Welcome to an adrenaline junkie’s guide to analyzing risk. I wouldn’t blame you if you closed your laptop immediately and walked away. But thanks to years of poor, risk-ignoring, endorphin-driven choices, I’ve learned valuable decision-making skills around separating thrill-seeking motivations from money-seeking endeavors. Thrill-seeking desires are great for a few afternoons of cliff diving. Not so great for a few decades of retirement.
So how does someone that used to throw caution to the wind, throw themselves into a responsible investment strategy? Here are some tips for putting your investments through the wringer and keeping surprises where they belong: with birthday parties and puppy kisses.
- Read the risks. It starts that simple. With Regulation Crowdfunding, an issuer is legally required to publish known risks with their business and capital raise on their campaign page. Think of these as those little warning signs on the way to having fun, like “Bumps ahead” or “No trespassing,” or the eternal winner of the necessary-but-super-weird award: “Slippery when wet.” While no one can read the future, these risk disclosures can give you a heads-up on what challenges your investment might be up against.
- Take a second to identify your own motivations. If getting rich quick is high on your list, your risk-analyzing glasses may have a hint of rose color to them. We all come with our own biases and goals, but make sure yours line up with the business you’re investing in. If you want to climb aboard the next potential rocketship, then maybe a high-risk tech startup is right up your alley.
You’re the boss of your portfolio, but the business owners run their own show. Making sure you and your investments are shooting for the same thing can help you avoid disappointment in the future. Happiness = Reality – Expectations.
- Make calculated decisions. Young Malcolm didn’t let danger get in the way of having fun. Sadly #worthit didn’t always ring true. Once you understand the risks, compare them to the potential reward (don’t forget your social returns) and decide if it’s worth it to you. Ask yourself, “Is the upside worth it knowing all these ways it could crash and burn?”
- Don’t swing for the fences every time. FINRA has placed limitations on how much you can invest, but just like those street signs, they can’t protect you from having a bad day. The age-old advice of diversifying still applies to your place-based portfolio. Often the best defense against a deal going south is having a bunch more that haven’t. Or as Richard Branson put it: “If you have one company and something goes wrong, you don’t have any companies. If you have 250 and one goes wrong, you’ve got 249.”
Risk analysis, like investing, is very personal. But following a disciplined process can help set you up for a solid portfolio with calculated decisions and fewer surprises.
But if you still want to scratch that thrill-seeking itch… I know a place where the cliffs are high and the water is deep. I’ll probably bring a life jacket this time though.