In the financial industry you hear a lot of discussion about risk. It’s widely accepted that risk is a natural part of building wealth. While I agree that taking the right kind of risk can, at times, be extremely profitable, I do not believe it is a requirement, and I certainly don’t believe it should be taken lightly.
You see there are two types of risk. One type has the potential for creating significant wealth. It’s the type that Walt Disney took when he started Disneyland, the type that Ray Kroc took when he started McDonald’s, and it’s the type thousands of men and women have taken throughout the years to achieve their dreams. I call it “smart risk.”
Smart risk is simple. It’s calculated risk. You understand why you are taking it and you see the potential gains for risk well taken. This doesn’t always go your way, but that’s okay, you knew what you were in for.
The other type of risk is the excuse to make unsound financial decisions. It’s justification for a bad investment model. It’s the kind of risk Wall Street tells us is necessary. I call it dumb risk. Dumb risk is uncalculated, you don’t know why you’re taking it other than you think you should be taking risk, and you have no clue what the potential outcome could be.
Now you tell me, is it smart risk or dumb risk to invest money without knowing where it goes, why it’s going there, or what you’ll gain from it? Most Americans are taking dumb risk, unnecessarily riding the Wall Street roller coaster.
You see, taking smart risk is an advanced skill. Not everyone wants or even needs to take risk. If it’s not smart risk don’t take it. Most people would do just fine saving faithfully, and growing it in a conservative tax free environment like life insurance. No risk necessary. This is why so many corporations use this strategy to pay employee pensions. It’s safe and they can count on it. No risk involved. Their actions speak volumes.
Here’s a great example of smart risk versus dumb risk. Warren Buffett makes billions of dollars buying stocks. Millions of Americans invest in the stock market everyday. While they both buy stocks, it’s extremely different. For Mr. Buffett, buying a stock is buying a company. He knows the company, he calculates the risk, sees the potential, and pulls the trigger. The vast majority of Americans are mindlessly tossing money into the market, hoping something good will come of it. One is smart risk, the other is dumb risk.