Here's what most people get dead wrong about risk
We fear what we don’t understand.
We’ve been talking about money a lot lately, both here in the newsletter and on our Becoming Kinetic community calls.
As I’ve talked about the merits of alternative investment strategies, I’ve been met with two responses that I think are important to share.
“I’m really stupid when it comes to money which is why this is so helpful.”
That’s EXACTLY why I find it so important to talk about money, and why I’ll continue to do so.
However the second is the one I want to talk about today.
“People often pursue more complex strategies because they’re sexy but are blind to the risk.”
Here’s what I find really interesting about this line of reasoning.
We assume that…
New and unknown = complex. And…
Complex = risky. Therefore…
New and unknown = incredibly risky. Right?
Oh, and then as a result of that perceived risk that means it’s a no go.
In my opinion, these are the types of assumptions that keep people trapped in a never-ending cycle of misunderstanding money.
Different than you’re used to doesn’t mean risky. Let me give you a few personal examples.
Real Estate
I bought my first rental property in 2019, and quickly accumulated a bunch of properties and doors in the first 9 months.
To do so I burned the proverbial boats…I sold off my equity portfolio worth roughly $90k.
From the time I started making money in the Army I started managing my own portfolio, actively building a very intentional dividend portfolio along the way that did surprisingly well.
That route was known to me.
The unknown? Real estate.
Thankfully that didn’t stop me from diving in head first, and going ALL IN. I saw a lot of success early on (let’s be real…you could swing with your eyes closed and make money in real estate then), I had some devastating losses, and I came out the other side.
Roughly estimating the market now vs. in 2019, I can probably safely assume that $90k would have doubled. Not bad right?
But through these various investments, starting with real estate, that value increased by more than 5x. That’s including the devastating losses, and NOT including the cash flow along the way.
Playing it safe, and avoiding new because it means risky, would have cost me and my family hundreds of thousands of dollars over the past 5.5 years (though I’d probably still have darker hair…)
Lending
Over the past few years I’ve also done a couple of private lending deals with people I know.
These deals were incredibly straightforward…for the first one I loaned a friend $20k for a real estate deal to fund the renovation.
I knew and trusted the person doing it, and a very brief overview and understanding of the deal showed that it made perfect sense.
In exchange for the loan I earned 2% per month.
So my $20,000 made $400 per month, and when I got paid back six months later, I now had $22,400.
Was there a risk?
Sure, there always is. Nothing is guaranteed.
But the “safe” bet is the stock market. And depending on when you invested it over the past 5 years, it could be worth as much as $24,700 or as little as $16,500.
So the way that you define risk depends on the game you are playing.
I will gladly take a 24% annualized return with monthly payments, to me that is far less risky than praying the market goes up (and praying that the so-called leader of the free world doesn’t throw a Twitter Tantrum that tanks the market).
Most people are unaware that these opportunities are out there. They simply see the known.
What’s the known?
S&P 500 and mutual funds averaging 9% YoY growth
“High Yield” savings account offering 4.5% APY
Whatever your wealth advisor says
There’s a story (I can’t verify the accuracy but the point remains) that Warren Buffett’s son or grandson had inherited a large sum of money in shares of Berkshire Hathaway stock. When the manager of the trust saw the entire amount was consolidated in a single stock he said how risky that was and that he needed to diversify.
The son/grandson allegedly said “maybe if Warren had diversified he’d have been a trust manager rather than the one leaving the trust.”
True or not, it provides a valuable reminder…different and unknown doesn’t necessarily mean risky. And certainly doesn’t mean bad.
Sometimes it just represents a new opportunity.
What are you afraid to do with your money, your life, your family, or your business simply because it’s unknown?
And what’s one thing can you do about it?
Send me a note!
Patrick Menefee
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