Broker Check
How Do You Define Risk?

How Do You Define Risk?

| September 08, 2019

When you think of risk, what comes to mind?  

Does it give you a lot of warm and fuzzy feelings?  Does it give you peace of mind and certainty?  Most people would say no to all the above.  Most associate risk with losses, nervousness, and uncertainty.  Risk can seem very scary!  It seems scary because the outcome(s) of a situation are unknown, which is why there is risk - the risk that the outcome is good OR bad.  

My business coach, Joe Delisi, gave me this example and I use it all the time with my clients:

Have you ever gone skydiving?  For me, personally, I don't know how anyone could have the nerve to jump out of a perfectly good airplane.  

If you are like me, and most people, you may associate skydiving as being a very risky activity.  Why?  Because the outcome could be good or bad, and if it is bad, the outcome is catastrophic - splat!

But, is skydiving really risky?  According to the data, no, it's actually not at all.  It is actually safer than driving your car.  I know, that's hard for me to believe too, but it's true!

According to the US Parachute Association*, in 2010 there were 21 recorded, fatal skydiving accidents in about 3,000,000 jumps throughout the U.S.  So if we do some quick math, that's a 0.000007% chance of dying from a skydiving accident.  

If you use a skydiving instructor (tandem), the odds of passing away drop even further.

So just looking at the math behind the risk of skydiving, it's actually not risky at all.  The reason people (like me) are nervous or scared of skydiving is simply because of the uncertainty of the outcome and the severity if it is a bad outcome.

But now we can understand a few more things.  

  1. There is a way to measure risk.  Risk involves math.
  2. Risk isn't uncertainty, and it is the uncertainty that brings negative emotions.
  3. If we manage risk in life (and in finances), we may be able to achieve better outcomes.
  4. Using a professional can help reduce risks we may not see ourselves. (There's my plug).

So let's transition this to investing.  When you invest, you oftentimes are assuming some degree of risk.  The reason people get in trouble with risk is because they lack an understanding of what risk is, and have no way of actually measuring what degree of risk they are taking. 

  • How much risk are you taking in your 401(k)? 
  • Do your returns that you got last year justify the risks you took? 
  • How are you measuring that, and how has that changed over the last few years?
  • Have you re-balanced your holdings to adjust for your new comfort level of risk?

If you are like most people, the answer to those questions is most likely no.  Most of the time, someone's 401(k) allocation is a "set-it-and-forget-it" strategy.  That works in an up market, but does it also work in a down market?  I guess we will find out soon enough.

When people take on too much risk, that opens them up to having more volatility or fluctuations in their portfolio balances over time.  When risk becomes un-managed, you may start to achieve much of the downside and not as much of the upside.  Very rarely does the opposite happen.  When people have more volatility in their portfolio over time, they begin to have those same feelings that are associated with uncertainty - scary, nervous, and stressed - which all lead to bad financial behavior.  This is what causes the average investor to inevitably buy high and sell low.  They buy-in once things are already doing really well and sell after things have already gotten bad.

Usually the buy-high, sell-low strategy is not a profitable one long-term (or short-term).

We are coming up on the end of the year, and if you haven't reviewed your portfolios recently, now might be a great time to make sure everything is in balance and updated according to where you are at today.

If you have any questions for me, or would like to sit down to review things together (don't worry, you won't be billed for doing so), send me an email at or drop a comment/note on  I look forward to seeing how I can help!