Risk aversion: Always protect the downside

The whole purpose of protecting the downside is preventing total annihilation. You can’t put all your life energy into only one thing.

What’s a big goal or dream that you have? Do you want to start a business? Become a fulltime author? Travel the world? Become financially independent? Change careers?

I bet you’ve thought about it, and at some point thought, “I’m not sure I can achieve that.”

If you’re anything like me, you always think about risks that are involved with making a big move in life. And that’s not a surprise. We’re collectively risk averse. We truly hate risk. I’ve never met someone who said, “I love to lose everything!”

But what can we do about our risk aversion? If you think about it, most of us are put off by fear. You think of doing something, consider the risks, and decide not to do it. Here are some examples.

  • “I want to start a business. But I also have a job at the moment. I need the pay. So I’m going to work on my business in the evenings. But what if I quit my job and go all in and the business fails?”
  • “I want to invest in the stock market for my retirement. But what if it’s the wrong time? Maybe we’ll get another financial crisis in a few months.”
  • “I want to change careers. I’m tired of working in sales. I want to become a programmer. But what if I can never find a job as a coder?”

I think you get the point. There are always certain risks involved with every decision we make. But that shouldn’t scare us.

Be bold — but don’t take risks

We all know that you don’t achieve anything by living a timid life. Nothing will ever change if you lock yourself up in your house. To live life to the fullest and reach our full potential, we need to make bold moves.

We also need to take risks — that’s what we believe, right? Well, I do believe in making bold moves. However, I don’t believe in taking risks. Richard Branson wrote this in his autobiography, Losing My Virginity:

“It is only by being bold that you get anywhere. If you are a risk-taker, then the art is to protect the downside.”

Branson is a bold guy. And yet, his motto is to protect the downside. Another successful person, Warren Buffett has a similar maxim:

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

Somehow, when I mention Buffett, there’s always someone who says: “Yeah, but Buffett lost millions!” Sure. No one is perfect. But at least he tries NOT to. And that’s what counts.

I’ve also adopted this risk-averse strategy for my life. In other words: I always try to limit my potential losses.

Especially when it comes to my career, business, and investing decisions, I always protect the downside. Here’s how I apply it to the most important aspects of my life.

1. Career decisions

Protect the downside by learning skills and investing in yourself.

Ask yourself this question: How can I spend my time in a way that I always learn something?

In your career, time is your most important asset — not money or even reputation (which is also very important). It’s time that you can use to build a career.

But what do most of us do? Spend all of our time working on other people’s goals. And there’s nothing wrong with having a job or having a business that only buys and sells bullshit products.

You need money. But I challenge you to look beyond that. Because what happens when that source of income vanishes overnight? Exactly, you end up with nothing. That’s zero downside protection.

But if you spend your time wisely, improve your skills every day, learn new things, and build relationships, you will always have something to fall back on. After time, your network is the most valuable resource. So spend your time on yourself and helping others.

2. Business decisions

Protect the downside by serving multiple segments.

Rolex has always been a luxury brand. But that means they could not sell their watches to everyone. Obviously, that’s the strategy of luxury brands. So Rolex couldn’t introduce a “cheap” watch because that would harm their identity. They would risk losing their high-end clients.

But Hans Wilsdorf, the founder of Rolex, still wanted to create good quality watches that were affordable. What did he do? He developed a new brand, called Tudor, which is more affordable compared to Rolex.

They serve young professionals and people who want to buy their first high-quality timepiece.

If you’re in business, consider serving more than one group of customers or focusing on more than one industry. When sales don’t perform well in one area, you always have other places you can sell. That’s why I always create multiple products, focused on different groups and different sectors.

3. Investing decisions

Protect the downside by making sure you can’t lose all your money.

There are many ways investors protect the downside. You can get as technical as you want by using options or purchasing assets that are negatively correlated to the asset you are investing in. But that’s not for me. I’m not a professional trader.

I limit my potential losses by diversifying. But it’s not the type of diversification you might expect. For example, I put all the money that I’ve set aside for stock investing in one index fund.

Doesn’t look like diversification, right? Well, that’s only one part of my investing strategy. I also invest in real estate (commercial and residential) and I own two business (in two unrelated fields). Plus, I keep enough cash in savings to live off for a year.

The idea is that when one investment goes down, I’m not losing ALL my money. I could diversify a lot more than this. Think about serving multiple industries and countries.

Lastly, when it comes to investing; invest.

Don’t do stupid shit like buying bitcoin or something else that has no underlying value. Remember: If something sounds too good to be true, it probably is.

Avoid taking a big hit

The whole purpose of protecting the downside is preventing total annihilation. You can’t put all your life energy into only one thing. This is also true for your personal life.

When people lose their personal identity in their intimate relationship, it hardly ends well. They are either destroyed when the relationship ends, or they feel powerless to leave, and end up staying against their will.

The point is that you want to live a conscious and vibrant life — without taking unnecessary risk. Think about the decisions you make, and more importantly: Think ahead. Ultimately, that’s what will give you freedom.

This article first appeared on DariusForoux.com.