RISK IS PERHAPS THE MOST IMPORTANT notion in finance—and yet one that receives too little attention from most folks. Like investment costs, and unlike future investment returns, we have a fair amount of control over risk, so it’s worth spending serious time thinking about what risks we face and which ones we want to limit.
I discuss risk in my latest column, which looks at some of the major financial dangers we face. In writing the column, I was reminded of the 17th century philosopher and mathematician, Blaise Pascal, and what’s come to be known as Pascal’s wager. As Pascal saw it, it was rational to believe in God. If you believed and it turned out there was no God, the price was modest—a life with a little less immorality. But if you didn’t believe and it turned out God existed, the price was somewhat higher—an eternity roasting in hell.
In other words, we should focus less on the odds that we will be right or wrong, and more on the consequences. Yes, you might get lucky and make it successfully through life with no health insurance, a badly diversified portfolio and a few heavily mortgaged rental properties. But consider the consequences if your luck isn’t so good.