Have You Become More Financially Risk Averse

I met up with Ben a former classmate I hadn’t seen in many years recently. Ben looks very much the same, he hasn’t gained  a lot of weight and in fact looks better than many of our classmates where the last decade seems to have aged them.  Back in school, Ben was one of the bigger risk takers, wanting to aggressively pursue plans such as his own business, high risk investments, and traveling to exotic places.  However, after a long time of losing touch with him, as our conversation proceeded, I realized that Ben had changed a lot.  Medical bills, a mortgage, lots of other things had happened, and now Ben was quite content working in a 9-5 job and staying on health insurance.  There is nothing wrong with Ben’s lifestyle, and if fact, he confessed that he is much more grounded now than when we were in school where he constantly wondered about what 10 other opportunities he might have given up.  But, in reflecting on the conversation, I realized that everyone I know has become more financially risk averse, which seemed to be a product of getting older, not achieving as much financially as we might have expected, and having experienced several recessions.  In my view, many of us, myself included, have become too financially risk averse, thereby underinvesting in financial risk and missing critical opportunities.  Here are three things I will be examining in the next couple of months:

–Is your emergency fund (cash pile) too big? — the vast majority of households have too little saved for an emergency.  However, for some, the lure of not losing principle means that they have excess amounts that are sitting in cash accounts or money market funds.  With interest rates currently very low, this is a place of risk aversion.

–Is your investment or retirement portfolio too conservative? – a good diversity among asset classes is one of the best things for a portfolio, however, many people are failing to keep up with inflation with their investment choices. I will examine some additions that include more into emerging markets (I am already overweight), and possibly REIT ETFs.

–Are you hesitant to try an entrepreneurial venture? — a lot of people harbor a secret dream to start their own company or launch an enterprise on their own.  While this is highly risky (and most start-ups fail), I meet too many people who wish they had at least tried to launch their own venture a decade ago.  If you have a burning desire to start your own thing, spend a few days working on a plan and canvassing a few friends to see how it might work.  Even if you don’t quit your job and plunge in full time, this might result in a fabulous hobby or a new set of contacts.

shared at this week’s Carnival of Personal Finance