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“Risk management” just became sexy

3 April 2020

I think “risk management” just become sexy.

My impression is that most people have been attracted to the blog by the “wealth” part of “wealth & risk”.

But if you ask me, I think the “risk” part is more interesting – and important.

Dealing with risk involves dealing with uncertainty.

It’s easy to spend most of our lives living within an illusion of certainty. But in the past few weeks, this veil of certainty has pierced.

We live in an uncertain world. If it wasn’t clear to you before, it will be clear now.

Risk is what we really care about

In 2017 I wrote a couple of articles explaining that “Money is not the measure”. In the second article (the “risk edition”) I quoted an excellent article by Cathy O’Neil. She states:

speaking in terms of wealth is a mistake. We should instead speak in terms of risk. It’s a different unit, and it’s harder to quantify, but I think risk is what we actually care about. I claim it’s more basic than money.

For example, why are we afraid of not having money? It’s because we run the risk of not having resources to eat, sleep, or get medicine or treatment when we’re sick. If we didn’t have fears about this stuff then people would have a very different relationship to money. The underlying issue is the risk, not the money.”

Managing risk isn’t just about stopping bad things from happening

Over the coming weeks and months, I’ll be talking more about risk and uncertainty.

One of the themes I will return to is that managing risk – in other words, managing uncertainty – often isn’t just about minimising the downside. Managing risk can also increase the potential upside.

For instance, “retirement” is often a euphemism for being displaced from the workforce. I regularly explain to clients that this is a major financial risk that they need to consider and manage.

The best way of managing this career risk is by developing knowledge, skills, expertise, contacts, and a good reputation. Whether you work in an organisation (with a single employer) or in your own business (with lots of clients/employers), the key is to be so valuable that you have leverage: you’re too valuable to let go, and/or you can easily find new work, even in tough situations. This enables you to be sui generis, or as Cal Newport explains, “So good they can’t ignore you”.

When you’re in this position in your career, risks are minimised. The flip side is that you’re also likely to be able to command a good income and your ability to earn an income is more secure.

It illustrates the general point: managing the risk and increasing the upside can work together.


Tags

luck, planning, risk, risk management, uncertainty, uncertainty management


About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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