it so it doesn’t redefine you.
Check out this related article at TheStreet: Nine Questions about Investment Risk.
