How many of you remember your first drink? Since almost 60% of Americans had at least one drink before they were 18, chances are your first drink was illegal. It must have been exhilarating because if you were caught, police would be involved, you would receive a record, and a fine. That was worth the light beer (extreme sarcasm notice). When you were young, you were probably prone to taking unnecessary risks. Case and point, you were 60% likely to do something that was quite risky.
You were probably taking other unnecessary risks. I went whitewater kayaking, climbing, and backpacking. Essentially all three of these could be described as slow and/or dangerous ways to get from point A to point B. Each of these could be completed with much easier and/or safer methods. So why did I do these? Simply put, they were fun. Sure I could have driven or taken an elevator from point A to point B, but that was not always an option. Also, that would make the journey pointless. So why is it that people take risks like these, but when it comes to finances, people prefer to save their money instead of risk it by investing? In this post I will explain what affects our risk tolerances.
Why Are Older Adults Less Prone To Taking Risks Than Younger People?
Simply put, if you are a dependent, you are not fully responsible for yourself. Most states enforce laws to ensure parents uphold their children and prevent them from committing crimes. If you were caught drinking before you were 18, your parents likely had to pay the fine and were charged the misdemeanor. My parents told me I better not drink underage because if I get fined or they have to pay my bail, they will pull the money from my college fund.
If I was injured during whitewater kayaking when I was under 18, my parents would have to pay the medical bills since the general law is that children under 18 cannot sign a contract. There are exceptions, but generally speaking parents must pay for any medical expenses. If you took an unnecessary risk and got injured you are not fully responsible.
Some scientists may make a spin about how older adults and younger adults are psychologically different and will try to find ways to determine this. The truth is, adults are more risk adverse and less likely to take unnecessary risks because the consequences of those risks fall almost exclusively on themselves. Children do not take the full risks of their actions and are less adverse to risk until they take on more responsibility. There is likely some psychology behind this, but responsibility is one of the only solid lines between adults and children.
Risk Alone Does Not Equal Gain
Whitewater kayaking is fairly risky by itself. But there are far larger risks you can take. For instance, you could go whitewater kayaking without a wet suit or helmet, or without a guide. Then you would be going through rapids with only your experience as a guide and if you are wrong at all about the best path, you are far more prone to injury. These are not small risks. Many of the rapids and features I kayaked through have infamous names after people who died from them. Some have more than one of those names. I minimized those risks with safety equipment and with a guide. What would be the point of taking these unnecessary risks? Pride. If I have ever tried those unnecessary risks, the only gain I could obtain was bragging rights. Bragging rights alone are worthless.
In finances, this is no difference. I know many people who invest in penny stocks and brag about it. These people are far more likely to be investing in the next industrial pioneer than I am investing in mutual funds and large cap stocks. But they are also far more likely to lose money. If these people end up investing in the next emerging company, they will have bragging rights for turning a few dollars into at least several thousand. But there is a large chance they will not.
By investing in large cap stocks and mutual funds with proven history, the chances of growth are far greater. However, none of the companies I invest in will be the next pioneer, they have already had such an impact. Growth is likely, but it is unlikely to be explosive. This path is far safer and far less exciting and the risks I am taking are not unnecessary.
Can You Have Safe Investments With Potential For Explosive Growth?
There is no truly safe investment. Even investments with proven histories like an S&P 500 index fund is prone to risks. However, many investments with proven histories have a large tendency to grow in the long-term, but almost certainly not explosive growth.
There are several types of investments which have potential for explosive growth. In general the two I know is to form your own business, or to invest in physical real estate. Note you will find that investing into physical real estate is very similar to investing in your own business.
In both situations you could invest in an area that is well proven for less risky yet healthy growth, or invest in a new area with more risks but higher potential for explosive growth. You could invest in something that is fairly safe, or something that could potentially be big and anything in between.
Are These Investments Taking Unnecessary Risks?
Even the safest businesses and physical real estate have considerably higher risk, usually even more than many stocks and mutual funds. But there is far more potential for explosive growth. So would you be taking unnecessary risks by investing in one of these? Yes.
Think about it, you could easily make significant returns of investment investing in the stock market, especially if you invest for retirement. It would not be hard to become a millionaire with this method much less have a comfortable retirement where you can provide wealth to your kin. Even if you were to use less risky investments such as bonds, you could easily retire comfortably. But will that be enough? Will you be okay on your death bed knowing the fact that you have only provided comfort and safety to your kin and family?
Most people will say that they tried their best, maybe even you would. But before you settle on “your best” I think you must read the words paraphrased from my greatest mentor. “Any person worth half their weight in dung provides for their family and protects their home, every great person does the same, the only difference is the great have no limits to who they call their kin nor any borders for where they call their home.”
These types of risks are only unnecessary if you are okay with only providing for your immediate family and protecting your own home, but if you want to provide more than that for your family and the world, these risks become necessary.
We have all taken some unnecessary risks when we were younger. Some even more stupid than others. When you take on responsibilities, you may become more risk adverse to protect what is yours. This makes no sense because as you become older you will take on risks which may yield more rewards. The risks you probably took when you were younger yielded few to no rewards.
However, there will be many risks you will take that may be deemed “unnecessary” by others. Some may say that it is an unnecessary risk to invest in stocks, maybe even bonds. Even more will say that chasing enterprises are unnecessary risks.
Note there is a difference between a calculated risk and a foolish risk. There are just as many enterprises and investments you should NOT take as there are those you should take. But note the only thing that separates the average from the great is the risks you take.