Reversability Is A Dimension Of Risk

No action is risky if you can reverse it for little or no cost.

People often confuse complexity and the size of the transaction with risk. At the same time, they believe that simplicity and ease of performance will reduce risk. The world does not work that way.

Many expensive and complex transactions can be undone. Many simple ones cannot.

For example, many people spend a great deal of time and trouble buying a house. How much risk is there if they are wrong? Probably not much. Put it back on the market and likely you will lose little more than some time and some sales and closing costs. If those costs are affordable, the deal is not risky.

In the same vein, a decision to sell your home is typically not easy to reverse. It is counter intuitive, but selling your home is actually riskier than buying it. If you sell and you don’t like the result, could you get it back? Probably not.

This is an important consideration if you are counseling people who have lost their spouse. That is one of the reasons that there needs to be a time span to adapt to a new life.

What about the decision to have your first child?

Very high risk! Your whole life will be changed and you can’t send the child back if you don’t like the change. Subsequent children are not without risk, but they are much lower risk. The first child changed your life. On the risk side, later ones just increase the noise.

Some financial actions can be reversed, while others cannot. Pay attention. Read the fine print or get assurances that you can change your mind.

A wise planner examines the ability to reverse any material transaction. If an action cannot be reversed (life annuity) or would be very costly to reverse, use great care.

Typically, there are no do-overs with a will or an estate distribution plan. A good lawyer will tell you to take the care you would if you knew it was your last opportunity to express your wishes. One of them will be your last opportunity.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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