Taking risk is something we can manage, but can’t escape. Karen Firestone has been focused on taking risk sensibly in work and life for decades. She’s a seasoned investment expert and our guest this week.
Laura and Kate explore with Karen how to assess risk around money, career and relationships. Be sure to keep reading or listen to the show for interesting tips about how to take risk the right way so it pays off.
Richer Life Lab Podcast show quote
“Applying appropriate skepticism means being unafraid to raise questions, taking your time while you come to a conclusion, and walking away if you cannot become comfortable with the response.” — Karen Firestone
Taking Risk Sensibly in Investing, Work, and Life
Karen Firestone is the Chairman and CEO of Aureus Asset Management, an independent investing firm managing over $1 billion. Before founding Aureus, she spent 22 years as a fund manager with Fidelity Investments. Karen received her BA and MBA from Harvard University.
In April 2016, Karen published the very readable book, Even The Odds: Sensible Risk-Taking in Business, Investing, and Life. She was motivated to write the book because although smart risk-taking has always been at the core of her work as an investor, she also thinks carefully about risk in all other areas of life, too. “It’s the lens through which I look at life,” she said.
Given her experience with risk, writing the book on the topic seemed natural. Here are Karen’s four steps to take sensible risk:
- Right Size Your Risk
- Right Time Your Risk
- Rely on Knowledge, Skill, and Experience
- Maintain a Healthy Skepticism
Tips and Advice for Taking Risk Sensibly
Karen shared these great points for how to take risk the best way in our investing, work, and life:
Point #1: Skepticism is not the enemy of trust
Most people think skepticism is the opposite of trust. They believe if they ask too many questions about the risk-taking activity—such as investing money on the recommendation of a friend—it signals they don’t trust the other person.
Not so, says Karen. The person encouraging you to take the risk believes it is going to work, but it’s up to you to ask sensible questions to ensure you know enough to make the right decision.
Point #2: Risk is a natural part of life
We are exposed to many risks every day. If you leave the house too quickly in the morning, you risk that you forgot to lock the door. If you interrupt a person in a meeting and don’t check your tone of voice, you risk damaging a workplace relationship.
Don’t be afraid of taking risk. Embrace it but learn to think through the elements of sensible risk-taking for better outcomes.
Point #3: Risk has upsides
The definition of risk is an exposure to uncertainty. But that’s not always bad. You can’t earn a high rate of return on financial investments if you don’t take risks.
While we tend to feel the negative sides of taking risk (losses) much more than we feel the positive (rewards), taking sensible risks can bring us all sorts of opportunities.
Point #4: There’s no such thing as a risk gene
Studies have shown that while some people take repeated risks in one area of life—like downhill ski racers—they don’t necessarily embrace taking risk in other areas. At the same time, there are types of people who are too trusting or gullible. They get burned taking risks.
No one is born good or bad at risk taking. It’s just that successful risk takers already know how to take sensible risks, while the naïve ones (the majority of us), need to be more skeptical and analytical when we approach uncertainty.
Point #5: Invest when you’re young
Today’s younger workers are unfortunately not investing as much as they should, mainly because they don’t have much disposable income. Wage stagnation coupled with rising housing costs is largely responsible.
Karen predicts salaries should go up in the next few years, and advises younger people to begin investing and taking risk with their non-essential funds as mush as they can.
Point #6: Don’t invest more than you can afford to lose
Karen recommends only investing your non-essential funds—that is the extra money you have that you don’t need to support your current lifestyle. A sensible way to invest these funds would be purchasing shares of a mutual fund that invests in the S&P 500. These low cost funds are not too risky but should pay off.
Point #7: Good returns are not risk-free
There’s no free ride, says Karen. You have to take on at least some risk in order to get returns on your investment these days. The classic lowest risk investments, like bonds, are providing next to no returns since interest rates are so low.
Point #8: Resist the temptation to day trade
Note to those dreaming of becoming day traders: the odds are not in your favor. It takes decades of studying the market, and learning patterns of research and fundamental analysis in order to know how to invest wisely. Please leave this to the pros.
Point #9: What to tell friends who want your money
If a friend or family member asks you to invest in their startup, think of it is a charitable donation, says Karen. As an investment, it’s unlikely you will get a return, if anything.
Point #10: Family happiness is the main goal in career decisions
Career choices involve major risk. When you change jobs, not only are you giving up stability for something new and uncertain, you’re also affecting the other people in your life, especially if you have a partner or family.
Consider risks and rewards carefully between the opportunities that a new job brings and the well-being of your family.
Point #11: How to choose an investment advisor
Karen recommends choosing an investment advisor you trust and believe is listening to you. You should also examine the advisor’s performance record and ask for references. And fully understand the person or company’s fees—too high a fee (over 1%) or too low a fee (e.g. 1/5%) are red flags.
Richer Life Lab Podcast practical
This week’s Richer Life Lab practical is to spend a couple of days being mindful of taking risk each day. It could be crossing the street on a red light, how you interact at the office, the way you speak to your kids, or what you might buy impulsively.
Are you thinking about the size of the risks you take? Is this the right time to take a risk? How much do you know about what you’re doing? And are you being skeptical? Be aware and you’ll start getting comfortable with risks. It will make you better at sensible risk-taking.
We want to hear about what’s working for you! Let us know if you try out one of the strategies we suggested in the show or have other recommendations that we can share with listeners in a future show.
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