What Matt Ryan Can Tell Us About Risk

| October 10, 2014

Matt Ryan earns, on average, 20 million dollars a year to play Quarterback for the Atlanta Falcons.

That’s a good living but it is not without risk. Massive defensive lineman want to body slam you into the turf. The threat of concussions, damaged knees and dislocated shoulders are a real possibility.

But Matt Ryan channeled his inner economist and decided the payoff was worth the risk.

But what if he wanted to take on more risk and play the game without wearing a helmet? Would the Falcons pay him more money? Would he be compensated for that risk?

That wouldn’t make sense right… why take on a risk you are not properly compensated for.

Now let’s turn our attention to the individual investor. He wants the opposite. He wants the return but doesn’t want to take on any risk. He is like the football player at the end of the bench who wonders why he isn’t making 20 million dollars a year. But you have to take on risk to earn some return.

For example, there is more risk and uncertainty in loaning a business money for 30 years than there is loaning them money for 2 years. The business has to pay you a higher interest rate to get you to tie up your money for 30 years. Otherwise, you will only do the two year loan. There are no free lunches in the marketplace.

Uncertainty comes with the territory.

You have the risk of losing your money if the market goes down, or if a company goes bankrupt. You also have the risk of losing your purchasing power to inflation or the risk of outliving your money.

Successful investors learn to live with the risk and the uncertainty. The key questions for you are simple.

Am I being compensated for the risk I am taking? Our Matt Ryan example. Or am I fooling myself by trying to earn a return without taking on any risk. In other words, where’s my free lunch?

Those are great questions to ask your financial advisor. You need to understand and be comfortable with your risk tolerance and its place in your plan when pursuing your financial goals.

As for myself, I participate in football the risk-free way… comfortably from my couch.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.