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Don't Forget About The Risk

If you watch HGTV at all, I'm sure you've come across a show called Flip or Flop. This is a show where a couple buys cheap houses (foreclosures, short sales, etc.), fixed them up, and resells them. Hopefully, they make money in the process. It's a television reality program and it fantasizes house flipping.

A few weeks ago I got a fancy invitation in the mail, along with two tickets (which they claim are worth $150 each) to a seminar that would teach me how to flip houses. It is put on by Flip or Flop's hosts, Tarek and Christina El Moussa (although, I thought they were divorced...and yes, I am too lazy to Google it).

It reminds me of some commercials I hear in the mornings on our local talk radio station. Some loud, enthusiastic guy comes on talking about how he loves making money in real estate and wants to show you how to do it, too. He'll even buy you dinner and give you a gift! Plus, you get to spend his money so all you have to do is collect your profits!

There's one thing these folks don't tell you about, and it's the same thing they've been trained to hide from you. Risk.

What Is Risk?

At its most basic level, risk is the possibility something will not happen the way you hoped. If you are a hiker, you might twist your ankle on a difficult part of the hike. In the world of investing you can think of risk as being getting a return on your investment that isn't as high as you hoped (or even losing money). In real estate, risk can mean a lot of things; you can't find a buyer, you can't get the price you thought you would, or a city or county rule you didn't know about could prevent you from fixing up that "fixer-upper" the way you wanted.

Reward And Risk Are Always Related

Read that again! Then one more time. This is always the case. There can be no rewards without taking some risk. Said another way, if you don't want to take any risk, you can't expect any reward. Here are a few examples:

  • If I want to go 35 mph down a hill on my bike (which is really fun), I might wipe out. If I don't want to wipe out, I don't get to ride my bike that fast.

  • If I don't want to get into a car accident, I don't have to drive, but I can't get to work or the store. Once I get into my car I am at risk of getting into a car accident.

  • If I want to get a higher return, I can invest my money in stocks, but my investments could go down when I need them. If I stay out of the stock market, I can't get a return that helps my money grow.

This trade-off exists everywhere you look.

What If You Had The Secret?

Imagine for a minute that you have a money-making secret. It could be a house-flipping method you thought of or a way to make a killing in the stock market. If your goal was to make money, you would simply keep this method a secret and mint your money - over and over again. What benefit would you get from selling it to me? I would now be competing with you for your profits.

I think it's valuable to think in this way if someone presents you with a money-making opportunity. I saw a program about a guy in Las Vegas who was selling a machine that could predict Keno outcomes. He charged $500 for this machine. Of course it was a scam and there were multiple scammers involved, but they were able to sell these. They promised the get-rich-quick scheme that so many of us are looking for. Now, viewed through this lens, you can ask yourself, "If these guys can use this thing and make $10,000 in a weekend, why would they want to sell it to me for $500?"

I know the temptation is there to want to earn a quick buck, especially if it seems to be risk-free. But risk-free doesn't exist.

Always cover your wallet if you hear someone talking about something that seems too good to be true. And run away if they claim their reward comes with no risk.



About the Author

Derek Hagen, CFA, CFP, FBS, CFT-I, CIPM is a speaker, writer, and coach specializing in financial psychology, meaning and valued living, resilience, and mindfulness.


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