Redefining Risk


Did you know that risk is fluid and not fixed? In other words, risk and the perception of risk are not fixed and can change depending on the person and the circumstances. Take, for instance, a burning house. Anyone running into the burning house risks extreme injury and even death.

Under normal circumstances, nobody would willingly run into a burning house for no good reason.

However, there are circumstances in which any one of us would consider running into a burning house. What if there was a loved one trapped in the fire? Most of us would not hesitate to run into danger to save the life of a loved one potentially. What about saving a stranger? Some, maybe not all of us, would rush into a burning house to save a stranger. What about saving a pet? Once again, this time, the number may be smaller than those of us who would be willing to save a loved one or neighbor, but a few of us would be willing to risk life and limb to save a pet.

The perception of risk also changes with the person.

What if the person confronted with the choice to enter a burning building to save someone or something is an off-duty firefighter? That person certainly has skills, knowledge, and experience that would make them more confident about entering the burning building.

In the investing world, the risk is also fluid – changing with the circumstances and the person – with the outcomes from our investment decisions, and chances of success depend on our mindset and approach towards risk.

Here are how different groups of financial players and investors approach risk:

The Financial Planner.

The typical Wall Street line largely informs a financial planner’s attitude towards risk regarding the risk-return spectrum. Moreover, this approach to risk is largely confined to the assets and products with which the financial planner is most familiar (i.e., stocks, bonds, mutual funds, ETFs, REITs, annuities, and treasuries.).

The risk-return spectrum is an institutionalized concept of risk where returns are correlated with risk. The higher the risk, the higher the return, and the lower the risk, the lower the return. This idea of risk is a longstanding Wall Street doctrine – reinforced by family, society, learning institutions, Corporate America, the financial media, the internet, social media, and so forth.

The Physician.

The Physician is a physician for a reason. They wanted a safe career. It’s no different with their investments. They like to play it safe. Their attitude towards risk is one of aversion – where loss’s pain outweighs gain satisfaction. To a physician, risk can only lead to loss. The Physician puts their money in low-risk assets like index funds, treasuries, and deposit accounts like CDs, Money Market accounts, and high-yield savings accounts.

The Entrepreneur.

The entrepreneur is the opposite of the Physician. They’re risk takers. That’s why they’re entrepreneurs. The potential gain from taking risks far outweighs the potential loss from failure. The entrepreneur would be one of the first to rush into a burning building without asking questions because if there’s even a slim chance a person was in that fire, saving that person’s life would be worth the risk. In other words, the potential payoff of taking risks outweighs the potential adverse consequences of taking those risks.

The High-Net Worth Investor.

In our example above, the high-net-worth investor (HNWI) is the off-duty firefighter. They possess skills, knowledge, and experience that allow them to mitigate risks and navigate obstacles to maximize their chances of success.

In the context of investing, the HNWI has a different attitude towards risk because of their experience. They don’t perceive risks like everyone else. They’re more open mind and don’t have a narrow concept of risk like the masses. They know how to navigate uncertain waters – especially waters outside of Wall Street. They gravitate toward alternative investments outside public markets offering higher payoffs and reduced risk. These HNWIs know how to mitigate risk and navigate investment waters to maximize their returns.

So how do HNWIs reach the point where they have a healthy attitude toward risk and can maximize returns at lower risk rates?

First, they educated themselves – they learned and increased their knowledge about all investment options and assets – not just the Wall Street ones. They learned about alternative investments and explored the track records of the assets that HNWIs who came before them gravitated towards the most. Then came the key to all of this. Smart investors learned to mitigate risk. First, by investing in assets with a history of the most reliable returns, and second, by partnering with experts with knowledge, skills, and experience in particular segments far exceeding their own. Why reinvent the wheel? Also, by teaming up with experts, these HNWIs can further mitigate risk by investing in assets across multiple segments, geographic locations, and payout structures.

Redefine Your Risk.

Tired of volatile or underwhelming Wall Street returns?

Well, reversing your fortunes may mean redefining your attitude towards risk. You don’t have to play it safe like the Physician, and you don’t have to invest with reckless abandon like the entrepreneur. And yes, despite what Wall Street tells you, it is possible to earn above-market returns at lower risk. How? With the right knowledge and experience and by partnering with the right experts to invest in the right asset classes.

To most investors, an investment boasting 8% ROI is high and must entail high risk. For most investors, a 4% return is acceptable with reduced risk.

To the smart investor, it’s possible to have your cake and eat it too. To the experienced and smart investor, returns of 10 to 15% at reduced risk are not unrealistic because they know what assets to turn to, and in the hands of the right partners, risk can be reduced and mitigated.

Our Wavemark Income Fund is one such asset offering smart investors fixed returns of 12 to 14% at reduced risk because of our years of experience and track record of success.

Contact us today to speak to one of our experts to learn more.