May 2002

The Biggest Risk to
Your Financial Success

© Talbot Stevens

There are many risks that stand between you and financial success. Some of the common ones that investors face include market risk, company risk, political risk, geographic risk, and currency risk. But these are not the real threats to your financial independence. Consider some additional risks that are often overlooked.

Cashflow risk might be defined as the risk of having your income reduced, interrupted, or terminated, perhaps due to death or permanent disability.

Awareness risk is the potential loss that results from not knowing all of the ideas that could benefit you. In the financial world, knowledge is power, or more accurately, the potential for power. A concept does not exist (in your world) until you are aware of it. Since we are not taught how to manage money, it is easy to not be aware of simple strategies to gain thousands of dollars a year in missed tax, investment and consumer opportunities.

Behavioural risk is the danger that even with good cashflow and awareness of how to succeed financially, our natural behaviour is often to do the opposite of what we know we should do.

As I regularly point out in seminars, investor performance is much more important than investment performance. More generally, the key to financial success is not what you know, it is what you do with what you know - how you act as a consumer, tax payer, and investor.

Behaviour risk encompasses several specific risks. Procrastination is a huge factor that sabotages many financial goals.

Emotional risk is the danger that we make financial decisions based on emotion rather than rational analysis. The fact is that most financial decisions are made with our heart, not our head. Everyone knows to "buy low and sell high", but most of us tend to do the opposite.

One of the reasons that Warren Buffet is such a successful investor is because he is disciplined enough to not be emotionally seduced into investing in companies or industries that he does not understand.

In reviewing the various threats to financial success, we can make an important observation that gives hope to anyone who thinks that there are too many risks. The important risks that threaten our financial security are things that we can directly control. Individuals cannot influence the national economy, the stock markets, exchange rates or government policies.

But we do have almost 100% control over our individual economy of how much we earn and spend, our awareness of financial ideas, and our behaviour.

By identifying the biggest risks, you can accept responsibility for ensuring your financial success. You can clearly define goals, work with trusted resources to take advantage of the most effective strategies, and stay disciplined in acting towards your written financial plan.

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