We acknowledge that risk is personal and subjective by nature and thus the definition is as well. Our species and our education system have a blind spot when it comes to risk and decision science mainly because it involves a math where we quantify uncertainty, rather than a fact like 2x2.
Risk is what’s left when you think you have thought of everything. It’s magnified by the fact that nobody saw it coming - either the event itself, the timing, or the magnitude. Risk management, when done right, is thankless - it isn’t sexy and really has limited utility to quantify that success.
Risk control is the best route to loss avoidance; conversely, risk avoidance, is likely to lead to return avoidance. The paradox of risk comes to life in investment returns and just about anything - if you focus on what you lack, you will lose what you have and if you focus on what you have, you will gain what you lack. So in that spirit, you have to choose your sacrifice - If you are not willing to sacrifice for what you want, what you want becomes the sacrifice.
Each investor has their own personal risk spectrum that must be explored to understand where that sacrifice can be minimized.
Here we offer some structure around the paradoxes to capture our interpretation of several on this topic to weave a unique perspective, with the hope of crystallizing your view on investment risk.
Take investment risks that consider the regret factor. Make sure you won’t regret not taking the risk while simultaneously not regretting the risk when it doesn’t work out..
Conversely, don’t take risk that prevents you from living the financial life you desire. This cuts both ways - not just the risk associated with the permanent loss of money, but also the opportunity cost of growth.
The most dangerous risk may be expectations risk - when a gap exists between what you expect from market returns and what really happened, it can trigger behaviors that fuel greed or fear that can lead to compounding the risk you have already realized.
Unnecessary risk, if experienced, can result in taking undesirable risks - any risk that you take that is greater than the risk you need to fulfill you desired life, is subject to experience risk that can be avoided without penalty.
Investors have the right to change their timeframe and their benchmark to make their investments look as good or bad as they want. Numbers have the right to say anything you want if you torture them enough. When context is optional, you will only have cherry-picked facts, rather than a well rounded truth.
Buying Bitcoin at $30,000 and selling at $40,000 is no less risky than buying Bitcoin at $60,000 and selling at $40,000. It’s just that the outcome was different.
As your wealth accumulates, you are faced with the strangest of risk paradoxes - having a low need for investment risk while simultaneously being able to absorb some of the worst losses ever experienced. Likewise, if you liquid assets are just enough to scrape by, you may need more investment risk, while simultaneously being unable to absorb and experience risk events.