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Calculated Risks

I hate most risk tolerance questionnaires. They ask vague, unanswerable questions that often leave folks more confused than they were to start. And they tend to pigeon-hole people into either “risk-takers” or “risk-averse” with very little gray area in the middle.

I tend to view risk more in terms of probabilities and magnitudes. Probabilities matter greatly in that a risk with a 50% chance of happening should be considered much more than one with a 5% likelihood. Similarly, I should be much more concerned with something that’s likely to leave me paralyzed vs one that will have me laid up in bed for a few days.

We can look back at Covid (that’s a past-tense thing now, right?) and see some of our faulty logic, mis-information and ways that we let it shape our entire lives. That’s not to say that it was not a risk. I lost a dear client to Covid and according to worldometer, more than 7 million people have died from Covid to date. However, over 700 million cases have been reported, with many more times this having happened unreported to date, making the actual risk to most of us very low while the probability very high of contracting the disease.

Investments can be looked at through a similar lens. There’s a roughly 1 in 4 chance that stocks will go down in any one calendar year. So over the course of a decade, it will probably happen 2-3 times, which sounds a bit scary. But the chance of losing money in general over that same decade is very minimal as you can see in the chart below.

The chance of making money, on the other hand, is very high, with an average annual return of around 10.62% over the past 100 years. So the longer our time horizon, the better your chance of earning a positive return. In fact, some might argue that it’s actually riskier to not invest in stocks, as the chance of losing money to inflation is almost 100% over time, which will erode the purchasing power of our money.

This is where the beauty of calculated risks comes into play. If we can get away from thinking about ourselves as simply risk-averse or risk-takers, we can begin to assess risks individually based on their likelihood and severity which can help us make less emotional decisions when it comes to investing, healthcare, jobs, relationships, diet, and on down the line.

For investments, just because there’s a chance of losing money doesn’t make a decision bad, and a chance of making money doesn’t make a decision good. It must be weight in terms of probability and severity of outcome, and also in terms of alternatives.

We’d like to think that we can live a risk-free life, but that’s simply not possible. For those who think that flying in an airplane is risky, the alternative modes of transportation aren’t much better if at all. Airplanes often feel riskier, but it’s because they seem to defy gravity and because you’re not in control of the plane, unlike cars which make more logical sense and offer a steering wheel even though the chance of a car-related accident and/or death is much, much higher.

Finally, I want to challenge all of us with how we view risks, even calculated risks, when it comes to eternal matters.  C.S. Lewis speaks to the danger of making some calculated risks when it comes to being a Christian:

“This is my endlessly recurrent temptation: to go down to that Sea (I think St. John of the Cross called God a sea) and there neither dive nor swim nor float, but only dabble and splash, careful not to get out of my depth and holding on to the lifeline which connects me with my things temporal.”  It’s the temptation to not give up our lives in surrender to follow Jesus but rather to try to add God on to our current lives to perhaps get an improved life rather than an exchanged one.

Giving up our lives for Him is risky, perhaps the riskiest thing we can do.  God asks for everything we have, not just 10% of our money or Sunday mornings.  This feels dangerous and we’d rather hold onto the lifeline in case He doesn’t come through.  Of course, this can also be a calculated risk.  Jim Elliot famously said that “he is no fool who gives up what he cannot keep to gain that which he cannot lose.”  There is always a trade-off, but when it comes to a surrendered life to God, the trade-off is much more appealing than the stock market.  He is a pearl of great value (Matthew 13:45-46), worth giving up everything we have in order to obtain.

So whether it’s in the stock market, lifestyle choices, or discipleship, let’s fully count the cost and make great calculated risks.  Some rewards are possible, some are likely, and others are guaranteed.