If there was risk in your life, but you were not afraid of it, would it really be there?
Most people see risk as a potential for loss. That is fear talking. There is also the risk of doing well. Risk is a complicated subject and few people work past their emotional response. Thinking it through reduces its effect and offers better options. People should work past the emotions because risk is everywhere and always. Fear is a poor counselor.
Risk has three important aspects. Exposure, capacity and tolerance. You should assess all three before making a decision based on emotion.
Exposure is an interesting one. You could get an idea of how physical exposure works if you look at the questions they ask you on a life insurance or disability income insurance application. You might think all they care about is medical things, but no.
- Are you a pilot? How many hours do you fly each year? Do you fly as crew or passenger on other than commercial flights?
- Do you scuba dive. Certifications. Depth? frequency?
- Sky dive, hang gliding, motorcycle racing and all of that sort of hobby.
- Driving record matters. Speeding, careless or dangerous have an effect. Driving under the influence is a big issue. I know of a case turned down on a child because the father had two careless and a DUI in past three years.
- Are you going to travel outside Canada and the US. Where? For how long? If you tell them you are going to Syria for three weeks, they will ask you to apply when you return. It is not just the risk of an incident it is also the risk that care may not be available.
- Smoking, drug use, family history, height and weight ratio, and so on make some sense.
Your defense to exposure is avoid where possible.
Financial risk is different. Adding lottery tickets to your portfolio is a form of risk. Buying turn-arounds could be an issue. Private equity is always an issue. Fourth mortgages. Junk bonds. There are many exposures you can avoid.
Variability of market prices looks like and is sold as risk but it is not really. It is a condition of the system. It is noise. If you are not looking at a specific and near-term time, it goes away.
The second condition is capacity. How much risk can you afford. What if the loss happens? What is the effect? If you cannot afford the loss then you should insure it. Insurance works because insurable risks cover rare events. If it was common it would not be a risk. Dying is certain, but dying today is improbable. Having a lot of people paying for the risk now, means it is affordable.
Self insurance is a reasonable position if you have high capacity. It is logically correct to accept the risk and keep the premiums to pay for the rare losses. Does UPS insure their vehicles for collision damage? Probably not. Does Bill Gates have fire insurance on his home? He would not have a significant financial loss by his capacity standard, but it might be convenient to insure it.
Last of course, is tolerance. How much could you put up with? Some people are very risk averse, to the point they worry about things that are meaningless. Like market fluctuations 25 years before retirement. Being meaningless doesn’t allay their fear. Fear is a powerful emotion and rational thought seldom defeats it. They can defend themselves by paying less attention to markets and market commentators.
Learning more helps. So does planning. Anticipation helps neutralize fear and provides a plan “B.” People who understand situations respect the conditions but don’t fear them.
Or they could adapt the idea that worrying works. Nothing I worry about ever happens.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772