Risk-Adjusted Mindset

Three physicians were recently overheard discussing investments at their weekly practice luncheon.

​​It was interesting to listen to each one’s attitude towards risk. One equated risk to loss. Another toed the Wall Street line on risk, and the third one completely upended the risk conversation by suggesting that what we’ve all been taught about risk is false – that it is possible to achieve higher returns and reduce risk.

​​Here’s my take on each of these physicians’ take on risk:

Physician #1:  Risk = Loss

Physician #1 buys into the myth that risk can only lead to loss. He only puts his money in risk-free assets – namely treasuries and deposit accounts like CDs, Money Market Accounts, and high-yield savings accounts. In his efforts to avoid loss, putting money in these “risk-free” options guarantees that he will lose money. How?

​​When factoring in inflation, all of these options are money losers because they fail to keep pace with inflation – even more so in light of the current inflationary environment.

Physician #2:  Wall Street Risk-Return Spectrum

This physician adheres to the institutionalized concept of risk, where returns are correlated with risk. The higher the risk, the higher the return, and the lower the risk, the lower the return. This idea of risk has been indoctrinated into investors’ mindsets from the cradle to the grave – reinforced by the conspiring forces of family, society, learning institutions, Corporate America, the financial media, the internet, social media, and so forth.

When presented with the idea of alternative investments that can achieve higher returns at reduced risk, investors like Physician #2 are incredulous. It’s impossible, they say.

Physician #3:  Risk-Adjusted Mindset

Physician #3 has an open mind and has undoubtedly discovered a world of investing outside Wall Street. Physician #3 isn’t afraid to question conventions and break away from the crowd to embrace nonconformity. She has a healthy relationship with risk and has discovered that outside of Wall Street, it is possible to achieve above-market returns with reduced risk.

​​She only realized this after expanding her knowledge through research, study, and networking with experienced investors in the alternative asset class.

Why You Should Have a Risk-Adjusted Mindset

Unless you’re open to acquiring a risk-adjusted mindset, you’ll always be stuck in investments that either lose money or produce results incompatible with achieving financial independence.

If you’re Physician #1, putting money in fixed-income “safe” options guarantees an erosion of your capital over time because of inflation.

If you’re Physician #2, you’re either likely to:

  • Put your money in a 401(k), mutual fund, or EFT on the low-risk end of the spectrum where the fund manager fees and inflation swallow up returns; or
  • ​You play the timing game on the high-risk end of the spectrum where even 9 out of 10 professionals fail to beat the market.

Investors like Physician #3 have different goals than the average investor. This investor is motivated to achieve financial independence by generating multiple streams of passive income from alternative assets that cash flow, appreciate, offer significant tax benefits, and are insulated from recessions and inflation. Their eye isn’t on a comfortable retirement; it’s on multigenerational wealth.

How to Mitigate Risks

The wealthy can achieve above-market risk-adjusted returns because they target assets where risks can be mitigated without sacrificing returns. How? Here are two risk mitigation strategies that savvy investors embrace.

Non-Correlation to Wall Street. Assets untethered from Wall Street are insulated from Wall Street volatility – shielding assets from risks correlated to the broader market.

Improvements in Management and Operational Efficiencies. Passive investments with experienced partners with the ability, knowledge, and infrastructure to improve managerial and operational efficiencies associated with an asset can reduce the risk of loss in connection with those assets while improving returns.

For many investors, if Wall Street isn’t cutting it, they’ll retreat and sideline their money while inflation erodes their buying power. It’s not worth the risk they tell themselves. Staying in and staying on the market slide or sidelining capital are undesirable options for investors facing a declining stock market.

These investors don’t realize that there’s another option, but adjusting their returns will require changing their mindset regarding risk. It will take breaking out of the herd mindset and embracing the possibility that higher returns are achievable at reduced risk.

If they adopt this mindset, the road will invariably lead them to alternative assets like private company investing (private equity) and real assets that offer recession-insulated cash flow and appreciation ideal for building and maintaining wealth.