we've learned

getting comfortable with risk

let’s start out today with a few questions:

how comfortable do you feel with the general concept of risk? are you likely to make big changes in life that come with risk, or stick with what’s comfortable, what you know, or what comes with little exposure?

on the finance side, do you view yourself as risk-averse or risk-tolerant? have you switched from one to the other over time? if so, what convinced you to change your mindset?

we’d love to hear from you guys on these questions!

we are now in a place, financially and in life, in which we have fully embraced and accepted a certain level of risk. our growing stockpile is heavily invested in index funds (for our taxable savings, which will sustain us until 59 1/2, when we can access 401ks), and in mutual funds (for our 401ks, because until we roll them over after we quit, we don’t have other options), and only a small amount of cash (an ally savings account, which we use primarily to dollar cost average our investments over to vanguard). this allocation is mostly stocks, and a few bonds — in other words, investments which could go poof at any time, however unlikely that is.

and the whole idea of early retirement of course feels like a risky proposition — what if our savings run out? we’re willingly leaving the job market — what if we no longer have employable skills and need to earn more money? what about all the unknowns we can’t be sure of, like health care costs, natural disasters, or inflation? what if we wake up one day, realize we don’t like being frugal, but have been then dealt our careers a fatal blow?

but here’s the thing, to misquote the princess bride: life is risk. anyone who says differently is selling something.

and to back up a bit, we are not by nature risk-tolerant people. or, to be more accurate, we’re half risk-averse, half risk-tolerant. the wife, pre-marriage, used to only invest in bond funds, because stocks felt too risky. (yes, really.) the husband, however, once quit his job to travel for six months, and has at times bought individual stocks (whose poor performance did nothing to quell the wife’s fears).

sidebar — we’ve got to figure out better euphemisms for ourselves. mr. and mrs. onl don’t feel quite right, mainly because we don’t have the same last names in real life. we aren’t actually mr. and mrs. anything! any suggestions? ;-)

what helped us embrace risk more fully was the realization that literally everything in life and finance comes with risk. think your money in your savings account is safe? sure, it can’t go down in value, but you’re actually guaranteed to lose spending power on savings, because the interest rate can’t keep pace with inflation, at least not anymore. and it certainly won’t grow in our current interest rate environment. so the safest place of all to park your money is a guaranteed loser. if you want any shot at growth in your nest egg, you need to go the investment route, and be willing to stick your neck out, at least a little bit. or how about the risk of non-action: you stay in your career, you don’t travel more than a few weeks a year, you don’t spend enough time with aging loved ones, and before you know it, you’re full of regret for not living life to its fullest, of missing your window to do the things you’d always dreamed of. the path of least resistance is also the path of least reward.

though half of the our next life team is risk-averse by nature, we’ve jointly come to realize that we are not path of least reward people. it’s not even about the money — it’s about the freedom. we want the time and flexibility to do big things, dream big dreams. we have a vision for what some of that is, but a lot of it we want to give ourselves time to figure out. we think once we’re retired, we’ll get to know ourselves in a whole different way, and maybe then we’ll figure out if there’s anything else we want to do when we grow up.

for us that’s worth the risk. how about for you?

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Categories: we've learned

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26 replies »

  1. We are very risk tolerant. To actively strive towards early retirement, you almost need to be.

    People’s comfort zones are very often their biggest limitation. Doing what is comfortable, of course, is very natural to most people – me included. But the problem is when people don’t emerge from their comfort zones, they don’t position themselves to make better decisions for their lives. They remain stuck in the “same old, same old”.

    I live my life very simply: I understand and realize that anything can happen. The stock market could blow up tomorrow. A meteor could hit Arizona next week. My car might break down on the way up to the UPS Store to ship a package (which I will be doing in about an hour).

    In other words, things CAN and DO happen, but that should not stop us from venturing outside of what we feel are our sweet spots in life. It might be easier to just stay home all day, but I don’t know many people who would believe that to be a productive way to live.

    I believe that the more brain power you put into something, the less risky it ultimately becomes. Both my wife and I have put many, many (MANY!) hours into planning for our future early retirement, and I know you guys have as well. You can’t plan for everything, but you sure as heck can give the important elements of your life the requisite respect by devoting time and thoughtful consideration into what a particular risk means, what it entails, and your position if everything suddenly hits the fan.

    The truth of the matter is jobs are replaceable. Hell, so are careers. If you decide to retire early and things don’t work out, there will always be something to come back to. You might not have the same job at the same salary, but any productive person can find a job, rebuild and try again.

    Personally, I believe in the no-risk no-reward philosophy. I’m not here to simply live out some dull and barren life and then die in Florida after 60 years of office work. That sounds horrible.

    Risks are what you make of them. Early retirement, here we come. :)

    • We’re envious that risk tolerance comes so naturally to both of you — it’s often a more male trait, so kudos to Courtney for embracing it! And amen to not retiring to FL after 60 years of work! :-) Have a great day, Steve!

  2. I also envy Steve’s risk tolerance and love his overall outlook – you definitely can fall back on something else if things don’t go as planned, that’s why it’s very important to be resourceful. I have to admit that I am the more risk averse in our partnership. I think it was mostly due to my lack of knowledge in investing and the ways to optimize my savings. The MC was very good at educating me on this topic (he spent a great deal reading and researching it) and over time my risk tolerance has increased. We are both very happy with our portfolio and often talk about ‘the worst’, but never worry about it. There are things you can control, and there are things you cannot, so we focus on the former and embrace the latter as they come our way. I hope you two enjoy your week of no travel!

    • Being resourceful — and optimistic! — is everything. That thinking actually helped us embrace the inherent risk of this approach, knowing that we’re generally figure-it-out people. We know we can handle whatever life throws at us, even if it’s not pleasant. It’s great that your risk tolerance has increased over time! For us, understanding the huge risks that actually come from “conservative” investing (namely the loss of value to inflation) helped a ton.

      Having a great week at home so far — enjoyed some weed wacking yesterday, and finally got our home offices in order after months of disarray. :-) Thanks!

  3. Having a plan means that you also need to do a risk assessment. For each risk you need to look at the likelihood that it will happen and the impact that it will have.
    The way I look at it: a crash will happen, the impact will be big, but recovery will come (actually, let me reread this after the first crash I go through while on the journey). and then it will be forgotten, r so says history
    But for each risk, I also foresee mitigation action. that is why a part of my portfolio is in no risk assets. I know it will slow down my time to FIRE, But it make me sleep at night.

    • That’s our approach as well. And the risk assessment for us includes the range of natural disasters that are more likely in our area (we live in wildfire and earthquake country). So we are sure to keep enough of a cash cushion to insulate against expenses that would likely result from those. Thanks for commenting!

  4. Nice article on risk. It is the unknown assumptions that kill you. I will take your article on risk as a way to evaluate the risks I am taking in life and see if they are appropriate ones.

    One point I would like to add is this. I totally agree that life is filled with events and each event has certain risk associated with it. It is also true that we can come up with mitigation steps for each risk. The thing I would like to add is: each event also has a probability of the event happening associated with it as well. The actions taken to mitigate the risk MUST be prioritized based on the probability of encountering the risk.

    The probability of a stock market downturn is pretty high (imo). So, for the past couple months, I have been thinking about risk, believe it or not :-) I spent some time on formulating my mitigation steps (http://humblefi.com/2015/03/14/how-to-prepare-for-the-next-recession/) and some on my investments (http://humblefi.com/2015/03/31/risk-analysis-of-my-mutual-fund-investments-beta-coefficient/).

    My current emphasis is on my income stream…I am evaluating the risk of staying with my current company or changing to a new one. All of this are pittance compared to health risks, relationship risks, etc These will have to come next.

    Thanks once again for raising an important topic!

    • You have clearly given this a great deal of thought! Like you, we try to anticipate potential risks, build in a contingency plan for those we can’t anticipate, weight the relative risk of each — and then just go forward with a healthy dose of optimism!

  5. Totally agree with the above comment, risk needs to be considered as a likelihood that an outcome will occur, consequences if it does occur and then look at ways to mitigate risks to reach your comfort level.

    I think that most people are horrible at risk assessment. This is something we are continually working on as it does not come naturally to either of us, especially the Mrs.

    We assume that an uncommon path such as ER must be risky. By carefully assessing risks, many times we find that an activity that we originally found risky was really just our fear of the unknown.

    • Totally agree with that — that often something that seems risky is in fact just counter to the norm. Like our realization that, by taking the easy financial path, we were actually taking a much bigger risk: that we might spend all of our best years stuck behind a desk. Sometimes it’s helpful to look at the flipside of what seems risky, and see if in fact both options are equally risky, just in different ways. Helps keep things in perspective!

  6. Wow! Everyone responding is so positive. We’re at the middle phase of eliminating debts, so we can save faster for early retirement. Every time we eliminate one, it seems we take one step forward and two steps back! I admire you all for the positive attitudes, but it’s hard to believe from our angle right now. I guess you could say we’re pretty cautious right now.

    • We completely feel for you — we’ve been there! The debt payoff phase is the hardest part of ER. Take things one step at a time, and only do what’s comfortable at this stage. As long as you stay focused, you’ll get past it, and then things will look up faster than you can imagine.

  7. For me it depends. Like with my investments, I’m pretty close to 100% equities which some would describe as risky. With my job I’m pretty conservative. I could leave and maybe make more money, or leave and have a reduced schedule, but I’m comfortable where I am for the time being. People like me, I get good ratings, so I do what I’m told and am pretty conservative with my job. I’m fairly conservative with my health. I work out about 4x a week and try to be active. And then if I go out on the town with the boys, then that’s definitely risky! So I guess it just depends :)

  8. Your risk posts are so good!!

    Overall, I think I could be considered a big risk taker. I do things like quit well paying jobs I don’t like (without having anything lined up), moving across an ocean because I fell in love, and bouncing around in my 20’s to try different things. It’s actually funny for me to admit that I’m a ‘big risk taker’, because I grew up in a very risk averse household. Plus I’m a woman so have been socialized to not rock the boat. Risk taker is something I’m coming to terms with. :)

    Financially, I used to be very conservative. It wasn’t that I wanted to be conservative, but that I was just too lazy to learn about investing and wanted to focus on other adventures instead. So now that I’ve educated myself a bit, it’s not hard for me to go all in and invest in 100% equities as that seems to fit my risk taking profile. Although I know that the ER community has re-framed the concept of risk; by conventional non-ER standards, my all-in equities approach is considered risky.

    Thanks for the food for thought and for sharing your risk profiles! My husband is also risk averse so we’re in a half risk averse / half risk tolerant marriage too.

    • Aww, thanks! That’s awesome that, as a woman, you’re so open to risk-taking! There’s a good breakdown on the Vanguard site of the relative risk/reward of different allocations of equities vs bonds. Perhaps you’ve seen it already, but if not, it’s a good resource for figuring out the mix that lets you sleep at night. Ultimately, that’s all that matters!

  9. I don’t necessarily think you need to take big risk to get big reward. I’m fully leveraged into stocks at the moment, but it doesn’t take Einstein to know that money printing and continuous stimulus will create a bubble that will pop soon. There is unprecedented things happening now like negative interest rate. When the bubble pops, I have a plan to wind everything up and protect my wealth. Some of you are committed to the buy and hold cult that you’d rather see your wealth disappear and then hope that it goes back up in time (perhaps with help from government stimulus). Not me though. This time it really is different. Look at the money supply charts. Looks at the debt charts. Have a plan to profit when the market goes up, but more important have a plan to protect your wealth when the market goes down.