Risk is Based on Your Perception

Too many people use the word risk too loosely and don’t understand that risk is simply based on your perception to that risk. Two people can look at a certain situation with the exact same facts being given to both and one will see opportunity and minimal risk, and another will see high risk with no upside. Both are right, but for completely different reasons.

The choices we make in life are often influenced by our cultural values, life experiences, education, skills, background, and many other variables too numerous to cover. When we get advice about what is risky or not risky from someone, we are getting their biased views based on those same variables.

“Professional” Advice Isn’t Always Better

It doesn’t matter if the person giving you the advice is considered a professional with years of education and several licenses or the person never went to college and doesn’t hold any licenses. Both will come at a given situation with all the same variables that will influence their perception of the situation in front of them.

Some of the best advice I ever received about investing was given to me by an amazing man that grew up poor on a farm during the Great Depression and never went to college. I have received some of the worse investing advice by an Ivy League MBA with a bunch of letters behind his name telling the world how smart he was. Both individuals had completely different outlooks on the world based on their life experiences, culture, skills, and knowledge.

You Are Your Best Advisor

The point is that YOU need to learn how to evaluate risk based on your perception of it. You can often mitigate risk with the right skills, education, hard work, and professional team. You can also increase your risk by not having these things. Your life experiences may also influence your perception and that life experience may be hindering or helping you depending on what it is.

Here are some scenarios that I consider to be part of The Money Outlaw philosophy that some people call risky and Outlaws consider the least risky path available. Both are right, but for different reasons and both perceive and experience this risk differently.

Self-Employment vs. W-2 Employment

I look at the risk of working for someone else and having 100% of my income vanish in a heartbeat when an employer says, “we won’t be needing your services any longer” and your livelihood vanishes like an Arizona frost as far too high. In addition, earning all of your income as a W2 employee is the most expensive income, from a tax perspective, you will ever earn in your life. I much prefer self-employment. Someone else may look at self-employment as a huge risk and the “safety” of a 9-5 job as less risky.

This person views the steady paycheck every two weeks and their ability to get another job quickly if they lose this one as far less risky as someone who is self-employed and thinks that person doesn’t know where their next paycheck is coming from or worse when it is coming. Two individuals earning an income view two ways of doing it completely differently. One sees unacceptable risk whereas the other sees control and opportunity.  Interestingly in the book the Millionaire Mind by Thomas J. Stanley who did a survey and found most self-employed millionaires found it far too risky to NOT be self-employed! I couldn’t agree more. The Money Outlaw sees self-employment as a far safer alternative for many reasons.

• Multiple Streams of Income
• Lower Taxes
• Flexibility
• Freedom
• Control Your Own Destiny

Alternative Investments vs. The Stock Market

One investor is completely sickened and loses sleep when they have money in the stock market and market volatility causes 50% of their 401(k) to disappear in a matter of days or worse hours. They can’t stand watching the markets gyrate up and down all the time and listening to the never-ending number of excuses from commentators trying to explain this insane phenomenon. This investor prefers putting the bulk of their investments in real estate where they feel more in control and their net worth doesn’t have wild swings from one day to the next.

A second investor might look at this same scenario and think that is absolute insanity to put all your money in something as risky as real estate. He thinks it is so much safer and easier to put everything in the market in an index fund and let the long-term market averages balance out your gains and losses over time. After all the market returns on average 9% over time, right? Two investors with completely different views of the world who see two different investment scenarios as differently as night and day.

Counter Economics vs. Mainstream Economics

One person may think the Federal Reserve bank driving interest rates artificially to zero and “buying” up “assets” on the market like government bonds, bad corporate debt, etc. and think that is absolutely nuts! What are they buying it with? Where did the money come from that they are using to “buy” all this stuff? Won’t this cause inflation? I think I should buy gold and other solid assets that will go up with inflation because this situation is too risky.

A second person will see the Fed as a white knight riding in to save the day by injecting “liquidity” into the market that will buoy and stabilize the stock market and economy and will allow their 401(k) to recover in time for retirement. The notion of putting your money in gold or hard assets where they don’t earn a return like stocks as risky and dangerous.

Unfortunately, there is a third type of person who says something brilliant like what is the Federal Reserve? Economic risk, what’s that? Consequences monsequences as long as I have my iPhone and Instagram, can go out to eat 4 nights per week, and binge Netflix, I am good! This third type of person is far too common in the world. This person has no idea there is an amazing world around them with vast opportunities if only they would open their eyes.

These people are destined to live in a world where the rules are created by others. They don’t understand these rules and are constantly taken advantage of. These people spend time wondering why they can’t seem to get ahead and spend time blaming everyone else except the one person they should be blaming… themselves.

Risk is Perception

In all the situations above you had different people with completely different perceptions of risk for certain scenarios. The two people looked at their own preferences based on their own life experiences, cultural values, education, and lifestyle and saw completely different scenarios. One saw safety, control, and lower risk in their own choice. They saw the other person’s situation as dangerous, with no control, and high risk. How does this happen?

It is caused by pure perception tempered with experience, education, culture, and lifestyle. Each of these elements has a way of changing your outlook on the world in any given situation. Differences, some might call it a weakness, in one or more of these areas might make that risk much more real and give that person a completely different view of the same scenario.

Perception of Employment Risk

For example, one person may see a self-employed freelancer working on a project that will end in two weeks and the associated “paycheck” that goes with it, disappearing, as far too risky. Through lack of experience and education, they don’t know how that person replaces that income. They see this as insanely risky and much prefer a regular 9-5 job with a steady paycheck every two weeks as far less risky… unless they get fired.

The self-employed freelancer knows from experience and education that their network, marketing campaigns, and sales skills will easily lock down another project. Maybe they already have two or three other projects lined up. They know that their other recurring income streams will pad the timing between projects. This is the Money Outlaw and they often have multiple streams of income. That next project might be building a huge eCommerce website that will earn them a “paycheck” of $20,000 dollars. The employee at the company might know down to the penny what his/her next paycheck will be, but they have no upside potential beyond that paycheck.

In this example who is right and who is wrong? Neither. A person with the wrong skills, education, and temperament will find self-employment dangerous and nerve-wracking and they are right. Another person with a different set of skills, education, and life experience will see self-employment as the least risky path. Care to guess where most self-made millionaires as surveyed in the book the Millionaire Mind come down on the issue? I think you already know where Money Outlaws land on the issue 😉

Perception of Investment Risk

Take an investment example, the person that has a 401(k) and puts all their money into index funds and knows with a reasonable amount of certainty that the market will return a 9% average over time with some years being higher and some being lower, but overall this investor feels reasonably confident in the long term. Then again, the world might experience a global pandemic that causes the market to drop 30% in a matter of days. However black swan events aside our stock market investor can be reasonably certain they will get their 9% increase and their savings will be worth that much more. What is far less likely is the market will shoot up by 100% in that same year and double their money.

The Money Outlaw investor might be a house flipper that buys and sells real estate. The Outlaw investor knows from education and experience that they can find an ideal property below market value. They have the skills and education to properly estimate the repairs with little risk. They have a strong network of contractors, real estate agents, and lenders that will allow them to sell this finished house in 60 days for vastly more than they bought it for. The Outlaw investor knows with a high degree of certainty that if they put up $20,000 of their own capital into this project that after all expenses in 60 days they will sell this house with a $35,000 profit margin which yields him a 175% return on his original $20,000 investment in 2 months giving him huge upside potential with very little downside risk.

As we discussed above each investor will look at the other and see nothing but risk and/or lack of opportunity. However, each has different types of life experiences, education, skills, and lifestyles that influence this risk perception. So, what are those differences and how do they factor in?

Education & Skill Set

Most risk in any scenario from employment to investing can be largely controlled and mitigated by having the right knowledge and skill set. Our house flipper above has education on real estate markets, time value of money, property values, and marketing. These investors also have skills in things like estimating repair costs, project management and finance. These investors use this knowledge and their skills to find amazing opportunities with huge upside potential and very little risk. If, however our stock market investor from above were to try the same thing without all these advantages they would most likely lose their shirt. They would buy the wrong house, underestimate the repairs, poorly manage the job and have contractors creating cost overruns and taking advantage of them. The one thing that separates the outcomes of these two investors is their individual skills and knowledge.

Lifestyle

The Money Outlaw investor has a different lifestyle from many others. They spend their free time and occasional weekends reading books on alternative investing, such as, real estate investing for example or attending seminars and taking online classes to learn new skills. They ask questions about the world around them and certain situations like how does the house flipper find a property? Where do you learn market values of houses? Their curiosity will lead them to uncovering the answers to those questions. The Money Outlaw spends time building a network and connections. They save money and view those savings as sacrosanct because it is investment capital that will ultimately earn them much more.

The typical person does none of these things. They pour 100% of their daily effort into a job with an employer. Sometimes work nights, weekends and holidays building something of value for someone else. When they do have free time the last thing they want to do is go to a seminar or read an investment book. Instead they binge watch the latest series on Netflix, spend weekends partying or doing other consumer activities like shopping, going to sporting events or eating out.

They give very little thought to saving money and deploying those savings to a higher earning potential. They put all their savings (if they save at all) in a 401(k)-plan set up at work and let “professionals” manage it. They don’t realize these plans are often being eaten alive with high fees and have poor investment choices setting their savings goals back by decades, but at least “professionals” are managing it and they don’t have to try and figure it out. Now, where is that remote again, I just saw Netflix released…    

Culture

Some people grow up and are constantly told to get good grades, go to college, get a good job, invest in your company 401(k) plan, keep your nose to the grindstone for 35 years or so and retire to Florida and play golf or go fishing and boating each day. Never mind that a lot of this is a myth.

Good grades don’t determine success. A secure job you work at for 35 years is a complete illusion. Your 401(k) has high fees and is managed by people who are far more concerned about their retirement than yours. The returns on your investments aren’t nearly as good as they could be. Oh, and your student loan debt from that high-priced college you went to is so high you couldn’t afford to buy a house until you were 45 and you will have to use your Social Security check to continue to pay it off until you die.

Other people grow up with a completely different culture. They realize education isn’t as much about the grades you get, but more about the actual skills you possess. The grades simply represent skills you can do and not some type of showpiece to impress your parent’s PTA friends or some college admission officer.

These people grow up in a family that runs a business, which could be a parent that is a freelancer or a small family-owned restaurant, HVAC company, or tool and die shop. Maybe their family or friends own rental properties or flip houses. Maybe their father or uncle fixes cars on the weekend out of the family garage and puts extra cash in their pocket. Their parents save money and invest it well. They don’t pretend to be faux rich with stupid debt. They work hard, but also know how to relax and play hard.

Diversification

You may be asking if the Money Outlaw must choose just one path? The short answer is no. There are as many ways to put aspects of the Money Outlaw lifestyle together as there are stars in the night time sky. Have ever seen an Amish made quilt that is a patchwork of fabrics and color? This is the Money Outlaw’s life. Maybe it does include a job that is 9-5 with the right employer, but it also includes a side hustle.

Maybe you invest in a 401(k) through a job, but you don’t put all your savings in there. You take additional savings and build up an investment fund that you use to buy and hold real estate or flip a couple of houses each year. Maybe you invest some money in individual stocks because you understand how to do that and take the large gains from a stock that doubles in value in 18 months and buy a rental property.

You minimize your risk by utilizing a patchwork of strategies and techniques that limits risk but gives you a huge monetary upside where you can earn far more money much more quickly. You diversify where your income comes from or where you put your investment dollars. Maybe you take all the profits from your last flip and buy gold bullion and put it in a safe as a hedge against stock market losses or inflation. In other words, it is not either or, black and white, or Yin and Yang. You mix strategies and techniques together in a patchwork of items that works for you. It is an individualized program. However having said that most Money Outlaws, once they start down the path, realize they can’t live in a world of half measures. It doesn’t take long before they are going all in.

Summary

Risk is often far more about your perception based on your life experiences, education, cultural values, and lifestyle. By having the right skills and attitudes and making the right lifestyle choices combined with diversification you can minimize, notice I didn’t say, eliminate, risk but to minimize it to very acceptable levels.

There is no such thing as a risk-free life. There is risk in simply walking out the door and driving to work, but millions of people do it every single day. It our perception of that risk and the steps we are willing to take to mitigate that risk that makes the difference.

Minimizing risk means working harder than other people. It means spending your free time differently. It means making different choices about what you do with your income. It means you avoid stupid debt. In short it means you take a much more active role in managing your life. Understand most people are NOT willing to do these things. Some of those people will ridicule or criticize you and wonder why you do these things. Listening to them creates the most unacceptable risk of all because you are letting your life be directed by someone else’s skills, knowledge, perception of risk, cultural values, and negative attitude.

The Money Outlaw makes different choices in employment, investing, and how they navigate economics/society. By making these choices that so many others will not they have both a lower perceived risk of the world and most likely an actual lower risk profile, with a much higher upside potential, more personal freedom, and a higher quality of life.