Wheatworks Blog: Financial Matters

There seems to be two basic ways to think about the future in terms of one’s financial life. One way is safe. The other is unnecessarily (Big ‘R’) Risky. (Remember, ‘risky’ with a little ‘r’ is not a bad thing if the risk has been considered and one’s financial plans accomodate it. In financial discussions risk typically describes the possibility for variation in expected results.)

Big ‘R’ Risky is risk of a different nature. Unlike the usual definition of financial risk related to variation of outcomes, Big ‘R’ Risky is rashly dangerous.

Big ‘R’ Risky comes into play when someone makes financial plans based only on what they hope will happen in the future. Big ‘R’ Risky never considers possible downsides. Big ‘R’ Risky depends on luck.

Few of us can see into the future, so most of our hopes about the future are wrong in some way or another. Working against us, too, is that human nature makes it difficult to be giddy-hopeful about a particular option and still give serious consideration to negative possibilities (or worse, we even ignore the probabilities).

A classic example of Big ‘R’ Risky occurs when a young couple stretches to buy a home based on the assumption that both partners will continue to be employed. If the purchase of a home absolutely requires two incomes, that decision carries a lot of Big ‘R’ Risk. What happens if one partner become ill or disabled?

Another classic is the person who, approaching retirement and concerned that his retirement account isn’t large enough, invests it all in a friend’s ‘can’t lose’ investment opportunity. That’s classic Big ‘R’ Risky. When approaching retirement, a bird in the hand is better than two in the bush.

When you plan for the future, force yourself to consider all the possible negative outcomes you can imagine before rashly taking on a Big ‘R’ Risk. Most find that little ‘r’ risk is risky enough.